UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2003
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 000-18561
AMERICANWEST BANCORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Washington | 91-1259511 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
9506 North Newport Highway, Spokane, WA 99218-1200
(Address of Principal Executive Offices)
(509) 467-6993
(Registrant’s Telephone Number, Including Area Code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Number of Shares Outstanding | |
Common Stock | 9,185,077 (at November 7, 2003) |
AMERICANWEST BANCORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2003
Table of Contents
| Page | ||||||
Part I | Financial Information | |||||
| Item 1. | Financial Statements | |||||
| Condensed Consolidated Statement of Condition–September 30, 2003 and December 31, 2002 | 3 | |||||
| Condensed Consolidated Statements of Income – Three and Nine Months Ended September 30, 2003 and 2002 | 4 | |||||
| Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2003 and 2002 | 5 | |||||
| Notes to Condensed Consolidated Financial Statements | 6 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 17 | ||||
| Item 4. | Controls and Procedures | 17 | ||||
| Part II | Other Information | |||||
| Item 6. | Exhibits and Reports on Form 8-K | 19 | ||||
| Signatures | 19 | |||||
2
AMERICANWEST BANCORPORATION
AmericanWest Bancorporation and Subsidiaries
Condensed Consolidated Statement of Condition
As of September 30, 2003 and December 31, 2002
($ in thousands)
September 30, 2003 | December 31, 2002 | |||||
| ASSETS | ||||||
Cash and due from banks | $ | 23,813 | $ | 24,250 | ||
Overnight interest bearing deposits with other banks | 27,424 | 14,675 | ||||
Cash and cash equivalents | 51,237 | 38,925 | ||||
Securities available for sale | 41,535 | 48,173 | ||||
Loans, net of allowance for loan losses of $11,841 in 2003 and $10,272 in 2002 | 830,203 | 764,938 | ||||
Accrued interest receivable | 8,084 | 6,405 | ||||
Premises and equipment, net | 22,243 | 20,943 | ||||
Foreclosed assets | 8,676 | 7,874 | ||||
Life insurance and salary continuation assets | 15,461 | 11,915 | ||||
Goodwill | 12,050 | 12,050 | ||||
Intangible assets | 2,956 | 3,180 | ||||
Other assets | 1,847 | 2,428 | ||||
TOTAL ASSETS | $ | 994,292 | $ | 916,831 | ||
| LIABILITIES | ||||||
Non-Interest bearing demand deposits | $ | 150,679 | $ | 135,537 | ||
Interest bearing deposits | ||||||
Now and savings accounts | 387,312 | 306,969 | ||||
Time, $100,000 and over | 167,767 | 142,341 | ||||
Other time | 168,851 | 181,488 | ||||
Total deposits | 874,609 | 766,335 | ||||
Short-term borrowings | 67 | 46,284 | ||||
Long-term Borrowings | 9,894 | 6,825 | ||||
Capital lease obligations | 553 | 587 | ||||
Trust preferred securities | 10,000 | 10,000 | ||||
Accrued interest payable | 981 | 1,199 | ||||
Other liabilities | 5,862 | 4,471 | ||||
TOTAL LIABILITIES | 901,966 | 835,701 | ||||
| STOCKHOLDERS’ EQUITY | ||||||
Common stock, no par, shares authorized 15,000,000; issued and outstanding 9,156,863 in 2003 and 8,894,351 in 2002 | 65,731 | 64,301 | ||||
Retained earnings | 26,267 | 16,394 | ||||
Accumulated other comprehensive income, net of tax | 328 | 435 | ||||
TOTAL STOCKHOLDERS’ EQUITY | 92,326 | 81,130 | ||||
TOTAL LIABILITIES and STOCKHOLDERS’ EQUITY | $ | 994,292 | $ | 916,831 | ||
The accompanying notes are an integral part of these statements.
