UNITED
STATES
SECURITIES AND EXCHANGE COMMISSIONWashington D.C.  20549 FORM 10-Q (Mark One)xQuarterly Report Pursuant to Section 13
or 15(d) of the Securities and Exchange Act of 1934 For the quarterly period ended March
31, 2001  ̈Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 For the transition
period  from to Commission file number0-26632 Pacific
  Northwest Bancorp(Exact name of registrant as specified in its charter)
  Chartered
  by the State of Washington
  91-1691216(State or other jurisdiction of incorporation or
  organization)
  (I.R.S. Employer Identification No.)
  1111
  Third Avenue, Suite 250Seattle,
  Washington(Address of principal executive offices)
  98101(Zip Code)Registrant's telephone number including area code:
  (206)
  624-0600
  Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YESxNO ̈ As of April 30,
2001, 15,524,622 shares of common stock were outstanding with no par value.    PACIFIC NORTHWEST BANCORP

INDEXPART I.
  FINANCIAL INFORMATIONItem 1.
  Financial
  StatementsConsolidated Statements of Financial
  Conditionas of March 31, 2001 and December 31, 2000Consolidated
  Statements of Incomefor the three-month
  periods endedMarch 31, 2001 and 2000Consolidated
  Statements of Shareholders Equityfor the three-month
  periods endedMarch 31, 2001 and 2000Consolidated
  Statements of Cash Flows forthe three-month periods
  endedMarch 31, 2001 and 2000Notes
  to Unaudited Consolidated Financial StatementsItem 2.
  Management
  Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
  Quantitative
  and Qualitative DisclosuresAbout Market RiskPART II.
  OTHER INFORMATIONItem 1.
  Legal ProceedingsItem 6.
  Exhibits
  and Reports on Form 8-KSIGNATURES


CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED) Dollars in thousands
  March
  31, 2001
  December
  31, 2000AssetsCash and
  due from banksNon-interest-bearing
  $69,545
  $70,566Interest-bearing
  4,150
  8,295Federal
  funds sold and securities purchased under agreements to resell
  38,150
  7,467Securities available for sale
  836,065
  840,489Securities held to maturity
  
  64,741Loans
  receivable
  1,796,649
  1,776,108Allowance for losses on loans
  (18,303)
  (17,561)Net loans
  receivable
  1,778,346
  1,758,547Loans
  held for sale
  19,686
  14,187Interest
  receivable
  17,678
  19,762Other
  real estate
  10,441
  9,909Premises
  and equipment
  59,388
  58,466Goodwill
  and other intangible assets
  20,135
  20,701Other
  assets
  6,352
  9,740Total
  assets
  $2,859,936
  $2,882,870LiabilitiesDeposits:Non-interest-bearing
  $253,918
  $244,100Interest-bearing
  1,519,409
  1,473,008Total
  deposits
  1,773,327
  1,717,108Federal
  Home Loan Bank (FHLB) advances
  611,200
  643,200Securities sold under agreements to repurchase
  212,462
  274,920Guaranteed preferred beneficial interests in subordinated debt
  40,000
  40,000Other
  borrowings
  12,493
  1,753Other
  liabilities
  25,339
  27,153Total
  liabilities
  2,674,821
  2,704,134Shareholders EquityCommon
  stock, no par value Authorized shares 30,000,000 Issued and outstanding:
  15,524,122 and 15,494,357 shares
  
  --Paid-in-capital
  26,466
  26,291Retained
  earnings
  161,555
  159,613Accumulated
  other comprehensive loss
  (1,566)
  (5,500)Debt
  related to employee stock ownership plan (ESOP)
  (1,340)
  (1,668)Total
  shareholders' equity
  185,115
  178,736Total
  liabilities and shareholders equity
  $2,859,936
  $2,882,870 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three-month
  periods ended March 31,Dollars in thousands, except per share amounts
  2001
  2000Interest IncomeLoans
  receivable and loans held for sale
  $39,735
  $38,602Securities available for sale
  13,981
  12,993Securities held to maturity
  
  1,075Other
  331
  47454,047
  53,144Interest ExpenseDeposits
  17,890
  14,210FHLB
  advances and other borrowings
  9,288
  10,122Securities sold under agreements to repurchase
  4,278
  4,276Guaranteed preferred beneficial interests in subordinated debt
  987
  98832,443
  29,596Net interest income
  21,604
  23,548Provision for losses on loans
  1,400
  550Net interest income after provision for losses on loans
  20,204
  22,998Non-interest IncomeService
  fees
  3,053
  2,752Investment product fees and insurance commissions
  575
  835Gain
  (loss) on sale of loans
  453
  (24)Gain on
  sale of securities available for sale
  698
  6Gain on
  sale of partnership
  574
  Other
  552
  9175,905
  4,486Non-interest ExpenseCompensation and employee benefits
  9,418
  9,783General
  and administrative
  4,439
  4,322Occupancy and equipment
  2,976
  2,482Data
  processing
  1,826
  1,214Loss
  from real estate write-downs and operations
  16
  228Conversion and integration
  856
  31719,531
  18,346Income before income tax expense
  6,578
  9,138Income tax expense
  2,457
  3,257Net income
  $4,121
  $5,881Basic net income per share
  $0.27
  $0.38Diluted net income per share
  $0.26
  $0.37Dividends declared per share
  $0.14
  $0.14CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)






Dollars in thousands, except share data
  Common
  Stock, no
  par value
  Shares
  Paid-in
  Capital
  Retained
  Earnings
  Accumulated
  Other
  Paid-in
  Comprehensive
  Loss
  Debt
  Related
  ToESOP
  TotalJanuary 1, 2000
  15,800,377
  $33,297
  $162,043
  $(20,640)
  $(2,980)
  $171,720Dividends declared, $0.14 per share
  
  
  (2,173)
  
  
  (2,173)Issuance of common stock:Stock option plans
  34,720
  217
  
  
  
  217ESOP debt repayment
  14,519
  
  
  
  328
  328Purchase and retirement of common stock
  (365,000)
  (6,253)
  
  
  
  (6,253)Comprehensive income:Net income
  
  
  5,881
  
  
  5,881Other
  comprehensive loss -Unrealized
  loss on securities available for sale, net of taxes of $3,132
  
  
  
  (5,817)
  
  (5,817)Reclassification adjustment for gains included in net income, net of
  taxes of $2
  
  
  
  (4)
  
  (4)Total comprehensive income
  
  
  
  
  
  60March 31, 2000
  15,484,616
  $27,261
  $165,751
  $(26,461)
  $(2,652)
  $163,899January 1, 2001
  15,494,357
  $26,291
  $159,613
  $(5,500)
  $(1,668)
  $178,736Dividends declared, $0.14 per share
  
  
  (2,179)
  
  
  (2,179)Issuance of common stock:Stock option plans
  19,011
  175
  
  
  
  175ESOP debt repayment
  10,754
  
  
  
  328
  328Comprehensive income:Net income
  
  
  4,121
  
  
  4,121Other
  comprehensive income (loss) -Reclassification of securities held to maturity to securities
  available for sale, net of taxes of $321
  
