---

UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-K





|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------




| |  | For the fiscal year ended December 31, 2001
| |  | -------------------------------------------




OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




| |  | For the transition period from
 to
| |  | ----------------------------------




Commission file number 0-18561





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AMERICANWEST BANCORPORATION


(Exact name of registrant
as specified in its charter)





Washington

91-1259511(State or other jurisdiction of incorporation)

(IRS Employer Identification No.)





9506 North Newport Highway


Spokane, Washington 99218-1200


(Address of principal executive offices)





Registrants telephone number, including area code (509) 467-6949





Securities registered pursuant to Section 12(b) of the Act:





None





Securities registered pursuant to section 12(g) of the Act:





Common Stock, no par value


Title of each class





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Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during
the past 12 months (or for such shorter period as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x  NO  ̈





Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.  ̈





The aggregate market value of the voting stock held by non-affiliates of the registrant,
computed by reference to the stock closing prices on stock at February 15, 2002, was approximately $84,622,000. The number of shares of common stock outstanding at such date was 7,897,144.





Documents incorporated by reference. Portions of the AmericanWest Bancorporation definitive Proxy Statement for the annual meeting of shareholders to be held on April 23, 2002, are
incorporated by reference into Part III of the Form 10-K.





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AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR


ENDED DECEMBER 31, 2001





TABLE OF CONTENTS





PagePART IItem 1.

Business

3Item 2.

Properties

17Item 3.

Legal Proceedings

17Item 4.

Submission of Matters to a Vote of Security Holders

17PART IIItem 5.

Market for Registrants Common Equity and Related Stockholder Matters

17Item 6.

Selected Financial Data

18Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations

19Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

23Item 8.

Financial Statements and Supplementary Data

25Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

25PART IIIItem 10.

Directors and Executive Officers of the Registrant

25Item 11.

Executive Compensation

25Item 12.

Security Ownership of Certain Beneficial Owners and Management

25Item 13.

Certain Relationships and Related Transactions

25PART IVItem 14.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

26SIGNATURES

26




2




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PART I





Item 1.Business.





AmericanWest Bancorporation





AmericanWest Bancorporation (AWBC) is a one-bank holding company headquartered in Spokane, Washington. During 2001 AWBC merged its five affiliated banks United Security Bank, Home
Security Bank, Bank of Pullman, Grant National Bank, and AmericanWest Bank to form AmericanWest Bank (AWB or Bank) (Washington). AWBC also sold its insurance agency USB Insurance during 2001. AWBC conducts its banking business through thirty-two
branches located in communities throughout eastern Washington, including Spokane and one branch in Moscow, Idaho. AWBC focuses its banking and other services on individuals, professionals, and small to medium sized businesses in diversified
industries throughout its service area. At December 31, 2001, AWBC had total assets of $659.3 million, loans of $587.5 million and deposits of $532.2 million. AWBC was founded in 1983 and has been profitable in every year since its inception. AWBC
trades on NASDAQ under the symbol of AWBC.





Bank





AWB offers a full range of financial services to commercial and individual customers, including short-term and medium-term loans, revolving credit facilities, inventory and accounts receivable financing, equipment
financing, residential and small commercial construction lending, agricultural lending, mortgage lending, equipment leasing, various savings programs, checking accounts, installment and personal loans, and bank credit cards. AWB also provides a
broad range of depository and lending services to commercial, industrial and agricultural enterprises, governmental entities and individuals. AWBs deposit taking and lending activities are primarily directed to the communities in which their
branches are located. AWBs primary marketing focus is on small to medium-sized businesses and professionals in these communities.





AWBs loan portfolio consists primarily of commercial, agricultural, real estate (both mortgage and construction loans) and installment loans originated within the principal service areas. AWB is committed to the needs of the local
communities it serves, and strives to provide a high level of personal and professional service to its customers. Management believes AWBs involvement, its understanding of its service area and its local decision-making abilities give it a
distinct advantage over larger banking institutions. AWB is well positioned to provide loans to small and medium sized businesses because of AWBs direct knowledge of its customers businesses and the communities it serves. AWB provides
personalized, quality financial service to its customers, which has enabled them to maintain a stable and relatively low-cost retail deposit base.





Business Strategy





AWBs business strategy is to continue to build a growing, profitable community banking
and financial services network by emphasizing high quality customer service and by focusing on the financial needs of consumers and small to medium-sized businesses. AWB intends to pursue an aggressive growth strategy, the key components of which
include:





| |  |  | Increasing market share in existing markets
| | - |  | -------------------------------------------




| |  |  | Expanding the markets served through new branch openings and acquisitions
| | - |  | -------------------------------------------------------------------------




| |  |  | Providing superior customer service
| | - |  | -----------------------------------




AWBC completed a Strategic Plan.It is the vision of AWBC to be, and to be recognized as, the premier financial services company in the markets we serve. It is the mission of AWBC to provide all employees with
a positive environment in which to maximize their contribution to our success and attain their career goals; in order to be responsive to customer needs, and partner in helping




3




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individuals and businesses in our markets achieve their financial goals; in order to optimize long-term shareholder value and to provide a superior rate of
return on shareholder investment.





Increase Market Share in Existing Markets.Since its formation
AWBC has focused on commercial banking to small and medium-sized businesses, professionals and other individuals. Management believes that AWBC can continue to gain market share by targeting products and services to these businesses.





AWBC emphasizes the development of long-term relationships with its customers, which enables the Banks to develop and
offer new products that meet its customers needs. AWBC is oriented toward the communities it serves and is actively involved. AWBC believes this community orientation gives a competitive advantage in attracting and retaining targeted
customers.





The consolidation of the banking industry in recent years has resulted in centralized loan approval in the larger
financial institutions with which AWBC competes. This has resulted in inconvenience and reduced service to small business and individual customers of these institutions, and has created opportunities for smaller, locally-focused institutions, such
as community banks, which can approve credit and offer other customized banking services within each branch. AWBC maintains local loan officers having the authority to approve large loans.





Expand Markets Served through New Branch Openings and Acquisitions.    AWBC intends to expand its presence in eastern and central Washington by opening new
branches and possibly acquiring other financial institutions in markets not currently served by the Banks.





Management considers
a variety of criteria in evaluating potential branch expansion, including the demographics and short and long-term growth prospects for the location, the management and other resources needed to integrate the branch into its existing operations, the
degree to which the branch would enhance the geographic diversity of AWBC or would enhance the presence in an existing market, and the estimated cost of opening and operating the branch as compared to the cost of acquiring an existing office and
deposit base.





In addition to internal growth, there may be attractive opportunities to grow AWBC through carefully selected
acquisitions of other financial institutions or their branches in central and eastern Washington, eastern Oregon and northern Idaho.





Provide Superior Customer Service.AWBC attributes it success to its efforts to offer superior, personal service through professional bankers at all of its branches. AWBC distinguishes itself in its markets by
emphasizing a culture in which customers are the highest priority in all aspects. Ongoing employee training is focused on customer needs, responsiveness and courtesy to customers. AWBCs marketing efforts and operating practices emphasize ties
to the local communities it serves, and its commitment to providing the highest level of personalized service.





Lending Activities





AWBCs loan portfolio consists primarily of commercial loans, agricultural loans, real estate mortgage loans,
residential real estate and other construction loans, consumer installment loans and bankcard loans. At December 31, 2001, AWBC had total loans outstanding of $588 million, which equals 110.4% of AWBCs deposits and 89.1% of its assets.
Virtually all of the loans held by AWBC were to borrowers within the AWBs principal market areas. See loan category amounts for five years in Item 6, selected financial data.





Commercial Loans.Commercial loans primarily consist of loans to businesses for various purposes, including revolving lines of credit, equipment financing
loans and letters of credit. These loans generally mature within five years, have adjustable rates and are secured by inventory, accounts receivable, equipment or real estate. AWB also classifies commercial construction loans as commercial loans.




4




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Agricultural Loans.Agricultural loans primarily consist of farm
loans to finance operating expenses. These loans generally mature within one year, have adjustable rates and are secured by farm real estate, equipment, crops or livestock. Since agricultural loans present certain risks not associated with other
types of lending, the policy of AWB has been to make such loans generally only to agricultural producers with diverse crops, thereby mitigating the risk of loss attributable to a crop failure or the deterioration of commodity prices.





Mortgage Loans.Mortgage loans include various types of loans for which AWB holds real
property as collateral. These loans include adjustable and fixed rate first mortgage loans secured by one to four family residential properties, second mortgage loans secured by one to four family residential properties, and loans secured by
multifamily (five or more) residential properties. Mortgage loans typically mature in one to five years and require payments on amortization schedules ranging from one year to twenty years.





Construction Loans.Construction loans are made to individuals and contractors to construct primarily single-family
principal residences. These loans have maturities of three months to six months. Interest rates are typically adjustable, although some fixed-rate loans are made. AWBs policy is to require that a permanent financing commitment be in place
before a construction loan is made to an individual borrower.





Installment and Other
Loans.Installment loans are primarily automobile and home equity loans. Consumer loans generally have maturities of five years or less, and fixed interest rates. Other loans consist of personal lines of credit and
bankcard advances. Personal lines of credit generally have maturities of one year or less, and fixed interest rates. Bankcard advances are generally due within 30 days and bear interest at rates that vary from time-to-time.





Interest Rates.The interest rates earned on loans vary with the degree of risk and amount of the loan, and are
further subject to competitive pressures, money market rates, the availability of funds and government regulations. Approximately 39% of the loans in AWBs portfolio have interest rates that float with the lending Banks reference rate,
which is in turn based on various indices such as the rates of interest charged by money center banks.





Lending and
Credit Management.AWB follows loan policies. The policies establish levels of loan commitment by loan type, and credit review and grading criteria, and other matters such as loan administration, loans to affiliates,
costs, problem loans and loan loss reserves, and related items. Loans are typically reviewed and graded on a monthly basis.





All loan applications are processed at AWBs branch lending offices. Designated AWB officers follow approved guidelines and underwriting policies to approve all loan applications. Credit limits generally vary according to the type of
loan and the individual loan officers experience. The maximum current loan limits available to any one individual vary from $25,000 to $6,500,000 per loan.





Under applicable federal and state law, permissible loans to one borrower by AWB are limited. The Bank, as a matter of policy, does not extend credit to any single borrower in excess of
$10,000,000. At December 31, 2001, 2000 and 1999, the outstanding balance of loan participations sold outside AWB was $41.3 million, $51.2 million, and $17.1 million, respectively.





Secondary Mortgage Sales.AWB sells mortgage loans in the secondary market as a correspondent and a broker. AWB offers a variety of products for refinance
and purchases; and is approved to originate FHA and VA loans. The majority of loans originated in 2001 were fixed rate single-family loans. Such loans were sold on a servicing released basis and also a portion of the loans was sold with servicing
retained. Total loans sold in 2001 were $38.0 million with $32.5 million servicing released and $5.5 million servicing retained.




5




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Nonperforming Assets.The following table provides information
for AWBs nonperforming assets.





Year ended December 31,2001


2000


1999


1998


1997($ in thousands)Nonperforming loans:Nonaccrual loans

$
11,023


$
5,458


$
5,875


$
1,481


$
2,220Accrual loans 90 days or more past due


2,193



1,339



489



664



982Total nonperforming loans


13,216



6,797



6,364



2,145



3,202Other real estate owned and other repossessed assets


1,616



1,510



1,179



1,245



1,167Total nonperforming assets

$
14,832


$
8,307


$
7,543


$
3,390


$
4,369Allowance for loan losses

$
6,624


$
4,948


$
4,349


$
3,819


$
3,869Ratio of total nonperforming assets to total assets


2.25
%


1.39
%


1.43
%


0.66
%


0.90
%Ratio of total nonperforming loans to total loans


2.25
%


1.38
%


1.51
%


0.59
%


1.01
%Ratio of allowance for loan losses to total nonperforming loans


50.1
%


72.8
%


68.3
%


178.0
%


120.8
%





AWBs nonperforming loans consist of nonaccruing loans and accruing loans 90
days or more past due. Accruing loans 90 days or more past due remain on an accrual basis because they are adequately collateralized and in the process of collection. For nonaccrual loans no interest is taken into income unless received in cash or
until such time as the borrower demonstrates an ability to resume payments of principal and interest. Interest previously accrued, but not collected is reversed and charged against income at the time a loan is placed in nonaccrual status. The
majority of the nonperforming assets as of December 31, 2001 involve four borrowers. AWB is well secured on a $3.8 million retail/office complex near downtown Spokane and two ice skating complexes in Spokane for another $5.2 million. The fourth
borrower of $800,000 is on two apple orchards in the Yakima Valley.





Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Real estate properties and other repossessed assets of AWB had a book value of $1,616,000 as of December 31, 2001, consisting primarily of commercial and chattel property.





Analysis of Allowance for Loan Losses





The
allowance for loan losses represents managements recognition of the risks of extending credit and its evaluation of the quality of the loan portfolio of AWB. The allowance is maintained at levels considered adequate by management to provide
for anticipated loan losses, and is based on managements assessment of factors affecting the loan portfolios, including problem loans, business conditions and loss experience, an overall evaluation of the quality of the underlying collateral,
and collateral selling costs. The allowance is increased by provisions charged to operations and is reduced by loans charged off, net of any recoveries.





In originating loans AWB recognizes that losses will be experienced and that the risk of loss will vary depending on the type of loan, the creditworthiness of the borrower over the term of the loan, general economic
conditions, and the quality of the security for the loan. As a result, AWB maintains an allowance for loan losses by following generally accepted accounting principles outlined in SFAS No. 5, Accounting for Contingencies. AWB has established
systematic methodologies for determination of the adequacy of the allowance for loan losses. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance and specific allowances
for individual nonperforming loans. AWB adopted SFAS No. 114 and No. 118, Accounting by Creditors for Impairment of a Loan. These accounting pronouncements require specific identification of an allowance for loan loss for an impaired or
nonperforming loan.




6




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AWB believes it has established its existing allowance for loan losses in accordance with
generally accepted accounting principles. In addition banking regulators may request an additional allowance for loan losses based on their review of the loan portfolio. Also future events affecting borrowers and collateral cannot be predicted with
certainty, which may result in an increase to the future allowance for loan losses as additional information becomes available. AWB management believes that the allowance for loan losses is adequate.





The following table sets forth information regarding changes in AWBs allowance for loan losses as follows:





Years ended December 31,2001


2000


1999


1998


1997($ in thousands)Balance of allowance for loan losses at beginning of period

$
4,948


$
4,349


$
3,819


$
3,869


$
2,906Charge-offsCommercial


396



833



755



348



526Agricultural


613











213



112Real estate


96



97



210



157



272Installment


188



164



199



220



191Other


36



46



84



126



35Total charge-offs


1,329



1,140



1,248



1,064



1,136RecoveriesCommercial


112



51



119



167



293Agricultural


2Real estate


21



2



40



22



37Installment


13



42



30



31



14Other


2



1



12



10Total recoveries


150



96



201



230



344Net charge-offs


1,179



1,044



1,047



834



792Provision for loan losses


2,855



1,643



1,577



784



1,055Allowance acquired through acquisition


















700Balance of allowance for loan losses at end of period

$
6,624


$
4,948


$
4,349


$
3,819


$
3,869Ratio of net charge-offs to average loans


0.22
%


0.23
%


0.27
%


0.24
%


0.29
%Average loans outstanding during the period

$
540,159


$
450,901


$
394,132


$
344,470


$
276,180





The following table sets forth the allowance for loan losses by loan category,
based on managements assessment of the risk associated with such categories as of the dates indicated, and summarizes the percentage of gross loans in each category to total gross loans.





December 31,2001 Amount of Allowance

%


2000 Amount of Allowance

%


1999 Amount of Allowance

%


1998 Amount of Allowance

%


1997 Amount of Allowance

%($ in thousands)Commercial

$
4,632

70
%

$
3,167

64
%

$
2,535

58
%

$
2,040

53
%

$
1,863

48
%Agricultural


993

15
%


742

15
%


688

16
%


658

17
%


691

18
%Real estate-mortgage


452

7
%


643

13
%


685

16
%


662

17
%


813

21
%Real estate-construction


194

3
%


99

2
%


152

3
%


149

4
%


104

3
%Installment


296

4
%


247

5
%


218

5
%


214

6
%


265

7
%Other


57

1
%


50

1
%


71

2
%


96

3
%


133

3
%Total

$
6,624

100
%

$
4,948

100
%

$
4,349

100
%

$
3,819

100
%

$
3,869

100
%




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Investments





Management of the investment portfolio is by the Vice President and Chief Financial Officer and reviewed with the AWB Asset/Liability Committee, which consists of AWBs President and Chief Executive Officer, Vice
President and Chief Financial Officer, Senior Vice President and Loan Administrator, and the Vice President and Senior Operations Officer. The AWB investments are managed consistent with the Liquidity, Asset/Liability, and Investment Management
Policy, which were approved by the Board of Directors.





The following table sets forth the carrying value, by type, of the
securities in AWBs portfolio at December 31, 2001, 2000 and 1999.





December 31,2001

2000

1999($ in thousands)U.S. Treasury and other U.S. Government agencies

$
7,896

$
26,507

$
27,611States of the U.S. and political subdivisions


1,297


7,592


8,870Other securities


6,357


13,786


16,660Total securities

$
15,550

$
47,885

$
53,141





At December 31, 2001, the market value of AWB securities exceeded amortized cost
by $124,000. At December 31, 2000 amortized cost exceeded market value by $128,000. No portion of AWBs investment portfolio is invested in derivative securities (being securities whose value derives from the value of an underlying security or
securities, or market index of underlying securities values).




8




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The following table sets forth the carrying values, maturities and approximate average
aggregate yields of securities in AWBs investment portfolio by type at December 31, 2001.





Type and Maturity

Yield


Amount($ in thousands)U.S. Treasury and other U.S. government agencies and corporations:1 year or less

6.12
%

$
1,039Over 1 through 5 years

5.34
%


4,627Over 5 through 10 years

6.68
%


2,230Over 10 yearsTotal

5.82
%


7,896States and political subdivisions1 year or less

6.14
%


474Over 1 through 5 years

7.49
%


566Over 5 through 10 yearsOver 10 Years

9.39
%


257Total

7.37
%


1,297Other securities:1 year or less

6.60
%


4,173Over 1 through 5 years

6.05
%


1,713Over 5 through 10 years

6.20
%


471Over 10 yearsTotal

6.42
%


6,357Total investment securities:1 year or less

6.30
%


5,686Over 1 through 5 years

5.49
%


6,906Over 5 through 10 years

6.60
%


2,701Over 10 years

9.39
%


257Total

6.20
%

$
15,550





The yields for tax-exempt securities have been computed on a tax equivalent basis
using an assumed tax rate of 34%. Maturities are estimated using payment speeds as of December 31, 2001.




9




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Deposits





AWBs primary source of funds has historically been customer deposits. AWB strives to maintain a high percentage of noninterest-bearing deposits, which are low cost funds and result in higher interest margins. At
December 31, 2001, 2000, and 1999, AWBs ratios of noninterest-bearing deposits to total deposits were 18.5%, 19.2%, and 18.2%, respectively.





AWB offers a variety of accounts designed to attract both short-term and long-term deposits from its customers. These accounts include negotiable order of withdrawal (NOW) accounts, money market investment
accounts, savings accounts, and certificates of deposit and other time deposits. Interest-bearing accounts earn interest at rates established by management of AWB, based on competitive market factors and managements desire to increase or
decrease certain types or maturities of deposits consistent with AWB policies.





The following table sets forth the average
balances for each major category of deposit and the weighted-average interest rate paid for deposits in 2001, 2000 and 1999.





Year Ended December 31,2001


2000


1999Average Balance

Interest Rate


Average Balance

Interest Rate


Average Balance

Interest Rate($ in thousands)Interest-bearing demand deposits

$
156,683

2.85
%

$
153,327

3.92
%

$
146,190

3.62
%Savings deposits


41,266

1.74
%


45,541

2.86
%


47,227

2.84
%Time deposits


225,289

5.32
%


195,875

5.95
%


168,168

4.96
%Noninterest-bearing demand deposits


92,008





83,920





79,050Total

$
515,246




$
478,663




$
440,635





The following table shows the amounts and maturities of certificates of deposit
that had balances of more than $100,000 at December 31, 2001, 2000 and 1999.





December 31,2001

2000

1999($ in thousands)Certificates of Deposit over $100,000 with remaining maturity:Less than three months

$
30,050

$
39,595

$
31,705Three months to one year


44,454


30,348


20,668Over one year


7,004


1,792


4,057Total

$
81,508

$
71,735

$
56,430




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Competition





While AWB encounters a great deal of competition in its lending activities, management believes there is less competition in AWBs specialty middle market and neighborhood bank niche than there was a few years
ago. AWB believes that its competitive position has been strengthened by the consolidation in the banking industry, which has resulted in a focus on the larger accounts with less contact between the bank officers and their customers. AWBs
strategy by contrast, is to remain a middle market lender, which maintains close long-term relationships with its customers.





AWB competes for deposits and banking business in central and eastern Washington from thirty-two locations including one in Moscow, Idaho. AWBs market area encompasses Spokane, Stevens, Ferry, Lincoln, Pend Oreille, Franklin, Yakima,
Benton, Whitman, Grant, Walla Walla, Columbia, and Latah County, Idaho Counties. AWB competes against commercial banks, mutual savings banks, credit unions, savings and loans, mortgage companies, and other financial institutions. The major
commercial bank competitors are the regional banks that have a branch or branches within AWBs primary trade areas.





Management believes that the principal competitive factors affecting AWBs markets include interest rates paid on deposits and charged on loans, the range of banking products available, and customer service and support. Although
management believes that AWBs products currently compete favorably with respect to these factors, there can be no assurance that AWB can maintain its competitive position against current and potential competitors, especially those with
significantly greater financial resources.





Employees





As of December 31, 2001, AWB had 300 employees. None of AWBCs employees are covered by a collective bargaining agreement. Management believes relations with AWBs employees are good. AWBC is located at 9506
N. Newport Hwy. Spokane, WA 99218 and the telephone number is 509-467-6949.




11




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Supervision and Regulation





The following generally refers to certain significant statutes and regulations affecting its subsidiary banking industry. These references are only intended to provide brief summaries
and, therefore, are not complete and are qualified by the statutes and regulations referenced. Changes in applicable laws or regulations may have a material effect on the business and prospects of AWBC. The operations of AWBC may also be affected by
changes in the policies of banking and other government regulators. AWBC cannot accurately predict the nature or extent of the effects on its business and earnings that fiscal or monetary policies, or new federal or state laws, may have in the
future.





Changes in Banking Laws and Regulations





The laws and regulations that affect banks and bank holding companies have undergone changes. On November 12, 1999, the president signed into law the Financial Services Modernization Act of 1999. Generally, the act
(i) repeals the historical restrictions on preventing banks from affiliating with securities firms, (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies, (iii) broadens the activities that
may be conducted by national banks and banking subsidiaries of bank holding companies, (iv) provides an enhanced framework for protecting the privacy of consumers information and (v) addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of financial institutions.





Bank holding companies are permitted
to engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities activities. In addition, in a change from previous law, bank holding companies will be in a position to be
owned, controlled or acquired by any company engaged in financially related activities, so long as such company meets certain regulatory requirements. The act also permits national banks (and, in states with wildcard statutes, certain state banks),
either directly or through operating subsidiaries, to engage in certain non-banking financial activities.





AWBC does not believe
that the act will negatively affect the operations of it or its subsidiaries. However, to the extent the legislation permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further
consolidation. This consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than AWBC currently offers and that can aggressively compete in the markets currently served by AWBC
and its subsidiary banks.





General.As a bank holding company, AWBC is subject to the Bank Holding
Company Act of 1956 (BHCA), as amended, which places AWBC under the supervision of the Board of Governors of the Federal Reserve (FRB). AWBC must file annual reports with the Federal Reserve and must provide it with such additional
information as it may require. In addition, the Federal Reserve periodically examines AWBC and its subsidiary banks.





In
general, the BHCA limits bank holding company business to owning or controlling banks and engaging in other banking-related activities. Bank holding companies must obtain the FRBs approval before they: (1) acquire direct or indirect ownership
or control of any voting shares of any bank that results in total ownership or control, directly or indirectly, of more than 5% of the voting shares of such bank; (2) merge or consolidate with another bank holding company; or (3) acquire
substantially all of the assets of any additional banks. Subject to certain state laws, such as age and contingency laws, a bank holding company that is adequately capitalized and adequately managed may acquire the assets of both in-state and
out-of-state banks. Under the Financial Modernization Act of 1999, a bank holding company may apply to the FRB to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain activities deemed financial in
nature, such as securities brokerage and insurance underwriting.




12




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Control of Nonbanks.With certain exceptions, the BHCA prohibits
bank holding companies from acquiring direct or indirect ownership or control of voting shares in any company that is not a bank or a bank holding company unless the FRB determines that the activities of such company are incidental or closely
related to the business of banking. If a bank holding company is well capitalized and meets certain criteria specified by the FRB, it may engage de novo in certain permissible nonbanking activities without prior FRB approval.





