UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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) 246-5976
Securities registered pursuant to Section 12(b) of the Act:
Floating Rate Notes Due 1999, listed on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $1.25 Par Value.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of First Security Corporation (FSCO) common stock
held by nonaffiliates was $3,226,655,670 as of February 28, 1999.
The number of shares outstanding of FSCO common stock $1.25 Par Value was
190,042,657 (net of 4,927,898 treasury shares) as of February 28, 1999.
FSCO's Proxy Statement dated March 22, 1999, is incorporated by reference
into Parts I and III of this Form 10-K.
<PAGE>
FIRST SECURITY CORPORATION (FSCO) - INDEX
Part I
1 Business
1a General Development of Business
1b Financial Information About Industry Segments
1c Narrative Description of Business
1d Financial Information About Foreign and Domestic Operations
2 Properties
3 Legal Proceedings
4 Submission of Matters to a Vote of Security Holders
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters
6 Selected Financial Data
7 Management's Discussion and Analysis of Results of Operations and
Financial Condition
7a Quantitative and Qualitative Disclosures About Market Risk
8 Financial Statements and Supplementary Data
9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures
Part III
10 Directors and Executive Officers of the Registrant (*)
11 Executive Compensation (*)
12 Security Ownership of Certain Beneficial Owners and Management (*)
13 Certain Relationships and Related Transactions (*)
(*) Incorporated by reference from FSCO's Proxy Statement dated March 22, 1999.
Part IV
14 Financial Statement Schedules, Exhibits, and Reports on Form 8-K
Financial Statement Schedules:
* Report of Independent Certified Public Accountants
* Consolidated Balance Sheets
as of December 31, 1998 and 1997
* Consolidated Statements of Income
for the Years Ended December 31, 1998, 1997, and 1996
* Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996, 1997, and 1998
* Consolidated Statements of Cash Flows
for the Years Ended December 31, 1998, 1997, and 1996
* Notes to Consolidated Financial Statements
Exhibits:
* Exhibit 3.1, Certificate of Amendment of Certificate of Incorporation, of
FSCO, dated May 6, 1993 (Ex. 3.1 to FSCO's Annual Report on Form 10-K for
the year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 3.2, Certificate of Amendment of Certificate of Incorporation, of
FSCO, dated May 8, 1996 (Ex. 3.2 to FSCO's Annual Report on Form 10-K for
the year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 3.3, Restated FSCO Bylaws, as amended January 26, 1998 (Ex. 3.3
to FSCO's Annual Report on Form 10-K for the year ended Dec. 31, 1997,
incorporated by reference).
* Exhibit 3.4, Certificate of Designation Series A Preferred Stock, dated
Aug. 27, 1990 (Ex. 3.4 to FSCO's Annual Report on Form 10-K for the year
ended Dec. 31, 1997, incorporated by reference).
* Exhibit 4.1, No instruments defining the rights of holders of long-term
debt of FSCO and its subsidiaries have been included as exhibits because
the total amount of indebtedness authorized under any such instrument
does not exceed 10% of the total assets of FSCO and its subsidiaries on a
consolidated basis.
* Exhibit 4.2, Shareholder Rights Agreement between FSCO and First Security
Bank, NA, dated Aug. 28, 1989, which includes: Ex. A, the form of Rights
Certificate and the form of Election of Exercise; Ex. B, the form of
Certificate of Designation of FSCO's Junior Series B Preferred Stock, no
par value per share; and Ex. C, the Summary of Rights (Ex. 4 to FSCO's
Report on Form 8-K, dated Aug. 28, 1989, filed Sept. 1, 1989,
incorporated by reference).
* Exhibit 4.3, Amendment Agreement between FSCO and First Security Bank,
NA, dated Sept. 26, 1989, amending the Shareholder Rights Agreement
between the same parties dated Aug. 28, 1989, (Ex. 1 to FSCO's Amendment
#1 on Form 8-A, dated Oct. 10, 1989, filed Oct. 16, 1989, amending FSCO's
Report on Form 8-K, dated Aug. 28, 1989, filed Sept. 1, 1989,
incorporated by reference).
* Exhibit 4.4, Amendment Agreement between FSCO and First Chicago Trust
Company of New York, as successor Rights Agent, dated Oct. 26, 1998:
a. amending the Shareholder Rights Agreement, dated Aug. 28, 1989, as
previously amended Sep. 26, 1989 and May 18, 1993 (Ex. 4.1 to FSCO's
Report on Form 8-K, dated Oct. 26, 1998, filed Nov. 2, 1998,
incorporated by reference).
b. adopting a successor Shareholder Rights Agreement with substantially
similar terms to the Shareholder Rights Plan, as amended, to take
effect immediately upon the expiration of the Shareholder Rights Plan
on Aug. 28, 1999 (Ex. 4.2 to FSCO's Report on Form 8-K, dated Oct. 26,
1998, filed Nov. 2, 1998, incorporated by reference).
* Exhibit 10, Material Contracts: Executive Compensation Plans and
Arrangements:
* Exhibit 10.1, Amended and Restated FSCO Comprehensive Management
Incentive Plan (Ex. 10.1 to FSCO's Annual Report on Form 10-K for the
year ended Dec. 31, 1994, incorporated by reference).
* Exhibit 10.2, Employment Agreement between FSCO and Spencer F. Eccles,
dated Feb. 2, 1998 (Ex. 10.2 to FSCO's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 10.3, Employment Agreement between FSCO and Morgan J. Evans,
dated Feb. 2, 1998 (Ex. 10.3 to FSCO's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 10.4, Employment Agreement between FSCO and Michael P. Caughlin,
dated Feb. 2, 1998 (Ex. 10.4 to FSCO's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 10.5, Employment Agreement between FSCO and Brad D. Hardy,
dated Feb. 2, 1998 (Ex. 10.5 to FSCO's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 10.6, Employment Agreement between FSCO and Mark D. Howell,
dated Feb. 2, 1998 (Ex. 10.6 to FSCO's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 10.7, Employment Agreement between FSCO and J. Patrick McMurray,
dated Feb. 2, 1998 (Ex. 10.7 to FSCO's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 10.8, Employment Agreement between FSCO and Scott Nelson,
dated Feb. 2, 1998 (Ex. 10.8 to FSCO's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 10.9, Employment Agreement between FSCO and Scott C. Ulbrich,
dated Feb. 2, 1998 (Ex. 10.9 to FSCO's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
* Exhibit 10.10, The form of FSCO's Deferred Compensation Plan Deferral
Election -- 01/01/95 - 12/31/95 (Ex. 10.10 to FSCO's Annual Report on
Form 10-K for the year ended Dec. 31, 1994, incorporated by reference).
* Exhibit 10.11, Employment Agreement between FSCO and David R. Golden,
dated Jan. 19, 1999.
* Exhibit 11, Computation of Earnings Per Share.
* Exhibit 21, Subsidiaries.
* Exhibit 23, Consent of Independent Certified Public Accountants:
Deloitte & Touche LLP.
* Exhibit 27, Financial Data Schedule.