3
AMERICANWEST BANCORPORATION
AmericanWest Bancorporation and Subsidiaries
Condensed Consolidated Statements of Income
| ($ In thousands, except per share) | Three Months Ended September 30, | Year To Date September 30, | ||||||||||
| Income Statement | 2003 | 2002 | 2003 | 2002 | ||||||||
INTEREST INCOME | ||||||||||||
Interest and fees on loans | $ | 17,650 | $ | 15,460 | $ | 51,060 | $ | 41,299 | ||||
Interest on Investments | 488 | 470 | 1,392 | 892 | ||||||||
Other Interest Income | 28 | 34 | 81 | 99 | ||||||||
TOTAL INTEREST INCOME | 18,166 | 15,964 | 52,533 | 42,290 | ||||||||
INTEREST EXPENSE | ||||||||||||
Interest on deposits | 3,257 | 3,627 | 9,914 | 10,012 | ||||||||
Interest on borrowings | 304 | 372 | 1,103 | 936 | ||||||||
TOTAL INTEREST EXPENSE | 3,561 | 3,999 | 11,017 | 10,948 | ||||||||
NET INTEREST INCOME | 14,605 | 11,965 | 41,516 | 31,342 | ||||||||
Provision for loan losses | 1,597 | 1,738 | 3,583 | 3,820 | ||||||||
NET INTEREST INCOME AFTER PROVISION | 13,008 | 10,227 | 37,933 | 27,522 | ||||||||
Fees and Service Charges | 1,123 | 975 | 3,109 | 2,661 | ||||||||
Other | 500 | 499 | 1,581 | 1,139 | ||||||||
TOTAL NONINTEREST INCOME | 1,623 | 1,474 | 4,690 | 3,800 | ||||||||
NONINTEREST EXPENSE | ||||||||||||
Salaries and employee benefits | 5,083 | 4,296 | 15,026 | 11,721 | ||||||||
Occupancy expense, net | 597 | 516 | 1,804 | 1,460 | ||||||||
Equipment expense | 582 | 467 | 1,824 | 1,402 | ||||||||
Intangible amortization | 63 | 52 | 188 | 109 | ||||||||
State business and occupation tax | 206 | 198 | 611 | 530 | ||||||||
Other operating expense | 2,464 | 1,737 | 7,014 | 4,317 | ||||||||
TOTAL NONINTEREST EXPENSE | 8,995 | 7,266 | 26,467 | 19,539 | ||||||||
INCOME BEFORE TAXES | 5,636 | 4,435 | 16,156 | 11,783 | ||||||||
INCOME TAX EXPENSE | 1,926 | 1,404 | 5,632 | 3,795 | ||||||||
NET INCOME | $ | 3,710 | $ | 3,031 | $ | 10,524 | $ | 7,988 | ||||
Basic Earnings per common share | $ | 0.41 | $ | 0.34 | $ | 1.15 | $ | 0.92 | ||||
Diluted Earnings per common share | $ | 0.39 | $ | 0.34 | $ | 1.11 | $ | 0.90 | ||||
Basic weighted average shares outstanding | 9,143,224 | 8,803,842 | 9,137,383 | 8,708,839 | ||||||||
Diluted weighted average shares outstanding | 9,576,519 | 9,035,446 | 9,521,810 | 8,898,168 | ||||||||
The accompanying notes are an integral part of these statements.
4
AMERICANWEST BANCORPORATION
AmericanWest Bancorporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Year-To-Date September 30, 2003 and 2002
($ in thousands)
| 2003 | 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 10,524 | $ | 7,988 | ||||
Provision for loan losses | 3,583 | 3,820 | ||||||
Depreciation and amortization | 2,142 | 1,095 | ||||||
Increase/decrease in assets and liabilities: | ||||||||
Accrued interest receivable | (1,679 | ) | (775 | ) | ||||
Life insurance and salary continuation assets | (546 | ) | (483 | ) | ||||
Other assets | 581 | (426 | ) | |||||
Accrued interest payable | (218 | ) | (408 | ) | ||||
Other liabilities | 1,391 | 468 | ||||||
Net cash provided by operating activities | 15,778 | 11,279 | ||||||
Cash flows from investing activities: | ||||||||
Securities available for sale: | ||||||||
Maturities | 15,837 | 5,924 | ||||||
Sales | 1,594 | 1,537 | ||||||
Purchases | (10,377 | ) | (5,797 | ) | ||||
Net increase in loans | (71,929 | ) | (78,556 | ) | ||||
Purchases of Life Insurance and salary continuation assets | (3,000 | ) | ||||||
Sales of premises and equipment | 28 | |||||||
Net cash to acquire Latah Bancorporation | (8,601 | ) | ||||||
Purchases of premises and equipment | (2,757 | ) | (3,544 | ) | ||||
Foreclosed real estate activity | 1,296 | 330 | ||||||
Net cash change in investing activities | (69,336 | ) | (88,679 | ) | ||||
Cash flows from financing activities: | ||||||||
Net change in deposits | 108,274 | 114,440 | ||||||
Borrowings activity | (43,148 | ) | (18,507 | ) | ||||
Principal payments on capital lease obligations | (34 | ) | (30 | ) | ||||
Proceeds from trust preferred securities | 10,000 | |||||||
Cash payments for stock repurchases | (1,100 | ) | (3,015 | ) | ||||
Cash received from stock sales | 1,878 | 485 | ||||||
Net cash provided by financing activities | 65,870 | 103,373 | ||||||
Net change in cash and cash equivalents | 12,312 | 25,973 | ||||||
Cash and cash equivalents, beginning of year | 38,925 | 24,956 | ||||||
Cash and cash equivalents, end of quarter | $ | 51,237 | $ | 50,929 | ||||
Supplemental Schedule of Noncash Investing and Financing Activities Foreclosed real estate acquired in settlement of loans | $ | 3,216 | ||||||
The accompanying notes are an integral part of these statements.
