SELECTED FINANCIAL DATA
Dollars in thousands, except per share data 1993 1992 1991 1990 1989
For the year
Summary of operations
Interest income - taxable equivalent $515,798 $446,913 $459,704 $455,050 $431,524
Interest expense 193,435 195,090 249,980 268,014 266,022
Net interest income - taxable equivalent 322,363 251,823 209,724 187,036 165,502
Taxable equivalent adjustment 18,473 13,125 12,152 11,347 9,671
Net interest income 303,890 238,698 197,572 175,689 155,831
Provision for credit losses 13,383 14,308 29,680 11,668 7,514
Net interest income after provision
for credit losses 290,507 224,390 167,892 164,021 148,317
Other income 102,014 81,771 70,548 61,931 52,072
Securities gains 495 1,690 2,156 24 862
Total noninterest income 102,509 83,461 72,704 61,955 52,934
Salaries and employee benefits 128,886 104,024 90,485 82,211 78,719
Other expense 143,552 112,500 92,651 80,825 74,169
Total noninterest expense 272,438 216,524 183,136 163,036 152,888
Income before taxes 120,578 91,327 57,460 62,940 48,363
Provision for income taxes 37,391 27,955 16,261 18,673 13,375
Net income $83,187 $63,372 $41,199 $44,267 $34,988
Primary earnings per share $2.50 $2.09 $1.47 $1.60 $1.27
Fully diluted earnings per share 2.38 1.98 1.44 1.60 1.26
Cash dividends declared per share .49 .675 .48 .44 .41
Cash dividends paid per share .595 .51 .47 .44 .40
At December 31
Assets $7,671,353 $7,133,637 $5,417,199 $4,946,989 $4,760,263
Deposits 5,937,047 5,636,339 4,044,408 3,860,881 3,597,072
Loans 5,354,497 4,531,913 3,497,451 3,292,217 2,934,970
Allowance for credit losses 74,923 68,243 53,048 47,823 49,755
Long-term debt 116,460 117,649 111,881 72,614 71,863
Shareholders' equity 623,566 489,825 367,048 332,692 298,469
Full-time equivalent employees 4,477 4,293 3,464 3,370 3,283
Shares outstanding 34,718,731 32,351,160 28,062,404 27,567,672 27,425,588
In September 1992, West One acquired certain assets and deposits from Security
Pacific Corporation in Washington.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis of West One Bancorp and subsidiaries (the
Corporation) supplements the accompanying consolidated financial statements.
Prior year information has been restated to reflect a two-for-one stock split
effected by means of a stock dividend paid in August 1993.
PERFORMANCE OVERVIEW
Net income was $83.2 million in 1993, a 31% increase over the Corporation's
previous record earnings of $63.4 million in 1992. Net income in 1992 was 54%
higher than the $41.2 million earned in 1991. Loan growth, a higher net
interest margin and lower credit related costs contributed to the earnings
improvement in 1993 and 1992. Fully diluted earnings per share increased 20%
to $2.38 in 1993 following an increase of 38% in 1992. The Corporation's five-
year compound growth rate for net income was 25% and fully diluted earnings per
share increased at a compound annual growth rate of 19% over the same period.
The Corporation's return on average assets was 1.14% in 1993, an improvement
from returns of 1.08% and .80% in 1992 and 1991, respectively. Return on
average shareholders' equity was 15.61% in 1993, up from 14.93% in 1992 and
11.82% in 1991.
Expansion in the state of Washington contributed to the Corporation's
performance in 1993. In September 1992, the Corporation acquired 38 branches
with deposits of $1.2 billion and loans of $837 million from Security Pacific
Corporation (the Washington Acquisition). The Corporation further improved
its competitive position in Washington by acquiring Yakima Valley Bank, a four-
branch institution with assets of $119 million, in October 1992,and Ben
Franklin National Bank, a three-branch institution with assets of $37 million,
in May 1993.
REGIONAL ECONOMIC PERFORMANCE
A financial institution's performance is directly influenced by economic
conditions in its service area. In 1993, the Corporation's service area of
Idaho, Washington, Oregon and Utah was one of the strongest economic regions
of the country. Utah and Idaho led the nation in employment growth during much
of the year, with Utah's gains exceeding 5%. Idaho's employment gains were
especially significant in the high technology sector, accompanied by strong
growth in tourism and business services. Oregon's economy began to recover from
the effects of drastic cuts in timber production on federal lands, and by late
1993 reported annual gains in employment of over 2%. Strength in Washington
was largely offset by the effects of aerospace cutbacks; however, metropolitan
areas served by the Corporation outside of the Puget Sound region, including
Yakima, Spokane, Vancouver and the Tri-Cities, experienced vibrant and
expanding economies during the year with rising employment and construction
activity.
Lower interest rates and substantial net inmigration expanded residential
construction in Idaho, Oregon and Utah. The number of new dwelling units
authorized was up 13% throughout the region in 1993 as Utah, Oregon and Idaho
posted gains of 41%, 17% and 14%, respectively, and no change was reported in
Washington.
Prospects for continued economic growth in the Corporation's service area
appear favorable in 1994, especially in light of an improving national economy.
Construction activity is expected to remain strong in Idaho, Oregon and Utah.
Washington's economy will not fully participate in the region's growth until
production levels in the aerospace industry stabilize.
(Graphic material omitted)
A map of the Western United States is depicted, our four-state service area of
Idaho, Washington, Oregon and Utah is highlighted.
-13-
AVERAGE BALANCES AND RATIOS
Dollars in thousands 1993 1992 1991 1990 1989
Selected average balances
Assets $7,312,017 $5,848,131 $5,165,354 $4,731,919 $4,429,280
Earning assets 6,612,814 5,294,949 4,686,354 4,266,191 3,988,822
Securities 1,666,520 1,321,390 1,110,381 987,800 918,115
Loans 4,903,797 3,767,186 3,349,190 3,110,738 2,692,968
Deposits 5,689,938 4,503,586 3,917,298 3,663,402 3,413,926
Short-term borrowings 880,495 736,043 745,699 621,272 604,860
Long-term debt 117,990 114,727 86,024 67,736 67,225
Shareholders' equity 532,898 424,429 348,684 312,599 283,124
Growth measures
(percent change in average balances)
Assets 25.0% 13.2% 9.2% 6.8% 12.3%
Earning assets 24.9 13.0 9.8 7.0 11.6
Securities 26.1 19.0 12.4 7.6 (1.1)
Loans 30.2 12.5 7.7 15.5 16.7
Deposits 26.3 15.0 6.9 7.3 15.6
Short-term borrowings 19.6 (1.3) 20.0 2.7 (2.3)
Long-term debt 2.8 33.4 27.0 .8 7.8
Shareholders' equity 25.6 21.7 11.5 10.4 8.9
Ratios (averages)
Return on shareholders' equity 15.61% 14.93% 11.82% 14.16% 12.36%
Return on assets 1.14 1.08 .80 .94 .79
Dividend payout ratio 19.74 33.11 32.38 26.30 31.63
Loans to deposits 86.18 83.65 85.50 84.91 78.88
Shareholders' equity to assets 7.29 7.26 6.75 6.61 6.39
Shareholders' equity to loans 10.87 11.27 10.41 10.05 10.51
-14-
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
The Corporation's strong capital position merits the confidence of customers,
investors and regulators, and provides a solid foundation for asset growth.
Capital management ensures capital is available for current needs, anticipated
growth and advantageous business opportunities. The Corporation regularly
monitors current and projected consolidated and subsidiary capital positions
to ensure capital levels exceed regulatory guidelines.
At December 31, 1993, shareholders' equity totaled $624 million, up 27% from
a year ago. The primary source of additional shareholders' equity in 1993 was
$68 million of retained earnings, up 58% from 1992. In addition, the
Corporation issued $47 million of common stock through a dividend reinvestment
and stock purchase plan providing shareholders the opportunity to purchase
common stock and reinvest dividends at a discount from the market price. At
December 31, 1993, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." In accordance with the pronouncement, securities available
for sale were reported at market value and the resulting net unrealized after-
tax gain of $9 million was included in shareholders' equity, without impacting
net income or risk-based capital ratios in 1993.
Shareholders' equity as a percent of assets measures capital strength. At
December 31, 1993, the Corporation's ratio increased to 8.13%, up from 6.87%
at December 31, 1992 and 6.78% at December 31, 1991.
In 1993, the Corporation paid dividends for the 58th consecutive year. The
Corporation's dividend policy is designed to strike a balance between providing
immediate returns to shareholders through cash dividends and increasing long-
term shareholders' value through profitable utilization of earnings as capital.
In recognition of record net income and a strong capital position, the
Corporation's Board of Directors increased the quarterly dividend by 16% to
$.18 per share in October 1993, representing the fifth consecutive year of
dividend increases. On a per share basis, dividends paid in 1993 were $.595,
a 17% increase from $.51 in 1992. The comparable dividend was $.47 in 1991.
The market price per share of the Corporation's common stock was $28.50 at
December 31, 1993, or 159% of the $17.96 book value per share. At year-end
1992, the market price was $25.375 or 168% of the $15.14 book value per share.
The Corporation's market capitalization was $989.5 million at December 31,
1993, up 21% from $820.9 million a year ago.
The average annual compounded return to the Corporation's shareholders for the
five-year period ending December 31, 1993 assuming reinvestment of dividends
was 27%, significantly outperforming our peer group of 539 commercial banks
whose return was 13% and the NASDAQ market index return of 7%.
The Corporation's stock was held by 7,328 shareholders of record at December
31, 1993, and is traded in the over-the-counter market on the National Market
System of NASDAQ under the symbol WEST. The accompanying market quotations
represent the high and low closing sales price per share for the indicated
periods, as reported by NASDAQ (NMS).
The Corporation is subject to risk-based capital guidelines established by the
Federal Reserve Board requiring minimum capital levels based on the perceived
risk of assets and off-balance sheet instruments. The Corporation's strong
capital position, adequate allowance for credit losses, low intangible asset
level and limited off-balance sheet exposure resulted in capital ratios
exceeding regulatory minimums as presented in the chart at left. Bank
regulators also adopted five capital category definitions applicable to banks
for certain regulatory supervision purposes, ranging from well-capitalized to
critically undercapitalized. At December 31, 1993, the Corporation and its
banking subsidiaries exceeded the regulatory criteria for well-capitalized
institutions and qualified for the minimum FDIC insurance assessment.
Double leverage is created when debt is incurred to acquire subsidiaries or to
increase a subsidiary's capital and when intangible assets arise from
acquisitions. The double leverage ratio is calculated for the Parent Company
as the sum of investment in subsidiaries plus goodwill and core deposit
intangibles divided by total shareholders' equity. Regulators have not
specified a maximum level of double leverage. At December 31, 1993, the
Corporation's double leverage ratio improved to .98 compared to 1.11 and 1.04,
respectively, at December 31, 1992 and 1991.