  
  
  (597)
  
  (597)Unrealized
  gain on securities available for sale, net of taxes of $2,684
  
  
  
  4,985
  
  4,985Reclassification adjustment for gains included in net income, net of
  taxes of $244
  
  
  
  (454)
  
  (454)Total comprehensive
  income
  
  
  
  
  
  8,055March 31, 2001
  15,524,122
  $26,466
  $161,555
  $(1,566)
  $(1,340)
  $185,115CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three-month
  periods ended March 31,Dollars in thousands
  2001
  2000Operating ActivitiesNet income
  $4,121
  $5,881Adjustments to reconcile net income to net cash
  provided by operating activities:Depreciation
  1,580
  1,417Amortization
  of intangible assets
  567
  466Provision for
  losses on loans
  1,400
  550Write-downs on
  other real estate
  
  160Amortization
  (accretion) of premiums and discounts, net
  (246)
  39Loss (gain) on
  sale of loans
  (453)
  24Gain on sale
  of securities available for sale
  (698)
  (6)Gain on sale
  of other real estate
  (12)
  (105)Loan fees
  deferred, net of amortization
  549
  (636)FHLB stock
  dividends
  (672)
  (633)Changes in operating assets and liabilities:Interest
  receivable
  2,084
  (559)Other
  assets
  3,348
  (1,211)Other liabilities
  (3,828)
  1,789Net cash provided by operating activities
  $7,740
  $7,176Investing ActivitiesPurchases of
  securities available for sale
  (94,820)
  (15,025)Proceeds from maturing and principalrepayments on securities available for sale
  160,017
  18,614Proceeds from
  sale of securities available for sale
  11,698
  5,000Proceeds from
  maturing and principal repayments on securities held to maturity
  
  842Proceeds from
  sale of loans
  26,433
  55,281Net increase
  in loans receivable
  (54,861)
  (117,053)Proceeds from
  sale of other real estate
  1,592
  1,532Improvements
  capitalized to other real estate
  (478)
  (139)Purchases of
  premises and equipment
  (2,634)
  (1,458)Net increase
  in federal funds sold and securities purchased under agreements to resell
  (30,683)
  (11,025)Net cash provided by (used in) investing activities
  $16,264
  $(63,431)CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)(continued)

Three-month
  periods ended March 31,Dollars in thousands
  2001
  2000Financing ActivitiesNet increase
  in deposits
  $19,180
  $36,749Net
  increase (decrease) in certificates of deposit
  37,039
  (26,670)Proceeds from
  FHLB advances, securities sold under agreements to repurchase, and other
  borrowings
  443,262
  411,448Repayment of FHLB advances, securities
  sold underagreements to repurchase and other borrowings
  (526,652)
  (368,391)Dividends
  paid to shareholders
  (2,174)
  (2,248)Purchase
  and retirement of common stock
  
  (6,253)Issuance of
  common stock from exercise of stock options
  175
  217Net cash provided by (used in) financing activities
  (29,170)
  44,852Net decrease in cash and due from banks
  (5,166)
  (11,403)Cash and due from banksBeginning of
  period
  78,861
  114,062End of period
  $73,695
  $102,659Supplemental Disclosures of Cash Flow InformationCash paid
  during the period for:Interest
  $30,672
  $24,122Income
  taxes
  1,000
  6,372Non-cash
  investing and financing activities:Loans
  receivable transferred to other real estate
  1,633
  3,529Premises
  and equipment transferred to other real estate
  
  279Transfer
  of securities from held to maturity to available for sale
  64,741
  ESOP debt
  repayment
  328
  328NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE ABASIS OF PRESENTATION

Pacific Northwest Bancorp is a bank holding company
incorporated in Washington state. 
Through its commercial bank subsidiary, Pacific Northwest Bank, a wide
range of financial services are offered to businesses and individuals
throughout western and central Washington state.  Financial services of Pacific Northwest Bank include the banking
activities of accepting deposits from businesses and individuals and
originating commercial and commercial real estate loans, residential loans,
consumer loans, and agricultural loans.

The unaudited consolidated financial statements include
the accounts of Pacific Northwest Bancorp and its wholly owned subsidiaries
(collectively PNWB).  As of March 31,
2001, Pacific Northwest Bancorps wholly owned subsidiaries were Pacific
Northwest Bank and InterWest Capital Trust I. 
All material inter-company transactions and balances have been
eliminated.

The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
amounts reported in the consolidated financial statements.  Changes in these estimates and assumptions
are considered reasonably possible and may have a material impact on the
consolidated financial statements and thus actual results could differ from the
amounts reported and disclosed herein.

The unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. 
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements.  In the
opinion of management, all adjustments necessary for a fair presentation are
reflected in the unaudited interim consolidated financial statements.  The consolidated statements of income for
the three-month periods ended March 31, 2001 and 2000 are not necessarily
indicative of the operating results for the full year.  For further information, refer to the
consolidated financial statements and footnotes for the most recent annual
period, December 31, 2000.

NOTE BRECLASSIFICATIONS

Certain reclassifications have been made to prior
financial statements to conform to current presentation.  The effects of the reclassifications are not
considered material.

NOTEC
NET INCOME PER SHARE

Basic
net income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period.  Diluted net income per share is calculated
by dividing net income by diluted weighted average shares outstanding, which
includes common stock equivalent shares outstanding using the treasury stock
method, unless such shares are anti-dilutive. 
Common stock equivalents include shares issuable upon exercise of stock
options.  Unallocated shares relating to
the debt-leveraged money purchase employee stock ownership plan debt obligation
are deducted in the calculation of weighted average shares outstanding.

The
following table presents the computation of basic and diluted net income per
share for the three-month periods ended March 31:

Dollars in thousands, except share and per share amounts
  2001
  2000Numerator:Net income
  $4,121
  $5,881Denominator:Denominator for basic net income per share - Weighted
  average shares
  15,511,258
  15,653,079Effect of dilutive securities:  Stock options
  110,520
  161,052Denominator for diluted net income per share- 
  Weighted average shares and assumed conversion of dilutive stock options
  15,621,778
  15,814,131Basic net income per share
  $0.27
  $0.38Diluted net income per share
  $0.26
  $0.37

NOTE DCONVERSION AND INTEGRATION EXPENSES

During
the year ended December 31, 2000, PNWB initiated the process of converting its
various subsidiary bank operating systems to a single enhanced operating
system.  The first four phases of the
five-phase conversion process were completed during the year ended December 31,
2000 with the final phase of the conversion successfully completed on April 9,
2001.  Conversion and integration
expenses are expensed as incurred. 
Total expenses associated with conversion and integration efforts were
$856,000 and $317,000 during the three-month periods ended March 31, 2001 and
2000, respectively.  As of March 31,
2001, PNWB had an accrued liability of $1.3 million related to conversion and
integration expenses that will be paid out during 2001.