Control Transactions.The Change in Bank Control Act of 1978, as amended, requires a person (or group of
persons acting in concert) acquiring "control" of a bank holding company to provide the FRB with 60 days prior written notice of the proposed acquisition. Following receipt of this notice, the FRB has 60 days within which to issue a notice
disapproving the proposed acquisition, but the FRB may extend this time period for up to another 30 days. An acquisition may be completed before expiration of the disapproval period if the FRB issues written notice of its intent not to disapprove
the transaction. In addition, any "company" must obtain the FRBs approval before acquiring 25% (5% if the "company" is a bank holding company) or more of the outstanding shares or otherwise obtaining control over AWBC.





Transactions with Affiliates.AWBC and its subsidiary banks are deemed affiliates within the meaning of the
Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Accordingly, AWBC and its subsidiary banks must comply with Sections 23A and 23B of the Federal Reserve Act. Generally, Sections 23A and 23B (1) limit the
extent to which a financial institution or its subsidiaries may engage in "covered transactions" with an affiliate, as defined, to an amount equal to 10% of such institutions capital and surplus and an aggregate limit on all such transactions
with all affiliates to an amount equal to 20% of such capital and surplus, and (2) require all transactions with an affiliate, whether or not "covered transactions," to be on terms substantially the same, or at least as favorable to the institution
or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.





Regulation of Management.Federal law (1) sets forth the circumstances under which officers or directors of a financial
institution may be removed by the institutions federal supervisory agency; (2) places restraints on lending by an institution to its executive officers, directors, principal stockholders, and their related interests; and (3) prohibits
management personnel from serving as a director or in other management positions with another financial institution which has assets exceeding a specified amount or which has an office within a specified geographic area.





Tie-In Arrangements.AWBC and its subsidiary bank cannot engage in certain tie-in arrangements in connection
with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither AWBC nor its subsidiary banks may condition an extension of credit on either (1) a requirement that the customer obtain
additional services provided by it or (2) an agreement by the customer to refrain from obtaining other services from a competitor.





The FRB has adopted significant amendments to its anti-tying rules that: (1) removed FRB-imposed anti-tying restrictions on bank holding companies and their non-bank subsidiaries; (2) allow banks greater flexibility
to package products with their affiliates; and (3) establish a safe harbor from the tying restrictions for certain foreign transactions. These amendments were designed to enhance competition in banking and nonbanking products and to allow banks and
their affiliates to provide more efficient, lower cost service to their customers. However, the impact of the amendments on AWBC and its subsidiary banks is unclear at this time.





State Law Restrictions.As a Washington business corporation, AWBC may be subject to certain limitations and restrictions as provided under applicable
Washington corporate law. In addition, Washington banking law may restrict certain activities of its subsidiary bank.




13




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General.AWB is subject to regulation by the State of Washington
and the Federal Deposit Insurance Corporation (FDIC). The federal and state laws that apply to AWBCs subsidiary bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for loans. The laws and regulations governing its subsidiary bank generally have been promulgated to protect depositors and not to protect stockholders of the subsidiary
bank or its holding company.





CRA.The Community Reinvestment Act (the CRA)
requires that, in connection with examinations of financial institutions within their jurisdiction, regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and
moderate-income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.





Insider Credit Transactions.Banks are also subject to certain restrictions imposed by the Federal Reserve Act on
extensions of credit to executive officers, directors, principal shareholders, or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow
credit underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the
affected bank or any officer, director, employee, agent, or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions.





FDICIA.Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the FDICIA), each federal
banking agency has prescribed, by regulation, noncapital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems, and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An
institution, which fails to meet these standards, must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. Management of AWBC believes that its subsidiary bank meets all such standards, and therefore, does not believe that these regulatory standards materially affect AWBCs business operations.





Interstate Banking and Branching.The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Interstate Act) permits nationwide interstate banking and branching under certain circumstances. This legislation generally authorizes interstate branching and relaxes federal law restrictions on interstate banking. Currently, bank
holding companies may purchase banks in any state, and states may not prohibit such purchases. Additionally, banks are permitted to merge with banks in other states as long as the home state of neither merging bank has opted out. The
Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.





Under recent FDIC regulations, banks are prohibited from using their interstate branches primarily for deposit production. The FDIC has accordingly implemented a loan-to-deposit ratio
screen to ensure compliance with this prohibition.





With regard to interstate bank mergers, Washington has "opted in" to the
Interstate Act and allows in-state banks to merge with out-of-state banks subject to certain aging requirements. Washington law generally authorizes the acquisition of an in-state bank by an out-of-state bank through merger




14




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with a Washington financial institution that has been in existence for at least 5 years prior to the acquisition. With regard to interstate bank branching,
out-of-state banks that do not already operate a branch in Washington may not establish de novo branches in Washington or establish and operate a branch by acquiring a branch in Washington.





Deposit Insurance.The deposits of its subsidiary banks are currently insured to a maximum of $100,000 per depositor through its subsidiary banks Insurance
Fund (BIF) administered by the FDIC. All insured banks are required to pay semi-annual deposit insurance premium assessments to the FDIC.





The FDICIA included provisions to reform the Federal Deposit Insurance System, including the implementation of risk-based deposit insurance premiums. The FDICIA also permits the FDIC to make special assessments on
insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources, or for any other purpose the FDIC deems necessary. The FDIC
has implemented a risk-based insurance premium system under which banks are assessed insurance premiums based on how much risk they present to the BIF. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower
premiums than banks with lower levels of capital or a higher degree of supervisory concern.





Dividends.The principal source of AWBCs cash revenues is dividends received from its subsidiary bank. The payment of dividends is subject to government regulation, in that regulatory authorities may
prohibit banks and bank holding companies from paying dividends, which would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary
to meet minimum applicable regulatory capital requirements. Other than the laws and regulations noted above, which apply to all banks and bank holding companies, neither AWBC nor its subsidiary bank are currently subject to any regulatory
restrictions on its dividends.





Capital Adequacy.Federal bank regulatory agencies use
capital adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or
nonbank businesses or to open new facilities.





The FDIC and Federal Reserve use risk-based capital guidelines for banks
and bank holding companies. These are designed to make such capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for
holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The guidelines are minimums, and the Federal Reserve has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the
minimum. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier I capital. Tier I capital for bank holding companies
includes common shareholders' equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles except as described above.





The Federal Reserve also employs a leverage ratio, which is Tier I capital as a percentage of total assets less intangibles, to be used as a supplement
to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The Federal Reserve requires a minimum leverage ratio of 3%. However,
for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, the Federal Reserve expects an additional cushion of at least 1% to 2%.




15




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FDICIA created a statutory framework of supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC,
an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. Institutions which are deemed to be
"undercapitalized" depending on the category to which they are assigned are subject to certain mandatory supervisory corrective actions. AWBC does not believe that these regulations have any material effect on its operations.





Effects of Government Monetary Policy.The earnings and growth of AWBC are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve can and does implement national monetary policy for such purposes as curbing inflation and combating
recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank
loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on AWBC and its subsidiary bank cannot be predicted with certainty.





Securities Registration and Reporting.The common stock of AWBC is registered as a class
with the SEC under the 1934 Act and thus is subject to the periodic reporting and proxy solicitation requirements and the insider-trading restrictions of that Act. In addition, the securities issued by AWBC are subject to the registration
requirements of the 1933 Act and applicable state securities laws unless exemptions are available. The periodic reports, proxy statements, and other information filed by AWBC with the SEC are available at the SECs Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. AWBC is an electronic filer with the SEC and the AWBC filings may be obtained at the
SEC website (http://www.sec.gov).




16




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Item 2.Properties.





At December 31, 2001, AWBC owned or leased facilities in thirty-three
locations including thirty-two in eastern Washington and one in Moscow, Idaho and the Computer/Processing Center. AWBCs main office is located in North Spokane, which is owned by AWB. About 1,400 square feet is used for the Administrative
Offices. In addition AWBC leases approximately 9,000 square feet for its Computer/Processing Center located near the Spokane Airport. AWBC is separated into four separate Regions. As of January 1, 2002 these were the Inland Empire Region
headquartered in Spokane, Washington, the Columbia River Region headquartered in Ephrata, Washington, the Blue Mountain Region headquartered in Walla Walla, Washington, and the Palouse Region headquartered in Pullman, Washington.





The thirty-two branch locations are in the State of Washington in Chewelah, Colton, Colville, Davenport, Dayton, Ephrata, Kettle Falls,
Mabton, Moses Lake, Naches, Prosser, Pullman (2), Richland, Spokane (10), Sunnyside, Uniontown, Waitsburg, Walla Walla (2), and Yakima (2), and Moscow, Idaho.





Item 3.Legal Proceedings.





Periodically and in the ordinary course of business, various claims and
lawsuits are brought against AWBC or AWB, such as claims to enforce liens, condemnation proceedings on properties in which AWB held security interests, claims involving the making and servicing of real property loans and other issues incident to the
business of AWBC and AWB. In the opinion of management, the ultimate liability, if any, resulting from such claims or lawsuits will not have a material adverse effect on the financial position or results of operations of AWBC.





Item 4.Submission of Matters to a Vote of Security Holders.





No matters were submitted to a vote
of AWBCs shareholders during the fourth quarter of 2001.





PART II





Item 5.Market for Registrants Common Equity and Related Stockholder Matters.





Market
Information.The Common Stock is quoted on the Nasdaq National Market System (NASDAQ) under the symbol AWBC. The following table sets out the high and low bid prices per share for the Common Stock for 2001 and
2000 as reported by NASDAQ.





2001

2000High

Low

High

LowFirst Quarter

$
10.46

$
8.78

$
11.15

$
7.55Second Quarter

$
10.00

$
9.09

$
8.57

$
7.70Third Quarter

$
10.91

$
9.86

$
8.24

$
7.95Fourth Quarter

$
11.14

$
10.14

$
9.40

$
8.11





Per share amounts have been adjusted giving retroactive effect to stock
dividends.





Holders.The number of holders of common stock of record on February 15, 2002 was
approximately 3,000.





Dividends.    AWBC has declared and paid the following dividends
subsequent to January 1, 2000: On February 24, 2000, February 15, 2001, and February 1, 2002 AWBC paid 10% stock dividends. No cash dividends were paid.




17




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Item 6.Selected Financial Data.





The following table sets forth certain selected consolidated
financial data of AWBC at and for the years ended December 31:





2001


2000


1999


1998


1997($ in thousands, except per share amounts)Net interest income

$
34,424


$
30,356


$
28,474


$
26,475


$
21,696Provision for loan losses


2,855



1,643



1,577



784



1,055Noninterest income


4,702



4,029



5,912



4,977



4,833Noninterest expense


22,276



21,328



19,209



19,764



14,905Income before income tax expense


13,995



11,414



13,600



10,904



10,569Income tax expense


4,788



3,379



3,888



3,521



3,346Net income


9,207



8,035



9,712



7,383



7,223Basic earnings per common share

$
1.12


$
0.91


$
1.05


$
0.81


$
0.79Diluted earnings per common share

$
1.12


$
0.90


$
1.04


$
0.79


$
0.77Return on average assets


1.46
%


1.44
%


1.90
%


1.49
%


1.78
%Return on average equity


13.87
%


12.73
%


16.58
%


14.66
%


16.30
%Assets

$
659,341


$
598,513


$
527,726


$
513,144


$
486,778Securities


15,550



47,885



53,141



87,350



102,964Loans:Commercial and industrial


411,197



317,108



246,796



199,798



153,344Agricultural


88,121



76,093



67,025



57,511



56,899Real estate mortgage


40,084



62,173



66,690



63,127



66,959Real estate construction


17,201



12,252



14,781



14,170



8,588Installment


26,311



22,489



21,190



20,364



21,843Other loans


5,062



3,972



6,939



9,149



10,962Total loans


587,976



494,087



423,421



364,119



318,595Allowance for loan loss to loans percentage


1.13
%


1.00
%


1.03
%


1.05
%


1.22
%Deposits


532,237



501,426



452,899



452,913



425,094Borrowings


53,601



27,367



8,198



1,348



11,284Stockholders' equity


68,206



64,530



62,922



54,211



46,174Equity to assets ratio


10.34
%


10.78
%


11.92
%


10.56
%


9.49
%Basic weighted average shares


8,190,374



8,819,697



9,233,412



9,160,555



9,121,465





See Results of Operations for a description of the nonrecurring items in 2001,
2000 and 1999. In 1997, AWBC recovered from its insurance provider $796,000 for a theft by a former employee. After income taxes the recovery improved 1997 net income by $525,000 or $.06 per share.