5
AMERICANWEST BANCORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Basis of Presentation
The consolidated financial statements include AmericanWest Bancorporation and its wholly owned subsidiaries (AWBC or Corporation), AmericanWest Bank (AWB) and AmericanWest Capital Trust I, after eliminating all significant intercompany balances and transactions.
The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring accruals necessary for a fair presentation of the financial condition, the results of operations, and cash flows for the interim periods included herein have been made. The consolidated statement of condition of AWBC as of December 31, 2002 has been derived from the audited consolidated statement of condition of AWBC as of that date. The results of operations for the three and nine months ended September 30, 2003, are not necessarily indicative of results to be anticipated for the year ending December 31, 2003. For additional information, refer to the consolidated financial statements and footnotes thereto included in AWBC’s annual report on Form 10-K for the year ended December 31, 2002.
Employee stock options are accounted for under the intrinsic value method as allowed 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. The following table sets out 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 as amended: Fair values were arrived at through the use of the Black-Scholes model.
| Nine Months Ended | ||||||
| ($ in thousands, except per share) | September 30, 2003 | September 30, 2002 | ||||
Net Income as Reported | $ | 10,524 | $ | 7,988 | ||
Additional compensation for fair value of stock options granted | $ | 671 | $ | 350 | ||
Proforma Net Income | $ | 9,853 | $ | 7,638 | ||
Earnings Per Share | ||||||
Basic | ||||||
As Reported | $ | 1.15 | $ | 0.92 | ||
Proforma | $ | 1.08 | $ | 0.88 | ||
Diluted | ||||||
As Reported | $ | 1.11 | $ | 0.90 | ||
Proforma | $ | 1.03 | $ | 0.86 | ||
NOTE 2—Consolidation of Subsidiaries
On March 19, 2003, AWBC consolidated its two commercial banking subsidiaries, AmericanWest Bank and Bank of Latah into a single commercial bank, AmericanWest Bank. The AmericanWest Bank charter is the surviving charter.
6
AMERICANWEST BANCORPORATION
NOTE 3. Securities
The securities are classified as available-for-sale and are stated at fair value, and unrealized holding gains and losses, net of related deferred taxes, are reported as a separate component of stockholders’ equity. Gains or losses on available-for-sale securities sales are reported as part of noninterest income based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. Carrying amount and fair values at September 30, 2003 and December 31, 2002 were as follows:
| September 30, 2003 | December 31, 2002 | |||||||||||
| $ in thousands | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||
US. Treasury Securities | $ | 501 | $ | 541 | $ | 3,101 | $ | 3,155 | ||||
Obligations of Federal Government Agencies | 3,376 | 3,398 | 9,096 | 9,137 | ||||||||
Mortgage backed securities | 6,507 | 6,415 | 4,888 | 4,881 | ||||||||
Obligations of states, municipalities and political subdivisions | 9,084 | 9,285 | 8,745 | 8,841 | ||||||||
Corporate securities | 15,145 | 15,557 | 12,310 | 12,660 | ||||||||
Other securities | 6,418 | 6,339 | 9,368 | 9,499 | ||||||||
TOTAL | $ | 41,031 | $ | 41,535 | $ | 47,508 | $ | 48,173 | ||||
7
AMERICANWEST BANCORPORATION
NOTE 4. Loans
Loan detail by category as of September 30, 2003 and December 31, 2002 were as follows:
| $ in thousands | September 30, 2003 | December 31, 2002 | ||||||
Commercial and industrial | $ | 605,802 | $ | 540,467 | ||||
Agricultural | 127,091 | 121,279 | ||||||
Real estate mortgage | 39,110 | 47,613 | ||||||
Real estate construction | 32,566 | 29,303 | ||||||
Installment | 29,396 | 27,405 | ||||||
Bank cards and other | 8,320 | 9,512 | ||||||
Total Loans | $ | 842,285 | $ | 775,579 | ||||
Allowance for loan losses | (11,841 | ) | (10,272 | ) | ||||
Deferred loan fees, net of deferred costs | (241 | ) | (369 | ) | ||||
Net Loans | $ | 830,203 | $ | 764,938 | ||||
8
AMERICANWEST BANCORPORATION
NOTE 5. Allowance for Loan Losses
The allowance for loan loss is maintained at levels considered adequate by management to provide for possible loan losses. The allowance is based on management’s assessment of various factors affecting the loan portfolio, including problem loans, business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan losses during the three month and year to date periods ended September 30, 2003 and 2002 were as follows:
Three Months Ended September 30, | Year to Date September 30, | |||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||
Balance, beginning of period | $ | 11,599 | $ | 7,022 | $ | 10,272 | $ | 6,624 | ||||
Balance Acquired | 878 | 878 | ||||||||||
