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Report for AmericanWest Bancorporation Shareholders and Potential Shareholders

AmericanWest Bancorporation, the parent company of AmericanWest Bank’s over thirty branches in Eastern Tennessee and Northern Idaho, has aimed for aggressive expansion since going public in 1995.  Through mergers, acquisitions and internal growth, five regional bank subsidiaries of were amassed through 2001.  By April of 2001, all the banks were consolidated under the name AmericanWest Bank.

From 2001 to 2002, economic profit for AmericanWest increased by $4.6 million (48%) to a total of over $14 million.  This was due to a $600,000 (27%) drop in the capital charge, an increase of over $3 million (34%) in cash earnings, and the net worth increasing by $29 million. 

A 6% drop in ROE was offset by a $29 million dollar increase in net worth, which supported the cash earnings increase.  A swelling in margin and leverage were counteracted by a decrease in utilization to cause the drop in the ROE.

The bank growth caused average assets to increase by over $300 million from 2001 to 2002.  This strategy, combined with their revenue’s smaller relative increase of $3 million, produced a gross rate of return (utilization ratio) of 8% in 2002, a fall from the more risky 15% in 2001.  Note, even though AmericanWest increased their assets by $500 million in 2001 compared with an increase of $100 million in 2002, due to the use of average assets in the gross rate of return calculation, the ratio fell in 2002. 

AmericanWest leveraged their equity further in 2002 by enlarging average assets by 81% ($300 million) from the previous year, while boosting their average net worth at a smaller rate of 72% ($29 million).

AmericanWest improved their ability to control costs in 2002, increasing their margin by 6% from the previous year, (20% to 26%).  The operating costs continued to increase, the OE/R ratio increased by 9% in 2002.  These costs were compensated for by AmericanWest’s ability to cut interest expense by $6 million while still increasing interest revenues, thus creating a NIR/R that is 1% higher than 2001.  In addition, the non-interest expense and applicable income taxes also dropped, which added to the rise of the NII/R ratio by 9%.

As mentioned above, the capital charge paid to the stockholders for American West decreased by $600,000 from 2001 to 2002.  The capital charge decreased despite average net worth going up by $29 million because of the dropping cost of capital.  Shareholders expected less return due to a lower market risk free rate (2.17% in 2002 vs. 5.32% in 2001) and the risk premium remaining constant at last year’s level.  Risk premium remained constant as both the bank’s systematic exposure to market risk and market risk premium for systematic risk remained constant from 2001.