<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report October 1, 1998
Commission File Number 1-6906
FIRST SECURITY CORPORATION
(Exact name of registrant as specified in its charter)
State of incorporation Delaware
I.R.S. Employer Identification No. 87-6118148
Address of principal executive offices 79 South Main, P.O. Box 30006
Salt Lake City, Utah
Zip Code 84130-0006
Registrant's telephone number, including area code (801) 246-5706
Item 5. Other Information
On October 1, 1998, First Security Corporation (FSCO) restated the financial
data for its previously released Annual Report on Form 10-K for the year ended
December 31, 1997 in order to reflect the pooling-of-interests merger with
California State Bank on May 30, 1998. A copy of this restated financial data,
including an independent auditors' report on the related financial statements,
is attached to this report as Exhibit A.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST SECURITY CORPORATION
(Registrant)
/s/ Scott C. Ulbrich October 1, 1998
__________________________________________________________ __________________
Scott C. Ulbrich (Date)
Executive Vice President, Finance and Capital Markets
and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT A
FIRST SECURITY CORPORATION (FSCO) - INDEX
Part I
1 Business
1a General Development of Business
1c Narrative Description of Business
Competitive Position
Employment
Executive Officers (incorporated by reference from FSCO's Proxy Statement
dated March 18, 1998)
1d Financial Information About Foreign and Domestic Operations
Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
Analysis of Interest Changes Due to Volumes and Changes in Rates
Investment Portfolio
Loan Portfolio
A. Types of Loans
B. Maturities and Sensitivities to Changes in Interest Rates
C. Risk Elements
D. Other Interest-Bearing Assets
Summary of Loan Loss Experience
Deposits
Return on Equity and Return on Assets
Short-Term Borrowings
2 Properties
Part II
5 Market for Registrant's Common Equity and Related Security Holder Matters
6 Selected Financial Data
7 Management's Discussion and Analysis of Results of Operations and
Financial Condition
8 Financial Statements and Supplementary Data
Part IV
14a Exhibits and Financial Statement Schedules:
1. Report of Independent Certified Public Accountants
Consolidated Balance Sheets
December 31, 1997 and 1996
Consolidated Statements of Income
for the Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1995, 1996, and 1997
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
2. Exhibit Index
Exhibit 11, Computation of Earnings Per Share.
Exhibit 21, Subsidiaries.
Exhibit 23, Consent of Independent Certified Public Accountants:
Deloitte & Touche LLP.
Exhibit 27.1, Financial Data Schedule (with Restated Periods).
Exhibit 27.2, Financial Data Schedule (with Restated Periods).
14b Reports on Form 8-K:
Item 5. Filed on July 20, 1998:
On July 20, 1998, FSCO issued a press release announcing its earnings and
other financial data for the first six months of 1998.
Item 5. Filed on October 1, 1998:
On September 23, 1998, FSCO issued a press release announcing the signing
of a definitive agreement to acquire Van Kasper & Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following pages contain the First Security Corporation (FSCO) "Management's
Discussion and Analysis of Results of Operations and Financial Condition" (MDA)
for 1997, including comparisons with prior years' results and identification of
possible risks and trends.
THIS MDA SHOULD BE READ IN CONJUNCTION WITH FSCO'S CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
IMPORTANT NOTICES:
* All FSCO financial statements have been restated for:
1. two separate 3-for-2 common stock splits in the form of 50% stock
dividends, paid in May 1997 and February 1998 (see: "Common and Preferred
Stock").
2. the May 30, 1998, acquisition of California State Bank (CSB) in a
pooling-of-interests merger (see: "Mergers and Acquisitions"; "Note 1:
Summary Of Significant Accounting And Reporting Policies"; and "Note 15:
Mergers and Acquisitions").
* As required by SFAS No. 128, "Earnings Per Share", earnings per common share
(EPS) primary has been restated to EPS basic; and EPS fully diluted has been
restated to EPS diluted (see: "Note 1: Summary Of Significant Accounting And
Reporting Policies"; and "Note 12: Stockholders' Equity").
* As required by applicable accounting rules, all 1992 amounts used to
calculate five-year compound growth rates were restated in 1993 to reflect
the 1993 pooling-of-interests merger with First National Financial Corp., and
the adoption of SFAS 109 "Accounting for Income Taxes", which was applied
retroactively.
* Five-year compound growth rates shown on tables throughout this MDA may not
represent actual trends due to acquisitions and certain nonrecurring events.
FORWARD-LOOKING STATEMENTS
Except for the historical information in this document, the matters described
herein are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. FSCO cautions readers not to place
undue reliance on any forward-looking statements, which speak only as of the
date made.
FSCO advises readers that various risks and uncertainties could affect FSCO's
financial performance and could cause FSCO's actual results for future periods
to differ materially from those anticipated or projected. These risks and
uncertainties include, but are not limited to, those related to: the economic
environment, particularly in the regions where FSCO operates; competitive
products and pricing; changes in prevailing interest rates; credit and other
risks of lending and investment activities; fiscal and monetary policies of the
U.S. and other governments; regulations affecting financial institutions;
acquisitions and the integration of acquired businesses; technology and
associated risks; and other risks and uncertainties affecting FSCO's operations
and personnel.
Be advised that FSCO, as part of its core business, regularly evaluates the
potential acquisition of, and holds discussions with, prospective acquisition
candidates, which candidates may conduct any type of businesses permissible for
a bank holding company and its affiliates. FSCO's discussions in this document
are subject to the changes that may result if any such acquisition transaction
is completed. FSCO restates its guiding principle that it will not comment on
or publicly announce any such acquisition until after a binding and definitive
acquisition agreement has been reached.
FSCO specifically disclaims any obligation to update any forward-looking
statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
TABLE OF CONTENTS:
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Important Notices
Forward-Looking Statements
Glossary
Table 1: Financial Highlights - Five-Year Summary
Highlights
Operating Subsidiaries
Table 2: Consolidating Statements
Line of Business Segments
Analysis of Statements of Income:
Earnings Summary
Net Interest Income and Net Interest Margin
Table 3: Average Balance Sheets, Net Interest Income, Yields And Rates
Table 4: Analysis of Interest Changes Due To Volumes And Rates
Provision For Loan Losses
Noninterest Income
Table 5: Noninterest Income
Noninterest Expenses
Table 6: Noninterest Expenses
Provision for Income Taxes
Analysis of Balance Sheets:
Summary
Interest-Earning Assets: Trading Account Securities
and Other Money Market Investments
Interest-Earning Assets: Available for Sale Securities
Table 7: Available for Sale Securities
Interest-Earning Assets: Loans
Table 8: Loans
Asset Quality: Problem Assets and Potential Problem Assets
Table 9: Problem Assets and Potential Problem Assets
Asset Quality: Reserve for Loan Losses
Table 10: Reconciliation of the Reserve for Loan Losses
Table 11: Allocation of the Reserve for Loan Losses
Asset Quality: Provision for Loan Losses
Asset/Liability Management
Asset/Liability Management: Liquidity
Table 12: Deposits
Table 13: Short-Term Borrowings
Table 14: Long-Term Debt
Asset/Liability Management: Market Risk Management
Asset/Liability Management: Interest Rate Risk -
Other Than Trading Account Securities
Asset/Liability Management: Interest Rate Risk - Trading Account Securities
Other Assets and Liabilities
Stockholders' Equity and Capital Adequacy
Table 15: Capital Ratios and Risk-Based Capital Ratios
Common and Preferred Stock
Off-Balance Sheet Items
Inflation Accounting and Capital Commitments
Table 16: Quarterly Financial Highlights
Mergers and Acquisitions
Factors That May Affect Future Results of Operations and Financial Condition
Technological Change and Year 2000 Computer Issue
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
GLOSSARY
AFS: Available For Sale. A classification of securities which may be sold as
part of the asset/liability management process.
ALCO: Asset/Liability Management Committees, comprised of senior FSCO officers.
The ALCO process identifies, assesses, and manages FSCO's capital adequacy, and
the liquidity and interest rate risk of FSCO's business lines.
BHCPR: Bank Holding Company Performing Report. A banking industry report
prepared by the Federal Reserve and used by FSCO to compare its performance
against that of its national peer group. Typically this report is not available
until 3 to 6 months after the reporting date.
Book Value Per Common Share: Common stockholders' equity divided by the number
of common shares outstanding, net of common treasury shares.
Capital Adequacy: Sufficient equity to support strategic plans while providing
an attractive rate of return for stockholders. Often measured by risk-based
capital ratios.
Derivatives: Financial instruments where the performance is derived from the
performance of another financial instrument or an interest rate, currency, or
other referenced index (see: "Note 11: Commitments, Contingent Liabilities, and
Financial Instruments with Off-Balance Sheet Risk").
Fair value: An approximation of current market value derived from carrying
value, market quotes, and discounted cash flow analysis.
FTE: Fully Taxable Equivalent. An adjustment made to interest income to
facilitate comparison of interest income earned on tax-exempt or tax-favored
loans, leases, and securities with interest earned subject to full taxation.
Gap: An asset/liability management measurement that assigns each interest-
earning asset and interest-bearing liability to a time frame reflecting its
next repricing or maturity date. The difference between total interest-
sensitive assets and liabilities at each time interval represents the interest
sensitivity "Gap" for that interval.
Intangible Assets: Goodwill, mortgage servicing rights, deposit-based
intangibles, and insurance intangibles.
Interest Rate Risk: The risk that changes in interest rates will cause
volatility in net interest income.
Leverage Ratio: Tier 1 capital divided by the sum of total assets minus
nonqualifying intangibles.
Liquidity: The ability to meet cash flow requirements at reasonable cost.
Market Capitalization: The market (bid) price of a share of common stock
multiplied by the number of shares of common stock outstanding, i.e., the
total market value of all outstanding common shares.
MSR: Mortgage Servicing Right. The asset value associated with the right to
service mortgage loans, classified as an intangible asset by the Federal
Reserve. MSR's are created when FSCO originates mortgage loans, or purchases
mortgage servicing rights through secondary markets.
NASDAQ: The National Association of Securities Dealers Automated Quotation
System's National Market System on which FSCO Common Stock is traded.
Net Interest Income: Interest income plus loan fees minus interest expense,
frequently adjusted to an FTE basis for analytical purposes.
Net Interest Margin: Net interest income FTE divided by average interest-
earning assets.
Net Interest Spread: The arithmetic difference between the FTE yield on
interest-earning assets and the rate paid on interest-bearing funds.
Nonaccruing Loans: Loans on which interest is not being accrued for income
statement purposes. Interest received on nonaccruing loans is reported on a
cash basis.
Nonperforming Assets: Nonaccruing loans plus renegotiated loans plus ORE.
Notional Amount: The contractual amount against which interest rates or other
indices are applied in the calculation of interest exchanges. Not a measurement
of principal at risk.
Operating Expense Ratio: Noninterest expenses divided by the sum of net
interest income FTE plus noninterest income. Also known as an "efficiency
ratio".
ORE: Other real estate owned. Also includes other foreclosed assets.
Potential Problem Loans: As defined by the SEC, potential problem loans are
performing loans that have characteristics that cause management to have
serious doubts about the borrower's ability to comply with the present loan
repayment terms. These loans are less than 90 days past due, and are accruing
interest.
Problem Assets: Nonperforming assets plus accruing loans past due 90 days or
more.
Productivity Ratio: Noninterest expenses divided by average total assets.
Provision For Loan Losses: A charge against income made to adjust the reserve
for loan losses to a desired level to cover potential future loan losses.
Reserve For Loan Losses: An adjustment made to loans to recognize estimated
future loan chargeoffs. All loan losses are charged against this reserve as
they become probable and subject to reasonable estimation. Recoveries of
amounts previously charged off are credited to this reserve. The reserve is
adjusted by means of the provision for loan losses.
Risk-Based Capital Ratios: Equity measurements used by regulatory agencies to
assess a bank's capital adequacy. These ratios are: Tier 1 Capital divided by
risk-adjusted assets; and Total Capital divided by risk-adjusted assets.
ROAA: Return on average assets. Net income divided by average total assets.
ROAE: Return on average equity. Net income divided by average total
stockholders' equity.
S&Ls: Savings and loan financial institutions.
SEC: The Securities and Exchange Commission.
SFAS: Statement of Financial Accounting Standards. Accounting pronouncements
issued by the Financial Accounting Standards Board.
Shock Analysis: An evaluation of the securities portfolios against small and
large movements in interest rates, which are assumed to be instantaneous and
parallel, and other spread factors that may affect the value of the portfolio.
Tangible Common Equity Ratio: Common stockholders' equity minus intangible
assets, divided by the sum of total assets minus intangible assets.
Tier 1 Capital: Stockholders' equity plus certain capital securities and
minority equity in subsidiaries, minus goodwill and deposit-based intangibles.
Tier 2 Capital: Reserves for loan losses up to 1.25% of risk-adjusted assets
plus qualifying subordinated debt.
Total Capital: The sum of Tier 1 plus Tier 2 Capital.
<PAGE>
<TABLE>
TABLE 1: FINANCIAL HIGHLIGHTS - FIVE YEAR SUMMARY (in thousands, except per share data & ratios)
<CAPTION>
5-Year
Compound
97/96 Growth
1997 1996 1995 1994 1993 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------- --------
Common & Preferred Stock Data:
Earnings per common share: basic 1.18 1.03 0.71 0.83 0.70 14.6 12.7
Earnings per common share: diluted 1.14 1.00 0.69 0.81 0.68 14.0 12.6
Tangible EPCS: diluted 1.23 1.09 0.77 0.88 0.70 12.8 13.6
Dividends paid per common share 0.44 0.38 0.33 0.31 0.26 15.7 17.0
Book value per common share [EOP] 7.59 6.72 6.13 5.36 5.16 12.9 9.8
Tangible book value per common share [EOP] 6.05 5.68 5.26 4.38 5.08 6.5 5.4
Market price (bid) [EOP] 27.917 15.167 11.259 6.741 7.630 84.1 28.2
High bid for the period 27.917 15.167 11.259 9.481 8.963 84.1 27.9
Low bid for the period 14.222 10.167 6.519 6.370 7.111 39.9 21.4
Market capitalization (mktprice x #shrs) [EOP] 5,148,509 2,748,928 1,988,655 1,178,172 1,303,616 87.3 31.7
Market price / book value per com share [EOP] % 367.81 225.70 183.67 125.76 147.87
Dividend payout ratio (DPCS / EPCS: basic) % 37.46 37.09 46.76 37.11 37.29
Dividend yield (DPCS / mktprice) [EOP] % 1.58 2.52 2.95 4.57 3.42
Price / earnings ratio (mktprice / EPCS: basic) 23.7x 14.7x 15.9x 8.1x 10.9
Common shares: basic [EOP] 184,422 181,244 176,628 174,777 170,854 1.8 2.7
Common shares: basic [Avg] 182,240 179,767 176,082 172,597 165,075 1.4 2.7
Common shares: diluted [Avg] 188,739 185,000 180,025 176,448 169,441 2.0 2.8
Common shareholders of record(not rounded)[EOP] 10,786 10,843 10,222 9,921 9,748 (0.5) 3.7
Preferred shares [EOP] 10 10 11 12 13 -- (7.8)
Prefer shareholders of record(not rounded)[EOP] 497 541 588 634 671 (8.1) (7.7)
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------- --------
Income Statement:
Interest income 1,213,378 1,039,391 974,015 801,659 668,086 16.7 12.2
Interest expense 587,439 485,328 469,812 322,035 246,816 21.0 15.3
Net interest income 625,939 554,063 504,203 479,624 421,270 13.0 9.7
Fully taxable equivalent (FTE) adjustment 10,492 7,822 8,382 7,937 7,633 34.1 1.7
Net interest income, FTE 636,431 561,885 512,585 487,561 428,903 13.3 9.5
Provision for loan losses 63,386 41,300 22,682 1,545 13,004 53.5 15.5
Noninterest income 357,157 306,444 270,638 202,043 171,821 16.5 19.1
Noninterest expenses 588,904 531,219 555,192 455,322 405,806 10.9 10.6
Provision for income taxes 115,532 103,516 72,336 81,098 59,021 11.6 17.2
Net income 215,274 184,472 124,631 143,702 115,260 16.7 15.8
Preferred stock dividend requirement 30 33 35 39 43 (9.1) (9.0)
Common stock dividend 77,955 66,775 57,375 52,474 39,980 16.7 23.6
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------- --------
Balance Sheet - End of Period:
Trading account securities 255,320 447,486 638,393 553,826 607,854 (42.9) (8.1)
Available for sale (AFS) securities 4,351,525 3,324,797 2,733,631 2,352,910 1,859,028 30.9 18.9
Memo: fair value adjustment for AFS securities 37,678 1,687 22,932 (88,509) -- 2133.4 NM
Loans, net of unearned income 11,230,766 9,697,351 8,616,763 8,442,282 6,744,786 15.8 14.0
Reserve for loan losses (157,525) (142,693) (135,011) (138,107) (138,051) 10.4 3.8
Total interest-earning assets 16,044,477 13,752,286 12,175,603 11,410,389 9,630,639 16.7 13.9
Intangible assets 285,156 187,427 153,429 171,234 13,571 52.1 76.6
Total assets 18,151,783 15,456,649 13,529,699 12,602,149 10,553,834 17.4 14.5
Noninterest-bearing deposits 2,431,006 2,423,596 2,015,487 1,834,861 1,767,175 0.3 10.2
Interest-bearing deposits 8,986,628 7,679,411 7,187,357 6,607,174 6,029,696 17.0 9.7
Total deposits 11,417,634 10,103,007 9,202,844 8,442,035 7,796,871 13.0 9.8
Short-term borrowed funds 3,605,199 2,833,368 2,207,989 2,360,149 1,486,905 27.2 29.3
Long-term debt 1,304,463 944,055 720,521 685,426 224,836 38.2 59.3
Total interest-bearing liabilities 13,896,290 11,456,834 10,115,867 9,652,749 7,741,437 21.3 15.4
Preferred stockholders' equity 501 540 571 629 703 (7.2) (8.5)
Common stockholders' equity 1,400,345 1,217,300 1,082,424 936,739 881,555 15.0 12.8
Parent company investment in subsidiaries 1,555,112 1,283,229 1,124,052 980,632 787,712 21.2 17.8
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------- --------
Problem Assets & Potential Problem Assets - End of Period:
Total nonaccruing loans 36,876 35,750 24,660 26,103 42,690 3.1 (14.8)
Other real estate 7,981 10,672 12,206 9,606 26,330 (25.2) (27.2)
Total nonperforming assets 44,857 46,422 36,866 35,709 69,020 (3.4) (18.0)
Accruing loans past due 90 days or more 20,841 20,393 13,622 12,323 7,535 2.2 11.2
Total problem assets 65,698 66,815 50,488 48,032 76,555 (1.7) (13.2)
Potential problem assets 7,423 8,271 12,319 12,018 19,179 (10.3) (20.2)
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------- --------
Reconciliation of the Reserve for Loan Losses:
Reserve for loan losses, beginning 142,693 135,011 138,107 138,051 130,649 5.7 1.9
Total loans charged off (86,195) (64,209) (53,865) (39,117) (41,483) 34.2 10.2
Total recoveries of loans charged off 33,182 27,098 28,087 30,929 28,699 22.5 10.9
Net loans charged off (53,013) (37,111) (25,778) (8,188) (12,784) 42.8 9.7
Provision for loan losses 63,386 41,300 22,682 1,545 13,004 53.5 15.5
Acquisitions & reclassifications 4,459 3,493 -- 6,699 7,182 27.7 4.9
Reserve for loan losses, ending 157,525 142,693 135,011 138,107 138,051 10.4 3.8
=============================================== ============ ============ ============ ============ ============ ======== ========
<FN>
Notes:
EOP: End Of Period. EPCS: Earnings Per Common Share. DPCS: Dividends Per Common Share. AFS: Available For Sale. NM: Not Meaningful.
</TABLE>
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<TABLE>
TABLE 1: FINANCIAL HIGHLIGHTS - FIVE YEAR SUMMARY (in thousands, except per share data & ratios) (continued)
<CAPTION>
5-Year
Compound
97/96 Growth
1997 1996 1995 1994 1993 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------- --------
Balance Sheet - Average:
Trading account securities 217,337 197,308 487,992 629,308 424,091 10.2 (12.8)
Available for sale (AFS) securities 3,703,409 3,006,242 2,437,812 2,357,380 1,874,966 23.2 15.5
Memo: fair value adjustment for AFS securities 7,061 (3,086) (21,335) (30,246) -- (328.8) NM
Loans, net of unearned income 10,428,044 9,075,277 8,477,057 7,455,006 6,117,790 14.9 13.0
Reserve for loan losses (148,055) (139,486) (136,181) (138,230) (131,574) 6.1 2.1
Deferred taxes on leases (187,588) (170,588) (160,244) (145,264) (132,749) 10.0 8.6
Total interest-earning assets, excluding fair value
adjustment AFS sec's & deferred tax on leases 14,234,308 12,240,614 11,440,040 10,402,070 8,613,448 16.3 12.3
Intangible assets 229,895 168,696 154,684 121,019 15,447 36.3 69.7
Total assets 15,983,748 13,715,134 12,700,669 11,525,222 9,560,634 16.5 12.6
Noninterest-bearing deposits 2,203,031 1,970,492 1,760,233 1,701,434 1,494,277 11.8 11.5
Interest-bearing deposits 8,103,960 7,499,417 7,028,556 6,319,955 5,755,348 8.1 7.7
Total deposits 10,306,991 9,469,909 8,788,789 8,021,389 7,249,625 8.8 8.5
Short-term borrowed funds 2,969,746 2,057,407 1,906,634 2,018,495 1,121,641 44.3 24.7
Long-term debt 1,040,147 746,885 728,788 368,096 204,129 39.3 58.6
Total interest-bearing liabilities 12,113,853 10,303,709 9,663,978 8,706,546 7,081,118 17.6 12.7
Preferred stockholders' equity 524 554 599 675 728 (5.4) (8.6)
Common stockholders' equity 1,296,192 1,135,736 1,036,124 915,208 830,984 14.1 12.2
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ -------- --------
Other Data - End of Period (not rounded):
Full-time equivalent employees 7,996 7,391 7,904 7,863 6,560 8.2 5.4
Domestic bank offices:
FS Bank (Utah) (A) 129 124 127 119 113 4.0 3.6
FS Bank (Idaho) (A) 88 87 91 91 86 1.1 0.9
FS Bank (Oregon) (A) 13 13 13 13 13 -- 3.4
FS Bank (Wyoming) (A) 8 7 6 6 2 14.3 51.6
FSB New Mexico 31 28 27 27 26 10.7 3.6
FSB Nevada 14 7 8 5 5 100.0 NM
FSB California 17 18 14 13 12 (5.6) 7.2
Total domestic bank offices 300 284 286 274 257 5.6 4.4
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------
Selected Ratios (%):
Return on average assets (ROAA) 1.35 1.35 0.98 1.25 1.21
Tangible ROAA 1.48 1.48 1.11 1.37 1.24
Return on average stockholders' equity (ROAE) 16.60 16.23 12.02 15.69 13.86
Tangible ROAE 21.81 20.76 15.77 19.61 14.56
Net interest margin, FTE 4.47 4.59 4.48 4.69 4.98
Net interest spread, FTE 3.75 3.85 3.73 4.08 4.35
Operating expense ratio 59.27 61.18 70.89 66.03 67.55
Productivity ratio 3.68 3.87 4.37 3.95 4.24
Loans / deposits [EOP] 98.36 95.98 93.63 100.00 86.51
Loans / assets [EOP] 61.87 62.74 63.69 66.99 63.91
Reserve for loan losses [EOP] /:
Total loans 1.40 1.47 1.57 1.64 2.05
Nonaccruing loans 427.17 399.14 547.49 529.08 323.38
Nonaccruing + accruing loans past due 90 days 272.93 254.16 352.67 359.41 274.87
Nonaccruing loans / total loans 0.33 0.37 0.29 0.31 0.63
Nonaccruing + accr lns past due / total loans 0.51 0.58 0.44 0.46 0.74
Nonperforming assets [EOP] /:
Total loans + other real estate 0.40 0.48 0.43 0.42 1.02
Total assets 0.25 0.30 0.27 0.28 0.65
Total equity 3.20 3.81 3.40 3.81 7.82
Total equity + reserve for loan losses 2.88 3.41 3.03 3.32 6.76
Problem assets [EOP] /:
Total loans + other real estate 0.58 0.69 0.59 0.57 1.13
Total assets 0.36 0.43 0.37 0.38 0.73
Total equity 4.69 5.49 4.66 5.12 8.68
Total equity + reserve for loan losses 4.22 4.91 4.15 4.47 7.50
Net loans charged off / average loans 0.51 0.41 0.30 0.11 0.21
- ----------------------------------------------- ----------- ----------- ----------- ----------- -----------
Capital Ratios & Risk-Based Capital Ratios (%):
Stockholders' equity / assets [EOP] 7.72 7.88 8.00 7.44 8.36
Stockholders' equity / assets [Avg] 8.11 8.28 8.16 7.95 8.70
Tangible common equity / tangible assets [EOP] 6.24 6.74 6.95 6.16 8.23
Leverage ratio 7.53 8.15 7.22 6.98 8.25
Tier 1 risk-based capital ratio 10.62 11.34 10.44 10.02 12.05
Total (Tier 1 + 2) risk-based capital ratio 13.42 14.41 13.85 12.13 14.34
=============================================== =========== =========== =========== =========== ===========
<FN>
Notes:
EOP: End Of Period. EPCS: Earnings Per Common Share. DPCS: Dividends Per Common Share. AFS: Available For Sale. NM: Not Meaningful.
(A) FSCO created FS Bank from these mergers: FSB Utah and FSB Idaho (June 1996); FSB Oregon (May 1997); FSB Wyoming (November 1997).
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
1997 HIGHLIGHTS
Highlights of First Security Corporation's performance in 1997, and comparisons
to 1996, included:
RESULTS OF OPERATIONS - FULL YEAR 1997
* Record net income of $215.3 million, up $30.8 million or 16.7%.
* Record earnings per common share diluted of $1.14, up $0.14 or 14.0%.
* Total revenues were $983.1 million, up $122.6 million or 14.2%.
* Consolidated operating expense ratio was 59.27%, improved from 61.18%.
RESULTS OF OPERATIONS - FOURTH QUARTER OF 1997
* Record net income of $58.0 million, up $4.8 million or 8.9%.
* Record earnings per common share diluted of $0.30, up $0.01 or 3.4%.
FINANCIAL CONDITION AT DECEMBER 31, 1997
* Record total assets of $18.2 billion, up $2.7 billion or 17.4%.
* Record interest-earning assets of $16.0 billion, up $2.3 billion or 16.7%.
* Record loans of $11.2 billion, up $1.5 billion or 15.8%.
* Record stockholders' equity of $1.4 billion, up $0.2 billion or 15.0%.
* Asset quality: total problem assets to total loans and ORE at 0.58%, down
from 0.69%.
* Ratio of reserve to nonaccruing loans at 427.17%, up from 399.14%.
* All equity and risk-based capital ratios continued to exceed regulatory
requirements for "well capitalized" status for FSCO and subsidiary banks.
OTHER 1997 HIGHLIGHTS
* FSCO declared a 3-for-2 common stock split in the form of a 50% stock
dividend, paid in May 1997.
* First Security Bank of Oregon and First Security Bank of Wyoming were merged
into First Security Bank, N.A.
* CrossLand Mortgage purchased the wholesale loan production branch operations
of Harbourton Mortgage Co., L.P.
* American Bancorp of Nevada was acquired and merged into FSCO.
YEAR-TO-DATE 1998 HIGHLIGHTS
* FSCO declared another 3-for-2 common stock split in the form of a 50% stock
dividend, paid in February 1998.
* Rio Grande Bancshares, Inc. and its two subsidiary banks were acquired and
merged into FSCO.
* California State Bank (CSB) was acquired in a pooling-of-interests merger.
* FSCO rescinded a stock buyback program begun in 1997.
OPERATING SUBSIDIARIES
First Security Corporation is the largest financial services organization
headquartered in the Intermountain West. Incorporated in 1928, FSCO is the
nation's oldest multistate bank holding company. At December 31, 1997, FSCO's
banks operated 300 full service domestic bank offices in Utah, Idaho, New
Mexico, Oregon, Nevada, Wyoming, and California. Nonbank subsidiaries are
engaged in residential mortgage loan origination and servicing, full-service
leasing, bankcard transaction processing, insurance services, investment
management, full-service securities brokerage, information technology, small
business investment, and asset management.
FSCO's subsidiaries and their principal activities as of December 31, 1997,
are discussed below (see: "Table 2: Consolidating Statements").
* First Security Bank, N.A. (FS Bank) is a national bank with branches in Utah,
Idaho, Oregon, and Wyoming. During 1997, First Security Bank of Oregon and
First Security Bank of Wyoming were merged into FS Bank (see: "Corporate
Structure"). FS Bank has two wholly owned operating subsidiaries:
** CrossLand Mortgage Corp (CrossLand Mortgage) originates and services
residential term loans, and services mortgage loans for all FSCO subsidiaries.
All CrossLand Mortgage loan originations are sold into the secondary market. At
December 31, 1997, CrossLand Mortgage operated 81 offices in 26 states, and was
ranked among the top mortgage banking companies in the nation in terms of loan
originations and servicing.
** First Security Hong Kong Agreement Corporation provides letters of credit
and other international banking services.
* First Security Bank of New Mexico, N.A. (FSB New Mexico) is a national bank.
* First Security Bank of Nevada (FSB Nevada) is a Nevada state-chartered bank.
* California State Bank (CSB) is a California state-chartered bank.
* First Security Leasing Company (FS Leasing) is a full-service leasing company
that originates and manages leases for both its own portfolio and the lease
portfolios of FSCO's subsidiary banks.
* First Security Processing Services, Inc. (FS Processing Services) processes
bankcard and ATM transactions for other financial institutions.
* First Security Insurance, Inc. (FS Insurance) is a full-service insurance
agency that offers a wide range of insurance products to customers in FSCO's
market areas.
* First Security Life Insurance Company of Arizona (FS Life Insurance)
reinsures the credit life and disability insurance of borrowers from other FSCO
subsidiaries.
* First Security Investment Services, Inc. (FS Investment Services) has two
operating subsidiaries:
** First Security Investor Services provides a full spectrum of securities
products and brokerage services to the public, including full service
securities brokerage, investment advice, and discount brokerage services, and
makes available FSCO's "Achievement Funds", a family of proprietary mutual
funds.
** First Security Investment Management, Inc. provides investment management
and investment advisory services to FSCO's trust business and to other clients,
and is an advisor to mutual funds, including certain of FSCO's "Achievement
Funds".
* First Security Business Investment Corporation (FS Business Investment) makes
both equity and debt investments in small businesses and provides alternative
financing sources for small companies whose financing needs are typically not
being met by conventional lending sources.
* First Security Service Company (FS Service) provides operational services to
FSCO's subsidiaries. These services include loan servicing, item processing,
accounting, tax, security, consumer compliance, human resources, planning,
sales training, marketing, communications, purchasing, and risk management.
* First Security Information Technology, Inc. (FS Information Technology)
provides specialized services including all forms of data processing and
telecommunications to FSCO's subsidiaries.
* First Security Capital I (FS Capital I) is FSCO's special purpose business
trust supplying Tier 1 capital to FSCO's balance sheet for regulatory purposes.
* First Security Capital Markets, Inc. (FS Capital Markets) is a "Section 20"
full service securities broker dealer which provides business, municipal, and
individual customers a wide array of capital raising products as well as other
investment banking and securities related services.
* First Security Specialized Services Inc. (FS Specialized Services) provides
specialized finance consulting services for businesses.