18




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Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations.





Overview





AWBCs net income is derived primarily from net interest income of the Bank, which is the difference between interest
earned on their loan and investment portfolios and their cost of funds, primarily interest paid on deposits and borrowings. For the years ended December 31, 2001, 2000, and 1999, AWBCs average net interest margins were 6.0%, 6.0%, and 6.2%,
respectively.





Net income is also affected by levels of provisions for loan losses, noninterest income (primarily service
charges on deposits, insurance commissions, sale of securities gains or losses and other operating income) and noninterest expense (primarily salaries and benefits, occupancy expense, data processing cost, legal and professional services expense,
business and occupation tax, and other operating expenses). For the three years ended December 31, 2001, 2000, and 1999, the provision for loan losses was $2,855,000, $1,643,000, and $1,577,000, respectively. Net charge-offs during the year ended
December 31, 2001 was $1,179,000 as compared to $1,044,000 and $1,047,000 during 2000 and 1999, respectively.





Net Interest Income





The following table sets forth information with regard to average balances of assets and liabilities, and interest income from
interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread (the difference between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities), and the net interest margin.





Year Ended December 31,2001


2000


1999Average Balance

Interest

%


Average Balance

Interest

%


Average Balance

Interest

%($ in thousands)ASSETSLoans

$
540,159

$
51,300

9.50
%

$
450,901

$
46,319

10.27
%

$
394,132

$
39,728

10.08
%Taxable securities


30,533


1,868

6.12
%


41,237


2,790

6.77
%


52,505


3,237

6.17
%Nontaxable securities


4,583


318

6.94
%


9,553


711

7.44
%


10,421


725

6.96
%Overnight deposits with other banks


3,234


126

3.90
%


7,250


464

6.40
%


7,775


420

5.40
%Total interest earning assets


578,509

$
53,612

9.27
%


508,941

$
50,284

9.88
%


464,833

$
44,110

9.49
%Noninterest earning assets


51,622








48,384








46,007Total assets

$
630,131







$
557,325







$
510,840LIABILITIESInterest-bearing demand deposits

$
156,683

$
4,471

2.85
%

$
153,327

$
6,018

3.92
%

$
146,190

$
5,286

3.62
%Savings deposits


41,266


717

1.74
%


45,541


1,301

2.86
%


47,227


1,342

2.84
%Time deposits


225,289


11,979

5.32
%


195,875


11,660

5.95
%


168,168


8,335

4.96
%Total interest-bearing deposits


423,238


17,167

4.06
%


394,743


18,979

4.81
%


361,585


14,963

4.14
%Short-term borrowings


42,461


1,850

4.36
%


10,050


639

6.36
%


6,503


401

6.17
%Long-term borrowings


647


63

9.74
%


678


68

10.03
%


701


70

9.99
%Total interest-bearing liabilities


466,346

$
19,080

4.09
%


405,471

$
19,686

4.86
%


368,789

$
15,434

4.19
%Noninterest bearing demand deposits


92,008








83,920








79,050Other noninterest bearing liabilities


5,389








4,842








4,407Total liabilities


563,743








494,233








452,246STOCKHOLDERS' EQUITY


66,388








63,092








58,594Total liabilities and stockholders' equity

$
630,131







$
557,325







$
510,840Net interest income




$
34,532

5.18
%




$
30,598

5.03
%




$
28,676

5.30
%Net interest margin to averageearning assets







5.97
%







6.01
%







6.17
%





Nonaccrual loans are included with loan balances. In the above table tax-exempt
securities income has been presented using a tax equivalent basis and an assumed tax rate of 34%.




19




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The following table illustrates the changes in AWBCs net interest income due to changes
in volumes and interest rates.





The change in interest income and interest expense due to changes in both volume and rate, which
cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.





2001 vs 2000


2000 vs 1999Increase (decrease) in net interest income due to changes inVolume


Rate


Total


Volume


Rate


Total($ in thousands)INTEREST EARNING ASSETSLoans

$
9,169


($
4,188
)

$
4,981


$
5,722


$
869


$
6,591Securities


(1,080
)


(235
)


(1,315
)


(764
)


303



(461
)Federal funds sold and overnight time deposits


(257
)


(81
)


(338
)


(28
)


72



44Total interest earning assets


7,832



(4,504
)


3,328



4,930



1,244



6,174INTEREST BEARING LIABILITIESInterest-bearing demand deposits


132



(1,679
)


(1,547
)


258



474



732Savings deposits


(122
)


(462
)


(584
)


(48
)


7



(41
)Time deposits


1,751



(1,432
)


319



1,373



1,952



3,325Total interest bearing deposits


1,761



(3,573
)


(1,812
)


1,583



2,433



4,016Short-term borrowings


2,061



(850
)


1,211



219



19



238Long-term borrowings


(3
)


(2
)


(5
)


(2
)






(2
)Total interest bearing liabilities


3,819



(4,425
)


(606
)


1,800



2,452



4,252Total increase (decrease) in net interest income

$
4,013


($
79
)

$
3,934


$
3,130


($
1,208
)

$
1,922





The following table presents the aggregate maturities of loans in each major
category of the AWBCs loan portfolio at December 31, 2001. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments.





Less than one year

One to five years

Over five years

Total($ in thousands)Commercial, financial and agricultural

$
154,502

$
182,287

$
162,529

$
499,318Real estate-mortgage


7,261


22,860


9,963


40,084Real estate-construction


15,850


1,272


79


17,201Installment


3,341


14,382


8,588


26,311Other


4,963


89


10


5,062Total

$
185,917

$
220,890

$
181,169

$
587,976




20




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Results of Operations





Years Ended December 31, 2001, 2000, and 1999





Performance Summary





% Change2001

2000

1999

2001


2000($ in thousands, except per share)Interest income

$
53,504

$
50,042

$
43,908

6.92
%

13.97
%Interest expense


19,080


19,686


15,434

-3.08
%

27.55
%Net interest income


34,424


30,356


28,474

13.40
%

6.61
%Provision for loan losses


2,855


1,643


1,577

73.77
%

4.19
%Net interest income after provision for loan losses


31,569


28,713


26,897

9.95
%

6.75
%Noninterest income


4,702


4,029


5,912

16.70
%

-31.85
%Noninterest expense


22,276


21,328


19,209

4.44
%

11.03
%Income before income taxes


13,995


11,414


13,600

22.61
%

-16.07
%Income taxes


4,788


3,379


3,888

41.70
%

-13.09
%Net income

$
9,207

$
8,035

$
9,712

14.59
%

-17.27
%Basic earnings per common share

$
1.12

$
0.91

$
1.05

23.08
%

-13.33
%Diluted earnings per common share

$
1.12

$
0.90

$
1.04

24.44
%

-13.46
%





AWBCs net income was $9,207,000 in 2001, $8,035,000 in 2000, and $9,712,000
in 1999. Basic earnings per share were $1.12, $.91, and $1.05 for 2001, 2000, and 1999, respectively. Diluted earnings per share were $1.12, $.90, and $1.04 in 2001, 2000, and 1999, respectively.





2001 results include a gain of $392,000 on the sale of the Insurance Agency. This gain increased 2001 net income by $258,000 and $.03 per share. 2000 results included a
rehabilitation tax credit of $283,000, loss on the sale of securities of $358,000, and a loss on the completion of the amortization of the Moses Lake Branch intangible asset of $505,000. 2000 net income was reduced by $290,000 and $.03 per share for
these items.





AWBC completed its merger with AmericanWest Bank (AWB) effective February 1, 1999. At the time of the merger AWB
was known as Bank of the West, but in June 1999 it received $1,250,000 for the sale of its name. The income from the sale of the name added $825,000 to net income or $.10 per share. As of February 1, 1999 AWB had approximately $103 million in total
assets, $90 million in deposits, $68 million in loans, and $12 million in total equity. 1,749,300 AWBC shares were issued to AWB shareholders for the merger. The pooling-of-interests accounting method was used for the transaction.





Return on average assets was 1.46%, 1.44%, and 1.90% for 2001, 2000, and 1999, respectively. Return on average equity was 13.87%, 12.73%, and
16.58% for 2001, 2000, and 1999, respectively. Without the nonrecurring items described above, return on assets would have been 1.42%, 1.49%, and 1.74% for 2001, 2000, and 1999, respectively. Return on equity would have been 13.48%, 13.20%, and
15.17% for 2001, 2000, and 1999, respectively.





Net Interest Income.Net interest income increased
13% to $34,424,000 in 2001 compared to 2000. The increase in 2000 was 7% to $30,356,000 over 1999 results. The net interest income improvements were primarily the result of loan volume increases in 2001 and 2000. AWBCs net interest margin to
average earning assets was 5.97%, 6.01%, and 6.17% in 2001, 2000, and 1999, respectively. As market interest rates decreased significantly during 2001 the yield on earning assets declined to 9.27% in 2001 after rising to 9.88% in 2000. Interest
bearing liabilities also moved with market interest rates by declining to 4.09% in 2001 after rising to 4.86% in 2000. The overall result was a slight net interest margin decline from 6.01% to 5.97% in 2001 after declining from 6.17% in 2000.
Average earning assets increased 13% to $579 million in 2001 after rising 9% to $509 million in 2000.




21




---




Noninterest Income.Noninterest income, which consists of fees
and service charges, insurance commissions, securities gains and losses, and other income, increased 17% in 2001 to $4.7 million. The increase was due to the gain on the sale of the Insurance Agency of $392,000 and gains on the sale of credit card
servicing, securities, and a loan. In 2000 noninterest income declined 32% due to the nonrecurring gain on the sale of the Bank of the West name in 1999. Fees and service charges for banking services increased to $2.8 million in 2001 after remaining
at $2.5 million in 2000 and 1999. Insurance commissions declined to $349,000 in 2001 due to the sale of the Insurance Agency at the beginning of the second quarter in 2001. Insurance commissions had remained at the same level for 2000 and 1999. AWBC
sold securities in 2001 for a net gain of $188,000 after selling mutual fund securities for a net loss in 2000. Other income was higher in 2001 due to the items described above.





Noninterest Expense.Noninterest expense increased by only 4% in 2001 due to loan officer incentive expense, nonperforming loan legal expense, and merger of
the banks expense offset by lower expenses with the sale of the Insurance Agency and a business and occupation tax expense refund from an audit. Noninterest expense increased in 2000 due to the cost of new locations, higher incentive expense for
employees and the write-off of the impaired intangible asset.





Income Tax Expense.Income
tax expense was reduced by $285,000 in 2000 and $400,000 in 1999 due to tax credits for the renovation of historical properties.





Liquidity and
Capital Resources





Management believes that AWBCs cash flow will be sufficient to support its existing operations for
the foreseeable future. If AWBC needs additional liquidity, it would be required to borrow or issue additional capital stock. AWBCs ability to incur indebtedness is limited by government regulations and its ability to service borrowings is
dependent upon the availability of dividends from the Bank. The payment of dividends by the Bank is subject to limitations imposed by law and governmental regulations. During 2001 AWB received $20,122,000 in certificates of deposit through the use
of QwickRate Express Data and their Internet services.





The Bank may borrow on a short-term basis to compensate for reductions
in other sources of funds. Bank borrowings may also be used on a longer-term basis to support expanded lending activities and to match the maturity of repricing intervals of assets. At December 31, 2001 AWBC had approximately $97 million of lines of
credit available for liquidity purposes. Cash flows from operations also contribute significantly to liquidity as indicated in AWBCs Consolidated Statement of Cash Flows, as well as proceeds from maturities of securities and increasing
customer deposits.





AWBCs total stockholders equity increased to $68,206,000 at December 31, 2001, from $64,530,000
at December 31, 2000 and $62,922,000 at December 31, 1999. At December 31, 2001, stockholders equity was 10.34% of total assets, compared to 10.78% at December 31, 2000. At December 31, 2001, AWBC held cash and cash-equivalent assets of $25.0
million.





The capital levels of AWBC and the Bank exceed applicable regulatory well-capitalized guidelines at December 31,
2001.





Effects of Inflation and Changing Prices.The primary impact of inflation on AWBCs
operations is increased asset yields, deposit costs and operating overhead. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institutions performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services,
increases in inflation generally have resulted in increased interest rates. The effects of inflation




22




---

can magnify the growth of assets, and if significant, would require that equity capital increase at a faster rate than would otherwise be necessary.





New Accounting Pronouncements.