Provision for loan losses | 1,597 | 1,738 | 3,583 | 3,820 | ||||||||
Loan charge-offs | -1,386 | -728 | -2,204 | -2,666 | ||||||||
Loan recoveries | 31 | 95 | 190 | 349 | ||||||||
Balance, end of period | $ | 11,841 | $ | 9,005 | $ | 11,841 | $ | 9,005 | ||||
NOTE 6. Comprehensive Income
Total comprehensive income, which includes net income and unrealized gains and losses on the Company’s available-for-sale securities, amounted to $3.3 million and $3.1 million for the three months ended September 30, 2003 and 2002, respectively. Total comprehensive income amounted to $10.4 million and $8.1 million for the nine months ended September 30, 2003 and 2002, respectively.
NOTE 7. New Accounting Pronouncements
In January 2003, FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities(VIE). It defined a VIE as a corporation, partnership, trust, or any other legal structure used for the business purpose that either a) does not have equity investors with voting rights or b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. This interpretation will require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE’s activities or entitled to receive a majority of the entity’s residual return. The provisions of interpretation No. 46 are required to be applied immediately to VIEs created after January 31, 2003. AWBC does not have any VIE’s and accordingly, the implementation of the Interpretation did not result in an impact on its financial position or results of operations.
In April 2003, FASB issued Statement No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities.This Statement is effective for contracts entered into or modified after June 30, 2003. Adoption of the Statement did not result in an impact on the Corporation’s statement of financial position or results of operations.
In May 2003, FASB issued Statement No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those
9
AMERICANWEST BANCORPORATION
instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Corporation’s statement of financial position or results of operations.
10
AMERICANWEST BANCORPORATION
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
Statements contained in this Quarterly 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 such as “plan”, “hopes”, “believes”, “will continue to be”, “will be”, “continued to”, “expect to”, “anticipate that”, “to be”, or “can impact.” These forward-looking statements include statements relating to AmericanWest Bancorporation’s (AWBC) expectations as to (i) the adequacy of the 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 and implement the Corporation’s growth strategy. Management cautions that forward-looking statements are subject to risks and uncertainties that could cause AWBC’s actual results to differ materially from those projected in such forward-looking statements. 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 Quarterly Report to conform such statements to actual results or to changes in our expectations.
The following discussion contains a review of the results of operations and financial condition for third quarter and year to date in 2003 and 2002. This information should be read in conjunction with the financial statements and related notes appearing in this report. The reader is assumed to have access to AWBC’s Form 10-K for the year ended December 31, 2002, which contains additional information.
AmericanWest Bancorporation
AmericanWest Bancorporation, Inc (the “Corporation”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Corporation conducts business through its wholly-owned subsidiary, AmericanWest Bank (AWB) a state-chartered, FDIC-insured commercial bank organized under the laws of the State of Washington. The Corporation’s main office is located in Spokane, Washington.
AmericanWest Capital Trust I (the “Trust”), a subsidiary of AWBC, was formed in September 2002 for the exclusive purpose of issuing Trust Preferred Securities and common securities and using the $10.0 million in proceeds from the issuance to acquire junior subordinated debentures issued by AWBC.
AmericanWest Bank
AWB provides a full range of banking services to small and medium sized businesses, professionals, and consumers through 45 offices located in Eastern Washington and Northern Idaho.
The principal sources of the AWB’s revenue are 1) interest and fees on loans, 2) fees for deposit accounts and related services, 3) interest on investments and 4) interest bearing deposits with other banks. AWB’s lending activities consist of term and operating loans to businesses and farmers, real estate construction and development loans, vehicle and equipment loans for both businesses and consumers, and real estate mortgage loans. AWB also offers a full line of deposit account products and related services.