Subsequent to year-end 1997, FSCO acquired Rio Grande Bancshares, Inc. (RGB)
and its subsidiaries, First National Bank of Dona Ana County and First National
Bank of Chaves County which were later merged to form First Security Bank of
Southern New Mexico (see: "Mergers and Acquisitions").
<TABLE>
TABLE 2: CONSOLIDATING STATEMENTS (in thousands, except ratios) (A)
For the Year Ended December 31, 1997
<CAPTION>
Reserve Non- Return Return
Total Total for Loan Perform. Total Total Net on Avg. on Avg.
Assets Loans, Net Losses Assets Deposits Equity Income Assets Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------- ------------ ------------ ----------- --------- ------------ ------------ --------- ------- -------
Bank Subsidiaries:
FS Bank (B) 14,458,248 9,527,861 (115,424) 33,785 8,767,642 1,120,357 192,606 1.52% 18.63%
FSB New Mexico 1,971,600 714,231 (18,577) 996 1,197,528 128,290 18,496 1.02 15.64
FSB Nevada 1,056,946 404,034 (10,148) 964 838,791 136,045 8,558 1.24 10.22
California State Bank 849,068 451,219 (8,400) 6,497 701,309 83,433 9,330 1.19 11.57
Consolidating adjustments (88,559) -- -- -- (79,024) -- (12) NM NM
- ----------------------------- ------------ ------------ ---------- --------- ------------ ----------- --------- ------- -------
Total Bank Subsidiaries 18,247,303 11,097,345 (152,549) 42,242 11,426,246 1,468,125 228,978 1.44 17.43
- ----------------------------- ------------ ------------ ---------- --------- ------------ ----------- --------- ------- -------
Nonbank Subsidiaries:
FS Leasing 148,946 130,044 (4,589) 2,615 -- 35,518 1,946 1.13 5.67
FS Processing Services 4,689 -- -- -- -- 1,110 (693) (16.89) (30.54)
FS Insurance 14,861 900 -- -- -- 10,705 1,395 9.77 14.12
FS Life Insurance 17,084 -- -- -- -- 13,570 1,428 9.22 11.51
FS Investment Services 4,939 20 -- -- -- 3,826 1,154 29.58 37.84
FS Business Investment 2,895 1,597 (387) -- -- 2,869 (425) (14.28) (14.41)
FS Service 36,449 866 -- -- -- 12,141 (5,257) (15.49) (50.45)
FS Information Technology 12,551 -- -- -- -- 1,892 (6,161) (49.60) NM
FS Capital I 155,236 154,640 -- -- -- 4,640 -- NM NM
FS Capital Markets 1,000 -- -- -- -- 1,000 -- NM NM
FS Specialized Services 10 -- -- -- -- 10 -- NM NM
Consolidating adjustments (3,702) -- -- -- -- (294) (55) NM NM
- ----------------------------- ------------ ------------ ---------- --------- ------------ ----------- --------- ------- -------
Total Nonbank Subsidiaries 394,958 288,067 (4,976) 2,615 -- 86,987 (6,668) (2.30) (8.23)
- ----------------------------- ------------ ------------ ---------- --------- ------------ ----------- --------- ------- -------
FSCO Parent Company only 2,054,785 477,226 -- -- -- 1,400,846 73,599 2.78 5.69
Consolidating adjustments (2,545,263) (631,872) -- -- (8,612) (1,555,112) (80,635) NM NM
- ----------------------------- ------------ ------------ ---------- --------- ------------ ----------- --------- ------- -------
FSCO Consolidated 18,151,783 11,230,766 (157,525) 44,857 11,417,634 1,400,846 215,274 1.35 16.60
============================= ============ ============ ========== ========= ============ =========== ========= ======= =======
<FN>
Notes:
(A) FSCO owns 100% of the stock of all of its subsidiaries.
(B) FSCO created FS Bank from these mergers: FSB Utah and FSB Idaho (June 1996); FSB Oregon (May 1997); FSB Wyoming (November 1997).
</TABLE>
LINE OF BUSINESS SEGMENTS
FSCO's organizational management structure now consists of six customer-focused
"lines of business": Community Banking Services; Retail Lending Services;
Business Banking Services; Finance and Capital Markets; Technology and
Processing Services; and Corporate Services.
* Community Banking Services provides transaction deposit, personal investment,
private banking, personal trust, insurance, electronic banking, and customer
services.
* Retail Lending Services provides a full range of credit products to retail
customers including consumer loans (direct and indirect vehicle, credit cards,
student loans, and other), residential real estate loans (mortgage, home
equity, and construction), and commercial loans under $100,000.
* Business Banking Services provides a full range of products to business
customers including commercial loans over $100,000, commercial real estate
loans (term and construction), leases, and banking, trust, and financial
services for businesses.
* Finance and Capital Markets combines FSCO's Capital Markets, Treasury,
Purchasing, Comptroller, and Corporate Communications functions.
* Technology and Processing Services combines FSCO's computer systems
(development, integration, and maintenance), items processing functions, and
customer service centers.
* Corporate Services combines FSCO's General Counsel, Corporate Compliance,
Human Resources, Facilities Administration, and Internal Audit functions.
ANALYSIS OF STATEMENTS OF INCOME
EARNINGS SUMMARY
FSCO earned record net income totaling $215.3 million for 1997, up $30.8
million or 16.7% from $184.5 million earned in 1996, which in turn was up $59.8
million or 48.0% from $124.6 million earned in 1995 (see: "Table 1: Financial
Highlights"; and "Factors That May Affect Future Results of Operations and
Financial Condition"). This net income generated a 1.35% ROAA and a 16.60% ROAE
for 1997, compared with a 1.35% ROAA and a 16.23% ROAE for 1996 and a 0.98%
ROAA and a 12.02% ROAE for 1995. Earnings per common share diluted were a
record $1.14 for the year, up $0.14 or 14.0% from $1.00 for 1996, which in turn
was up $0.31 or 44.9% from $0.69 for 1995. For 1997, 1996, and 1995,
respectively, the tangible ROAA was 1.48%, 1.48%, and 1.11%, the tangible ROAE
was 21.81%, 20.76%, and 15.77%, while tangible earnings per common share
diluted were $1.23, $1.09, and $0.77.
FSCO's net income was a record $58.0 million for the fourth quarter of 1997, up
$4.8 million or 8.9% from $53.3 million in the fourth quarter of 1996. This net
income generated a 1.33% ROAA and a 16.63% ROAE for the quarter, compared with
a 1.45% ROAA and a 19.16% ROAE for the year-ago quarter. Earnings per common
share diluted were a record $0.30 for the quarter, up $0.01 or 3.4% from $0.29
for the year-ago quarter. The tangible ROAA was 1.39%, the tangible ROAE was
21.31%, and tangible earnings per common share diluted were $0.31 for the
fourth quarter of 1997, compared with a 1.56% tangible ROAA, a 24.33% tangible
ROAE, and tangible earnings per common share diluted of $0.30 for the year-ago
quarter.
NET INTEREST INCOME AND NET INTEREST MARGIN
The largest component of FSCO's income is net interest income. For purposes of
this discussion, interest income earned on tax-exempt or tax-favored loans,
leases, and securities is adjusted to an FTE basis to facilitate comparison
with interest earned that is subject to statutory taxation.
Changes in net interest income generally occur due to fluctuations in the
volumes (balances and/or mixes) of interest-earning assets and interest-bearing
liabilities, and changes in their corresponding interest rates (yields or
costs). Changes in nonperforming assets, together with interest lost and
recovered on those assets, also impact comparisons of net interest income.
FSCO's net interest income FTE totaled a record $636.4 million for 1997, up
$74.5 million or 13.3% from 1996 (see: "Table 3: Average Balance Sheets, Net
Interest Income, Yields and Rates"; "Table 4: Analysis of Interest Changes Due
to Volumes and Rates"; and "Table 1: Financial Highlights"). This increase was
due to increases of 14.9% in average loans, inclusive of the impact of various
asset securitizations / sales totaling $925 million (see: "Interest-Earning
Assets and Asset Quality - Loans"), and 23.2% in average AFS securities,
partially offset by a 17.6% increase in average interest-bearing liabilities.
By comparison, FSCO's net interest income FTE totaled $561.9 million for 1996,
up $49.3 million or 9.6% from 1995. That increase was due to volume growth of
7.1% in average loans and 23.3% in average AFS securities, and lower average
rates on savings / money market accounts and overnight borrowed funds, partially
offset by volume growth of 6.6% in average interest-bearing liabilities.
FSCO's net interest margin was 4.47% for 1997, down only 12 basis points from
1996, which in turn was up only 11 basis points from 1995. The decrease in 1997
was due primarily to the combined impact of increased short term borrowed funds
and $300 million of long-term debt issued in the fourth quarter of 1996 to take
advantage of relatively low long-term interest rates. During 1997, a one basis
point (0.01%) change in FSCO's net interest margin FTE equaled approximately
$1.4 million of net interest income FTE.
Over the past 11 years, growth in FSCO's net interest income FTE has largely
been due to sustained growth in average interest-earning assets. The net
interest margin FTE has also reflected increased competition, balance sheet
restructuring, and the impact of changes in the yield curve.
<TABLE>
TABLE 3: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, YIELDS AND RATES (in thousands) (A)
<CAPTION>
For the years ended December 31, 1997 1997 1997 1996 1996 1996
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Fully Tax Avg % Fully Tax Avg %
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Assets:
Interest-Earning Assets:
Federal funds sold & securities purchased 78,620 4,249 5.40 109,810 5,734 5.22
Interest-bearing deposits in other banks 1,547 69 4.46 19,479 1,080 5.54
Trading account securities 217,337 12,724 5.85 197,308 10,094 5.12
Available for sale (AFS) securities (B) 3,696,348 248,631 6.73 3,009,328 197,173 6.55
Loans, net of unearned income &
deferred taxes on leases (C) 10,240,456 958,197 9.36 8,904,689 833,132 9.36
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Interest-Earning Assets, Excluding
Fair Value Adjustments for AFS Securities
& Deferred Taxes On Leases (B) 14,234,308 1,223,870 8.60 12,240,614 1,047,213 8.56
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Cash & due from banks 775,908 655,931
Premises & equipment, net 272,314 222,209
Other real estate 7,787 4,702
Reserve for loan losses (148,055) (139,486)
Other assets 646,837 563,662
Deferred taxes on leases, deducted above 187,588 170,588
Fair value adjustment for AFS securities 7,061 (3,086)
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
TOTAL ASSETS 15,983,748 13,715,134
============================================= =========== ================= ============ ========== ======
Liabilities:
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest-bearing demand accounts 475,950 9,849 2.07 895,506 25,525 2.85
Savings & money market accounts 3,570,722 8,265 0.23 2,983,353 93,639 3.14
Time deposits of $100,000 or more 975,454 56,223 5.76 812,673 45,221 5.56
Other time deposits 3,081,834 278,319 9.03 2,807,885 162,404 5.78
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Interest-Bearing Deposits 8,103,960 352,656 4.35 7,499,417 326,789 4.36
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Federal funds purchased & securities sold 2,649,889 141,207 5.33 1,801,694 90,840 5.04
Other short-term borrowings 319,857 21,889 6.84 255,713 17,558 6.87
Long-term debt 1,040,147 71,687 6.89 746,885 50,141 6.71
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Interest-Bearing Liabilities 12,113,853 587,439 4.85 10,303,709 485,328 4.71
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Noninterest-bearing deposits 2,203,031 1,970,492
Other liabilities 370,148 304,643
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Liabilities 14,687,032 12,578,844
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Stockholders' Equity:
Preferred stockholders' equity 524 554
Common stockholders' equity 1,296,192 1,135,736
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Stockholders' Equity 1,296,716 1,136,290
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 15,983,748 13,715,134
============================================= =========== ================= ============ ========== ======
Interest income / earning assets 8.60 8.56
Interest expense / earning assets 4.13 3.97
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Net interest income / earning assets 636,431 4.47 561,885 4.59
Less FTE adjustment 10,492 7,822
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
NET INTEREST INCOME, PER STATEMENTS OF INCOME 625,939 554,063
============================================= =========== ================= ============ ========== ======
Loan fees included in interest income 39,864 29,799
============================================= =========== ================= ============ ========== ======
<FN>
Notes:
(A) Interest is presented on a fully taxable equivalent (FTE) basis, calculated on federal and state taxes applicable to the
subsidiary carrying the asset. The combined tax rate was approximately 39% for 1997-1993, and 38% for 1992.
(B) Yields on available for sale (AFS) securities exclude average fair value adjustments. Yields for 1995 and 1994 have been
restated to reflect this change. During 1995 and 1994, $225,715 and $270,079, respectively, were classified as held to maturity
(HTM) securities. Prior to 1994, all securities other than trading account securities were classified as HTM securities.
At the end of 1995, FSCO elected to classify all securities as AFS securities.
(C) Loans include nonaccruing loans.
</TABLE>
<TABLE>
TABLE 3: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, YIELDS AND RATES (in thousands) (A)
<CAPTION>
For the years ended December 31, 1995 1995 1995 1994 1994 1994
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Fully Tax Avg % Fully Tax Avg %
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Assets:
Interest-Earning Assets:
Federal funds sold & securities purchased 161,103 9,381 5.82 70,828 2,914 4.11
Interest-bearing deposits in other banks 14,985 883 5.89 4,566 180 3.94
Trading account securities 487,992 29,130 5.97 629,308 33,983 5.40
Available for sale (AFS) securities (B) 2,459,147 153,616 6.25 2,387,626 131,967 5.53
Loans, net of unearned income &
deferred taxes on leases (C) 8,316,813 789,387 9.49 7,309,742 640,552 8.76
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Interest-Earning Assets, Excluding
Fair Value Adjustments for AFS Securities
& Deferred Taxes On Leases (B) 11,440,040 982,397 8.59 10,402,070 809,596 7.78
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Cash & due from banks 604,295 604,479
Premises & equipment, net 201,749 165,545
Other real estate 3,923 8,856
Reserve for loan losses (136,181) (138,230)
Other assets 447,934 367,484
Deferred taxes on leases, deducted above 160,244 145,264
Fair value adjustment for AFS securities (21,335) (30,246)
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
TOTAL ASSETS 12,700,669 11,525,222
============================================= =========== ================= ============ ========== ======
Liabilities:
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest-bearing demand accounts 1,121,519 21,430 1.91 1,134,187 19,337 1.70
Savings & money market accounts 2,493,210 92,159 3.70 2,659,920 80,609 3.03
Time deposits of $100,000 or more 763,895 44,997 5.89 480,613 20,863 4.34
Other time deposits 2,649,932 150,845 5.69 2,045,235 91,109 4.45
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Interest-Bearing Deposits 7,028,556 309,431 4.40 6,319,955 211,918 3.35
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Federal funds purchased & securities sold 1,699,989 95,267 5.60 1,945,621 82,162 4.22
Other short-term borrowings 206,645 13,663 6.61 72,874 4,071 5.59
Long-term debt 728,788 51,451 7.06 368,096 23,884 6.49
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Interest-Bearing Liabilities 9,663,978 469,812 4.86 8,706,546 322,035 3.70
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Noninterest-bearing deposits 1,760,233 1,701,434
Other liabilities 239,735 201,359
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Liabilities 11,663,946 10,609,339
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Stockholders' Equity:
Preferred stockholders' equity 599 675
Common stockholders' equity 1,036,124 915,208
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Total Stockholders' Equity 1,036,723 915,883
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 12,700,669 11,525,222
============================================= =========== ================= ============ ========== ======
Interest income / earning assets 8.59 7.78
Interest expense / earning assets 4.11 3.09
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
Net interest income / earning assets 512,585 4.48 487,561 4.69
Less FTE adjustment 8,382 7,937
- --------------------------------------------- ----------- ---------- ------ ------------ ---------- ------
NET INTEREST INCOME, PER STATEMENTS OF INCOME 504,203 479,624
============================================= =========== ================= ============ ========== ======
Loan fees included in interest income 26,540 20,258
============================================= =========== ================= ============ ========== ======
<FN>
Notes:
(A) Interest is presented on a fully taxable equivalent (FTE) basis, calculated on federal and state taxes applicable to the
subsidiary carrying the asset. The combined tax rate was approximately 39% for 1997-1993, and 38% for 1992.
(B) Yields on available for sale (AFS) securities exclude average fair value adjustments. Yields for 1995 and 1994 have been
restated to reflect this change. During 1995 and 1994, $225,715 and $270,079, respectively, were classified as held to maturity
(HTM) securities. Prior to 1994, all securities other than trading account securities were classified as HTM securities.
At the end of 1995, FSCO elected to classify all securities as AFS securities.
(C) Loans include nonaccruing loans.
</TABLE>
<TABLE>
TABLE 3: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, YIELDS AND RATES (in thousands) (A)
<CAPTION>
For the years ended December 31, 1993 1993 1993
- --------------------------------------------- ----------- ---------- ------
Fully Tax Avg %
Average Equivalent Yield/
Balance Interest Rate
<S> <C> <C> <C>
- --------------------------------------------- ----------- ---------- ------
Assets:
Interest-Earning Assets:
Federal funds sold & securities purchased 312,049 9,470 3.03
Interest-bearing deposits in other banks 17,301 529 3.06
Trading account securities 424,091 20,841 4.91
Available for sale (AFS) securities (B) 1,874,966 111,137 5.93
Loans, net of unearned income &
deferred taxes on leases (C) 5,985,041 533,742 8.92
- --------------------------------------------- ----------- ---------- ------
Total Interest-Earning Assets, Excluding
Fair Value Adjustments for AFS Securities
& Deferred Taxes On Leases (B) 8,613,448 675,719 7.84
- --------------------------------------------- ----------- ---------- ------
Cash & due from banks 568,716
Premises & equipment, net 145,099
Other real estate 26,506
Reserve for loan losses (131,574)
Other assets 205,690
Deferred taxes on leases, deducted above 132,749
Fair value adjustment for AFS securities -
- --------------------------------------------- ----------- ---------- ------
TOTAL ASSETS 9,560,634
============================================= =========== =================
Liabilities:
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest-bearing demand accounts 995,218 18,710 1.88
Savings & money market accounts 2,319,550 70,719 3.05
Time deposits of $100,000 or more 413,218 16,454 3.98
Other time deposits 2,027,362 93,118 4.59
- --------------------------------------------- ----------- ---------- ------
Total Interest-Bearing Deposits 5,755,348 199,001 3.46
- --------------------------------------------- ----------- ---------- ------
Federal funds purchased & securities sold 1,065,886 31,652 2.97
Other short-term borrowings 55,755 2,340 4.20
Long-term debt 204,129 13,823 6.77
- --------------------------------------------- ----------- ---------- ------
Total Interest-Bearing Liabilities 7,081,118 246,816 3.49
- --------------------------------------------- ----------- ---------- ------
Noninterest-bearing deposits 1,494,277
Other liabilities 153,527
- --------------------------------------------- ----------- ---------- ------
Total Liabilities 8,728,922
- --------------------------------------------- ----------- ---------- ------
Stockholders' Equity:
Preferred stockholders' equity 728
Common stockholders' equity 830,984
- --------------------------------------------- ----------- ---------- ------
Total Stockholders' Equity 831,712
- --------------------------------------------- ----------- ---------- ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 9,560,634
============================================= =========== =================
Interest income / earning assets 7.84
Interest expense / earning assets 2.86
- --------------------------------------------- ----------- ---------- ------
Net interest income / earning assets 428,903 4.98
Less FTE adjustment 7,633
- --------------------------------------------- ----------- ---------- ------
NET INTEREST INCOME, PER STATEMENTS OF INCOME 421,270
============================================= =========== =================
Loan fees included in interest income 14,619
============================================= =========== =================
<FN>
Notes:
(A) Interest is presented on a fully taxable equivalent (FTE) basis, calculated on federal and state taxes applicable to the
subsidiary carrying the asset. The combined tax rate was approximately 39% for 1997-1993, and 38% for 1992.
(B) Yields on available for sale (AFS) securities exclude average fair value adjustments. Yields for 1995 and 1994 have been
restated to reflect this change. During 1995 and 1994, $225,715 and $270,079, respectively, were classified as held to maturity
(HTM) securities. Prior to 1994, all securities other than trading account securities were classified as HTM securities.
At the end of 1995, FSCO elected to classify all securities as AFS securities.
(C) Loans include nonaccruing loans.
</TABLE>
<PAGE>
<TABLE>
TABLE 4: ANALYSIS OF INTEREST CHANGES DUE TO VOLUMES AND RATES (in thousands) (A)
<CAPTION>
1997 over 1996 1996 over 1995 1995 over 1994
- ----------------------------------------- ----------------------------- ----------------------------- -----------------------------
Changes Due to: Total Changes Due to: Total Changes Due to: Total
Volume Rate Change Volume Rate Change Volume Rate Change
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------- ----------------------------- ----------------------------- -----------------------------
Interest-Earning Assets:
Federal funds sold & securities purchased ($1,629) $144 ($1,485) ($2,987) ($660) ($3,647) $3,714 $2,753 $6,467
Interest-bearing deposits in other banks (994) (17) (1,011) 265 (68) 197 411 292 703
Trading account securities 1,025 1,605 2,630 (17,352) (1,684) (19,036) (7,631) 2,778 (4,853)
Available for sale (AFS) securities 45,014 6,444 51,458 34,368 9,189 43,557 3,953 17,696 21,649
Loans, net of unearned income &
deferred taxes on leases (B) 124,976 89 125,065 55,798 (12,053) 43,745 88,250 60,585 148,835
- ----------------------------------------- ------------------------------------------------------------------------------------------
Total Interest-Earning Assets, Excluding
Fair Value Adjustments for AFS Securities
& Deferred Taxes On Leases (B) 168,391 8,266 176,657 70,092 (5,276) 64,816 88,696 84,105 172,801
- ----------------------------------------- ------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest-bearing demand accounts (11,959) (3,717) (15,676) (4,319) 8,414 4,095 (216) 2,309 2,093
Savings & money market accounts 18,436 (103,810) (85,374) 18,118 (16,638) 1,480 (5,052) 16,602 11,550
Time deposits of $100,000 or more 9,058 1,944 11,002 2,873 (2,649) 224 12,297 11,837 24,134
Other time deposits 15,845 100,070 115,915 8,991 2,568 11,559 26,937 32,799 59,736
- ----------------------------------------- ------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 31,380 (5,513) 25,867 25,664 (8,306) 17,358 33,966 63,547 97,513
- ----------------------------------------- ------------------------------------------------------------------------------------------
Federal funds purchased & securities sold 42,765 7,602 50,367 5,700 (10,127) (4,427) (10,373) 23,478 13,105
Other short-term borrowings 4,404 (73) 4,331 3,244 651 3,895 7,473 2,119 9,592
Long-term debt 19,688 1,858 21,546 1,278 (2,588) (1,310) 23,404 4,163 27,567
- ----------------------------------------- ------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 98,237 3,874 102,111 35,885 (20,369) 15,516 54,470 93,307 147,777
- ----------------------------------------- ------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $70,154 $4,392 $74,546 $34,207 $15,093 $49,300 $34,226 ($9,202) $25,024
========================================= ========= ========= ========= ========= ========= ========= ========= ========= =========
<CAPTION>
1994 over 1993 1993 over 1992
- ----------------------------------------- ----------------------------- -----------------------------
Changes Due to: Total Changes Due to: Total
Volume Rate Change Volume Rate Change
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------- ----------------------------- -----------------------------
Interest-Earning Assets:
Federal funds sold & securities purchased ($7,321) $765 ($6,556) $4,098 ($1,232) $2,866
Interest-bearing deposits in other banks (389) 40 (349) 33 (210) (177)
Trading account securities 10,085 3,057 13,142 (375) (5,953) (6,328)
Available for sale (AFS) securities 30,387 (9,557) 20,830 5,361 (21,717) (16,356)
Loans, net of unearned income &
deferred taxes on leases (B) 118,136 (11,326) 106,810 42,780 (39,224) 3,556
- ----------------------------------------- ------------------------------------------------------------
Total Interest-Earning Assets, Excluding
Fair Value Adjustments for AFS Securities
& Deferred Taxes On Leases (B) 150,898 (17,021) 133,877 51,897 (68,336) (16,439)
- ----------------------------------------- ------------------------------------------------------------
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest-bearing demand accounts 2,613 (1,986) 627 2,483 (7,698) (5,215)
Savings & money market accounts 10,377 (487) 9,890 14,521 (15,059) (538)
Time deposits of $100,000 or more 2,684 1,725 4,409 (2,812) (4,073) (6,885)
Other time deposits 821 (2,830) (2,009) (14,268) (20,275) (34,543)
- ----------------------------------------- ------------------------------------------------------------
Total Interest-Bearing Deposits 16,494 (3,577) 12,917 (75) (47,106) (47,181)
- ----------------------------------------- ------------------------------------------------------------
Federal funds purchased & securities sold 26,124 24,386 50,510 4,681 (4,828) (147)
Other short-term borrowings 718 1,013 1,731 69 9 78
Long-term debt 11,103 (1,042) 10,061 8,090 (2,614) 5,476
- ----------------------------------------- ------------------------------------------------------------
Total Interest-Bearing Liabilities 54,440 20,779 75,219 12,765 (54,539) (41,774)
- ----------------------------------------- ------------------------------------------------------------
CHANGE IN NET INTEREST INCOME $96,458 ($37,800) $58,658 $39,132 ($13,797) $25,335
========================================= ========= ========= ========= ========= ========= =========
<FN>
Notes:
(A) Changes not due entirely to changes in volume or rate have been allocated to rate. Interest is presented on a fully taxable
equivalent (FTE) basis, calculated on federal and state taxes applicable to the subsidiary carrying the asset. The combined
tax rate was approximately 39% for 1997-1993, and 38% for 1992.
(B) Loan fees included in interest income: 1997: $39,864; 1996: $29,799; 1995: $26,540; 1994: $20,258; 1993: $14,619; and 1992:
$13,836.
</TABLE>
PROVISION FOR LOAN LOSSES
FSCO's provision for loan losses totaled $63.4 million for 1997, up $22.1
million or 53.5% from $41.3 million in 1996, which in turn was up $18.6 million
or 82.1% from $22.7 million for 1995 (see: "Interest-Earning Assets and Asset
Quality - Provision for Loan Losses", and "Table 10: Reconciliation of the
Reserve for Loan Losses").
NONINTEREST INCOME
FSCO's noninterest income totaled a record $357.2 million for 1997, up $50.7
million or 16.5% from 1996 (see: "Table 5: Noninterest Income"). In addition,
noninterest income was a record $106.9 million for the fourth quarter of 1997,
up $20.4 million or 23.6% from the year-ago quarter. These increases were the
result of FSCO's continued emphasis on increasing and diversifying sources of
noninterest income, improving the value pricing of all fee-based services, plus
the growing impact of mortgage banking activities and ongoing asset
securitizations / sales. FSCO's noninterest income for 1997 amounted to 36.33%
of total revenues, up from 35.61% for 1996 and 34.93% for 1995.
By comparison, FSCO's noninterest income totaled $306.4 million for 1996, up
$35.8 million or 13.2% from 1995. That increase was due primarily to FSCO's
ongoing emphasis on increasing and diversifying sources of noninterest income,
plus the positive impact of the mortgage banking activities of CrossLand
Mortgage and FSCO's subsidiary banks. The gain on the sale of trading account
securities decreased due to the lack of volatility in short-term markets which
resulted in limited trading opportunities, while the gain on the sale of AFS
securities increased due to a variety of strategies which included swapping
short-term securities for those with longer maturities and greater returns.
<TABLE>
TABLE 5: NONINTEREST INCOME (in thousands)
<CAPTION>
5-Year
Compound
97/96 Growth
For the Years Ended December 31, 1997 1996 1995 1994 1993 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -------- --------
Noninterest Income:
Service charges on deposit accounts $90,835 $83,921 $70,301 $64,382 $58,393 8.2 11.1
Other service charges, collections, commissions, & fee 55,473 46,478 36,208 27,544 24,654 19.4 21.3
Asset securitization gains 17,515 2,765 -- -- -- 533.5 NM
Bankcard servicing fees & third-party processing fees 34,295 30,469 25,974 31,129 33,083 12.6 4.6
Insurance commissions & fees 16,975 15,016 13,655 12,631 9,953 13.0 14.3
Mortgage banking activities 117,859 97,580 86,235 41,968 24,502 20.8 45.7
Mortgage banking activities MSR amortization (16,146) (11,896) (9,316) (9,073) (823) (35.7) NM
Trust (fiduciary) commissions & fees 26,195 23,104 20,894 20,706 18,980 13.4 7.6
Trading account securities gains (losses) 1,446 2,383 6,390 (2,386) (4,856) (39.3) NM
Available for sale securities gains (losses) 3,150 4,618 (952) (1,187) 1,002 (31.8) 14.1
Other 9,560 12,006 21,249 16,329 6,933 (20.4) 5.4
- ----------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -------- --------
TOTAL NONINTEREST INCOME $357,157 $306,444 $270,638 $202,043 $171,821 16.5 19.1
==================================================== =========== =========== =========== =========== =========== ======== ========
<FN>
Notes:
NM: Not Meaningful
</TABLE>
NONINTEREST EXPENSES
FSCO's noninterest expenses totaled $588.9 million for 1997, up $57.7 million
or 10.9% from 1996 (see: "Table 6: Noninterest Expenses"). FSCO has
strengthened its ability to control noninterest expenses, as increases were
primarily due to additions of revenue-generating personnel and facilities,
volume growth, acquisitions, and investments in technological advances and
upgrades appropriate for a high performance financial services company. The
components of FSCO's noninterest expenses for 1997, compared with 1996, are
discussed below.
* FSCO's salaries and benefits expense totaled $304.9 million for 1997, up
$27.2 million or 9.8% from 1996. This was primarily due to personnel increases
in mortgage and consumer loan production, customer service, personal financial
services, and acquisitions. As a result, full-time equivalent employees were
increased to 7,996 at December 31, 1997, up 605 or 8.2% from year-end 1996.
* FSCO's nonpersonnel expenses totaled $284.0 million for 1997, up $30.5
million or 12.0% from 1996. This increase was due to many factors including:
additions to production and services facilities with related increases in
occupancy, rent, furniture, equipment, and telephone expenses; volume growth in
bankcard interbank interchange and fees; volume growth in loans, deposits, and
banking services with related increases in credit, appraisal, and legal
expenses; marketing campaigns focused on deposit gathering; consulting expenses
for FSCO's line of business restructuring and reporting systems; higher ORE
losses; and $2.6 million expended in 1997 as part of FSCO's efforts to resolve
its "Year 2000 Computer Issue" (see: "Technological Change And Year 2000
Computer Issue"). The above increases were partially offset by a reduction of
stationery and supplies expense, and a decrease in the amortization of
intangibles.
By comparison, FSCO's noninterest expenses totaled $531.2 million for 1996,
reduced $24.0 million or 4.3% from 1995. Excluding the 1995 restructuring
charge for Project VISION, FSCO's restructuring project, noninterest expenses
for 1996 were up $20.0 million or 3.9% from $511.2 million in 1995. Salaries
and benefits expense remained relatively unchanged as Project VISION reductions
in employees were offset by additional personnel needed in loan production,
centralized customer service, and personal financial services. Nonpersonnel
expenses, excluding the 1995 restructuring charge, increased due to: volume
growth in bankcard interbank interchange fees; higher depreciation expense on
buildings, furniture, and equipment; the absence of ORE recoveries and other
favorable events that had been generated in 1995; and advertising campaigns
focused on deposit gathering. These increases were partially offset by
decreased insurance expense as FSCO was not required to pay FDIC insurance
during 1996, and by general noninterest expense reductions related to Project
VISION.
The operating expense ratio is one measure of FSCO's effectiveness and ongoing
efforts to control its noninterest expenses, expressed as a percent of total
revenue. FSCO's operating expense ratio was reduced to 59.27% for 1997, an
improvement of 191 basis points from 61.18% for 1996 and 1,162 basis points
from 70.89% for 1995.
