EXHIBIT 13 - SELECTED PORTIONS OF THE WEST ONE BANCORP 1994 ANNUAL REPORT
TO SHAREHOLDERS
Selected Financial Data
Dollars in thousands, except per share data
For the year 1994 1993 1992 1991 1990
Interest income - taxable equivalent $583,876 $515,798 $446,913 $459,704 $455,050
Interest expense 221,361 193,435 195,090 249,980 268,014
Net interest income -
taxable equivalent 362,515 322,363 251,823 209,724 187,036
Taxable equivalent adjustment 20,890 18,473 13,125 12,152 11,347
Net interest income 341,625 303,890 238,698 197,572 175,689
Provision for credit losses 13,278 13,383 14,308 29,680 11,668
Net interest income after provision
for credit losses 328,347 290,507 224,390 167,892 164,021
Other income 114,513 102,014 81,771 70,548 61,931
Securities gains (losses) (1,067) 495 1,690 2,156 24
Total noninterest income 113,446 102,509 83,461 72,704 61,955
Salaries and employee benefits 142,512 128,886 104,024 90,485 82,211
Other expense 152,180 143,552 112,500 92,651 80,825
Total noninterest expense 294,692 272,438 216,524 183,136 163,036
Income before taxes 147,101 120,578 91,327 57,460 62,940
Provision for income taxes 43,930 37,391 27,955 16,261 18,673
Net income $103,171 $83,187 $63,372 $41,199 $44,267
Primary earnings per share $2.88 $2.50 $2.09 $1.47 $1.60
Fully diluted earnings per share 2.74 2.38 1.98 1.44 1.60
Cash dividends declared per share .76 .49 .675 .48 .44
Cash dividends paid per share .72 .595 .51 .47 .44
Assets $8,792,699 $7,671,353 $7,133,637 $5,417,199 $4,946,989
Loans 6,065,423 5,354,497 4,531,913 3,497,451 3,292,217
Allowance for credit losses 81,757 74,923 68,243 53,048 47,823
Deposits 6,810,882 5,937,047 5,636,339 4,044,408 3,860,881
Long-term debt 253,073 116,460 117,649 111,881 72,614
Shareholders' equity 715,769 623,566 489,825 367,048 332,692
Full-time equivalent employees 4,778 4,477 4,293 3,464 3,370
Shares outstanding 36,745,368 34,718,731 32,351,160 28,062,404 27,567,672
In September 1992, West One acquired certain assets and deposits from Security
Pacific Corporation in Washington.
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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.
Performance Overview
The Corporation completed the most profitable year in its 127 year history in
1994. Net income was $103.2 million, a 24% increase over the $83.2 million
earned in 1993. Net income was 31% higher in 1993 than the $63.4 million earned
in 1992. Highlights of 1994 include the continuation of double-digit loan
growth, outstanding asset quality and the sixth consecutive increase in annual
shareholders' dividends. Nonperforming assets declined to .29% of total assets
and the allowance for credit losses was over 400% of nonperforming loans at
December 31, 1994. Capital ratios strengthened in 1994 and easily exceeded
regulatory requirements. Earnings per share increased 15% to $2.74 in 1994
following an increase of 20% to $2.38 in 1993. The five-year compound growth
rate was 24% for net income and 17% for earnings per share.
Return on assets averaged 1.28% in 1994, an improvement from returns of 1.14%
and 1.08% in 1993 and 1992, respectively. Return on shareholders' equity
averaged 15.63% in 1994, up from 15.61% in 1993 and 14.93% in 1992. Late in
1993, $47 million of common stock was issued through a Dividend Reinvestment and
Stock Purchase Plan.
The Corporation continues to pursue opportunities for profitable growth and
asset diversification, with expansion in the states of Washington and Oregon a
high priority. An improved competitive position in Oregon resulted from the
acquisition in 1994 of 10 branches of Far West Federal Savings Bank with
deposits of $173 million, and National Security Bank Holding Company, a five
branch institution on the Oregon coast with assets of $132 million. Market
penetration improved in the state of Washington with the acquisition of Valley
Commercial Bank in 1994, a two branch institution serving Clarkston, Washington
with assets of $64 million. The acquisition of Idaho State Bank with assets of
$48 million and seven branches in Idaho communities previously not served by the
Corporation was also completed in 1994. Growth rates for 1992 and 1993
reflected the acquisition in September 1992 of $1.2 billion in deposits from
Security Pacific Corporation in the state of Washington (the Washington
acquisition).
Regional Economic Performance
A financial institution's performance is directly influenced by economic
conditions in its service area. In 1994, strong economic conditions prevailed
in the Corporation's service area of Idaho, Washington, Oregon and Utah. Idaho
and Utah maintained exceptional levels of economic growth, and Oregon
experienced increasingly stronger growth as 1994 progressed. In recent years,
Washington's growth was more moderate due to employment cuts in aerospace
manufacturing; however, renewed economic strength and momentum were evident
during the fourth quarter. Utah and Idaho were two of the top three job
producing states in the nation in 1993 and 1994, and total nonfarm employment
growth in the four-state region totaled 3.3% in 1994 compared to a 3.1% gain
nationally. Individually, gains ranged from 2.1% in Washington to 5.8% in Utah.
Residential construction activity remained vigorous in 1994 with demand slowing
late in the year as consumers in Idaho and Utah reacted to higher mortgage
interest rates. Strengthening economies in Oregon and Washington actually
produced rising residential construction permit levels during the fourth quarter
despite the higher interest rates. Dynamic economic conditions caused
commercial office vacancy rates to decline sharply in Portland and Salt Lake
City during 1994 and to remain flat at a very low level in Boise. Vacancy rates
in Seattle were unchanged from the prior year.
Rising employment led to strong personal income gains in the region with
inflation adjusted gains ranging from 3.2% in Washington to over 6% in Utah.
The region remains a magnet for people from all over the United States, and all
four states experienced substantial net inmigration during 1994. Tighter labor
markets in other regions of the United States and the prospect of a return to
economic growth in California suggest that the rate of inmigration may slow in
1995. Higher interest rates will likely produce a decline in housing starts
from the peaks experienced in 1994, but strong job growth suggests that economic
expansion will continue in the region in 1995. Idaho's employment and income
growth are expected to slow somewhat from the lofty levels of prior years, but
employment growth of 3.5% and personal income growth of approximately 7.5% are
projected for 1995, both well above national
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benchmarks. Expanded export markets combined with continued trade promotion
efforts, aggressive new product development by high technology companies and
national expansion by local retailers indicate Washington's economy will
continue to improve in 1995. Employment in Washington is expected to grow by
2% while personal income should increase approximately 5.5% in 1995. The
technology sector in Oregon is expected to continue to expand in 1995,
reflecting several large electronics projects announced in 1994. As a result,
employment growth of 2.6% and personal income growth of about 6.5% are
projected for Oregon in 1995. In Utah, state projections indicate annual
employment growth will be about 4.3% and personal income will grow
approximately 7.4%.
AVERAGE BALANCES AND RATIOS
Dollars in thousands 1994 1993 1992 1991 1990
Selected average balances
Assets $8,037,140 $7,312,017 $5,848,131 $5,165,354 $4,731,919
Earning assets 7,318,280 6,612,814 5,294,949 4,686,354 4,266,191
Securities 1,607,017 1,666,520 1,321,390 1,110,381 987,800
Loans 5,646,382 4,903,797 3,767,186 3,349,190 3,110,738
Deposits 6,302,035 5,689,938 4,503,586 3,917,298 3,663,402
Short-term borrowings 831,208 880,495 736,043 745,699 621,272
Long-term debt 149,257 117,990 114,727 86,024 67,736
Shareholders' equity 660,055 532,898 424,429 348,684 312,599
Growth measures
(percent change in average balances)
Assets 9.9% 25.0% 13.2% 9.2% 6.8%
Earning assets 10.7 24.9 13.0 9.8 7.0
Securities (3.6) 26.1 19.0 12.4 7.6
Loans 15.1 30.2 12.5 7.7 15.5
Deposits 10.8 26.3 15.0 6.9 7.3
Short-term borrowings (5.6) 19.6 (1.3) 20.0 2.7
Long-term debt 26.5 2.8 33.4 27.0 .8
Shareholders' equity 23.9 25.6 21.7 11.5 10.4
Ratios (averages)
Return on shareholders' equity 15.63% 15.61% 14.93% 11.82% 14.16%
Return on assets 1.28 1.14 1.08 .80 .94
Dividend payout ratio 26.26 19.74 33.11 32.38 26.30
Loans to deposits 89.60 86.18 83.65 85.50 84.91
Shareholders' equity to assets 8.21 7.29 7.26 6.75 6.61
Shareholders' equity to loans 11.69 10.87 11.27 10.41 10.05
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. Current and projected
consolidated and subsidiary capital positions are monitored regularly to ensure
capital levels exceed regulatory guidelines.
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At December 31, 1994, shareholders' equity totaled $716 million, up 15% from a
year ago. The primary component of additional shareholders' equity in 1994
was $89 million of retained earnings, up 32% from 1993. At December 31, 1994,
shareholders' equity included a net unrealized after-tax loss of $13 million to
adjust securities available for sale to market value. Shareholders' equity as
a percent of assets measures capital strength. At December 31, 1994, the
ratio was 8.14% compared to 8.13% at December 31, 1993 and 6.87% at December
31, 1992.