RISK BASED CAPITAL RATIOS
(Graphic material omitted, replaces the two graphs presented on this page)
<CAPTIONS>
Regulatory Capital
Levels
West One at December 31, 1993 1992 Well Minimum
Leverage ratio 7.61% 6.90% 5.00% 3.00%
Tier 1 capital 9.53 8.91 6.00 4.00
Total capital 11.80 11.41 10.00 8.00
-15-
QUARTERLY COMMON STOCK STATISTICS
Fourth Third Second First
1993
Market quotations
High $31 5/8 $29 1/2 $26 3/8 $27 1/4
Low 23 7/8 24 3/8 22 7/8 24 1/2
Quarter-end 28 1/2 29 1/2 24 3/4 25 3/4
Per share
Cash dividends declared .18 .155 .155 --
Cash dividends paid .155 .155 .155 .13
Book value, quarter-end 17.96 16.76 16.20 15.71
1992
Market quotations
High $25 3/8 $21 1/8 $21 5/8 $19 3/4
Low 20 3/8 19 3/8 18 15 3/4
Quarter-end 25 3/8 20 1/2 20 5/8 19 3/4
Per share
Cash dividends declared .285 .13 .13 .13
Cash dividends paid .13 .13 .13 .12
Book value, quarter-end 15.14 14.90 14.49 13.46
See Note 14 to the financial statements
-16-
NET INTEREST INCOME
Net interest income is the Corporation's principal source of revenue and is
comprised of interest income on earning assets minus interest expense on
interest bearing liabilities. Net interest margin is net interest income
expressed as a percent of average earning assets and represents the difference
between the yield on earning assets and the composite interest rate paid on all
sources of funds. Net interest income is adjusted to a taxable equivalent
basis to present income earned on taxable and tax-exempt assets on a comparable
basis. References to net interest income and net interest margin in this
discussion represent taxable equivalent amounts.
Net interest income was $322.4 million in 1993, an increase of 28% from the
prior year. Comparable increases were 20% in 1992 and 12% in 1991. Net
interest income accounted for 76% of total revenue in 1993, 75% in 1992 and 74%
in 1991. Net interest income is influenced primarily by changes in the volume
and mix of earning assets and funding sources, market rates of interest and
income tax rates.
Average earning assets increased $1.32 billion or 25% to $6.61 billion in 1993
following increases of 13% and 10%, respectively, in 1992 and 1991.
Approximately 40% of the increase in 1993 was attributable to loans acquired
in the Washington Acquisition. Loans represent the highest yielding component
of earning assets and accounted for 74% of average earning assets in 1993, up
from 71% in 1992 and 72% in 1991.
A significant shift in the mix of sources of funds improved net interest income
and net interest margin in 1993 and 1992. Depositors, inclined to maintain
liquid investments during periods of low interest rates, shifted funds from
certificates of deposit to noninterest bearing demand deposits and lower cost
interest bearing demand and savings deposits. Average noninterest bearing
funds increased to 16% of total sources of funds in 1993 from 14% in 1992 and
12% in 1991, resulting in lower interest expense, higher net interest income
and a wider net interest margin. The shift in deposit mix may result in a
higher risk of future disintermediation of funding sources as customers seek
higher yielding investment alternatives.
Net interest margin increased 11 basis points to 4.87% in 1993 from 4.76% in
1992. Net interest margin was 4.48% in 1991. The yield on earning assets and
the cost of funds both declined in 1993, reflecting lower money market interest
rates. Improvements in the mix of both earning assets and sources of funds,
combined with aggressive efforts to reduce funding costs and to price loans
profitably, resulted in a 75 basis point decrease in the cost of funds compared
to a 64 basis point decline in the earning asset yield. Interest income
foregone net of tax on nonperforming loans declined to $1.1 million in 1993
from $1.7 million in 1992 and $2.2 million in 1991. Nonaccrual loans declined
to .44% of total loans at December 31, 1993 from .46% at year-end 1992 and
1.20% at year-end 1991. Net interest income and net interest margin also
improved in 1992 due to a favorable interest rate environment, steeper yield
curve, a higher volume of earning assets and improved asset quality. The
accompanying table presents the detailed rate and volume analysis of earning
assets and interest bearing liabilities for the last three years.
AVERAGE EARNING ASSETS, Percent at December 31,
(Graphic material omitted)
<CAPTIONS>
1993 1992 1991 1990 1989
Loans 74.2% 71.1% 71.5% 72.9% 67.5%
Securities 25.2 25.0 23.7 23.2 23.0
Short-term investments .6 3.9 4.8 3.9 9.5
Total 100.0% 100.0% 100.0% 100.0% 100.0%
-17-
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT
INTEREST RATE AND VOLUME ANALYSIS
1993-1992
Average Yield Interest Change in 1993-1992 Change
Average Balance or Rate Income/ Expense Income/ Attributable to
Dollars in thousands 1993 1992 1993 1992 1993 1992 Expense Volume Rate
Assets
Due from banks-interest bearing $23,894 $184,914 3.26% 4.02% $779 $7,431 $(6,652) $(5,467) $(1,185)
Federal funds sold, securities
purchased under agreements to resell
and other 18,603 21,459 3.18 3.95 592 847 (255) (104) (151)
Securities:
U.S. Treasury and Government agencies 578,522 537,567 5.51 6.86 31,869 36,875 (5,006) 2,655 (7,661)
State and municipal bonds 457,377 248,134 8.35 9.33 38,202 23,161 15,041 17,705 (2,664)
Mortgage-backed securities 379,799 321,487 5.75 6.83 21,842 21,971 (129) 3,648 (3,777)
Other 250,822 214,202 6.50 7.10 16,292 15,209 1,083 2,452 (1,369)
Total securities 1,666,520 1,321,390 6.49 7.36 108,205 97,216 10,989 23,334 (12,345)
Loans:
Real estate 1,902,330 1,365,050 8.57 9.49 163,060 129,518 33,542 47,024 (13,482)
Commercial and agriculture 1,796,611 1,377,120 7.22 7.68 129,660 105,765 23,895 30,596 (6,701)
Commercial - tax exempt 109,573 88,366 8.77 9.52 9,605 8,413 1,192 1,899 (707)
Consumer 943,815 800,980 9.64 10.55 90,951 84,518 6,433 14,192 (7,759)
Leases 151,468 135,670 8.55 9.73 12,946 13,205 (259) 1,446 (1,705)
Total loans 4,903,797 3,767,186 8.28 9.06 406,222 341,419 64,803 96,119 (31,316)
Total earning assets 6,612,814 5,294,949 7.80 8.44 515,798 446,913 68,885 104,765 (35,880)
Cash and due from banks 470,961 366,761
Premises and equipment 122,679 99,680
Allowance for credit losses (72,187) (59,055)
Other nonearning assets 177,750 145,796
Total assets $7,312,017 $5,848,131
Liabilities and shareholders' equity
Interest bearing deposits:
Interest bearing demand $696,996 $521,319 2.13 2.79 14,879 14,532 347 4,220 (3,873)
Regular and money market savings 1,856,420 1,353,181 2.88 3.58 53,437 48,476 4,961 15,710 (10,749)
Time certificates under $100,000 1,577,139 1,427,677 4.62 5.45 72,921 77,874 (4,953) 7,647 (12,600)
Time certificates $100,000 and over 456,431 388,752 4.13 4.95 18,839 19,256 (417) 3,067 (3,484)
Total interest bearing deposits 4,586,986 3,690,929 3.49 4.34 160,076 160,138 (62) 34,665 (34,727)
Federal funds purchased and
securities sold under agreements to
repurchase 665,106 624,864 2.80 3.36 18,592 20,995 (2,403) 1,289 (3,692)
Other short-term borrowings 215,389 111,179 3.04 3.52 6,543 3,911 2,632 3,229 (597)
Long-term debt 117,990 114,727 6.97 8.76 8,224 10,046 (1,822) 279 (2,101)
Total interest bearing funds 5,585,471 4,541,699 3.46 4.30 193,435 195,090 (1,655) 40,122 (41,777)
Noninterest bearing funds 1,027,343 753,250
Total sources of funds 6,612,814 5,294,949 2.93 3.68 193,435 195,090
Noninterest bearing deposits 1,102,952 812,657
Other liabilities 90,696 69,346
Shareholders' equity 532,898 424,429
Less noninterest bearing funds (1,027,343) (753,250)
Total liabilities and shareholders'
equity $7,312,017 $5,848,131
Net interest margin and income 4.87% 4.76% $322,363 $251,823 $70,540 $64,643 $5,897
-18-
1992-1991
Average Yield Interest Change in 1992-1991 Change
Average Balance or Rate Income/ Expense Income/ Attributable to
Dollars in thousands 1991 1991 1991 Expense Volume Rate
Assets
Due from banks-interest bearing $199,031 6.18% $12,305 $(4,874) $(821) $(4,053)
Federal funds sold, securities
purchased under agreements to resell
and other 27,752 6.16 1,709 (862) (334) (528)
Securities:
U.S. Treasury and Government agencies 535,706 8.05 43,142 (6,267) 149 (6,416)
State and municipal bonds 203,711 9.70 19,761 3,400 4,171 (771)
Mortgage-backed securities 229,759 8.50 19,536 2,435 6,773 (4,338)
Other 141,205 8.72 12,309 2,900 5,495 (2,595)
Total securities 1,110,381 8.53 94,748 2,468 16,567 (14,099)
Loans:
Real estate 1,135,046 10.15 115,233 14,285 22,196 (7,911)
Commercial and agricultural 1,222,859 9.74 119,155 (13,390) 13,843 (27,233)
Commercial - tax-exempt 83,141 10.55 8,774 (361) 530 (891)
Consumer 782,519 12.14 95,000 (10,482) 2,196 (12,678)
Leases 125,625 10.17 12,780 425 993 (568)
Total loans 3,349,190 10.48 350,942 (9,523) 40,958 (50,481)
Total earning assets 4,686,354 9.81 459,704 (12,791) 55,684 (68,475)
Cash and due from banks 298,624
Premises and equipment 90,829
Allowance for credit losses (50,895)
Other nonearning assets 140,442
Total assets $5,165,354
Liabilities and shareholders' equity
Interest bearing deposits:
Interest bearing demand $407,326 4.37 17,810 (3,278) 4,197 (7,475)
Regular and money market savings 999,008 5.28 52,768 (4,292) 15,552 (19,844)
Time certificates under $100,000 1,461,895 7.00 102,285 (24,411) (2,343) (22,068)
Time certificates $100,000 and over 411,040 6.73 27,667 (8,411) (1,433) (6,978)
Total interest bearing deposits 3,279,269 6.12 200,530 (40,392) 22,967 (63,359)
Federal funds purchased and
securities sold under agreements to
repurchase 610,014 5.50 33,573 (12,578) 799 (13,377)
Other short-term borrowings 135,685 5.82 7,901 (3,990) (1,250) (2,740)
Long-term debt 86,024 9.27 7,976 2,070 2,534 (464)
Total interest bearing funds 4,110,992 6.08 249,980 (54,890) 24,168 (79,058)
Noninterest bearing funds 575,362
Total sources of funds 4,686,354 5.33 249,980
Noninterest bearing deposits 638,029
Other liabilities 67,649
Shareholders' equity 348,684
Less noninterest bearing funds (575,362)
Total liabilities and shareholders'
equity $5,165,354
Net interest margin and income 4.48% $209,724 $42,099 $31,516 $10,583
Interest income is adjusted to present tax-exempt revenue from securities and
loans on a basis comparable with taxable revenue, utilizing the statutory
federal and the applicable state tax rates.
The taxable equivalent adjustments were $18,473 in 1993, $13,125 in 1992 and
$12,152 in 1991. Nonaccrual loans are included in average balances; however,
interest income has not been accrued on such loans. Net changes which are
attributable to volume and rate are allocated proportionately.