Reports on Form 8-K (all are Item 5 Other Information):
* Jan. 27, 1998 report of:
a. a Jan. 26, 1998 press release announcing a 3-for-2 common stock split
and an increase in the quarterly cash dividend.
b. a Jan. 26, 1998 press release announcing that Michele Papen-Daniel,
Ph.D., had been elected to FSCO's board of directors.
c. a Jan. 26, 1998 press release announcing that Dr. J. Bernard Machen
had been elected to FSCO's board of directors.
* Feb. 19, 1998 report of:
a. a Feb. 19, 1998 press release announcing that FSCO had signed a
definitive agreement to acquire California State Bank.
b. a Feb. 19, 1998 press release announcing that FSCO's board of
directors had rescinded a stock buyback program.
* Jul. 20, 1998 report of a Jul. 20, 1998 press release announcing FSCO's
earnings and other financial data for the first six months of 1998.
* Oct. 1, 1998 report of a Sep. 23, 1998 press release announcing the
signing of a definitive agreement to acquire Van Kasper & Company.
* Oct. 1, 1998 report of an Oct. 1, 1998 restatement of FSCO's financial
data for its previously released Annual Report on Form 10-K for the year
ended Dec. 31, 1997 in order to reflect the pooling-of-interests merger
with California State Bank on May 30, 1998.
* Oct. 15, 1998 report that FSCO had reached final agreement with its
underwriters on the form of Underwriting Agreement that will govern take
downs of securities from the FSCO Universal Shelf Registration now
effective at the Commission (Commission file number 333-58873).
* Nov. 2, 1998 report that on Oct. 26, 1998, FSCO's board of directors
amended its Shareholder Rights Agreement, dated Aug. 28, 1989, as
previously amended Sep. 26, 1989 and May 18, 1993 (the "Rights Plan"), by
and between FSCO and First Chicago Trust Company of New York, as
successor Rights Agent, and adopted a successor shareholder rights
agreement with substantially similar terms to the Rights Plan, as
amended, to take effect immediately upon the expiration of the Rights
Plan on Aug. 28, 1999.
* Nov. 19, 1998 report of a Nov. 12, 1998 press release announcing
strategic organizational changes that restructure responsibilities for
several senior managers.
* Jan. 25, 1999 report of a Jan. 21, 1999 press release announcing FSCO's
earnings and other financial data for the year and quarter ended Dec. 31,
1998.
* Feb. 1, 1999 report of a change to previously announced approximate
conversion ratios for shares to be issued by FSCO to acquire Van Kasper &
Company.
* Feb. 9, 1999 report of disclosures relating to certain litigation
associated with the Van Kasper & Company acquisition.
Signatures
<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 1998, 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 data prior to June 30, 1998 were previously restated for
the pooling-of-interests merger with First Security Bank of California, N.A.
(FSB California, formerly California State Bank) (see: "Mergers and
Acquisitions"; "Note 1: Summary Of Significant Accounting And Reporting
Policies"; and "Note 15: Mergers and Acquisitions").
* Certain reclassifications of previously reported prior period amounts have
been made to conform to FSCO's 1998 classifications.
* 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 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.
<PAGE>
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
Highlights
Table 1: Financial Highlights - Five-Year Summary
Operating Subsidiaries
Table 2: Consolidating Statements
Line of Business Segments
Table 3. Line of Business Segments
Management Changes
Analysis of Statements of Income:
Earnings Summary
Revenues
Net Interest Income and Net Interest Margin
Table 4: Average Balance Sheets, Net Interest Income, Yields And Rates
Table 5: Analysis of Interest Changes Due To Volumes And Rates
Provision For Loan Losses
Noninterest Income
Table 6: Noninterest Income
Noninterest Expenses
Table 7: 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 8: Available for Sale Securities
Interest-Earning Assets: Loans
Table 9: Loans
Asset Quality: Problem Assets and Potential Problem Assets
Table 10: Problem Assets and Potential Problem Assets
Asset Quality: Reserve for Loan Losses
Table 11: Reconciliation of the Reserve for Loan Losses
Table 12: Allocation of the Reserve for Loan Losses
Asset Quality: Provision for Loan Losses
Asset/Liability Management
Asset/Liability Management: Liquidity
Table 13: Deposits
Table 14: Short-Term Borrowings
Table 15: Long-Term Debt
Asset/Liability Management: Market Risk Management
Asset/Liability Management: Interest Rate Risk (Excluding Trading Account
Securities)
Asset/Liability Management: Market Risk - Trading Account Securities
Other Assets and Liabilities
Common and Preferred Stock
Stockholders' Equity and Capital Adequacy
Table 16: Capital Ratios and Risk-Based Capital Ratios
Off-Balance Sheet Items
Inflation Accounting and Capital Commitments
Table 17: Quarterly Financial Highlights
Mergers and Acquisitions
National and Regional Economies
Competitive Position
Factors That May Affect Future Results of Operations and Financial Condition
Competition
Economic Conditions
Technology
Year 2000 Issues: FSCO's Year 2000 Project
Year 2000 Issues: FSCO's Year 2000 Risks
Year 2000 Issues: FSCO's Year 2000 Contingency Plans
Year 2000 Issues: FSCO's Year 2000 Forward-Looking Statements
Regulatory and Legislative Attitudes
Financial Market Perceptions
Legal Proceedings
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
OFFICERS AND DIRECTORS
CORPORATE INFORMATION
SIGNATURES
<PAGE>
GLOSSARY
AFS: Available For Sale. A classification of investment 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.
Avg: Average.
BHCPR: Bank Holding Company Performance Report. A Federal Reserve report
used by FSCO to compare its performance against that of its national peer
group. This report is usually available 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").
EOP: End of period.
EPS: Earnings per common share. Net income divided by the average number of
common shares outstanding during the period. EPS basic is net income minus
preferred stock dividend requirement, divided by average common shares
outstanding. EPS diluted is total net income, divided by average common shares
outstanding plus options and preferred stock common equivalents.
Fair value: An approximation of current market value derived from carrying
value, market quotes, and discounted cash flow analysis.
FSB: First Security Bank.
FSCO: First Security Corporation.
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. A positive gap generally indicates that
rising interest rates during a given interval will increase net interest
income, as more assets than liabilities will reprice. A negative gap generally
indicates that rising interest rates during a given interval will decrease net
interest income, as more liabilities than assets will reprice. Because all
interest rates do not adjust at exactly the same time or by the same magnitude,
and because the gap report does not reflect any future changes in balance sheet
structure, gap can only be analyzed as a static or general indication of
interest rate sensitivity.
Intangible Assets: Includes goodwill, loan servicing rights, deposit-based
intangibles, and insurance customer base 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.
LSR: Loan Servicing Right. The asset value associated with the right to
service loans, classified as an intangible asset by the Federal Reserve. LSR's
are created when FSCO sells or securitizes loans, or purchases loan servicing
rights in secondary markets.
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.
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 FTE yield on interest-earning assets minus the rate
paid on interest-bearing funds.