In 1994, the Corporation paid dividends for the 60th consecutive year. The
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 Board
of Directors increased the quarterly dividend by 22% to $.22 per share in
October 1994, representing the sixth consecutive year of dividend increases.
On a per share basis, dividends paid in 1994 were $.72, a 21% increase from
$.595 in 1993. The comparable dividend was $.51 in 1992.
The book value per share of common stock was $19.48 at December 31, 1994, an 8%
increase from the $17.96 book value per share at year-end 1993. Market
capitalization at December 31, 1994 was $974 million. The Corporation's
average annual compound return to shareholders was 22% for the five-year period
ended December 31, 1994 assuming reinvestment of dividends, significantly
higher than the 8% return for a peer group of 503 commercial banks and the
Nasdaq market index return of 6%.
The Corporation's stock was held by 6,957 shareholders of record at December 31,
1994 and is traded in the over-the-counter market on The Nasdaq Stock Market
under the symbol of WEST. The accompanying market quotations represent the high
and low closing sales price per share for the indicated periods as reported by
The Nasdaq Stock Market.
QUARTERLY COMMON STOCK STATISTICS
Fourth Third Second First
1994
Market quotations
High $28 9/16 $31 13/16 $32 $28 1/2
Low 24 11/16 28 26 1/2 25 3/4
Quarter-end 26 1/2 28 28 3/4 27
Per share
Cash dividends declared .22 .18 .18 .18
Cash dividends paid .18 .18 .18 .18
Book value, quarter-end 19.48 19.25 18.69 18.29
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
See Note 15 to the financial statements.
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(Graphic material omitted, replaces the two graphs presented on this page).
AVERAGE SHAREHOLDERS' EQUITY
Dollars in millions 1994 1993 1992 1991 1990
Average shareholders' equity $715.8 $623.6 $489.4 $367.0 $332.7
COMPARATIVE RISK-BASED CAPITAL RATIOS
At December 31, Well Regulatory
1994 Capitalized Minimum
Leverage ratio 8.16% 5.00% 3.00%
Tier 1 capital 10.30 6.00 4.00
Total capital 12.41 10.00 8.00
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Financial institutions are subject to risk-based capital guidelines 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 well above regulatory minimums as
presented in the accompanying graph. 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, 1994, all banking subsidiaries exceeded the regulatory criteria for
well-capitalized institutions and qualified for the minimum FDIC insurance
assessment. Dividends from subsidiaries to West One Bancorp are used to provide
capital to other subsidiaries, to reduce debt and to support shareholder
dividends. The Corporation's leverage, Tier I and total capital ratios were
8.16%, 10.30% and 12.41%, respectively, at December 31, 1994 compared with
7.61%, 9.53% and 11.80%, respectively, at December 31, 1993.
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 West One Bancorp 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, 1994, the double leverage ratio
improved to .94 compared to .98 and 1.11, respectively, at December 31, 1993 and
1992.
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 is impacted primarily by changes in the volume and mix of
earning assets and funding sources, market rates of interest and asset quality.
Net interest income was $362.5 million in 1994, an increase of 12% from the
prior year. Comparable increases were 28% in 1993 and 20% in 1992. Net
interest income increased in 1994 due to an 11% increase in average earning
assets and an 8 basis point improvement in net interest margin. Net interest
income accounted for 76% of total revenue in 1994 and 1993 and 75% in 1992.
Average earning assets increased $705 million or 11% to $7.32 billion in 1994
following increases of 25% and 13% in 1993 and 1992, respectively. The increase
in 1994 was attributable to average loan growth of $743 million due primarily
to internal loan generation. Acquisitions completed in 1994 contributed $35
million of the average loan growth. Loans represent the highest yielding
component of earning assets and accounted for 77% of average earning assets in
1994, up from 74% in 1993 and 71% in 1992. Interest income foregone on
nonperforming loans reduced net interest income by $1.0 million, net of tax, in
1994 compared to $1.1 million in 1993 and $1.7 million in 1992. Nonaccrual
loans declined to .32% of total loans at December 31, 1994 from .44% at year-end
1993 and .46% at year-end 1992.
A shift in the mix of sources of funds improved net interest income and net
interest margin in 1994 as a significant increase in noninterest bearing funds
allowed the Corporation to reduce its reliance on short-term borrowings.
Average noninterest bearing funds increased to 17.5% of total sources of funds
in 1994 from 15.5% in 1993, resulting in lower interest expense and a wider net
interest margin. Average short-term borrowings were $831 million or 11.4% of
total sources of funds in 1994 compared to $880 million or 13.3% in 1993.
Net interest margin increased 8 basis points to 4.95% in 1994 from 4.87% in
1993. Net interest margin was 4.76% in 1992. The yield on earning assets and
the cost of funds both increased in 1994, reflecting higher money market rates.
Improvements in the mix of both earning assets and sources of funds, combined
with aggressive efforts to stabilize funding costs and to price loans
profitably, resulted in a 17 basis point increase in the yield on earning assets
compared to a 9 basis point increase in the cost of sources of funds. The
accompanying table presents the rate and volume analysis of earnings assets and
interest bearing liabilities for the last three years.
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Consolidated Average Balance Sheets
and Taxable Equivalent Interest Rate and Volume Analysis
1994-1993
Average Interest Change in 1994-1993 Change
Average Balance Yield or Rate Income/Expense Income/ Attributable to
Dollars in thousands 1994 1993 1994 1993 1994 1993 Expense Volume Rate
Assets
Due from banks - interest bearing $7,356 $23,894 4.01% 3.26% $295 $779 $(484) $(632) $148
Federal funds sold, securities
purchased under agreements to
resell and other 57,525 18,603 4.70 3.18 2,705 592 2,113 1,720 393
Securities:
U.S. Treasury and Government
agencies 611,337 578,522 5.53 5.51 33,805 31,869 1,936 1,814 122
State and municipal bonds 587,364 457,377 7.70 8.35 45,248 38,202 7,046 10,195 (3,149)
Mortgage-backed securities 257,550 379,799 5.91 5.75 15,233 21,842 (6,609) (7,214) 605
Other 150,766 250,822 6.70 6.50 10,098 16,292 (6,194) (6,687) 493
Total securities 1,607,017 1,666,520 6.50 6.49 104,384 108,205 (3,821) (3,865) 44
Loans:
Real estate 2,294,093 1,902,330 8.48 8.57 194,538 163,060 31,478 33,239 (1,761)
Commercial and agricultural 1,977,261 1,796,611 7.84 7.22 154,927 129,660 25,267 13,641 11,626
Commercial - tax-exempt 124,864 109,573 9.21 8.77 11,501 9,605 1,896 1,390 506
Consumer 1,093,457 943,815 9.47 9.64 103,571 90,951 12,620 14,198 (1,578)
Leases 156,707 151,468 7.63 8.55 11,955 12,946 (991) 436 (1,427)
Total loans 5,646,382 4,903,797 8.44 8.28 476,492 406,222 70,270 62,539 7,731
Total earning assets 7,318,280 6,612,814 7.97 7.80 583,876 515,798 68,078 56,062 12,016
Cash and due from banks 482,138 470,961
Premises and equipment 124,766 122,679
Allowance for credit losses (79,015) (72,187)
Other nonearning assets 190,971 177,750
Total assets $8,037,140 $7,312,017
Liabilities and shareholders' equity
Interest bearing deposits:
Interest bearing demand $736,731 $696,996 1.75 2.13 12,883 14,879 (1,996) 811 (2,807)
Regular and money market savings 2,063,091 1,856,420 3.01 2.88 62,178 53,437 8,741 6,146 2,595
Time certificates under $100,000 1,606,909 1,577,139 4.65 4.62 74,685 72,921 1,764 1,382 382
Time certificates $100,000 and over 652,124 456,431 4.58 4.13 29,893 18,839 11,054 8,787 2,267
Total interest bearing deposits 5,058,855 4,586,986 3.55 3.49 179,639 160,076 19,563 16,714 2,849
Federal funds purchased and
securities sold under agreement
to repurchase 576,968 665,106 3.85 2.80 22,185 18,592 3,593 (2,705) 6,298
Other short-term borrowings 254,240 215,389 4.09 3.04 10,390 6,543 3,847 1,320 2,527
Long-term debt 149,257 117,990 6.13 6.97 9,147 8,224 923 1,999 (1,076)
Total interest bearing funds 6,039,320 5,585,471 3.67 3.46 221,361 193,435 27,926 16,252 11,674
Noninterest bearing funds 1,278,960 1,027,343
Total sources of funds 7,318,280 6,612,814 3.02 2.93 221,361 193,435
Noninterest bearing deposits 1,243,180 1,102,952
Other liabilities 94,585 90,696
Shareholders' equity 660,055 532,898
Less noninterest bearing funds (1,278,960) (1,027,343)
Total liabilities and shareholders'
equity $8,037,140 $7,312,017
Net interest margin and income 4.95% 4.87% $362,515 $322,363 $40,152 $39,810 $342
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1993-1992
Average Interest Change in 1993-1992 Change
Average Balance Yield or Rate Income/Expense Income/ Attributable to
Dollars in thousands 1992 1992 1992 Expense Volume Rate
Assets
Due from banks-interest bearing $184,914 4.02% $7,431 $(6,652) $(5,467) $(1,185)
Federal funds sold, securities
under agreements to resell
and other 21,459 3.95 847 (255) (104) (151)
Securities:
U.S. Treasury and Government
agencies 537,567 6.86 36,875 (5,006) 2,655 (7,661)
State and municipal bonds 248,134 9.33 23,161 15,041 17,705 (2,664)