CrossLand Mortgage has a higher operating expense ratio than FSCO's bank
subsidiaries, due to its labor intensive business of originating, selling, and
servicing mortgage loans. Excluding the impact of CrossLand Mortgage, FSCO's
"core" operating expense ratio was 58.05% for 1997, an improvement of 125 basis
points from 59.30% for 1996 and 1,135 basis points from 69.40% for 1995.
The productivity ratio was 3.68% for 1997, an improvement from 3.87% for 1996,
4.37% for 1995, and 4.02% for 1995 excluding the restructuring charge.
FSCO remains committed to becoming a more efficient and lower cost provider of
financial services within its marketplaces, while continuing to improve
customer service and increase value for shareholders.
<TABLE>
TABLE 6: NONINTEREST EXPENSES (in thousands)
<CAPTION>
5-Year
Compound
97/96 Growth
For the Years Ended December 31, 1997 1996 1995 1994 1993 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -------- --------
Noninterest Expenses:
Salaries & employee benefits $304,903 $277,706 $274,048 $233,035 $184,564 9.8 12.4
Amortization of intangibles 7,537 9,249 9,140 7,084 3,500 (18.5) 22.8
Armored & messenger 6,065 5,865 5,499 5,093 4,667 3.4 8.7
Bankcard interbank interchange & fees 34,130 29,396 18,148 16,965 14,725 16.1 24.9
Credit, appraisal, & repossession 17,176 14,459 14,267 12,920 7,274 18.8 22.4
Fees 9,942 8,832 8,638 8,597 6,775 12.6 8.6
Furniture & equipment 46,263 43,252 37,487 31,969 28,788 7.0 11.0
Insurance 6,302 5,534 16,232 24,293 20,440 13.9 (20.4)
Marketing 14,258 12,478 11,444 12,216 10,910 14.3 12.8
Occupancy, net 36,729 33,096 30,357 28,011 26,204 11.0 11.5
Other real estate expense & loss provision (recovery) 2,022 422 (2,296) (6,211) 8,724 379.1 (28.9)
Postage 11,367 11,100 11,272 9,708 7,428 2.4 9.4
Professional 15,082 9,020 12,931 12,008 14,479 67.2 6.5
Stationery & supplies 18,259 19,583 18,910 16,336 16,156 (6.8) 6.9
Telephone 16,317 14,189 13,278 11,834 8,610 15.0 17.3
Travel 9,797 8,261 8,178 7,884 6,305 18.6 13.8
Other 32,755 28,777 23,659 23,580 36,257 13.8 6.5
Restructuring charge -- -- 44,000 -- -- -- NM
- ----------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -------- --------
TOTAL NONINTEREST EXPENSES $588,904 $531,219 $555,192 $455,322 $405,806 10.9 10.6
==================================================== =========== =========== =========== =========== =========== ======== ========
<FN>
Notes:
NM: Not Meaningful
</TABLE>
PROVISION FOR INCOME TAXES
FSCO employs several strategies to permanently reduce or defer payment of
income taxes. As a result, FSCO's tax provisions have historically been lower
than statutory tax rates, and deferred tax liabilities have been an important
source of funding. FSCO's tax strategies include investments in securities and
loans yielding tax-exempt interest, investments in leveraged leases,
investments in tax credit producing affordable housing and the recognition of
investment tax credits on leases using the deferral method. In 1997, FSCO
continued to employ these and other tax planning strategies.
ANALYSIS OF BALANCE SHEETS
SUMMARY
As of December 31, 1997, FSCO increased its total assets, interest-earning
assets, and equity to record levels, and maintained good asset quality and
liquidity (see: "Factors That May Affect Future Results of Operations And
Financial Condition").
FSCO's assets totaled a record $18.2 billion at December 31, 1997, up $2.7
billion or 17.4% from year-end 1996. Interest-earning assets were a record
$16.0 billion at year-end 1997, up $2.3 billion or 16.7% from year-end 1996,
while loans were a record $11.2 billion, up $1.5 billion or 15.8% (see:
"Interest-Earning Assets and Asset Quality").
FSCO's liabilities totaled $16.8 billion at December 31, 1997, up $2.5 billion
or 17.6% from year-end 1996. Total interest-bearing liabilities were $13.9
billion at year-end 1997, up $2.4 billion or 21.3% from year-end 1996 (see:
"Asset / Liability Management").
FSCO's stockholders' equity was increased to a record $1.4 billion at December
31, 1997, up $0.2 billion or 15.0% from year-end 1996 (see: "Stockholders'
Equity and Capital Adequacy").
INTEREST-EARNING ASSETS:
TRADING ACCOUNT SECURITIES AND OTHER MONEY MARKET INVESTMENTS
FSCO's investment policies for trading account securities are designed to
monitor daily interest rate fluctuations and market value volatility. Trading
positions and strategies are continually monitored as to the changing interest
rate environment, are kept flexible to meet changing economic conditions, and
are carefully reviewed by management daily.
FSCO's trading account securities portfolio was $255.3 million at December 31,
1997, down $192.2 million or 42.9% from year-end 1996. Fluctuations in trading
opportunities have generally decreased over the past year due to stability in
interest rates.
In 1998, FSCO's priorities for trading account securities continue to be
identification of both market volatility and inefficiencies wherein cash or
futures transactions can generate profits within acceptable risk parameters.
Fluctuations in Federal funds sold and interest-bearing deposits held in other
banks occur in response to changing yield opportunities and liquidity.
INTEREST-EARNING ASSETS:
AVAILABLE FOR SALE SECURITIES
Since December 1995, FSCO has managed its entire investment securities
portfolio under the "available for sale" (AFS) classification. FSCO's AFS
securities policies are designed to achieve desired liquidity, interest rate
sensitivity, earnings, and collateral requirements. FSCO's AFS securities
strategies are continually monitored and adjusted to the changing interest rate
environment and economic conditions.
FSCO actively manages its AFS securities portfolio, rather than holding lower
rate securities to maturity which could result in an earnings level
significantly below the current market yield. By so doing, FSCO is able to
improve the income stream from these AFS securities, moving the portfolio's
yield closer to the market yield and mitigating the impact of narrowing spreads
between the securities yield and the cost of funds.
The AFS securities portfolio has been positioned to have a relatively short
average life while providing a positive return and an appropriate mix of
securities to meet current and future requirements. The estimated average
maturity of FSCO's AFS securities portfolio is approximately 3.1 years as of
December 31, 1997, essentially unchanged from December 31, 1996. With the
exception of U.S. Government and U.S. Government-sponsored agency securities,
FSCO had no concentrations of AFS securities from any single issuer that
constituted 10% or more of stockholders' equity at year-end 1997.
FSCO's AFS securities were $4.4 billion at December 31, 1997, up $1.0 billion
or 30.9% from year-end 1996 (see: "Table 7: Available For Sale Securities").
This increase was due to a combination of growth consistent with overall
balance sheet growth, acquisitions of banks, and spread opportunities in the
markets. The SFAS No. 115 net unrealized gain (loss) on AFS securities
generally responds inversely to changes in interest rates. The recent increase
in unrealized gains was due to a combination of new purchases and market value
improvements. AFS securities purchased included a mix of U.S. Treasuries,
Federal agencies, municipal bonds, agency issued collateralized mortgage
obligations, and agency mortgage-backed securities.
In 1998, FSCO's AFS securities priorities continue to be a balance between
liquidity, interest rate risk, and maximizing return. U.S. Treasury, Federal
agency, and agency related mortgage securities are currently the primary
reinvestment selection of maturing and prepaying investments. FSCO's AFS
securities strategy remains flexible to changing market conditions and
opportunities, while maintaining a continuous review of risk and liquidity
through the ALCO process.
<TABLE>
TABLE 7: AVAILABLE FOR SALE SECURITIES (A) (in thousands)
<CAPTION>
As of December 31, 1997 1997 1997 1996 1996 1996 1995 1995 1995
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Yield(B)% Cost Fair Value Yield(B)% Cost Fair Value Yield(B)%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Debt Securities Issued by the U.S. Treasury and Other U.S. Government Agencies and Corporations:
One year or less $55,043 $55,161 6.11 $183,967 $184,472 6.43 $296,300 $298,075 6.41
After 1 year through 5 years 879,826 885,740 6.81 595,485 597,389 7.06 305,718 309,717 6.52
After 5 years through 10 years 63,080 63,747 6.64 10,120 10,069 6.42 4,204 4,151 6.17
After 10 years 5,986 6,213 7.57 7,500 7,570 7.27 8,276 8,374 7.68
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals 1,003,935 1,010,861 6.77 797,072 799,500 6.91 614,498 620,317 6.48
Memo: Unrealized gains 7,160 3,570 6,156
Memo: Unrealized losses (234) (1,142) (337)
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Debt Securities Issued by States of the U.S. and Political Subdivisions:
One year or less 41,862 41,944 5.06 46,551 46,642 5.13 60,161 60,254 5.35
After 1 year through 5 years 74,691 75,735 5.36 81,899 83,001 5.58 67,797 69,411 6.07
After 5 years through 10 years 120,728 124,255 5.28 78,216 79,000 5.27 47,466 48,988 5.66
After 10 years 60,201 61,650 5.87 38,461 38,965 6.07 18,680 19,324 6.25
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals 297,482 303,584 5.39 245,127 247,608 5.47 194,104 197,977 5.76
Memo: Unrealized gains 6,309 3,180 4,116
Memo: Unrealized losses (207) (699) (243)
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Corporate Debt Securities:
One year or less 100 101 9.09 2,103 2,107 6.46 1,653 1,663 7.47
After 1 year through 5 years 2,492 2,501 6.43 1,657 1,647 6.43 4,086 4,136 6.19
After 5 years through 10 years 4,337 4,381 6.83 4,262 4,281 6.83 1,364 1,353 6.40
After 10 years 592 607 6.84 - - - 3,137 3,172 7.13
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals 7,521 7,590 6.73 8,022 8,035 6.65 10,240 10,324 6.71
Memo: Unrealized gains 89 53 127
Memo: Unrealized losses (20) (40) (43)
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Debt Securities:
One year or less 97,005 97,206 5.66 232,621 233,221 6.17 358,114 359,992 6.24
After 1 year through 5 years 957,009 963,976 6.70 679,041 682,037 6.88 377,601 383,264 6.44
After 5 years through 10 years 188,145 192,383 5.77 92,598 93,350 5.47 53,034 54,492 5.73
After 10 years 66,779 68,470 6.04 45,961 46,535 6.27 30,093 30,870 6.73
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Debt Securities 1,308,938 1,322,035 6.46 1,050,221 1,055,143 6.57 818,842 828,618 6.32
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Mortgage-backed securities 2,859,331 2,874,996 6.77 2,147,689 2,138,421 6.60 1,820,294 1,825,270 6.43
Memo: Unrealized gains 20,115 8,322 13,485
Memo: Unrealized losses (4,450) (17,590) (8,509)
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Small Business Administration
Pool certificates 4,648 4,867 7.29 14,973 15,044 7.71 54,777 11,020 8.56
Memo: Unrealized gains 219 204 157
Memo: Unrealized losses - (133) (4)
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Equity securities 69,081 77,778 6.10 50,147 56,109 7.53 2,710,699 13,946 5.86
Memo: Unrealized gains 8,978 6,068 8,103
Memo: Unrealized losses (281) (106) (76)
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Federal Home Loan Bank and
Federal Reserve Stock 71,849 71,849 5.98 60,080 60,080 7.46 - 54,777 5.82
Memo: Unrealized gains - - -
Memo: Unrealized losses - - -
- -------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL AFS SECURITIES $4,313,847 $4,351,525 6.65 $3,323,110 $3,324,797 6.63 $5,404,612 $2,733,631 6.39
Memo: Unrealized gains 42,870 21,397 32,144
Memo: Unrealized losses (5,192) (19,710) (9,212)
================================ ========== ========== ========== ========== ========== ========== ========== ========== ==========
<FN>
(A) FSCO has elected to classify all securities as available for sale (AFS) securities.
(B) Average yields have been calculated using coupon rates, not adjusted to a fully-taxable equivalent basis.
</TABLE>
INTEREST-EARNING ASSETS:
LOANS
FSCO's borrowers reside primarily in the states where it has banking and
mortgage offices and in markets contiguous to those states. FSCO's borrowers
are primarily small-and medium-sized businesses, and consumers. There is
substantial economic diversification across FSCO's six-state region which
provides a beneficial natural diversification for its loan portfolio. FSCO has
policies and procedures in place designed to maintain high quality in its loan
portfolio. These policies and procedures include underwriting standards for new
credits and continuous monitoring of and reporting on the existing loan
portfolio.
FSCO's loan portfolio, net of unearned income but before the reserve for loan
losses, was a record $11.2 billion at December 31, 1997, up $1.5 billion or
15.8% from year end 1996 (see: "Table 1: Financial Highlights", "Table 8:
Loans", and "Note 5: Loans"). Growth occurred in most major components of the
loan portfolio as a result of continued strong loan demand, combined with $284
million in real estate loans added with the acquisition of Harbourton Mortgage
Co., L.P. (HMC) and $146 million in total loans added with the acquisition of
American Bancorp of Nevada (ABN) (see: "Mergers and Acquisitions"), partially
offset by asset securitizations and sales totaling $925 million.
The ratio of total loans to total assets was 61.87% at December 31, 1997, down
slightly from 62.74% at year-end 1996. The components of FSCO's loan portfolio
at December 31, 1997, compared with December 31, 1996, are discussed below.
* Commercial loans were a record $2.8 billion, up $0.5 billion or 21.6%, due
primarily to a continued broad-based business expansion in FSCO's market areas.
Commercial loans consist primarily of loans to small- and medium-sized
businesses and agricultural loans.
* Real estate secured loans were a record $4.5 billion, up $0.9 billion or
23.8%. Record loan originations were generated by increased demand and lower
interest rates, with 1 to 4 family residential term loan originations totaling
approximately $6.4 billion, up $2.2 billion or 51.8%. Loans were also added
from the HMC and ABN acquisitions. However, loan originations were mostly
offset by mortgage loan sales. For balance sheet management purposes, FSCO does
not retain all newly originated mortgage loans but regularly sells most loans
in the secondary markets on an ongoing flow-through basis. At year-end 1997,
$1.1 billion of real estate secured loans were held for sale, up $0.8 billion
or 232.3% from year-end 1996.
* Consumer loans were $2.9 billion, down $0.1 billion or 3.5%. Indirect vehicle
loan originations totaled approximately $2.3 billion for 1997, up $0.6 billion
or 32.6% from 1996. However, this growth was offset by a combination of
maturing loans and $803 million of loans securitized and sold during the year.
FSCO remains the leading consumer lender in its primary market area.
* Leases were $1.0 billion, up $0.3 billion or 36.9% due primarily to FSCO's
growth in the vehicle and equipment leasing markets, partially offset by the
direct sale of $23.3 million of leases during the year.
<TABLE>
TABLE 8: LOANS (in thousands)
<CAPTION>
5-Year
Compound
97/96 Growth
As of December 31, 1997 1996 1995 1994 1993 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
COMMERCIAL LOANS:
Commercial & industrial $2,251,179 $1,744,943 $1,623,181 $1,461,612 $1,218,648 29.0 15.0
Agricultural 362,820 337,511 301,427 291,807 255,122 7.5 8.5
Other commercial 144,866 186,706 112,597 153,888 151,594 (22.4) 1.8
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
TOTAL COMMERCIAL LOANS (A) 2,758,865 2,269,160 2,037,205 1,907,307 1,625,364 21.6 13.1
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
REAL ESTATE SECURED LOANS:
1 to 4 family residential term 2,177,415 1,473,523 1,471,625 1,574,888 1,251,541 47.8 14.2
1 to 4 family residential home equity 506,999 496,931 460,948 369,487 288,211 2.0 17.5
1 to 4 family residential construction 425,343 349,771 221,551 186,342 160,713 21.6 36.2
Commercial & other term 1,112,042 1,132,787 1,085,961 1,036,942 853,060 (1.8) 7.3
Commercial & other construction 313,686 210,214 276,099 146,731 99,903 49.2 25.2
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
TOTAL REAL ESTATE SECURED LOANS 4,535,485 3,663,226 3,516,184 3,314,390 2,653,428 23.8 14.3
Memo: Total real estate term 3,796,456 3,103,241 3,018,534 2,981,317 2,392,812 22.3 12.2
Memo: Loans held for sale included
in total real estate term 1,125,616 338,722 270,530 176,376 NM 232.3 NM
Memo: Tot real estate construction (A) 739,029 559,985 497,650 333,073 260,616 32.0 30.8
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
CONSUMER LOANS:
Credit card & related 320,656 312,647 314,382 309,598 278,747 2.6 1.8
Vehicle & other consumer 2,585,139 2,699,257 2,335,732 2,567,690 1,911,083 (4.2) 12.1
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
TOTAL CONSUMER LOANS 2,905,795 3,011,904 2,650,114 2,877,288 2,189,830 (3.5) 10.6
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
TOTAL LEASES 1,030,621 753,061 413,260 343,297 276,164 36.9 31.8
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
LOANS, NET OF UNEARNED INCOME 11,230,766 9,697,351 8,616,763 8,442,282 6,744,786 15.8 14.0
Memo: Unearned income (106,369) (69,940) (19,169) (11,680) (13,140) 52.1 48.3
Reserve for loan losses (157,525) (142,693) (135,011) (138,107) (138,051) 10.4 3.8
- --------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
TOTAL LOANS, NET $11,073,241 $9,554,658 $8,481,752 $8,304,175 $6,606,735 15.9 14.2
======================================= ============ ============ ============ ============ ============ ======= =======
<CAPTION>
(A) MATURITIES AND INTEREST RATE SENSITIVITIES OF SELECTED LOAN CATEGORIES (in thousands)
1 Year 1 Year to Over
As of December 31, 1997 Total or Less 5 Years 5 Years
<S> <C> <C> <C> <C>
- ---------------------------------------- ----------- ------------ ------------ ------------
Remaining Maturity:
Commercial loans $2,758,865 $1,703,905 $622,602 $432,358
Real estate construction loans 739,029 613,307 116,118 9,604
- ---------------------------------------- ----------- ------------ ------------ ------------
TOTAL $3,497,894 $2,317,212 $738,720 $441,962
- ---------------------------------------- ----------- ------------ ------------ ------------
Interest Rate Sensitivities Of Commercial
Loans And Real Estate Construction Loans
Maturing In More Than One Year:
With fixed rates $478,482 $235,850 $242,632
With floating rates 702,200 502,870 199,330
- ---------------------------------------- ----------- ------------ ------------ ------------
TOTAL INTEREST RATE SENSITIVITIES $1,180,682 $738,720 $441,962
======================================== =========== ============ ============ ============
<FN>
Notes:
NM: Not Meaningful.
</TABLE>
ASSET QUALITY:
PROBLEM ASSETS AND POTENTIAL PROBLEM ASSETS
Strong asset quality continues to be a primary objective for FSCO. However,
economic cycles and loan-specific events can cause periodic fluctuations in
problem assets.
FSCO continued to maintain good asset quality in 1997, as its ratio of total
problem assets to total loans and ORE real estate was a low 0.58% at December
31, 1997, down from 0.69% at year-end 1996 (see: "Table 1: Financial
Highlights"). The ratio of nonperforming assets to total loans and ORE was
0.40% at December 31, 1997, down from 0.48% at year-end 1996.
Problem assets totaled $65.7 million at December 31, 1997, down $1.1 million or
1.7% from $66.8 million at year-end 1996 (see: "Table 9: Problem Assets and
Potential Problem Assets"). The components of FSCO's problem assets at December
31, 1997, compared with December 31, 1996, are discussed below.
* Nonaccruing loans totaled $36.9 million, up $1.1 million or 3.1% from 1996
due to growth in the loan portfolio. The ratio of nonaccruing loans to total
loans was 0.33%, down from 0.37% one year ago. On a linked-quarter basis,
nonaccruing loans at year end 1997 decreased $1.2 million or 3.2% from
September 30, 1997, and the ratio of nonaccruing loans to total loans was
0.33%, compared with 0.34% at the end of the third quarter.
* Other real estate remained low at $8.0 million, down $2.7 million or 25.2%.
ORE property values are reviewed at least annually, and the ORE portfolio is
adjusted to the lower of cost or fair value less estimated selling costs.
* Accruing loans past due 90 days or more were $20.8 million, up only $0.4
million or 2.2%. The ratio of accruing loans past due 90 days or more to total
loans was 0.19%, down from 0.21%.
A comparison of FSCO to its BHCPR peer group as of September 30, 1997 showed
that: FSCO's ratio of nonaccruing loans to total loans was 0.34%, which
compared favorably with the peer group average of 0.57%; and FSCO's ratio of
accruing loans past due 90 days or more to total loans was 0.18%, which
compared favorably with the peer group average of 0.26%.
Potential problem loans identified by FSCO were $7.4 million at December 31,
1997, down $0.8 million or 10.3% from year end 1996. The decrease occurred
primarily in small- and medium-sized commercial loans. Potential problem loans
consisted primarily of commercial loans.
<TABLE>
TABLE 9: PROBLEM ASSETS AND POTENTIAL PROBLEM ASSETS (in thousands)
<CAPTION>
5-Year
97/96 Compound
As of December 31, 1997 1996 1995 1994 1993 % Chg Growth Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------- --------- --------- --------- --------- --------- ------- -----------
Problem Assets:
Nonaccruing Loans:
Commercial $13,670 $14,360 $9,740 $9,469 $12,800 (4.8) (6.7)
Real estate term 16,288 17,067 11,907 13,601 24,421 (4.6) (21.8)
Real estate construction 4,669 3,935 2,349 1,914 2,192 18.7 (5.2)
Consumer 2 137 254 270 658 (98.5) (70.2)
Leases 331 251 400 837 1,484 31.9 17.9
Renegotiated 1,916 - 10 12 1,135 - 83.9
- ----------------------------------------- --------- --------- --------- --------- --------- ------- -----------
Total Nonaccruing Loans 36,876 35,750 24,660 26,103 42,690 3.1 (14.8)
Other real estate 7,981 10,672 12,206 9,606 26,330 (25.2) (27.2)
- ----------------------------------------- --------- --------- --------- --------- --------- ------- -----------
Total Nonperforming Assets 44,857 46,422 36,866 35,709 69,020 (3.4) (18.0)
Accruing loans past due 90 days or more 20,841 20,393 13,622 12,323 7,535 2.2 11.2
- ----------------------------------------- --------- --------- --------- --------- --------- ------- -----------
TOTAL PROBLEM ASSETS $65,698 $66,815 $50,488 $48,032 $76,555 (1.7) (13.2)
========================================= ========= ========= ========= ========= ========= ======= ===========
POTENTIAL PROBLEM ASSETS $7,423 $8,271 $12,319 $12,018 $19,179 (10.3) (20.2)
========================================= ========= ========= ========= ========= ========= ======= ===========
Gross Interest Income That Would Have Been Recorded If Loans Had Been Current In Accordance With Original Terms:
Nonaccruing loans $2,810 $3,242 $2,500 $2,146 $2,333 (13.3) (15.3)
Renegotiated loans - - - - 111 - NM
- ----------------------------------------- --------- --------- --------- --------- --------- ------- -----------
Interest Actually Recognized:
Nonaccruing loans $1,772 $2,158 $2,766 $2,264 $679 (17.9) 11.8
Renegotiated loans - - - - 87 - NM
========================================= ========= ========= ========= ========= ========= ======= ===========
Approximate Percentage Of Nonperforming Assets Over $500,000 By Location (Does not include California State Bank):
Utah 13% 7% 11% 24% 26%
Idaho 82 63 45 15 5
New Mexico - 3 18 34 35
Washington & Oregon 5 6 - 9 13
Nevada - 16 26 8 -
All others - 5 - 10 21
========================================= ========= ========= ========= ========= ========= ======= ===========
Approximate Percentage of Nonperforming Assets Over $500,000 By Type Of Security (Does not include California State Bank):
Office buildings 0% 0% 10% 0% 5%
Shopping centers - - - 17 28
Land - - 14 32 36
Single family dwellings 32 42 21 8 4
Other real estate secured 10 9 10 13 14
All others 58 49 45 30 13
========================================= ========= ========= ========= ========= ========= ======= ===========
</TABLE>
ASSET QUALITY:
RESERVE FOR LOAN LOSSES
The adequacy of a reserve for loan losses is evaluated quarterly based on
policies established by the board of directors of its subsidiary banks,
regulatory and accounting guidelines, and industry practices. Most
specifically, FSCO follows the Comptroller of the Currency's regulations and
guidelines for determining the appropriate level of the reserve for loan
losses.
The methodology followed by FSCO in determining appropriate reserve levels
includes thorough analysis of historic loss trends, loan grades, concentration
and portfolio mix studies, loss migration analysis, industry and economic
trends, and ongoing analysis of identified problem and potential problem
assets. The methodology also takes into account unique characteristics of a
large 1 to 4 family residential mortgage portfolio which may periodically
exhibit higher delinquency levels, but incur minimal actual chargeoffs, and
large consumer loan portfolios where loans are automatically charged off after
becoming 120 days past due. Finally, specific reserves are established on large
substandard loans and when a loan is considered impaired as defined by SFAS 114.
FSCO's reserve for loan losses was increased to $157.5 million at December 31,
1997, up $14.8 million or 10.4% from year end 1996 (see: "Table 10:
Reconciliation of the Reserve for Loan Losses"). This increase included $10.4
million in net additions to the reserve as FSCO responded to 14.9% average loan
growth during the year, and $4.5 million in reserves added with the June 30,
1997 acquisition of American Bancorp of Nevada (ABN) (see: "Mergers and
Acquisitions").
Based on its analysis of reserve adequacy, FSCO considered its reserve for loan
losses at December 31, 1997 to be adequate to absorb estimated loan losses in
the current loan portfolio. At year-end 1997, FSCO's coverage ratio of the
reserve to nonaccruing loans was 427.17%, up from 399.14% at year end 1996,
while its ratio of the reserve to total loans was 1.40% at December 31, 1997,
down from 1.47% at year end 1996, due in large part to the strong volume growth
in loans (see: "Table 1: Financial Highlights").
Net loans charged off against the reserve totaled $53.0 million for 1997, up
$15.9 million or 42.8% from 1996 (see: "Table 10: Reconciliation of the Reserve
For Loan Losses"). This increase was due to higher consumer losses following
national trends and an increase in the charge off of smaller commercial
credits. The annualized ratio of net loans charged off to average loans was
0.51% for 1997, up from 0.41% for 1996.
A comparison of FSCO to its BHCPR peer group as of September 30, 1997 showed
that: FSCO's coverage ratio of the reserve to nonaccruing loans was 401.57%,
which compared favorably with the peer group average of 370.77%; its ratio of
the reserve to total loans was 1.37%, compared with the peer group average of
1.76%; and its annualized ratio of net loans charged off to average loans was
0.48% for the first nine months of 1997, which compared closely to the peer
group average of 0.52%. While comparisons with the BHCPR peer group are
instructive, FSCO relies on the methodology for analysis of reserve adequacy
outlined above and not on any specific reserve ratio comparison.
While reserve adequacy and allocation are measured using the above criteria,
FSCO's reserve for loan losses is available for use by its entire loan
portfolio, as needed, regardless of allocation.
ASSET QUALITY:
PROVISION FOR LOAN LOSSES
FSCO uses the provision for loan losses to adjust the reserve when a
replenishment or addition is appropriate.
FSCO's provision for loan losses totaled $63.4 million for 1997, up $22.1
million or 53.5% from $41.3 million in 1996, which in turn was up $18.6 million
or 82.1% from $22.7 million for 1995 (see: "Table 10: Reconciliation of the
Reserve for Loan Losses"). The increase included additions to the reserve for
loan losses of $10.4 million over and above net loans charged off during 1997.
<TABLE>
TABLE 10: RECONCILIATION OF THE RESERVE FOR LOAN LOSSES (in thousands)
<CAPTION>
5-Year
Compound
97/96 Growth
For the years ended December 31, 1997 1996 1995 1994 1993 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------- --------- --------- --------- --------- --------- -------- --------
Reserve For Loan Losses, Beginning $142,693 $135,011 $138,107 $138,051 $130,649 5.7 1.9
Loans Charged Off:
Commercial (12,313) (6,195) (4,636) (6,280) (10,174) 98.8 (7.8)
Real estate term (3,067) (1,808) (3,574) (2,054) (7,039) 69.6 (23.2)
Real estate construction (109) (314) (100) (506) (542) (65.3) (16.0)
Consumer credit card & related (14,222) (13,519) (10,377) (6,926) (7,031) 5.2 9.1
Consumer vehicle & other (53,507) (41,759) (34,221) (23,112) (15,231) 28.1 32.1
Leases (2,977) (614) (957) (239) (1,466) 384.9 47.5
- ----------------------------------------- --------- --------- --------- --------- --------- -------- --------
Total Loans Charged Off (86,195) (64,209) (53,865) (39,117) (41,483) 34.2 10.2
- ----------------------------------------- --------- --------- --------- --------- --------- -------- --------
Recoveries Of Loans Charged Off:
Commercial 5,316 6,756 7,712 11,302 11,843 (21.3) (10.0)
Real estate term 1,850 889 2,963 5,651 3,294 108.1 (5.5)
Real estate construction 12 847 163 201 3,151 (98.6) (48.6)
Consumer credit card & related 2,477 2,293 2,117 1,794 1,891 8.0 9.5
Consumer vehicle & other 22,046 15,993 14,669 11,144 8,407 37.8 28.4
Leases 1,481 320 463 837 113 362.8 96.9
- ----------------------------------------- --------- --------- --------- --------- --------- -------- --------
Total Recoveries Of Loans Charged Off 33,182 27,098 28,087 30,929 28,699 22.5 10.9
- ----------------------------------------- --------- --------- --------- --------- --------- -------- --------
Net Loans Charged Off (53,013) (37,111) (25,778) (8,188) (12,784) 42.8 9.7
Provision for loan losses 63,386 41,300 22,682 1,545 13,004 53.5 15.5
Acquisitions & reclassifications 4,459 3,493 - 6,699 7,182 27.7 4.9
- ----------------------------------------- --------- --------- --------- --------- --------- -------- --------
Reserve For Loan Losses, Ending $157,525 $142,693 $135,011 $138,107 $138,051 10.4 3.8
========================================= ========= ========= ========= ========= ========= ======== ========
<FN>
NM: Not Meaningful.
</TABLE>
<TABLE>
TABLE 11: ALLOCATION OF THE RESERVE FOR LOAN LOSSES (in thousands)
<CAPTION>
As of December 31, 1997 1997 1996 1996 1995 1995 1994 1994 1993 1993
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Loan Loan Loan Loan Loan
Type/ Type/ Type/ Type/ Type/
Allocated Total Allocated Total Allocated Total Allocated Total Allocated Total
Reserve Loans Reserve Loans Reserve Loans Reserve Loans Reserve Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Loans:
Commercial $43,136 24.6% $46,617 23.4% $38,523 23.6% $38,088 22.6% $37,763 24.1%
Real estate term 13,873 33.8 12,737 32.0 8,345 35.0 15,133 35.3 15,119 35.5
Real estate construction 4,725 6.6 4,378 5.8 4,148 5.8 4,951 3.9 4,700 3.9
Consumer 44,933 25.9 44,457 31.1 43,349 30.8 42,726 34.1 33,039 32.5
Leases 8,963 9.2 8,224 7.8 6,068 4.8 7,117 4.1 9,654 4.1
Unallocated 41,895 -- 26,280 -- 34,578 -- 30,092 -- 37,776 --
- ----------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
TOTALS $157,525 100.0 $142,693 100.0 $135,011 100.0 $138,107 100.0 $138,051 100.0
========================================= ================ ================ ================ ================ ================
</TABLE>
ASSET/LIABILITY MANAGEMENT
FSCO's asset / liability management committee (ALCO) process is responsible for
the identification, assessment, and management of liquidity, interest rate risk,
and capital adequacy (see: "Stockholders' Equity and Capital Adequacy") for FSCO
and its subsidiaries. The objective of the ALCO process is to ensure that FSCO's
balance sheet structure maintains prudent levels of risk, within the context of
currently known and forecasted economic conditions, and to establish strategies
which provide FSCO with appropriate compensation for the assumption of those
risks. Formal policies and procedures govern the ALCO process. This process,
structured by FSCO's senior management and approved by its board of directors,
guides FSCO and each subsidiary bank continuously through changing economic and
market events. Utilizing on- and off-balance sheet products, FSCO's liquidity,
market risk, and interest rate risks are limited to prudent levels while
earnings opportunities are maximized. As of March 1, 1998, FSCO contracted with
its new subsidiary, FS Capital Markets, to merge FSCO's corporate-wide ALCO
process under the direction of the several ALCO committees and the boards of
directors of the subsidiaries.