Nonaccruing Loans: Loans on which interest is not 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.
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 an appropriate level to cover loan losses inherent
in the loan portfolio.
Reserve For Loan Losses: An adjustment made to loans to recognize loan
losses inherent in the loan portfolio. 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.
SEC: The Securities and Exchange Commission.
Section 20: Section 20 of the Federal Reserve Banking Act of 1933,
authorizing certain levels of securities underwriting activities by bank
holding companies. Those levels are: Tier I, which generally refers to
government and municipal securities; and Tier II, which generally refers to
corporate debt and equity.
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.
Year 2000 (also known as Y2K). The date reference associated with a serious
worldwide problem in which many computer systems may not properly process date
calculations before, during, or after the year 2000.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
HIGHLIGHTS
Highlights of First Security Corporation's performance in 1998, and
comparisons to corresponding 1997 periods, included:
RESULTS OF OPERATIONS - FULL YEAR 1998
* Record net income of $247.7 million, up $32.4 million or 15.1%.
* Record earnings per common share diluted of $1.28, up $0.14 or 12.3%.
* Record noninterest income of $474.4 million, up $117.2 million or 32.8%.
RESULTS OF OPERATIONS - FOURTH QUARTER OF 1998
* Record net income of $67.3 million, up $9.3 million or 16.0%.
* Record earnings per common share diluted of $0.35, up $0.05 or 16.7%.
* Record noninterest income of $132.4 million, up $25.6 million or 23.9%.
FINANCIAL CONDITION AT DECEMBER 31, 1998
* Record total assets of $21.7 billion, up $3.5 billion or 19.5%.
* Record interest-earning assets of $19.3 billion, up $3.3 billion or 20.5%.
* Record stockholders' equity of $1.6 billion, up $0.2 billion or 13.9%.
* Asset quality: ratio of total problem assets to total loans and ORE of 0.52%,
down from 0.58%.
OTHER 1998 HIGHLIGHTS
* FSCO declared a 3-for-2 common stock split in the form of a 50% stock
dividend, paid in February 1998.
* Rio Grande Bancshares, Inc. was acquired, and its two subsidiary banks were
subsequently merged to create First Security Bank of Southern New Mexico,
N.A..
* First Security Bank of California, N.A. was created from the acquisitions and
merger of California State Bank and Marine National Bank.
* FSCO signed a definitive agreement to acquire Van Kasper & Company.
* FSCO signed a definitive agreement to acquire XEON Financial Corporation.
* FSCO signed a definitive agreement to acquire Comstock Bancorp.
* FSCO restructured responsibilities for several senior executives.
<PAGE>
<TABLE>
TABLE 1: FINANCIAL HIGHLIGHTS - FIVE YEAR SUMMARY (in thousands, except per share data and ratios) (A)
<CAPTION>
5-Year
Compound
98/97 Growth
1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
COMMON & PREFERRED STOCK DATA:
Earnings per common share basic $1.32 $1.18 $1.03 $0.71 $0.83 11.9 13.5
Earnings per common share diluted 1.28 1.14 1.00 0.69 0.81 12.3 13.5
Tangible EPS diluted 1.47 1.23 1.09 0.77 0.88 19.5 16.0
Dividends paid per common share 0.52 0.44 0.38 0.33 0.31 17.9 14.8
Book value per common share [EOP] 8.54 7.59 6.72 6.13 5.36 12.5 10.6
Tangible book value per common share [EOP] 6.35 6.05 5.68 5.26 4.38 5.0 4.6
Market price (bid) [EOP] 23.313 27.917 15.167 11.259 6.741 (16.5) 25.0
High bid for the period 26.167 27.917 15.167 11.259 9.481 (6.3) 23.9
Low bid for the period 15.500 14.222 10.167 6.519 6.370 9.0 16.9
Market capitalization (mktprice x #shrs) [EOP] 4,352,817 5,148,509 2,748,928 1,988,655 1,178,172 (15.5) 27.3
Market price / book value per com share [EOP] % 272.99 367.81 225.70 183.67 125.76
Dividend payout ratio (DPS / EPS basic) % 39.39 37.37 37.09 46.76 37.11
Dividend yield (DPS / mktprice) [EOP] % 2.23 1.58 2.52 2.95 4.57
Price / earnings ratio (mktprice / EPS basic) 17.5x 23.7x 14.7x 15.9x 8.1x
Common shares basic [EOP] 186,712 184,422 181,244 176,628 174,777 1.2 1.8
Common shares basic [Avg] 187,572 182,240 179,767 176,082 172,597 2.9 2.6
Common shares diluted [Avg] 193,840 188,739 185,000 180,025 176,448 2.7 2.7
Common shareholders of record(not rounded)[EOP] 12,663 10,786 10,843 10,222 9,921 17.4 5.4
Preferred shares [EOP] 9 10 10 11 12 (10.0) (7.1)
Preferred shareholders of record(notrounded)[EOP] 466 497 541 588 634 (6.2) (7.0)
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
INCOME STATEMENT:
Interest income $1,420,660 $1,213,378 $1,039,391 $974,015 $801,659 17.1 16.3
Interest expense 716,961 587,439 485,328 469,812 322,035 22.0 23.8
Net interest income 703,699 625,939 554,063 504,203 479,624 12.4 10.8
Fully taxable equivalent (FTE) adjustment 10,381 10,492 7,822 8,382 7,937 (1.1) 6.3
Net interest income, FTE 714,080 636,431 561,885 512,585 487,561 12.2 10.7
Provision for loan losses 71,923 63,386 41,300 22,682 1,545 13.5 40.8
Noninterest income 474,390 357,157 306,444 270,638 202,043 32.8 22.5
Noninterest expenses 723,088 588,904 531,219 555,192 455,322 22.8 12.2
Provision for income taxes 135,398 115,532 103,516 72,336 81,098 17.2 18.1
Net income 247,680 215,274 184,472 124,631 143,702 15.1 16.5
Preferred stock dividend requirement 28 30 33 35 39 (6.7) (8.2)
Common stock dividend 95,581 77,955 66,775 57,375 52,474 22.6 19.0
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
BALANCE SHEET - END OF PERIOD:
Trading account securities $329,109 $255,320 $447,486 $638,393 $553,826 28.9 (11.5)
Available for sale (AFS) securities 4,764,127 4,351,525 3,324,797 2,733,631 2,352,910 9.5 20.7
Memo: fair value adjustment AFS securities 48,251 37,678 1,687 22,932 (88,509) 28.1 NM
Loans, net of unearned income 14,013,417 11,230,766 9,697,351 8,616,763 8,442,282 24.8 15.7
Reserve for loan losses (173,350) (157,525) (142,693) (135,011) (138,107) 10.0 4.7
Total interest-earning assets 19,337,468 16,044,477 13,752,286 12,175,603 11,410,389 20.5 15.0
Intangible assets 409,367 285,156 187,427 153,429 171,234 43.6 97.7
Total assets 21,689,088 18,151,783 15,456,649 13,529,699 12,602,149 19.5 15.5
Noninterest-bearing deposits 2,752,009 2,431,006 2,423,596 2,015,487 1,834,861 13.2 9.3
Interest-bearing deposits 9,906,565 8,986,628 7,679,411 7,187,357 6,607,174 10.2 10.4
Total deposits 12,658,574 11,417,634 10,103,007 9,202,844 8,442,035 10.9 10.2
Short-term borrowed funds 4,265,589 3,605,199 2,833,368 2,207,989 2,360,149 18.3 23.5
Long-term debt 2,609,558 1,304,463 944,055 720,521 685,426 100.0 63.3