In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. AWBC will
apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $226,000 per year.
During 2002, AWBC will perform the first of the required impairment tests of goodwill as of January 1, 2002 and does not expect the effect of these tests to have an impact on the earnings and financial position of AWBC.





In June 2001, the FASB issued Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development, and the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party
is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppel. This Statement amends FASB Statement No. 19,
Financial Accounting and Reporting by Oil and Gas Producing Companies. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. AWBC does not expect the statement will result in a material impact on
its financial position or results of operations.





In August 2001, the FASB issued Statement Accounting Standard No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Dispose Of, and the accounting and reporting provisions of APB Opinion NO. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions for the disposal of a segment of a business. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged.
The provisions of this Statement generally are to be applied prospectively.





Item 7A.Quantitative and Qualitative Disclosures About Market Risk.





Market Risk





Management considers interest rate risk to be a market risk that could have a significant effect on the financial condition and results of operations of
AWBC. AWBC does not use derivatives including forward and futures contracts, options, and swaps to manage its market and interest rate risks. All of AWBCs transactions are denominated in U.S. dollars. Approximately 34% of AWBCs loan
portfolio has interest rates, which float with the Banks reference interest rate. Fixed rate loans are generally made with a term of five years or less. General economic conditions, regulatory policy and competition in the marketplace affect
interest income and cost of funds. The Banks operating strategies focus on asset/liability management. The purpose of asset/liability




23




---

management (ALM) is to provide stable net interest income growth by protecting the AWBCs earnings from undue interest rate risk. AWB follows
an ALM policy for controlling exposure to interest rate risk. The ALM policy is designed to maintain an appropriate balance between rate-sensitive assets and liabilities in order to maximize interest rate spreads. AWB monitors the sensitivity of its
assets and liabilities with respect to changes in interest rates and maturities, and direct the allocation of their funds accordingly. The strategy of AWB has been to maintain, to the extent possible, a balanced position between assets and
liabilities, and to place emphasis on the sensitivity of its assets.





The following table presents estimated maturity or pricing
information indicating AWBCs exposure to interest rate changes as of December 31, 2001. The expected maturities take into consideration historical and estimated principal prepayments for loans and securities. Principal prepayments are the
amounts of principal reduction in addition to contractual amortization. Fixed-rate and variable-rate loans are expected to have payment rates of 35%, 25%, 15%, 15%, and 10% for the following five years, respectively. Securities principal payments
are based on payment speeds as of December 31, 2001. The expected maturities for financial liabilities with no stated maturity reflect historical and estimated future roll-off rates. The anticipated annual roll-off rates for noninterest bearing
deposits, interest-bearing demand deposits and savings deposits are 15%. The interest rates disclosed are based on rates from 2001 results. Fair values are based on the calculations used in accordance with generally accepted accounting principles as
disclosed in the financial statements.





Expected maturity


Fair Value2002


2003


2004


2005


2006


Thereafter


TotalYear ended December 31, 2001

($ in thousands)Financial AssetsCash and due from banks

$
24,421

















$
24,421


$
24,421Overnight interest bearing deposits with other banks


535


















535



535Weighted average interest rate





















2.00
%Securities


5,686


















5,686



15,550Weighted average interest rate





















5.50
%Fixed rate loans


123,061


87,901


52,740


52,740


35,161






351,603



380,696Weighted average interest rate





















8.25
%Variable rate loans


80,254


57,324


34,394


34,394


22,930






229,296



229,296Weighted average interest rate





















7.50
%Financial LiabilitiesNoninterest bearing deposits


14,742


14,742


14,742


14,742


14,742


24,570



98,280



98,280Interest-bearing demand deposits


25,058


25,058


25,058


25,058


25,058


41,765



167,055



167,055Weighted average interest rate





















2.25
%Savings deposits


6,051


6,051


6,051


6,051


6,051


10,087



40,342



40,342Weighted average interest rate





















1.75
%Time deposits


199,869


22,004


2,730


1,365


493


99



226,560



247,490Weighted average interest rate





















3.50
%Short-term borrowings


52,974


















52,974



52,9742.40
%Net of financial assets and liabilities


(64,737
)

77,370


38,553


39,918


11,747


(76,521
)Cumulative net amount


(64,737
)

12,633


51,186


91,104


102,851


26,330Percentage of total assets


-9.82
%

1.92
%

7.76
%

13.82
%

15.60
%

3.99
%





The above table presents information about AWBCs interest sensitivity; it
does not predict future earnings. AWBC uses budgeting and earnings projections to forecast earnings. It requires assumptions about the projection of loan and securities prepayments, loan originations and liability funding sources, which may be
inaccurate. Weighted average interest rates by expected maturity are not available.





Forward Looking
Statements.    Statements contained in this Annual Report, which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. A forward-looking
statement may contain words as plan, hopes, believes, estimates, will continue to be, will be, continued to, expect to, anticipate that,
to be, or can impact. These forward-looking statements include statements




24




---

relating to AWBCs expectations as to (i) the adequacy of provisions for loan losses, (ii) the sufficiency of existing cash balances and investments,
together with cash flow from operating activities and available lines of credit to meet AWBCs liquidity and capital spending requirements in future years, (iii) the effects of inflation and changing prices on AWBCs operations, (iv)
managements assessment of interest rate risks, and (v) AWBCs ability to continue to compete effectively with larger enterprises. Management cautions that forward-looking statements are subject to risk and uncertainties that could cause
AWBCs actual results to differ materially from those projected in such forward-looking statements. AWBCs future business, financial condition and results of operations could differ materially from those anticipated by such
forward-looking statements and are subject to risks and uncertainties including the risks set forth below. Moreover, neither AWBC nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. AWBC
is under no duty to update any of the forward-looking statements after the date of this Annual Report to conform such statements to actual results or to changes in our expectations.





Item 8.Financial Statements and Supplementary Data.





The consolidated financial statements and
supplementary data of AWBC and its subsidiary for the years ended December 31, 2001, 2000, and 1999, which have been audited except as indicated by Moss Adams LLP, are included as part of Item 14 of this report.





Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.





Not
applicable.





PART III





Item
10.Directors and Executive Officers of the Registrant.





The information requested by this
item is contained in the registrants 2002 proxy statement under the headings Election of Directors and Executive Officers who are not Directors, and is incorporated by reference.





Item 11.Executive Compensation.





The information requested by this item is contained in the
registrants 2002 proxy statement under the headings Executive Compensation and Report of the Compensation Committee, and is incorporated by reference.





Item 12.Security Ownership of Certain Beneficial Owners and Management.





The information requested
by this item is contained in the registrants 2002 proxy statement under the heading Security Ownership of Certain Beneficial Owners and Management, and is incorporated by reference.





Item 13.Certain Relationships and Related Transactions.





The information requested by this item is
contained in the registrants 2002 proxy statement under the heading Related Party Transactions and Business Relations, and is incorporated by reference.




25




---




PART IV





Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K.





(a)
(1)  Financial Statements





Independent Auditors Report on Consolidated Financial Statements





Consolidated Statements of Condition





Consolidated Statements of Income





Consolidated Statements of Changes in Stockholders Equity





Consolidated Statements of Cash
Flows





Notes to Consolidated Financial Statements





(a) (2)  There are no financial statement schedules filed herewith.





(a) (3)  Exhibits





21

Subsidiary of Registrant. Reference is made to Item 1. Business. AmericanWest Bancorporation and The Bank for the required
information.





(b)  Reports on Form 8-K.





There were no Form 8-K Reports during fourth quarter 2001.





(c)  All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or related notes.





SIGNATURES





In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized on the 26th of February 2002.





Principal Executive Officer:By:

/s/    WES COLLEY Wes Colley



President, Chief Executive Officer and DirectorPrincipal Accounting OfficerBy:

/s/    CHAD GALLOWAY Chad Galloway



Vice President and Chief Financial OfficerRemaining DirectorsBy:

/s/    RAND ELLIOTT Rand Elliott, Directors



By

/s/    DON SWARTZ Don SwartzBy:

/s/    DAVE FRAME Dave Frame, Director



By:

/s/    KEITH SATTER Keith Sattler, Chairman and DirectorBy:

/s/    ROBERT J. GARDNER Robert J. Gardner, Director



By:

/s/    MIKE TAYLOR Mike Taylor




26




---




INDEPENDENT AUDITORS REPORT





Board of Directors and Shareholders


AmericanWest Bancorporation


Spokane, Washington





We
have audited the accompanying consolidated statement of financial condition of AmericanWest Bancorporation and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders equity, and cash flows
for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Corporations management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.





We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provided a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of AmericanWest Bancorporation and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years ended
December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.





| | /s/ | Moss Adams LLP
| | --- | --------------




Everett, Washington


January 24, 2002




27




---




AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





CONSOLIDATED STATEMENTS OF CONDITION


DECEMBER 31, 2001 AND 2000


($ In thousands)





2001

2000ASSETSCash and due from banks

$
24,421

$
28,580Overnight interest bearing deposits with other banks


535


1,247Cash and cash equivalents


24,956


29,827Securities


15,550


47,885Loans, net of allowance for loan losses of $6,624 in 2001 and $4,948 in 2000


580,899


488,459Accrued interest receivable


5,368


5,379Premises and equipment, net


13,488


13,215Foreclosed real estate and other foreclosed assets


1,616


1,510Life insurance and salary continuation assets


10,519


4,304Intangible assets


4,970


5,302Other assets


1,975


2,632TOTAL ASSETS

$
659,341

$
598,513LIABILITIESNoninterest bearingdemand deposits

$
98,280

$
96,087Interest bearing deposits:NOW and savings accounts


207,397


195,241Time, $100,000 and over


81,508


71,735Other time


145,052


138,363TOTAL DEPOSITS


532,237


501,426Short-term borrowings


52,974


26,701Capital lease obligations


627


666Accrued interest payable


1,439


1,980Other liabilities


3,858


3,210TOTAL LIABILITIES


591,135


533,983STOCKHOLDERS' EQUITYCommon stock, no par, shares authorized 15 million; issued and outstanding 7,905,366 in 2001 and 6,974,012 in 2000


61,540


48,904Retained earnings


6,584


15,710Accumulated other comprehensive income, net of tax


82


(84
)TOTAL STOCKHOLDERS' EQUITY


68,206


64,530TOTAL LIABILITIES and STOCKHOLDERS' EQUITY

$
659,341

$
598,513





The accompanying notes are an integral part of these financial statements.




28




---




AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





CONSOLIDATED STATEMENTS OF INCOME


YEARS ENDED DECEMBER 31, 2001, 2000 and 1999


($ In thousands, except per share amounts)





2001

2000


1999INTEREST INCOMEInterest and fees on loans

$
51,300

$
46,319


$
39,728Interest on securities


2,078


3,259



3,760Other interest income


126


464



420TOTAL INTEREST INCOME


53,504


50,042



43,908INTEREST EXPENSEInterest on deposits


17,167


18,979



14,963Interest on borrowings


1,913


707



471TOTAL INTEREST EXPENSE


19,080


19,686



15,434NET INTEREST INCOME


34,424


30,356



28,474Provision for loan losses


2,855


1,643



1,577NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES


31,569


28,713



26,897NONINTEREST INCOMEFees and service charges


2,802


2,467



2,482Insurance commissions


349


964



985Securities gains/(losses)


188


(327
)


66Gain on sale of Bank of the West name









1,250Other


1,363


925



1,129TOTAL NONINTEREST INCOME


4,702


4,029



5,912NONINTEREST EXPENSESalaries and employee benefits


13,115


12,685



11,450Occupancy expense, net


1,849


1,804



1,562Equipment expense


1,649


1,503



1,380State business and occupation tax


571


608



579Director fees


114


351



501Intangible assets amortization


336


884



381Other


4,642


3,493



3,356TOTAL NONINTEREST EXPENSE


22,276


21,328



19,209INCOME BEFORE INCOME TAX EXPENSE


13,995


11,414



13,600INCOME TAX EXPENSE


4,788


3,379



3,888NET INCOME

$
9,207

$
8,035


$
9,712Basic earnings per common share

$
1.12

$
0.91


$
1.05Diluted earnings per common share

$
1.12

$
0.90


$
1.04Basic weighted average shares outstanding


8,190,374


8,819,697



9,233,412Diluted weighted average shares outstanding


8,256,160


8,881,387



9,358,949





The accompanying notes are an integral part of these financial statements.