Mortgage-backed securities 321,487 6.83 21,971 (129) 3,648 (3,777)
Other 214,202 7.10 15,209 1,083 2,452 (1,369)
Total securities 1,321,390 7.36 97,216 10,989 23,334 (12,345)
Loans:
Real estate 1,365,050 9.49 129,518 33,542 47,024 (13,482)
Commercial and agricultural 1,377,120 7.68 105,765 23,895 30,596 (6,701)
Commercial - tax-exempt 88,366 9.52 8,413 1,192 1,899 (707)
Consumer 800,980 10.55 84,518 6,433 14,192 (7,759)
Leases 135,670 9.73 13,205 (259) 1,446 (1,705)
Total loans 3,767,186 9.06 341,419 64,803 96,119 (31,316)
Total earning assets 5,294,949 8.44 446,913 68,885 104,765 (35,880)
Cash and due from banks 366,761
Premises and equipment 99,680
Allowance for credit losses (59,055)
Other nonearning assets 145,796
Total assets $5,848,131
Liabilities and shareholders' equity
Interest bearing deposits:
Interest bearing demand $521,319 2.79 14,532 347 4,220 (3,873)
Regular and money market savings 1,353,181 3.58 48,476 4,961 15,710 (10,749)
Time certificates under $100,000 1,427,677 5.45 77,874 (4,953) 7,647 (12,600)
Time certificates $100,000 and over 388,752 4.95 19,256 (417) 3,067 (3,484)
Total interest bearing deposits 3,690,929 4.34 160,138 (62) 34,665 (34,727)
Federal funds purchased and
securities sold under agreement
to repurchase 624,864 3.36 20,995 (2,403) 1,289 (3,692)
Other short-term borrowings 111,179 3.52 3,911 2,632 3,229 (597)
Long-term debt 114,727 8.76 10,046 (1,822) 279 (2,101)
Total interest bearing funds 4,541,699 4.30 195,090 (1,655) 40,122 (41,777)
Noninterest bearing funds 753,250
Total sources of funds 5,294,949 3.68 195,090
Noninterest bearing deposits 812,657
Other liabilities 69,346
Shareholders' equity 424,429
Less noninterest bearing funds (753,250)
Total liabilities and shareholders'
equity $5,848,131
Net interest margin and income 4.76% $251,823 $70,540 $64,643 $5,897
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 $20,890 in 1994, $18,473 in 1993 and
$13,125 in 1992. 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.
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(Graphic material omitted, replaces the two graphs presented on this page).
Dollars in billions 1994 1993 1992 1991 1990
Average loans $5.6 $4.9 $3.8 $3.3 $3.1
Average earning assets 7.3 6.6 5.3 4.7 4.3
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Loans
Loans represent the Corporation's largest component of earning assets and,
accordingly, are its primary source of income. Loans totaled $6.07 billion at
December 31, 1994, up from $5.35 billion at year-end 1993 and $4.53 billion at
year-end 1992. Loans increased 13% in 1994 compared to increases of 18% and
30% in 1993 and 1992, respectively. Strong economic conditions in the
Corporation's market area contributed to real estate loan growth of $376 million
or 17%, commercial and agricultural loan growth of $209 million or 10% and
consumer loan growth of $134 million or 13%. Residential real estate loans
totaling an additional $194 million were originated and sold in the secondary
market during 1994. The average loan to deposit ratio was 89.60% in 1994
compared to 86.18% in 1993 and 83.65% in 1992. Nonperforming loans totaled $20
million at year-end 1994 and represented .32% of total loans as compared to .44%
in 1993 and .46% in 1992.
Real estate loans totaled $2.53 billion at December 31, 1994. The largest
component of the real estate loan portfolio is loans to individual homeowners
collateralized by one-to-four family residential properties. At $1.26 billion,
residential real estate loans were 50% of total real estate loans at December
31, 1994. Residential real estate loans increased $162 million or 15% in 1994
following increases of 23% and 46% in 1993 and 1992, respectively. High rates
of inmigration and the consolidation of consumer debt into tax-advantaged home
equity credit lines contributed to the increase in 1994.
Commercial real estate loans increased $139 million or 17% to $946 million at
December 31, 1994 compared to increases of 18% in 1993 and 47% in 1992. The
increase in 1994 represented loans to local business customers for expansion of
operations and facilities in response to strong consumer demand for goods and
services. More than 90% of the properties collateralizing commercial real estate
loans were located in the Corporation's local market area. Underwriting
standards typically rely on cash flow for repayment ability and not asset value
or appreciation. The types of properties supporting commercial real estate
loan obligations are well diversified. In accordance with the Corporation's
community banking strategy, loans collateralized by warehouse facilities and
office buildings are primarily owner occupied and domiciled in our four-state
market area.
Construction loans increased $74 million or 30% to $319 million at December 31,
1994. Dwelling units authorized in the Corporation's market area increased 16%
in 1994 due to an acceleration in single and multi-family residential
construction. Nonperforming real estate loans were $7.4 million at December 31,
1994 or 37% of total nonperforming loans and .3% of total real estate loans.
Commercial and agricultural loans totaled $2.21 billion at December 31, 1994, a
$209 million or 10% increase from the prior year compared to increases of 12%
in 1993 and 30% in 1992. Commercial loans increased 11% to $1.78 billion in
1994, reflecting improved regional economic conditions as measured by increases
in employment, population, personal income and retail sales. Growth was
primarily in the small-to-middle market where efficient and personal service is
provided by community-based lending officers. Agricultural loans increased 9%
to $429 million at December 31, 1994 as the Corporation maintained its position
as one of the leading agricultural lenders in the nation. At December 31, 1994,
nonperforming commercial and agricultural loans totaled $10.7 million or .5% of
commercial and agricultural loans.
Consumer loans increased 13% to $1.17 billion at December 31, 1994 following
increases of 19% in 1993 and 10% in 1992. Bankcard loans increased 9% to $232
million in 1994 due to increases in merchants served and credit cards
outstanding. The remainder of the current year increase was primarily
attributable to acquisitions completed in 1994. Nonperforming consumer loans
totaled $1.0 million at December 31, 1994.
Securities
The 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.
At December 31, 1994, the amortized cost of the securities portfolio totaled
$1.74 billion, an increase of $131 million or 8% from December 31, 1993.
The mix of securities changed over this time period as the portfolio was
restructured to take advantage of rising interest rates. Variable rate United
States Government agency securities increased $145 million and short-term United
States Treasury securities increased $82 million in 1994. Mortgage-backed
securities declined $55 million as maturing securities were not replaced and
additional securities were sold due to unfavorable terms in a rising rate
environment.
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 cost of securities held to maturity at December
-23-
(Graphic material omitted, replaces the two graphs presented on this page).
Dollars in billions 1994 1993 1992 1991 1990
Average deposits $6.3 $5.7 $4.5 $3.9 $3.7
Dollars in millions, at December 31, 1994 1993 1992 1991 1990
Nonperforming assets $25.8 $28.4 $31.1 $54.0 $39.7
-24-
31, 1994 exceeded aggregate market value by $13 million. Securities available
for sale may be sold as part of the asset and liability management process and
are reported at market value. Unrealized gains or losses related to the
adjustment of these securities to market value are recorded net of tax as a
component of shareholders' equity. At December 31, 1994, the cost of
securities available for sale exceeded market value by $21 million.
Sources of Funds
Earning assets are funded primarily by deposits acquired locally within the
Corporation's four-state market area. Deposits increased $874 million or 15%
to $6.81 billion at December 31, 1994 following increases of 5% in 1993 and 39%
in 1992. Approximately $355 million of the 1994 increase was attributable to
acquisitions. The increase in 1992 included the effect of the Washington
acquisition.
Core deposits include all domestic deposits except time certificates $100
thousand and over and are the primary funding source of earning assets. Growth
in core deposits of $523 million or 10% to $6 billion accounted for most of the
deposit increase in 1994. Core deposits represent stable funds from local
customers and funded 76% of earning assets at year-end 1994, a very high
level compared to industry averages. Time certificates $100 thousand and
over increased $351 million or 75% to $822 million at December 31, 1994.
The increase occurred as depositors reduced liquid investments to take advantage
ofhigher interest rates.
Average total short-term borrowings as a percent of average earning assets
declined to 11% in 1994 from 13% in 1993 and 14% in 1992. Other short-term
borrowings include United States Treasury borrowings, Federal Home Loan Bank
borrowings and commercial paper. United States Treasury borrowings declined
at December 31, 1994 compared to a year ago as less funds were available
through the United States Treasury Tax and Loan Note Option Program. These
borrowings were replaced by Federal funds purchased, an alternative short-term
source of funds.