Total interest-bearing liabilities 16,781,712 13,896,290 11,456,834 10,115,867 9,652,749 20.8 16.7
Preferred stockholders' equity 484 501 540 571 629 (3.4) (7.2)
Common stockholders' equity 1,595,011 1,400,345 1,217,300 1,082,424 936,739 13.9 12.6
Parent company investment in subsidiaries 1,945,390 1,555,112 1,283,229 1,124,052 980,632 25.1 19.8
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
PROBLEM ASSETS & POTENTIAL PROBLEM ASSET - END OF PERIOD:
Total nonaccruing loans $45,812 $36,876 $35,750 $24,660 $26,103 24.2 1.4
Other real estate 3,617 7,981 10,672 12,206 9,606 (54.7) (32.8)
Total nonperforming assets 49,429 44,857 46,422 36,866 35,709 10.2 (6.5)
Accruing loans past due 90 days or more 23,758 20,841 20,393 13,622 12,323 14.0 25.8
Total problem assets 73,187 65,698 66,815 50,488 48,032 11.4 (0.9)
Potential problem assets 47,319 7,423 8,271 12,319 12,018 537.5 19.8
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
RECONCILIATION OF THE RESERVE FOR LOAN LOSSES:
Reserve for loan losses, beginning $157,525 $142,693 $135,011 $138,107 $138,051 10.4 3.8
Total loans charged off (94,790) (86,195) (64,209) (53,865) (39,117) 10.0 18.0
Total recoveries of loans charged off 33,889 33,182 27,098 28,087 30,929 2.1 3.4
Net loans charged off (60,901) (53,013) (37,111) (25,778) (8,188) 14.9 36.6
Provision for loan losses 71,923 63,386 41,300 22,682 1,545 13.5 40.8
Acquisitions & reclassifications 4,803 4,459 3,493 0 6,699 7.7 (7.7)
Reserve for loan losses, ending 173,350 157,525 142,693 135,011 138,107 10.0 4.7
================================================ ============ ============ ============ ============ ============ ======== ========
<FN>
EOP: End Of Period. Avg: Average. EPS: Earnings Per Common Share. DPS: Dividends Per Common Share. NM: Not Meaningful.
(A) ALL FSCO FINANCIAL DATA HAS BEEN RESTATED FOR:
* two separate 3-for-2 common stock splits in the form of 50% stock dividends, paid in May 1997 and February 1998.
* SFAS No. 128, "Earnings Per Share", restating EPS primary to EPS basic and EPS fully diluted to EPS diluted.
* the May 30, 1998 pooling-of-interests merger with FSB California (formerly California State Bank).
</TABLE>
<PAGE>
<TABLE>
TABLE 1: FINANCIAL HIGHLIGHTS - FIVE YEAR SUMMARY (in thousands, except per share data & ratios) (A) (continued)
<CAPTION>
5-Year
Compound
98/97 Growth
1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
BALANCE SHEET - AVERAGE:
Trading account securities $158,605 $217,337 $197,308 $487,992 $629,308 (27.0) (17.9)
Available for sale (AFS) securities 4,634,580 3,703,409 3,006,242 2,437,812 2,357,380 25.1 19.8
Memo: fair value adjustment AFS securities 44,898 7,061 (3,086) (21,335) (30,246) 535.9 NM
Loans, net of unearned income 12,552,230 10,428,044 9,075,277 8,477,057 7,455,006 20.4 15.5
Reserve for loan losses (165,585) (148,055) (139,486) (136,181) (138,230) 11.8 4.7
Deferred taxes on leases (197,343) (187,588) (170,588) (160,244) (145,264) 5.2 8.3
Total interest-earning assets, excluding fair value
adjustment AFS sec's & deferred tax on leases 17,203,589 14,234,308 12,240,614 11,440,040 10,402,070 20.9 14.8
Intangible assets 345,578 229,895 168,696 154,684 121,019 50.3 86.2
Total assets 19,301,016 15,983,748 13,715,134 12,700,669 11,525,222 20.8 15.1
Noninterest-bearing deposits 2,312,666 2,203,031 1,970,492 1,760,233 1,701,434 5.0 9.1
Interest-bearing deposits 9,447,832 8,103,960 7,499,417 7,028,556 6,319,955 16.6 10.4
Total deposits 11,760,498 10,306,991 9,469,909 8,788,789 8,021,389 14.1 10.2
Short-term borrowed funds 3,826,474 2,969,746 2,057,407 1,906,634 2,018,495 28.8 27.8
Long-term debt 1,680,421 1,040,147 746,885 728,788 368,096 61.6 52.4
Total interest-bearing liabilities 14,954,727 12,113,853 10,303,709 9,663,978 8,706,546 23.5 16.1
Preferred stockholders' equity 494 524 554 599 675 (5.7) (7.5)
Common stockholders' equity 1,527,170 1,296,192 1,135,736 1,036,124 915,208 17.8 12.9
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
OTHER DATA (NOT ROUNDED) [EOP]:
Full-time equivalent employees 9,424 7,996 7,391 7,904 7,863 17.9 7.5
Domestic bank offices:
FS Bank (Utah offices) 134 129 124 127 119 3.9 3.5
FS Bank (Idaho offices) 88 88 87 91 91 0.0 0.5
FS Bank (Oregon offices) 14 13 13 13 13 7.7 1.5
FS Bank (Wyoming offices) 8 8 7 6 6 0.0 32.0
FSB New Mexico 34 31 28 27 27 9.7 5.5
FSB Southern New Mexico 11 0 0 0 0 NM NM
FSB Nevada 15 14 7 8 5 7.1 24.6
FSB California 18 17 18 14 13 5.9 8.4
Total domestic bank offices 322 300 284 286 274 7.3 4.6
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
SELECTED RATIOS (%):
Return on average assets (ROAA) 1.28% 1.35% 1.35% 0.98% 1.25%
Tangible ROAA 1.50 1.48 1.48 1.11 1.37
Return on average stockholders' equity (ROAE) 16.21 16.60 16.23 12.02 15.69
Tangible ROAE 24.07 21.81 20.76 15.77 19.61
Net interest margin, FTE 4.15 4.47 4.59 4.48 4.69
Net interest spread, FTE 3.53 3.75 3.85 3.73 4.08
Operating expense ratio 60.84 59.27 61.18 70.89 66.03
Productivity ratio 3.75 3.68 3.87 4.37 3.95
Loans / deposits [EOP] 110.70 98.36 95.98 93.63 100.00
Loans / assets [EOP] 64.61 61.87 62.74 63.69 66.99
Reserve for loan losses [EOP] /:
Total loans 1.24 1.40 1.47 1.57 1.64
Nonaccruing loans 378.39 427.17 399.14 547.49 529.08
Nonaccruing + accruing loans past due 90 days 249.17 272.93 254.16 352.67 359.41
Nonaccruing loans / total loans 0.33 0.33 0.37 0.29 0.31
Nonaccruing + accr lns past due / total loans 0.50 0.51 0.58 0.44 0.46
Nonperforming assets [EOP] /:
Total loans + other real estate 0.35 0.40 0.48 0.43 0.42
Total assets 0.23 0.25 0.30 0.27 0.28
Total equity 3.10 3.20 3.81 3.40 3.81
Total equity + reserve for loan losses 2.79 2.88 3.41 3.03 3.32
Problem assets [EOP] /:
Total loans + other real estate 0.52 0.58 0.69 0.59 0.57
Total assets 0.34 0.36 0.43 0.37 0.38
Total equity 4.59 4.69 5.49 4.66 5.12
Total equity + reserve for loan losses 4.14 4.22 4.91 4.15 4.47
Net loans charged off / average loans 0.49 0.51 0.41 0.30 0.11
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
CAPITAL RATIOS & RISK-BASED CAPITAL RATIOS (%):
Stockholders' equity / assets [EOP] 7.36% 7.72% 7.88% 8.00% 7.44%
Stockholders' equity / assets [Avg] 7.91 8.11 8.28 8.16 7.95
Tangible common equity / tangible assets [EOP] 5.57 6.24 6.74 6.95 6.16
Leverage ratio 6.90 7.53 8.15 7.22 6.98
Tier 1 risk-based capital ratio 9.10 10.62 11.34 10.44 10.02
Total (Tier 1 + 2) risk-based capital ratio 11.31 13.42 14.41 13.85 12.13
================================================ ============ ============ ============ ============ ============ ======== ========
<FN>
EOP: End Of Period. Avg: Average. NM: Not Meaningful.