NOTE EBUSINESS SEGMENT INFORMATION

Between the period August 1996, and
October 1999, PNWB acquired six commercial banking institutions. Subsequent to
the acquisitions of Pacific Northwest Bank, First National Bank of Port
Orchard, Pioneer Bank and Kittitas Valley Bank in 1998, PNWB was managed at the
subsidiary bank level.  Each subsidiary
bank had a board of directors and an executive management team responsible for
the operation and performance of the respective subsidiary bank.

During the year ended December 31, 2000,
PNWB consolidated its executive management functions and implemented a new
organizational structure while consolidating the subsidiary banks into a single
commercial bank using a single operating system.  Effective July 1, 2000, Pacific Northwest Bank and The Bank of
Tukwila were merged into InterWest Bank. 
Effective September 1, 2000 InterWest
Bank changed its name to Pacific Northwest Bank.  As a result of these organizational changes, the financial
information that is used by the chief operating decision maker in allocating
resources and assessing performance is only provided for one reportable segment
for the three-month period ended March 31, 2001.

NOTE FACCOUNTING CHANGES

In June 1998, the Financial Accounting
and Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of
SFAS No. 133 to clarify specific areas presenting difficulties in
implementation.  SFAS No. 133, as
amended by SFAS No. 138, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments imbedded in
other contracts, and for hedging activities. 
It requires the recognition of all derivatives as either assets or
liabilities in the statement of financial condition and the measurement of
those instruments at estimated fair value. 
In certain defined conditions, a derivative may be specifically
designated as a hedge for a particular exposure.  The accounting for derivatives depends on the intended use of the
derivatives and the resulting designation. 
This statement was adopted by PNWB on January 1, 2001. The adoption of
this statement did not have a material impact on PNWBs financial condition or
results of operations.  As permitted by
the provisions of this statement, PNWB reclassified all securities held to
maturity to securities available for sale on January 1, 2001.  This reclassification resulted in other
comprehensive loss of $597,000, net of income taxes of $321,000.

In September 2000, the FASB issued SFAS No. 140
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, a replacement of SFAS No. 125.  This statement revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures; however, it carries over most of SFAS No. 125s
provisions without reconsideration.  The
standards addressed in this statement are based on consistent application of a
financial components approach that focuses on control.  Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished.  This statement is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after March 31, 2001.  
This statement was effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal year 2000.  The
adoption of this statement affects the disclosures in PNWBs financial
statements; however, the adoption of this statement did not have a material
impact on PNWBs financial condition or results of operations.

Item
2.  MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion is provided for the unaudited consolidated financial
condition and results of operations of Pacific Northwest Bancorp, which
includes its wholly owned subsidiaries (collectively PNWB).  As of March 31, 2001, Pacific Northwest
Bancorps wholly owned subsidiaries were Pacific Northwest Bank and InterWest
Capital Trust I.  The purpose of this
discussion is to focus on significant factors concerning PNWBs financial
condition and results of operations. 
This discussion should be read along with the unaudited consolidated
financial statements for an understanding of the following discussion and
analysis.

Pacific
Northwest Bancorp is a bank holding company incorporated in Washington state.  PNWB is a financial services company
providing a variety of products and services for both business and individual
customers.  Financial services of PNWB
include the banking activities of accepting deposits from businesses and
individuals and originating commercial and commercial real estate loans,
residential loans, consumer loans and agricultural loans.  PNWB continues to change the composition of
the loan portfolio and the deposit base as part of the migration to a
commercial bank.  These changes are
designed to have a positive impact on net interest income and service fee
revenue while continuing to meet the needs of PNWBs customers.

Pacific
Northwest Bancorp completed the acquisition of six commercial banking
institutions between 1996 and 1999, which added a total of $668 million in
assets as measured at the respective acquisition dates.  The following table summarizes pertinent
information related to the completed acquisitions:

Acquisition Date
  Institution
  Total
  Assets At Acquisition Date(dollars in thousands)
  Common
  Shares IssuedAugust 31, 1996
  Central Bancorporation
  (1)
  $206,093
  2,147,391January 15, 1998
  Puget Sound Bancorp,
  Inc.(1)
  53,109
  586,420June 15, 1998
  Pacific Northwest Bank
  (1)
  200,219
  2,346,081June 16, 1998
  Pioneer Bancorp, Inc.
  (1)
  108,399
  692,846August 31, 1998
  Kittitas Valley
  Bancorp, Inc. (2)
  47,441
  229,831*October 1, 1999
  NBT Northwest Bancorp
  (2)
  53,018
  677,109(1)         Pooling-of-interests
method of accounting(2)         Purchase
method of accounting

* Additionally, $6.4 million in cash was
paid to Kittitas shareholders.

A source of future growth may be through
mergers and acquisitions.  PNWBs
management believes that many other financial institutions are considering
selling their institutions for a variety of reasons, including lack of
shareholder liquidity, management succession issues, technology challenges,
increasing competition and pending changes with respect to the method of
accounting used for mergers and acquisitions. PNWB actively reviews proposals
for various acquisition opportunities. 
PNWB has a due diligence review process to evaluate potential
acquisitions and has established parameters for potential acquisitions relating
to market factors, financial performance and certain non-financial
factors.  Successful completion of
acquisitions by PNWB depends on several factors such as the availability of
suitable acquisition candidates, necessary regulatory and shareholder approval
and compliance with applicable capital requirements.  No assurance can be made that acquisition activity will continue
in the future.

Currently,
PNWB conducts its business through 55 financial centers in western and central
Washington state.  Investments are
available through Pacific Northwest Financial Services and insurance products
are available through Pacific Northwest Insurance Agency, wholly owned
subsidiaries of Pacific Northwest Bank.

RESULTS OF OPERATIONS

PNWB had net income of $4.1 million for the three-month
period ended March 31, 2001 compared to net income of $5.9 million for the
three-month period ended March 31, 2000. 
Diluted net income per share was $0.26 for the three-month period ended
March 31, 2001, compared to diluted net income per share of $0.37 for the
three-month period ended March 31, 2000. 
PNWBs return on average shareholders equity was 9.10 percent for the
three-month period ended March 31, 2001, compared to 13.85 percent for the
three-month period ended March 31, 2000. 
PNWBs return on average assets was 0.58 percent for the three-month
period ended March 31, 2001, compared to 0.84 percent for the three-month
period ended March 31, 2000.  Results
for the three-month period ended March 31, 2001 included costs associated with
conversion and integration initiatives of $0.6 million, net of income taxes,
and a gain on the sale of an equity interest in a partnership of $0.4 million,
net of income taxes.  Additionally, net
income decreased from the three-month period ended March 31, 2000, due to increases
in the provision for losses on loans and non-interest expense and a decrease in
net interest income partially offset by an increase in non-interest income.