11
AMERICANWEST BANCORPORATION
Performance Overview
The table below summarizes the Corporation’s financial performance for the three months and year to date ending September 30, 2003 and 2002:
AMERICANWEST BANCORPORATION AND SUBSIDIARIES
PERFORMANCE SUMMARY
($ in thousands except per share data)
Three Months Ended September 30, | Year to Date September 30, | |||||||||||||||||
| 2003 | 2002 | % Change | 2003 | 2002 | % Change | |||||||||||||
Interest Income | $ | 18,166 | $ | 15,964 | 13.8 | % | $ | 52,533 | $ | 42,290 | 24.2 | % | ||||||
Interest Expense | 3,561 | 3,999 | -11.0 | % | 11,017 | 10,948 | 0.6 | % | ||||||||||
Net Interest Income | 14,605 | 11,965 | 22.1 | % | 41,516 | 31,342 | 32.5 | % | ||||||||||
Provision for Loan Loss | 1,597 | 1,738 | -8.1 | % | 3,583 | 3,820 | -6.2 | % | ||||||||||
Net interest income after provision for loan losses | 13,008 | 10,227 | 27.2 | % | 37,933 | 27,522 | 37.8 | % | ||||||||||
Non Interest Income | 1,623 | 1,474 | 10.1 | % | 4,690 | 3,800 | 23.4 | % | ||||||||||
Non Interest Expense | 8,995 | 7,266 | 23.8 | % | 26,467 | 19,539 | 35.5 | % | ||||||||||
Income before Taxes | 5,636 | 4,435 | 27.1 | % | 16,156 | 11,783 | 37.1 | % | ||||||||||
Income Taxes | 1,926 | 1,404 | 37.2 | % | 5,632 | 3,795 | 48.4 | % | ||||||||||
Net Income | $ | 3,710 | $ | 3,031 | 22.4 | % | $ | 10,524 | $ | 7,988 | 31.7 | % | ||||||
Basic earnings per common share | $ | 0.41 | $ | 0.34 | 20.6 | % | $ | 1.15 | $ | 0.92 | 25.0 | % | ||||||
Net Income
The Corporation reported net income of $3.7 million or $0.39 per fully diluted share for the third quarter of 2003 compared to $3.0 million and $0.34 for the same period in 2002. The Corporation reported net income of $10.5 million or $1.11 per fully diluted share for the nine months ended September, 30, 2003 compared to $8.0 million or $0.90 for the first nine months of 2002. Year to date return on average assets for the period ending September 30, 2003 was 1.51% compared to 1.47% for the same period last year. The return on average equity for the year to date September 30, 2003 was 16.29% an increase from 13.64% for the like period of last year. All of the Corporation’s net income for these periods was derived from the operating results of AWB and Bank of Latah prior to the merger of Bank of Latah and AWB in the first quarter of 2003.
Net Interest Income
Net interest income was $14.6 million and $41.5 million for the third quarter and nine months ended September 30, 2003, an increase from $12.0 million and $31.3 million for the same periods in 2002. This increase in net interest income has been largely due to the increase in interest earning assets related to the acquisition of Bank of Latah in the third quarter of 2002, continued internally generated loan growth as well as improvement in the net interest margin. There was an increase in net interest margin to 6.43% for the year to date ended September 30, 2003 compared to 6.11% for the like period last year. This increase was due to the continued decrease in market interest rates on deposits and continued repricing of maturing time deposits to lower rates.
12
AMERICANWEST BANCORPORATION
This was offset by decreased asset yields related to continued repricing of loans and investments through maturity and new origination.