(A) All FSCO financial data has been restated for the May 30, 1998 pooling-of-interests merger with FSB California (formerly
California State Bank).
</TABLE>
<PAGE>
OPERATING SUBSIDIARIES
First Security Corporation is the West's second largest independent bank
holding company, and is the nation's oldest multistate bank holding company,
having been incorporated on June 15, 1928. At December 31, 1998, FSCO's banks
operated 322 full service domestic bank offices in Utah, Idaho, Oregon,
Wyoming, New Mexico, Nevada, and California. Nonbank subsidiaries include a
residential mortgage loan company, a leasing company, two insurance
subsidiaries, an investment management company, a full-service retail
securities broker/dealer, a "Section 20" full-service securities broker/dealer,
a bankcard transaction processing company, an information technology
subsidiary, and a small business investment corporation.
FSCO's subsidiaries and their principal activities as of December 31, 1998,
are discussed below (see: "Table 2: Consolidating Statements").
* First Security Bank, N.A. (FS Bank) is a national bank, headquartered in
Ogden, Utah, with branches in Utah, Idaho, Oregon, and Wyoming. 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 bank
subsidiaries. All CrossLand Mortgage loan originations are sold into the
secondary market. At December 31, 1998, CrossLand Mortgage operated 87 offices
in 22 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 to U.S. importing customers.
* First Security Bank of New Mexico, N.A. (FSB New Mexico) is a national
bank, headquartered in Albuquerque, New Mexico.
* First Security Bank of Southern New Mexico, N.A. (FSB So. New Mexico) is a
national bank, headquartered in Las Cruces, New Mexico. In 1998, FSCO acquired
Rio Grande Bancshares, Inc. and its subsidiaries, then merged and renamed them
as FSB So. New Mexico (see: "Mergers and Acquisitions").
* First Security Bank of Nevada (FSB Nevada) is a Nevada state-chartered
bank, headquartered in Las Vegas, Nevada.
* First Security Bank of California, N.A. (FSB California) is a national
bank, headquartered in West Covina, California. In 1998, FSCO acquired and
merged California State Bank and Marine National Bank and renamed them FSB
California (see: "Mergers and Acquisitions").
* First Security Van Kasper, Inc. (FS Van Kasper), is a "Section 20"
subsidiary approved for Tier I and II powers. FS Van Kasper provides integrated
services such as corporate and public finance, personal financial services,
brokerage, and investment management. Effective February 12, 1999, FSCO
acquired Van Kasper & Company and renamed it FS Van Kasper (see: "Mergers and
Acquisitions"). FSCO plans to merge it with FS Capital Markets (below) later in
1999 to form a new "Section 20" subsidiary approved for Tier I and II powers.
* First Security Capital Markets, Inc. (FS Capital Markets) is a "Section
20" subsidiary approved for Tier I powers. FS Capital Markets is a full service
securities broker dealer that provides a wide array of capital raising products
and investment banking and securities related services to business, municipal,
and individual customers. It will be merged into FS Van Kasper later in 1999.
* 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 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 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 Leasing Company (FS Leasing) is a full-service equipment
leasing company that originates and manages leases for 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 Specialized Services Inc. (FS Specialized Services)
provides specialized financial consulting services for businesses.
* 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 executive supervision, 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.
<PAGE>
<TABLE>
TABLE 2: CONSOLIDATING STATEMENTS (in thousands, except ratios) (A)
<CAPTION>
For the Year Ended December 31, 1998 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 $17,238,561 $11,816,796 ($125,423) $39,458 $9,204,070 $1,324,214 $220,441 1.47% 18.70%
FSB New Mexico 2,133,903 825,609 (18,577) 1,840 1,275,008 140,756 20,315 1.02 15.33
FSB So. New Mexico 455,979 235,553 (2,927) 1,097 342,509 85,530 3,459 0.87 5.33
FSB Nevada 1,107,058 411,397 (10,148) 2,931 899,761 146,091 11,584 1.11 8.21
FSB California 1,197,185 634,157 (11,299) 3,439 953,745 146,542 7,899 0.90 8.74
Consolidating adjustments (685,275) (37,097) 0 0 (5,861) 0 0 0.00 0.00
- - ----------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
TOTAL BANK SUBSIDIARIES 21,447,411 13,886,415 (168,374) 48,765 12,669,232 1,843,133 263,698 1.38 16.40
- - ----------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
NONBANK SUBSIDIARIES:
FS Capital Markets 9,222 0 0 0 0 5,959 870 3.37 20.76
FS Investment Services 6,643 20 0 0 0 5,252 1,371 25.25 31.44
FS Capital I 155,236 154,640 0 0 0 4,640 0 0.00 0.00
FS Insurance 18,547 0 0 0 0 15,082 1,871 11.49 14.76
FS Life Insurance 19,186 0 0 0 0 15,596 1,808 9.99 12.54
FS Leasing 133,298 115,775 (4,589) 664 0 36,501 982 0.70 2.71
FS Processing Services 3,718 0 0 0 0 387 (3,973) (86.22) NM
FS Specialized Services 10 0 0 0 0 10 0 0.00 0.00
FS Business Investment 3,232 2,141 (387) 0 0 3,200 31 0.98 0.99
FS Service 48,049 11,345 0 0 0 13,295 (1,816) (3.85) (24.76)
FS Information Technology 23,232 0 0 0 0 2,650 (2,340) (12.66) 722.22
Consolidating adjustments (3,184) 0 0 0 0 (330) (37) 2.67 11.86
- - ----------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
TOTAL NONBANK SUBSIDIARIES 417,189 283,921 (4,976) 664 0 102,242 (1,233) (0.28) (1.43)
- - ----------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
FSCO Parent Company only 2,573,176 588,490 0 0 0 1,595,495 86,471 3.86 5.62
Consolidating adjustments (2,748,688) (745,409) 0 0 (10,658) (1,945,375) (101,256) 4.16 5.94
- - ----------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
FSCO CONSOLIDATED $21,689,088 $14,013,417 ($173,350) $49,429 $12,658,574 $1,595,495 $247,680 1.28% 16.21%
============================= ============ ============ ========== ========= ============ ============ ========== ======== ========
<FN>
(A) FSCO owns 100% of the stock of all of its subsidiaries.