-19-
COMPOSITION OF AVERAGE EARNING ASSETS
1993 1992 1991 1990 1989
Loans
Real estate 28.8% 25.8% 24.2% 24.4% 22.9%
Commercial and agricultural 28.8 27.7 27.9 28.1 26.1
Consumer 14.3 15.1 16.7 18.0 16.5
Leases 2.3 2.5 2.7 2.4 2.0
Total loans 74.2 71.1 71.5 72.9 67.5
Securities
United States Treasury and
Government agencies 8.8 10.2 11.4 11.8 14.5
State and municipal bonds 6.9 4.7 4.4 4.4 3.8
Mortgage-backed securities 5.7 6.1 4.9 4.1 1.8
Other 3.8 4.0 3.0 2.9 2.9
Total securities 25.2 25.0 23.7 23.2 23.0
Short-term investments .6 3.9 4.8 3.9 9.5
Total 100.0% 100.0% 100.0% 100.0% 100.0%
LOANS
Favorable economic conditions in the Corporation's market area created strong
loan demand in 1993. Recent acquisitions in Washington also presented new
market opportunities. Loans are the Corporation's primary earning asset and
totaled $5.35 billion at December 31, 1993, an increase of 18% from year-end
1992. Loans increased 30% in 1992 and 6% in 1991. Residential real estate
loans totaling $421 million were originated and sold in the secondary market
during 1993. The average loan to deposit ratio was 86.18% in 1993 compared to
83.65% in 1992 and 85.50% in 1991.
Real estate loans were $2.15 billion at December 31, 1993 and represented 40%
of total loans. Residential real estate loans increased 23% to $1.10 billion
at December 31, 1993 following increases of 46% and 10%, respectively, in 1992
and 1991. Low mortgage interest rates, a high rate of inmigration to the
region and the consolidation of consumer debt into home equity credit lines in
response to tax legislation all contributed to the increase in 1993.
Commercial real estate loans increased 18% to $808 million at December 31, 1993
compared to increases of 47% in 1992 and 9% in 1991. A major share of the
increase in 1993 represented loans to local business customers for expansion
of operations and facilities in response to consumer demand for products and
-20-
services. Less than 1% of commercial real estate loans represented projects
outside the Corporation's local market area.
Construction loans increased 54% to $245 million at December 31, 1993 and
represented 11% of total real estate loans compared to 9% a year ago.
Construction loans increased 32% in 1992 and 12% in 1991. Dwelling units
authorized in the Corporation's market area increased 13% in 1993 due to an
acceleration in single and multi-family residential construction.
Commercial and agricultural loans totaled $2 billion at December 31, 1993, a
12% increase from the prior year, compared to increases of 30% in 1992 and 7%
in 1991. The commercial loan increase in 1993 was consistent with improved
regional economic conditions as measured by increases in employment,
population, personal income and retail sales. Management continues to
encourage growth in the small-to-middle market by emphasizing efficient and
personal service provided by the Corporation's community-based lending
officers. Agricultural loans increased 9% to $392 million at December 31, 1993
as the Corporation maintained its position as one of the leading agricultural
lenders in the nation.
Consumer loans increased 19% to $1.04 billion at December 31, 1993 following
an increase of 10% in 1992 and no change in 1991. Bankcard loan growth
reflected increases in merchants served, credit cards outstanding and
transactions. Student, recreational vehicle and boat loans also contributed
to the increase.
SECURITIES
The Corporation's securities portfolio is comprised of investment quality,
marketable debt securities. Management's goal is to maximize long-term returns
while maintaining an acceptable level of risk.
The Corporation's securities portfolio declined 2% to $1.63 billion at December
31, 1993 to accommodate strong loan growth. Securities increased 36% in 1992
due to the Washington Acquisition and 18% in 1991. State and municipal bonds
increased 56% to $565 million at December 31, 1993 compared to the prior year
due to increased taxable equivalent yields resulting from higher federal tax
rates.
Debt securities the Corporation has the ability and intent to hold to maturity
are reported at cost adjusted for the amortization of premiums and accretion
of discounts. The aggregate market value of securities held to maturity at
December 31, 1993 exceeded aggregate cost by $30 million. Securities available
for sale may be sold as a part of the Corporation's asset and liability
management process and are reported at market value. Unrealized gains or
losses related to the adjustment of securities to market value are recorded net
LOAN GROWTH
Increase Increase
Increase (Decrease) (Decrease)
from from from
Dollars in thousands at December 31, 1993 1992 1992 1991 1991 1990
Real estate $2,150,835 24.0% $1,734,076 47.1% $1,179,101 8.8%
Commercial and agricultural 1,996,865 11.7 1,787,451 29.5 1,379,891 6.7
Consumer 1,038,678 18.7 875,203 9.8 797,076 (.1)
Leases 168,119 24.4 135,183 (4.4) 141,383 19.6
Total $5,354,497 18.2% $4,531,913 29.6% $3,497,451 6.2%
-21-
COMPOSITION OF SOURCES OF FUNDS BASED ON AVERAGE BALANCES
1993 1992 1991 1990 1989
Interest bearing demand deposits 10.5 % 9.8 % 8.7 % 9.1 % 9.1 %
Savings deposits 28.1 25.6 21.3 20.9 22.8
Certificates of deposit 30.8 34.3 40.0 41.6 39.3
Noninterest bearing funds 15.5 14.2 12.3 12.3 11.9
Short-term borrowings 13.3 13.9 15.9 14.5 15.2
Long-term debt 1.8 2.2 1.8 1.6 1.7
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
of tax as a component of shareholders' equity. At December 31, 1993, the
market value of securities available for sale exceeded cost by $15 million.
SOURCES OF FUNDS
Earning assets are funded primarily by deposits acquired from a broad base of
local markets. Deposits increased $301 million or 5% to $5.94 billion at
December 31, 1993 following increases of 39% in 1992, due primarily to the
Washington Acquisition, and 5% in 1991. Growth in core deposits of $265
million or 5% to $5.47 billion accounted for most of the deposit increase in
1993. Core deposits represented stable funds from local customers and funded
78% of earning assets at year-end 1993.
Average short-term borrowings as a percent of average earning assets declined
to 13% in 1993 from 14% in 1992 and 16% in 1991. Other short-term borrowings
include United States Treasury borrowings, Federal Home Loan Bank borrowings
and commercial paper. The 1993 increase in other short-term borrowings was
primarily attributable to United States Treasury borrowings, the least
expensive source of borrowed funds available.
ASSET AND LIABILITY MANAGEMENT
The Corporation's assets and liabilities are managed to maximize long-term
shareholder returns by optimizing net interest income within the constraints
of maintaining high credit quality, conservative interest rate risk disciplines
and prudent levels of leverage and liquidity. The Asset and Liability
Committee meets regularly to monitor the composition of the balance sheet, to
assess current and projected interest rate trends and to formulate strategies
consistent with established objectives for liquidity, interest rate risk and
capital adequacy.
LIQUIDITY
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. Cash flow from operations
contributes significantly to liquidity. Borrowings represent an important and
manageable source of liquidity based on the Corporation's ability to raise new
funds and renew maturing liabilities in a variety of markets. Liquidity is
also obtained by maintaining assets that are readily convertible to cash at
minimal cost through maturities and sales. Contingency plans exist and could
be implemented on a timely basis to minimize the risk associated with dramatic
changes in market conditions.
Deposit generation through the Corporation's extensive retail branch network
is an important source of liquidity. Deposits increased at a five-year annual
compound growth rate of 11%. Core deposits, comprised of certificates of
deposit under $100 thousand and local market transaction and savings accounts,
are a highly reliable source of funds. Core deposits represented 92% of total
deposits at year-ends 1993 and 1992, and 91% at year-end 1991. The Corporation
is able to attract but has not used brokered deposits from outside its market
area.
Securities available for sale totaled $1.06 billion at December 31, 1993,
representing a highly accessible source of liquidity. Held to maturity
securities will provide liquidity through maturities of $40 million in 1994.
Liquidity is also available through a variety of domestic money and capital
markets. Short-term borrowings provide a consistent source of funding and are
comprised primarily of securities sold under agreements to repurchase, United
States Treasury borrowings and federal funds purchased. Additional amounts of
short-term funds are raised through commercial paper and bank notes. Back-up
-22-
sources of liquidity are provided by credit lines available to West One
Bancorp. Washington, Oregon and Utah subsidiaries have access to liquidity and
matched funding from the Federal Home Loan Bank of Seattle. Additional
liquidity could be generated through borrowings from the Federal Reserve Bank
of San Francisco.
The Corporation's investment grade ratings by Moody's and Standard & Poor's
provide flexibility in meeting liquidity requirements through access to
national markets. Thompson BankWatch's issuer rating for West One Bancorp is
"B" and the short-term ratings of the Corporation and West One Bank, Idaho are
"TBW-1," the highest rating available.
Asset liquidity also arises from scheduled loan repayments. At December 31,
1993, scheduled principal payments due within one year were $1.96 billion or
37% of loans. The Corporation sells a majority of its residential mortgage
loan production, contributing to overall liquidity. In addition, portions of
the Corporation's residential mortgage, consumer and credit card loan
portfolios could be securitized and sold to increase liquidity.
The Corporation maintains a position of short-term investments consisting of
interest bearing deposits, federal funds sold and securities purchased under
agreements to resell that averaged $42 million in 1993. The position provides
flexibility in balancing the fluctuating borrowing requirements of customers
with the Corporation's daily funding capacity.
In 1994, $14 million of long-term debt matures. The debt obligations will be
met through additional external financing and internally generated cash.
Aggregate long-term debt maturities over the next five years total $66 million.
INTEREST RATE SENSITIVITY
The Corporation's net interest income is affected by changes in the level of
market interest rates. Management's objectives are to control interest rate
risk and to ensure predictable and consistent growth in net interest income.
Interest rate risk management focuses on fluctuations in net interest income
identified through computer simulations to evaluate volatility under varying
interest rate, spread and volume assumptions. The risk is quantified and
compared against risk tolerance levels designed to maintain stability in net
interest income. Sensitivity analysis indicated that the Corporation was
moderately liability sensitive and within established tolerance limits during
1993.
The Asset and Liability Maturity Repricing Schedule on page 24 depicts variable
rate instruments in the time period the balances are eligible for repricing and
fixed rate instruments according to repayment schedules. The analysis provides
a general measure of interest rate risk but does not address complexities such
as prepayment risk, interperiod sensitivities, interest rate floors and
ceilings imposed on financial instruments, interest rate dynamics and
customers' response to interest rate changes.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses is the expense incurred to maintain an adequate
allowance for anticipated credit losses. Actual credit losses, net of
recoveries of previously charged-off loans, are charged directly against the
allowance. The allowance for credit losses reflects management's current
estimate of the amount required to absorb losses on existing loans and
commitments to extend credit. Determination of the appropriate level of the
allowance is based on an analysis of various factors including historical loss
experience based on volumes and types of loans; volumes and trends in
delinquencies and nonaccruals; trends in portfolio volume, maturity and
composition; results of internal or independent external credit reviews;
industrial and geographical concentrations; and anticipated economic
conditions. Each affiliate regularly evaluates its allowance for credit
losses. The adequacy of the allowance is subject to quarterly review by an
executive committee and the audit committee of the Board of Directors. Based
on this analysis, management considers the allowance for credit losses to be
adequate.
The Corporation's asset quality ratios ranked among the best in the industry
in 1993. Net charge-offs were $7.1 million or .14% of average loans in 1993
compared to $9.8 million or .26% of average loans in 1992. In 1991, net
charge-offs totaled $24.5 million or .73% of average loans. During the last
two years, gross charge-offs totaled $35.6 million while recoveries amounted
to $18.7 million for a recovery ratio of 53%.