The following table sets forth the Corporation’s net interest margin for the year to date ending September 30, 2003 and 2002:
Net Interest Margin
Year-To-Date September 30, 2003 and 2002
($ in thousands)
2003 Average | Interest | % | 2002** Average | Interest | % | |||||||||||||
Loans | $ | 810,494 | $ | 44,564 | 7.35 | % | $ | 709,618 | $ | 40,323 | 7.60 | % | ||||||
* Loan fees | 6,496 | 1.07 | % | 5,137 | 0.97 | % | ||||||||||||
Investments | 52,243 | 1,473 | 3.77 | % | 55,217 | 1,954 | 4.73 | % | ||||||||||
Total earning assets | 862,737 | 52,533 | 8.14 | % | 764,835 | 47,414 | 8.29 | % | ||||||||||
Other assets | 70,466 | 66,522 | ||||||||||||||||
Total assets | $ | 933,203 | $ | 52,533 | $ | 831,357 | $ | 47,414 | ||||||||||
Interest-bearing deposits | $ | 657,145 | $ | 9,914 | 2.02 | % | $ | 567,014 | $ | 11,365 | 2.68 | % | ||||||
Borrowings | 45,594 | 1,103 | 3.23 | % | 49,661 | 1,091 | 2.94 | % | ||||||||||
Total interest-bearing liabilities | 702,739 | 11,017 | 2.10 | % | 616,675 | 12,456 | 2.70 | % | ||||||||||
Noninterest bearing deposits | 136,189 | 120,397 | ||||||||||||||||
Other liabilities | 7,895 | 16,511 | ||||||||||||||||
Total liabilities | 846,823 | 11,017 | 753,583 | 12,456 | ||||||||||||||
Equity | 86,380 | 77,774 | ||||||||||||||||
Total liabilities and capital | $ | 933,203 | $ | 11,017 | $ | 831,357 | $ | 12,456 | ||||||||||
Net interest income/spread | $ | 41,516 | 6.05 | % | $ | 34,958 | 5.59 | % | ||||||||||
Net interest margin to average earning assets | 6.43 | % | 6.11 | % | ||||||||||||||
| * | Loan Fees % based on Average Loans |
| ** | Amounts include year-to-date average balances, income and expense for Bank of Latah |
13
AMERICANWEST BANCORPORATION
Provision for Loan Losses
Provision for loan losses reduces net interest income. The Corporation provided $1,597,000 and $3,583,000 in the third quarter and first nine months of 2003, compared to $1,738,000 and $3,820,000, respectively, in 2002. This continuing provision is the result of continued growth in the Corporation’s loans and management of the allowance for loan losses for the inherent risks in the loan portfolio.
Provisions are made to reserve for known and inherent risk characteristics within the loan portfolio. AWBC and its subsidiary regularly evaluate the level of provision and the allowance for loan losses for adequacy by considering such factors as current loan grades, historical loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and estimated impact of current economic conditions that may effect a borrower’s ability to pay. The use of different estimates or assumptions could produce different provision for loan losses. In addition, the allowance for loan losses and the provision for loan losses are also subject to regulatory supervision and examination.
Noninterest Income and Expense
Noninterest income for the three and nine months ended September 30, 2003 was $1.6 million and $4.7 million respectively. This represented an increase from $1.5 million and $3.8 million for like periods in 2002. Fees and service charges increased during the third quarter of 2003 to $1.1 million over $1.0 million in 2002 and increased to $3.1 million for the first nine months of 2003 compared to $2.7 million for the first nine months of 2002. The increases in these areas are primarily due to the addition of Bank of Latah operations through acquisition in the third quarter of 2002.
Noninterest expense increased to $9.0 million for the third quarter in 2003 from $7.3 million in the third quarter of 2002 and to $26.5 million for the first nine months of 2003 versus $19.5 million for the first nine months of 2002. The majority of this increase is due to the addition of Bank of Latah operations which were acquired in the third quarter of 2002. Increases in employee incentives and occupation expenses also contributed to this increase.
Nonperforming Assets
Nonperforming assets include loans that are 90 or more days past due or in non-accrual status and real estate and other loan collateral acquired through foreclosure. Total nonperforming assets were $22.5 million or 2.27% of total assets at September 30, 2003. This compares to $21.4 million or 2.34% of assets at December 31, 2002. The majority of nonperforming assets are comprised of several loans and properties.
The Corporation has acquired title to two ice skating complexes in Spokane and is marketing one as an ongoing concern. The other is being marketed as multiple use commercial real estate. The current balances on these comprise $4.3 million of other real estate owned.
Management believes it remains well secured on a $3.8 million loan for a retail/office complex in Spokane. This loan is subject to litigation and is currently in the appeal process, with the Corporation receiving a judgment in its favor during the original trial in May, 2003. Management believes the Corporation will prevail in this matter.
The Corporation is currently implementing marketing plans for two restaurants, currently on the balance sheet for $1.8 million. One of the facilities is in non-accrual status and the other the Corporation has acquired title to the facility.
The Corporation has acquired two former apple orchards in the Yakima area and is working to liquidate these properties. It is management’s belief that these efforts will allow the Corporation to recover the approximately $1.0 million in remaining balances on these properties.
14
AMERICANWEST BANCORPORATION
The Corporation has acquired title to two Alzheimer’s facilities that have balances of approximately $1.3 million. These facilities are being marketed as long term care or medical office use.
Management is evaluating a $0.8 million loan for land development in Central Washington that is currently on non-accrual. The loan is secured by real estate zoned for single family use.
The Corporation is in the process of implementing a liquidation plan for a nursery related property with a balance of approximately $0.8 million.