</TABLE>
<PAGE>
LINE OF BUSINESS SEGMENTS
FSCO's organizational management structure for 1998 consisted of the
following five "Line of Business" segments (see: "Table 3: Line of Business
Segments"):
* Community Banking Services provides transaction deposit, personal
investment, private banking, personal trust, insurance, electronic banking, and
customer services. This line of business segment will be restructured in 1999
with all personal investment, private banking, personal trust, and insurance
functions being moved to the new Capital Markets, Treasury, and Investment
Management segment.
* 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. Retail Lending
Services also makes loans to selected types of businesses including automobile
dealers (new and used car flooring, capital loans, and real estate loans),
residential lot developers, and home builders (for construction of single
family residential homes).
* 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,
accounting, tax, and purchasing functions. This line of business segment will
be restructured in 1999 as Capital Markets, Treasury, and Investment Management
and will include capital markets, treasury, personal investment, private
banking, personal trust, insurance, investment management functions, and FS Van
Kasper.
* Parent and Other combines corporate administration, technology and
processing services, acquired banks that have not been converted to FSCO's
systems, and intersegment eliminations. This line of business segment will be
restructured in 1999 to include accounting, tax, and purchasing functions.
FSCO advises readers that its line of business segment data for periods
prior to 1998 has undergone material changes in internal reporting and cost
allocation systems. As a result, data for those periods was either unavailable,
or if shown, may not be comparable with 1998. It is the opinion of management
that this information results in no meaningful information useful in
interpreting FSCO's results of operations and financial position. In addition,
FSCO further advises readers that its actual results for future periods could
differ materially from those anticipated or projected.
<TABLE>
TABLE 3: LINE OF BUSINESS SEGMENTS - SELECTED DATA (in thousands) (A)
<CAPTION>
Finance &
Community Retail Business Capital Parent Total
Banking Lending Banking Markets & Other FSCO
<S> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
For the Year Ended December 31, 1998:
Total assets (Avg) $1,084,218 $8,149,137 $3,667,735 $4,264,452 $2,135,474 $19,301,016
Total deposits (Avg) 8,900,954 6,482 629,702 86,646 2,136,714 11,760,498
External interest income 31,033 720,715 298,648 264,985 105,279 1,420,660
External interest expense 383,578 1 21,585 179,305 132,492 716,961
Intersegment interest income (expense), net 553,394 (428,084) (141,206) (85,709) 101,605 0
Provision for income taxes 30,947 61,064 29,310 (1,735) 15,812 135,398
Net income 48,705 101,029 53,516 (2,718) 47,148 247,680
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
For the Year Ended December 31, 1997:
Total assets (Avg) $445,574 $6,458,695 $3,292,319 $3,751,800 $2,035,360 $15,983,748
Total deposits (Avg) 8,330,715 7,082 608,946 70,736 1,289,512 10,306,991
Total interest income 26,856 593,580 281,248 240,680 71,014 1,213,378
Total interest expense 352,742 31,196 23,740 160,499 19,262 587,439
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
For the Year Ended December 31, 1996:
Total assets (Avg) $882,771 $5,706,091 $2,943,441 $3,100,044 $1,082,787 $13,715,134
Total deposits (Avg) 8,329,658 101,996 513,439 25,340 499,476 9,469,909
Total interest income 457,975 534,430 290,446 683,448 (926,908) 1,039,391
Total interest expense 476,516 144,373 64,870 667,467 (867,898) 485,328
================================================ ============ ============ ============ ============ ============ ============
<FN>
(A) For the years reported, FSCO:
* reported intersegment interest income and interest expenses on a net basis;
* had no material revenues from foreign countries;
* did not rely on any single major customer for 10% or more of external revenues;
* had no material depreciation, depletion, and/or amortization expenses;
* had no material unusual items, extraordinary items, and/or significant noncash items;
</TABLE>
MANAGEMENT CHANGES
On November 12, 1998, FSCO made the following changes to its management
committee and their responsibilities:
* David R. Golden: executive vice president Risk Management.
* Brad D. Hardy: executive vice president Corporate Services; and general
counsel and chief financial officer, First Security Corporation.
* Scott C. Ulbrich: executive vice president Capital Markets, Treasury and
Investment Management line of business; and, effective upon FSCO's February 12,
1999 acquisition of Van Kasper & Company, chairman and chief executive officer
of FS Van Kasper (see: "Mergers and Acquisitions").
This strategic reorganization allows FSCO to take advantage of growth
opportunities and synergies resulting from the acquisition of FS Van Kasper. By
combining all investment banking and brokerage operations into one line of
business, FSCO can better meet the capital and funding requirements, and wealth
management needs, of small and medium-sized businesses, governmental entities,
affluent individuals and brokerage customers throughout its market areas.
<PAGE>
ANALYSIS OF STATEMENTS OF INCOME
EARNINGS SUMMARY
FSCO's net income was a record $247.7 million for 1998, up $32.4 million or
15.1% from $215.3 million in 1997, which in turn was up $30.8 million or 16.7%
from $184.5 million earned in 1996 (see: "Table 1: Financial Highlights"; and
"Factors That May Affect Future Results of Operations and Financial
Condition"). The resulting earnings per common share diluted were a record
$1.28 for 1998, up $0.14 or 12.3% from $1.14 for 1997, which in turn was up
$0.14 or 14.0% from $1.00 for 1996. This net income generated a 1.28% ROAA and
a 16.21% ROAE for 1998, compared with a 1.35% ROAA and a 16.60% ROAE for 1997
and a 1.35% ROAA and a 16.23% ROAE for 1996. For 1998, 1997, and 1996,
respectively, the tangible ROAA was 1.50%, 1.48%, and 1.48%, the tangible ROAE
was 24.07%, 21.81%, and 20.76%, while tangible EPS diluted were $1.47, $1.23,
and $1.09.