Nonperforming assets declined 9% to $28 million at December 31, 1993 from $31
million at December 31, 1992. At December 31, 1991 nonperforming assets were
$54 million. As a percent of total assets, nonperforming assets were .37% at
December 31, 1993 compared to .44% a year ago and 1.00% at December 31, 1991.
Other credit risk assets include loans with serious concern, defined as loans
classified as doubtful but accruing interest, and accruing loans past due 90
days or more. At December 31, 1993, other credit risk assets totaled $5
million, a 25% decrease from $7 million at December 31, 1992. Other credit
risk assets totaled $8 million at December 31, 1991.
(Graphic material omitted)
Core depostis - Certificates of deposit under $100,000 and transaction and
savings accounts of local market area customers.
-23-
ASSET AND LIABILITY MATURITY REPRICING SCHEDULE
Within Three Six to One to Five to Over
Three to Six Twelve Five Ten Ten
Dollars in millions at December 31, 1993 Months Months Months Years Years Years Total
Loans $2,975.8 $260.8 $378.3 $1,097.4 $417.4 $224.8 $5,354.5
Securities:
Available for sale 283.9 52.4 152.9 517.9 27.0 26.5 1,060.6
Held to maturity 14.0 3.7 22.0 151.3 308.2 66.0 565.2
Short-term investments 14.1 -- -- -- -- -- 14.1
Due from banks-interest bearing .3 .2 .1 -- -- -- .6
Nonearning assets -- -- -- -- -- 676.4 676.4
Total assets 3,288.1 317.1 553.3 1,766.6 752.6 993.7 7,671.4
Deposits:
Interest bearing demand 729.2 -- -- -- -- -- 729.2
Regular and money market savings 1,971.2 -- -- -- -- -- 1,971.2
Time certificates under $100,000 450.0 296.9 269.2 413.7 74.5 .9 1,505.2
Time certificates $100,000 and over 252.8 76.9 61.5 68.0 11.2 .2 470.6
Short-term borrowings 870.3 8.9 15.4 4.3 -- -- 898.9
Long-term debt 47.4 6.0 2.0 10.9 .2 50.0 116.5
Noninterest bearing liabilities
and shareholders' equity -- -- -- -- -- 1,979.8 1,979.8
Total liabilities and
shareholders' equity 4,320.9 388.7 348.1 496.9 85.9 2,030.9 7,671.4
Net interest rate sensitivity gap $(1,032.8) $(71.6) $205.2 $1,269.7 $666.7 $(1,037.2) $ --
The provision for credit losses was $13.4 million in 1993, a 6% decrease from
the $14.3 million reported in 1992. In 1991, the provision for credit losses
was $29.7 million.
The allowance for credit losses was $75 million at December 31, 1993, a 10%
increase from $68 million a year ago. At December 31, 1991, the allowance for
credit losses was $53 million. The allowance for credit losses represented
1.40% of total loans at December 31, 1993 compared to 1.51% and 1.52%,
respectively, at year-ends 1992 and 1991. The allowance for credit losses
covered 311% of nonperforming loans at December 31, 1993.
CREDIT RISK
The Corporation's credit policies are designed to minimize losses. The
policies require extensive evaluation of new requests for credit and continuing
review of existing credits to ensure early identification and monitoring of any
evidence of deteriorating loan quality, and quantification of possible loss.
A loan is placed on nonaccrual status when all or a portion of the interest is
deemed uncollectible.
The Corporation's objective is to maintain a loan portfolio that is diverse in
terms of the type of loans and borrowers, industry concentration, economic
conditions and geographic distribution in an effort to minimize the adverse
impact of a single event.
The Corporation's recent geographic expansion in Washington and Oregon resulted
in a more diversified loan portfolio. In 1993, 50% of the Corporation's loans
were in Idaho compared to 81% in 1985. Strong economic conditions in the
Corporation's market area are evidenced by healthy commercial and residential
real estate and construction industries. All four states experienced
significant population growth in 1993 indicating continued strong demand for
-24-
new housing units. Commercial vacancy rates in the major metropolitan areas
of Boise, Seattle, Portland and Salt Lake City are running well below the
national average.
Commercial loans, the second largest loan category, included no significant
industry concentrations. Agricultural and related loans represented the
largest single industry concentration in the loan portfolio, accounting for 10%
of total loans at December 31, 1993. The average balance per commercial and
agricultural loan was $86 thousand at December 31, 1993.
Foreign loans totaled only $3 million at December 31, 1993. At year-end 1993,
agreements to extend credit totaled $2.26 billion compared to $1.56 billion and
$1.25 billion at year-ends 1992 and 1991, respectively. Economic conditions
CREDIT RISK ASSETS
Dollars in thousands 1993 1992 1991 1990 1989
Nonperforming assets at December 31
Nonaccrual loans $23,732 $20,966 $41,862 $31,423 $33,982
Restructured loans 357 396 539 404 791
Other real estate owned 4,312 9,739 11,570 7,872 6,954
Total $28,401 $31,101 $53,971 $39,699 $41,727
Other credit risk assets at December 31
Loans with serious concern $1,905 $4,182 $4,775 $4,133 $6,947
Accruing loans past due
90 days or more 2,991 2,379 2,825 4,139 4,560
Provision and allowance
for credit losses
Allowance for credit losses 74,923 68,243 53,048 47,823 49,755
Net charge-offs 7,053 9,821 24,455 13,600 11,144
Provision for credit losses 13,383 14,308 29,680 11,668 7,514
Ratios
Nonperforming assets to loans
and other real estate owned .53% .68% 1.54% 1.20% 1.42%
Nonperforming assets to shareholders' equity
and allowance for credit losses 4.07 5.57 12.85 10.43 11.98
Nonperforming assets to
total assets .37 .44 1.00 .80 .88
Allowance for credit losses to
total loans 1.40 1.51 1.52 1.45 1.70
Allowance for credit losses to
nonperforming loans 311.03 319.46 125.11 150.26 143.09
Net charge-offs to average loans .14 .26 .73 .44 .41
-25-
impact credit risk and the Corporation's customers may be adversely impacted
by a downturn in the national economy.
NONINTEREST INCOME
Noninterest income increased 23% to $102.5 million in 1993 following increases
of 15% in 1992 and 17% in 1991. Other service charges, fees and commissions
included bank card income that increased $6.8 million or 55% in 1993 due to
increased credit cards outstanding, transaction volumes and merchants served.
Other income included gains on the sale of real estate loans and servicing
which increased $1.1 million or 22% in 1993 as a result of significant
residential mortgage refinancing activity due to low interest rates.
Noninterest income in 1993 also reflected the first full-year impact of the
Washington Acquisition.
An increasing percentage of the Corporation's earnings is noninterest income
generated from a wide variety of fee-based financial products and services.
Over the past five years, the compound growth rate for noninterest income,
excluding securities gains and losses, was 19% and exceeded the five-year
compound growth rate of 12% for assets.
NONINTEREST EXPENSE
Noninterest expense increased 26% to $272.4 million in 1993 compared with
increases of 18% and 12%, respectively, in 1992 and 1991. The current year
increase reflected the first full-year impact of the Washington Acquisition.
Employee benefits expense in 1993 included $1.7 million of post-retirement
benefits in accordance with SFAS No. 106. The interest rate environment in
1993 that was particularly favorable to mortgage origination volume also caused
significant prepayments in the mortgage servicing portfolio. Increased
prepayments reduced loans serviced and necessitated an acceleration of the
amortization of purchased mortgage servicing rights. The amortization
increased to $4.1 million in 1993 from $1.4 million in 1992. In 1993, the
Corporation established a telephone response system providing immediate
customer service seven days a week, twenty-four hours a day. The Customer
Service Center is a convenient alternative for customers and reduces retail
branch expenses.
INCOME TAXES
The effective income tax rate for the year-ended December 31, 1993 was 31.0%
compared to 30.6% in 1992 and 28.3% in 1991. The current year change reflected
the increase in the corporate federal tax rate to 35% in 1993 from 34% in 1992.
Note 13 to the financial statements reconciles the effective income tax rates
to the federal statutory rates. The implementation of SFAS No. 109,
"Accounting for Income Taxes," had no material effect on the income statement
or balance sheet.
INFLATION
In the opinion of management, inflation and changes in prices have not had a
material effect on the Corporation's financial results in 1993, 1992 and 1991.
-26-
QUARTERLY FINANCIAL DATA (unaudited)
Dollars in thousands, except per share data Fourth Third Second First
1993
Interest income $127,442 $126,640 $123,823 $119,420
Interest expense 46,713 48,169 49,018 49,535
Net interest income 80,729 78,471 74,805 69,885
Provision for credit losses 2,983 3,894 3,414 3,092
Net interest income after provision
for credit losses 77,746 74,577 71,391 66,793
Noninterest income 27,484 26,508 25,362 23,155
Noninterest expense 73,401 68,873 66,063 64,101
Income before taxes 31,829 32,212 30,690 25,847
Provision for income taxes 9,396 10,437 9,876 7,682
Net income $22,433 $21,775 $20,814 $18,165
Primary earnings per share* $.66 $.65 $.63 $.55
Fully diluted earnings per share* .63 .62 .60 .53
Net interest margin** 4.96% 4.92% 4.82% 4.79%
1992
Interest income $121,175 $108,402 $100,830 $103,381
Interest expense 52,116 47,050 45,699 50,225
Net interest income 69,059 61,352 55,131 53,156
Provision for credit losses 2,552 2,672 4,238 4,846
Net interest income after provision
for credit losses 66,507 58,680 50,893 48,310
Noninterest income 23,306 20,448 20,189 19,518
Noninterest expense 64,931 55,398 49,014 47,181
Income before taxes 24,882 23,730 22,068 20,647
Provision for income taxes 7,490 7,227 6,804 6,434
Net income $17,392 $16,503 $15,264 $14,213
Primary earnings per share* $.54 $.52 $.53 $.50
Fully diluted earnings per share* .51 .50 .50 .47
Net interest margin 4.66% 4.86% 4.88% 4.66%
* First and second 1993 quarter and 1992 quarter amounts have been restated
for the two-for-one stock split paid August 13, 1993.
** Reflects first and second quarter adjustments to provide for the
retroactive federal income tax rate increase.
-27-
CONSOLIDATED BALANCE SHEETS
Dollars in thousands at December 31, 1993 1992
Assets
Cash and due from banks (Note 14) $450,384 $525,162
Due from banks - interest bearing 599 162,500
Federal funds sold, securities purchased under
agreements to resell and other 14,055 28,210
Securities (Note 2):
Available for sale - market value of $163,025 in 1992 1,060,650 160,989
Held to maturity - market value of $595,146 and $1,519,774 565,165 1,496,480
Total securities 1,625,815 1,657,469
Loans, net of unearned income
of $40,244 and $38,681 (Note 14):
Real estate 2,150,835 1,734,076
Commercial and agricultural 1,996,865 1,787,451
Consumer 1,038,678 875,203
Leases 168,119 135,183
Total loans 5,354,497 4,531,913
Allowance for credit losses (Note 3) (74,923) (68,243)
Net loans 5,279,574 4,463,670
Premises and equipment (Note 4) 122,828 120,587
Interest receivable 50,141 49,513
Other assets 127,957 126,526
Total assets $7,671,353 $7,133,637
-28-
Dollars in thousands at December 31, 1993 1992
Liabilities
Deposits:
Noninterest bearing $1,260,869 $1,135,967
Interest bearing demand 729,247 696,656
Regular and money market savings 1,971,211 1,717,189
Time certificates under $100,000 1,505,177 1,651,344
Time certificates $100,000 and over 470,543 435,183
Total deposits 5,937,047 5,636,339
Short-term borrowings (Note 6):
Federal funds purchased and securities sold
under agreements to repurchase 568,295 668,631
Other 330,609 141,392
Long-term debt (Note 7) 116,460 117,649
Other liabilities 95,376 79,801
Total liabilities 7,047,787 6,643,812
Commitments and contingencies (Note 8)
Shareholders' equity (Note 9)
Common stock - $1.00 par value; 75,000,000 shares authorized;
34,718,731 and 32,351,160 shares outstanding 34,719 32,351
Capital surplus 304,413 249,627
Retained earnings 275,351 207,847
Unrealized gain on securities, net of tax 9,083 -
Total shareholders' equity 623,566 489,825
Total liabilities and shareholders' equity $7,671,353 $7,133,637
The accompanying notes are an integral part of the financial statements.