29




---




CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


YEARS ENDED DECEMBER 31, 2001, 2000, and 1999





Common Stock


Retained Earnings


Accumulated Other Comprehensive Income (Loss)


Total


Comprehensive Income (Loss)Shares


Amount($ in thousands)Balances, January 1, 1999

6,735,999


$
41,852


$
12,163


$
196


$
54,211Common stock issued for options exercised

32,628



221











221Net income









9,712







9,712


$
9,712Redemption of fractional shares

(1,118
)


(17
)










(17
)AmericanWest Bank portion of 10% stock dividend

174,930



2,415



(2,415
)Net change in unrealized gain on available-for-sale securities, net of taxes













(1,205
)


(1,205
)


(1,205
)Balances, December 31, 1999

6,942,439



44,471



19,460



(1,009
)


62,922


$
8,507Common stock issued for options exercised

86,789



585











58510% stock dividend

693,891



8,934



(8,934
)Net income









8,035







8,035


$
8,035Stock repurchase program

(749,107
)


(5,086
)


(2,851
)






(7,937
)Net change in unrealized gain on available-for-sale securities, net of taxes













925



925



925Balances, December 31, 2000

6,974,012



48,904



15,710



(84
)


64,530


$
8,960Common stock issued for options exercised

75,005



504











50410% stock dividend declared in January 2001

698,298



7,853



(7,853
)10% stock dividend declared in December 2001

718,670



8,408



(8,408
)Net income









9,207







9,207


$
9,207Stock repurchase program

(560,619
)


(4,129
)


(2,072
)






(6,201
)Net change in unrealized gain on available-for-sale securities, net of taxes













166



166



166Balances, December 31, 2001

7,905,366


$
61,540


$
6,584


$
82


$
68,206


$
9,373





The accompanying notes are an integral part of these financial statements.




30




---




CONSOLIDATED STATEMENTS OF CASH FLOWS


YEARS ENDED DECEMBER 31, 2001, 2000 and 1999


2001


2000


1999($ in thousands)CASH FLOWS FROM OPERATING ACTIVITIESNet Income

$
9,207


$
8,035


$
9,712Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses


2,855



1,643



1,577Depreciation and amortization


1,234



1,129



930Deferred income taxes


(814
)


(199
)


(465
)(Gain)/loss on sale of premises and equipment


(16
)


84



(50
)(Increase) decrease in assets:Accrued interest receivable


11



(885
)


71Life insurance and salary continuation assets


(115
)


(481
)


(611
)Other assets


1,803



(8
)


743Increase/(decrease) in liabilities:Accrued interest payable


(541
)


613



(279
)Other liabilities


648



870



(686
)NET CASH FROM OPERATING ACTIVITIES


14,272



10,801



10,942CASH FLOWS FROM INVESTING ACTIVITIESSecurities available-for-sale:Maturities


19,103



7,774



37,642Sales


27,566



8,002



10,150Purchases


(14,168
)


(9,595
)


(14,832
)Securities held-to-maturity:Maturities










44Net increase in loans and leases


(95,295
)


(71,892
)


(60,255
)Purchase of life insurance contracts


(6,100
)Purchases of premises and equipment


(1,514
)


(2,055
)


(2,388
)Proceeds from sale of premises and equipment


23



760



521Foreclosed assets activity


(106
)


(331
)


66NET CASH FROM INVESTING ACTIVITIES


(70,491
)


(67,337
)


(29,052
)CASH FLOWS FROM FINANCING ACTIVITIESNet increase/(decrease) in deposits


30,811



48,527



(14
)Short-term borrowings activity


26,273



19,193



6,872Principal payments on capital lease obligations


(39
)


(24
)


(22
)Proceeds from issuance of capital stock


504



585



221Stock repurchase program


(6,201
)


(7,937
)Cash dividends and fractional shares










(17
)NET CASH FROM FINANCING ACTIVITIES


51,348



60,344



7,040NET CHANGE IN CASH AND CASH EQUIVALENTS


(4,871
)


3,808



(11,070
)Cash and cash equivalents at January 1


29,827



26,019



37,089Cash and cash equivalents at December 31

$
24,956


$
29,827


$
26,019Interest paid

$
19,621


$
19,073


$
15,713Income taxes paid

$
4,852


$
3,726


$
3,981Supplemental Schedule of Noncash Investing and Financing ActivitiesForeclosed real estate acquired in settlement of loans

$
1,252


$
1,498


$
1,570Transfers from securities at cost to securities at fair value





$
707





The accompanying notes are an integral part of these financial statements




31




---




AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Note
1.    Business and Summary of Significant Accounting Policies





Basis of consolidation:





The consolidated financial statements include the accounts of AmericanWest Bancorporation (AWBC or Corporation) and its
wholly owned subsidiary AmericanWest Bank (AWB or Bank) after eliminating all significant intercompany balances and transactions. During 2001 AWBC merged its five Banks into AWB and sold its insurance subsidiary.





Nature of business:





AWB
is a state-chartered commercial bank under the laws of the State of Washington, and provides banking services primarily throughout eastern and central Washington and northern Idaho. AWBC is subject to competition from other financial institutions,
as well as nonfinancial intermediaries and to the regulations of certain federal and state agencies and it undergoes periodic examinations by those regulatory agencies.





Basis of financial statement presentation:





The financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities as of the date of the statement of financial condition and certain revenues and expenses for the period and the accompanying notes. Actual results could differ, either positively or negatively, from those
estimates.





Material estimates that are particularly susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in the satisfaction of loans. In connection with the determination of the allowance for loan losses and other real estate
owned, management obtains independent appraisals for significant properties.





Management believes that the allowances for loan
losses and other real estate owned are adequate. While management uses currently available information to recognize losses on loans and other real estate owned, future additions to the allowances may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the AWBC allowance for loan losses and other real estate owned. Such agencies may require AWBC to recognize additions to the
allowances based on their judgments of information available to them at the time of their examination.





Securities:





All of the securities are classified available-for-sale. Securities consist primarily of obligations of the U.S. government
and U.S. government agencies and state governments.




32




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 1.    Business
and Summary of Significant Accounting Policies (Continued)





Unrealized holding gains and losses, net of tax, on
available-for-sale securities are excluded from earnings and reported as a net amount in a separate component of stockholders equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the
specific-identification method. Premiums and discounts are recognized in interest income using the effective interest method over the period to maturity.





Loans and allowances for loan losses:





Loans receivable that management has the intent
and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or costs on originated
loans, or unamortized premiums or discounts on purchased loans. Net deferred fees or costs are amortized using the interest method over the life of the loan. Effective July 1, 2001, net loan origination fees and costs are no longer deferred and
amortized because the net difference is not significant.





The accrual of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid interest is reversed. Interest income is subsequently recognized only to the extent cash payments are
received.





An allowance for probable losses on loans is maintained at a level deemed by management to be adequate to provide for
potential loan losses through charges to operating expense. The allowance is based upon a continuing review of loans, which includes consideration of actual net loan loss experience, changes in the size and character of the loan portfolio,
identification of individual problem situations which may affect the borrowers ability to repay, the estimated value of any underlying collateral, and evaluation of current economic conditions. Loan losses are recognized through charges to the
allowance.





Foreclosed real estate:





Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis.
After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying amount or fair value less cost to sell.




33




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 1.    Business
and Summary of Significant Accounting Policies (Continued)





Premises and equipment:





Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation over estimated useful lives, which range from 3 to 30
years. Depreciation expense is computed using primarily the straight-line method for financial statement purposes. Accelerated depreciation methods are used for federal income tax purposes. Normal costs of maintenance and repairs are charged to
expense as incurred.





Intangibles:





Intangible assets acquired in the form of goodwill, customer lists and covenants to not compete, and core deposits purchased are being amortized using the straight-line method over five
to twenty-five years. AWBC periodically evaluates these intangible assets for impairment.





Income taxes:





AWBC files a consolidated federal income tax return. The income tax related to the individual entities is generally computed as if each one
had filed a separate tax return and is based on amounts reported in the statements of income (after exclusion of non-taxable permanent differences such as interest on state and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial statement purposes. Deferred taxes are computed using the asset and liability approach.





Per share amounts:





All per share amounts have been
calculated on the basis of weighted average number of shares outstanding during each year. All share and per share amounts have been adjusted giving retroactive effect to stock dividends.





Cash and cash equivalents:





For the purposes of
presentation in the consolidated financial statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and overnight deposits with other banks. The Bank places its cash with high credit quality institutions. The
amount on deposit fluctuates and at times exceeds the insured limit by the Federal Deposit Insurance Corporation, which potentially subjects the Bank to credit risk.





Stock options:





Employee stock options are accounted for
under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Stock options are granted at exercise prices not less than the fair market value of common stock on the date of grant. Under APB No. 25, no
compensation expense is recognized pursuant to AWBCs stock option plans. AWBC has disclosed the proforma amounts of net income and earnings per share that would have been reported had it elected to follow the fair value recognition provisions
of SFAS No. 123 (Note 14).




34




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 1.    Business
and Summary of Significant Accounting Policies (Continued)





Other off-statement of condition instruments:





In the ordinary course of business AWBC has entered into off-statement of condition financial instruments consisting of
commitments to extend credit, commitments under credit-card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are held for purposes other than trading and are recorded in the financial statements
when they are funded or related fees are incurred or received.





Note 2.    Accounting Pronouncements





In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. AWBC will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter 2002. Application of the nonamortization provisions of the
Statement is expected to result in an increase in net income of $226,000 per year. During 2002, AWBC will perform the first of the required impairment tests of goodwill as of January 1, 2002 and does not expect the effect of these tests to have an
impact on the earnings and financial position of AWBC.





Note 3.    Cash and Cash Equivalents





The Bank is required to maintain cash reserves with the Federal Reserve Bank. Cash reserve requirements are computed by applying prescribed percentages
to various types of deposits. When the Banks cash reserves are in excess of that required it might lend the excess to other banks on a daily basis. Conversely, when cash reserves are less than required, the Bank borrows funds on a daily basis.
Such reserve requirements at December 31, 2001 and 2000 were approximately $2,762,000 and $2,708,000, respectively. The average amounts of federal funds sold and overnight interest bearing deposits with other banks for the years ended December 31,
2001 and 2000, were $4,196,000 and $6,172,000, respectively. Similarly, averages of short-term borrowings were $42,461,000 and $10,050,000 for 2001 and 2000, respectively. The balance of short-term borrowings at December 31, 2001 and 2000 was
$52,974,000 and $26,701,000, respectively.




35




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 4.    Securities





Debt and equity securities have been classified according to managements intent. The amortized cost of securities and
their fair values at December 31 were as follows:





December 31, 2001

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value($ in thousands)Securities available-for-sale:U.S. Treasury securities

$
1,001

$
42




$
1,043Obligations of federal government agencies


4,531


53

$
20


4,564Obligations of states, municipalities and political subdivisions


1,255


42





1,297Mortgage backed securities


2,688


42





2,730Other securities


5,951


34


69


5,916Total

$
15,426

$
213

$
89

$
15,550





December 31, 2001

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value($ in thousands)Securities available-for-sale:U.S. Treasury securities

$
2,500

$
39

$
1

$
2,538Obligations of federal government agencies


18,054


16


95


17,975Obligations of states, municipalities and political subdivisions


7,458


134





7,592Mortgage backed securities


9,246


16


169


9,093Other securities


10,755


1


69


10,687Total

$
48,013

$
206

$
334

$
47,885




36




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 4.    Securities
(Continued)





Securities taxable interest income was $1,596,000, $2,573,000, and $3,009,000 for 2001, 2000 and 1999,
respectively. Securities nontaxable interest income was $210,000, $469,000 and $522,000 for 2001, 2000, and 1999, respectively. Dividend income was $272,000, $229,000, and $218,000 for 2001, 2000, and 1999, respectively. Securities with an amortized
cost of $5,674,000 and $12,635,000 at December 31, 2001 and 2000, respectively, were pledged for purposes required or permitted by law. Market value of these securities was $5,790,000 and $12,872,000 at December 31, 2001 and 2000, respectively.
Other securities includes Federal Home Loan Bank (FHLB) Stock of $4,173,000 in 2001 and $3,540,000 in 2000, which is carried at cost and can be sold back to the Federal Home Loan Bank at cost, but is restricted as to purchase and sale based on the
level of AWBC business activity with the FHLB.





Gross realized gains on sales of securities available for sale were $267,000,
$44,000, and $69,000 for 2001, 2000, and 1999, respectively. Gross realized losses were $79,000, $370,000, and $3,000 for 2001, 2000, and 1999, respectively.