The following table summarizes net income, net income per
share and key financial ratios for the three-month periods ended March 31:

Dollars in thousands, except per share amounts
  2001
  2000Net income
  $4,121
  $5,881Basic net income per share
  $0.27
  $0.38Diluted net income per share
  $0.26
  $0.37Return on average shareholders equity
  9.10%
  13.85%Return on average assets
  0.58%
  0.84%Net interest margin
  3.26%
  3.60%Efficiency ratio
  71.00%
  65.44%Net Interest Income| PNWBs net income is significantly affected by changes
in net interest income, which is the difference between interest income
received on loans receivable and other interest-earning assets and interest
paid on deposits and borrowings.  PNWBs
operations are sensitive to changes in interest rates and the resulting impact
on net interest income.  Interest
rate reductions during the first quarter should have a positive impact on net
interest margin and net interest income for the entire fiscal year; however,
the impact was minimal on the first quarter results based on the magnitude of
interest rate reductions over a relatively short period of time.  Furthermore, interest rate changes have a
greater initial impact on loan yields than on the cost of deposits and
borrowings as variable rate loans reprice immediately and short-term borrowings
and certificates of deposit reprice according to maturity schedules.  PNWB
continues to change the composition of its balance sheet to reduce its
sensitivity to movement in interest rates.

Net interest income was $21.6 million for the three-month
period ended March 31, 2001, compared to $23.5 million for the three-month
period ended March 31, 2000.This
decrease in net interest income was due to a decrease in net interest margin
partially offset by an increase in the average balance of interest-earning
assets.

Interest income was $54.0 million for the three-month
period ended March 31, 2001, compared to $53.1 million for the three-month
period ended March 31, 2000.  The
increase was due to growth in loans receivable and an increase in yields earned
on loans receivable.  The yield on
interest-earning assets increased to 8.16 percent for the three-month period
ended March 31, 2001, compared to 8.12 percent for the three-month period ended
March 31, 2000. This increase was primarily due to a change in the composition
of average interest-earning assets with a greater percentage comprised of
commercial loans with higher yields.

Interest expense was $32.4 million for the three-month
period ended March 31, 2001, compared to $29.6 million for the three-month
period ended March 31, 2000.  This
increase was due to an increase in interest-bearing liabilities to fund asset
growth and an increase in the cost of funds. 
The cost of funds was 5.45 percent for the three-month period ended
March 31, 2001, compared to 4.96 percent for the three-month period ended March
31, 2000.  The cost of funds increased
both as a result of the increased cost of deposits and borrowings.  The cost of deposits increased primarily due
to increased certificates of deposit and limited interest-bearing transaction
deposit growth.  The cost of borrowings increased
due to rising interest rates during 2000 during which a significant of amount
of borrowings matured and were replaced by borrowings with relatively higher
interest rates.  During the three-month
period ended March 31, 2001, overall interest rates have decreased and this
should reduce the cost of funds as borrowings and certificates of deposit
mature and are replaced at lower interest rates.

Net interest margin, which is net interest income divided
by average interest-earning assets, was 3.26 percent for the three-month period
ended March 31, 2001, compared to 3.60 percent for the three-month period ended
March 31, 2000.  The decrease in net
interest margin was primarily the result of an increase in the cost of funds,
which was partially offset by an increase in the yield earned on
interest-earning assets and an increase in non-interest-bearing deposits.

Average Rates and Balances| The following table indicates the average balance and
average interest rates earned or paid, interest rate spread and net interest
margin for the three-month periods ended March 31:

2001
  2000Dollars in thousands
  Average
  Balance
  Rate
  AverageBalance
  RateLoans receivable and loans held for sale
  $1,796,362
  8.93%
  $1,750,597
  8.82%Securities
  available for sale, securities held to maturity and other interest-earning
  assets
  870,514
  6.58%
  867,964
  6.70%Total interest-earning assets
  2,666,876
  8.16%
  2,618,561
  8.12%Interest-bearing deposits
  1,502,536
  4.83%
  1,359,896
  4.19%FHLB advances, securities sold under agreements to
  repurchase and other borrowings
  912,051
  6.47%
  1,035,513
  5.96%Total interest-bearing liabilities
  2,414,587
  5.45%
  2,395,409
  4.96%Non-interest-bearing deposits
  $225,824
  
  $211,005Net interest spread
  
  2.71%
  
  3.16%Net interest margin
  
  3.26%
  
  3.60%The following table provides information on changes in
net interest income for the periods that are attributable to changes in
interest rates and changes in volume:

Three-month
  periods March 31, 2000 to 2001Increase 
  (Decrease)Due to changes inDollars in thousands
  Rate
  Volume
  TotalInterest-earning assetsLoans receivable and loans held for sale
  $413
  $720
  $1,133Securities available for sale, securities held to
  maturity and other interest-earning assets
  (273)
  43
  (230)Total net change in income on interest-earning assets
  140
  763
  903Interest-bearing liabilitiesInterest-bearing deposits
  (2,196)
  (1,484)
  (3,680)FHLB advances, securities sold under agreement to
  repurchase and other borrowings
  (1,006)
  1,839
  833Total net change in expense on interest-bearing
  liabilities
  (3,202)
  355
  (2,847)Net change in net interest income
  $(3,062)
  $1,118
  $(1,944)Provision
for losses on loans|The provision for losses on loans was $1.4 million for the three-month period
ended March 31, 2001, compared to $0.6 million for the three-month period ended
March 31, 2000. Management increased the provision for losses on loans as a
result of the continuous assessment of known and inherent risk characteristics
in the loan portfolio.These
risk characteristics include changes in the size and composition of the loan
portfolio, delinquency levels, actual loan loss experience, current economic
conditions, and detailed analysis of individual loans for which full collectibility
may not be assured.  Management believes
the allowance for losses on loans was adequate as of March 31, 2001.

Non-interest Income| Non-interest income was $5.9 million for the
three-month period ended March 31, 2001, compared to $4.5 million for the
three-month period ended March 31, 2000.The increase in
non-interest income was primarily due to increases in gains on sale of loans,
gains on sale of securities available for sale and a gain on sale of an equity
interest in a partnership.

Gains
on the sale of loans were $453,000 for the three-month period ended March 31,
2001 compared to a loss of $24,000 for the three-month period ended March 31,
2000.  As part of the transition to a commercial bank, PNWB
changed its strategy with regards to the origination and retention of
single-family mortgage loans during 2000. 
The majority of PNWBs single-family mortgage loan production is
channeled to the secondary market with less single-family mortgages retained in
the loan portfolio.

Gains on the sale of securities
available for sale were $698,000 for the three-month period ended March 31,
2001 compared to $6,000 for the three-month period ended March 31, 2000.The
gains during the three-month period ended March 31, 2001 were primarily from
the sale of mortgage-backed securities that were securitized from PNWBs
single-family mortgage loan portfolio in prior periods.

Service
fees were $3.1 million for the three-month period ended March 31, 2001 compared
to $2.8 million for the three-month period ended March 31, 2000.  This increase is primarily due to increased
fees received on deposit accounts.

Non-interest
Expense|
Non-interest expense was $19.5 million for the three-month period ended March
31, 2001, compared to $18.3 million for the three-month period ended March 31,
2000.  Non-interest expense for the
three-month period ended March 31, 2001 includes costs associated with
conversion and integration initiatives of $0.9 million compared to $0.3 million
for the three-month period ended March 31, 2000.  Excluding conversion and integration expenses, non-interest
expense increased by $0.6 million, or 3.3 percent compared to the three-month
period ended March 31, 2000.