-29-
CONSOLIDATED STATEMENTS OF INCOME
Dollars in thousands, except per share data,
for the year ended December 31, 1993 1992 1991
Interest income
Loans $402,550 $338,290 $347,563
Short-term investments 1,371 8,278 14,014
Interest and dividends on securities:
United States Treasury and Government agencies 31,172 35,711 41,946
State and municipal bonds 25,056 15,392 13,285
Mortgage-backed securities 21,842 21,971 19,536
Other 15,334 14,146 11,208
Total interest income 497,325 433,788 447,552
Interest expense
Deposits 160,076 160,138 200,530
Federal funds purchased and securities sold
under agreements to repurchase 18,592 20,995 33,573
Other short-term borrowings 6,543 3,911 7,901
Long-term debt 8,224 10,046 7,976
Total interest expense 193,435 195,090 249,980
Net interest income 303,890 238,698 197,572
Provision for credit losses (Note 3) 13,383 14,308 29,680
Net interest income after
provision for credit losses 290,507 224,390 167,892
Noninterest income
Trust fees and commissions 13,627 11,819 10,902
Service charges on deposit accounts 36,588 30,882 25,538
Other service charges, fees and commissions 41,079 30,569 25,717
Other 10,720 8,501 8,391
Securities gains 495 1,690 2,156
Total noninterest income 102,509 83,461 72,704
Noninterest expense (Note 12)
Salaries and employee benefits (Note 11) 128,886 104,024 90,485
Other 143,552 112,500 92,651
Total noninterest expense 272,438 216,524 183,136
Income before taxes 120,578 91,327 57,460
Provision for income taxes (Note 13) 37,391 27,955 16,261
Net income $83,187 $63,372 $41,199
Primary earnings per share $2.50 $2.09 $1.47
Fully diluted earnings per share 2.38 1.98 1.44
The accompanying notes are an integral part of the financial statements.
-30-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized
Common Capital Retained Securities
Dollars in thousands, except per share data Stock Surplus Earnings Gains Total
Balance at December 31, 1990 $27,568 $167,574 $137,550 $332,692
Net income - - 41,199 41,199
Cash dividends declared -
$.48 per share - - (13,339) (13,339)
Issuance of common stock -
494,732 shares 494 5,417 (247) 5,664
Tax benefit of stock options exercised - 832 - 832
Balance at December 31, 1991 28,062 173,823 165,163 367,048
Net income - - 63,372 63,372
Cash dividends declared -
$.675 per share - - (20,983) (20,983)
Issuance of common stock -
3,375,062 shares 3,375 66,234 (1,687) 67,922
Acquisition of Yakima Valley Bank -
913,694 shares 914 8,758 1,982 11,654
Tax benefit of stock options exercised - 812 - 812
Balance at December 31, 1992 32,351 249,627 207,847 489,825
Net income - - 83,187 83,187
Cash dividends declared -
$.49 per share - - (16,421) (16,421)
Issuance of common stock-
2,161,317 shares 2,162 52,300 (86) 54,376
Acquisition of Ben Franklin National Bank -
206,254 shares 206 2,011 824 3,041
Tax benefit of stock options exercised - 475 - 475
Unrealized gain on securities, net of tax (Note 1) - - - $9,083 9,083
Balance at December 31, 1993 $34,719 $304,413 $275,351 $9,083 $623,566
The accompanying notes are an integral part of the financial statements.
-31-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands for the year ended December 31, 1993 1992 1991
Cash flows from operating activities
Net income $83,187 $63,372 $41,199
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 13,383 14,308 29,680
Depreciation of premises and equipment 15,619 11,451 9,771
Amortization and accretion of premiums
and discounts 14,013 9,479 7,401
Amortization of intangible and other assets 12,741 8,547 6,684
Originations of real estate loans held for sale (486,205) (304,612) (276,183)
Proceeds from real estate loans sold 421,141 309,249 249,812
Net gain on sale of real estate loans (1,931) (4,756) (2,600)
Net gain on sale of securities (495) (1,690) (2,156)
Purchase of trading account securities (37,550) (95,266) (125,739)
Sale of trading account securities 38,087 104,315 115,821
Net gain on reacquisition of long-term debt - (24) (1,768)
Changes in assets and liabilities, net of effect of acquisitions:
Interest receivable (156) 3,779 3,885
Other assets (10,775) (7,027) (6,153)
Other liabilities 7,557 4,314 9,464
Net cash provided by operating activities 68,616 115,439 59,118
Cash flows from investing activities
Change in short-term investments,
maturities less than 90 days 177,186 4,776 (86,743)
Purchase of securities available for sale (141,903) - -
Maturity of securities available for sale 112,007 - -
Sale of securities available for sale 82,043 - -
Purchase of securities held to maturity (453,933) (1,102,479) (817,544)
Maturity of securities held to maturity 448,916 531,152 310,501
Sale of securities held to maturity 704 157,988 312,912
Change in net loans and leases (746,376) (139,251) (208,059)
Purchase of premises and equipment (16,946) (14,162) (9,256)
Sale of premises and equipment 1,034 677 584
Additions to intangible assets (6,979) (9,455) (3,739)
Sale of other real estate owned 9,712 10,960 5,283
Cash provided by acquisitions 2,019 370,159 -
Net cash used by investing activities (532,516) (189,635) (496,061)
-32-
Dollars in thousands for the year ended December 31, 1993 1992 1991
Cash flows from financing activities
Change in deposits 268,448 249,910 183,527
Change in short-term borrowings,
maturities less than 90 days 59,305 12,721 211,512
Proceeds from short-term borrowings 128,283 164,795 179,659
Payments on short-term borrowings (100,605) (197,406) (184,513)
Additions to long-term debt 27,500 5,474 55,000
Payments on long-term debt (28,943) (4,501) (17,005)
Proceeds from issuance of common stock 54,526 67,922 5,664
Cash dividends paid (19,392) (15,130) (12,783)
Net cash provided by financing activities 389,122 283,785 421,061
Net increase (decrease) in cash and
due from banks (74,778) 209,589 (15,882)
Cash and due from banks - January 1 525,162 315,573 331,455
Cash and due from banks - December 31 $450,384 $525,162 $315,573
Supplemental information
Interest paid $195,094 $198,752 $253,485
Income taxes paid 36,000 19,629 14,699
Noncash activities
Reclassification of securities available for sale 939,254 160,989 -
Securities purchased not settled 3,761 - -
Loans held for sale transferred to the loan portfolio 41,457 14,518 7,235
Loan charge-offs 16,156 19,445 32,316
Transfer of loans to other real estate owned 4,295 9,177 5,283
Additions to core deposit intangibles - 8,188 -
Capital lease for computer equipment - 10,857 -
Termination of capital lease for computer equipment - 6,460 -
Tax benefit of stock options exercised 596 812 832
Dividends declared not paid 6,249 9,220 3,367
Acquisitions:
Investments 10,125 31,807 -
Loans 21,819 913,432 -
Premises and equipment 612 24,631 -
Intangible assets - 13,757 -
Deposits 32,260 1,342,021 -
Equity 3,041 11,654 -
The accompanying notes are an integral part of the financial statements.
-33-
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dollars in thousands
The accounting and reporting policies of West One Bancorp and its subsidiaries
(West One) conform with generally accepted accounting principles and general
practice in the banking industry. West One paid a two-for-one stock split on
August 13, 1993 for which prior period amounts have been restated. The
significant policies are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of West One with
elimination of material intercompany transactions and balances. The Parent
Company only financial statements (Note 15) reflect investment in subsidiaries
using the equity basis of accounting.
Certain reclassifications have been made to prior year financial statements to
conform to the 1993 presentation. Assets owned by others and held in a
fiduciary or agency capacity by subsidiaries are not included in the
consolidated balance sheets.
Acquisitions
In May 1993, West One acquired Ben Franklin National Bank in exchange for
206,254 shares of West One's common stock. At the date of acquisition, Ben
Franklin National Bank had year-to-date revenue of $2,171, year-to-date net
loss of $6 and total assets of $36,531. The transaction was accounted for as
a pooling of interests. Ben Franklin National Bank's financial position and
results of operations were not material to West One's financial position and
results of operations, and prior year financial statements have not been
restated.
In October 1992, West One acquired Yakima Valley Bank in exchange for 913,694
shares of West One's common stock. At the date of acquisition, Yakima Valley
Bank had year-to-date revenue of $8,527, year-to-date net income of $895 and
total assets of $119,493. The transaction was accounted for as a pooling of
interests. Because Yakima Valley Bank's financial position and results of
operations were not material to West One's financial position and results of
operations, and prior year financial statements have not been restated.
In September 1992, West One purchased 38 branches and seven specialty offices
in the Puget Sound region of Washington from Security Pacific Corporation. The
transaction included the receipt of $315 million of cash, $837 million of
loans, $21 million of premises and equipment, $21 million of intangible and
other assets, and the assumption of approximately $1.2 billion of deposits.
In July 1992, West One purchased three branches of Bank of America Oregon. The
transaction included the receipt of $45 million of cash, $1 million of loans,
$1 million of premises and equipment, $1 million of intangible and other
assets, and the assumption of $48 million of deposits and other liabilities.
Both of these transactions were accounted for as purchases of certain assets
and assumptions of certain liabilities.
In December 1991, West One acquired Washington Federal Savings Bank (WFSB) in
exchange for 2,049,030 shares of West One common stock in a transaction
accounted for as a pooling of interests. WFSB had total assets of $358,000
at the date of acquisition and revenue of $36,733 and net income of $3,365 in
1991 prior to the acquisition. WFSB paid dividends of $687 in 1991.
Securities
On December 31, 1993, West One adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under this pronouncement securities held to maturity are
stated at cost, adjusted for amortization of premiums and accretion of
discounts. Securities available for sale and trading account securities are
stated at market value. Gains and losses on sale of securities, recognized on
a specific identification basis, and valuation adjustments of trading account
securities are included in noninterest income. Net unrealized gain or loss on
securities available for sale are included, net of tax, as a component of
shareholders' equity.