FSCO's net income, before one-time FSB California merger charges of $7.2
million after tax (see: "Mergers and Acquisitions"), was $254.9 million for
1998, up $39.6 million or 18.4% from 1997. The resulting EPS diluted were $1.32
for 1998, up $0.18 or 15.8% from 1997. This net income generated a 1.32% ROAA
and a 16.69% ROAE for the year, while the tangible ROAA was 1.54%, the tangible
ROAE was 24.68%, and tangible EPS diluted were $1.51 for 1998.
FSCO's net income was a record $67.3 million for the fourth quarter of 1998,
up $9.3 million or 16.0% from $58.0 million in the fourth quarter of 1997. EPS
diluted were a record $0.35 for the quarter, up $0.05 or 16.7% from the year-
ago quarter. This net income generated a 1.31% ROAA and a 16.50% ROAE for the
quarter, compared with a 1.33% ROAA and a 16.63% ROAE for the year-ago quarter.
The tangible ROAA was 1.56%, the tangible ROAE was 25.08%, and tangible EPS
diluted were $0.41 for the quarter, up from a 1.39% tangible ROAA, a 21.31%
tangible ROAE, and tangible EPS diluted of $0.31 for the year-ago quarter.
REVENUES
FSCO's revenues (net interest income plus noninterest income) were $1.2
billion for 1998, up $195.0 million or 19.8% from $1.0 billion 1997, which in
turn was up $122.6 million or 14.2% from $860.5 million in 1996 (see: "Net
Interest Income" and "NonInterest Income"). Revenues were $319.2 million for
the fourth quarter of 1998, up $46.7 million or 17.1% from $272.5 million in
the year-ago quarter.
NET INTEREST INCOME AND NET INTEREST MARGIN
The largest component of FSCO's revenues 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 $714.1 million for 1998, up
$77.6 million or 12.2% from 1997 (see: "Table 4: Average Balance Sheets, Net
Interest Income, Yields and Rates"; "Table 5: Analysis of Interest Changes Due
to Volumes and Rates"; and "Table 1: Financial Highlights"). This increase was
due to additional interest earned by the 20.4% growth in average loans, net of
various asset sales and securitizations, and the 25.1% growth in average AFS
securities, plus the positive impact of recent purchase acquisitions, partially
offset by additional interest expense from the 23.5% increase in average
interest-bearing liabilities.
By comparison, FSCO's net interest income FTE totaled a record $636.4
million for 1997, up $74.5 million or 13.3% from $561.9 million in 1996. The
1997 increase was due to additional interest earned by 14.9% growth in average
loans, net of various asset sales and securitizations, and 23.2% growth in
average AFS securities, partially offset by additional interest expense from
the 17.6% increase in average interest-bearing liabilities.
FSCO's net interest margin was 4.15% for 1998, down 32 basis points from
1997. This decrease was due primarily to lower interest rates on the strong
volume growth in loans, especially refinanced mortgages and consumer loans,
funded by relatively constant rates on additional short-term borrowed funds,
long-term debt, and deposits. FSCO's net interest margin remained essentially
unchanged for each of the four quarters of 1998, while net interest income was
increased through volume growth in lending activities. During 1998, a one basis
point (0.01%) change in FSCO's net interest margin FTE equaled $1.7 million of
net interest income FTE.
By comparison, FSCO's net interest margin was 4.47% for 1997, down only 12
basis points from 4.59% in 1996. The 1997 decrease 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.
Over the past 12 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.
<PAGE>
<TABLE>
TABLE 4: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, YIELDS AND RATES (in thousands) (A)
<CAPTION>
For the years ended December 31, 1998 1998 1998 1997 1997 1997 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Fully Fully Fully
Taxable Avg% Taxable Avg% Taxable Avg%
Average Equivalent Yield Average Equivalent Yield Average Equivalent Yield
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
ASSETS:
Interest-Earning Assets:
Federal funds sold & securities purchased $98,731 $5,538 5.61 $78,620 $4,249 5.40 $109,810 $5,734 5.22
Interest-bearing deposits in other banks 1,684 177 10.51 1,547 69 4.46 19,479 1,080 5.54
Trading account securities 158,605 9,184 5.79 217,337 12,724 5.85 197,308 10,094 5.12
Available for sale (AFS) securities (B) 4,589,682 302,064 6.58 3,696,348 248,631 6.73 3,009,328 197,173 6.55
Loans, net of unearned income &
deferred taxes on leases (C) 12,354,887 1,114,078 9.02 10,240,456 958,197 9.36 8,904,689 833,132 9.36
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Total Interest-Earning Assets, Excluding
Fair Value Adjustment for AFS Securities
& Deferred Taxes On Leases (B) 17,203,589 1,431,041 8.32 14,234,308 1,223,870 8.60 12,240,614 1,047,213 8.56
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Cash & due from banks 822,841 775,908 655,931
Premises & equipment, net 292,801 272,314 222,209
Other real estate 3,603 7,787 4,702
Reserve for loan losses (165,585) (148,055) (139,486)
Other assets 1,296,212 646,837 563,662
Deferred taxes on leases, deducted above (197,343) 187,588 170,588
Fair value adjustment for AFS securities 44,898 7,061 (3,086)
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
TOTAL ASSETS $19,301,016 $15,983,748 $13,715,134
========================================= =========== ========== ====== =========== ========== ====== =========== ========== ======
LIABILITIES:
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest-bearing demand accounts $335,484 5,560 1.66 $475,950 9,849 2.07 $895,506 25,525 2.85
Savings & money market accounts 4,292,234 124,560 2.90 3,570,722 111,367 3.12 2,983,353 93,639 3.14
Time deposits of $100,000 or more 1,328,028 76,757 5.78 975,454 56,223 5.76 812,673 45,221 5.56
Other time deposits 3,492,086 197,009 5.64 3,081,834 175,217 5.69 2,807,885 162,404 5.78
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Total Interest-Bearing Deposits 9,447,832 403,886 4.27 8,103,960 352,656 4.35 7,499,417 326,789 4.36
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Federal funds purchased & securities sold 3,442,992 182,050 5.29 2,649,889 141,207 5.33 1,801,694 90,840 5.04
Other short-term borrowings 383,482 22,852 5.96 319,857 21,889 6.84 255,713 17,558 6.87
Long-term debt 1,680,421 108,173 6.44 1,040,147 71,687 6.89 746,885 50,141 6.71
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Total Interest-Bearing Liabilities 14,954,727 716,961 4.79 12,113,853 587,439 4.85 10,303,709 485,328 4.71
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Noninterest-bearing deposits 2,312,666 2,203,031 1,970,492
Other liabilities 505,959 370,148 304,643
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
TOTAL LIABILITIES 17,773,352 14,687,032 12,578,844
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
STOCKHOLDERS' EQUITY:
Preferred stockholders' equity 494 524 554
Common stockholders' equity 1,527,170 1,296,192 1,135,736
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
TOTAL STOCKHOLDERS' EQUITY 1,527,664 1,296,716 1,136,290
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $19,301,016 $15,983,748 $13,715,134
========================================= =========== ========== ====== =========== ========== ====== =========== ========== ======
Interest income FTE / earning assets 8.32 8.60 8.56
Interest expense FTE / earning assets 4.17 4.13 3.97
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ---------------------- ------
Net interest income / earning assets 714,080 4.15 636,431 4.47 561,885 4.59
Less FTE adjustment 10,381 10,492 7,822
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
NET INTEREST INCOME $703,699 $625,939 $554,063
========================================= =========== ========== ====== =========== ========== ====== =========== ========== ======
Loan fees included in interest income $48,925 $39,864 $29,799
========================================= =========== ========== ====== =========== ========== ====== =========== ========== ======
<FN>
(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 1998-1993.