As
discussed previously, the company completed acquisitions of four commercial
banks during fiscal year 1998 and one during the three-month period ended
December 31, 1999.  During 2000, PNWB
began the process of converting to a single enhanced operating system for the
entire company.  The first four phases
of the five-phase process were successfully completed during 2000.  The final phase of the conversion was
successfully completed April 9, 2001.

Compensation
and employee benefits were $9.4 million for the three-month period ended March
31, 2001, compared to $9.8 million for the three-month period ended March 31,
2000.  This decrease is primarily due to
the consolidation of certain executive and administrative functions as well as
a decrease in variable compensation expense related to performance based bonus
plans.

Occupancy
and equipment expense was $3.0 million for the three-month period ended March
31, 2001 compared to $2.5 million for the three-month period ended March 31,
2000.  Data processing expense was $1.8
million for the three-month period ended March 31, 2001 compared to $1.2
million for the three-month period ended March 31, 2000.  The increase in occupancy and equipment and
data processing expense reflects increased costs associated with PNWBs new
commercial bank operating system.

Income Tax Expense| Income tax expense was $2.5 million for the three-month
period ended March 31, 2001, compared to income tax expense of $3.3 million for
the three-month period ended March 31, 2000. 
The effective tax rate was 37.4 percent for the three-month period ended
March 31, 2001 compared to 35.6 percent for the three-month period ended March
31, 2000. The higher effective tax rate for 2001 is primarily due to the impact
of permanent differences on lower taxable income.

REVIEW OF
FINANCIAL CONDITION

PNWBs consolidated assets were $2.86 billion as of March
31, 2001, compared to $2.88 billion as of December 31, 2000.

Securities| As of March 31,
2001, PNWB had $836.1 million of securities available for sale, compared to
$840.5 million as of December 31, 2000.As permitted by the
provisions of SFAS No. 133, PNWB reclassified all securities held to maturity
to securities available for sale effective January 1, 2001.  As such, PNWB did not have any securities
held to maturity as of March 31, 2001, compared to $64.7 million as of December
31, 2000.

PNWB
maintains liquidity in accordance with an internal liquidity policy.  Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives, management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities, and management's expectation of the yield that will be
available in the future.  Management's
projections as to the short-term demand for funds to be used for loan
originations and other activities can also affect liquidity levels.

Securities
classified as available for sale are reported at estimated fair value, with
unrealized gains and losses (net of income taxes) reported in accumulated other
comprehensive income (loss), a separate component of shareholders' equity.

Loans
Receivable and Loans Held for Sale| Net loans receivable were
$1.78 billion as of March 31, 2001, compared to $1.76 billion as of December
31, 2000.  Growth in loans receivable
would have been more significant during the three-month period ended March 31, 2001;
however, approximately $26 million of single-family mortgage loans were sold
during the period.

Commercial
loans outstanding totaled $463.6 million as of March 31, 2001, an increase of
$33.5 million from December 31, 2000. 
Commercial real estate mortgage loans outstanding totaled $442.6 million
as of March 31, 2001, an increase of $14.6 million from December 31, 2000.  Commercial and commercial real estate loans
outstanding represented 49.6 percent of total gross loans as of March 31, 2001,
an increase from 47.7 percent of total gross loans as of December 31,
2000.  Growth in commercial lending
should shorten duration risk, increase net interest margin, create better
protection from interest rate volatility and ultimately meet the needs of
PNWBs customers.

Single-family
residential mortgage loans outstanding totaled $421.0 million as of March 31,
2001 compared to $420.1 million as of December 31, 2000.  As part
of the transition to a commercial bank, PNWB changed its strategy with regard to the origination and
retention of single-family mortgage loans during 2000.  The majority of PNWBs single-family
mortgage loan production is being channeled directly to the secondary market
with servicing rights released.

Real
estate construction loans outstanding totaled $320.8 million as of March 31,
2001 compared to $334.8 million as of December 31, 2000.

Loans
held for sale were $19.7 million as of March 31, 2001 compared to $14.2 million
as of December 31, 2000.  Loans held for
sale are carried at the lower of cost or estimated fair value in
aggregate.  Loans held for sale are
generally single-family mortgage loans and loans originated under a Small
Business Administration program.  Loans
held for sale are typically sold to other financial institutions.

The
following table sets forth the composition of PNWBs loan portfolio by type as
of the dates indicated:

Dollars in thousands
  March
  31, 2001
  December
  31, 2000Commercial loans
  $463,589
  $430,147Real estate mortgage loansSingle-family
  residential
  420,951
  420,084Commercial
  442,599
  427,958Real estate construction
  320,777
  334,789Consumer loans
  122,944
  130,222Agricultural loans
  54,567
  55,8501,825,427
  1,799,050Less:Loans held
  for sale
  19,686
  14,187Allowance
  for losses on loans
  18,303
  17,561Deferred
  loan fees and discounts
  9,092
  8,755Net loans receivable
  $1,778,346
  $1,758,547Non-performing Assets| Loans are generally placed on non-accrual when they
become past due over 90 days or when the collection of interest or principal is
considered unlikely.  Loans past due
over 90 days that are not on non-accrual status must be well secured by
tangible collateral and in the process of collection.  PNWB does not return a loan to accrual status until it is brought
current with respect to both principal and interest and future principal
payments are no longer in doubt.  When a
loan is placed on non-accrual status, any previously accrued and uncollected
interest is reversed from interest income. 
PNWB performs a review of its loan portfolio for weaknesses in credit
quality on an ongoing basis to identify problem loans.  This review results in internal loan
classifications based on risk characteristics and loan performance.  The overall objective of this review process
is to identify trends in the credit quality of the loan portfolio and to
determine the level of loss exposure to evaluate the need for an adjustment to
the allowance for losses on loans.

Non-accrual loans totaled $18.8 million as of March 31,
2001 compared to $13.9 million as of December 31, 2000.  Other real estate was $10.4 million as of
March 31, 2001, compared to $9.9 million as of December 31, 2000.  Total non-performing assets, including
non-accrual loans and other real estate, totaled $29.3 million or 1.02 percent
of consolidated assets as of March 31, 2001, compared to $23.8 million or 0.83
percent of consolidated assets as of December 31, 2000.  The increase in non-performing assets from
December 31, 2000 was primarily due to the placement of a $3.4 million
commercial real estate loan on non-accrual status during the quarter as well as
increases in non-accrual agricultural loans of $1.5 million.  Non-accrual agricultural loans increased due
to the weakness of the agricultural economy in central Washington.