Long-term debt was $253 million at December 31, 1994, an increase of $137
million or 117% from December 31, 1993 due to an increase in Federal Home Loan
Bank borrowings. The Federal Home Loan Bank provides ready access to a stable,
low cost source of long-term advances secured by certain loans and investment
securities. At December 31, 1994, four banking subsidiaries were members of
the Federal Home Loan Bank and advances totaled $178 million.
Asset and Liability Management
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 policies 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 flows from operations
contribute significantly to liquidity. Borrowing represents 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.
Deposits generated through the Corporation's extensive retail branch network
are an important source of liquidity. Deposits increased at a five-year annual
compound growth rate of 14%. Core deposits, comprised of time certificates
under $100 thousand and local market transaction and savings accounts, are
highly reliable sources of funds. At December 31, 1994, core deposits funded
76% of earnings assets. The Corporation is able to attract brokered deposits
from outside its market area but does not rely on the deposits as a source of
funds. At December 31, 1994, brokered deposits totaled $68 million and funded
only 1% of earning assets.
Securities available for sale totaled $1.14 billion at December 31, 1994 and
represented a highly accessible source of liquidity. Held to maturity
securities will provide liquidity through maturities of $33 million in 1995.
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,
-25-
United States Treasury borrowings and Federal funds purchased. Additional
amounts of short-term funds are readily available in the form of commercial
paper and bank notes. At December 31, 1994, the Corporation had no outstanding
balances from either of these fund sources. Back-up sources of liquidity are
provided by credit lines available to West One Bancorp. Bank subsidiaries in
Idaho, Washington, Oregon and Utah have ready access to liquidity and matched
funding from the Federal Home Loan Bank of Seattle. Additional liquidity is
available through borrowings from the Federal Reserve Bank of San Francisco.
The Corporation's investment grade ratings by Moody's and Standard and Poor's
provide flexibility in meeting liquidity requirements through access to
national markets. Thomson 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 loan repayments. At December 31, 1994,
scheduled principal payments due within one year were $2.18 billion or 36% of
loans. A majority of residential mortgage loan production is sold,
contributing to overall liquidity. In addition, portions of the residential
mortgage, consumer and credit card loan portfolios could be securitized and
sold to generate liquid assets.
Short-term investments averaged $65 million in 1994 and consisted of interest
bearing deposits, Federal funds sold and securities purchased under agreements
to resell. The investments provide flexibility in balancing the fluctuating
volume requirements of customers with the Corporation's daily funding capacity.
In 1995, $40 million of long-term debt matures. The debt obligations will be
met through internally generated cash and additional external financing.
Aggregate long-term debt maturities over the next five years total $201 million.
The liquidity requirements of West One Bancorp, primarily for dividends to
shareholders, retirement of debt and other corporate purposes, are met
principally through fees and regular dividends from subsidiaries. Banking
subsidiaries may declare dividends to West One Bancorp in 1995 up to $170
million plus 1995 net income to the date of dividend declaration.
Interest Rate Risk
Interest rate risk refers to the exposure of earnings and capital arising from
changes in interest rates. Management's objectives are to control interest
rate risk and to ensure predictable and consistent growth of earnings and
capital. 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
slightly liability sensitive and within established tolerance limits at
December 31, 1994.
The Asset and Liability Maturity Repricing Schedule on the following page
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, interest rate dynamics, interperiod
sensitivities, interest rate floors and ceilings imposed on financial
instruments, interest rate swaps and customers' responses to interest rate
changes.
The Corporation's financial objectives are achieved by focusing on core
business operations rather than by speculating on the direction and magnitude
of interest rate fluctuations. Exposure to adverse changes in interest rates
arising in the normal course of business is managed through the occasional use
of off-balance sheet instruments such as interest rate swaps. At December 31,
1994, the total notional value of all interest rate swap contracts outstanding
was $535 million. The interest rate swaps hedge interest rate risks associated
with certain prime-related assets and supporting deposits and are an integral
part of the Corporation's interest rate risk management strategy.
Asset Quality
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. The 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.
-26-
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, 1994 Months Months Months Years Years Years Total
Loans $3,342 $321 $478 $1,167 $422 $335 $6,065
Securities:
Available for sale 430 75 88 460 38 49 1,140
Held to maturity 4 8 21 228 292 28 581
Short-term investments 106 -- 7 -- -- -- 113
Nonearning assets -- -- -- -- -- 894 894
Total assets 3,882 404 594 1,855 752 1,306 8,793
Deposits:
Interest bearing demand 750 -- -- -- -- -- 750
Regular and money market savings 2,087 -- -- -- -- -- 2,087
Time certificates under $100,000 523 260 232 667 72 1 1,755
Time certificates $100,000 and over 503 126 79 102 11 1 822
Short-term borrowings 897 26 3 -- -- -- 926
Long-term debt 187 6 3 5 2 50 253
Noninterest bearing liabilities
and shareholders' equity -- -- -- -- -- 2,200 2,200
Total liabilities and
shareholders' equity 4,947 418 317 774 85 2,252 8,793
Net interest rate sensitivity gap $(1,065) $(14) $277 $1,081 $667 $(946) $ --
Each affiliate regularly evaluates its allowance for credit losses. 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
1994 and 1993. Net charge-offs were $10.2 million or .18% of average loans in
1994 compared to $7.1 million or .14% of average loans in 1993. In 1992, net
charge-offs totaled $9.8 million or .26% of average loans.
Nonperforming assets declined 9% to $26 million at December 31, 1994 from $28
million at year-end 1993. At December 31, 1992, nonperforming assets were $31
million. As a percent of total assets, nonperforming assets were .29% at
December 31, 1994 compared to .37% a year ago and .44% at December 31, 1992.
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, 1994, other credit risk assets, a precursor of
problem loans, declined 74% to $1.3 million compared to $4.9 million a year ago.
At December 31, 1992, other credit risk assets totaled $6.6 million.
The provision for credit losses was $13.3 million in 1994 compared to $13.4
million in 1993. In 1992, the provision for credit losses was $14.3 million.
The allowance for credit losses was $82 million at December 31, 1994, a 9%
increase from $75 million a year ago. At December 31, 1992, the allowance for
credit losses was $68 million. The allowance for credit losses represented
1.35% of total loans at December 31, 1994 compared to 1.40% and 1.51% at
year-ends 1993 and 1992, respectively. The allowance for credit losses
covered 412% of nonperforming loans at December 31, 1994.
-27-
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.
Management believes that loan loss is best prevented by accurate initial
assessment of new borrower risk, ongoing comprehensive review of the existing
loan portfolio and immediate action once a problem becomes apparent. Credit
policies are consistent with this philosophy. The Corporation employs a
rigorous risk identification and problem loan management process combining the
longtime practice of assigning responsibility to front line lenders for timely
and accurate risk grading of loans with an effective problem loan early warning
system administered through the Credit Examination Department. Once identified,
deteriorating loans are placed on the Watch List where they are subject to
frequent and in-depth management review. Credit risk management also includes
pricing of loans to cover future credit losses, funding costs and servicing
costs, and to allow for a profit margin.
The Corporation's objective is to maintain a loan portfolio that is diverse in
terms of the types of loans and borrowers, industry concentration and geographic
distribution in an effort to minimize the adverse impact of individual events.
At December 31, 1994, 46% of the Corporation's loans were in Idaho compared to
81% in 1985. Expansion in the states of Washington and Oregon has resulted in
a significant improvement in the geographic
CREDIT RISK ASSETS
Dollars in thousands 1994 1993 1992 1991 1990
Nonperforming assets at December 31
Nonaccrual loans $19,597 $23,732 $20,966 $41,862 $31,423
Restructured loans 240 357 396 539 404
Other real estate owned 5,962 4,312 9,739 11,570 7,872
Total $25,799 $28,401 $31,101 $53,971 $39,699
Other credit risk assets at December 31
Loans with serious concern $ 57 $ 1,905 $ 4,182 $ 4,775 $ 4,133
Accruing loans past due
90 days or more 1,218 2,991 2,379 2,825 4,139
Allowance and provision
for credit losses
Allowance for credit losses 81,757 74,923 68,243 53,048 47,823
Net charge-offs 10,227 7,053 9,821 24,455 13,600
Provision for credit losses 13,278 13,383 14,308 29,680 11,668
Ratios
Nonperforming assets to loans
and other real estate owned .42 % .53 % .68 % 1.54 % 1.20
Nonperforming assets to
shareholders' equity and
allowance for credit losses 3.23 4.07 5.57 12.85 10.43
Nonperforming assets to
total assets .29 .37 .44 1.00 .80
Allowance for credit losses to
total loans 1.35 1.40 1.51 1.52 1.45
Allowance for credit losses to
nonperforming loans 412.14 311.03 319.46 125.11 150.26
Net charge-offs to average loans .18 .14 .26 .73 .44
-28-
diversification of the loan portfolio. The Corporation's market area has
experienced some of the strongest economic conditions in the nation in recent
years and the outlook continues to be favorable. Economic conditions impact
credit risk, however, and customers may be adversely impacted by a downturn in
the national economy.