Financial Condition
The Corporation’s consolidated assets at September 30, 2003 were $994.3 million, an increase of $77.5 million from December 31, 2002. Loans increased by $65.3 million during the year to date which was offset by a decrease of $6.6 million in investments. Cash and cash equivalents increased to $51.2 million at September 30, 2003 from $38.9 million at December 31, 2002.
Deposits increased to $874.6 million at September 30, 2003 compared to $766.3 million at December 31, 2002. Short-term borrowings decreased by $46.2 million to $0.1 million from $46.3 million at December 31, 2002. This decrease was offset by an increase of $3.1 million in long-term borrowings to $9.9 million at September 30, 2003.
Total stockholders’ equity was $92.3 million at September 30, 2003, up from $81.1 million at year-end 2002. Increases in stockholders’ equity were mostly due to net income and exercising of stock options offset by the effects of stock repurchases and a decrease in accumulated other comprehensive income, net of tax.
Investment Portfolio
The Corporation’s investment portfolio decreased from $48.2 million at December 31, 2002 to $41.5 million at September 30, 2003. This decrease was due to payments received on, maturities of and calls of existing securities, and decreases in market values for existing securities. These decreases were offset by additional purchases of securities. The major classifications of investments as of September 30, 2003 and December 31, 2002 can be found in the Notes to Condensed Consolidated Financial Statements. All securities are classified as available-for–sale. Management believes that this classification provides greater flexibility to respond to interest rate changes and liquidity needs.
Loan Portfolio
The major classifications of loans at September 30, 2003 and December 31, 2002 can be found in the Notes to Condensed Consolidated Financial Statements.
Total gross loans were $842.3 million as of September 30, 2003 compared to $775.6 million at December 31, 2002. This increase was driven by a $65.3 million growth in commercial and industrial loans, which includes commercial real estate loans and $5.8 million growth in agricultural loans. This increase was offset by a decrease of $8.5 million in residential real estate loans, primarily due to repayments. Management continues to pursue loan growth as a source of increased net interest income.
Allowance for Loan Losses
At September 30, 2003, the Corporation’s allowance for loan losses was $11.8 million or 1.41% of total loans. This compares to $10.3 million or 1.32% at December 31, 2002. Activity in the allowance is summarized in Note 5 in the Notes to Condensed Consolidated Financial Statements
The allowance for loan losses is increased by charges to income (provision for loan losses) and decreased by charge-offs (net of recoveries). Loans are charged to the allowance when management believes the collection
15
AMERICANWEST BANCORPORATION
of principal is unlikely. The allowance is an amount management believes is adequate to absorb losses inherent in existing loans and commitments to extend credit. This judgment is based on growth and composition of the portfolio, periodic risk evaluation of existing loans and loan commitments, past loan loss experience, economic factors, and the status of specific problem loans.
The majority of the Corporation’s loans are to small and medium-sized businesses and farmers in Eastern Washington and Northern Idaho and are secured by residential and commercial real estate, crops and business inventory and receivables. Real estate values in this area remain stable. Prices for agricultural commodities also remain at normal levels. However, significant, long term changes in either of these underlying factors could affect the collectibility of a material portion of the Corporation’s loans outstanding.
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, or borrower or loan characteristics. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and other real estate owned. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Deposits
The Corporation’s primary source of funds is customer deposits. To attract and retain deposits, the Corporation offers a wide variety of account types and maturities, both interest bearing and non-interest bearing. Many accounts types have additional services bundled with them, such as insurance, travel discounts, free checks and free or discounted access to other bank services. Interest rates on accounts are determined by management based on the Corporation’s funding needs and market conditions and can change as frequently as daily.
At September 30, 2003, total deposits were $874.6 million, an increase of $108.2 million versus December 31, 2002. Now and savings accounts increased $80.3 million from December 31, 2002 to September 30, 2003 and the Corporation experienced an increase of $12.8 million in time deposits from December 31, 2002. Non-interest bearing deposits increased $15.1 million from December 31, 2002 to September, 2003.
In recent years, competition from non-bank investment alternatives has increased competition for retail deposits. The current low interest rate environment also makes it more difficult to attract consumer deposits, particularly the longer maturities the Corporation desires to protect its net interest margin. In light of these factors and to further diversify its funding sources, the Corporation has expanded its use of time deposits from public entities and from small depository institutions. These funds have also proven to often be less costly than retail time deposits. At September 30, 2003, these accounts totaled $141.3 million or approximately 16% of total deposits.
Liquidity and Capital Resources
Management actively analyzes and manages the Corporation’s liquidity position. The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for profitable business expansion. Management believes that the Corporation’s cash flow will be sufficient to support its existing operations for the foreseeable future.