ASSET/LIABILITY MANAGEMENT:
LIQUIDITY
FSCO's liquidity management objective is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for profitable business expansion. FSCO has established specific
policies and procedures governing liquidity management through the ALCO process.
Plans to address current and future liquidity needs are developed in the ALCO
process and executed through FSCO's subsidiary banks, and its Capital Markets
and Treasury Division.
FSCO maintains an adequate liquidity position in large part through stable
deposits generated from its widespread branch network (see: "Table 12:
Deposits"), the prudent use of debt (see: "Table 13: Short-Term Borrowings",
and "Table 14: Long-Term Debt"), from a high quality AFS securities portfolio
(see: "Interest-Earning Assets and Asset Quality - Available For Sale
Securities"), and from the loan portfolio. The average life of the AFS
securities portfolio is relatively short, providing a constant stream of
maturing and reinvestable assets which could be converted into cash without
significant loss of value should the need arise. Maturing balances in the large
loan portfolio also provide flexibility in managing cash flows. Assets may also
be sold or securitized in order to provide funding. The ability to redeploy
these funds is an important source of medium to long term liquidity. FSCO
monitors its liquidity levels on a daily basis through its Capital Markets /
Treasury area and on a monthly basis through its ALCO process.
FSCO has had continued success during 1997 in obtaining core deposits, without
having to offer above-market interest rates, through market growth, special
programs, and the efforts of its branch system. As a result, FSCO has been able
to maintain a strong, stable net interest margin as well as adequate liquidity.
FSCO has also utilized external funding sources, such as corporate and bank
notes as well as securitizations, in its normal course of business. These
funding sources have enabled FSCO to maximize earning assets while continuing
to maintain satisfactory liquidity goals. FSCO issued European Medium Term
Notes during the year and continued to use Federal Home Loan Bank Notes to
provide additional sources of funding. Additionally, plans are in place to
effect vehicle and mortgage loan securitizations during 1998.
Backup sources of liquidity are provided by: credit lines to FSCO; Federal
funds lines carried by FSCO's subsidiary banks; borrowings from the Federal
Home Loan Bank; bank note issuances by FSCO's subsidiary banks; and borrowings
from the Federal Reserve System.
FSCO's deposits totaled a record $11.4 billion at December 31, 1997, up $1.3
billion or 13.0% from year-end 1996 (see: "Table 12: Deposits"). This increase
was due to FSCO's continued emphasis on its deposit gathering functions, the
success of several deposit programs oriented to customers' needs, and $234
million in deposits added with the ABN acquisition (see: "Mergers and
Acquisitions"). The ratio of loans to deposits was 98.36% at December 31, 1997,
up from 95.98% at year end 1996. This ratio, as well as other loan and
liquidity ratios, varies with changes in economic cycles and is monitored
closely through FSCO's ALCO process to ensure that the proper balance is
maintained between risk and economic opportunities.
FSCO's debt, which included short-term borrowings and long-term debt, totaled
$4.9 billion at December 31, 1997, up $1.1 billion or 30.0% from year-end 1996
(see: "Table 13: Short-Term Borrowings", and "Table 14: Long-Term Debt"). The
components of FSCO's debt at December 31, 1997, compared with December 31,
1996, are discussed below.
* Federal funds purchased and securities sold under repurchase agreements were
$3.3 billion, up $0.7 billion or 27.8%. This increase occurred as FSCO funded,
on an interim basis, the loan growth generated by business-cycle opportunities
in its market areas, and funded growth in AFS securities through repurchase
agreements.
* All other short-term borrowed funds were $353 million, up $65 million or
22.5%. This increase was due in part to maturing issues formerly classified
as long-term debt.
* Long-term debt was $1.3 billion, up $360 million or 38.2%. This increase was
due to the October 10, 1997 issuance of $300 million of Floating Rate European
Medium Term Notes due in 2002 under a $1 billion program as part of FSCO's use
of diverse funding sources discussed above, and new Federal Home Loan Bank
borrowings. The increase was partially offset by the ongoing maturity of
existing long-term debt.
<TABLE>
TABLE 12: DEPOSITS (in thousands)
<CAPTION>
5-Year
Compound
97/96 Growth
As of December 31, 1997 1996 1995 1994 1993 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
Noninterest-bearing deposits $2,431,006 $2,423,596 $2,015,487 $1,834,861 $1,767,175 0.3 10.2
Interest-Bearing Deposits:
Interest-bearing demand accounts 436,382 1,170,978 1,144,814 1,149,084 1,080,845 (62.7) (15.0)
Savings accounts 1,369,760 1,493,117 1,380,067 1,302,771 1,355,022 (8.3) 5.6
Money market accounts 2,348,183 1,222,468 1,167,378 1,257,656 1,197,887 92.1 16.6
Time deposits of $100,000 or more:
Maturing in 3 months or less 380,344 268,195 279,617 328,170 213,188 41.8 8.5
Over 3 months through 6 months 194,661 147,297 152,090 77,180 68,505 32.2 27.1
Over 6 months through 12 months 414,546 198,074 188,846 87,941 75,520 109.3 53.7
Over 12 months 410,438 258,642 135,925 121,537 76,075 58.7 48.0
Memo: Foreign office 168,016 75,565 88,949 - - 122.3 NM
Other time deposits 3,432,314 2,920,640 2,738,620 2,282,836 1,962,655 17.5 9.9
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
Total Interest-Bearing Deposits 8,986,628 7,679,411 7,187,357 6,607,175 6,029,696 17.0 9.7
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
TOTAL DEPOSITS $11,417,634 $10,103,007 $9,202,844 $8,442,036 $7,796,871 13.0 9.8
=============================================== ============ ============ ============ ============ ============ ======= =======
<FN>
NM: Not Meaningful.
</TABLE>
<TABLE>
TABLE 13: SHORT-TERM BORROWINGS (in thousands)
<CAPTION>
5-Year
Compound
97/96 Growth
As of December 31, 1997 1996 1995 1994 1993 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
End Of Period Balance:
Federal funds purchased & securities sold $3,252,259 $2,545,327 $1,946,756 $2,175,597 $1,387,109 27.8 28.1
Other short-term borrowings 352,940 288,041 261,233 184,552 99,796 22.5 46.6
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
Weighted Average Rate:
Federal funds purchased & securities sold 5.38% 5.12% 5.44% 5.37% 2.93%
Other short-term borrowings 6.08 9.40 6.89 6.00 3.38
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
Average Outstandings For The Year:
Federal funds purchased & securities sold $2,649,889 $1,801,694 $1,699,989 $1,945,621 $1,065,495 47.1 23.3
Other short-term borrowings 319,857 255,713 206,645 72,874 56,146 25.1 42.7
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
Weighted Average Rate For The Year:
Federal funds purchased & securities sold 5.33% 5.04% 5.60% 4.23% 2.97%
Other short-term borrowings 6.85 6.87 6.61 5.59 4.19
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
Highest Month-End Balance For The Year:
Federal funds purchased & securities sold $3,252,506 $2,552,987 $2,450,703 $2,648,541 $1,387,109 27.4 21.8
Other short-term borrowings 480,292 321,962 349,678 184,552 99,796 49.2 39.6
=============================================== ============ ============ ============ ============ ============ ======= =======
</TABLE>
<TABLE>
TABLE 14: LONG-TERM DEBT (in thousands)
<CAPTION>
5-Year
Compound
97/96 Growth
As of December 31, 1997 1996 1995 1994 1993 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
Parent Company:
Medium term notes due 1994-2003 $32,750 $32,750 $50,000 $50,000 $31,250 - 0.9
Floating rate notes due 1999 6,842 6,984 7,175 7,475 7,910 (2.0) (3.9)
7.875% senior notes due 1999 98,962 98,962 99,462 100,000 - - NM
6.875% senior notes due 2006 150,000 150,000 - - - - NM
7.50% subordinated notes due 2002 75,000 75,000 75,000 75,000 75,000 - -
7.00% subordinated notes due 2005 125,000 125,000 125,000 - - - NM
Subsidiaries:
Guaranteed preferred beneficial interests -
8.41% subord. capital income sec. due 2026 150,000 150,000 - - - - NM
Floating rate European medium term notes due2002 300,000 - - - - NM NM
Other long-term notes: banks 647,397 583,476 583,623 602,170 137,221 11.0 109.3
Other long-term notes: nonbanks 402 1,039 689 1,775 1,155 (61.3) (20.8)
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
Total Debt With Original Maturity Over 1 Year 1,586,353 1,223,211 940,949 836,420 252,536 29.7 64.4
Less maturities under 1 year included in
short-term borrowings 281,890 279,156 220,428 150,994 27,700 1.0 125.8
- ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------- -------
TOTAL LONG-TERM DEBT $1,304,463 $944,055 $720,521 $685,426 $224,836 38.2 59.3
=============================================== ============ ============ ============ ============ ============ ======= =======
<FN>
NM: Not Meaningful.
</TABLE>
ASSET/LIABILITY MANAGEMENT:
MARKET RISK MANAGEMENT
Market risk is the risk of an increase or decrease in the market value / price
of a financial instrument due to anticipated or unanticipated changes in
prevailing interest rates, exchange rates or equity prices. FSCO's market risk
is composed primarily of interest rate risk throughout FSCO's balance sheet,
and to a lesser extent, market price risk in trading account securities. FSCO
has no material foreign currency exchange rate risk, commodity price risk, or
equity price risk.
ASSET/LIABILITY MANAGEMENT:
INTEREST RATE RISK - OTHER THAN TRADING ACCOUNT SECURITIES
FSCO's quantitative asset / liability management utilizes simulation modeling
as its primary tool in determining the earnings and cash flow effects of
current and projected risk strategies under varying economic and interest rate
scenarios. Interest sensitivity gap and product-specific duration analysis are
also employed to provide a general overview and other perspectives of FSCO's
risk profile.
Qualitative asset / liability management takes place in formal ALCO meetings,
where risk profiles, sensitivities and recommended risk strategies are
discussed in the context of the competitive business environment. Final
strategies are approved, which are then executed in FSCO's subsidiary banks
through the lending and deposit gathering functions, and in its Capital Markets
and Treasury Division, where on- and off-balance sheet tools are utilized to
achieve ALCO objectives.
In 1997, FSCO continued to maintain a relatively neutral interest rate risk
position and a conservative balance sheet. During the year, a strong regional
economy resulted in average loan growth of $1.4 billion or 14.9%, while
successful deposit promotions helped to generate average deposit growth of $0.8
billion or 8.8%, which was a healthy increase but not sufficient to entirely
fund the loan growth. FSCO utilized securitizations and external funding
sources to support a portion of its asset growth, including the issuance of
$300 million of Floating Rate European Medium Term Notes and new Federal Home
Loan Bank borrowings (see: "Asset / Liability Management - Liquidity").
FSCO took advantage of its strong capital ratios and further leveraged the
balance sheet in 1997 through an increase in the average AFS securities
portfolio of $0.7 billion or 23.2%. This increase was primarily funded through
the use of repurchase agreements.
FSCO is well positioned to support continued strong loan growth through growth
of regular deposit programs, the sale and / or runoff of securities, additional
securitizations, and access to external sources of funding.
During 1997, $50 million notional amount in new off-balance sheet derivative
positions were negotiated in connection with a $50 million brokered deposit
program. FSCO's derivatives portfolio decreased in 1997 principally due to
maturities of positions. When appropriate, new derivative transactions will be
considered.
Two interest rate risk monitoring tools, static interest rate gap analysis and
net income simulation, are currently used by FSCO to measure the level of
interest rate risk.
FSCO's static interest rate gap analysis measures the exposure to interest rate
risk based upon the mismatch between the maturity or repricing of interest-
earning assets and interest-bearing liabilities on the balance sheet at a given
point in time. The mismatch is calculated using the contractual maturity and
repricing dates for all such assets, liabilities, and derivative instruments.
Core deposits with indeterminate maturities are categorized based upon the
pricing behavior of estimated core and non-core components. These behaviors are
reviewed at least on an annual basis. The static interest rate gap analysis
also factors in prepayment estimates for FSCO's loan portfolio.
At December 31, 1997, FSCO's static interest rate gap analysis as a percent of
interest-earning assets for the 90 day and one year cumulative periods
projected the following approximate results:
Static 90 day Cumulative Gap (2.2%)
Static 1 year Cumulative Gap (2.1%)
These results were well within FSCO's policy guidelines in which mismatched
positions of assets and liabilities are restricted to 15% of interest-earning
assets during the 90-day and one-year periods.
FSCO's net income simulation model forecasts 12 and 15 month net income under
varying scenarios which incorporate changes in the absolute level of interest
rates, changes in the shape of the yield curve, and changes in interest rate
relationships. FSCO's management evaluates the effects on net income of
alternative interest rate scenarios against a base net income scenario. The
base scenario is developed from internal FSCO economic projections.
The net income simulation model includes forecasts from FSCO's various business
lines. Growth assumptions for all FSCO balance sheet items are derived based
upon management's outlook coupled with historical analysis which incorporates
seasonality patterns where applicable. Each business line provides reinvestment
assumptions and yield / rate analyses. Mortgage loan prepayments are developed
from industry median estimates of prepayment speeds for portfolios having
similar coupons and seasoning characteristics. Deposit seasonality and pricing
is based upon historical analysis and is reviewed periodically. All key
assumptions are reviewed at least annually.
At December 31, 1997, FSCO's net income simulation projected the following
approximate increase (decrease) in net income compared with its base case net
income over one year:
2.8% if rates were shocked down 200 basis points
(4.4%) if rates were shocked up 200 basis points
For the same shock scenarios, FSCO's net interest margin would rise by
approximately 1.5% or fall by approximately 2.5%, well within its policy
guidelines of 10%.
At December 31, 1997, FSCO exhibited slight liability sensitivity for the one-
year time horizon and minimal overall interest rate risk.
Additionally, specialized reports are produced for the AFS securities and
mortgage loan portfolios to monitor and control interest rate risk within
products characterized by embedded prepayment or explicit options. With the
complexity of FSCO's balance sheet increasing continuously, FSCO identifies and
implements the latest techniques and tools to measure and monitor risk while
enhancing returns. The ALCO policies and procedures guide the balance sheet
product selections and offerings to those which are well understood and
manageable by FSCO.
FSCO has used off-balance sheet derivative products for many years in managing
interest rate risk (see: "Note 11: Commitments, Contingent Liabilities, and
Financial Instruments with Off-Balance Sheet Risk"). The components of FSCO's
off-balance sheet derivative products at December 31, 1997, compared with
December 31, 1996, are discussed below.
* Derivative Products Used in the ALCO Process. Interest rate swaps, caps, and
floors have all served as useful tools to increase FSCO's flexibility in
protecting itself against adverse effects of interest rate volatility. FSCO
does not act as a dealer in these transactions, but as an end user of off-
balance sheet derivative products. The ALCO has established policies and
procedures which govern the use of derivatives. All off-balance sheet positions
used in the ALCO process are regularly reviewed for effectiveness, market risk,
and counterparty credit exposure. Off-balance sheet instruments used for
interest rate risk management activities, including interest rate swaps, caps,
and corridors, were $1.5 billion notional amount at year-end 1997. Excluding
CrossLand Mortgage for which 1996 year end data was not available, off-balance
sheet instruments used for interest rate risk management activities were $368
million notional amount at year-end 1997, down from $618 million notional
amount at year-end 1996.
ASSET/LIABILITY MANAGEMENT:
MARKET RISK - TRADING ACCOUNT SECURITIES
FSCO's trading account securities consist of cash securities, financial
futures, and option contracts. Financial futures and options contracts related
to FSCO's trading account securities totaled $12.6 billion notional par value,
up $2.5 billion from $10.1 billion notional par value at year-end 1996. This
position consisted of futures and options contracts on short-term Federal
funds, one month LIBOR, and three month Eurodollars with a small position in
U.S. Treasury Bond contracts. Market risk for trading account securities is
monitored on a daily basis through an assessed dollar value of risk per basis
point method. The net risk position of FSCO's trading account securities
(including futures, options, and on-balance sheet securities) at December 31,
1997, was $35,873 per basis point (0.01%) change in yield, compared with
$43,075 at year-end 1996, and well within FSCO's $55,400 limit. For comparative
purposes, this risk equates to that of FSCO owning an $84 million position in
five year U.S. Treasury Notes. Fluctuations in these positions are common as
traders take advantage of opportunities in the short term futures and options
markets. Additionally, on a monthly basis the trading position is evaluated
against small and large movements in interest rates, assumed to be
instantaneous and parallel, and other spread factors that may affect the value
of these securities or contracts. This analysis is reported to management as
part of the risk monitoring process. Financial futures, options contracts, and
other trading account securities are traded for profit or used to hedge market
risk in the same way that on-balance sheet securities are purchased and sold,
and they are subject to the same policies and loss control limit.
OTHER ASSETS AND LIABILITIES
FSCO's intangible assets were $285 million at December 31, 1997, up $98 million
or 52.1% from year-end 1996, due to goodwill associated with recent acquisitions
and increased originated mortgage servicing rights from higher loan production.
Fluctuations in other assets and other liabilities were in part due to the
effect of timing differences on cash, accounts receivable, and accounts payable
resulting from unsettled transactions in the purchase and sale of securities.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
FSCO's stockholders' equity was increased to a record $1.4 billion at December
31, 1997, up $0.2 billion or 15.0% from year-end 1996 (see: Financial
Statements "Consolidated Balance Sheets"). This growth was due to earnings
retained, the issuance of 5.4 million shares of new common stock, after
adjusting for the February 1998 stock split, for the ABN acquisition, and the
impact of the SFAS 115 net unrealized gain (loss) on AFS securities, partially
offset by repurchases of 3.8 million shares of common stock, after adjusting
for the stock split, in the public markets in 1997.
FSCO repurchases shares of its common stock at prevailing prices in the open
market as permitted by applicable rules. FSCO repurchases shares to reduce
dilution to existing shareholders and take advantage of market price savings,
and uses these shares for ongoing employee benefit plans, acquisitions
accounted for under the purchase method, and other needs. On February 19, 1998,
FSCO's Board of Directors rescinded a stock buyback program that had been
announced on November 18, 1997. FSCO had completed approximately 80% of the
3.375 million, adjusted for the 1998 stock split, share buyback program.
Application of SFAS 115 has resulted in, and will continue to result in,
additions to or deductions from FSCO's total stockholders' equity due to
fluctuations in the fair value of AFS securities. These fluctuations are shown
in the "Net unrealized gain (loss) on AFS securities" component of equity.
FSCO's ratio of stockholders' equity to total assets was 7.72% at December 31,
1997, compared with 7.88% at year-end 1996. The ratio of tangible common equity
to tangible assets was 6.24% at December 31, 1997, down from 6.74% at year-end
1996, reflecting the goodwill recognized with the ABN merger and the ongoing
origination of mortgage servicing rights.
A comparison of FSCO to its BHCPR peer group as of September 30, 1997 showed
that: FSCO's ratio of stockholders' equity to total assets was 8.06%, which was
above the peer group average of 7.90%; and its ratio of tangible common equity
to tangible assets was 6.61%, which was above the peer group average of 6.02%.
Regulations permit FSCO's $150 million of Guaranteed Preferred Beneficial
Interest - 8.41% Subordinated Capital Income Securities due 2026, issued in
1996, to be included in Tier 1 Capital for purposes of calculating the Tier 1
Leverage ratio and FSCO's risk-based capital ratios.
FSCO's risk-based capital ratios remained strong at December 31, 1997 due to
earnings retained and the above-mentioned Capital Income Securities (see:
"Table 15: Capital Ratios and Risk-Based Capital Ratios"). FSCO's risk-based
capital ratios at December 31, 1997 and 1996, respectively, were: Tier 1 at
10.62%, down from 11.34%; and Total Capital at 13.42%, down from 14.41%. The
leverage ratio at December 31, 1997 was 7.53%, down from 8.15% at year-end 1996.
FSCO and its subsidiary banks have exceeded regulatory requirements for "well
capitalized" status every year since these requirements were established. It
is FSCO's policy to maintain the "well capitalized" status at both the
consolidated and subsidiary bank levels.
With its strong equity and risk-based capital ratios, FSCO is well positioned
to selectively invest in profitable business opportunities, while maintaining
capital ratios at levels determined to be prudent and conservative by
management.
<TABLE>
TABLE 15: CAPITAL RATIOS AND RISKED-BASED CAPITAL RATIOS
<CAPTION>
FSCO FS Bank (A) FSB New Mexico FSB Nevada Cal.State Bank
As of December 31, 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Capital Ratios:
Stockholders' equity / assets [EOP] 7.72% 7.88% 7.75% 7.92% 6.51% 6.51% 12.87% 7.07% 9.82% 10.24%
Stockholders' equity / assets [Avg] 8.11 8.28 8.18 8.42 6.52 6.23 12.14 7.77 10.31 10.22
Tangible common equity / tangible assets [EOP] 6.24 6.74 6.42 6.66 6.50 6.50 7.45 7.07 8.08 8.09
Leverage ratio (B) 7.53 8.15 7.04 7.12 6.29 6.55 7.04 6.85 7.65 7.50
Risk-Based Capital Ratios:
Tier 1 risk-based capital ratio 10.62 11.34 9.64 9.52 13.28 13.53 13.05 10.99 11.11 10.51
Total (Tier 1 + 2) risk-based capital ratio 13.42 14.41 11.03 11.07 14.54 14.79 14.31 12.25 12.36 11.76
=============================================== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
<FN>
Notes:
(A) FSCO created FS Bank from these mergers: FSB Utah and FSB Idaho (June 1996); FSB Oregon (May 1997);
FSB Wyoming (November 1997).
(B) Federal Reserve Board guidelines provide that all bank holding companies (other than those that meet certain
criteria) maintain a minimum leverage ratio of 3%, plus an additional cushion of 100 to 200 basis points.
The guidelines also state that bank organizations experiencing internal growth or making acquisitions will be
expected to maintain "strong capital positions" substantially above the minimum supervisory levels without
significant reliance on intangible assets.
</TABLE>
COMMON AND PREFERRED STOCK
First Security Corporation's common stock is traded on Nasdaq under the symbol
FSCO, and is included in the Standard & Poors' "MidCap 400 Index", and the
Keefe, Bruyette & Woods, Inc. "KBW 50 Index".
On January 26, 1998, FSCO declared a 3-for-2 common stock split in the form of
a 50% stock dividend paid on February 24, 1998, to common shareholders of
record on February 12, 1998. As a result of the split, shareholders received
one additional share of FSCO common stock for every two shares held. This was
FSCO's third stock split since year-end 1995. All common stock and earnings per
common share data in this report reflect this stock split.
Also on January 26, 1998, FSCO increased its quarterly common stock dividend to
$0.130 per share after adjusting for the stock split, up $0.017 per share or
15.0% from the previous $0.113 per share. This dividend was paid on March 12,
1998, to shareholders of record on February 25, 1998, and equated to an annual
dividend rate of $0.520 per share. This was the fourth dividend increase since
year-end 1995.
On April 21, 1997, FSCO declared a 3-for-2 common stock split in the form of a
50% stock dividend paid on May 15, 1997, to shareholders of record on May 12,
1997. As a result of the split, shareholders received one additional share of
FSCO common stock for every two shares held. All common stock and earnings per
common share data in this report also reflect that stock split.
Also on April 21, 1997, FSCO increased its quarterly common stock dividend,
restated for all 3-for-2 common stock splits, to $0.113 per share, up $0.011
per share or 10.8% from the previous $0.102 per share. This dividend was paid
on June 2, 1997, to shareholders of record on May 16, 1997, and equated to an
annual dividend rate of $0.452 per share.
FSCO paid quarterly common stock dividends of $0.102 per share in the first
quarter of 1997, and $0.113 per share in each of the last three quarters of
1997, for a total of $0.442 per share in 1997. Common stock dividends paid
totaled $78.0 million in 1997, for a dividend payout ratio of 37.46%.
The 1997 dividends marked the 63rd consecutive year in which FSCO has paid cash
dividends on its common stock. National and state banking and insurance
regulations impose restrictions on the ability of FSCO's bank and insurance
subsidiaries to transfer funds to FSCO in the form of loans or dividends.
Such restrictions have not had, nor are they expected to have, any effect on
FSCO's current ability to pay dividends. FSCO's current and past record of
dividend payments should not be construed as a guarantee of similar dividend
payments in the future.
After adjusting for the 1998 stock split, the bid price of FSCO common stock
was $27.917 per share at the close of the market on December 31, 1997, versus
a book value of $7.59 per share, resulting in a market-to-book ratio of
367.81%. In comparison, the bid price of FSCO common stock was $15.167 per
share at the close of the market on December 31, 1996, versus a book value of
$6.72 per share, resulting in a market-to-book ratio of 225.70%. At December
31, 1997, FSCO's common stock market capitalization was a record $5.1 billion,
up $2.4 billion or 87.3% from year-end 1996 and representing a five-year
compound growth rate of 31.7%.
The approximate number of beneficial shareholders of FSCO common stock was
estimated to be 17,957 at year-end 1997, compared with an estimated 18,843
at year-end 1996.
For the years covered in this report, FSCO's preferred stock was convertible
into FSCO common stock at the conversion rate, restated for the stock split, of
one share of preferred stock for 41.00625 shares of common stock. There is no
active trading market for FSCO's preferred stock.
OFF-BALANCE SHEET ITEMS
During 1997, FSCO had "off-balance sheet" commitments consisting primarily of
loan commitments to customers, and derivative products used in the ALCO process
or carried in the trading accounts (see: "Asset / Liability Management", "Note
1: Summary of Significant Accounting and Reporting Policies", and "Note 11:
Commitments, Contingent Liabilities, and Financial Instruments with Off-Balance
Sheet Risk").
INFLATION ACCOUNTING AND CAPITAL COMMITMENTS
FSCO has determined that the effects of changing prices on financial data were
not significant to operating results for all years covered by this report.
FSCO had no material capital expenditure commitments at year-ends 1997 or 1996.
<TABLE>
TABLE 16: QUARTERLY FINANCIAL HIGHLIGHTS (in thousands, except per share data & ratios)
<CAPTION>
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
1997 1997 1997 1997
<S> <C> <C> <C> <C>
- ----------------------------------------------- ---------- ---------- ---------- ----------
Common & Preferred Stock Data:
Earnings per common share: basic $0.31 $0.30 $0.29 $0.28
Earnings per common share: diluted 0.30 0.29 0.28 0.27
Tangible EPCS: diluted 0.31 0.33 0.30 0.29
Dividends paid per common share 0.113 0.113 0.113 0.102
Book value per common share [EOP] 7.59 7.48 7.26 6.67
Tangible book value per common share [EOP] 6.05 6.04 5.84 5.63
Market price (bid) [EOP] 27.917 19.833 18.209 14.278
High bid for the period 27.917 21.333 19.000 16.555
Low bid for the period 19.083 17.583 14.445 14.222
Market capitalization (mktprice x #shrs) [EOP] 5,148,509 3,664,543 3,365,296 2,564,143
Market price / book value per com share [EOP] % 367.81 265.17 250.64 213.92
Dividend payout ratio (DPCS / EPCS: basic) % 36.45 37.67 38.97 36.43
Dividend yield (DPCS / mktprice) [EOP] % 1.62 2.28 2.48 2.86
Price / earnings ratio(mktprice/4qtrsEPCS:basic) 23.7x 17.1x 16.1x 13.1x
Common shares: basic [EOP] 184,422 184,770 184,815 179,587
Common shares: basic [Avg] 184,583 184,717 179,359 180,225
Common shares: diluted [Avg] 191,671 191,268 185,609 186,323
Preferred shares [EOP] 10 10 10 10
- ----------------------------------------------- ---------- ---------- ---------- ----------
Income Statement:
Interest income $328,965 $315,683 $294,255 $274,475
Interest expense 163,388 152,373 141,775 129,904
Net interest income 165,577 163,310 152,480 144,571
Fully taxable equivalent (FTE) adjustment 4,176 2,336 1,851 2,007
Net interest income, FTE 169,753 165,646 154,331 146,578
Provision for loan losses 21,243 13,921 14,074 14,148
Noninterest income 106,876 87,543 82,006 80,733
Noninterest expenses 164,944 149,830 140,658 133,472
Provision for income taxes 28,235 31,066 28,550 27,681
Net income 58,031 56,036 51,204 50,003
Preferred stock dividend requirement 7 7 8 8
Common stock dividend 20,038 20,318 19,569 17,760
- ---------------------------------------------- ---------- ---------- ---------- ----------
Balance Sheet - End of Period:
Trading account securities $255,320 $87,154 $274,014 $388,264
Available for sale (AFS) securities 4,351,525 4,109,176 3,642,437 3,504,187
Memo: fair value adjust AFS securities 37,678 19,196 2,081 (29,988)
Loans, net of unearned income 11,230,766 11,159,090 10,528,449 9,504,520
Reserve for loan losses (157,525) (152,951) (150,170) (144,225)
Total interest-earning assets 16,044,477 15,374,616 14,729,459 13,479,168
Intangible assets 285,156 265,492 263,523 188,281
Total assets 18,151,783 17,145,647 16,413,522 15,210,069
Noninterest-bearing deposits 2,431,006 2,391,563 2,435,479 2,239,273
Interest-bearing deposits 8,986,628 8,531,915 8,039,087 7,779,223
Total deposits 11,417,634 10,923,478 10,474,566 10,018,496
Short-term borrowed funds 3,605,199 3,399,509 3,285,243 2,564,633
Long-term debt 1,304,463 954,463 959,897 986,417
Total interest-bearing liabilities 13,896,290 12,885,887 12,284,227 11,330,273
Preferred stockholders' equity 501 510 532 532
Common stockholders' equity 1,400,345 1,381,980 1,342,678 1,198,625
Parent company investment in subsidiaries 1,555,112 1,503,053 1,450,529 1,295,226
- ----------------------------------------------- ---------- ---------- ---------- ----------
Balance Sheet - Average:
Trading account securities $163,330 $178,070 $360,339 $168,094
Available for sale (AFS) securities 4,190,292 3,728,035 3,521,411 3,364,555
Memo: fair value adjust AFS securities 28,511 13,808 (17,755) 3,328
Loans, net of unearned income 11,214,784 10,829,751 10,006,397 9,639,518
Reserve for loan losses (153,922) (151,204) (144,385) (142,549)
Deferred taxes on leases (192,903) (186,212) (187,553) (183,598)
Total interest-earning assets, excluding fair value
adjust AFS sec's & deferred tax on leases 15,415,241 14,612,051 13,785,315 13,094,975
Intangible assets 271,770 262,789 195,413 188,328
Total assets 17,295,476 16,394,898 15,433,778 14,778,665
Noninterest-bearing deposits 2,231,130 2,260,560 2,215,276 2,103,117
Interest-bearing deposits 8,658,839 8,223,536 7,781,168 7,740,893
Total deposits 10,889,969 10,484,096 9,996,444 9,844,010
Short-term borrowed funds 3,350,840 3,210,660 2,889,451 2,415,102
Long-term debt 1,246,482 971,356 989,408 950,850
Total interest-bearing liabilities 13,256,161 12,405,552 11,660,027 11,106,845
Preferred stockholders' equity 506 524 532 535
Common stockholders' equity 1,384,287 1,362,645 1,214,361 1,220,949
=============================================== ========== ========== ========== ==========
<FN>
Notes:
EOP: End of period. EPCS: Earnings Per Common Share. DPCS: Dividends Per Common Share. AFS: Available For Sale.