The contractual scheduled maturity of securities at December 31, 2001 were as follows:





Amortized Cost

Fair Value($ in thousands)Due in one year or less

$
6,070

$
6,102Due from one year to five years


3,658


3,716Due from five to ten years


2,775


2,745Due after ten years


316


339Mortgage backed securities


2,607


2,648$
15,426

$
15,550





Expected maturities will differ from contractual maturities because the issues of
certain debt securities have the right to call or prepay their obligations without any penalties.




37




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 5.    Loans and
Allowance for Loan Losses





Loan categories as of December 31, 2001 and 2000 were as follows:





2001


2000($ in thousands)Commercial and industrial

$
411,197


$
317,108Agricultural


88,121



76,093Real estate mortgage


40,084



62,173Real estate construction


17,201



12,252Installment


26,311



22,489Bank cards and other


5,062



3,972Total loans


587,976



494,087Allowance for loan losses


(6,624
)


(4,948
)Deferred loan fees, net of deferred costs


(453
)


(680
)Net loans

$
580,899


$
488,459





Variable rate loans were $229,296,000 and $185,345,000 as of December 31, 2001
and 2000, respectively. Remaining loans were fixed rate loans. A summary of loans by contractual maturity as of December 31, 2001 and 2000 is as follows:





2001

2000($ in thousands)Maturity within one year

$
185,917

$
124,644One to five years


220,890


211,794Over five years


181,169


157,649$
587,976

$
494,087





Changes in the allowance for loan losses are as follows:


2001


2000


1999($ in thousands)Balance, beginning of year

$
4,948


$
4,349


$
3,819Provision charged to operations


2,855



1,643



1,577Loans charged-off


(1,329
)


(1,140
)


(1,248
)Recoveries


150



96



201Balance, end of year

$
6,624


$
4,948


$
4,349




38




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 5.    Loans and
Allowance for Loan Losses (Continued)





Impaired loan information as of December 31, 2001, 2000 and 1999 is as follows:





2001

2000

1999($ in thousands)Impaired loans with specific allowance for loan losses

$
1,679

$
177

$
1,157Impaired loans without a specific allowance for loan losses


11,442


6,586


5,169Total impaired loans

$
13,121

$
6,763

$
6,326Impaired loans allowance for loan losses

$
444

$
50

$
539Average impaired loans


11,767


6,414


3,544Interest income recognized for impaired loans


269


41


306





Note 6.    Premises and Equipment





Major classifications of premises and equipment are summarized as of December 31, 2001 and 2000 as follows:





2001


2000($ in thousands)Premises

$
11,865


$
11,653Furniture, fixtures, and equipment


6,314



5,408Leasehold improvements


843



88919,022



17,950Less accumulated depreciation


(7,672
)


(6,873
)11,350



11,077Land


2,138



2,138Premises and equipment, net

$
13,488


$
13,215




39




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 7.    Life
Insurance and Salary Continuation Plan





The Bank maintains salary continuation plans for the benefit of certain of their
directors, executive officers and other key employees. The plan provides for monthly payments to such persons, or their designated beneficiaries, for a period of ten years following retirement at age 65, or death prior to retirement. Amounts payable
to eligible participants are determined by reference to such persons salary or directors fee as of the date of each such persons agreement under the plan.





The plan is generally available to most directors, executive officers and other key employees, and vests according to years of service. Persons employed for at least six continuous years
following the effective date of the plan are deemed vested with respect to 20% of the salary continuation benefits available to them, and become vested in an additional 20% of such benefits for each succeeding year of employment thereafter until the
employee becomes fully vested. Eligible persons employed for at least ten continuous years prior to the effective date of the plans are deemed fully vested. The Bank has invested funds in life insurance policies to protect the Bank from early payout
of the obligations under the salary continuation plan due to the untimely death of plan participants. The Bank is the beneficiary of the life insurance policies. The Bank earns interest on these invested funds, which is classified with noninterest
income.





Cash surrender values; salary continuance benefit obligations at age 65, and the recorded liability were as follows as
of December 31, 2001 and 2000:





2001

2000($ in thousands)Cash surrender value

$
4,419

$
4,304Present value at age 65 of all participants after full vesting is obtained


5,014


5,040Present value at age 65 of the current fully vested participants


3,933


3,959Recorded liability for future benefit obligation


1,428


1,123





Vested participants are eligible to receive benefits at age 65. The Bank invested
an additional $6.1 million in life insurance contracts in late December 2001.




40




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 8.    Income
Taxes





The components of income tax expense for the years presented are as follows:





2001


2000


1999($ in thousands)Current expense

$
5,602


$
3,578


$
4,353Deferred tax expense/(benefit)


(814
)


(199
)


(465
)Income tax expense

$
4,788


$
3,379


$
3,888





The effective tax rate differs from the statutory tax rate as follows:





2001


2000


1999($ in thousands)Income tax at statutory rates

$
4,772


$
3,892


$
4,647Effect of tax-exempt interest income


(104
)


(186
)


(204
)Effect of tax credit






(283
)


(400
)Effect of nondeductible expenses and other


120



(44
)


(155
)Income tax expense

$
4,788


$
3,379


$
3,888





The following are the significant components of deferred tax assets and
liabilities. The net amount is classified with other assets in the consolidated financial statements:





2001

2000($ in thousands)Deferred tax assets:Allowance for loan losses

$
2,163

$
1,400Deferred compensation expense


538


405Other


296


148Total deferred tax assets


2,997


1,953Deferred tax liabilities:Deferred loan costs


493


500Lease financing


74


100FHLB stock dividend income


579


486Unrealized losses on available-for-sale securities


42


(43
)Other


677


507Total deferred tax liabilities


1,865


1,550Net deferred tax assets

$
1,132

$
403





The applicable tax (benefit)/expense, net for securities gains and losses was
$64,000, $(112,000), and $22,000 for 2001, 2000, and 1999, respectively.




41




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 9.    Time
Deposit Maturities





At December 31, 2001, the scheduled maturities of time deposits were as follows:





($ in thousands)2002

$
199,8692003


22,0042004


2,7302005


1,3652006


493Later years


99Total

$
226,560





Note 10.    Commitments and Contingent Liabilities





In the ordinary course of business, AWBC has various outstanding commitments and contingent liabilities that are not reflected in the accompanying
consolidated financial statements. In addition, AWBC is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the consolidated financial condition of AWBC.





The minimum
annual rental commitments on capital and operating leases at December 31, 2001, exclusive of taxes and other charges, are summarized as follows:





($ in thousands)2002

$
6132003


6022004


5512005


4922006


456Later years


3,936Total minimum payments due


6,650Less: Amount representing interest


(342
)Present value of net minimum lease payments

$
6,308





AWBC rental expense for 2001, 2000, and 1999 was $669,000, $663,000, and
$494,000, respectively.





Other commitments and contingent liabilities:





AWBC is a party to financial instruments with off-statement of condition risk in the normal course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of
condition. The contract or notional amounts of those instruments reflect the extent of involvement AWBC has in particular classes of financial instruments.




42




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AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note
10.    Commitments and Contingent Liabilities (Continued)





AWBCs exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. AWBC uses
the same credit policies in making commitments and conditional obligations as it does for statement of condition instruments.





Contract or Notional Amount2001

2000($ in thousands)Financial instruments whose contract amounts represent credit risk:Commitments to extend credit

$
104,783

$
93,051Standby letters of credit and financial guarantees written


1,224


1,891Unused commitments on bankcards


10,078


13,477TOTAL

$
116,085

$
108,419





AWBC does not anticipate any material losses as a result of the commitments or
guarantees.





Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements. AWBC evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by AWBC upon extension of credit is based on
managements credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties.





Standby letters of credit and financial guarantees written are conditional commitments issued by AWBC to guarantee the performance of a customer of a
third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.




43




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note
10.    Commitments and Contingent Liabilities (Continued)





The Banks loans, commitments, and
commercial and standby letters of credit have been granted to customers in the Banks market area. As such, significant changes in economic conditions in the State of Washington or within its primary industries could adversely affect the
Banks ability to collect loans. Substantially all such customers are depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 5. AWBCs related party loans and deposits are disclosed in Note 16. The Bank,
as a matter of policy, does not extend credit to any single borrower in excess of $10,000,000.





As of December 31, 2001 and
2000, AWBC had lines of credit available of $97,439,000 and $95,865,000, respectively. The lines were available for short-term and long-term borrowings.





Note 11.    Common Stock





The Board of Directors approved two stock repurchases in 2001 and
2000. In 2001 560,619 shares were repurchased for $6.2 million. In 2000 749,107 shares were repurchased for $7.9 million. In January and December 2001, January 2000 and January 1999 the Board of Directors declared 10% common stock dividends. AWBC
recorded a transfer from retained earnings to common stock for the market value of the additional shares issued. Per share amounts and weighted average shares outstanding have been retroactively adjusted to reflect the stock dividends.





Note 12.    Restrictions on Dividends and Loans





The Bank is subject to banking regulations relating to the payment of dividends and the amount of loans that it may extend. The Bank is allowed to pay dividends out of retained earnings. As of December 31, 2001, the
amount of retained earnings of AWB was $38,969,000. As of December 31, 2001 AWBC had $6,584,000 of retained earnings available for dividends.





Certain loans to any person, including liabilities of a firm or association, cannot exceed twenty percent of the capital and surplus of the Bank. Loans that are secured or covered by guarantees, or by commitments or
agreements to take over or to purchase the same, made by any federal reserve bank or by the United States, including any corporation wholly owned directly or indirectly by the United States, are not subject to these restrictions. No loans can be
made unless the Bank has more than the minimum available funds required by law.




44




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 13.    Employee
Stock Ownership Plan (ESOP) and Profit Sharing 401(k) Plan





AWBC sponsors an ESOP. An ESOP is a form of retirement plan
whereby AWBC receives a deduction for contributions to the Plan and the Plan invests all or a portion of the employer Trust contributions and Trust earnings in stock of AWBC. The Plan is qualified under Section 401(a) of the Internal Revenue Code as
a stock bonus plan. Employees 21 years or older become eligible for participation after 1,000 hours or more of service in a plan year, and benefits fully vest after five years of service. Contributions to the ESOP plan totaled $183,000, $400,000 and
$322,000 for 2001, 2000 and 1999, respectively and are based on a percentage of AWBC earnings. Contributions are allocated pro rata based on eligible annual compensation on December 31. AWBC has a Profit Sharing 401(k) Plan. Contributions to the
401(k) plan in 2001 were $167,000. There were no employer contributions to the plan in 2000 and 1999.





Note 14.    Stock Option
Plans





The AWBC Shareholders and Board of Directors approved an Incentive Stock Plan (Plan) in 2001. The plan provides for
the issuance of incentive stock options to directors, officers and key employees. The maximum aggregate number of authorized shares issued under this plan is 800,000. In any given year, no eligible participant may receive more than 10,000 shares.
The exercise price of each option granted under the Plan may not be less than the fair market value of a share of AWBCs common stock on the date of grant. The Board of Directors Compensation Committee administers the Plan. The maximum term of
an incentive stock option granted under the Plan is ten years and the Plan will terminate on December 31, 2010. On June 1, 2001 128,370 common stock incentive stock options were issued under the new Plan. As of December 31, 2001 there were 357,742
stock options outstanding from prior approved Incentive Stock Option Plans. Future incentive stock options will be issued from the Plan approved in 2001.