Real estate loans accounted for 42% of total loans at December 31, 1994,
significantly below industry averages. Commercial loans, the second largest
loan category, accounted for 29% of loans and included no significant industry
concentrations.
Agricultural and related loans represented the largest single industry
concentration in the loan portfolio, accounting for 7% of total loans at
December 31, 1994. The agricultural portfolio includes loans for diverse crops,
beef and dairy cattle, food processing, nursery stock, fisheries and equipment.
The average balance per commercial and agricultural loan was $92 thousand at
December 31, 1994.
Foreign loans totaled $21 million or .35% of total loans at December 31, 1994.
At year-end 1994, agreements to extend credit totaled $2.86 billion compared to
$2.26 billion and $1.56 billion at year-ends 1993 and 1992, respectively.
Noninterest Income
Noninterest income includes revenue generated by fees, commissions and service
charges to compensate for banking products and services. Noninterest income
increased $10.9 million or 11% to $113.4 million in 1994 following increases of
23% in 1993 and 15% in 1992. Excluding securities gains and losses, noninterest
income increased 12% in 1994. Bankcard income improved in 1994 as the number of
merchants served and credit cards outstanding increased 15% and 20%,
respectively. Real estate servicing fees also improved in 1994 as loans
serviced increased 34% to $3 billion. The settlement of prior years' tax
litigation resulted in $1.9 million of interest income from Federal income tax
receivables. The five-year compound growth rate for noninterest income,
excluding securities gains and losses, was 17%, exceeding the five-year
compound growth rate of 13% for assets.
Noninterest Expense
Noninterest expense increased 8% to $294.7 million in 1994 compared with
increases of 26% and 18% in 1993 and 1992, respectively. Excluding the impact
of 1994 acquisitions, noninterest expense increased 6% in 1994. The current
year increase included the costs of staffing and operating three new branches in
Idaho and Utah, the opening of six branches in supermarkets in Washington and
Idaho, and technology.
Noninterest expense as a percent of average earning assets improved to 4.03% in
1994 from 4.12% in 1993, comparing very favorably to industry averages. The
efficiency ratio improved to 61.78% in 1994 from 64.20% in 1993. Management is
committed to improving earnings through the efficient allocation of human and
technological resources. These efforts included establishing an automated
telephone voice response system providing immediate customer service seven days
a week, 24 hours a day, in 1993. The service currently averages 20,000 calls
per day and resulted in staff reductions in retail branches. Successful
implementation of a loan-by-phone product and a debit/point-of-sale card have
also contributed to increased efficiency.
Income Taxes
Income tax planning plays a significant role in the maximization of long-term,
after-tax profitability. Income tax expense and the effective tax rate are
impacted by the mix of taxable versus tax-exempt income from investment
securities and loans.
The effective income tax rate was 29.9% in 1994 compared to 31.0% in 1993 and
30.6% in 1992. Note 14 to the financial statements reconciles the effective
income tax rates to the Federal statutory rates.
-29-
Graphic Material Omitted
A map of the Western United States depicting our four-state market area of
Idaho, Washington, Oregon and Utah and highlighting our branch locations
within these four states.
-30-
QUARTERLY FINANCIAL DATA (UNAUDITED)
Dollars in thousands, except per share data Fourth Third Second First
1994
Interest income $155,764 $145,279 $135,957 $125,986
Interest expense 66,531 57,993 51,353 45,484
Net interest income 89,233 87,286 84,604 80,502
Provision for credit losses 2,456 3,046 3,787 3,989
Net interest income after provision
for credit losses 86,777 84,240 80,817 76,513
Noninterest income 28,649 28,395 30,122 26,280
Noninterest expense 76,875 74,497 72,847 70,473
Income before taxes 38,551 38,138 38,092 32,320
Provision for income taxes 11,279 11,077 12,169 9,405
Net income $27,272 $27,061 $25,923 $22,915
Primary earnings per share $.75 $.76 $.73 $.65
Fully diluted earnings per share .71 .72 .69 .62
Net interest margin 4.88% 4.96% 4.98% 5.00%
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%
-31-
CONSOLIDATED BALANCE SHEETS
Dollars in thousands at December 31, 1994 1993
Assets
Cash and due from banks $632,577 $450,384
Federal funds sold, securities purchased under
agreements to resell and other 112,516 14,654
Securities:
Available for sale 1,139,765 1,060,650
Held to maturity - market value of $568,488 and $595,146 581,155 565,165
Total securities 1,720,920 1,625,815
Loans - net of unearned income
of $38,086 and $40,244:
Real estate 2,526,475 2,150,835
Commercial and agricultural 2,205,459 1,996,865
Consumer 1,172,616 1,038,678
Leases 160,873 168,119
Total loans 6,065,423 5,354,497
Allowance for credit losses (81,757) (74,923)
Net loans 5,983,666 5,279,574
Premises and equipment 128,506 122,828
Interest receivable 66,605 50,141
Other assets 147,909 127,957
Total assets $8,792,699 $7,671,353
-32-
Dollars in thousands at December 31, 1994 1993
Liabilities
Deposits:
Noninterest bearing $1,397,843 $1,260,869
Interest bearing demand 749,755 729,247
Regular and money market savings 2,086,718 1,971,211
Time certificates under $100,000 1,755,013 1,505,177
Time certificates $100,000 and over 821,553 470,543
Total deposits 6,810,882 5,937,047
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 804,161 568,295
Other 122,153 330,609
Long-term debt 253,073 116,460
Other liabilities 86,661 95,376
Total liabilities 8,076,930 7,047,787
Commitments and contingencies (Note 9)
Shareholders' equity
Common stock - $1.00 par value; 75,000,000 shares authorized;
36,745,368 and 34,718,731 shares outstanding 36,745 34,719
Capital surplus 327,879 304,413
Retained earnings 364,041 275,351
Unrealized gain (loss) on securities, net of tax (12,896) 9,083
Total shareholders' equity 715,769 623,566
Total liabilities and shareholders' equity $8,792,699 $7,671,353
The accompanying notes are an integral part of the financial statements.
-33-
CONSOLIDATED STATEMENT OF INCOME
Dollars in thousands except per share data, for the year ended December 31, 1994 1993 1992
Interest income
Loans $471,971 $402,550 $338,290
Short-term investments 3,000 1,371 8,278
Interest and dividends on securities:
United States Treasury and Government agencies 33,331 31,172 35,711
State and municipal bonds 30,147 25,056 15,392
Mortgage-backed securities 15,233 21,842 21,971
Other 9,304 15,334 14,146
Total interest income 562,986 497,325 433,788
Interest expense
Deposits 179,639 160,076 160,138
Federal funds purchased and securities sold
under agreements to repurchase 22,185 18,592 20,995
Other short-term borrowings 10,390 6,543 3,911
Long-term debt 9,147 8,224 10,046
Total interest expense 221,361 193,435 195,090
Net interest income 341,625 303,890 238,698
Provision for credit losses 13,278 13,383 14,308
Net interest income after
provision for credit losses 328,347 290,507 224,390
Noninterest income
Trust fees and commissions 14,201 13,627 11,819
Service charges on deposit accounts 39,536 36,588 30,882
Other service charges, fees and commissions 48,785 41,079 30,569
Other 11,991 10,720 8,501
Securities gains (losses) (1,067) 495 1,690
Total noninterest income 113,446 102,509 83,461
Noninterest expense
Salaries and employee benefits 142,512 128,886 104,024
Other 152,180 143,552 112,500
Total noninterest expense 294,692 272,438 216,524
Income before taxes 147,101 120,578 91,327
Provision for income taxes 43,930 37,391 27,955
Net income $103,171 $83,187 $63,372
Primary earnings per share $2.88 $2.50 $2.09
Fully diluted earnings per share 2.74 2.38 1.98
The accompanying notes are an integral part of the financial statements.