</TABLE>
<TABLE>
TABLE 16: QUARTERLY FINANCIAL HIGHLIGHTS (in thousands, except per share data & ratios) (continued)
<CAPTION>
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
1996 1996 1996 1996
<S> <C> <C> <C> <C>
- ----------------------------------------------- ---------- ---------- ---------- ----------
Common & Preferred Stock Data:
Earnings per common share: basic $0.29 $0.27 $0.25 $0.21
Earnings per common share: diluted 0.29 0.26 0.24 0.21
Tangible EPCS: diluted 0.30 0.29 0.27 0.23
Dividends paid per common share 0.102 0.093 0.093 0.093
Book value per common share [EOP] 6.72 6.45 6.24 6.15
Tangible book value per common share [EOP] 5.68 5.46 5.26 5.24
Market price (bid) [EOP] 15.167 12.167 10.667 12.333
High bid for the period 15.167 12.500 12.278 12.333
Low bid for the period 12.500 10.556 10.167 10.296
Market capitalization (mktprice x #shrs) [EOP] 2,748,928 2,201,925 1,926,735 2,186,332
Market price / book value per com share [EOP] % 225.70 188.62 170.98 200.63
Dividend payout ratio (DPCS / EPCS: basic) % 35.17 34.44 37.20 44.29
Dividend yield (DPCS / mktprice) [EOP] % 2.69 3.06 3.49 3.02
Price / earnings ratio(mktprice/4qtrsEPCS:basic) 14.7x 15.4x 14.2x 17.3x
Common shares: basic [EOP] 181,244 180,975 180,626 177,275
Common shares: basic [Avg] 181,147 180,833 180,169 177,011
Common shares: diluted [Avg] 186,807 185,930 185,172 182,183
Preferred shares [EOP] 10 10 11 11
- ----------------------------------------------- ---------- ---------- ---------- ----------
Income Statement:
Interest income $277,714 $266,125 $252,638 $242,914
Interest expense 129,355 122,748 117,106 116,119
Net interest income 148,359 143,377 135,532 126,795
Fully taxable equivalent (FTE) adjustment 2,444 1,799 1,212 2,367
Net interest income, FTE 150,803 145,176 136,744 129,162
Provision for loan losses 11,799 9,758 10,755 8,988
Noninterest income 86,444 74,360 77,879 67,761
Noninterest expenses 139,923 130,536 133,577 127,183
Provision for income taxes 29,812 28,236 24,544 20,924
Net income 53,269 49,207 44,535 37,461
Preferred stock dividend requirement 8 9 8 8
Common stock dividend 17,903 16,352 16,355 16,165
- ---------------------------------------------- ---------- ---------- ---------- ----------
Balance Sheet - End of Period:
Trading account securities $447,486 $171,910 $150,529 $272,443
Available for sale (AFS) securities 3,324,797 3,334,967 2,880,534 2,797,288
Memo: fair value adjust AFS securities 1,687 (13,752) (21,726) (2,925)
Loans, net of unearned income 9,697,351 9,384,280 9,147,284 8,674,686
Reserve for loan losses (142,693) (141,850) (141,779) (135,727)
Total interest-earning assets 13,752,286 13,045,845 12,275,540 11,908,217
Intangible assets 187,427 178,876 175,953 160,248
Total assets 15,456,649 14,472,464 13,768,854 13,244,250
Noninterest-bearing deposits 2,423,596 2,147,941 2,069,112 1,908,095
Interest-bearing deposits 7,679,411 7,582,940 7,459,660 7,371,440
Total deposits 10,103,007 9,730,881 9,528,772 9,279,535
Short-term borrowed funds 2,833,368 2,405,684 2,056,393 1,820,469
Long-term debt 944,055 821,932 723,728 675,460
Total interest-bearing liabilities 11,456,834 10,810,556 10,239,781 9,867,369
Preferred stockholders' equity 540 549 553 563
Common stockholders' equity 1,217,300 1,167,370 1,126,855 1,089,713
Parent company investment in subsidiaries 1,283,229 1,230,586 1,190,481 1,143,532
- ----------------------------------------------- ---------- ---------- ---------- ----------
Balance Sheet - Average:
Trading account securities $130,319 $159,258 $172,737 $328,072
Available for sale (AFS) securities 3,333,526 3,099,065 2,873,980 2,714,367
Memo: fair value adjust AFS securities 5,840 (24,413) (16,278) 20,447
Loans, net of unearned income 9,559,157 9,236,768 8,946,262 8,560,002
Reserve for loan losses (142,016) (141,755) (137,404) (135,115)
Deferred taxes on leases (177,841) (172,614) (166,840) (164,953)
Total interest-earning assets, excluding fair value
adjust AFS sec's & deferred tax on leases 12,984,592 12,434,284 11,966,748 11,576,300
Intangible assets 181,321 176,930 169,417 154,579
Total assets 14,576,830 13,888,814 13,422,557 12,963,272
Noninterest-bearing deposits 1,912,222 1,780,120 1,755,868 1,825,223
Interest-bearing deposits 7,707,678 7,600,350 7,444,619 7,241,621
Total deposits 9,619,900 9,380,470 9,200,487 9,066,844
Short-term borrowed funds 2,392,917 2,080,251 1,927,057 1,825,465
Long-term debt 831,910 771,128 691,766 691,535
Total interest-bearing liabilities 10,932,505 10,451,729 10,063,442 9,758,621
Preferred stockholders' equity 543 550 557 566
Common stockholders' equity 1,105,649 1,073,952 1,044,724 1,098,290
=============================================== ========== ========== ========== ==========
<FN>
Notes:
EOP: End of period. EPCS: Earnings Per Common Share. DPCS: Dividends Per Common Share. AFS: Available For Sale.
</TABLE>
<TABLE>
TABLE 16: QUARTERLY FINANCIAL HIGHLIGHTS (in thousands, except per share data & ratios) (continued)
<CAPTION>
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
1997 1997 1997 1997
<S> <C> <C> <C> <C>
- ----------------------------------------------- ---------- ---------- ---------- ----------
Problem Assets & Potential Problem Assets - End of Period:
Total nonaccruing loans $36,876 $38,088 $38,829 $33,846
Other real estate 7,981 6,789 8,449 8,759
Total nonperforming assets 44,857 44,877 47,278 42,605
Accruing loans past due 90 days or more 20,841 20,109 20,727 20,662
Total problem assets 65,698 64,986 68,005 63,267
Potential problem assets 7,423 11,654 9,742 12,450
- ----------------------------------------------- ---------- ---------- ---------- ----------
Reconciliation of the Reserve for Loan Losses:
Reserve for loan losses, beginning $152,951 $150,170 $144,225 $142,693
Total loans charged off (24,363) (18,976) (22,520) (20,334)
Total recoveries of loans charged off 7,694 7,836 9,932 7,718
Net loans (charged off) recovered (16,669) (11,140) (12,588) (12,616)
Provision for loan losses 21,243 13,921 14,074 14,148
Acquisitions - - 4,459 -
Reserve for loan losses, ending 157,525 152,951 150,170 144,225
- ----------------------------------------------- ---------- ---------- ---------- ----------
Other Data - End of Period (not rounded):
Full-time equivalent employees 7,996 7,826 7,665 7,361
Total domestic bank offices 300 295 291 285
- ----------------------------------------------- ---------- ---------- ---------- ----------
Selected Ratios (%):
Return on average assets (ROAA) 1.33% 1.36% 1.33% 1.37%
Tangible ROAA 1.39 1.56 1.46 1.50
Return on average stockholders' equity (ROAE) 16.63 16.31 16.91 16.60
Tangible ROAE 21.31 22.85 21.83 21.19
Net interest margin, FTE 4.40 4.53 4.48 4.48
Net interest spread, FTE 3.71 3.79 3.73 3.77
Operating expense ratio 59.63 59.18 59.52 58.72
Tangible operating expense ratio 59.04 56.91 57.44 56.72
Productivity ratio 3.78 3.63 3.66 3.66
Loans / deposits [EOP] 98.36 102.16 100.51 94.87
Loans / assets [EOP] 61.87 65.08 64.14 62.49
Reserve for loan losses [EOP] /:
Total loans 1.40 1.37 1.43 1.52
Nonaccruing loans 427.17 401.57 386.75 426.12
Nonaccruing + accruing loans past due 90 days 272.93 262.82 252.15 264.59
Nonaccruing loans / total loans 0.33 0.34 0.37 0.36
Nonaccruing + accr lns past due / total loans 0.51 0.52 0.57 0.57
Nonperforming assets [EOP] /:
Total loans + other real estate 0.40 0.40 0.45 0.45
Total assets 0.25 0.26 0.29 0.28
Total equity 3.20 3.25 3.52 3.55
Total equity + reserve for loan losses 2.88 2.92 3.17 3.17
Problem assets [EOP] /:
Total loans + other real estate 0.58 0.58 0.65 0.67
Total assets 0.36 0.38 0.41 0.42
Total equity 4.69 4.70 5.06 5.28
Total equity + reserve for loan losses 4.22 4.23 4.55 4.71
Net loans charged off / average loans 0.59 0.41 0.50 0.53
- ----------------------------------------------- ---------- ---------- ---------- ----------
Capital Ratios & Risk-Based Capital Ratios (%):
Stockholders' equity / assets [EOP] 7.72 8.06 8.18 7.88
Stockholders' equity / assets [Avg] 8.01 8.31 7.87 8.27
Tangible common equity / tangible assets [EOP] 6.24 6.61 6.68 6.73
Leverage ratio 7.53 7.90 8.02 8.31
Tier 1 risk-based capital ratio 10.62 10.70 10.98 11.45
Total (Tier 1 + 2) risk-based capital ratio 13.42 13.60 14.00 14.62
=============================================== ========== ========== ========== ==========
<FN>
Notes:
EOP: End of period. EPCS: Earnings Per Common Share. DPCS: Dividends Per Common Share. AFS: Available For Sale.
</TABLE>
<TABLE>
TABLE 16: QUARTERLY FINANCIAL HIGHLIGHTS (in thousands, except per share data & ratios) (continued)
<CAPTION>
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
1996 1996 1996 1996
<S> <C> <C> <C> <C>
- ----------------------------------------------- ---------- ---------- ---------- ----------
Problem Assets & Potential Problem Assets - End of Period:
Total nonaccruing loans $35,750 $35,247 $28,268 $27,801
Other real estate 10,672 11,833 13,013 13,189
Total nonperforming assets 46,422 47,080 41,281 40,990
Accruing loans past due 90 days or more 20,393 16,892 17,185 13,774
Total problem assets 66,815 63,972 58,466 54,764
Potential problem assets 8,271 12,283 23,513 7,595
- ----------------------------------------------- ---------- ---------- ---------- ----------
Reconciliation of the Reserve for Loan Losses:
Reserve for loan losses, beginning 141,450 141,779 135,727 135,011
Total loans charged off (18,457) (15,962) (14,427) (15,363)
Total recoveries of loans charged off 7,501 6,275 6,231 7,091
Net loans (charged off) recovered (10,956) (9,687) (8,196) (8,272)
Provision for loan losses 11,799 9,758 10,755 8,988
Acquisitions - - 3,493 -
Reserve for loan losses, ending 142,693 141,850 141,779 135,727
- ----------------------------------------------- ---------- ---------- ---------- ----------
Other Data - End of Period (not rounded):
Full-time equivalent employees 7,391 7,463 7,369 7,338
Total domestic bank offices 284 280 280 285
- ----------------------------------------------- ---------- ---------- ---------- ----------
Selected Ratios (%):
Return on average assets (ROAA) 1.45% 1.41% 1.33% 1.16%
Tangible ROAA 1.56 1.56 1.49 1.29
Return on average stockholders' equity (ROAE) 19.16 18.22 17.14 13.71
Tangible ROAE 24.33 23.85 22.62 17.55
Net interest margin, FTE 4.65 4.67 4.57 4.46
Net interest spread, FTE 3.90 3.92 3.84 3.72
Operating expense ratio 58.98 59.46 62.24 64.59
Tangible operating expense ratio 58.37 59.39 62.20 64.46
Productivity ratio 3.82 3.74 4.00 3.95
Loans / deposits [EOP] 95.98 96.44 96.00 93.48
Loans / assets [EOP] 62.74 64.84 66.43 65.50
Reserve for loan losses [EOP] /:
Total loans 1.47 1.51 1.55 1.56
Nonaccruing loans 399.14 402.45 501.55 488.21
Nonaccruing + accruing loans past due 90 days 254.16 272.06 311.92 326.46
Nonaccruing loans / total loans 0.37 0.38 0.31 0.32
Nonaccruing + accr lns past due / total loans 0.58 0.56 0.50 0.48
Nonperforming assets [EOP] /:
Total loans + other real estate 0.48 0.50 0.45 0.47
Total assets 0.30 0.33 0.30 0.31
Total equity 3.81 4.03 3.66 3.76
Total equity + reserve for loan losses 3.41 3.59 3.25 3.34
Problem assets [EOP] /:
Total loans + other real estate 0.69 0.68 0.64 0.63
Total assets 0.43 0.44 0.42 0.41
Total equity 5.49 5.48 5.19 5.02
Total equity + reserve for loan losses 4.91 4.88 4.61 4.47
Net loans charged off / average loans 0.46 0.42 0.37 0.39
- ----------------------------------------------- ---------- ---------- ---------- ----------
Capital Ratios & Risk-Based Capital Ratios (%):
Stockholders' equity / assets [EOP] 7.88 8.07 8.19 8.23
Stockholders' equity / assets [Avg] 7.59 7.74 7.79 8.48
Tangible common equity / tangible assets [EOP] 6.74 6.92 7.00 7.10
Leverage ratio 8.15 7.34 7.50 7.46
Tier 1 risk-based capital ratio 11.34 10.10 10.29 10.49
Total (Tier 1 + 2) risk-based capital ratio 14.41 13.36 13.65 13.96
=============================================== ========== ========== ========== ==========
<FN>
Notes:
EOP: End of period. EPCS: Earnings Per Common Share. DPCS: Dividends Per Common Share. AFS: Available For Sale.
</TABLE>
MERGERS AND ACQUISITIONS
FSCO's merger and acquisition activity reflects management's strategy of
diversifying and enhancing FSCO's financial services delivery system through
the expansion and geographical diversification of its bank branch network and
nonbank activities (see: "Note 15: Mergers and Acquisitions"). Management
believes that long-term returns on FSCO stockholders' investment will benefit
from these acquisitions, and will continue its strategy of acquiring solid,
well-managed financial services companies when suitable opportunities arise
in new and existing markets.
FSCO regularly evaluates acquisition opportunities and conducts due diligence
activities in connection with possible acquisitions. As a result, acquisition
discussions, negotiations, and actual acquisitions involving cash, debt, or
equity securities may occur. Since an acquisition typically involves the
payment of a premium over the book value of the acquired company, some dilution
of FSCO's book value and earnings per common share may occur.
Effective January 1, 1997, FS Insurance acquired Olson & Haig Employee Benefits
Inc./SKI-MED, a developer of specialty benefit, group health, and incentive
programs.
On March 31, 1997, CrossLand Mortgage purchased the wholesale loan production
branch operations of Harbourton Mortgage Co., L.P. (HMC), with 15 offices
located in 11 states and which originated $2.7 billion in mortgage loans during
1996. HMC was previously a subsidiary of Harbourton Financial Services, L.P.
(NYSE: HBT). This merger placed CrossLand Mortgage among the top mortgage loan
originators in the United States.
On June 30, 1997, American Bancorp of Nevada (ABN), headquartered in Las Vegas,
Nevada, was acquired and merged into FSCO, and its wholly owned subsidiary
American Bank of Commerce was merged into FSCO's First Security Bank of Nevada
(FSB Nevada). This merger made FSB Nevada the fifth largest bank in Nevada,
with combined assets of $850 million, loans of $370 million, deposits of $680
million, and 13 branches.
On February 2, 1998, FSCO acquired Rio Grande Bancshares, Inc. (RGB) and its
subsidiaries First National Bank of Dona Ana County and First National Bank of
Chaves County. RGB had year-end 1997 assets of $417 million, equity of $47
million, diversified loan and deposit portfolios, and 11 branches. RGB has been
in business in southern New Mexico for more than 90 years, and its banks have
10 branches in Dona Ana County and one in Chaves County. On July 1, 1998, FSCO
merged and renamed these subsidiaries as First Security Bank of Southern New
Mexico.
On May 30, 1998, FSCO acquired California State Bank, headquartered in West
Covina, California. At March 31, 1998, CSB had assets of $863.5 million and 17
branches serving small- and middle-market business customers and retail banking
clients in the San Gabriel Valley, as well as Orange, Riverside, and San
Bernardino counties of Southern California. This transaction was accounted for
as a pooling-of-interests merger, requiring the restatement of all prior period
FSCO financial statements. FSCO incurred one-time acquisition charges for this
transaction totaling $7.2 million or $0.037 per share after tax.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During its nearly 70 years of continuous operations, FSCO has experienced
strong growth in assets, deposits, capital and profits. This has been the
result of hard work by the FSCO team and the loyalty and patronage of its
customers. FSCO has also contributed to and benefited from its market areas,
which generally have been economically stable and growing over recent times.
Nevertheless, there have been business cycles along the way, with the downturns
in such cycles resulting from factors that exist in some form today, and which
require attention and careful management. These factors include: the effects of
competition; changing economic conditions in the local, national, and
international economies; technological change and its challenges; changing
regulatory and legislative attitudes; financial market perceptions; and socio-
economic trends. FSCO endeavors to anticipate and manage these many dynamic
factors, yet FSCO's businesses remain subject to rapid change which may impact
the results of operations and financial condition of FSCO.
TECHNOLOGICAL CHANGE AND YEAR 2000 COMPUTER ISSUE
Advances and changes in available technology can significantly impact the
business and operations of FSCO. Currently, a challenging problem exists as
many computer systems worldwide do not have the capability of recognizing the
year 2000 or years thereafter, and some systems may have difficulty in late
1999. No easy technological "quick fix" has yet been developed for this "Year
2000 Computer Issue". This problem creates risks for FSCO from unforeseen
problems in its own computer systems and from third parties with whom FSCO
deals on financial transactions worldwide. Failures of FSCO's and/or third
parties' computer systems could have a material impact on FSCO's ability to
conduct its business, and especially to process and account for the transfer
of funds electronically.
FSCO has been working to solve the "Year 2000 Computer Issue" since 1995. FSCO
is taking all appropriate actions and expending adequate resources to assure
that its computer systems are reprogrammed and / or replaced in time to
effectively deal with transactions through the year 2000 and beyond, and to
protect itself from problems in the data and / or systems of third parties.
FSCO believes that it will be technologically compliant for operating in the
year 2000 and beyond.
As of December 31, 1997, FSCO had completed its assessment of problems and
solutions, and had begun the process of implementing and testing the
corrections. FSCO's expenditures to resolve the "Year 2000 Computer Issue"
currently are estimated to total approximately $20.9 million, including $2.6
million accrued and spent in 1997, plus planned but unaccrued expenditures of
approximately $9.7 million in 1998, $7.6 million in 1999, and $1.0 million in
2000.
The increasing demands for computer access to bank accounts and for the ability
to do banking transactions away from bank premises also present challenges.
Moreover, as world business becomes ever more dependent on electronic media to
conduct business and to preserve business records, such business is made ever
more susceptible to negative impacts from technology failures, energy
disruptions, and technological mischief by those who would hurt a company or a
country.
# # #
<PAGE>
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
February 20, 1998
(May 30, 1998 as to Note 20)
To Our Stockholders:
The management of First Security Corporation (FSCO) is responsible for the
preparation, integrity, and fair presentation of its published financial
statements and all other information presented in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts based on informed judgments
and estimates made by management.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting presented in conformity
with generally accepted accounting principles and the Federal Reserve Board's
instructions for the FR Y-9 Report. The internal control structure contains
monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control structure can provide only reasonable assurance with respect
to financial statement preparation. Further, because of changes in conditions,
the effectiveness of an internal control structure may vary over time.
Management assessed FSCO's internal control structure over financial reporting
presented in conformity with generally accepted accounting principles and the
Federal Reserve Board's instructions for the FR Y-9 Report as of December 31,
1997. This assessment was based on criteria for effective internal control over
financial reporting described in "Internal Control - Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes that FSCO maintained an effective
internal control structure over financial reporting presented in conformity
with generally accepted accounting principles and the Federal Reserve Board's
instructions for the FR Y-9 Report as of December 31, 1997.
The audit committee of FSCO's board of directors is comprised entirely of
outside directors who are independent of FSCO's management. The audit committee
is responsible for recommending to the board of directors the selection of
independent auditors. It meets periodically with management, the independent
auditors, and the internal auditors to ensure that they are carrying out their
responsibilities. The committee is also responsible for performing an oversight
role by reviewing and monitoring the financial, accounting, and auditing
procedures of FSCO in addition to reviewing FSCO's financial reports. The
independent auditors and the internal auditors have full and free access to the
audit committee, with or without the presence of management, to discuss the
adequacy of the internal control structure for financial reporting and any
other matters which they believe should be brought to the attention of the
committee.
Management is also responsible for ensuring compliance with the Federal laws
and regulations concerning loans to insiders and the Federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness laws and regulations.
Management assessed its compliance with the designated safety and soundness
laws and regulations and has maintained records of its determinations and
assessments as required by the FDIC. Based on this assessment, management
believes that FSCO has complied, in all material respects, with the designated
safety and soundness laws and regulations for the year ended December 31, 1997.
/s/ Morgan J. Evans /s/ Scott C. Ulbrich
- ------------------------------------- ---------------------------------------
Morgan J. Evans Scott C. Ulbrich
President and Chief Operating Officer Executive Vice President,
Finance and Capital Markets,
and Chief Financial Officer
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Consolidated Balance Sheets (in thousands)
<CAPTION>
As of December 31, 1997 1996
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 1,219,435 $ 997,327
Federal funds sold and securities purchased under resale agreements 206,266 251,035
- ----------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 1,425,701 1,248,362
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits in other banks 600 31,617
Trading account securities 255,320 447,486
Available for sale securities, at fair value (cost $4,313,847 and $3,323,110, respectively) 4,351,525 3,324,797
Loans held for sale 1,125,616 338,722
Loans (net of reserve for loan losses of $157,525 and $142,693 and unearned income
of $106,369 and $69,940, respectively) 9,947,625 9,215,936
Premises and equipment, net 288,433 251,814
Accrued income receivable 106,974 93,626
Other real estate 7,981 10,672
Other assets 356,852 306,190
Intangible assets 285,156 187,427
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $18,151,783 $15,456,649
==================================================================================================================================
Liabilities And Stockholders' Equity:
Deposits:
Noninterest-bearing $ 2,431,006 $ 2,423,596
Interest-bearing 8,986,628 7,679,411
- ----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 11,417,634 10,103,007
- ----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities sold under repurchase agreements 3,252,259 2,545,327
U.S. Treasury demand notes 21,050 8,885
Other short-term borrowings 331,890 279,156
Accrued income taxes 255,062 182,556
Accrued interest payable 51,928 41,442
Other liabilities 116,651 134,381
Long-term debt:
Guaranteed preferred beneficial interests 150,000 150,000
Other 1,154,463 794,055
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 16,750,937 14,238,809
- ----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock: Series "A", $3.15 cumulative convertible (10 and 10 shares issued, respectively) 501 540
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stockholders' Equity:
Common stock (186,076 and 182,513 shares issued, respectively) 232,595 228,141
Paid-in surplus 115,855 52,200
Retained earnings 1,081,195 945,943
Net unrealized gain on available for sale securities (net of taxes) 23,568 896
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal 1,453,213 1,227,180
Common treasury stock, at cost (1,654 and 1,269 shares, respectively) (52,868) (9,880)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity 1,400,345 1,217,300
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,400,846 1,217,840
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $18,151,783 $15,456,649
==================================================================================================================================
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements Of Income (in thousands, except per share amounts)
<CAPTION>
For the years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans $ 954,992 $830,594 $785,837
Federal funds sold and securities purchased under resale agreements 4,249 5,734 9,381
Interest-bearing deposits in other banks 69 1,080 883
Trading account securities 12,686 10,058 29,096
Available for sale (AFS) securities 241,382 191,925 135,232
Held to maturity (HTM) securities -- -- 13,586
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 1,213,378 1,039,391 974,015
- ---------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits 352,656 326,789 309,431
Short-term borrowings 163,096 108,398 108,930
Long-term debt 71,687 50,141 51,451
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 587,439 485,328 469,812
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 625,939 554,063 504,203
Provision for loan losses 63,386 41,300 22,682
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 562,553 512,763 481,521
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 90,835 83,921 70,301
Other service charges, collections, commissions, and fees 55,473 46,478 36,208
Asset securitization gains 17,515 2,765 --
Bankcard servicing fees and third-party processing fees 34,295 30,469 25,974
Insurance commissions and fees 16,975 15,016 13,655
Mortgage banking activities 117,859 97,580 86,235
Mortgage banking activities MSR amortization (16,146) (11,896) (9,316)
Trust (fiduciary) commissions and fees 26,195 23,104 20,894
Trading account securities gains (losses) 1,446 2,383 6,390
Securities gains (losses) 3,150 4,618 (952)
Other 9,560 12,006 21,249
- ---------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 357,157 306,444 270,638
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest Expenses:
Salaries and employee benefits 304,903 277,706 274,048
Amortization of intangibles 7,537 9,249 9,140
Armored and messenger 6,065 5,865 5,499
Bankcard interbank interchange and fees 34,130 29,396 18,148
Credit, appraisal, and repossession 17,176 14,459 14,267
Fees 9,942 8,832 8,638
Furniture and equipment 46,263 43,252 37,487
Insurance 6,302 5,534 16,232
Marketing 14,258 12,478 11,444
Occupancy, net 36,729 33,096 30,357
Other real estate expenses and loss provision (recovery) 2,022 422 (2,296)
Postage 11,367 11,100 11,272
Professional 15,082 9,020 12,931
Stationery and supplies 18,259 19,583 18,910
Telephone 16,317 14,189 13,278
Travel 9,797 8,261 8,178
Other 32,755 28,777 23,659
Restructuring charge -- -- 44,000
- ---------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 588,904 531,219 555,192
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Provision For Income Taxes 330,806 287,988 196,967
Provision for income taxes 115,532 103,516 72,336
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income 215,274 184,472 124,631
Dividend requirement of preferred stock 30 33 35
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 215,244 $184,439 $124,596
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share Basic $ 1.18 $ 1.03 $ 0.71
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share Diluted $ 1.14 $ 1.00 $ 0.69
=================================================================================================================================
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements Of Stockholders' Equity (in thousands, except per share amounts)
<CAPTION>
Net
Unrealized
Gain (Loss)
on Available
for Sale Common
Preferred Common Paid-In Retained Securities Treasury
Total Stock Stock Surplus Earnings (Net of Taxes) Stock
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995:
As previously reported $ 889,474 $629 $210,757 $ -- $ 741,071 $(54,341) $ (8,642)
Effect of pooling-of-interest transaction 47,894 -- 9,242 19,765 19,987 (1,100) --
- ------------------------------------------------------------------------------------------------------------------------------------
Restated balance, January 1, 1995 $ 937,368 $629 $219,999 $19,765 $ 761,058 $(55,441) $ (8,642)
Net income for the year 124,631 -- -- -- 124,631 -- --
Sale of common stock through dividend
reinvestment and common stock purchase plan 2,671 -- 396 2,275 -- -- --
Sales of stock to employee benefit plans and
employee stock purchase plan 9,163 -- 1,475 4,658 -- -- 3,030
Common stock issued for acquisitions 637 -- 567 70 -- -- --
Cash dividends:
Preferred stock - $3.15 per share (35) -- -- -- (35) -- --
Common stock - $0.33 per share (57,375) -- -- -- (57,375) -- --
Conversion of preferred stock to common -- (58) 55 3 -- -- --
Purchase of common treasury stock (4,459) -- -- -- -- -- (4,459)
Net unrealized gain on available for sale
securities (net of taxes) 69,593 -- -- -- -- 69,593 --
Other 801 -- -- 801 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,082,995 571 222,492 27,572 828,279 14,152 (10,071)
- ----------------------------------------------------------------------------------------------------------------------- ------------
Net income for the year 184,472 -- -- -- 184,472 -- --
Sale of common stock through dividend reinvestment
and common stock purchase plan 3,339 -- 342 2,997 -- -- --
Sales of stock to employee benefit plans and
employee stock purchase plan 7,808 -- 1,323 4,245 -- -- 2,240
Cash dividends:
Preferred stock - $3.15 per share (33) -- -- -- (33) -- --
Common stock - $0.38 per share (66,775) -- -- -- (66,775) -- --
Conversion of preferred stock to common (1) (31) 28 2 -- -- --
Purchase of common treasury stock (2,049) -- -- -- -- -- (2,049)
Net unrealized loss on available for sale
securities (net of taxes) (13,256) -- -- -- -- (13,256) --
Common stock issued 18,494 -- 3,956 14,538 -- -- --
Other 2,846 -- -- 2,846 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,217,840 540 228,141 52,200 945,943 896 (9,880)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for the year 215,274 -- -- -- 215,274 -- --
Sale of common stock through dividend
reinvestment and common stock purchase plan 3,741 -- 264 3,477 -- -- --
Sales of stock to employee benefit plans and
employee stock purchase plan 8,952 -- 1,569 4,613 -- -- 2,770
Common stock issued for acquisitions 97,283 -- 2,844 50,738 (8) -- 43,709
Cash dividends:
Preferred stock - $3.15 per share (30) -- -- -- (30) -- --
Common stock - $0.44 per share (77,955) -- -- -- (77,955) -- --
Conversion of preferred stock to common (1) (39) 38 -- -- -- --
Purchase of common treasury stock (89,467) -- -- -- -- -- (89,467)
Purchase and retirement of common stock (2,969) -- (261) (679) (2,029) -- --
Net unrealized gain on available for sale
securities (net of taxes) 22,672 -- -- -- -- 22,672 --
Other 5,506 -- -- 5,506 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $1,400,846 $501 $232,595 $115,855 $1,081,195 $ 23,568 $(52,868)
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements Of Cash Flows (in thousands, except number of shares)
<CAPTION>
For the years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 215,274 $ 184,472 $ 124,631
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 63,386 41,300 22,682
Provision for (recovery of) loss on other real estate 1,135 (20) (2,809)
Provision for depreciation and amortization 35,419 32,841 28,031
Provision for amortization of intangible assets 7,537 9,249 9,140
Provision for deferred income taxes 58,494 58,293 17,620
Net change in deferred loan origination fees and costs 53,970 52,468 (10,294)
Net amortization of AFS & HTM securities discounts and premiums 2,931 (609) 20
Proceeds from sales of mortgage loans held for sale 5,175,757 3,709,605 3,460,687
Origination of mortgage loans held for sale (5,295,498) (3,253,230) (2,785,149)
AFS & HTM securities (gains) losses (3,085) (4,549) 806
Net realized gains on sold loans (26,613) (6,286) (9,107)
Decrease (increase) in trading account securities 192,166 190,907 (84,567)
Decrease (increase) in accrued income receivable (12,195) (7,452) 3,512
Increase (decrease) in accrued interest payable 8,897 (7,295) 21,028
Increase (decrease) in accrued income taxes 1,372 6,482 (9,153)
Other operating activities (180,149) (245,386) 58,390
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 298,798 760,790 845,468
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sales of available for sale securities 384,267 157,211 283,970
Redemption of matured available for sale securities 1,105,935 1,090,611 902,584
Redemption of matured held to maturity securities -- -- 72,004
Purchases of available for sale securities (2,365,561) (1,779,925) (1,451,752)
Purchases of held to maturity securities -- -- (77,620)
Net (increase) decrease in interest-bearing deposits in other banks 31,107 (8,970) (17,402)
Net increase in loans and leases (2,113,389) (1,490,563) (1,085,713)
Proceeds from sale of auto loans 802,935 10,800 250,068
Purchase of premises and equipment (39,967) (50,057) (46,064)
Proceeds from sales of other real estate 11,530 12,542 15,974
Payments to improve other real estate (3,627) (3,548) (4,312)
Net cash (paid for) received from acquisitions 37,468 15,640 677
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,149,302) (2,046,259) (1,157,586)
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase in deposits 1,080,723 683,042 760,808
Net increase (decrease) in Federal funds purchased and securities sold
under repurchase agreements and U.S. Treasury demand notes 728,777 573,559 (228,841)
Proceeds from issuance of nonrecourse debt on leveraged leases 37,440 71,142 --
Payments on nonrecourse debt on leveraged leases (24,557) (28,099) (31,025)
Proceeds from issuance of long-term debt and short-term borrowings 566,439 585,387 238,806
Payments on long-term debt and short-term borrowings (203,355) (310,033) (127,610)
Proceeds from issuance of common stock and sales of treasury stock 12,693 10,770 11,834
Purchases of treasury stock (89,467) (2,049) (4,459)
Purchases of stock for retirement (2,969) -- --
Dividends paid (77,881) (66,653) (57,401)
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 2,027,843 1,517,066 562,112
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 177,339 231,597 249,994
Cash and Cash Equivalents, Beginning of Year 1,248,362 1,016,765 766,771
- --------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 1,425,701 $ 1,248,362 $ 1,016,765
================================================================================================================================
(continued)
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements Of Cash Flows (in thousands, except number of shares) continued
<CAPTION>
For the years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 578,171 $493,045 $448,145
Income taxes 56,456 37,915 58,244
==================================================================================================================================
Supplemental Schedule of Noncash Investing
and Financing Activities:
Conversion of 736; 595; and 1,105 shares of convertible
preferred stock into 30,149; 23,876; and 45,249 shares of
common stock, respectively $ 39 $ 31 $ 58
==================================================================================================================================
Transfer of loans to other real estate $ 6,165 $ 5,671 $ 11,362
==================================================================================================================================
Securities transferred from held to maturity to available for sale $ -- $ -- $298,019
==================================================================================================================================
Net change in unrealized gain (loss) on available for sale securities
net of deferred taxes (included in stockholders' equity) $ 22,672 $(13,256) $ 69,593
==================================================================================================================================
Tax benefit resulting from certain stock option transactions $ 5,506 $ 2,846 $ 801
==================================================================================================================================
<FN>
In 1997, FSCO acquired American Bancorp of Nevada with total assets of approximately $304,272,000 and liabilities of $271,970,000
through the issuance of 5,337,093 shares of FSCO's common stock. In 1995, FSCO acquired three small companies with total assets of
approximately $2,727,000 and $1,372,000 in liabilities for $482,000 in cash and 454,725 shares of FSCO's common stock.