45




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 14.    Stock
Option Plans (Continued)





The status of the Plans as of December 31, 2001, 2000 and 1999 is as follows:





2001

2000

1999Number


Weighted Average Exercise Price

Number


Weighted Average Exercise Price

Number


Weighted Average Exercise PriceOutstanding at beginning of year

445,201


8.39

449,770


8.07

451,515


7.50Granted

128,370


9.73

149,617


8.15

44,029


10.55Exercised

(82,506
)

5.95

(105,015
)

5.58

(45,774
)

4.77Forfeited

(4,953
)

8.80

(49,171
)

12.23Outstanding at year-end

486,112


9.17

445,201


8.39

449,770


8.07Exercisable at year-end

227,985


8.87

337,659


7.57

281,212


6.81Weighted average fair value of options granted during the year




9.73




8.15




10.31





The following table summarizes information about stock options outstanding at
December 31, 2001:





Options Outstanding

Options ExercisableRange of Exercise Prices

Number Outstanding

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Number Exercisable

Weighted Average Exercise Price$5.48  $6.05

31,649

.1 years

$5.73

31,649

$5.73$6.35

33,983

1.1 years

$6.35

33,983

$6.35$7.20

8,910

1.2 years

$7.20

8,910

$7.20$7.85

121,000

2.1 years

$7.85

25,410

$7.85$7.86

11,550

1.2 years

$7.86

11,550

$7.86$9.39

28,622

3.1 years

$9.39

7,986

$9.39$9.73

128,370

4.1 years

$9.73

55,000

$9.73$10.50

35,463

2.1 years

$10.50$10.59

2,928

1.9 years

$10.59

2,928

$10.59$10.89

5,324

2.1 years

$10.89$11.19

6,003

2.0 years

$11.19$11.37

15,138

1.9 years

$11.37

15,138

$11.37$12.88

57,172

1.1 years

$12.88

35,431

$12.88




46




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 14.    Stock
Option Plans (Continued)





If the fair value based method of accounting under SFAS No. 123 had been used for 2001, 2000 and
1999 the results and related assumptions would have been as follows:





2001


2000


1999( $ in thousands, except per share)Results using fair value based method of accounting:Net income

$
8,919


$
7,739


$
9,608Basic earnings per common share

$
1.09


$
0.88


$
1.04Diluted earnings per common share

$
1.08


$
0.87


$
1.03Assumptions used to make the fair value calculation:Risk free interest rate


4.25
%


5.00
%


5.50
%Expected volatility


28.25
%


28.25
%


28.25
%Expected cash dividends


0
%


0
%


0
%Expected stock option life


5.0 years



5.0 years



5.0 years





Note 15.    Parent Company Only Statements





The following are the condensed statements of condition, income, and cash flows for the parent company only, AmericanWest Bancorporation. These
statements are presented using the equity method of accounting; therefore, accounts of the subsidiaries have not been included. Intercompany transactions and balances have not been eliminated. The following information should be read in conjunction
with the other notes to the consolidated financial statements.





Condensed Statements of Condition





December 31,2001

2000($ in thousands)Cash

$
1

$
348Investment in:Bank subsidiaries


63,918


62,211Nonbank subsidiary





299Premises and equipment





1,115Other assets


4,287


1,165TOTAL ASSETS

$
68,206

$
65,138Accrued expenses and other liabilities




$
608Stockholders' equity


68,206


64,530TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
68,206

$
65,138




47




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 15.    Parent
Company Only Statements (Continued)





Condensed Statements of Income





Years Ended December 31,2001


2000

1999($ in thousands)Income:Bank subsidiaries dividends

$
4,471


$
6,318

$
3,099Rent income






489


476Other income


395



6


1554,866



6,813


3,730Expenses:Salaries and benefits






1,151


1,029Interest expense


1



6Depreciation and amortization


226



171


169Other operating expenses






479


712227



1,807


1,910Income/(loss) before tax benefit and equity in undistributed net income of subsidiaries


4,639



5,006


1,820Income tax benefit/(expense)


(134
)


591


498Income/(loss) before equity in undistributed net income of subsidiaries


4,505



5,597


2,318Equity in undistributed net income of:Bank subsidiaries


4,634



2,348


7,333Nonbank subsidiaries


68



90


61Net income

$
9,207


$
8,035

$
9,712




48




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 15.    Parent
Company Only Statements (Continued)





Condensed Statements of Cash Flows





Years Ended December 31,2001


2000


1999($ in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net Income

$
9,207


$
8,035


$
9,712Adjustments to reconcile net income to cash provided by operating activities:Equity in undistributed net income of subsidiaries


(4,702
)


(2,438
)


(7,394
)Depreciation and amortization


226



171



169Gain on sale


(391
)(Increase) decrease in other assets


(2,966
)


(1,060
)


65Increase (decrease) in other liabilities


(608
)


547



(82
)NET CASH FROM OPERATING ACTIVITIES


766



5,255



2,470CASH FLOWS FROM INVESTING ACTIVITIESInvestment in subsidiaries


(294
)


(2,913
)Return of investment in subsidiaries


4,097







52Purchase of premises and equipment






(632
)


(612
)Proceeds from sale of Insurance Agency


781Sale of premises and equipment






3,585NET CASH FROM INVESTING ACTIVITIES


4,584



40



(560
)CASH FLOWS FROM FINANCING ACTIVITIESIssuance of capital stock


504



585



124Stock repurchase program


(6,201
)


(7,937
)Cash paid for redemption of fractional shares










(17
)NET CASH FROM FINANCING ACTIVITIES


(5,697
)


(7,352
)


107NET CHANGE IN CASH


(347
)


(2,057
)


2,017CASH, beginning of year


348



2,405



388CASH, end of year

$
1


$
348


$
2,405




49




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 16.    Related
Party Transactions





Loans to related parties:





Loans to AWBCs officers and directors are on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility. Such loans had the following balances and activity during 2001 and 2000:





2001


2000($ in thousands)Balance at beginning of year

$
15,104


$
20,515New loans or advances


815



5,230Repayments and adjustments


(11,897
)


(10,641
)Balance at end of year

$
4,022


$
15,104





Deposits from related parties:





Deposits from related parties totaled $1,365,000 and $12,647,000 at December 31, 2001 and 2000, respectively.





Payments to related parties:





AWB paid $84,000 in 2001, 2000, and 1999 respectively to an Association including one of the Directors of AWBC and AWB for the rent of its Ephrata branch.




50




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 17.    Fair Value
of Financial Instruments





SFAS No. 107, Disclosures about Fair Value of Financial Instruments requires disclosure of fair
value information about financial instruments for which it is practicable to estimate fair value. As defined by SFAS No. 107, financial instruments include the categories listed below. It does not include the value of property, plant and equipment
and intangible assets such as customer relationships and core deposit intangibles. Fair values of off-statement of condition lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counter parties credit standing. The fair value of the fees at December 31, 2001 and 2000, were insignificant. See Note 10 for the notional amount of the commitments to extend credit. The following table
summarizes carrying amounts, estimated fair values, and assumptions used by AWBC to estimate fair value as of December 31, 2001 and 2000:





As of December 31, 2001:

Assumptions Used in Estimating Fair Value

Carrying Amount

Estimated Fair Value($ in thousands)Financial Assets:Cash and due from banks

Equal to carrying value

$
24,421

$
24,421Overnight interest bearing deposits with other banks

Equal to carrying value


535


535Securities

Quoted market prices


15,550


15,550Loans

Fixed-rate loans: Discounted expected future cash flows, variable-rate loans: equal to carrying value, net of allowance for loan
losses


580,899


609,992Financial Liabilities:Deposits

Fixed-rate certificates of deposit: Discounted
expected future cash flowsAll other deposits: Equal to carrying value


532,237


553,167Short-term borrowings

Equal to carrying value


52,974


52,974


As of December 31, 2000:

Assumptions Used in Estimating Fair Value

Carrying Amount

Estimated Fair Value($ in thousands)Financial Assets:Cash and due from banks

Equal to carrying value

$
28,580

$
28,580Overnight interest bearing deposits with other banks

Equal to carrying value


1,247


1,247Securities

Quoted market prices


47,885


47,885Loans

Fixed-rate loans: Discounted expected future cash flows, variable-rate loans: equal to carrying value, net of allowance for loan losses


488,459


488,116Financial Liabilities:Deposits

Fixed-rate certificates of deposit: Discounted expected future cash flowsAll other deposits: Equal to carrying value


501,426


501,860Short-term borrowings

Equal to carrying value


26,701


26,701




51




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 18.    Regulatory
Matters





The Bank is subject to various regulatory capital requirements administered by the banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-statement of condition items.





The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios set forth in the following table of total and Tier I capital to risk-weighted and average assets. As of
December 31, 2001 AWBC and AWB were considered well capitalized based on regulatory capital standards.




52




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







As of December 31,
2001 and 2000 the regulatory ratios for AWBC and AWB were as follows:





Actual


Adequately Capitalized


Well CapitalizedAmount

Ratio


Amount

Ratio


Amount

Ratio($ in thousands)As of December 31, 2001:Total capital to risk weighted assets:AWBC

$
69,778

11.25
%

$
>49,633

8.00
%

$
>62,041

10.00
%AWB


69,362

11.18
%


>49,620

8.00
%


>62,025

10.00
%Tier I capital to risk weighted assets:AWBC


63,154

10.18
%


>24,816

4.00
%


>37,225

6.00
%AWB


62,738

10.12
%


>24,810

4.00
%


>37,215

6.00
%Leverage capital, Tier I capital to average assets:AWBC


63,154

9.84
%


>25,660

4.00
%


>32,075

5.00
%AWB


62,738

9.92
%


>25,297

4.00
%


>31,622

5.00
%As of December 31, 2000:Total capital to risk weighted assets:AWBC

$
64,260

12.18
%

$
>42,192

8.00
%

$
>52,740

10.00
%USB


24,723

11.04
%


>17,911

8.00
%


>23,389

10.00
%HSB


12,399

12.30
%


>8,064

8.00
%


>10,080

10.00
%BOP


6,678

10.77
%


>4,960

8.00
%


>6,199

10.00
%GNB


3,992

11.67
%


>2,736

8.00
%


>3,420

10.00
%AWB


14,178

11.46
%


>9,901

8.00
%


>12,376

10.00
%Tier I capital to risk weighted assets:AWBC


59,312

11.25
%


>21,096

4.00
%


>31,644

6.00
%USB


22,596

10.09
%


>8,956

4.00
%


>13,433

6.00
%HSB


11,424

11.33
%


>4,032

4.00
%


>6,048

6.00
%BOP


6,154

9.93
%


>2,480

4.00
%


>3,720

6.00
%GNB


3,668

10.72
%


>1,368

4.00
%


>2,052

6.00
%AWB


13,148

10.62
%


>4,950

4.00
%


>7,246

6.00
%Leverage capital, Tier I capital to average assets:AWBC


59,312

10.24
%


>23,176

4.00
%


>28,970

5.00
%USB


22,596

10.04
%


>8,998

4.00
%


>11,248

5.00
%HSB


11,424

10.19
%


>4,483

4.00
%


>5,604

5.00
%BOP


6,154

9.16
%


>2,686

4.00
%


>3,358

5.00
%GNB


3,668

8.02
%


>1,830

4.00
%


>2,288

5.00
%AWB


13,148

10.84
%


>4,850

4.00
%


>6,062

5.00
%




53




---



AMERICANWEST BANCORPORATION AND AMERICANWEST BANK





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 19.    Earnings
Per Share





The following is a reconciliation of the numerators and denominators for basic and diluted per-share computations
for net income for 2001, 2000 and 1999:





2001

2000

1999($ in thousands, except per share)Numerator:Net income

$
9,207

$
8,035

$
9,712Denominator:Weighted-average number of common shares outstanding


8,190,374


8,819,697


9,233,412Incremental shares assumed for stock options


65,786


61,690


125,537Total


8,256,160


8,881,387


9,358,949Basic earnings per common share

$
1.12

$
0.91

$
1.05Diluted earnings per common share

$
1.12

$
0.90

$
1.04Potentially dilutive stock option shares


122,028


150,650


143,013





QUARTERLY FINANCIAL DATA


CONDENSED CONSOLIDATED STATEMENT OF INCOME-QUARTERLY


($ in thousands, except per share)





UNAUDITED





2001, Quarter Ended

2000, Quarter EndedDec. 31

Sept. 30

June 30

Mar. 31

Dec. 31

Sept. 30

June 30

Mar. 31Interest income

$
13,229

$
13,616

$
13,340

$
13,319

$
13,727

$
13,055

$
12,022

$
11,238Interest expense


3,802


4,555


5,162


5,561


5,385


5,271


4,719


4,311Net Interest Income


9,427


9,061


8,178


7,758


8,342


7,784


7,303


6,927Provision for loan losses


618


1,109


707


421


647


352


307


337Net interest income after provision for loan losses


8,809


7,952


7,471


7,337


7,695


7,432


6,996


6,590Noninterest income


1,055


1,070


1,326


1,251


1,018


925


1,043


1,043Noninterest expense


5,548


5,545


5,322


5,861


5,837


5,123


5,148


5,220Income before income taxes


4,316


3,477


3,475


2,727


2,876


3,234


2,891


2,413Income tax


1,540


1,180


1,161


907


825


1,058


873


623Net income

$
2,776

$
2,297

$
2,314

$
1,820

$
2,051

$
2,176

$
2,018

$
1,790Basic earnings per common share

$
0.35

$
0.28

$
0.28

$
0.22

$
0.24

$
0.25

$
0.23

$
0.20Diluted earnings per common share

$
0.35

$
0.28

$
0.28

$
0.21

$
0.24

$
0.25

$
0.23

$
0.19Basic average shares


7,932,785


8,133,848


8,271,923


8,429,012


8,519,111


8,782,550


8,853,077


9,131,179Diluted average shares


8,007,335


8,205,918


8,330,313


8,502,078


8,591,469


8,831,893


8,898,737


9,206,633




54