The following table summarizes non-performing assets as
of the dates indicated:

Dollars in thousands
  March
  31, 2001
  December
  31, 2000Non-accrual loansCommercial loans
  $3,530
  $2,455Real estate mortgage loansSingle-family residential
  5,558
  5,020Commercial
  4,695
  991Real estate construction
  2,038
  3,920Consumer loans
  177
  225Agricultural loans
  2,834
  1,272Total
  non-accrual loans
  18,832
  13,883Other real estate
  10,441
  9,909Total non-performing assets
  $29,273
  $23,792Allowance
for Losses on Loans|
The allowance for losses on loans was $18.3 million or 1.02 percent of loans
receivable as of March 31, 2001, compared to $17.6 million or 0.99 percent of
loans receivable as of December 31, 2000. 
Net loan charge-offs were $0.7 million or 0.15 percent of the average
balance of loans outstanding for the three-month period ended March 31, 2001.
Net loan charge-offs were $0.4 million or 0.08 percent of the average balance
of loans outstanding for the three-month period ended March 31, 2000.  The increase in net charge-offs is
consistent with increases in non-performing assets.

The
allowance for losses on loans is maintained at an amount to sufficiently
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio.  Management analyzes
certain factors underlying the quality of the loan portfolio.  These factors include changes in the size
and composition of the loan portfolio, delinquency levels, actual loan loss
experience, current economic conditions, and detailed analysis of individual
loans for which full collectibility may not be assured. The appropriate amount
of the allowance for losses on loans is estimated based upon factors and trends
identified by management.

When
available information confirms that specific loans or portions thereof, are
uncollectible, these amounts are charged off against the allowance for losses
on loans. The existence of some or all of the following criteria will generally
confirm that a loss has been incurred: the loan is significantly delinquent and
the borrower has not evidenced the ability or intent to bring the loan current;
there is no recourse to the borrower, or if there is recourse, the borrower has
insufficient assets to pay the debt; the fair value of the loan collateral is
significantly below the current loan balance, and there is little or no
near-term prospect for improvement.  A
provision for losses on loans, which is a charge against income, is added to
the allowance for losses on loans based on ongoing assessments of credit risk
in the loan portfolio.

PNWB
believes it has established its allowance for losses on loans in accordance
with accounting principles generally accepted in the United States.  However, there can be no assurance that in
the future, regulators, when reviewing PNWB's loan portfolio, will not request
PNWB to increase its allowance for losses on loans, thereby affecting PNWB's
financial condition and results of operations.

PNWB
maintains an estimated allowance for losses on loans based on the analyses
conducted by management and credit personnel. 
The allowance for losses on loans is allocated to certain loan
categories based on the relative risk characteristics, asset classifications
and actual loss experience of the loan portfolio.  Although the allocation of the allowance for losses on loans is
an important credit management tool, the entire allowance for losses on loans
is available for the entire loan portfolio. 
Management reviewed the allocations in the various loan categories and
believes the allowance for losses loans was adequate as of March 31, 2001.

The
following tables summarize the activity in allowance for losses on loans during
the three-month periods ended March 31:

Dollars in thousands
  2001
  2000Allowance as of beginning of period
  $17,561
  $15,182Provision for losses on loans
  1,400
  550Recoveries
  296
  83Charge-offs
  (954)
  (446)Allowance as of end of period
  $18,303
  $15,369Goodwill and Other Intangible
Assets| Goodwill arising from
acquisitions represents the excess of the purchase price over the estimated
fair value of net assets acquired.

Other
intangible assets consist of core deposit intangibles and loan servicing
rights.  Loan servicing rights are
capitalized when acquired either through the purchase or origination of loans
that are subsequently sold or securitized with the servicing rights retained.
The estimated fair value of loan servicing rights at the date of the sale of
loans is determined based on the discounted present value of expected future cash
flows using key assumptions for servicing income and costs and prepayment rates
on the underlying loans. The estimated fair value is periodically evaluated for
impairment by comparing actual cash flows and estimated future cash flows from
servicing assets to those estimated at the time servicing assets were
originated.  Loan servicing rights are
amortized as an offset to service fees in proportion to and over the period of
estimated net servicing income.

Goodwill
and other intangible assets are amortized using the straight-line and
accelerated methods over periods not exceeding twenty years.

Goodwill
and other intangible assets consisted of the following as of the dates
indicated:

Dollars in thousands
  March
  31, 2001
  December
  31, 2000Goodwill
  $16,977
  $17,242Core deposit intangibles
  554
  598Loan servicing intangibles
  2,604
  2,861$20,135
  $20,701Deposits| PNWB offers various types of deposit accounts, including checking accounts,
savings accounts, money market accounts and certificate of deposit
accounts.  Deposit accounts vary as to
terms; the principal differences are the minimum balance required, the time
period the funds must remain on deposit, the interest rate, and the deposit or
withdrawal option.  PNWB relies on
generating deposits through a marketing strategy that employs a sales staff
responsible for establishing new customer relationships.  As part of initiatives to improve liquidity
and to reduce overall funding costs, PNWB began to use brokered and wholesale
certificates of deposit during 2000.

Non-interest-bearing
deposits were $253.9 million as of March 31, 2001, compared to $244.1 million
as of December 31, 2000. 
Non-interest-bearing deposits represented 14.3 percent of total deposits
as of March 31, 2001, compared to 14.2 percent as of December 31, 2000.  Interest-bearing transaction accounts (which
include interest-bearing checking, money market and savings accounts) totaled
$579.0 million as of March 31, 2001 compared to $569.7 million as of December
31, 2000.  Interest-bearing transaction
accounts represented 32.7 percent of total deposits as of March 31, 2001,
compared to 33.2 percent as of December 31, 2000.

Certificates
of deposit totaled $940.4 million as of March 31, 2001, compared to $903.4
million as of December 31, 2000. 
Certificates of deposit represented 53.0 percent of total deposits as of
March 31, 2001, an increase from 52.6 percent as of December 31, 2000.

Management
is continuing to pursue initiatives to increase the percentage of
non-interest-bearing deposits and interest-bearing transaction deposits
relative to certificates of deposit. 
This should increase net interest income and service fee revenue while
building customer relationships.

The
following table sets forth the balances of deposits by account type as of the
dates indicated:

Dollars in thousands
  March
  31, 2001
  December
  31, 2000Non-interest-bearing deposits
  $253,918
  $244,100Interest-bearing checking accounts
  206,757
  201,894Money market accounts
  271,800
  266,933Savings accounts
  100,463
  100,831Certificates of deposit
  940,389
  903,350Total
  $1,773,327
  $1,717,108FHLB Advances and Securities Sold Under Agreements to
Repurchase|
PNWB borrows through advances from the Federal Home Loan Bank (FHLB) and
securities sold under agreements to repurchase with third parties. These
borrowing sources totaled $823.7 million as of March 31, 2001 compared to
$918.1 million as of December 31, 2000. 
This decrease is a result of the overall increase in deposits.  It is managements intention to increase
deposits and reduce borrowings in the future.

The
FHLB provides credit for member financial institutions.  As members, financial institutions are
required to own capital stock in the FHLB, and are authorized to apply for
advances on the security of such stock, certain home mortgages and other assets
(principally securities that are obligations of, or guaranteed by, the United
States).  Advances are made to member
financial institutions pursuant to several different programs.  These programs are generally designed to
meet the financial institution's need while still reflecting market terms and
conditions.  Pacific Northwest Bank uses
advances from the FHLB to supplement funds available to lend and to meet
liquidity guidelines.  Interest rates on
these advances vary in response to general economic conditions.