See notes to consolidated financial statements. (concluded)
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1: Summary Of Significant Accounting And Reporting Policies
First Security Corporation (FSCO), a bank holding company, provides a full
range of financial services to individual and business customers through its
bank and nonbank subsidiaries and their branches in Utah, Idaho, New Mexico,
Oregon, Nevada, Wyoming, and California. FSCO and its subsidiaries are subject
to competition from other financial institutions and to the regulations of
certain federal agencies and undergo periodic examinations by those agencies.
Basis of Financial Statement Presentation. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles. In preparing such financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the balance sheet and the reported amounts of revenues and expenses for the
period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the reserve for loan losses, the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans, and the valuation of mortgage servicing rights. In connection with the
determination of the reserve for loan losses and the valuation of real estate
owned, management obtains independent appraisals for significant properties.
Consolidation. The consolidated financial statements include the accounts of
FSCO and its subsidiaries. The consolidated financial statements for 1997,
1996, and 1995 have been retroactively restated for the 1998 acquisition of
California State Bank (CSB) using the pooling-of-interest method of accounting
(See Note 20). All significant intercompany accounts and transactions are
eliminated in consolidation. The results of operations of insignificant
companies acquired using the pooling-of-interests method and the results of
operations of companies which were acquired and subject to purchase accounting
are included from the dates of acquisition.
Federal Funds Sold and Securities Purchased Under Resale Agreements. Federal
funds sold are unsecured short-term investments entered into with other
financial institutions. Securities purchased under resale agreements are short-
term investments. FSCO's subsidiaries generally hold the securities as
collateral during the term of the investment.
Trading Account, Available for Sale, and Held to Maturity Securities (See Note
4). Trading account securities are carried at fair value with net unrealized
gains or losses included in earnings during the period. Available for sale
securities are carried at fair value with net unrealized gains or losses (net
of taxes) excluded from income and reported as a separate component of
stockholders' equity. Held to maturity securities are reported at amortized
cost, based on management's positive intent and FSCO's and its subsidiaries'
ability to hold such securities to maturity. Gains or losses are determined on
the specific identification method. As allowed for under Financial Accounting
Series "Special Report - A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt Securities", FSCO elected to
reclassify all investments from held to maturity to available for sale in
December 1995.
Loans Held For Sale. Mortgage loans originated for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses are recognized through a valuation allowance by charges
to income.
Loans Receivable (See Note 5). Loans that management has the intent and
ability to hold for the foreseeable future are reported at their outstanding
principal balance adjusted for any deferred fees or costs on originated loans
and unamortized premiums or discounts on purchased loans. Loan origination
fees and certain direct origination costs are capitalized and recognized as
an adjustment of the yield over the life of the related loan.
Mortgage Banking Activities. FSCO originates mortgage loans for sale in the
secondary market. Mortgage servicing rights are capitalized and amortized in
proportion to and over the period of estimated net servicing income from the
related mortgage loans. FSCO's carrying values of mortgage servicing rights
and the amortization thereof are periodically evaluated in relation to
estimated future net servicing revenues. Impairment of mortgage servicing
rights is recorded through a valuation allowance. For purposes of impairment
evaluation and measurement, the mortgage servicing rights are stratified
based on the predominant risk characteristics of the underlying loans. For
FSCO, these risk characteristics include interest rate above and below 9%,
term to maturity 15 and 30 year, and loan type. Mortgage servicing rights are
included with intangible assets in the consolidated balance sheets.
Financial Asset Transfers and Servicing. Effective January 1, 1997, FSCO
adopted Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (as amended by SFAS No. 127, see Note 16). SFAS No. 125
establishes certain criteria for a transfer of assets to qualify as a sale. If
the transfer does not meet these criteria, the transaction is accounted for as
a secured borrowing. SFAS No. 125 also supersedes SFAS No. 122 by establishing
new criteria for when to recognize a servicing asset. All sales of financial
assets during the year have met the qualifications for sale treatment. The
adoption of SFAS No. 125 did not have a material effect on FSCO's consolidated
financial statements.
Lease Financing (See Note 5). Certain of FSCO's subsidiaries lease various
types of equipment to customers under both leveraged and nonleveraged
arrangements. For leveraged leases, a significant part of the cost of the
equipment is financed by other institutional lenders who depend on the related
lease and equipment as collateral for their loans, with no recourse to the
subsidiaries. The investment in lease financing consists principally of rentals
receivable and estimated residual values, less related unearned income.
Unearned income is amortized into income so as to produce a constant periodic
rate of return on the unrecovered investment. Investment tax credits on lease
financing equipment are deferred and amortized to income over the investment
recovery period.
Reserve for Loan Losses (See Note 5). The reserve for loan losses is
established to absorb known and inherent losses primarily resulting from
outstanding loans and leases. Reserves for loan losses on consumer, credit
card, residential mortgage, leases, and other loans with similar homogeneous
characteristics are established for the respective loan portfolio based on
historical loss experience considering current and anticipated economic
conditions. Reserves for loan losses on commercial, commercial real estate,
construction loans, and loan commitments are evaluated on both a specific loan
basis and historical loss experience considering the credit quality,
collateral, financial strength of the borrower and current economic conditions.
Losses are charged and recoveries are credited directly to the reserve. The
provision for loan losses charged to expense is an amount which, in
management's judgment, is sufficient to maintain the balance in the reserve at
an adequate level. While management uses the best information available on
which to base estimates, future adjustments to the reserve may be necessary if
economic conditions, particularly in FSCO's markets, differ substantially from
the assumptions previously used by management.
FSCO accounts for impaired loans in accordance with SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures". A
loan is considered impaired under SFAS No. 114 when, based on current
information, it is probable that the lender will not be able to collect all the
principal and interest due under the contractual terms of the loan. SFAS Nos.
114 and 118 require that an impaired loan be valued based on the present value
of expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, the loan's observable market value or the fair
value of the collateral if the loan is collateral dependent. Cash receipts on
impaired loans not performing are generally applied to reduce principal
balances. FSCO evaluates individual non-homogeneous loans in excess of $1
million for impairment while such loans are on nonaccrual or the loan has been
restructured. Smaller balance, homogeneous loans, including consumer mortgage,
installment, revolving credit, and consumer loans, are collectively evaluated
for impairment. Loans are placed on nonaccrual status upon becoming 90 days
past due as to interest or principal, unless both well-secured and in the
process of collection. Generally, consumer loans not secured by real estate are
not placed on nonaccrual status, but are entirely charged off after 120 days of
becoming past due.
Premises and Equipment (See Note 6). Premises and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization
included in noninterest expenses are computed using accelerated and straight-
line methods over the estimated useful lives of the related assets.
Other Real Estate. Other real estate is carried at the lower of cost or fair
value less estimated selling costs.
Securities Sold Under Repurchase Agreements. In accordance with SFAS No. 125,
securities sold under agreements to repurchase are accounted for as financing
transactions and are recorded at the amount at which the securities will be
reacquired, including accrued interest. Collateralization limits, based on
market values, generally range from 100% to 105%, depending on maturity.
Derivative Financial Instruments. FSCO enters into a variety of derivative
financial instruments as part of its interest rate risk management and in its
trading activities. Derivatives used in trading activities such as financial
futures and options contracts are marked to market. Any changes in the market
value are recognized in income at the time the changes occur and are reported
as noninterest income in the consolidated statements of income. Interest rate
swaps, caps, and corridors are used in FSCO's interest rate risk management
activities and are classified as hedges or matched transactions. Interest-rate
swap agreements are designated with the principal balance and term of specific
debt obligations or loan balances. These agreements involve the exchange of
amounts based on a fixed or variable interest rate for amounts based on
variable or fixed interest rates over the life of the agreement without an
exchange of the notional amount upon which the payments are based. The
differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest income or interest expense depending on
the assets or liabilities designated (the accrual accounting method). The
related amount payable to or receivable from counterparties is included in
other liabilities or assets.
The fair values of the swap agreements are not recognized in the financial
statements. Gains and losses on terminations of interest-rate swap agreements
are deferred as an adjustment to the carrying amount of the outstanding assets
or liabilities and amortized as an adjustment to interest expense or income
over the remaining term of the original contract life of the terminated swap
agreement. In the event of the early extinguishment of a designated asset or
debt obligation, any realized or unrealized gain or loss from the swap would be
recognized in income coincident with the extinguishment. For those derivatives
classified as hedges, the derivative is marked to market with the gains and
losses deferred and amortized as a yield adjustment over the life of the
underlying assets or liabilities. Premiums paid are deferred and amortized over
the life of the agreement on a straight-line basis.
FSCO purchases and sells interest-rate cap and corridor agreements that hedge
specific customer transactions and limit its exposure to interest rates. The
strike price of these agreements exceeds the current market levels at the time
they are entered into. The interest rate indices specified by the agreements
have been and are expected to be highly correlated with the interest rates FSCO
incurs on these transactions. Payments to be received/paid as a result of the
specified interest rate index differing from the strike price are accrued in
income receivable/interest payable and are recognized as an offset to interest
income/expense (the accrual accounting method). The cost of these agreements is
included in other assets and amortized to interest income/expense ratably
during the life of the agreement. Upon termination of an interest-rate cap
agreement, to the extent it represents the value attributable to the market
interest rate differing from the strike rate of the cap/corridor, the gain/loss
is deferred in other liabilities and amortized over the remaining term of the
original contractual life of the agreement as an offset of interest income/
expense. Additional gains or losses are recognized in earnings. Any notional
amounts of agreements in excess of the balance of the customer transaction
expected to be outstanding during their terms would be marked to market, with
changes in market value recorded in other income (expense).
Income Taxes (See Note 9). FSCO utilizes an asset and liability approach for
financial accounting and reporting for income taxes. Deferred income taxes
are provided for temporary differences in the bases of assets and liabilities
as reported for financial statement purposes and income tax purposes.
Interest and Fees on Loans. Accrual of interest on a loan is discontinued
when the borrower has defaulted for a period of 90 days or more in the
payment of principal or interest, or both, unless the loan is well-secured
and in the process of collection. Loan origination fees net of certain loan
origination costs are deferred and recognized over the lives of the related
loans as an adjustment of the yield.
Stock-Based Compensation. In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation", which
became effective for FSCO beginning January 1, 1996. SFAS No. 123 requires
expanded disclosures of stock-based compensation arrangements with employees
and encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Since FSCO has decided to
disclose the effects of SFAS No. 123 on a proforma basis and to continue to
follow APB 25 (as permitted by SFAS No. 123) as it relates to stock-based
compensation, the appropriate required disclosure of the effects of SFAS No.
123 are included in Note 13.
Intangible Assets. Included in intangible assets is the excess of cost over
fair value of net assets acquired of companies acquired using the purchase
method of accounting. Such excess is amortized on the straight-line basis
over five to 25 years and periodically reviewed for impairment.
Goodwill. Impairment of goodwill is determined on a periodic basis in
accordance with Accounting Principles Board Opinion No. 17, "Intangible
Assets". There were no significant impairments of goodwill during 1997 or 1996.
Long-Lived Assets. Impairment of long-lived assets, including goodwill, is
determined by evaluating long-lived assets on a periodic basis in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and of
Long-Lived Assets to be Disposed Of", which was adopted on January 1, 1996.
Assets determined to be impaired are written down to their fair value. There
were no significant impairments during 1997 or 1996.
Consolidated Statements of Cash Flows. For purposes of reporting cash flows,
cash and cash equivalents include cash and due from banks as well as federal
funds sold and securities purchased under resale agreements with an original
maturity of 90 days or less.
Earnings Per Share. Effective December 31, 1997, FSCO adopted SFAS No. 128,
"Earnings Per Share", and retroactively restated its earnings per share (EPS)
for 1997, 1996, and 1995 to conform with SFAS No. 128. Additional restatements
were made to reflect the effects of the 3-for-2 stock split announced January
26, 1998 and the stock splits that were paid May 15, 1997 and February 17, 1996
(See Note 12).
Reclassifications. Certain reclassifications of CSB amounts, and previously
reported FSCO 1996 and 1995 amounts, have been made to conform to FSCO's 1997
classifications.
NOTE 2: Restructuring Charge
In December 1995, FSCO completed an intensive review of its operations and
businesses and announced the results of a corporate-wide process redesign plan
called Project VISION. The process redesign was done to generate efficiencies
and enhance profitability of business and administrative work processes of all
operations of FSCO. As a result of this process redesign, FSCO recorded a $44.0
million pre-tax restructuring charge, $27.7 million after-tax, in December 1995.
Included in the restructuring charge were reduction in force costs of $20.5
million associated with employees from all levels throughout FSCO; costs of
$11.5 million associated with owned and leased facilities that will be vacated,
and furniture, equipment and leasehold improvements that will be abandoned or
sold as a result of business and process changes under Project VISION (these
costs include the future lease payments of leased facilities that will be
vacated, estimated losses from the sale of owned facilities that will be
vacated, and estimated losses from the sale or abandonment of furniture,
equipment, and leasehold improvements that will no longer be utilized in the
business operations of FSCO and related costs of charter consolidation); pension
and postretirement curtailment losses of $1.2 million that result from the
elimination of 1,577 full-time equivalent employees thus resulting in a
reduction in active plan participants in FSCO's pension and postretirement
benefit plans; and outside service fees and other costs related to the redesign
effort of $10.8 million.
The following table presents a summary of activity with respect to the
restructuring reserve (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Balance, January 1 $ 9,147 $ 35,218 $ --
Provision charged against income -- -- 44,000
Cash outlays (7,330) (24,023) (3,824)
Noncash charges (890) (2,048) (4,958)
- ------------------------------------------------------------------------------------------
Balance at December 31 $ 927 $ 9,147 $ 35,218
==========================================================================================
</TABLE>
The remaining balance in the restructuring reserve represents severance payable
over the next 12 months.
NOTE 3: Cash And Due From Banks
The Federal Reserve requires FSCO's national banking subsidiaries to maintain
certain average reserve balances with the Federal Reserve or through approved
correspondent banks. For the years ended December 31, 1997 and 1996, the
required average reserve balances were approximately $87,873,000 and
$69,146,000, respectively.
NOTE 4: Trading Account, Available For Sale, And Held To Maturity Securities
The amortized cost and fair value of securities were as follows (in thousands):
<TABLE>
<CAPTION>
Available For Sale: Gross Gross Estimated
Amortized Unrealized Unrealized Fair
As of December 31, 1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Debt Securities issued by U.S. Treasury
and other U.S. Government
agencies and corporations $1,003,935 $ 7,160 $ (234) $1,010,861
Debt securities issued by states
and political subdivisions 297,482 6,309 (207) 303,584
Corporate debt securities 7,521 89 (20) 7,590
Mortgage-backed securities 2,859,331 20,115 (4,450) 2,874,996
Small Business Administration
pool certificates 4,648 219 -- 4,867
Equity securities 69,081 8,978 (281) 77,778
Federal Home Loan Bank and
Federal Reserve stock 71,849 -- -- 71,849
- -----------------------------------------------------------------------------------------------------------------------------
Totals $4,313,847 $42,870 $ (5,192) $4,351,525
=============================================================================================================================
As of December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Debt Securities issued by U.S. Treasury
and other U.S. Government
agencies and corporations $ 797,072 $ 3,570 $ (1,142) $ 799,500
Debt securities issued by states
and political subdivisions 245,127 3,180 (699) 247,608
Corporate debt securities 8,022 53 (40) 8,035
Mortgage-backed securities 2,147,689 8,322 (17,590) 2,138,421
Small Business Administration
pool certificates 14,973 204 (133) 15,044
Equity securities 50,147 6,068 (106) 56,109
Federal Home Loan Bank and
Federal Reserve stock 60,080 -- -- 60,080
- -----------------------------------------------------------------------------------------------------------------------------
Totals $3,323,110 $21,397 $(19,710) $3,324,797
=============================================================================================================================
</TABLE>
The fair value and amortized cost of securities transferred from held to
maturity to available for sale in December 1995, as permitted by supplemental
guidance issued in relation to SFAS No. 115 (see Note 1), were $297,576,000 and
$293,767,000, respectively. The net unrealized gain related to the securities
transferred was $3,809,000.
The amortized cost and estimated fair value of debt securities at December 31,
1997 by contractual maturity are shown below (in thousands). Actual maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Available For Sale Amortized Estimated
Cost Fair Value
[S] [C] [C]
- ----------------------------------------------------------------
Due in one year or less $ 97,005 $ 97,206
Due after one year through five years 957,009 963,976
Due after five years through ten years 188,145 192,383
Due after ten years 66,779 68,470
- ----------------------------------------------------------------
Total debt securities 1,308,938 1,322,035
Mortgage-backed securities 2,859,331 2,874,996
Small Business Administration
pool certificates 4,648 4,867
Equity securities 140,930 149,627
- ----------------------------------------------------------------
Totals $4,313,847 $4,351,525
================================================================
Proceeds, gross gains, and gross losses from sales of securities using the
specific identification method were as follows (in thousands):
Available for Sale
------------------------------
1997 1996 1995
- ---------------------------------------------------
Proceeds $384,267 $157,211 $283,970
===================================================
Gross gains $ 5,596 $ 4,699 $ 2,660
Gross losses (2,446) (81) (3,612)
- ---------------------------------------------------
Net Gains (Losses) $ 3,150 $ 4,618 $ (952)
===================================================
The change in net unrealized holding loss on trading account securities that has
been included in earnings for the years ended December 31, 1997, 1996, and 1995
totaled $618,617, $215,266, and $366,672, respectively.
Interest earned on tax exempt securities was approximately $13,716,000,
$10,802,000, and $9,447,000, respectively, for the years ended December 31,
1997, 1996, and 1995.
At December 31, 1997 and 1996, securities carried at $2,819,619,000 and
$2,474,385,000, respectively, were pledged for various purposes. Included in
these pledged securities were trading account securities totaling $38,775,000
and $66,555,000, respectively.
At December 31, 1997 and 1996, FSCO and its subsidiaries had available for sale
securities sold under repurchase agreements totaling $2,253,032,000 and
$1,998,745,000, respectively. The carrying value, approximate market value,
related repurchase liability, and weighted average interest rate of the
repurchase liabilities related to the securities sold under repurchase
agreements (grouped by maturity of the repurchase agreement) are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------
Collateralized By Collateralized By
- -----------------------------------------------------------------------------------------------------------------
U.S. Treasury U.S. Government U.S. Treasury U.S. Government
Maturity Obligations Agency Obligations Obligations Agency Obligations
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Overnight:
Carrying amount $ 74,077 $ 54,334 $ 44,871 $ 5,785
Market value 74,077 54,334 44,871 5,785
Repurchase liability 71,799 53,639 44,147 4,742
Weighted average interest rate 6.70% 5.95% 6.77% 4.65%
2 to 30 days:
Carrying amount 57,485 484,866 66,377 27,223
Market value 57,485 484,866 66,377 27,223
Repurchase liability 55,772 484,487 63,793 27,326
Weighted average interest rate 5.69% 5.89% 5.40% 5.36%
31 to 90 days:
Carrying amount 497 3,027 1,016 6,486
Market value 497 3,027 1,016 6,486
Repurchase liability 497 3,024 1,007 6,469
Weighted average interest rate 5.70% 5.50% 5.23% 5.33%
Demand:
Carrying amount 197,015 1,352,917 185,911 1,661,031
Market value 197,015 1,352,917 185,911 1,661,031
Repurchase liability 193,273 1,347,896 179,703 1,671,781
Weighted average interest rate 5.63% 5.35% 6.14% 5.67%
=================================================================================================================
</TABLE>
Securities sold under agreements to repurchase averaged approximately
$2,003,242,000 and $1,634,905,000 during 1997 and 1996, and the maximum
amounts outstanding at any month-end during 1997 and 1996 were $2,252,682,000
and $2,086,597,000, respectively. Approximately 25% of the securities sold
under repurchase agreements were delivered to broker-dealers who arranged the
transactions. The broker-dealers may have sold, loaned, or otherwise disposed of
such securities to other parties in the normal course of their operations, and
have agreed to resell to FSCO substantially identical securities at the
maturities of the agreements. The remaining securities sold are either held by
FSCO or delivered into a third-party custodian's account designated by FSCO
under a written custodial agreement that explicitly recognizes FSCO's interest
in the securities.
NOTE 5: Loans
Loans (net of unearned income) consisted of the following (in thousands):
As of December 31, 1997 1996
- ---------------------------------------------------------
Commercial, financial,
and agricultural $2,758,865 $2,269,160
Real estate:
Commercial 1,112,042 1,132,787
Residential 1,558,798 1,631,732
Construction 739,029 559,985
Consumer 2,905,795 3,011,904
Leases 1,030,621 753,061
- ---------------------------------------------------------
Total 10,105,150 9,358,629
Reserve for loan losses (157,525) (142,693)
- ---------------------------------------------------------
Totals $9,947,625 $9,215,936
=========================================================
At December 31, 1997 and 1996, loans carried at approximately $895,308,000 and
$643,653,000, respectively, were pledged for various purposes.
Included in loans were loans to directors, executive officers, and to their
associates as follows (in thousands):
1997 1996
- --------------------------------------------------------
Balance, January 1 $126,117 $ 74,210
Additions 22,262 55,720
Repayments (8,591) (3,813)
- --------------------------------------------------------
Balance, December 31 $139,788 $126,117
========================================================
None of the above loans to directors, executive officers, and to their
associates as of December 31, 1997 and 1996 were nonaccruing, were past due, or
had been restructured.
Concentrations of Credit Risk. Most of FSCO's lending activity is with customers
located in the western United States. An economic downturn in the western United
States would likely have a negative impact on FSCO's results of operations
depending on the severity of the downturn. FSCO maintains a diversified
portfolio and does not have significant on- or off-balance sheet concentrations
of credit risk in any one industry.
Lease financing consisted of the following (in thousands):
As of December 31, 1997 1996
- ------------------------------------------------------
Leveraged leases $ 209,070 $197,207
Non leveraged leases 819,824 555,320
Assets held for sale or lease 1,727 534
- ------------------------------------------------------
Totals $1,030,621 $753,061
======================================================
Changes in the reserve for loan losses were as follows (in thousands):
1997 1996 1995
- --------------------------------------------------------
Balance, January 1 $142,693 $135,011 $138,107
Provision charged
to expense 63,386 41,300 22,682
Reserves acquired
through acquisitions
(Note 15) 4,459 3,493 --
Loans charged off,
net of recoveries of
$33,182, $27,098,
and $28,087,
respectively (53,013) (37,111) (25,778)
- --------------------------------------------------------
Balance, December 31 $157,525 $142,693 $135,011
========================================================
FSCO's investment in impaired loans at December 31, 1997 and 1996, as defined in
SFAS Nos. 114 and 118, totaled $4,688,000 and $5,566,000, respectively. The
SFAS No. 114 allowance related to impaired loans at December 31, 1997 and 1996
was $4,175,000 and $5,566,000, respectively. During the years ended December
31, 1997, 1996, and 1995, FSCO's average investment in impaired loans was
approximately $6,179,000, $7,770,000, and $5,644,000, respectively. Interest
income recognized on impaired loans totaled $261,000, $130,000, and $196,000
for 1997, 1996, and 1995, respectively.
At December 31, 1997 and 1996, total nonaccruing loans were $36,876,000 and
$35,750,000, respectively. Gross interest income foregone on nonaccruing loans
during 1997, 1996, and 1995 was $2,810,000, $3,242,000, and $2,506,000,
respectively. In 1997, there was $1,916,000 of troubled debt restructuring and
none in 1996 and 1995.
During 1997 and 1995, FSCO securitized approximately $802,935,000 and
$250,899,000 of auto loans and sold certificates to investors bearing interest
rates ranging from 6.1% to 6.5% and 6.25%, respectively. FSCO will continue to
service the underlying auto loans for a fee through 2003 and 2001 for the 1997
and 1995 securitizations, respectively.
The estimated fair value of capitalized servicing rights related to the auto
loans securitized was $12,197,000 (net of a valuation allowance of $772,000) at
December 31, 1997. The risk characteristics used to value auto loan and mortgage
loan servicing assets are loss rates, prepayment speed, weighted average
remaining maturities, and weighted average loan ages. A discounted cash flow
model is used to value the auto loan servicing assets using a loss rate of 0.6%,
prepayment assumption of 1.5% (using the Asset-Backed Securities model), and a
discount rate of 9%.
Following is a summary of capitalized servicing rights, net of accumulated
amortization (in thousands):
1997 1996 1995
- ----------------------------------------------------------
Balance, January 1 $ 78,586 $ 52,604 $ 56,130
Originated 103,084 42,678 17,832
Purchased -- -- 1,818
Sold (56,122) (4,800) (13,860)
Amortization (16,146) (11,896) (9,316)
Valuation allowance (772) -- --
- ----------------------------------------------------------
Balance, December 31 $108,630 $ 78,586 $ 52,604
==========================================================
Mortgage Banking Activities. At December 31, 1997 and 1996, FSCO's subsidiaries
were servicing 127,858 and 123,524 mortgage loans, aggregating $11,152,501,000
and $10,664,568,000, respectively, of which $12,995,000 and $18,060,000 were
subserviced as of December 31, 1997 and 1996, respectively. The amount of loan
principal that was delinquent on serviced loans at December 31, 1997 and 1996
was approximately $447,968,000 and $321,946,000, respectively. Related trust
funds were on deposit with FSCO's subsidiary banks.
FSCO sold mortgage servicing rights on a bulk sale basis in 1996 and 1995
related to mortgage loans totaling approximately $0.5 billion and $1.2 billion
with gains of $2.5 million and $7.5 million, respectively. During 1997 FSCO sold
mortgage loan servicing rights on a monthly basis concurrent with the
securitization and marketing of approximately $2.8 billion of mortgage loans.
The value of such servicing rights recognized in accordance with the provisions
of FASB Statement 125 totaled approximately $51.4 million.
The mortgage servicing rights capitalized at December 31, 1997, represents the
rights to service approximately $8.8 billion of mortgage loans. In addition,
FSCO has approximately $2.4 billion of loans for which the mortgage servicing
rights were not capitalized. No valuation allowance was required as of December
31, 1997 or 1996. Mortgage servicing assets are recorded at a discounted fair
value based on an active market for such rights. The estimated fair value of
capitalized mortgage servicing rights was $122,141,000, $96,728,000 and
$62,294,000 at December 31, 1997, 1996, and 1995 respectively.
During the year ended December 31, 1997, FSCO issued 302 GNMA loan pools with
security proceeds of $2,437,749,000. Additionally, FSCO was servicing 1,081 GNMA
loan pools with an outstanding security balance of $1,890,187,000 at December
31, 1997. During the year ended December 31, 1997, FSCO originated 27,825 FHA/VA
insured/guaranteed mortgage loans with loan proceeds of $2,792,895,000.
Additionally, FSCO was servicing 29,983 FHA/VA insured/guaranteed mortgage loans
with an unpaid principal balance of $2,494,477,000 at December 31, 1997.
NOTE 6: Premises And Equipment
Premises and equipment consisted of the following (in thousands):
As of December 31, 1997 1996
- --------------------------------------------------------
Land $ 46,678 $ 37,981
Buildings and improvements 202,377 166,899
Equipment 204,029 239,956
Leasehold improvements 19,921 18,643
Construction in progress 33,591 41,111
- --------------------------------------------------------
Totals 506,596 504,590
Accumulated depreciation
and amortization (218,163) (252,776)
- --------------------------------------------------------
Net $ 288,433 $ 251,814
========================================================
The executive offices of FSCO are located in an owned facility in Salt Lake
City, Utah. In addition, other office buildings are owned in Salt Lake City,
Utah; Boise, Idaho; Las Vegas, Nevada, Albuquerque, New Mexico, and West
Covina, California.
At December 31, 1997, a total of 188 bank offices were in owned buildings, with
the remaining 112 bank offices located in facilities leased under operating
leases with terms ranging from 1 to 30 years and renewal options ranging from 1
to 30 years. Offices of the nonbank subsidiaries are almost all located in owned
quarters.
At December 31, 1997, future minimum lease payments by year related to operating
leases for premises and equipment were as follows (in thousands):
1998 $25,438
1999 20,619
2000 10,617
2001 7,776
2002 5,649
Thereafter 12,557
- -------------------------------------------------
Total $82,656
=================================================
Total rent expense under all operating leases for 1997, 1996, and 1995
approximated $24,551,000, $21,362,000, and $18,854,000, respectively.