-34-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized
Securities
Common Capital Retained Gain
Dollars in thousands except per share data Stock Surplus Earnings (Loss) Total
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 -
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 -
206,254 shares 206 2,011 824 - 3,041
Tax benefit of stock options exercised - 475 - - 475
Unrealized gain on securities, net of tax - - - 9,083 9,083
Balance at December 31, 1993 34,719 304,413 275,351 9,083 623,566
Net income - - 103,171 - 103,171
Cash dividends declared -
$.76 per share - - (27,094) - (27,094)
Issuance of common stock -
381,039 shares 381 7,488 - - 7,869
Acquisitions -
1,639,687 shares 1,639 14,543 12,613 (1,048) 27,747
Conversion of subordinated debentures -
5,911 shares 6 103 - - 109
Tax benefit of stock options exercised - 1,332 - - 1,332
Unrealized loss on securities, net of tax - - - (20,931) (20,931)
Balance at December 31, 1994 $36,745 $327,879 $364,041 $(12,896) $715,769
The accompanying notes are an integral part of the financial statements
-35-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands for the year ended December 31, 1994 1993 1992
Cash flows from operating activities
Net income $103,171 $83,187 $63,372
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 13,278 13,383 14,308
Depreciation of premises and equipment 16,446 15,619 11,451
Amortization and accretion of premiums
and discounts 11,409 14,013 9,479
Amortization of intangible and other assets 11,743 12,741 8,547
Originations of real estate loans held for sale (274,119) (486,205) (304,612)
Proceeds from real estate and other loans sold 291,068 421,141 309,249
Net gain on sale of real estate loans (3,258) (1,931) (4,756)
Net (gain) loss on sale of securities 1,067 (495) (1,690)
Purchase of trading account securities (101,905) (37,550) (95,266)
Sale of trading account securities 102,578 38,087 104,315
Changes in assets and liabilities, net of effect of acquisitions:
Interest receivable (14,166) (156) 3,779
Other assets (7,428) (10,775) (7,027)
Other liabilities 577 7,557 4,290
Net cash provided by operating activities 150,461 68,616 115,439
Cash flows from investing activities
Change in short-term investments,
maturities less than 90 days (91,324) 177,186 4,776
Purchase of securities available for sale (609,658) (141,903) -
Maturity of securities available for sale 309,419 112,007 -
Sale of securities available for sale 264,278 82,043 -
Purchase of securities held to maturity (64,138) (453,933) (1,102,479)
Maturity of securities held to maturity 46,184 448,916 531,152
Sale of investment securities - 704 157,988
Change in net loans and leases (618,648) (746,376) (139,251)
Purchase of premises and equipment (15,431) (16,946) (14,162)
Sale of premises and equipment 346 1,034 677
Additions to intangible assets (9,556) (6,979) (9,455)
Sale of other real estate owned 8,861 9,712 10,960
Cash provided by acquisitions 176,918 2,019 370,159
Net cash used by investing activities (602,749) (532,516) (189,635)
-36-
Dollars in thousands for the year ended December 31, 1994 1993 1992
Cash flows from financing activities
Change in deposits 495,063 268,448 249,910
Change in short-term borrowings,
maturities less than 90 days 33,103 59,305 12,721
Proceeds from short-term borrowings 41,107 128,283 164,795
Payments on short-term borrowings (48,611) (100,605) (197,406)
Additions to long-term debt 145,000 27,500 5,474
Payments on long-term debt (14,385) (28,943) (4,501)
Proceeds from issuance of common stock 8,463 54,526 67,922
Cash dividends paid (25,259) (19,392) (15,130)
Net cash provided by financing activities 634,481 389,122 283,785
Net increase (decrease) in cash and due from banks 182,193 (74,778) 209,589
Cash and due from banks - January 1 450,384 525,162 315,573
Cash and due from banks - December 31 $632,577 $450,384 $525,162
Supplemental information
Interest paid $213,749 $195,094 $198,752
Income taxes paid 50,159 36,000 19,629
Noncash transactions
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 32,799 41,457 14,518
Loan charge-offs 18,999 16,156 19,445
Transfer of loans to other real estate owned 10,318 4,295 9,177
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 1,332 475 812
Dividends declared not paid 8,084 6,249 9,220
Acquisitions:
Securities and short-term investments 94,693 11,792 31,807
Net loans 122,266 21,469 913,432
Premises and equipment 7,045 612 24,631
Intangible assets 11,389 - 13,757
Deposits 378,772 32,260 1,342,021
Other liabilities, net 5,792 591 111
Equity 27,747 3,041 11,654
The accompanying notes are an integral part of the financial statements.
-37-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 16) reflect investment in subsidiaries
using the equity basis of accounting. Certain reclassifications have been made
to prior year financial statements to conform to the 1994 presentation. Assets
owned by others and held in a fiduciary or agency capacity by subsidiaries are
not included in the consolidated balance sheets.
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." 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 gains and losses 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
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
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. Any loans repurchased
are 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.
-38-
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
prepayment assumptions.
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.
New Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," SFAS No. 116, "Accounting for
Contributions Received and Contributions Made" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures,"
effective for years beginning after December 15, 1994. None of these
statements is expected to have a material effect on West One.
NOTE 2. ACQUISITIONS
West One acquired the financial institutions listed below in transactions
accounted for as poolings of interests. The acquisitions were not material to
West One's financial position, results of operations and cash flows and prior
year financial statements have not been restated.
Dollars in thousands
Year-to-date Year-to-date Total assets Number of
revenues at net income at at West One
Entity Acquired Acquisition Date acquisition acquisition acquisition shares
date date date exchanged
National Security Bank November 1994 $9,595 $1,701 $131,662 1,101,832
Valley Commercial Bank September 1994 2,803 255 63,576 404,523
Idaho State Bank January 1994 - - 47,949 133,332
Ben Franklin National Bank May 1993 2,171 (6) 36,531 206,254
Yakima Valley Bank October 1992 8,527 895 119,493 913,694
West One acquired ten Far West Federal Savings Bank branches in Oregon from
Resolution Trust Corporation in April 1994. The transaction included the
receipt of $159,814 in cash, $2,257 of premises and equipment, $11,249 of
intangible assets, and the assumption of $173,320 of deposits and other
liabilities. The transaction was accounted for as a purchase of certain assets
and assumption of certain liabilities.
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, the purchase of
approximately $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, the purchase of approximately $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.
-39-
NOTE 3. SECURITIES
Gross Gross Estimated
Amortized unrealized unrealized market
Dollars in thousands cost gains losses value
1994
AVAILABLE FOR SALE
United States Treasury securities $371,139 $5 $(8,774) $362,370
United States Government agencies 389,355 4,498 (2,186) 391,667
Mortgage-backed securities 240,916 107 (13,550) 227,473
Other 159,429 88 (1,262) 158,255
Total available for sale 1,160,839 4,698 (25,772) 1,139,765
HELD TO MATURITY
State and municipal bonds 581,155 4,958 (17,625) 568,488
Total securities $1,741,994 $9,656 $(43,397) $1,708,253
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
Gross gains of $521 and gross losses of $1,588 were realized on 1994 sales.
Gross gains of $678 and gross losses of $183 were realized on 1993 sales.
Securities having book values of $1,409,755 and $1,342,023 at December 31, 1994
and 1993, respectively, were pledged as collateral for public and trust
deposits, United States Treasury borrowings and securities sold under
agreements to repurchase.
-40-
Contractual maturities of securities at December 31, 1994 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 $118,757 $243,613 $ - $ - $ - $362,370
Government agencies 22,762 49,012 50,579 269,314 - 391,667
Mortgage-backed securities - - - - 227,473 227,473
Other 34,716 49,891 18,067 55,581 - 158,255
Total market value 176,235 342,516 68,646 324,895 227,473 1,139,765
Total amortized cost 177,184 352,263 68,706 321,771 240,915 1,160,839
Average yield 5.68% 5.58% 7.53% 6.58% 6.75% 6.23%
Held to maturity
State and municipal bonds at cost $33,215 $228,176 $291,653 $28,111 - $581,155
Total market value 33,241 225,494 282,561 27,192 - 568,488
Average yield 5.22% 5.53% 5.50% 6.25% - 5.53%
-41-
NOTE 4. ALLOWANCE FOR CREDIT LOSSES
Dollars in thousands 1994 1993 1992
Balance at January 1 $74,923 $68,243 $53,048
Loan charge-offs
Real estate 379 1,141 1,292
Commercial and agricultural 5,286 4,804 8,111
Consumer 13,164 9,802 9,597
Leases 170 409 445
Total charge-offs 18,999 16,156 19,445
Loan recoveries
Real estate 366 468 421
Commercial and agricultural 3,559 4,496 4,298
Consumer 4,740 3,970 4,641
Leases 107 169 264
Total recoveries 8,772 9,103 9,624
Net charge-offs 10,227 7,053 9,821
Provision for credit losses 13,278 13,383 14,308
Additions from acquisitions 3,783 350 10,708
Balance at December 31 $81,757 $74,923 $68,243
NOTE 5. PREMISES AND EQUIPMENT
Dollars in thousands 1994 1993
Land $34,687 $33,030
Buildings 93,911 85,040
Furniture and equipment 95,138 87,053
Leasehold improvements 13,719 12,103
237,455 217,226
Accumulated depreciation and amortization (108,949) (94,398)
Net premises and equipment $128,506 $122,828
-42-
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 included in net occupancy and equipment expense was $10,283 in
1994, $10,434 in 1993 and $7,506 in 1992. Occupancy expense was reduced by
rental income of $2,088 in 1994, $2,169 in 1993 and $2,283 in 1992.