PNWB also uses the securities market for borrowings by
utilizing its securities available for sale as collateral. These borrowings are
collateralized by securities with an estimated fair value exceeding the face
value of the borrowings.



Other borrowings|Other borrowings were $12.5 million as of
March 31, 2001 compared to $1.8 million as of December 31, 2000.  This increase is due to Pacific Northwest
Bancorp borrowing $10 million from another financial institution during the
three-month period ended March 31, 2001. This borrowing qualifies as Tier II
capital under the capital guidelines of the Federal Reserve Board.

Guaranteed Preferred Beneficial Interests in Subordinated
Debt|
On November 15, 1999, $40 million of 9.875
percent Capital Securities were issued by InterWest Capital Trust I (the
Trust).  The proceeds of the offering
were invested by the Trust in junior subordinated debentures of Pacific
Northwest Bancorp.  The debentures held
by the Trust are the sole assets of the Trust. 
The capital securities are subject to mandatory redemption, in whole or
in part, upon repayment of the debentures. 
The debentures will not mature earlier than November 15, 2009, and not
later than November 15, 2029.  Pacific
Northwest Bancorp entered into agreements which, taken collectively, fully and
unconditionally guarantee the capital securities subject to the terms of each
of the guarantees.  The capital
securities qualify as Tier I capital under the capital guidelines of the
Federal Reserve Board.

Shareholders Equity| Pacific Northwest Bancorp is committed to managing capital for maximum
shareholder benefit and maintaining strong protection for depositors and
creditors.  PNWB manages various capital
levels at both the holding company and subsidiary bank level to maintain
adequate capital ratios and levels in accordance with external regulations and
capital guidelines established by the Board of Directors.

PNWBs
total shareholders equity was $185.1 million as of March 31, 2001, an increase
of $6.4 million from $178.7 million as of December 31, 2000.  The increase in shareholders equity was due
to net income, other comprehensive income, the issuance of common stock under stock
option plans and repayments on the ESOP loan partially offset by dividends
declared to shareholders.  Book value
per share was $11.92 as of March 31, 2001, compared to $11.54 as of December
31, 2000.  During the three-month period
ended March 31, 2001, Pacific Northwest Bancorp declared cash dividends
totaling $0.14 per share.

SUPERVISION AND
REGULATION

Pacific
Northwest Bancorp is a registered bank holding company under the Bank Holding
Company Act of 1956 (BHCA) and is subject to the supervision of, and regulation
by, the Board of Governors of the Federal Reserve System  (FRB). 
Under the BHCA, Pacific Northwest Bancorp files with the FRB annual
reports of operations and such additional information as the FRB may
require.  Under the BHCA, a bank holding
company may engage in banking, managing or controlling banks, furnishing or
performing services for banks it controls, and conducting activities that the
FRB has determined to be closely related to banking.

Pacific
Northwest Bank is a member of the Federal Deposit Insurance Corporation (FDIC),
and as such, is subject to examination thereby.  Pacific Northwest Bank is a state-chartered commercial bank
subject to regulation and supervision by the Washington Department of Financial
Institutions Division of Banks.  In
practice, the primary regulator makes regular examinations of the subsidiary
bank subject to its regulatory review or participates in joint examinations
with other regulators.  Areas subject to
regulation by federal or state authorities include the allowance for losses on
loans, investments, loans, mergers and acquisitions, issuance of securities,
payment of dividends, establishment of branches and other aspects of
operations.

The
enforcement powers available to banking regulators are substantial and include,
among other things, the ability to assess civil monetary penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions against
banking organizations and institution-affiliated parties, as defined.  In general, enforcement actions must be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions, or inactions, may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities.  Applicable law also
requires public disclosure of final enforcement actions.

Pacific
Northwest Bancorp and Pacific Northwest Bank are subject to risk-based capital
guidelines requiring minimum capital levels based on the credit risk of
assets.  Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a material
effect on PNWBs consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Pacific Northwest Bancorp and Pacific Northwest
Bank must meet specific capital guidelines that involve quantitative measures
of assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. 
Capital classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.  The regulations define the relevant capital
levels for the five categories.  In
general terms, the capital definitions are as follows:

Total Capital (to Risk 
  Weighted Assets)
  Tier 1 (to Risk
  Weighted Assets)
  Tier
  1
  (to AverageAssets)Well
  capitalized
  10%
  6%
  5%Adequately
  capitalized
  8%
  4%
  4%Undercapitalized
  Below
  8%
  Below
  4%
  Below
  4%Significantly
  undercapitalized
  Below
  6%
  Below
  3%
  Below
  3%Critically
  undercapitalized
  -
  -
  2%
  or lessPacific Northwest Bancorp is subject to risk-based capital
guidelines issued by the FRB, which establish a risk-adjusted ratio
relating capital to different categories of assets.  Tier I capital is comprised of shareholders equity and
guaranteed preferred beneficial interests in subordinated debt less certain
intangibles, and excludes the equity impact of adjusting securities available
for sale to estimated fair value. Total capital is Tier I capital, the
allowance for losses on loans and certain long-term debt that qualifies for
inclusion as regulatory capital.  The
FRBs risk-based capital rules have been supplemented by a leverage capital
ratio, defined as Tier I capital to adjusted quarterly average total
assets.  As of March 31, 2001, under the
FRBs capital guidelines, Pacific Northwest Bancorps levels of consolidated
regulatory capital exceeded the FRBs well-capitalized requirements.  The capital amounts and ratios for Pacific
Northwest Bancorp and Pacific Northwest Bank as of March 31, 2001, are
presented in the following table:

Amount
  For CapitalAdequacy Purposes
  To
  Be WellCapitalized UnderPrompt Corrective 
  Action ProvisionsCAPITAL RATIOSDollars in thousands
  Amount
  Ratio
  Amount
  Ratio
  Amount
  RatioPacific Northwest Bancorp:Total capital (to
  risk-weighted assets)
  $237,248
  11.55%
  $164,338
  8.0%
  $205,422
  10.0%Tier I capital (to
  risk-weighted assets)
  208,945
  10.17%
  82,169
  4.0%
  123,253
  6.0%Tier I capital (to
  average assets)
  208,945
  7.36%
  113,576
  4.0%
  141,970
  5.0%Pacific Northwest Bank:Total capital (to
  risk-weighted assets)
  $232,933
  11.40%
  $163,476
  8.0%
  $204,345
  10.0%Tier I capital (to
  risk-weighted assets)
  214,630
  10.50%
  81,738
  4.0%
  122,607
  6.0%Tier I capital (to
  average assets)
  214,630
  7.58%
  113,265
  4.0%
  141,581
  5.0%As of
March 31, 2001, Pacific Northwest Bank was in compliance with well-capitalized
capital requirements.  Management
believes that under the current regulations Pacific Northwest Bank will
continue to meet well-capitalized capital requirements in the foreseeable
future.  However, events beyond the
control of Pacific Northwest Bank, such as a downturn in the economy in areas
where Pacific Northwest Bank has most of its loans, could adversely affect
future earnings and, consequently, the ability of Pacific Northwest Bank to
meet future well-capitalized capital requirements.