NOTE 7: Deposits
Deposits consisted of the following (in thousands):
As of December 31, 1997 1996
- ----------------------------------------------------------------------------
Non interest-bearing demand deposit accounts $ 2,431,006 $2,423,596
Interest-bearing demand and savings 1,806,142 2,664,095
Money market accounts 2,348,183 1,222,468
Time certificates of deposit less than $100,000 3,432,314 2,920,640
Time certificates of deposit of $100,000 or more 1,399,989 872,208
- ----------------------------------------------------------------------------
Totals $11,417,634 $10,103,007
============================================================================
NOTE 8: Line Of Credit
FSCO had a $200 million line of credit at December 31, 1997 which expires in
2000. The line is unsecured and bears interest generally at various calculated
rates or at the prime rates of the lending institutions. There were no
borrowings under the line of credit at December 31, 1997.
NOTE 9: Income Taxes
Accrued income taxes payable consisted of the following (in thousands):
As of December 31, 1997 1996
- ----------------------------------------------------
Current $ 3,124 $ 2,370
Deferred 251,938 180,186
- ----------------------------------------------------
Totals $255,062 $182,556
====================================================
The income tax provisions consisted of the following components (in
thousands):
1997 1996 1995
- -----------------------------------------------------
Current:
Federal $ 51,064 $41,051 $49,156
State 5,974 4,172 5,560
- -----------------------------------------------------
Subtotals 57,038 45,223 54,716
- -----------------------------------------------------
Deferred:
Federal 49,146 48,958 14,410
State 9,348 9,335 3,210
- -----------------------------------------------------
Subtotals 58,494 58,293 17,620
- -----------------------------------------------------
Totals $115,532 $103,516 $72,336
=====================================================
The tax provisions were at effective rates as follows:
1997 1996 1995
- ------------------------------------------------------------------------------
U.S. Federal income tax rate 35.0% 35.0% 35.0%
Change in rate resulting from:
Tax-exempt state and municipal bond income (1.5) (1.4) (1.9)
Amortization of intangibles 0.7 0.9 1.4
State income taxes, net of U.S. Federal income tax benefit 2.9 2.7 2.5
Tax credits and miscellaneous items (2.2) (1.3) (0.3)
- ------------------------------------------------------------------------------
Effective Tax Rates 34.9% 35.9% 36.7%
==============================================================================
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are as follows (in
thousands):
As of December 31, 1997 1996
- -------------------------------------------------------------------------------
Assets:
Loan loss reserve $ 58,347 $ 52,451
Other reserves 647 3,323
Deferred income 3,718 1,639
Other postretirement benefits 1,707 1,438
NOL carryforward 1,498 1,498
Deferred compensation 4,212 3,172
Other 5,153 4,952
- -------------------------------------------------------------------------------
Total Deferred Tax Assets 75,282 68,473
- -------------------------------------------------------------------------------
Liabilities:
Leasing operations 259,596 207,562
Depreciation 5,498 5,068
Pension plan contributions 2,848 1,103
Originated mortgage servicing rights 28,376 19,530
FHLB stock dividends 7,000 5,538
Deferred loan fees 6,084 6,336
Fair value adjustments on available for sale securities 13,982 791
Other 3,836 2,731
- -------------------------------------------------------------------------------
Total Deferred Tax Liabilities 327,220 248,659
- -------------------------------------------------------------------------------
Net Deferred Tax Liability $251,938 $180,186
===============================================================================
NOTE 10: Long-Term Debt
The details of long-term debt, including related short-term maturities, were as
follows (in thousands):
As of December 31, 1997 1996
- -------------------------------------------------------------------------------
Parent company:
Medium-term notes due 1998-2003 $ 32,750 $ 32,750
Floating rate notes due 1999 6,842 6,984
7.875% senior notes due 1999 98,962 98,962
7.50% subordinated notes due 2002 75,000 75,000
7.00% subordinated notes due 2005 125,000 125,000
6.875% senior notes due 2006 150,000 150,000
Subsidiaries:
Bank:
European Medium Term Floating Rate Notes due 2002 300,000 --
Other 647,397 583,476
Guaranteed Preferred Beneficial Interests -
8.41% subordinated capital income securities due 2026 150,000 150,000
Nonbank 402 1,039
- -------------------------------------------------------------------------------
Totals 1,586,353 1,223,211
Less current maturities included
in other short-term borrowings (281,890) (279,156)
- -------------------------------------------------------------------------------
Long-Term Portion $1,304,463 $ 944,055
===============================================================================
Medium Term Notes Due 1998-2003: Senior medium term notes are unsecured and bear
interest at fixed rates ranging from 5.71% to 9.07% with a weighted average
coupon of 6.53%. The notes mature from 1998 to 2003 with interest payable semi-
annually at the stated rate on February 19 and August 19 of each year. Terms of
the notes restrict, among other things, the ability of FSCO to reduce its
ownership in any of its major constituent banks.
Floating Rate Notes Due 1999: The interest rate of these notes is the higher of
1.25% above the defined U.S. Treasury Bill rate or a rate as determined by FSCO.
Interest rates during the three years ended December 31, 1997 have ranged from
5.75% to 7.15% and at December 31, 1997 was 6.45%. The notes are redeemable at
the option of the holder at par on any March l or September l and are subject to
redemption at any time by FSCO at par.
7.875% Senior Notes Due 1999: During 1995, FSCO filed a $300,000,000 debt shelf
registration statement and issued $100,000,000 of senior notes under the shelf
registration statement with interest payable semi-annually on April 15 and
October 15 through 1999. The notes are unsecured.
7.50% Subordinated Notes Due 2002: Subordinated notes of $75,000,000 are
unsecured, with interest payable semi-annually at the stated rate on February 15
and August 15 of each year. The notes are payable at maturity in September 2002
and are not subject to prepayment.
7.00% Subordinated Notes Due 2005: Subordinated notes of $125,000,000 are
unsecured, with interest payable semi-annually at the stated rate on January 15
and July 15 of each year. The notes are payable at maturity in July 2005 and are
not subject to prepayment.
6.875% Senior Notes Due 2006: During 1996, FSCO filed a $600,000,000 debt shelf
registration statement and issued $150,000,000 of senior notes under the shelf
registration statement with interest payable semi-annually on May 15 and
November 15 through 2006. The notes are unsecured.
Guaranteed Preferred Beneficial Interests- 8.41% Subordinated Capital Income
Securities Due 2026: In December 1996, First Security Capital I (the business
trust), a wholly owned subsidiary of FSCO, issued $150,000,000 of subordinated
capital income securities (capital securities) which represent preferred
undivided beneficial ownership interest in the assets of the business trust. The
business trust's sole assets are junior subordinated debentures which have a
distribution rate and distribution payment dates which correspond to the
interest rate and interest payment date of the capital securities and which are
guaranteed by FSCO and due in 2026.
European Medium-Term Floating Rate Notes Due 2002: In October 1997, First
Security Bank, N.A., issued $300,000,000 of European Medium-Term Floating Rate
Notes under a $1 billion note program. The interest rate is based upon the three
month LIBOR and was 5.82% at December 31, 1997. The notes are unsecured and are
redeemable at the option of the issuer in whole on any interest payment date.
Interest is paid quarterly.
Other: Other long-term debt of the banking subsidiaries as of December 31, 1997
consisted of approximately $637,490,000 of advances from the Federal Home Loan
Bank which are collateralized primarily by mortgage loans, bear interest at
rates generally ranging from 3.00% to 8.17%, and are payable principally through
November 2012; and $9,907,000 of miscellaneous notes payable at various rates
and maturities.
Scheduled maturities of long-term debt by year were as follows as of December
31, 1997 (in thousands):
Parent
Company Consolidated
- ---------------------------------------------------
1998 $ 10,842 $ 281,890
1999 103,962 212,928
2000 -- 144,743
2001 8,750 60,219
2002 75,000 401,546
Thereafter 290,000 485,027
- ---------------------------------------------------
Totals $488,554 $1,586,353
===================================================
NOTE 11: Commitments, Contingent Liabilities, And Financial Instruments With
Off-Balance Sheet Risk
At December 31, 1997 and 1996, FSCO and its subsidiaries were involved in
various claims and litigation occurring in the ordinary course of business. In
the opinion of management and its legal counsel, potential liabilities arising
from these claims, if any, will not have a material effect on the consolidated
financial statements of FSCO and its subsidiaries.
FSCO and its subsidiaries are parties to financial instruments with off-balance-
sheet risk in the normal course of business. These financial instruments include
commitments to extend credit, standby letters of credit, commitments to sell
loans and leases, interest rate swaps, caps, corridors, futures contracts, and
options contracts. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated balance sheets.
Loan Commitments and Letters of Credit: At December 31, 1997 and 1996, such
commitments include the following (in thousands):
1997 1996
- ----------------------------------------------------------------------
Standby letters of credit $ 286,525 $ 259,551
Undisbursed construction loans 340,584 339,085
Credit card lines 830,966 756,707
Other loan commitments to customers 3,582,539 2,795,130
Commitments to sell mortgage loans and leases 1,042,014 305,389
======================================================================
FSCO and its subsidiaries' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual
amount of those instruments. FSCO and its subsidiaries use the same credit
policies in making commitments and conditional obligations as they do for on-
balance-sheet instruments. Market risk arises from changes in interest rates.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Derivative Trading Activities: FSCO uses financial futures and option contracts
in its proprietary trading activities, which include trading for profit. The
overall trading strategies of FSCO not only include futures and options but also
include cash market securities. FSCO's futures and options had net gains
(losses) of $1,013,000, $3,018,000, and $(3,032,000) for the years ended
December 31, 1997, 1996, and 1995, respectively. For the years ended December
31, 1997, 1996, and 1995, total income including gains and interest from FSCO's
overall trading activities (including non-derivative securities) was
$14,132,000, $12,369,000, and $35,486,000, respectively. All trading activities
including futures and options contracts are subject to FSCO's policies and loss
limit controls. Market risk arises from changes in interest rates. Credit risk
arises from the potential inability of a counterparty to meet the interest
payment obligations on its transactions.
Financial futures contracts represent commitments to purchase (asset) or sell
(liability) securities or money market instruments at a future date and at a
specified price. Futures contracts are traded on organized exchanges (exchange
traded) and are exchange guaranteed, thereby minimizing FSCO's credit risk. The
net change in the futures contract value is settled daily in cash with the
exchanges. Net gains or losses resulting from FSCO's daily settlements are
included with trading account securities gains (losses) in the consolidated
statements of income.
Options contracts grant the buyer the right, but not the obligation, to purchase
or sell, at a specified price, a stated number of units of an underlying
financial instrument, such as treasury securities, Eurodollars, and foreign
currency, at a future date. Options contracts are exchange traded. The price of
an option contract is equal to the premium paid by the purchaser and is
significantly less than the contract or notional amount. Option contracts are
marked to market monthly with net gains or losses recognized currently in
trading account securities gains (losses) in the consolidated statements of
income. Cash is exchanged with the counterparties on the option contracts'
settlement dates.
Financial futures contracts and option contracts as of December 31, 1997 and
1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Contract Average Assessed Dollar
(Notional) Fair Fair Value Net Value at Risk
Amount At Value At for the Gains At Year End(3)
Year End(1) Year End(2) Year(2) (Losses) (Unaudited)
<S> <C> <C> <C> <C> <C>
December 31,1997
- ------------------------------------------------------------------------------------------------------------------------
Assets (Long Position):
Financial futures contracts $8,507,000 $ 358 $ 2 $ 883 $82
Options contracts 100,000 18 -- (91) 1
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $8,607,000 $ 376 $ 2 $ 792 $83
========================================================================================================================
Liabilities (Short Position):
Financial futures contracts $1,194,200 $ (28) $ (3) $ (960) $35
Options contracts (written call) 2,834,800 (1,133) 3 1,181 40
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities $4,029,000 $(1,161) $ -- $ 221 $75
========================================================================================================================
December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
Assets (Long Position):
Financial futures contracts $7,901,000 $ (37) $ 6 $2,293 $66
Options contracts -- -- 3 (29) --
Foreign exchange options
contracts (purchased put) -- -- -- 38 --
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $7,901,000 $ (37) $ 9 $2,302 $66
========================================================================================================================
Liabilities (Short Position):
Financial futures contracts $1,204,000 $ 56 $ -- $ 124 $14
Options contracts (written call) 989,000 177 243 592 9
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities $2,193,000 $ 233 $243 $ 716 $23
========================================================================================================================
<FN>
(1) Contract (notional) amounts of futures and options contracts do not represent amounts exchanged by the parties and,
thus, are not a measure of FSCO's exposure through its use of futures and options contracts. The amounts exchanged are
determined by reference to the notional amounts and the other terms of the futures and options contracts.
(2) The fair value of futures and options contracts generally reflects the estimated amounts that FSCO would receive or
(pay) to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or
losses of open contracts.
(3) The assessed dollar value at risk at year end represents the estimated amount of change in fair value of futures
and options contracts with a change in interest rates of one basis point. An increase in interest rates generally
results in a loss in the long position and a gain in the short position. A decrease in interest rates generally results
in a gain in the long position and a loss in the short position.
</TABLE>
Interest Rate Risk Management Activities: FSCO uses off-balance-sheet derivative
instruments to manage volatility of net interest income. Net interest income is
generated from FSCO's investment of interest and noninterest bearing funding
into loans, securities, and other interest-earning assets. Interest rate swaps,
caps, and corridors serve as tools in the management of interest rate risk.
FSCO's asset/liability management committee (ALCO) process is responsible for
the identification, assessment, and management of interest rate risk, liquidity,
and capital adequacy for FSCO and its subsidiaries. The objective of the ALCO
process is to ensure that FSCO's balance sheet structure maintains prudent
levels of risk, within the context of currently known and forecasted economic
conditions, and to establish strategies which provide FSCO with appropriate
compensation for the assumption of those risks. Formal policies and procedures
govern the ALCO process. This process, structured by FSCO's senior management
and approved by its board of directors, guides FSCO and each subsidiary bank
continuously through changing economic and market events. Utilizing on- and
off-balance sheet products, FSCO's market, liquidity, and interest rate risks
are limited to prudent levels while earnings opportunities are maximized.
Off-balance-sheet derivatives also carry credit exposure to counterparties. The
notional amount in a particular contract is not at-risk from a credit
standpoint, rather it is simply the negotiated amount upon which interest
payments are based. Credit risk arises from the potential inability of a
counterparty to meet the interest payment obligations on its transactions. FSCO
settles in cash with its counterparties on a quarterly or semi-annual basis on
dates specified in each contract.
The off-balance-sheet derivative instruments in place on December 31, 1997 and
1996 fall into three categories:
Receive Fixed Interest Rate Swaps are entered into to convert the repricing
characteristics of floating rate assets to less volatile fixed rates. These
structures allow FSCO to add a dual stream of cash flows in which the interest
income received is at a fixed rate and the associated expense varies with the
level of short-term interest rates. The floating side of the transaction is tied
to the level of three-month LIBOR at the beginning or end of each settlement
period.
Interest Rate Corridors (LIBOR/LIBOR) are structured to provide a limited amount
of protection against increases in short-term funding rates. Rate corridors are
accounted for under the settlement basis of accounting previously described. No
interest rate corridors were outstanding at December 31, 1997.
Customer Transactions (principally pay fixed swaps) are negotiated to protect
the spread on certain large-dollar loans to FSCO's customers. Any benefit or
cost arising from these transactions is offset by a corresponding cost or
benefit, respectively, in an on-balance-sheet loan. These transactions are
negotiated on a fairly regular basis in the course of business. FSCO accounts
for its customer transaction swaps based on the settlement method of accounting
described previously. In the event of a swap being terminated prior to the final
settlement date, any gain or loss resulting from the termination would be
deferred as an adjustment to the carrying amount of the outstanding assets or
liabilities and amortized as an adjustment to interest expense or income over
the remaining term of the original contract life of the terminated swap
agreement.
All of the transactions described above have fixed maturity dates and absolute
notional amounts.
The following table summarizes the terms and unrealized gains and losses of
derivative products by category as of December 31, 1997. The fixed rate or fixed
spread to a floating index has been specified for each group within the
category, where applicable. Where three- or six-month LIBOR is used as the index
for one side of the swap, they may be expected to rise and fall as other short-
term market rates rise and fall in response to economic and monetary conditions.
The floating rate in effect on each contract depends on the level of LIBOR on
the contract's last reset date. At December 31, 1997 and 1996, three-month LIBOR
was 5.81% and 5.56%, the six-month LIBOR was 5.84% and 5.60%, and the prime rate
was 8.50% and 8.25%, respectively.
Derivatives used for interest rate management activities as of December 31, 1997
and 1996 were as follows (in millions):
<TABLE>
<CAPTION>
Maturities as of Estimated Estimated
December 31, Fair Market Value At Fair Market Value At
Type and Notional Amount 1997 December 31, 1997 December 31, 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Receive Fixed Swaps:
(Pay 3-month LIBOR):
$300.0 (fixed 4.83%) (expired during 1997) $ -- $(0.6)
$200.0 (fixed 6.24%) May/June 1998 0.4 1.4
$50.0 (fixed 7.125 - 7.35%) May/June 2007 0.1 --
(Pay 6-month LIBOR):
$50.0 (fixed 6.28%) May 1998 0.1 0.3
Customer Transaction Hedges:
$67.6 (1997); $67.8 (1996) Various maturities through 2004 (1.0) (1.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Positions ($367.6 and $617.8
in 1997 and 1996, respectively) $(0.4) $ 0.1
===================================================================================================================================
</TABLE>
NOTE 12: Stockholders' Equity
In January 1996, April 1997, and in January 1998, FSCO's board of directors
approved three-for-two stock splits in the form of dividends to stockholders of
record on February 12, 1996, May 12, 1997, and February 12, 1998, respectively.
The effects of the stock splits have been retroactively reflected in all common
shares and per share amounts in the financial statements and notes as if the
stock splits had occurred prior to 1995.
Earnings Per Common Share: Effective December 31, 1997, FSCO adopted SFAS No.
128, "Earnings Per Share", which established new standards for computing and
presenting EPS. Upon adoption, FSCO restated its EPS for 1997, 1996, and 1995 to
conform with SFAS No. 128. The computations of EPS under SFAS No. 128 are
summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ------------------------------- --------------------------
Per- Per- Per-
Average Share Average Share Average Share
Income Shares Amount Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Income $215,274 $184,472 $124,631
Less preferred stock dividends 30 33 35
- ------------------------------------------------------------------------------------------------------------------------------------
EPS Basic:
Income available to
common stockholders 215,244 182,240 $1.18 184,439 179,767 $1.03 124,596 176,082 $0.71
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of Dilutive Securities:
Options -- 6,089 -- 4,800 -- 3,475
Convertible preferred 30 410 33 433 35 468
- ------------------------------------------------------------------------------------------------------------------------------------
Total dilution 30 6,499 33 5,233 35 3,943
- ------------------------------------------------------------------------------------------------------------------------------------
EPS Diluted:
Income available to common
stockholders with assumed
conversions $215,274 188,739 $1.14 $184,472 185,000 $1.00 $124,631 180,025 $0.69
====================================================================================================================================
</TABLE>
Earnings per common share diluted are computed assuming all outstanding
preferred stock is converted into common shares on the basis of 41.00625 shares
of common for each share of preferred with the elimination of dividends on the
preferred stock, except in those years where the effect of such conversion is
antidilutive, and the effect of stock options outstanding using the treasury
stock method.
Changes in Shares of Stock: A summary of the changes in shares of stock during
the three years ended December 31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
Preferred Stock-
Common Stock - Series "A"
Par Value $1.25 $3.15 Cumulative
Held In Convertible
Issued Treasury No Par
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995:
As previously reported 168,606 1,223 12
Effect of pooling-of-interest transaction 7,394 -- --
- -----------------------------------------------------------------------------------------------------------------
Restated balance, January 1, 1995 176,000 1,223 12
- -----------------------------------------------------------------------------------------------------------------
Sale of common stock through dividend reinvestment
and common stock purchase plan 316 -- --
Purchase of common treasury stock -- 568 --
Conversion of preferred stock to common 45 -- (1)
Common stock issued for acquisitions 455 -- --
Sale of stock to employee benefit plans 632 (223) --
Sale of stock to employee stock purchase plan 546 (202) --
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 177,994 1,366 11
- -----------------------------------------------------------------------------------------------------------------
Sale of common stock through dividend reinvestment
and common stock purchase plan 273 -- --
Purchase of common treasury stock -- 184 --
Conversion of preferred stock to common 24 -- (1)
Sale of stock to employee benefit plans 1,057 (281) --
Common stock issued 3,165 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 182,513 1,269 10
- -----------------------------------------------------------------------------------------------------------------
Sale of common stock through dividend reinvestment
and common stock purchase plan 211 -- --
Purchase of common treasury stock -- 3,826 --
Common stock issued for acquisitions 2,275 (3,256) --
Conversion of preferred stock to common 30 -- --
Sale of stock to employee benefit plans 1,256 (185) --
Purchase and retirement of common stock (209) -- --
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 186,076 1,654 10
=================================================================================================================
Shares Authorized, December 31, 1997 and 1996 300,000 -- 18
=================================================================================================================
Shares Authorized, December 31, 1995 150,000 -- 18
=================================================================================================================
</TABLE>
The liquidating preference of Series "A", $3.15 cumulative convertible preferred
stock is $52.50 a share. At the option of FSCO's board of directors, this stock
is redeemable at $52.50 a share. Each share of Series "A" preferred stock is
convertible at any time into 41.00625 shares of common stock.
One or more additional series of preferred stock, with a combined maximum of
400,000 shares, may be issued with the terms thereof determinable by the board.
A dividend reinvestment and common stock purchase plan for 2,500,000 shares was
established in 1978 to provide common shareholders a means of investing cash
dividends together with optional cash payments. Through December 31, 1997, a
total of 1,494,000 shares were issued pursuant to the plan.
Conversion of all preferred stock outstanding at December 31, 1997 would require
391,000 shares of common stock.
During 1989, FSCO's board of directors approved issuance of a stockholder right
to all common stockholders which entitles each stockholder to buy one one-
thousandth of a share of a new class of preferred stock at an exercise price of
$13.17 in the event a group acquires or announces a tender offer which would
result in ownership of 15% or more of FSCO's common stock by such group.
NOTE 13: Employee Benefit Plans
Retirement Plan: FSCO and its subsidiaries have a retirement plan (the Plan)
which covers generally all employees with one year or more of service of at
least 1,000 hours who are at least 21 years of age. The retirement benefits are
based on years of service and the average of the employee's highest three
consecutive years of base salary with 100% vesting at 5 years of service. FSCO's
policy is to fund the actuarially computed retirement cost accrued.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
The following table sets forth the Plan's funded status and amounts recognized
in the consolidated balance sheets at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Actuarially computed present value of benefit obligations-
accumulated benefit obligation, including vested benefits of
$96,492 and $81,479 at December 31, 1997 and 1996, respectively $ 102,844 $ 83,768
- --------------------------------------------------------------------------------------------------
Plan assets at fair value, primarily common stocks and U.S.
Government debt securities $ 127,296 $ 99,802
Actuarially computed present value of benefit obligations-
projected benefit obligation for service rendered to date (127,894) (105,263)
Unrecognized prior service cost 7,502 8,648
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions (1,776) 2,277
Unrecognized net assets at January 1, 1986 being recognized over 15 years (1,808) (2,282)
- --------------------------------------------------------------------------------------------------
Prepaid Pension Cost Included In Other Assets $ 3,320 $ 3,182
==================================================================================================
<CAPTION>
Assumptions used in determining the projected benefit obligations as of December 31, 1997 and 1996 were:
1997 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Discount rate 7.25% 7.75%
Rate of increase in compensation levels 4.50 4.50
==================================================================================================
<CAPTION>
The net pension expense included the following components (in thousands):
1997 1996 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Service cost for benefits earned during the period $ 6,139 $ 6,433 $ 5,004
Interest cost on projected benefit obligation 8,825 8,033 7,352
Actual loss (return) on plan assets (26,973) (11,130) (18,995)
Net amortization and deferral 18,671 3,195 13,111
- --------------------------------------------------------------------------------------------------------------
Net Pension Expense $ 6,662 $ 6,531 $ 6,472
==============================================================================================================
<CAPTION>
Assumptions used in determining the net pension expense were:
1997 1996 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Discount rate 7.75% 7.25% 8.75%
Rate of increase in compensation levels 4.50 4.50 6.00
Expected long-term rate of return on assets 9.00 9.75 9.75
==============================================================================================================
</TABLE>
401(k) Savings Plan: FSCO and its subsidiaries have a 401(k) contributory
savings plan (the Savings Plan) in which participation is limited to employees
age 21 or older with one year of service. Under provisions of the Savings Plan,
participants may contribute up to 17% of their pre-tax base salary subject to
the "excess contribution" limitations imposed by the tax law. An additional
amount, equal to 50% of the first 6% of the participants' compensation
contributed, is contributed by the employer. Employer contributions to the
Savings Plan were approximately $4,068,000, $3,930,000, and $3,693,000 in 1997,
1996, and 1995, respectively.
Stock-Based Compensation Plans: At December 31, 1997, FSCO has four stock-based
compensation plans, which are described below. FSCO applied APB Opinion 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan. Had compensation cost for FSCO's three stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of SFAS No. 123, FSCO's
net income and earnings per common share would have changed to the pro forma
amounts indicated below:
Years Ended
December 31,
---------------------------------
As of December 31, 1997 1996 1995
- -----------------------------------------------------------------------
Net Income:
As reported $215,274 $184,472 $124,631
Pro forma 213,076 183,779 124,513
- -----------------------------------------------------------------------
Earnings per common share basic
As reported $ 1.18 $ 1.03 $ 0.71
Pro forma 1.17 1.02 0.71
Earnings per common share diluted
As reported 1.14 1.00 0.69
Pro forma 1.13 0.99 0.69
=======================================================================
Comprehensive Management Incentive Plan: FSCO and its subsidiaries adopted a
comprehensive management incentive plan (the Management Plan) which amends,
supersedes, and incorporates FSCO's previous restricted stock bonus plan and its
nonstatutory stock option and stock appreciation rights plan. The Management
Plan provides for the issuance of up to a total of 21,726,563 shares of FSCO's
common stock for all incentive awards under the Management Plan which may
consist of restricted awards of common stock, nonstatutory stock options, stock
appreciation rights, and incentive stock options. However, only 2,657,813 shares
of FSCO's common stock may be issued for restricted awards and performance
awards as defined by the Management Plan.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995, respectively: dividend
yield of 3.4%, 3.72%, and 3.24%; expected volatility of 37%, 35%, and 35%;
risk-free interest rates of 6.56%, 6.27%, and 6.18%, and expected lives of 10
years for 1997, 1996, and 1995.
Nonstatutory stock options outstanding generally become exercisable in 25%
annual increments on each January 15, beginning with the first January 15
following the grant date, and expire after 10 years. Certain nonstatutory stock
options issued to management are exercisable at six months following the grant
date and expire after 10 years. A summary of these options follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 8,459,611 $6.21 8,342,311 $5.27 8,834,875 $5.22
Expired -- NA -- NA -- NA
Granted 1,489,920 14.47 1,047,700 11.99 33,750 8.30
Exercised (1,025,386) 4.25 (916,328) 4.24 (412,907) 8.66
Forfeited (38,376) 12.89 (14,072) 8.85 (113,407) 7.17
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 8,885,769 $7.79 8,459,611 $6.21 8,342,311 $5.27
================================================================================================================================
Options exercisable at year end 5,901,492 5,987,997 5,670,934
================================================================================================================================
Weighted average fair market value
of options granted during year $5.46 $4.46 $3.09
================================================================================================================================
</TABLE>
The following table summarizes information about the Comprehensive Management
Incentive Plan fixed stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- -------------------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------- -------------------------------------------
$ 2.64- $ 4.15 2,167,849 1.70 $ 3.32 2,167,849 $ 3.32
5.22- 7.30 2,365,553 5.20 6.20 2,102,843 6.06
7.33- 12.00 2,879,726 7.30 9.07 1,630,800 8.27
14.39- 18.92 1,472,641 9.10 14.47 -- --
- -------------------------------------------------------------------------- -------------------------------------------
$ 2.64- $ 18.92 8,885,769 7.40 $ 7.79 5,901,492 $ 8.02
========================================================================== ===========================================
</TABLE>
CSB (See Note 20) had stock option plans for directors and key employees. Under
the plans, both incentive stock options and nonqualified stock options were
granted. The exercise price of each option granted was not less than the market
price of CSB's stock at the date of grant. Generally, options granted may be
exercised at a rate of 20% per year and expire ten years from the date of grant.
Activity in the stock option plans for the three years ended December 31, 1997
follows:
Options Price Options
Available Per Share Outstanding
- ------------------------------------------------------------------------------
Balance at Jan. 1, 1995 $306,579 2.81 - 6.55 1,904,991
- ------------------------------------------------------------------------------
Options granted (44,304) 5.87 - 6.75 44,304
Options exercised -- 3.89 - 4.79 (186,251)
Options Cancelled 37,820 4.46 - 6.55 (38,363)
- ------------------------------------------------------------------------------
Balance at Dec. 31, 1995 300,095 2.81 - 6.75 1,724,681
- ------------------------------------------------------------------------------
Options granted (42,600) 6.99 - 7.28 42,600
Options exercised -- 3.69 - 4.76 (160,510)
Options Cancelled 15,975 4.46 - 5.87 (15,975)
- ------------------------------------------------------------------------------
Balance at Dec. 31, 1996 273,470 2.81 - 7.28 1,590,796
- ------------------------------------------------------------------------------
Options granted (58,575) 9.95 -13.50 58,575
Options exercised -- 2.81 - 7.28 (217,249)
Options Cancelled 52,185 4.23 -13.50 (52,185)
- ------------------------------------------------------------------------------
Balance at Dec. 31, 1997 267,080 3.87 -11.74 1,379,937
==============================================================================
At December 31, 1997, 995,896 shares were exercisable at prices varying from
$3.87 to $7.27. An additional 166,992 shares become exercisable in 1998 at
prices ranging from $3.87 to $11.74 per share. After FSCO's acquisition of CSB,
all of CSB's stock options were converted into FSCO stock options at the
conversion rate of 2.13.
Non Employee Director Stock Option Plan: In 1995, FSCO adopted an incentive plan
for the board of directors, which allows up to 1,687,500 options to be granted
to the directors. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1995, respectively:
dividend yield of 3.4% and 3.24%; expected volatility of 37% and 35%; risk-free
interest rates of 6.79% and 7.06%, and expected lives of 10 years. A summary of
these options follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------- ------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 165,375 $ 7.07 182,250 $7.07 -- $ --
Expired -- NA -- NA -- --
Granted 2,250 15.83 -- NA 182,250 7.07
Exercised (10,125) 7.07 (16,875) 7.07 -- --
Forfeited -- NA -- NA -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 157,500 $ 7.20 165,375 $7.07 182,250 $ 7.07
- ----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 94,500 43,875 none
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average fair market value
of options granted during year $ 6.04 -- $ 2.78
==================================================================================================================================
</TABLE>
The following table summarizes information about the nonemployee director fixed
stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------- --------------------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
$ 7.07 155,000 7.4 years $ 7.07 94,500 $ 7.07
15.83 2,250 9.3 years 15.83 none none
==================================================================================================================================
</TABLE>
Employee Stock Purchase Plan: During 1994, FSCO and its subsidiaries adopted an
employee stock purchase plan which allows eligible employees to purchase FSCO's
common stock at fair market value through payroll deductions without incurring
brokers' fees or commissions. Under this plan, 546,750 shares of common stock
were issued to employees in 1995, and no shares of stock were issued to
employees in 1997 or 1996.