Loans
Loans and leases are stated at the principal amount outstanding, net of
unearned income. Interest on loans is recognized as income based on the
outstanding principal and the stated interest rates as adjusted for net
deferred loan fees, premiums and discounts. Loan origination fees and costs
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are deferred and recognized as income on the interest method over the life of
the loans. Lease income, primarily from financing leases, is recognized on the
level interest method. Recognition of interest income is discontinued and all
accrued, unpaid interest is reversed when a loan is placed on nonaccrual
status. A loan or lease is placed on nonaccrual status when timely collection
of interest becomes doubtful. Interest payments received on nonaccrual loans
and leases are applied to principal if collection of principal is doubtful or
reflected as interest income on a cash basis. Loans and leases are removed from
nonaccrual status when they are current and collectibility of principal and
interest is no longer doubtful. Loans held for sale are stated at the lower
of cost or market.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level considered adequate
by management to provide for losses inherent in the portfolio of loans, leases
and commitments to extend credit . Loans sold with servicing released have
technical underwriting exception and repurchase risks which are also considered
in the determination of the adequacy of the allowance for credit losses. The
estimate of additions to the allowance for credit losses, and resulting charge
to expense, requires judgment in evaluating the borrower's management,
financial position, cash flow, collateral values and guarantees, as well as
projection of the outcome of future events. The continuing adequacy of the
allowance for credit losses is determined based upon the results of a credit
classification system, internal and external credit examinations, historic
experience, economic conditions, industry concentrations, elements of risk and
other loss factors affecting the quality of the loan portfolio.
Premises and Equipment
Premises, equipment, major improvements and replacements are stated at cost.
Depreciation is recognized on the straight-line method over the estimated
useful life of the asset. Leasehold improvements are amortized over the
shorter of the useful life of the asset or the remaining term of the lease.
Gains or losses from disposal of premises and equipment are reflected in
noninterest expense. Maintenance and repairs are expensed and improvements are
capitalized. Costs of purchased and internally-developed software are amortized
over periods up to five years.
Other Real Estate Owned
Other real estate owned consists principally of properties acquired through
foreclosure and is stated at the lower of cost or market value.
Other Assets
Other assets include goodwill and core deposit intangibles and are stated at
cost, net of amortization provided on straight-line and level interest methods
over useful lives ranging up to 25 years. Purchased mortgage servicing rights
are stated at cost net of amortization based on the income method and related
prepayment assumptions.
Income Taxes
Income taxes are provided on earnings as reported for financial statement
purposes adjusted principally for nontaxable interest income. Deferred income
taxes reflect the tax effect of temporary differences between financial
statement income and taxable income.
In 1993, West One adopted SFAS No. 109, "Accounting for Income Taxes," which
prescribes the use of the liability method of accounting for income taxes.
Under this method, the change between periods in the deferred tax assets and
liabilities together with income taxes currently payable are reflected as
income tax expense in the financial statements.
Earnings per Share
Primary and fully diluted earnings per share are computed using the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares result from the assumed exercise of outstanding stock
options, if dilutive. Fully diluted earnings per share assumes conversion of
the convertible debentures, if dilutive.
Statements of Cash Flows
Cash and cash equivalents consist of cash and due from banks.
New Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," effective for years beginning after
December 15, 1993, and SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," effective for years beginning after December 15, 1994. Neither
statement is expected to have a material effect on West One.
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NOTE 2. SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated market
value of securities follow:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Dollars in thousands at December 31, Cost Gains Losses Value
1993
Available for sale
United States Treasury securities $289,428 $2,706 $(56) $292,078
United States Government agencies 255,686 5,898 (97) 261,487
Mortgage-backed securities 295,421 3,592 (318) 298,695
Other 205,228 3,187 (25) 208,390
Total available for sale 1,045,763 15,383 (496) 1,060,650
Held to maturity
State and municipal bonds 565,165 32,723 (2,742) 595,146
Total securities $1,610,928 $48,106 $(3,238) $1,655,796
1992
Available for sale
Securities $160,989 $2,737 $(701) $163,025
Held to maturity
United States Treasury securities 287,732 2,732 (584) 289,880
United States Government agencies 281,852 4,243 (460) 285,635
State and municipal bonds 362,110 12,966 (780) 374,296
Mortgage-backed securities 343,236 3,608 (1,225) 345,619
Other 221,550 3,187 (393) 224,344
Total held to maturity 1,496,480 26,736 (3,442) 1,519,774
Total securities $1,657,469 $29,473 $(4,143) $1,682,799
Gross gains of $678 and gross losses of $183 were realized on 1993 sales.
Gross gains of $1,991 and gross losses of $301 were realized on 1992 sales.
Gross gains of $2,894 and gross losses of $738 were realized on 1991 sales.
Securities having book values of $1,342,023 and $1,124,073 at December 31, 1993
and 1992, respectively, were pledged as collateral for public and trust
deposits, United States Treasury borrowings and securities sold under
agreements to repurchase.
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Contractual maturities of securities at December 31, 1993 follow. Average
yields are based on expected returns on cost and average lives for
mortgage-backed securities.
Within One to Five After
One Five to Ten Ten Serial
Year Years Years Years Maturities Total
Available for sale
United States Treasury securities $96,398 $195,680 $ - $ - $ - $292,078
United States Government agencies 43,970 41,059 - 176,458 - 261,487
Mortgage-backed securities - - - - 298,695 298,695
Other 4,584 132,372 23,824 47,610 - 208,390
Total market value $144,952 $369,111 $23,824 $224,068 $298,695 $1,060,650
Total amortized cost $143,814 $365,030 $22,882 $218,617 $295,420 $1,045,763
Average yield 5.46% 5.16% 9.30% 5.87% 5.62% 5.57%
Held to maturity
State and municipal bonds at cost $39,620 $151,321 $308,180 $66,044 - $565,165
Total market value $39,994 $159,577 $324,604 $70,971 - $595,146
Average yield 4.22% 5.30% 5.15% 5.55% - 5.17%
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NOTE 3. ALLOWANCE FOR CREDIT LOSSES
A summary of allowance for credit loss activity follows:
Dollars in thousands 1993 1992 1991
Balance at January 1 $68,243 $53,048 $47,823
Loan charge-offs
Real estate 1,141 1,292 3,135
Commercial and agricultural 4,804 8,111 18,188
Consumer 9,802 9,597 10,330
Leases 409 445 663
Total charge-offs 16,156 19,445 32,316
Loan recoveries
Real estate 468 421 113
Commercial and agricultural 4,496 4,298 2,950
Consumer 3,970 4,641 4,507
Leases 169 264 291
Total recoveries 9,103 9,624 7,861
Net charge-offs 7,053 9,821 24,455
Provision for credit losses 13,383 14,308 29,680
Additions from acquisitions 350 10,708 -
Balance at December 31 $74,923 $68,243 $53,048
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NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment at December 31 follow:
Dollars in thousands 1993 1992
Land $33,030 $31,090
Buildings 85,040 80,571
Furniture and equipment 87,053 79,490
Leasehold improvements 12,103 11,771
217,226 202,922
Accumulated depreciation and amortization (94,398) (82,335)
Net premises and equipment $122,828 $120,587
Leases of bank premises and equipment generally provide for the payment of
taxes, maintenance, insurance and certain other related expenses and contain
extension provisions, escalation clauses and purchase options.
Lease expense was $10,434 in 1993, $7,506 in 1992, and $5,497 in 1991, and is
included in net occupancy and equipment expense. Occupancy expense was reduced
by rental income of $2,169 in 1993, $2,283 in 1992 and $2,332 in 1991.
At December 31, 1993 future minimum lease payments under long-term noncancelable
operating leases were $10,018 in 1994, $8,984 in 1995, $7,416 in 1996, $6,087 in
1997, $4,543 in 1998 and $34,403 thereafter. Management expects to renew or
replace expiring leases in the normal course of business.
NOTE 5. MORTGAGE BANKING
Mortgage banking activities included loan origination, sale
and servicing as follows:
Dollars in thousands 1993 1992 1991
Loans originated and serviced
Loans sold with servicing released $299,690 $304,493 $247,212
Loans held for sale 76,625 50,988 51,711
Loans serviced for others 1,506,612 1,354,599 1,123,699
Purchased mortgage servicing rights
Balance at January 1 $10,884 $6,736 $3,734
Additions 6,969 5,545 3,731
Amortization (4,056) (1,397) (729)
Balance at December 31 $13,797 $10,884 $6,736
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NOTE 6. SHORT-TERM BORROWINGS
A summary of short-term borrowings and average interest rates follows:
1993 1992 1991
Dollars in thousands Amount Rate Amount Rate Amount Rate
Federal funds purchased and securities
sold under agreements to repurchase
Balance at December 31 $568,295 2.68 % $668,631 2.75 % $618,861 4.16 %
Average 665,106 2.80 624,864 3.36 610,014 5.50
Maximum month-end balance 735,046 688,689 808,672
Other short-term borrowings
Balance at December 31 330,609 2.68 141,392 2.56 206,284 3.96
Average 215,389 3.04 111,179 3.52 135,685 5.82
Maximum month-end balance 434,910 244,765 223,579
The average balance is computed on a daily average method. The average rate is
computed by dividing total interest expense by the average outstanding balance.
Other short-term borrowings consist of United States Treasury borrowings, bank
notes and commercial paper. Unused lines of credit aggregating $45,000 at
December 31, 1993 were maintained with banks in support of commercial paper.
The lines bear interest at short-term money market rates if drawn upon, and
required commitment fees of $84, $76, and $76 in 1993, 1992 and 1991,
respectively.
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NOTE 7. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
Dollars in thousands 1993 1992
Parent company
Convertible subordinated debentures at 7.75% due 2006,
interest payable semi-annually $50,000 $50,000
Notes at 11% due 1993, interest payable semi-annually - 23,993
Convertible subordinated capital notes at 1/4% above the three-month
LIBOR due 1997, interest payable quarterly 20,983 20,978
Capital leases of computer equipment at 10%, payable in monthly
installments through 1997 6,821 9,598
Other - 789
Subsidiaries
Federal Home Loan Bank Notes with interest payable monthly at
floating and fixed rates ranging primarily from 3.11% to 5.18% and
with principal due 1994 through 2000 38,029 11,069
Other 627 1,222
Total $116,460 $117,649
Scheduled reductions of debt are $14,318 in 1994, $9,240 in 1995,
$20,590 in 1996, $22,073 in 1997, $25 in 1998 and $50,214 thereafter.
The convertible subordinated debentures are convertible into shares
of common stock of West One at a conversion price of $18.605 per
share. The convertible subordinated capital notes may be called and
exchanged for common stock, preferred stock or other capital securities
at the option of West One. The interest rate on these notes was 5.25%
at December 31, 1993 and 1992. The debt agreements limit indebtedness
and sale of subsidiaries' stock.
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NOTE 8. COMMITMENTS AND CONTINGENCIES
West One is a party to certain financial instruments with off-balance sheet
risks to meet the financing needs of customers and to reduce exposure to
interest rate fluctuations. The following is a summary of the contract or
notional amount of these financial instruments as of December 31:
Dollars in thousands 1993 1992
Financial instruments with credit risk
up to contract amounts (a)
Commitments to extend credit $2,260,507 $1,562,344
Standby letters of credit 188,029 178,350
Commercial letters of credit 25,527 35,589
Financial instruments with risk less
than contract or notional amounts
Mortgage-backed security contracts (b):
Forward sales 32,500 21,000
Purchased options 9,000 8,000
Notional value of interest rate swaps (b) - 20,000
Foreign exchange contracts (c):
Commitments to purchase 5,422 11,512
Commitments to sell 1,500 3,888
(a) Commitments to extend credit have fixed maturity dates and represent West
One's obligations to fund commercial and real estate loans, including home
equity lines, lines of credit, revolving lines of credit and other types of
commitments. Letters of credit are performance assurances of customer
obligations or guarantees of financing for trade transactions. West One's
exposure to credit loss for commitments to extend credit and letters of credit,
in the event of nonperformance by others, is represented by the contractual
amount of the instruments. Since many commitments to extend credit are expected
to expire without being drawn upon, the total commitments do not necessarily
represent future cash requirements. West One follows the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. Collateral varies, but may include accounts receivable,
inventory, premises and equipment, and commercial properties. West One's
lending activities are concentrated in Idaho, Washington, Oregon and Utah.