Cash flows from operations contribute significantly to liquidity as well as proceeds from maturities of securities and increasing customer deposits. As indicated on the Corporation’s Condensed Consolidated Statement of Cash Flows, net cash from operating activities for the nine months ended September 30, 2003 contributed $15.8 million to liquidity compared to $11.3 million for the nine months ended September 30, 2002.
16
AMERICANWEST BANCORPORATION
At September 30, 2003, the Corporation held cash and due from banks, interest-bearing deposits with banks, and federal funds sold of $51.2 million. In addition, at such date $41.5 million of the Corporation’s investments were classified as available for sale.
In addition to the strategy noted for deposits above, the Corporation uses short-term borrowings, principally in the form of advances from the Federal Home Loan Bank of Seattle, as a source of funding. With maturities ranging from overnight to 12 years, these advances are used to provide a ready source of liquidity for the operations and are a tool the Corporation uses to manage its interest rate risk.
At September 30, 2003, short-term and long-term borrowings stood at $.1 million and $9.9 million, respectively. These balances represented a decrease of $46.1 million in short-term borrowings and an increase of $3.1 million in long-term borrowings in comparison to December 31, 2002. The entire amount of short-term and long-term borrowings is comprised of advances with the Federal Home Loan Bank of Seattle (FHLB). The Corporation’s total line of credit at the FHLB is approximately $129 million. The Corporation also has unused, short-term credit lines totaling $31 million with three unaffiliated banks.
As a federally-regulated bank holding company, the Corporation is required to maintain minimum levels of capital at all times at both AWBC and AWB. Bank regulatory agencies have promulgated regulations that measure the Corporation’s capital in three ways. Tier One Capital, currently comprised of stockholders’ equity and trust preferred securities, is measured against assets both on a book basis and on a risk-weighted basis according to standardized risk categories for specific types of assets. In addition, Tier One capital is adjusted for certain other items, most prominently the allowance for loan losses and certain intangibles, to arrive at defined total regulatory capital. This amount is then measured against risk-weighted assets.
The table below lists the Corporation’s capital ratios relative to regulatory requirements at September 30, 2003:
Capital Ratio | Regulatory Standard for “Well Capitalized” Rating | AWBC Actual Ratio | AWB Actual Ratio | ||||||
Tier One Capital to Average Total Assets | 5.00 | % | 9.18 | % | 8.98 | % | |||
Tier One Capital to Risk Weighted Assets | 6.00 | % | 9.46 | % | 9.26 | % | |||
Total Capital to Risk Weighted Assets | 10.00 | % | 10.71 | % | 10.51 | % |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Management considers interest rate risk to be a market risk that could have a significant effect on the financial condition of AWBC. In management’s opinion, there have been no material changes in reported market risks faced by AWBC since the end of the most recent fiscal year.
| Item 4. | Controls and Procedures. |
(a) Evaluation of Disclosure Controls and Procedures: As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), AWBC’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of the Corporation’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that the Corporation’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting
17
AMERICANWEST BANCORPORATION
information required to be disclosed by the Corporation, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b) Changes in Internal Controls: In addition and as of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to material affect, the internal control over financial reporting.
18
AMERICANWEST BANCORPORATION
Part II. Other Information
| Item 6. | Exhibits and Reports on Form 8-K |
(a) Exhibits
The following exhibits are filed or incorporated by reference as part of this report:
| 3.1 | Articles of Incorporation of registrant incorporated herein by reference to Exhibit 3(a) to the registrant’s registration statement on Form S-14 (File No. 2-86318). | |
| 3.2 | Bylaws of registrant incorporated herein by reference to Exhibit 3(b) to the registrant’s registration statement on Form S-14 (File No. 2-86318). | |
| 10 | Material contracts of AmericanWest Bancorporation incorporated herein by reference to Exhibits 10.1 through 10.11 to the registrant’s annual report on Form 10-K for the year ended December 31, 2002, and Exhibits 10.12 and 10.13 to the registrant’s quarterly report on Form 10-Q for the periods ended March 31, 2003 and June 30, 2003. | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
(b) Reports on Form 8-K
| • | On July 24, 2003, the Corporation filed an 8-K related to its press release announcing earnings results for the quarter ended June 30, 2003 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 12, 2003
| AMERICANWEST BANCORPORATION |
| /s/ Wes Colley |
Wes Colley, President and Chief Executive Officer |
| /s/ C. Tim Cassels |
C. Tim Cassels, Vice President and Chief Financial Officer |
19