At December 31, 1994, future minimum lease payments under long-term
noncancelable operating leases were $10,377 in 1995, $8,568 in 1996, $7,122 in
1997, $5,458 in 1998, $3,537 in 1999 and $33,565 thereafter. Management expects
to renew or replace expiring leases in the normal course of business
NOTE 6. MORTGAGE BANKING
Dollars in thousands 1994 1993 1992
REAL ESTATE LOANS ORIGINATED AND SERVICED
Sold with servicing released $221,458 $299,690 $304,493
Held for sale 28,523 76,625 50,988
Serviced for others 2,083,452 1,506,612 1,354,599
PURCHASED MORTGAGE SERVICING RIGHTS
Balance at January 1 $13,797 $10,884 $6,736
Additions 9,556 6,969 5,545
Amortization (2,894) (4,056) (1,397)
Balance at December 31 $20,459 $13,797 $10,884
NOTE 7. SHORT-TERM BORROWINGS
1994 1993 1992
Dollars in thousands Amount Interest rate Amount Interest rate Amount Interest rate
Federal funds purchased and securities
sold under agreements to repurchase
Balance at December 31 $804,161 5.55 % $568,295 2.68 % $668,631 2.75 %
Average 576,968 3.85 665,106 2.80 624,864 3.36
Maximum month-end balance 804,161 735,046 688,689
Other short-term borrowings
Balance at December 31 122,153 4.66 330,609 2.68 141,392 2.56
Average 254,240 4.09 215,389 3.04 111,179 3.52
Maximum month-end balance 500,547 434,910 244,765
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 and
bank notes. Unused lines of credit aggregating $45,000 at December 31, 1994
were maintained with banks in support of commercial paper. The lines bear
interest at short-term money market rates, if drawn upon. The lines required
commitment fees of $83, $84, and $76 in 1994, 1993 and 1992, respectively.
-43-
NOTE 8. LONG-TERM DEBT
Dollars in thousands 1994 1993
Parent company
Convertible subordinated debentures at 7.75% due 2006,
interest payable semi-annually $49,890 $50,000
Convertible subordinated capital notes at 1/4% above the
three-month LIBOR due 1997, interest payable quarterly 20,987 20,983
Capital lease obligations at 10%, payable in monthly installments
through 1997 3,754 6,821
Subsidiaries
Federal Home Loan Bank Notes with interest payable monthly at floating
and fixed rates ranging from 3.98% to 7.95% and with principal
due 1995 through 2004 178,233 38,029
Other 209 627
Total $253,073 $116,460
Scheduled reductions of debt are $40,150 in 1995, $86,379 in 1996, $72,869 in
1997, $815 in 1998, $817 in 1999 and $52,043 thereafter including reductions of
Parent Company debt of $3,387 in 1995, $273 in 1996, $21,081 in 1997 and
$49,890 in 2006. The convertible subordinated debentures are convertible into
shares of common stock of West One at a conversion price of $18.605 per share,
and are callable by West One at a redemption price ranging from 104.650 in 1995
to 100.775 in 2000. 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 6.25% at December
31, 1994 and 5.25% at December 31, 1993. The debt agreements limit
indebtedness and sale of subsidiaries' stock.
-44-
NOTE 9. COMMITMENTS AND CONTINGENCIES
West One is a party to certain financial instruments to meet the financing
needs of customers and to reduce exposure to interest rate risk. The following
is a summary of the contract or notional amount of these financial instruments,
all of which were held or issued for purposes other than trading, as of
December 31.
Dollars in thousands 1994 1993
Financial instruments with credit risk
up to contract amounts (a)
Commitments to extend credit $2,858,143 $2,260,507
Standby letters of credit 177,349 188,029
Commercial letters of credit 30,353 25,527
Financial instruments with credit risk less
than contract or notional amounts
Mortgage-backed security contracts (b):
Forward sales 6,500 32,500
Purchased options 2,000 9,000
Notional value of interest rate swaps (b): 534,556 -
Foreign exchange contracts (c):
Commitments to purchase 3,492 5,422
Commitments to sell 7,608 1,500
(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) The 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. The option premium paid, which represents
loss exposure, is amortized over the life of the option.
Interest rate swaps are principally used to hedge interest rate risks
associated with certain loans and deposits and are accounted for on the accrual
method of accounting. The principal swap, which matures in 1999, requires
payment of prime less 2.535% and receipt of the three month London Interbank
Offering Rate (LIBOR) with caps, which increase 25 basis points per quarter, on
the notional amount of $500,000.
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, 1994 and 1993.
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.
-45-
NOTE 10. 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.
At December 31, 1994 and 1993 securities available for sale were stated at
market and the resulting net after-tax unrealized loss of $12,896 and gain of
$9,083, respectively are 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.
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 acquirer 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. The following summary sets
forth the activity under the option plan:
Option price Available Options
range per share for grant outstanding
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
Granted 24.750 - 32.000 (322,744) 322,744
Exercised 6.629 - 25.938 - (177,645)
Canceled 11.438 - 26.375 32,750 (32,750)
Expired 11.438 - 13.938 (4,750) -
December 31, 1994 8.083 - 32.000 1,043,463 1,359,944
Options excercisable under the plans were 662,319, 599,880 and 516,668 at
December 31, 1994, 1993 and 1992, respectively.
-46-
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
1994 1993
Dollars in thousands Book Estimated Book Estimated
value fair value value fair value
Financial assets
Cash and short-term investments $745,093 $745,093 $465,038 $465,038
Securities:
Available for sale 1,139,765 1,139,765 1,060,650 1,060,650
Held to maturity 581,155 568,488 565,165 595,146
Loans, net of leases and allowance for credit losses 5,822,793 5,798,565 5,111,455 5,149,693
Financial liabilities
Demand and savings deposits $4,234,316 $4,234,316 $3,961,327 $3,961,327
Time certificates of deposit 2,576,566 2,351,241 1,975,720 1,994,389
Short-term borrowings 926,314 926,314 898,904 898,904
Long-term debt 253,073 272,909 116,460 146,675
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. The value of long-term relationships with depositors (core deposit
intangibles) is not reflected and such value is significant. Changes in the
following methodologies and assumptions could significantly affect the
estimates.
Financial Assets
The estimated fair value of cash and short-term investments approximates the
book value. For securities, the fair value is based on quoted market prices at
December 31. The fair value of loans is estimated by discounting future cash
flows using current rates at which similar categories of 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 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, letters of credit and interest rate swaps
represent the principal categories of off-balance sheet financial instruments.
See Note 9 to the financial statements. The fair value of West One's
commitments to extend credit, letters of credit, forward sale, purchased option
and foreign exchange contracts are not material. The interest rate swaps hedge
interest rate risks associated with certain prime-related assets and supporting
deposits as a part of West One's interest rate risk management strategy. The
present value of the interest rate swaps using discounted cash flows and
assuming interest rates at December 31, 1994 remain constant is a liability of
$4.3 million. Based on implied forward interest rates at December 31, 1994, an
exit cost (fair value) of $34.9 million would be incurred to terminate the
contracts. These contracts are part of a continuing asset and liability risk
management strategy, and West One currently has no intent to exit the
contracts.
-47-
NOTE 12. 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 1994, 1993 or 1992.
Pension (income) expense included the following components for the
year ended December 31:
Dollars in thousands 1994 1993 1992
Service cost $3,576 $2,319 $1,819
Interest cost 4,544 3,788 3,342
Actual return on plan assets 2,455 (4,618) (4,617)
Deferred loss (9,841) (1,912) (1,408)
Amortization (654) (725) (725)
Pension (income) expense $80 $(1,148) $(1,589)
The funded status of the plan and pension asset at December 31
consisted of:
1994 1993 1992
Actuarial present value of accumulated benefit obligation
Vested $(43,396) $(44,497) $(27,202)
Nonvested (2,663) (2,891) (1,592)
Accumulated benefit obligation $(46,059) $(47,388) $(28,794)
Plan assets at fair value
U.S. Government securities $16,321 $16,563 $19,416
Equity securities 38,449 40,199 32,935
Other 10,133 11,963 12,927
Total 64,903 68,725 65,278
Projected benefit obligation (55,566) (54,489) (38,030)
Plan assets in excess of projected benefit obligations 9,337 14,236 27,248
Unrecognized net (gain) loss 11,102 6,892 (6,238)
Unrecognized net transition asset (3,842) (4,610) (5,379)
Unrecognized prior service cost 101 260 -
Pension asset $16,698 $16,778 $15,631
-48-
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.
Pension expense for the supplemental retirement plans included the following
for the year ended December 31:
1994 1993 1992
Supplemental Executive Retirement Plan (SERP) $323 $316 $303
Non-Qualified IRC 415 Benefit Limit Make-Up 14 16 51
Executive Deferred Compensation Pension Make-Up 77 38 26
Total supplemental pension expense $414 $370 $380
Pension expense for the SERP included the following components for the year
ended December 31:
1994 1993 1992
Service cost $151 $113 $115
Interest cost 130 154 139
Amortization 42 49 49
Pension expense $323 $316 $303
The status of the SERP and pension liability at December 31 consisted of:
1994 1993 1992
Actuarial present value of accumulated benefit obligations:
Vested $(1,051) $(1,747) $(642)
Nonvested - (6) -
Accumulated benefit obligation $(1,051) $(1,753) $(642)
Projected benefit obligation $(1,609) $(2,185) $(1,596)
Unrecognized net (gain) loss (603) 320 (29)
Unrecognized net transition obligation 536 584 633
Unrecognized prior service cost 141 - -
Additional liability - (472) -
Pension liability $(1,535) $(1,753) $(992)
-49-
Assumptions used for projected benefit obligations, computed using the
projected unit credit method, were:
1994 1993 1992
Discount rate 8.75 % 7.50 % 9.50 %
Rate of increase in compensation levels 4.00 3.00 6.00
Long-term rate of return on assets 10.00 10.50 10.50
A change in method for determining the market-related value of plan assets
decreased pension expense $313 in 1994. 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.