(b) Forward sale and purchased option contracts and interest rate swaps are
typically hedges against interest rate risk on specific assets or liabilities.
West One's forward sales and purchased options are contracts to buy or sell
mortgage-backed securities to hedge interest rate risk on fixed rate mortgage
loan or rate commitments. Net positions are valued at the lower of cost or
market. Gains or losses are recognized upon settlement of the forward sale
contracts based on the difference between the net sales proceeds and the net
carrying value of the loans sold. Purchased options are contracts to buy or
sell mortgage-backed securities at fixed prices during a specified period. The
option premium paid, which represents loss exposure, is amortized over the life
of the option.
Interest rate swap agreements involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying notional amount on
which the interest payments are calculated. The differential between the fixed
and variable rate is recorded as interest income or expense of the liability
being hedged. Prior to expiration of the interest rate swap agreements, West
One paid fixed interest rates averaging 8.39% in 1993 and 8.46% in 1992 and
received floating interest rates based on LIBOR.
The credit and market risks associated with forward sale and purchased option
contracts, and interest rate swaps arise from the possible inability of
counterparties to meet the terms of the contracts and from fluctuations in
securities' values and interest rates. West One limits credit risk by
restricting counterparties to a list of approved institutions. Generally, West
One does not require collateral for these types of instruments.
(c) The credit and market risks associated with foreign exchange contracts,
which may arise from the counterparty's inability to make payment at the
settlement date and fluctuations in value of a foreign currency in relation to
the U.S. dollar, were nominal at December 31, 1993 and 1992.
West One is a defendant in various pending lawsuits, arising in the ordinary
course of business, none of which are expected to have a material effect on
West One's financial position or results of operations.
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NOTE 9. SHAREHOLDERS' EQUITY
Authorized capital stock of West One consists of 75,000,000 shares of $1.00 par
value common stock and 5,000,000 shares of $1.00 par value preferred stock, of
which 150,000 preferred shares are reserved for issuance under the Shareholder
Rights Plan.
On July 15, 1993, the Board of Directors declared a two-for-one common stock
split, issued in the form of stock dividend, payable August 13, 1993 to
shareholders of record on July 23, 1993. The number of common shares
outstanding, shares issued, stock option information, dividends declared per
share, common stock and retained earnings have been restated to reflect the
stock split for all prior periods presented.
At December 31, 1993 securities available for sale were stated at market and the
resulting net after-tax unrealized gain of $9,083 is presented as a component of
shareholders' equity.
On October 19, 1989 the Board of Directors adopted a Shareholder Rights Plan.
Under the terms of the Plan, the Board declared a dividend distribution of one
Right for each share of common stock outstanding on October 31, 1989, or at
specified times thereafter. When initially issued each Right entitled the
registered holder to purchase from West One a unit consisting of one-hundredth
of a share of Series A Junior Participating Preferred Stock at a purchase price
of $150 per unit, subject to adjustment. Following a dividend distribution on
August 13, 1993 of one share of common stock for each share of common stock
outstanding as of July 23, 1993, pursuant to the adjustment provision contained
in the Rights Plan, each share of common stock outstanding following the
distribution had associated with it 0.5 Rights, and each new share of common
stock issued thereafter and prior to the Distribution Date (as defined) will be
issued 0.5 Rights.
The rights will become exercisable upon the occurrence of specified events which
could result in a change in control of West One or upon the determination by the
Board that an Adverse Person (as defined) beneficially owns 10 percent or more
of the outstanding common stock. Once the Rights become exercisable, if the
Board determines that a person is an Adverse Person or a person becomes the
owner of 25 percent or more of the then-outstanding shares of common stock (with
certain exceptions), each holder of a Right (other than an Acquiring Person (as
defined) or an Adverse Person) will thereafter become entitled to receive, upon
payment of the exercise price, common stock (or in certain circumstances other
consideration) having a value equal to two times the exercise price or, at the
discretion of the Board, to receive common stock (or other consideration) having
one-half that value without payment of the exercise price. The Rights are
nonvoting, may be redeemed by West One at a price of $.01 per Right at any time
until ten business days after an individual or group acquires 20 percent of West
One's common stock and expire on October 31, 1999. The issuance of the Rights
is intended to encourage any potential acquiror of West One to negotiate the
manner and terms of the transaction with the Board and to protect shareholders
from unsolicited tender offers which do not treat all shareholders in a fair and
equal manner, and from other coercive takeover tactics.
Under shareholder approved incentive programs, the Board of Directors may grant
to key employees options to purchase common stock and other stock-based awards.
All options are to be granted at market value of the stock at date of grant and
may be exercisable over periods up to ten years. No other stock-based awards
have been granted. The following summary sets forth the activity under the
option plan:
Option Price Available Options
Range per Share for Grant Outstanding
December 31, 1990 $6.023 - $13.000 370,134 960,174
Authorized - 1,700,000 -
Granted 12.188 - 17.000 (183,000) 183,000
Exercised 6.023 - 13.000 - (199,180)
Canceled 11.438 - 12.313 - (27,000)
December 31, 1991 6.553 - 17.000 1,887,134 916,994
Granted 16.688 - 25.250 (289,226) 289,226
Exercised 6.553 - 14.188 - (91,806)
December 31, 1992 6.629 - 25.250 1,597,908 1,114,414
Granted 23.875 - 28.625 (263,701) 263,701
Exercised 6.629 - 14.188 - (125,520)
Canceled 11.438 - 24.500 5,000 (5,000)
Expired 11.438 - 12.313 (1,000) -
December 31, 1993 6.629 - 28.625 1,338,207 1,247,595
Options exercisable under the plans were 599,880, 516,668 and 472,744
at December 31, 1993, 1992 and 1991, respectively.
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NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The summary of book value and estimated fair value of principal
financial assets and liabilities at December 31 follows:
1993 1992
Estimated Estimated
Book Fair Book Fair
Dollars in thousands Value Value Value Value
Financial assets
Cash and short-term investments $465,038 $465,038 $715,872 $715,872
Securities 1,625,815 1,655,796 1,657,469 1,682,799
Loans, net of leases and allowance for credit losses 5,111,455 5,149,693 4,328,487 4,360,747
Financial liabilities
Demand and savings deposits $3,961,327 $3,961,327 $3,549,812 $3,549,812
Time certificates of deposit 1,975,720 1,994,389 2,086,527 2,101,580
Short-term borrowings 898,904 898,904 810,023 810,023
Long-term debt 116,460 146,675 117,649 142,074
Financial assets and financial liabilities other than securities and certain
long-term debt of West One are not traded in active markets. Estimated fair
values require subjective judgments and are approximate. The above estimates
of fair value are not necessarily representative of amounts that could be
realized in actual market transactions, nor of the underlying value of West
One. Changes in the following methodologies and assumptions could significantly
affect the estimates:
Financial assets
The estimated fair value approximates the book value of cash and short-term
investments. For securities, the fair value is based on quoted market prices.
The book value of securities at December 31, 1993 includes securities
available for sale stated at market value and securities held to maturity
stated at historical cost. At December 31, 1992, the book value of all
securities was historical cost. See Note 2 to the financial statements.
The fair value of loans is estimated by discounting future cash flows using
current rates at which similar loans would be made, net of the present value
of estimated net charge-offs.
Financial liabilities
The estimated fair value of demand and savings deposits approximates book
value. The value of long-term relationships with depositors is not reflected.
The fair value of time certificates of deposit is estimated by discounting
future cash flows using current rates offered on similar certificates. For
short-term borrowings, the fair value approximates book value. The estimated
fair value of long-term debt is based on quoted market prices or estimates of
discounted cash flows using current rates at which similar financing could be
obtained.
Off-balance sheet financial instruments
Commitments to extend credit and letters of credit represent the principal
categories of off-balance sheet financial instruments. The fair value of
these commitments is not material. See Note 8 to the financial statements.
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NOTE 11. EMPLOYEE BENEFITS
West One has a noncontributory defined benefit retirement plan covering
substantially all employees. Benefits to retired employees are based on years
of service and compensation. West One funds at least the minimum annual
contributions required by the Employee Retirement Income Security Act of 1974.
Since plan assets exceeded accumulated benefit obligation, no additional
funding was made in 1993, 1992 or 1991.
Pension income included the following components for the year ended December 31:
Dollars in thousands 1993 1992 1991
Service cost - benefits earned during the year $2,319 $1,819 $1,899
Interest cost on projected benefit obligation 3,788 3,342 3,192
Actual return on plan assets (4,618) (4,617) (11,567)
Deferred gain (loss) (1,912) (1,408) 6,232
Amortization of transition asset (725) (725) (725)
Pension income $(1,148) $(1,589) $(969)
The funded status of the plan and prepaid pension cost at December 31
consisted of: 1993 1992 1991
Actuarial present value of accumulated benefit obligation
Vested $(44,497) $(27,202) $(23,271)
Nonvested (2,891) (1,592) (1,751)
Accumulated benefit obligation $(47,388) $(28,794) $(25,022)
Plan assets at fair value
U.S. Government securities $16,563 $19,416 $20,282
Equity securities 40,199 32,935 28,589
Other 11,963 12,927 13,099
Total 68,725 65,278 61,970
Total projected benefit obligation for participants' past service (54,489) (38,030) (36,431)
Plan assets in excess of projected benefit obligation 14,236 27,248 25,539
Unrecognized net (gain) loss and effect of changes in
actuarial assumptions 6,892 (6,238) (5,350)
Unrecognized net transition asset being recognized over
participants' average remaining service (4,610) (5,379) (6,147)
Unrecognized prior service cost 260 - -
Prepaid pension cost $16,778 $15,631 $14,042
West One also has three unfunded supplemental retirement plans. The
Supplemental Executive Retirement Plan provides supplemental benefits to
eligible employees when the employee's earnings exceed the dollar amount used
for the definition of a highly compensated employee in the Internal Revenue
Code (IRC) Section 414 (q) (1) (B) during each of the three preceding years.
The Non-Qualified IRC 415 Benefit Limit Make-Up plan provides for additional
payments to be made to employees whose defined pension benefit exceeds the
limit for maximum benefits from the defined benefit pension plan. The
Executive Deferred Compensation Pension Make-Up plan covers pension benefits
resulting from salary deferrals which have not been included in the computation
of benefits under the regular defined benefit pension plan.
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Pension expense for the supplemental retirement plans included the following
for years ended December 31: 1993 1992 1991
Supplemental Executive Retirement Plan (SERP) $316 $303 $300
Non-Qualified IRC 415 Benefit Limit Make-Up 16 51 36
Executive Deferred Compensation Pension Make-Up 38 26 22
Total supplemental pension expense $370 $380 $358
Pension expense for the SERP included the following components for the years
ended December 31: 1993 1992 1991
Service cost - benefits earned during the year $113 $115 $118
Interest cost on projected benefit obligation 154 139 134
Amortization of net transition obligation 49 49 48
Pension expense $316 $303 $300
The funded status of the SERP and pension liability at December 31 consisted of: 1993 1992 1991
Actuarial present value of accumulated benefit obligation:
Vested $(1,747) $(642) $(522)
Nonvested (6) - -
Accumulated benefit obligation $(1,753) $(642) $(522)
Projected benefit obligation for participants' past service $(2,185) $(1,596) $(1,375)
Unrecognized net (gain) loss and effect of changes in actuarial assumptions 320 (29) (29)
Unrecognized net transition obligation being recognized over
participants' average remaining service 584 633 682
Additional liability (472) - -
Pension liability $(1,753) $(992) $(722)
Assumptions used for projected benefit obligations, computed using the
projected unit credit method, were: 1993 1992 1991
Discount rate 7.5% 9.5% 9.5%
Rate of increase in compensation levels 3.0 6.0 6.0
Long-term rate of return on assets 10.5 10.5 10.5
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The change in salary increase assumption increased pension income by $319 in
1993. Changes in the assumed participant withdrawal rates increased pension
income $789 in 1992. The change in the assumed long-term rate of return on plan
assets increased pension income in 1991 by $508.