Postretirement Benefits: FSCO provides certain health care, dental, and life
benefits for substantially all of its retired employees. The plan's accumulated
postretirement benefit obligation and reconciliation to the consolidated balance
sheets at December 31, 1997 and 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Retirees $ 4,074 $ 3,634
Fully eligible plan participants 461 408
Other active plan participants 2,232 1,928
- --------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 6,767 5,970
Unrecognized net transition obligation (4,320) (4,580)
Unrecognized net loss 1,582 2,067
- --------------------------------------------------------------------------------------------------
Accrued Postretirement Benefit Liability $ 4,029 $ 3,457
==================================================================================================
</TABLE>
FSCO has not funded any part of the accumulated postretirement benefit
obligation.
Net postretirement benefit cost for 1997, 1996, and 1995 consisted of the
following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Service cost-benefits earned during the year $ 208 $ 355 $ 273
Interest cost on accumulated postretirement benefit obligation 468 655 625
Amortization of transition obligation 186 293 260
- ----------------------------------------------------------------------------------------------------------------------
Totals $ 862 $ 1,303 $ 1,158
======================================================================================================================
</TABLE>
The assumed health care cost trend rate used to measure the expected cost of
benefits covered by the plan for 1997 is 9.5%; the rate is assumed to decrease
each successive year until it reaches 5.5% in 2005, after which it remains
constant. A one percent increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1997 by approximately $0.6 million and net postretirement benefit
cost by $0.1 million for the year. The assumed discount rate used in determining
the accumulated postretirement benefit obligation was 7.25% and 7.75% at
December 31, 1997 and 1996, respectively.
Postemployment Benefits: As discussed in Note 2, during 1995 FSCO announced a
restructuring and accrued $1,213,000 relating to severance benefits.
NOTE 14: Restrictions On The Transfer Of Funds
National and state banking and insurance regulations impose restrictions on the
ability of FSCO's bank and insurance subsidiaries to transfer funds to FSCO in
the form of loans or dividends. At December 31, 1997 and 1996, FSCO's equity in
all of its subsidiaries was $1,555,112,000 and $1,283,229,000, respectively,
of which $1,148,016,000 and $951,727,000 were restricted and $407,096,000 and
$331,502,000 were unrestricted by such regulations.
NOTE 15: Mergers And Acquisitions
In 1995, FSCO acquired three small companies with total assets of approximately
$2,727,000 and liabilities of $1,372,000 for $482,000 in cash and 454,725
shares of FSCO's common stock.
In 1996, CSB acquired Landmark Bancorp and its wholly owned subsidiary,
Landmark Bank. A summary of the significant components of the acquisition,
which was accounted for as a purchase, is as follows:
Cash and cash equivalents acquired $ 28,611,000
Fair value of assets acquired 209,542,000
Fair value of liabilities assumed (217,656,000)
Goodwill and other intangible assets 14,229,000
-------------
Consideration paid in cash and stock $ 34,726,000
=============
On June 30, 1997, FSCO issued approximately 5,337,093 shares of its common stock
in exchange for all of the outstanding common stock of American Bancorp of
Nevada (ABN), headquartered in Las Vegas, Nevada. The total assets and
liabilities of ABN at the date of merger were approximately $304,272,000 and
$271,970,000. On March 31, 1997, CrossLand Mortgage purchased the wholesale loan
production and fixed assets of Harbourton Mortgage Co., L.P. (HMC), with
15 offices located in 11 states for approximately $4 million plus earn-out
payments of up to $3.25 million based on 1997 results. The fixed assets
purchased had book value at the date of the merger of $1,595,000. The
acquisitions were accounted for using the purchase method of accounting. The
results of operations of the acquired institutions have been included in the
1997 consolidated financial statements from the dates of acquisition. The
acquisitions created intangible assets for FSCO of approximately $69,519,000.
Pro forma results of operations for 1997 and 1996 as if the companies had
combined at the beginning of the periods are not presented because the effect
was not material.
On October 20, 1997, FSCO announced that it has signed a definitive agreement to
acquire Rio Grande Bancshares, Inc. (RGB), headquartered in Las Cruces, New
Mexico. RGB's assets and liabilities at December 31, 1997 approximate
$416,995,000 and $369,652,000, respectively. This acquisition was completed
February 2, 1998 and was accounted for using the purchase method of accounting.
On February 19, 1998, FSCO announced it has signed a definitive agreement to
acquire California State Bank (CSB) headquartered in West Covina, California.
CSB had year-end assets and liabilities of $849.2 million and $765.8 million,
respectively. This acquisition was closed on May 30, 1998, and was accounted
for as a pooling-of-interests.
NOTE 16: Recently Issued Financial Accounting Standards
In December 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS Statement
No. 125". SFAS No. 127 defers for one year the effective date of certain
provisions of SFAS No. 125 to allow affected enterprises to modify information
systems and accounting processes to comply with SFAS No. 125. The delay applies
to the provisions that deal with secured borrowings and collateral, as well as
to transfers of financial assets for repurchase agreements, dollar rolls, and
securities lending. SFAS No. 127 will be effective for all applicable transfers
occurring after December 31, 1997. The impact of SFAS No. 127 is not expected to
be material in relation to the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. This Statement requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS No. 130 will require FSCO
to add disclosure to the financial statements about comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which redefines how public business
enterprises report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographical areas, and major customers. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The adoption of SFAS No. 131 will result in additional disclosures
regarding FSCO's segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which supercedes SFAS No. 80, "Accounting
for Futures Contracts", FSAS No. 105, "Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentration of Credit Risk", and SFAS No. 119, "Disclosures About
Derivative Financial Instruments and Fair Value of Financial Instruments", and
also amends certain aspects of other SFAS's previously issued. This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999.
FSCO management is currently evaluating the effects of this change in its
accounting for derivatives and hedging activities.
NOTE 17: Capital Requirements
FSCO is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on FSCO's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, FSCO must meet specific capital
guidelines that involve quantitative measures of FSCO's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. FSCO's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require FSCO to maintain minimum amounts and ratios (set forth in the table at
right) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to end of
period assets (as defined). Management believes, as of December 31, 1997, that
FSCO meets all capital adequacy requirements to which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the Office
of the Comptroller of the Currency categorized FSCO's most significant banking
subsidiaries as "well capitalized" under the regulatory framework for prompt
corrective action (see table at right). To be categorized as "well capitalized",
FSCO must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category. FSCO's actual capital amounts and ratios are also presented in the
table. No amounts were deducted from capital for interest-rate risk.
<TABLE>
<CAPTION>
Minimum To Be
"Well Capitalized"
Minimum for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- --------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997
Total Capital (Tier 1 + Tier 2) to Risk Weighted Assets:
Consolidated $1,708,458 13.42% $1,018,117 8.00% $1,272,646 10.00%
FS Bank 1,155,466 11.03 837,871 8.00 1,047,339 10.00
FSB New Mexico 135,440 14.54 74,529 8.00 93,161 10.00
FSB Nevada 79,186 14.31 44,268 8.00 55,335 10.00
CSB 68,952 12.36 44,633 8.00 55,792 10.00
Tier 1 Capital to Risk Weighted Assets:
Consolidated 1,350,932 10.62 509,058 4.00 763,587 6.00
FS Bank 1,010,042 9.64 418,936 4.00 628,403 6.00
FSB New Mexico 123,709 13.28 37,264 4.00 55,897 6.00
FSB Nevada 72,229 13.05 22,134 4.00 33,201 6.00
CSB 61,960 11.11 22,317 4.00 33,475 6.00
Tier 1 Capital to End of Period Assets (Leverage Ratio):
Consolidated 1,350,932 7.53 726,071 4.00 907,589 5.00
FS Bank 1,010,042 7.04 578,330 4.00 722,912 5.00
FSB New Mexico 123,709 6.29 78,864 4.00 98,580 5.00
FSB Nevada 72,229 7.04 42,278 4.00 52,847 5.00
CSB 61,960 7.65 32,397 4.00 40,497 5.00
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996
Total Capital (Tier1 + Tier 2) to Risk Weighted Assets:
Consolidated $1,588,655 14.41% $882,265 8.00% $1,102,831 10.00%
FS Bank 958,361 10.93 701,462 8.00 876,828 10.00
FSB New Mexico 125,075 14.79 67,652 8.00 84,565 10.00
FSB Oregon 47,695 12.94 29,477 8.00 36,846 10.00
FSB Nevada 35,641 12.25 23,283 8.00 29,104 10.00
FSB Wyoming 20,195 14.16 11,410 8.00 14,262 10.00
CSB 61,189 11.76 41,617 8.00 52,022 10.00
Tier 1 Capital to Risk Weighted Assets:
Consolidated 1,250,741 11.34 441,133 4.00 661,699 6.00
FS Bank 822,713 9.38 350,731 4.00 526,097 6.00
FSB New Mexico 114,406 13.53 33,826 4.00 50,739 6.00
FSB Oregon 43,082 11.69 14,739 4.00 22,108 6.00
FSB Nevada 31,978 10.99 11,641 4.00 17,462 6.00
FSB Wyoming 18,400 12.90 5,705 4.00 8,557 6.00
CSB 54,665 10.51 20,809 4.00 31,213 6.00
Tier 1 Capital to End of Period Assets (Leverage Ratio):
Consolidated 1,250,741 8.15 618,266 4.00 772,832 5.00
FS Bank 822,713 7.01 469,451 4.00 586,814 5.00
FSB New Mexico 114,406 6.55 69,866 4.00 87,333 5.00
FSB Oregon 43,082 9.32 18,490 4.00 23,113 5.00
FSB Nevada 31,978 6.85 18,673 4.00 23,342 5.00
FSB Wyoming 18,400 8.58 8,578 4.00 10,723 5.00
CSB 54,665 7.50 29,146 4.00 36,433 5.00
=================================================================================================================================
</TABLE>
NOTE 18: Estimated Fair Value Of Financial Instruments
The estimated fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. In the case of cash and short-term
investments, the carrying amount is considered a reasonable estimate of fair
value. For securities, the quoted market price is used to estimate fair value.
Trading account securities are marked to market, therefore the carrying amount
is considered a reasonable estimate of fair value. The carrying amount of
deposits with no stated maturity, such as demand deposits, money market
accounts, and savings accounts, is considered a reasonable estimate of fair
value. The carrying amounts of securities sold under repurchase agreements and
short-term borrowings are considered a reasonable estimate of fair value. The
fair value of the remainder of on-balance-sheet instruments, such as loans,
certificates of deposit, and long-term borrowings, is estimated by using a
discounted cash flow approach. FSCO employs a modeling tool which discounts
estimated future cash flows through the projected maturity using market discount
rates that approximately reflect the credit risk, operating cost, and interest
rate risk potentially inherent in the instrument.
The estimated fair value of FSCO's financial futures and options used in trading
activities is obtained from market quotes. The estimated fair value of interest
rate swaps, caps, and corridors are obtained from market quotes representing the
estimated amount FSCO would receive or pay to terminate the contracts or
agreements, taking into account current interest rates. The estimated fair value
of commitments to extend credit and letters of credit are estimated using the
maximum fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements, the present creditworthiness of
the counterparties, and the difference between current levels of interest rates
and the committed rates.
Fair value estimates are made as of a specific point in time. Because no market
exists for a significant portion of FSCO's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, interest rate levels, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of judgment and
therefore cannot be determined or relied on with any degree of certainty.
Changes in assumptions could significantly affect the estimates.
A summary of the carrying amounts and estimated fair values for FSCO was as
follows (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and short-term investments $ 1,426,301 $ 1,426,301 $ 1,279,979 $ 1,279,979
Trading account securities 255,320 255,320 447,486 447,486
Available for sale securities 4,351,525 4,351,525 3,324,797 3,324,797
Net loans (excluding leases) 10,051,740 10,214,498 8,810,257 8,828,256
- -------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $16,084,886 $16,247,644 $13,862,519 $13,880,518
===============================================================================================================================
Financial Liabilities:
Total deposits, excluding certificates $ 6,585,345 $ 6,585,345 $ 6,310,159 $ 6,310,159
Certificates of deposit 4,832,289 4,866,477 3,792,848 3,786,455
Short-term borrowings 1,352,764 1,352,764 754,431 754,431
Securities sold under repurchase agreements 2,252,435 2,252,435 2,078,937 2,078,937
Long-term debt 1,304,463 1,283,335 944,055 920,334
- -------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $16,327,296 $16,340,356 $13,880,430 $13,850,316
===============================================================================================================================
Off-Balance Sheet Financial Instruments:
Financial futures and options (trading):
Gains $ 376 $ 376 $ 233 $ 233
Losses (1,161) (1,161) (37) (37)
Interest rate swaps, caps, and corridors-
interest rate risk management -- (356) -- 122
Letters of credit and other commitments
to extend credit -- (21,959) -- (19,723)
- -------------------------------------------------------------------------------------------------------------------------------
Total Off-Balance-Sheet Financial Instruments $ (785) $ (23,100) $ 196 $ (19,405)
===============================================================================================================================
</TABLE>
[CAPTION]
NOTE 19: Condensed Financial Information Of Parent Company Only
<TABLE>
<CAPTION>
Condensed Balance Sheets (in thousands)
December 31, 1997 1996
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
Assets:
Cash $ 54 $ --
Securities purchased under resale agreement with subsidiary bank 15,919 19,954
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents 15,973 19,954
Commercial loans receivable from subsidiaries:
Banks 374,682 408,198
Nonbanks 102,544 135,091
Investments in subsidiaries:
Banks 1,468,125 1,205,251
Nonbanks 86,987 77,978
Other assets 6,474 24,971
- ------------------------------------------------------------------------------------------------------
Total Assets $ 2,054,785 $ 1,871,443
======================================================================================================
Liabilities and Stockholders' Equity:
Accrued interest and preferred dividends payable $ 10,745 $ 10,267
Short-term borrowings 10,842 --
Long-term debt:
With subsidiary 154,640 154,640
Other 477,712 488,696
- ------------------------------------------------------------------------------------------------------
Total Liabilities 653,939 653,603
- ------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock-Series "A", $3.15 cumulative convertible 501 540
- ------------------------------------------------------------------------------------------------------
Common stock (175,163 and 171,608 shares issued, respectively) 232,595 228,141
Paid-in surplus 115,855 52,200
Retained earnings 1,081,195 945,943
Net unrealized gain on available for sale securities
held by subsidiaries (net of taxes) 23,568 896
- ------------------------------------------------------------------------------------------------------
Subtotal 1,453,213 1,227,180
Common treasury stock, at cost (1,654 and 1,269 shares, respectively) (52,868) (9,880)
- ------------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity 1,400,345 1,217,300
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,400,846 1,217,840
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,054,785 $ 1,871,443
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements Of Income (in thousands)
For the years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Income:
Cash dividends from subsidiaries:
Banks $ 80,636 $ 51,231 $ 48,433
Nonbanks -- -- 5,675
Interest (principally from subsidiaries) 36,781 27,415 22,234
- ------------------------------------------------------------------------------------------------------------------------
Total income 117,417 78,646 76,342
Interest expense 48,154 27,415 22,234
Provision for taxes (4,336) -- --
- ------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of subsidiaries 73,599 51,231 54,108
Equity in undistributed earnings of subsidiaries:
Banks 148,342 134,771 77,369
Nonbanks (6,667) (1,530) (6,846)
- ------------------------------------------------------------------------------------------------------------------------
Net Income $ 215,274 $ 184,472 $ 124,631
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements Of Cash Flows (in thousands, except number of shares)
For the years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 215,274 $ 184,472 $ 124,631
Adjustments to reconcile net income to
net cash provided by operating activities (140,329) (128,186) (67,116)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 74,945 56,286 57,515
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of securities (700) (20,000) --
Proceeds from sales of securities 20,000 -- --
Loans and capital contributions made to subsidiaries (263,147) (388,516) (340,630)
Principal collected on loans to subsidiaries 319,710 130,912 208,717
Cash investments in subsidiaries (1,478) (13,210) (2,401)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities 74,385 (290,814) (134,314)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from long-term debt -- 304,640 125,000
Payments on long-term debt and short-term borrowings 174 (17,940) (6,518)
Proceeds from issuance of common stock and sales of treasury stock 11,708 10,466 10,965
Purchase of treasury stock and stock retired (89,467) (2,049) (4,459)
Dividends paid (75,726) (64,926) (56,001)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing Activities (153,311) 230,191 68,987
- ------------------------------------------------------------------------------------------------------------------------
Net Decrease In Cash And Cash Equivalents (3,981) (4,337) (7,812)
Cash And Cash Equivalents, Beginning Of Year 19,954 24,291 32,103
- ------------------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents, End Of Year $ 15,973 $ 19,954 $ 24,291
========================================================================================================================
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the year for:
Interest $ 47,675 $ 26,504 $ 18,067
Income taxes 1,964 19 25
========================================================================================================================
</TABLE>
Supplemental Schedule of Non Cash Investing and Financing Activities (Note 15):
In 1997, FSCO issued 5,337,093 shares of common stock for the acquisition of
American Bancorp of Nevada. FSCO acquired assets of approximately $304,272,000
and assumed liabilities of $271,970,000. In 1995, FSCO issued 454,725 shares of
common stock for the acquisition of two small insurance agencies merged into FS
Insurance, Inc.
NOTE 20: Subsequent Events and Restatement of FSCO's Annual Report on Form 10-K
On May 30, 1998, FSCO acquired California State Bank (CSB) in a pooling-of-
interests merger. For this merger, FSCO issued approximately 11,383,000 shares
of its common stock in exchange for all of the outstanding shares of CSB
common stock, and incurred one-time acquisition charges totaling $7.2 million
or $0.037 per share after tax. There were no material intercompany transactions
between FSCO and CSB prior to the merger. Certain reclassifications/adjustments
have been made to amounts previously reported by CSB to conform to FSCO
accounting practices and policies. Results of operations previously reported
and restated are as follows (in thousands):
Previously Reported: Reclass/ FSCO
FSCO CSB Adjust Restated
- ------------------------------------- --------- --------- --------- ---------
Year ended December 31, 1997:
Net interest income $582,500 $43,352 $87 $625,939
Noninterest income 349,645 7,288 224 357,157
Extraordinary items -- -- -- --
Net income 205,944 9,330 -- 215,274
- ------------------------------------- --------- --------- --------- ---------
Year ended December 31, 1996:
Net interest income $516,576 $37,425 $62 $554,063
Noninterest income 298,686 7,788 (30) 306,444
Extraordinary items -- -- -- --
Net income 177,843 6,629 -- 184,472
- ------------------------------------- --------- --------- --------- ---------
Year ended December 31, 1995:
Net interest income $474,991 $29,212 -- $504,203
Noninterest income 266,492 4,146 -- 270,638
Extraordinary items -- -- -- --
Net income 120,005 4,626 -- 124,631
===================================== ========= ========= ========= =========
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of First Security Corporation:
We have audited the consolidated balance sheets of First Security Corporation
and subsidiaries (FSCO) as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on
our audits. The consolidated financial statements give retroactive effect to
the merger of FSCO and California State Bank, which has been accounted for as
a pooling-of-interests as described in Note 20 to the consolidated financial
statements.
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Security
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE
Salt Lake City, Utah
February 20, 1998
(May 30, 1998 as to Note 20)
EXHIBIT 11. COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
FIRST SECURITY CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE (in thousands, except per share amounts; unaudited)
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------- ------------ ------------ ------------
NET INCOME:
Net income per consolidated income statements 215,274 184,472 124,631
Subtract dividend requirement of preferred stock 30 33 35
- ----------------------------------------------------------- ------------ ------------ ------------
NET INCOME APPLICABLE TO COMMON STOCK (BASIC) 215,244 184,439 124,596
Add dividend requirement of preferred stock 30 33 35
- ----------------------------------------------------------- ------------ ------------ ------------
NET INCOME DILUTED 215,274 184,472 124,631
=========================================================== ============ ============ ============
EARNINGS PER COMMON SHARE BASIC 1.18 1.03 0.71
EARNINGS PER COMMON SHARE DILUTED 1.14 1.00 0.69
=========================================================== ============ ============ ============
SHARES OUTSTANDING (AVERAGE):
Common shares 185,171 181,063 177,353
Treasury shares (2,931) (1,296) (1,271)
- ----------------------------------------------------------- ------------ ------------ ------------
COMMON SHARES BASIC (AVG) 182,240 179,767 176,082
Options: common equivalents 6,089 4,800 3,475
Preferred shares: common equivalents 410 433 468
- ----------------------------------------------------------- ------------ ------------ ------------
COMMON SHARES DILUTED (AVG) 188,739 185,000 180,025
=========================================================== ============ ============ ============
<FN>
Notes:
Earnings Per Common Share Diluted were computed assuming that all outstanding shares of preferred stock
were converted into common stock on the basis of 41.00625 shares of common for each share of preferred,
with the elimination of dividends on the preferred stock. Common stock equivalents are common stock
options outstanding accounted for on the treasury stock method for purposes of these computations.
</TABLE>
<TABLE>
EXHIBIT 21. Subsidiaries
FIRST SECURITY CORPORATION
For the year ended December 31, 1997
<CAPTION>
Organized Percentage of
Under Voting Securities
Tier and Name of Subsidiary (A) Location Laws of Owned by FSC
- ----------------------------------------------------------------------------------------- ----------- -------------------
<S> <C> <C> <C>
First Security Bank, National Association (B) Salt Lake City, Utah U.S.A. 100.0
2nd Tier: CrossLand Mortgage Acquisition Corp. Salt Lake City, Utah Utah 100.0
3rd Tier: CrossLand Mortgage Corp. Salt Lake City, Utah Utah 100.0
2nd Tier: First Security Hong Kong Agreement Corp. Salt Lake City, Utah Utah 100.0
3rd Tier: First Security Trade Services Ltd. Hong Kong, Hong Kong China 100.0
First Security Bank of New Mexico, National Association Albuquerque, NM U.S.A. 100.0
First Security Bank of Nevada Las Vegas, Nevada Nevada 100.0
2nd Tier: First Security Trust Company of Nevada Las Vegas, Nevada Nevada 100.0
2nd Tier: First Security Services of Nevada, Inc. Las Vegas, Nevada Nevada 100.0
California State Bank West Covina, California California 100.0
First Security Leasing Company Salt Lake City, Utah Utah 100.0
2nd Tier: First Security Leasing Company of Nevada Las Vegas, Nevada Nevada 100.0
First Security Processing Services, Inc. Salt Lake City, Utah Utah 100.0
First Security Insurance, Inc. Salt Lake City, Utah Utah 100.0
2nd Tier: First Security Insurance of Idaho, Inc. Boise, Idaho Idaho 100.0
2nd Tier: Intermountain Insurance Agency, Inc. (Inactive) Salem, Oregon Oregon 100.0
2nd Tier: First Security Insurance of Oregon Inc. Portland, Oregon Oregon 100.0
2nd Tier: First Security Benefits Salt Lake City, Utah Utah 100.0
First Security Life Insurance Company of Arizona Salt Lake City, Utah Arizona 100.0
First Security Investment Services, Inc. Salt Lake City, Utah Utah 100.0
2nd Tier: First Security Investor Services Salt Lake City, Utah Utah 100.0
3rd Tier: First Security Investor Services of Nevada, Inc. Las Vegas, Nevada Nevada 100.0
3rd Tier: First Security Investor Services of Wyoming, Inc. Rock Springs, Wyoming Wyoming 100.0
2nd Tier: First Security Investment Management, Inc. Salt Lake City, Utah Utah 100.0
First Security Business Investment Corporation Salt Lake City, Utah Utah 100.0
First Security Service Company Salt Lake City, Utah Utah 100.0
First Security Information Technology, Inc. Salt Lake City, Utah Utah 100.0
First Security Mortgage Company (Inactive) Salt Lake City, Utah Utah 100.0
2nd Tier: Asset Recovery, Inc. (Inactive) Salt Lake City, Utah Utah 100.0
First Security Capital I Salt Lake City, Utah Delaware 100.0
First Security Capital Markets Inc. Salt Lake City, Utah Utah 100.0
First Security Specialized Services Inc. Salt Lake City, Utah Utah 100.0
<FN>
(A) All subsidiaries are included in consolidated financial statements.
(B) On June 21, 1996, FSB Utah and FSB Idaho merged to become FS Bank.
On May 23, 1997, FSB Oregon was merged into FS Bank.
On November 24, 1997, FSB Wyoming was merged into FS Bank.
</TABLE>
Exhibit 23, Consent of Independent Certified Public Accountants:
Deloitte & Touche LLP.
We consent to the incorporation by reference in Registration Statement Nos.
33-35847, 333-28497, 333-29701, 33-52205, 33-52609, and 333-3377 on Form S-3,
in Post-Effective Amendment No. 1 to Registration Statement No. 2-62919 on
Form S-3, and in Registration Statement Nos. 33-9501, 33-21556, and 33-57107 on
Form S-8, of First Security Corporation of our report dated February 20, 1998
(May 30, 1998 as to Note 20), appearing in this Current Report on Form 8-K of
First Security Corporation for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
October 1, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 1,219,435 928,056 872,726 995,796
<INT-BEARING-DEPOSITS> 600 600 600 500
<FED-FUNDS-SOLD> 206,266 18,596 283,959 81,698
<TRADING-ASSETS> 255,320 87,154 274,014 388,264
<INVESTMENTS-HELD-FOR-SALE> 4,351,525 4,109,176 3,642,437 3,504,187
<INVESTMENTS-CARRYING> 0 0 0 0
<INVESTMENTS-MARKET> 0 0 0 0
<LOANS> 11,230,766 11,159,090 10,528,449 9,504,520
<ALLOWANCE> (157,525) (152,951) (150,170) (144,225)
<TOTAL-ASSETS> 18,151,783 17,145,647 16,413,522 15,210,069
<DEPOSITS> 11,417,634 10,923,478 10,474,566 10,018,496
<SHORT-TERM> 3,605,199 3,399,508 3,285,243 2,564,633
<LIABILITIES-OTHER> 423,641 485,707 350,607 441,898
<LONG-TERM> 1,304,463 954,463 959,897 986,417
<COMMON> 1,400,345 1,381,981 1,342,678 1,198,093
0 0 0 0
501 510 531 532
<OTHER-SE> 0 0 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 18,151,783 17,145,647 16,413,522 15,210,069
<INTEREST-LOAN> 954,992 697,685 446,474 216,286
<INTEREST-INVEST> 241,382 173,026 112,218 54,409
<INTEREST-OTHER> 17,004 13,702 10,038 3,780
<INTEREST-TOTAL> 1,213,378 884,413 568,730 274,475
<INTEREST-DEPOSIT> 352,656 257,090 166,304 81,729
<INTEREST-EXPENSE> 587,439 424,052 271,679 129,904
<INTEREST-INCOME-NET> 625,939 460,361 297,051 144,571
<LOAN-LOSSES> 63,386 42,143 28,222 14,148
<SECURITIES-GAINS> 3,150 2,957 2,913 637
<EXPENSE-OTHER> 588,904 423,960 274,130 133,472
<INCOME-PRETAX> 330,806 244,540 157,438 77,684
<INCOME-PRE-EXTRAORDINARY> 330,806 244,540 157,438 77,684
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 215,274 157,243 101,207 50,003
<EPS-PRIMARY> 1.18 0.85 0.80 0.28
<EPS-DILUTED> 1.14 0.82 0.79 0.27
<YIELD-ACTUAL> 4.47 4.50 4.15 4.48
<LOANS-NON> 36,876 38,088 38,829 33,846
<LOANS-PAST> 20,841 20,109 20,727 20,662
<LOANS-TROUBLED> 0 0 0 0
<LOANS-PROBLEM> 65,698 64,986 68,005 63,267
<ALLOWANCE-OPEN> 142,693 142,693 142,693 142,693
<CHARGE-OFFS> (86,195) (61,830) (42,854) (20,334)
<RECOVERIES> 33,182 25,486 17,650 7,718
<ALLOWANCE-CLOSE> 157,525 152,951 150,170 144,225
<ALLOWANCE-DOMESTIC> 157,525 152,951 150,170 144,225
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
<FN>
This financial data schedule contains restated summary financial information extracted from
First Security Corporation's Forms 10-K and 10-Q during the latest three fiscal years and
interim periods of the latest two fiscal years and is qualified in its entirety by reference
to such financial statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<CASH> 997,327 804,148 851,721 747,759 852,596
<INT-BEARING-DEPOSITS> 31,617 47,020 6,664 31,862 22,647
<FED-FUNDS-SOLD> 251,035 107,668 90,529 131,938 164,169
<TRADING-ASSETS> 447,486 171,910 150,529 272,443 638,393
<INVESTMENTS-HELD-FOR-SALE> 3,324,797 3,334,967 2,880,534 2,797,288 2,733,631
<INVESTMENTS-CARRYING> 0 0 0 0 0
<INVESTMENTS-MARKET> 0 0 0 0 0
<LOANS> 9,697,351 9,384,280 9,147,284 8,674,686 8,616,763
<ALLOWANCE> (142,693) (141,850) (141,779) (135,727) (135,011)
<TOTAL-ASSETS> 15,456,649 14,472,464 13,768,854 13,244,250 13,529,699
<DEPOSITS> 10,103,007 9,730,881 9,528,772 9,279,535 9,202,844
<SHORT-TERM> 2,833,368 2,405,684 2,056,393 1,820,469 2,207,989
<LIABILITIES-OTHER> 358,379 346,048 332,553 378,510 315,350
<LONG-TERM> 944,055 821,932 723,728 675,460 720,521
<COMMON> 1,217,300 1,167,370 1,126,855 1,089,713 1,082,424
0 0 0 0 0
540 549 553 563 571
<OTHER-SE> 0 0 0 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 15,456,649 14,472,464 13,768,854 13,244,250 13,529,699
<INTEREST-LOAN> 830,594 609,972 397,365 193,720 785,837
<INTEREST-INVEST> 191,925 138,432 87,941 42,479 135,232
<INTEREST-OTHER> 16,872 13,273 10,246 6,715 52,946
<INTEREST-TOTAL> 1,039,391 761,677 495,552 242,914 974,015
<INTEREST-DEPOSIT> 326,789 242,999 160,478 80,178 309,431
<INTEREST-EXPENSE> 485,328 355,973 233,225 116,119 469,812
<INTEREST-INCOME-NET> 554,063 405,704 262,327 126,795 504,203
<LOAN-LOSSES> 41,300 29,501 19,743 8,988 22,682
<SECURITIES-GAINS> 4,618 2,216 839 18 (952)
<EXPENSE-OTHER> 531,219 391,296 260,760 127,162 555,192
<INCOME-PRETAX> 287,988 204,907 127,464 58,388 196,967
<INCOME-PRE-EXTRAORDINARY> 287,988 204,907 127,464 58,388 196,967
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 184,472 131,210 81,996 37,464 124,631
<EPS-PRIMARY> 1.03 0.71 0.65 0.21 0.71
<EPS-DILUTED> 1.00 0.68 0.64 0.21 0.69
<YIELD-ACTUAL> 4.59 4.56 4.52 4.46 4.48
<LOANS-NON> 35,750 35,247 28,268 27,801 24,660
<LOANS-PAST> 20,393 16,892 17,185 13,774 13,622
<LOANS-TROUBLED> 0 0 0 0 0
<LOANS-PROBLEM> 66,815 63,972 58,466 54,764 50,488
<ALLOWANCE-OPEN> 135,011 135,011 135,011 135,011 138,107
<CHARGE-OFFS> (64,209) (45,752) (29,790) (15,363) (53,865)
<RECOVERIES> 27,098 19,597 13,322 7,091 28,087
<ALLOWANCE-CLOSE> 142,693 142,693 142,693 142,693 135,011
<ALLOWANCE-DOMESTIC> 142,693 142,693 142,693 142,693 135,011
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0 0
<FN>
* This financial data schedule contains restated summary financial information extracted from
First Security Corporation's Forms 10-K and 10-Q during the latest three fiscal years and
interim periods of the latest two fiscal years and is qualified in its entirety by reference
to such financial statements.
</TABLE>