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 1994 and 1993, and 5% of salary in 1992 aggregating $2,744 for 1994,
$2,384 for 1993 and $1,566 for 1992.
West One provides certain health care insurance benefits for retired employees
and their dependents (postretirement benefits). 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.
Postretirement benefit expense included the following components for the year
ended December 31:
1994 1993
Service cost $243 $165
Interest cost 968 959
Amortization 590 554
Postretirement benefit expense $1,801 $1,678
The reconciliation of the status of the plan at December 31 follows:
1994 1993
Accumulated postretirement benefit obligation:
Retirees and dependents $(8,234) $(10,477)
Eligible active employees 218 243
Other active plan participants (3,239) (3,122)
Accumulated postretirement benefit obligation (11,255) (13,356)
Unrecognized net transition obligation 9,965 10,519
Unrecognized net (gain) loss (596) 1,884
Accrued postretirement benefit liability $(1,886) $(953)
Postretirement benefit claims for the year $868 $725
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In 1994 West One assumed a 13% 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, 1994 by $1,107 and the aggregate of the service cost and interest
cost components of net periodic postretirement benefit expense for 1994 by
$153.
The discount rate used in determining the actuarial present value of the
projected postretirement benefit obligation was 8.75%. 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.
NOTE 13. NONINTEREST EXPENSE
Dollars in thousands for the year ended December 31, 1994 1993 1992
Salaries $114,916 $104,737 $85,741
Employee benefits 27,596 24,149 18,283
Outside services 31,977 28,242 21,590
Equipment 21,942 21,725 17,174
Net occupancy 20,604 19,571 15,255
Insurance and miscellaneous taxes 19,224 16,899 13,506
Marketing 10,331 9,792 7,975
Postage and courier 9,756 8,568 6,344
Supplies 7,453 7,364 5,989
Telephone 7,515 6,551 4,739
Other 23,378 24,840 19,928
Total $294,692 $272,438 $216,524
NOTE 14. INCOME TAXES
The provision for income taxes consisted of the following for the year ended
December 31:
Dollars in thousands 1994 1993 1992
Federal
Current $42,257 $29,480 $20,136
Deferred (5,225) 1,006 2,925
State
Current 6,773 6,329 4,621
Deferred 125 576 273
Total federal and state $43,930 $37,391 $27,955
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Deferred taxes were as follows for the year ended December 31:
1994 1993 1992
Provision for credit losses $ 300 $(2,218) $(926)
Depreciation and amortization (3,358) (778) (674)
Cash basis accounting (493) (1,288) (289)
Leasing (2,947) 2,546 2,745
Alternative minimum tax - - 1,154
Other 889 1,861 102
Use of subsidiary preacquisition tax carryforwards
to reduce purchased intangibles 509 1,459 1,086
Total deferred taxes $(5,100) $1,582 $3,198
The provision for income taxes varied from amounts computed at the federal
statutory rate as follows for the year ended December 31:
1994 1993 1992
Provision at statutory rate $51,485 35.0 % $42,202 35.0 % $31,051 34.0 %
Nontaxable interest income (12,041) (8.2) (10,473) (8.7) (7,045) (7.7)
State income taxes, net of federal
benefit 4,484 3.1 4,367 3.6 3,230 3.5
Other 2 - 1,295 1.1 719 .8
Provision for income taxes $43,930 29.9 % $37,391 31.0 % $27,955 30.6 %
The components of net deferred taxes are as follows for the year ended December
31:
1994 1993
Deferred tax assets
Allowance for credit losses $30,226 $29,491
Cash basis accounting 6,677 6,283
Unrealized securities losses 8,178 -
Other 3,098 3,744
Total deferred tax assets 48,179 39,518
Deferred tax liabilities
Depreciation and amortization (4,516) (7,712)
Leasing (24,881) (27,828)
Pension and retirement benefits (5,743) (6,492)
Purchase accounting (2,685) (2,170)
Unrealized securities gains - (5,990)
Other (2,521) (2,040)
Total deferred tax liabilities (40,346) (52,232)
Net deferred tax asset (liability) $7,833 $(12,714)
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A subsidiary has preacquisition net operating loss carryforwards remaining of
$1,954 which expire through 2008.
The corporation recorded tax benefits of $1,332, $475 and $812 for executive
stock option exercises in 1994, 1993 and 1992, respectively. The tax benefits
have been allocated to shareholders' equity. In 1994 the deferred benefit for
income taxes of $13,319 for unrealized securities losses has been allocated to
shareholders' equity.
Deferred tax liabilities of $2,133 have not been recognized for a thrift
subsidiary's base year tax bad debt reserve of $5,359. 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.
NOTE 15. REGULATORY REQUIREMENTS AND RESTRICTIONS
Regulatory authorities require banks to maintain cash reserves against
deposits. These reserves vary according to the type and maturity of the
deposit. Cash reserve balances at December 31, 1994 and 1993 were $152,312 and
$144,998, respectively.
Federal and state laws 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
$100,475 to the Parent Company and nonbank affiliates as of December 31, 1994.
Any extensions of such credit are subject to strict collateral requirements.
Federal and state laws also 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 1995 up to $170,440 plus 1995 net income to the date of dividend
declaration.
Credit extensions to directors, executive officers and their associates, which
are within regulatory limitations, are as follows:
Dollars in thousands 1994 1993
Balance at January 1 $74,849 $73,910
Increases 91,621 53,644
Decreases 77,746 52,705
Balance at December 31 $88,724 $74,849
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NOTE 16. PARENT COMPANY ONLY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
Dollars in thousands At December 31, 1994 1993
Assets
Cash and due from banks $122 $430
Loans and advances to subsidiaries:
Banks 55,025 47,475
Nonbanks 22,519 15,375
Investment in subsidiaries:
Banks 669,497 607,766
Nonbanks 5,344 5,351
Other loans and investments 22,261 19,563
Premises and equipment 15,972 19,455
Other assets 40,695 40,900
Total assets $831,435 $756,315
Liabilities
Commercial paper $ - $20,162
Long-term debt 74,631 77,804
Other liabilities 41,035 34,783
Total liabilities 115,666 132,749
Shareholders' equity 715,769 623,566
Total liabilities and shareholders' equity $831,435 $756,315
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CONDENSED STATEMENTS OF INCOME
Dollars in thousands for the year ended December 31, 1994 1993 1992
Income
Dividends from subsidiaries:
Banks $65,513 $40,521 $41,650
Nonbanks 1,934 1,412 1,830
Interest:
Loans and advances to subsidiaries 4,080 3,212 2,516
Loans and short-term investments - nonaffiliates 1,298 497 763
Other, principally subsidiaries 87,711 79,564 54,975
Total income 160,536 125,206 101,734
Expense
Interest 6,351 8,345 9,845
Salaries and employee benefits 42,320 40,366 30,203
Other 55,492 51,799 45,045
Total expense 104,163 100,510 85,093
Income before taxes and equity in earnings of subsidiaries 56,373 24,696 16,641
Income tax benefit 5,654 7,016 10,327
Equity in undistributed earnings of subsidiaries 41,144 51,475 36,404
Net income $103,171 $83,187 $63,372
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STATEMENTS OF CASH FLOWS
Dollars in thousands for the year ended December 31, 1994 1993 1992
Cash flows from operating activities
Net income $103,171 $83,187 $63,372
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (41,144) (51,475) (36,404)
Depreciation and amortization 11,045 10,296 7,623
Changes in assets and liabilities 1,639 (7,094) (107)
Net cash provided by operating activities 74,711 34,914 34,484
Cash flows from investing activities
Change in other short-term investments, maturities less than 90 days 157 (15,878) 9,567
Purchase of securities held to maturity (20,000) (3,416) (54,643)
Maturity of securities held to maturity - 6,139 51,053
Sale of securities 2,155 - 17,894
Change in loans to subsidiaries (2,144) (23,950) (9,279)
Change in loans to nonaffiliates 2,364 320 4,582
Other (2,156) (3,432) (3,429)
Capitalization of subsidiaries (14,864) (6,685) (114,211)
Net cash used by investing activities (34,488) (46,902) (98,466)
Cash flows from financing activities
Change in short-term borrowings, maturities less than 90 days (15,878) (1,416) 14,259
Proceeds from short-term borrowings 4,162 13,200 -
Payments on short-term borrowings (8,952) (7,000) -
Payments on long-term debt (3,067) (27,566) (4,189)
Proceeds from issuance of common stock 8,463 54,526 67,922
Cash dividends paid (25,259) (19,392) (15,130)
Net cash provided (used) by financing activities (40,531) 12,352 62,862
Net increase (decrease) in cash and due from banks (308) 364 (1,120)
Cash and due from banks - January 1 430 66 1,186
Cash and due from banks - December 31 $122 $430 $66
Supplemental information
Interest paid $4,395 $8,737 $9,936
Income taxes paid 50,381 36,260 19,325
Noncash transactions
Additions to investment in subsidiaries 27,609 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 1,332 475 812
Dividends declared not paid 8,084 6,249 9,220
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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, 1994 and 1993, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1994. 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, 1994 and 1993 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994, 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 & Lybrand L.L.P.
Boise, Idaho
January 19,1995
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