LIQUIDITY RESOURCES

Liquidity management focuses on the need
to meet both short-term funding requirements and PNWBs long-term strategies
and goals. Specifically, the objective of liquidity management is to ensure the
continuous availability of funds to meet the demands of depositors, creditors
and borrowers. Management structures the balance sheet to meet these needs.
PNWB desires to attract and retain business and retail customer relationships
with a focus on transaction accounts and commercial and consumer lending.  PNWB also uses wholesale funds through
advances from the FHLB and the sale of securities under agreements to
repurchase to fund asset growth and meet liquidity needs. PNWB also uses
wholesale and brokered certificates of deposit to supplement wholesale
borrowings.  Other sources of funds for
liquidity include loan repayments, loan sales, security sales and
mortgage-backed and related security repayments. Repayments on loans and
mortgage-backed and related securities and deposit inflows and outflows are
affected by changes in interest rates.

PNWB has the capacity to borrow funds
from the FHLB through pre-approved credit lines.  These credit lines have pledge requirements whereby PNWB must
maintain unencumbered collateral with a value at least equal to the outstanding
balance.  Additionally, PNWB uses the
securities market as a vehicle for borrowing by utilizing its securities
available for sale as collateral.  These
borrowings are collateralized by securities with an estimated fair value
exceeding the face value of the borrowings. If the estimated fair value of the
securities were to decline as a result of an increase in interest rates or
other factors, PNWB would be required to pledge additional securities or cash
as collateral.

The
analysis of liquidity also includes a review of PNWBs consolidated statement
of cash flows for the three-month period ended March 31, 2001.  The consolidated statement of cash flows
details PNWBs operating, investing and financing activities during the
period.  The most significant items
under operating activities include net income of $4.1 million for the
three-month period ended March 31, 2000, a decrease in other liabilities of
$3.8 million and a decrease in other assets of $3.3 million.  Also included in operating activities are
the add back of non-cash depreciation, amortization of intangible assets and
the provision for losses of loans totaling $3.5 million.  Net cash provided by operating activities is
also adjusted for the gains on the sale of loans and securities available for
sale totaling $1.2 million.  Investing
activities included proceeds from maturing and principal repayments on
securities available for sale of $160.0 million, purchases of securities
available for sale of $94.8 million and proceeds from the sale of securities
available for sale of $11.7 million. 
Investing activities also included a $54.9 million increase in loans
receivable, $26.4 million of proceeds from the sale of loans and a $30.7
million increase in federal funds sold. 
During the period, financing activities included $83.4 million in
borrowing repayments, net of borrowing proceeds, a $37.0 million increase in
certificates of deposit, a $19.2 million increase in deposits and a total of
$2.2 million paid in cash dividends to shareholders.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

PNWBs results of operations are largely
dependent upon its ability to manage interest rate risk. Management considers
interest rate risk to be a significant market risk that could have a material
effect on PNWBs financial condition and results of operations.

PNWB is sensitive to potential changes in
interest rates and the resulting impact on net interest income.  It is an objective of management to reduce
this sensitivity through the use of adjustable rate loans and short-term
commercial and consumer loans.  This enables
PNWB to better match the duration of its deposit base with these types of
assets.

In addition to adjustable rate loans and
short-term commercial and consumer loans, PNWB uses a number of other
strategies to minimize the impact on net income due to significant changes in
interest rates. The strategies utilized by PNWB include sales of long-term,
fixed-rate mortgage loans, emphasis on growth in non-interest-bearing deposits
and adjustable rate commercial lending.

Management uses simulation analysis to measure PNWBs
interest sensitivity position.  This
simulation analysis is used to evaluate the effects of potential interest rate
movements on net interest income.  The
simulation analysis model is dynamic in nature, and incorporates managements
current balance sheet strategy. Management develops assumptions regarding
interest rate spreads, projected balances, expected maturities, cash flows and
prepayment assumptions under different interest rate scenarios.  Actual results will differ from simulated
results due to timing, magnitude, and frequency of interest rate changes and
changes in market conditions and management strategies, among other factors.

For further information on interest rate risk, reference
is made to the sections Net Interest Income and Average Rates and Balances in
Item 2. Management Discussion and Analysis contained in this quarterly report
on Form 10-Q.  Information regarding the
expected maturities of financial assets and financial liabilities has not
changed materially from disclosures made in the Annual Report on Form 10-K for
the year ended December 31, 2000.

FORWARD-LOOKING STATEMENTS

In
this quarterly report on Form 10-Q, PNWB has included certain forward-looking
statements concerning its future operations. It is PNWBs desire to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. This statement is for the express purpose of availing PNWB
of the protections of such safe harbor with respect to all forward-looking
statements contained in this quarterly report on Form 10-Q.  Sentences containing words such as may,
will, expect, anticipate, believe, estimate, should, projected,
or similar words may constitute forward-looking statements.  Although PNWB believes that the expectations
expressed in these forward-looking statements are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
it is possible that actual results may differ materially from these
expectations.  PNWB has used these
statements to describe expectations and estimates in various areas, including,
but not limited to: changes in the economy of the markets in which it operates;
interest rate movements; future acquisition and growth strategies; data
processing system conversions; the impact of competitive products, services and
pricing; and legislative, regulatory and accounting changes affecting the
banking and financial services industry. 
Actual results could vary materially from the future results covered in
forward-looking statements.  Factors
such as interest rate trends and loan delinquency rates, as well as the general
state of the economy in Washington state and the United States as a whole,
could also cause actual results to vary materially from the future results
anticipated in such forward-looking statements. These factors should be
considered in evaluating the forward-looking statements and undue reliance
should not be placed on such statements.

PART II. OTHER INFORMATION

Item 1.Legal
Proceedings

PNWB faces ordinary routine litigation arising in the
normal course of business.  In the
opinion of management, liabilities (if any) arising from such claims will not
have a material effect upon the business, results of operations or financial
condition of PNWB.Items 2,3,4 and 5 are not applicable and have been omitted.

Item 6.Exhibits and
Reports on Form 8-K

(a)Exhibits

3.1        Articles
of Incorporation of Pacific Northwest Bancorp (incorporated by reference to
Exhibit 3.1 to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2000)3.2        Bylaws of
Pacific Northwest Bancorp (incorporated by reference to Exhibit 3.2 to the
Registrants Annual Report on Form 10-K for the year ended December 31, 2000)10         Material
contracts of Pacific Northwest Bancorp (incorporated by reference to Exhibits
10.1 through 10.14 to the Registrants Annual Report on Form 10-K for the year
ended December 31, 2000)(b) Reports
on Form 8-K

The company filed a Form 8-K dated March 21, 2001
providing a first quarter update with respect to systems conversions and
anticipated financial results for the quarter.SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.



PACIFIC NORTHWEST BANCORPBy:
  /s/ Patrick M. FaheyPatrick M. Fahey,President and Chief
  Executive Officer/s/ Bette J. FlorayBette J. FlorayExecutive Vice President
  and Chief Financial OfficerDated:
  May 10, 2001