West One has an Employee Thrift Investment Plan, under IRC Section 401,
covering substantially all employees. Under the plan, West One made
contributions of 50% of participating employees' salary deferrals up to 6% of
salary in 1993, 5% of salary in 1992 and 4% of salary in 1991, aggregating
$2,384 for 1993, $1,566 for 1992 and $1,078 for 1991.
West One provides certain health care insurance benefits for retired employees
and their dependents. Substantially all of West One's retirees are eligible
for those benefits if they retired directly from service with at least ten
years of credited service. Retiree contributions are required depending on age
and number of years of service at the time of retirement.
Net periodic postretirement benefit expense included the following components
for the year ended December 31, 1993:
1993
Service cost $165
Interest cost 959
Amortization of transition obligation 554
Net periodic postretirement benefit expense $1,678
The reconciliation of the funded status of the plan at December 31, 1993
follows:
Accumulated postretirement benefit obligation: 1993
Retirees and dependents $(10,477)
Eligible active employees 243
Other active plan participants (3,122)
Accumulated postretirement benefit obligation (13,356)
Unrecognized net transition obligation 10,519
Unrecognized net loss 1,884
Accrued postretirement benefit cost $(953)
Postretirement benefit claims for the year ended December 31, 1993 $725
In 1993 West One assumed a 14% annual rate of increase in the per capita cost
of covered retiree and dependent health care benefits. The medical trend rate
was assumed to decrease gradually to 6% in 2006 and remain at that level for
future years. A one percentage point increase in the assumed health care cost
trend rate would increase the accumulated postretirement benefit obligation at
December 31, 1993 by $1,314 and the aggregate of the service cost and interest
cost components of net periodic postretirement benefit expense for 1993 by
$138.
The discount rate used in determining the actuarial present value of the
projected postretirement benefit obligation was 7.5%. The salary limits which
determine the amount of the deductible paid by the employee were assumed to
increase in proportion to West One salary levels.
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NOTE 12. NONINTEREST EXPENSE
Noninterest expense includes:
Dollars in thousands for the year ended December 31, 1993 1992 1991
Salaries $104,737 $85,741 $76,148
Employee benefits 24,149 18,283 14,337
Outside services 28,242 21,590 22,554
Equipment 21,725 17,174 13,182
Net occupancy 19,571 15,255 11,781
Insurance and miscellaneous taxes 16,899 13,506 10,792
Marketing 9,792 7,975 6,508
Postage and courier 8,568 6,344 4,899
Supplies 7,364 5,989 4,956
Telephone 6,551 4,739 3,318
Other 24,840 19,928 14,661
Total $272,438 $216,524 $183,136
NOTE 13. INCOME TAXES
The provision for income taxes consisted of the following for the year ended December 31:
Dollars in thousands 1993 1992 1991
Federal
Current $29,480 $20,136 $12,936
Deferred and other 1,006 2,925 40
State
Current 6,329 4,621 2,503
Deferred and other 576 273 782
Total federal and state $37,391 $27,955 $16,261
Deferred and other taxes were as follows for the year ended
December 31: 1993 1992 1991
Provision for credit losses $(2,218) $(926) $(2,302)
Cash basis accounting (1,288) (289) (251)
Leasing 2,546 2,745 3,118
Alternative minimum tax - 1,154 (1,038)
Other 1,083 (572) 1,295
Use of subsidiary preacquisition tax carryforwards to
reduce purchased intangibles 1,459 1,086 -
Total deferred and other taxes $1,582 $3,198 $822
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The provision for income taxes varied from amounts computed
at the federal statutory rates as follows:
For the year ended December 31, 1993 1992 1991
Provision at statutory rates $42,202 35.0% $31,051 34.0% $19,536 34.0%
Nontaxable interest income (10,473) (8.7) (7,045) (7.7) (6,171) (10.7)
State income taxes, net of federal benefit 4,367 3.6 3,230 3.5 1,568 2.7
Other 1,295 1.1 719 .8 1,328 2.3
Provision for income taxes $37,391 31.0% $27,955 30.6% $16,261 28.3%
The components of the net deferred tax liability are as
follows for the years ended December 31: 1993 1992
Deferred tax assets
Allowance for credit losses $29,491 $26,318
Cash basis accounting 6,283 5,252
Other 3,744 3,327
Total deferred tax assets 39,518 34,897
Deferred tax liabilities
Depreciation and amortization (7,712) (8,174)
Leasing (27,828) (24,708)
Pension and retirement benefits (6,492) (7,263)
Purchase accounting (2,170) (3,376)
Unrealized securities gains (5,990) -
Other (2,040) (948)
Total deferred tax liabilities (52,232) (44,469)
Net deferred tax liability $(12,714) $(9,572)
A subsidiary has preacquisition investment tax credit carryforwards remaining
of $500 which expire through 2003. Upon realization, the benefit of these tax
carryforwards will be reflected as reductions of the purchase price allocated
to acquired intangible assets.
The tax benefits of stock options exercised of $1,900 in 1993, $1,700 in 1992
and $1,400 in 1991 have been allocated to shareholders' equity. In 1993 the
deferred provision for income taxes of $5,800 for unrealized securities gains
has been allocated to shareholders' equity.
Deferred tax liabilities of approximately $2,100 have not been recognized for a
thrift subsidiary's base year tax bad debt reserve of $5,300. If the
subsidiary fails to qualify as a savings and loan association or is converted
to a commercial bank the bad debt reserve would become taxable. Management
does not expect this difference to reverse in the foreseeable future.
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NOTE 14. REGULATORY REQUIREMENTS and RESTRICTIONS
Dollars in thousands
Regulatory authorities require banks to maintain cash reserves against deposits
which vary according to the type and maturity of the deposit. Cash reserve
balances at December 31, 1993 and 1992 were $144,998 and $118,460,
respectively.
Loans to directors, executive officers and their associates are subject to
regulatory limitations. Such loans, which are within the regulatory
limitations, totaled $35,021 and $36,328 at December 31, 1993 and 1992,
respectively. During 1993 there were $137,254 of additions and $138,561 of
reductions of such loans. During 1992 there were $131,029 of additions and
$132,704 in reductions of these loans.
Federal and state laws also place limitations on the extension of credit by
banking subsidiaries to the Parent Company and nonbank affiliates. Under these
restrictions, banking subsidiaries may not extend credit beyond an aggregate of
$94,155 to the Parent Company as of December 31, 1993. Any extensions of such
credit are subject to strict collateral requirements.
Federal and state laws restrict the amount of dividends that may be declared by
banking subsidiaries without the approval of regulatory authorities. Banking
subsidiaries may declare dividends to the Parent Company in 1994 up to $141,465
plus 1994 net income to the date of dividend declaration.
NOTE 15. PARENT COMPANY ONLY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
Dollars in thousands at December 31, 1993 1992
Assets
Cash and due from banks $430 $66
Loans to subsidiaries:
Banks 47,475 24,804
Nonbanks 15,375 10,925
Investment in subsidiaries:
Banks 607,766 537,743
Nonbanks 5,351 5,044
Other loans and investments 19,563 10,023
Premises and equipment 19,455 21,553
Other assets 40,900 37,615
Total assets $756,315 $647,773
Liabilities
Commercial paper $20,162 $14,469
Long-term debt 77,804 105,358
Other liabilities 34,783 38,121
Total liabilities 132,749 157,948
Shareholders' equity 623,566 489,825
Total liabilities and shareholders' equity $756,315 $647,773
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CONDENSED STATEMENTS OF INCOME
Dollars in thousands for the year ended December 31, 1993 1992 1991
Income
Dividends from subsidiaries:
Banks $40,521 $41,650 $27,242
Nonbanks 1,412 1,830 1,493
Interest:
Loans to subsidiaries 3,212 2,516 1,122
Loans to nonaffiliates 497 763 971
Other, principally subsidiaries 79,564 54,975 53,728
Total income 125,206 101,734 84,556
Expense
Interest 8,345 9,845 7,974
Salaries and employee benefits 40,366 30,203 23,533
Other 51,799 45,045 36,463
Total expense 100,510 85,093 67,970
Income before taxes and equity in earnings of subsidiaries 24,696 16,641 16,586
Income tax benefit 7,016 10,327 5,213
Equity in undistributed earnings of subsidiaries 51,475 36,404 19,400
Net income $83,187 $63,372 $41,199
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STATEMENTS OF CASH FLOWS
Dollars in thousands for the year ended December 31, 1993 1992 1991
Cash flows from operating activities
Net income $83,187 $63,372 $41,199
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (51,475) (36,404) (19,400)
Depreciation and amortization 10,296 7,623 6,064
Changes in other assets and liabilities (7,094) (107) (297)
Net cash provided by operating activities 34,914 34,484 27,566
Cash flows from investing activities
Change in other short-term investments, maturities less than 90 days (15,878) 9,567 (4,848)
Purchase of securities held to maturity (3,416) (54,643) (20,147)
Maturity of securities held to maturity 6,139 51,053 2,744
Sale of securities - 17,894 -
Change in loans to subsidiaries (23,950) (9,279) (20,861)
Change in loans to nonaffiliates 320 4,582 252
Other (3,432) (3,429) (2,800)
Capitalization of subsidiaries (6,685) (114,211) (11,157)
Net cash used by investing activities (46,902) (98,466) (56,817)
Cash flows from financing activities
Change in short-term borrowings, maturities less than 90 days (1,416) 14,259 (347)
Proceeds from short-term borrowings 13,200 - -
Payments on short-term borrowings (7,000) - -
Additions to long-term debt - - 50,000
Payments on long-term debt (27,566) (4,189) (12,362)
Proceeds from issuance of common stock 54,526 67,922 5,664
Cash dividends paid (19,392) (15,130) (12,783)
Net cash provided by financing activities 12,352 62,862 30,172
Net increase (decrease) in cash and due from banks 364 (1,120) 921
Cash and due from banks - January 1 66 1,186 265
Cash and due from banks - December 31 $430 $66 $1,186
Supplemental information
Interest paid $8,737 $9,936 $8,044
Income taxes paid 36,260 19,325 11,253
Noncash activities
Additions to investment in subsidiaries 3,041 11,512 -
Capital lease for computer equipment - 10,857 -
Termination of capital lease for computer equipment - 6,460 -
Tax benefit of stock options exercised 596 812 832
Dividends declared not paid 6,249 9,220 3,367
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Report of Independent Accountants
To the Shareholders and Directors of West One Bancorp
We have audited the consolidated balance sheets of West One Bancorp
and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31,
1993. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of West One Bancorp and subsidiaries as of December 31,
1993 and 1992 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements,
during 1993 the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities".
/s/ Coopers and Lybrand
Boise, Idaho
January 20, 1994
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