(B) Yields on available for sale 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 investment securities as AFS securities.
(C) Loans include nonaccruing loans.
</TABLE>
<PAGE>
<TABLE>
TABLE 4: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, YIELDS AND RATES (in thousands) (A) (continued)
<CAPTION>
For the years ended December 31, 1995 1995 1995 1994 1994 1994
<S> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------
Fully Fully
Taxable Avg% Taxable Avg%
Average Equivalent Yield Average Equivalent Yield
Balance Interest Rate Balance Interest Rate
- - ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------
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 Adjustment 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 FTE / earning assets 8.59 7.78
Interest expense FTE / 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 $504,203 $479,624
========================================= =========== ========== ====== =========== ========== ======
Loan fees included in interest income $26,540 $20,258
========================================= =========== ========== ====== =========== ========== ======
<FN>
(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 1998-1993.
(B) Yields on available for sale 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 investment securities as AFS securities.
(C) Loans include nonaccruing loans.
</TABLE>
<PAGE>
<TABLE>
TABLE 5: ANALYSIS OF INTEREST CHANGES DUE TO VOLUMES AND RATES (in thousands) (A)
<CAPTION>
1998 over 1997 1997 over 1996 1996 over 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Changes Due to: Total Changes Due to: Total Changes Due to: Total
Volume Rate Change Volume Rate Change Volume Rate Change
- - ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
INTEREST-EARNING ASSETS:
Federal funds sold & securities purchased $1,087 $202 $1,289 ($1,629) $144 ($1,485) ($2,987) ($660) ($3,647)
Interest-bearing deposits in other banks 6 102 108 (994) (17) (1,011) 265 (68) 197
Trading account securities (3,438) (102) (3,540) 1,024 1,606 2,630 (17,352) (1,684) (19,036)
Available for sale (AFS) securities 60,089 (6,656) 53,433 45,014 6,444 51,458 34,368 9,189 43,557
Loans, net of unearned income &
deferred taxes on leases 197,847 (41,966) 155,881 124,976 89 125,065 55,798 (12,053) 43,745
- - ----------------------------------------- --------- --------- --------- --------------------------------------- --------- ---------
Total Interest-Earning Assets, Excluding
Fair Value Adjustments for AFS Securities
& Deferred Taxes On Leases 255,591 (48,420) 207,171 168,391 8,266 176,657 70,092 (5,276) 64,816
- - ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-Bearing Deposits:
Interest-bearing demand accounts (2,907) (1,382) (4,289) (11,959) (3,717) (15,676) (4,319) 8,414 4,095
Savings & money market accounts 22,503 (9,310) 13,193 18,436 (708) 17,728 18,118 (16,638) 1,480
Time deposits of $100,000 or more 20,322 212 20,534 9,058 1,944 11,002 2,873 (2,649) 224
Other time deposits 23,325 (1,533) 21,792 15,845 (3,032) 12,813 8,991 2,568 11,559
- - ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Interest-Bearing Deposits 63,243 (12,013) 51,230 31,380 (5,513) 25,867 25,664 (8,306) 17,358
- - ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Federal funds purchased & securities sold 42,263 (1,420) 40,843 42,765 7,602 50,367 5,699 (10,126) (4,427)
Other short-term borrowings 4,354 (3,391) 963 4,404 (73) 4,331 3,244 651 3,895
Long-term debt 44,128 (7,642) 36,486 19,688 1,858 21,546 1,278 (2,588) (1,310)
- - ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Interest-Bearing Liabilities 153,988 (24,466) 129,522 98,237 3,874 102,111 35,885 (20,369) 15,516
- - ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
CHANGE IN NET INTEREST INCOME $101,603 ($23,954) $77,649 $70,154 $4,392 $74,546 $34,207 $15,093 $49,300
========================================= ========= ========= ========= ========= ========= ========= ========= ========= =========
<FN>
(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 1998-1993.
</TABLE>
<TABLE>
TABLE 5: ANALYSIS OF INTEREST CHANGES DUE TO VOLUMES AND RATES (in thousands) (A) (continued)
<CAPTION>
1995 over 1994 1994 over 1993
<S> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------- --------- --------- --------- --------- --------- ---------
Changes Due to: Total Changes Due to: Total
Volume Rate Change Volume Rate Change
- - ----------------------------------------- --------- --------- --------- --------- --------- ---------
INTEREST-EARNING ASSETS:
Federal funds sold & securities purchased $3,714 $2,753 $6,467 ($7,321) $765 ($6,556)
Interest-bearing deposits in other banks 411 292 703 (389) 40 (349)
Trading account securities (7,631) 2,778 (4,853) 10,085 3,057 13,142
Available for sale (AFS) securities 3,953 17,696 21,649 30,387 (9,557) 20,830
Loans, net of unearned income &
deferred taxes on leases 88,249 60,586 148,835 118,136 (11,326) 106,810
- - ----------------------------------------- --------- --------- --------- --------- --------- ---------
Total Interest-Earning Assets, Excluding
Fair Value Adjustments for AFS Securities
& Deferred Taxes On Leases 88,696 84,105 172,801 150,898 (17,021) 133,877
- - ----------------------------------------- --------- --------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-Bearing Deposits:
Interest-bearing demand accounts (216) 2,309 2,093 2,613 (1,986) 627
Savings & money market accounts (5,052) 16,602 11,550 10,377 (487) 9,890
Time deposits of $100,000 or more 12,297 11,837 24,134 2,684 1,725 4,409
Other time deposits 26,937 32,799 59,736 821 (2,830) (2,009)
- - ----------------------------------------- --------- --------- --------- --------- --------- ---------
Total Interest-Bearing Deposits 33,966 63,547 97,513 16,495 (3,578) 12,917
- - ----------------------------------------- --------- --------- --------- --------- --------- ---------
Federal funds purchased & securities sold (10,373) 23,478 13,105 26,124 24,386 50,510
Other short-term borrowings 7,473 2,119 9,592 718 1,013 1,731
Long-term debt 23,404 4,163 27,567 11,103 (1,042) 10,061
- - ----------------------------------------- --------- --------- --------- --------- --------- ---------
Total Interest-Bearing Liabilities 54,470 93,307 147,777 54,440 20,779 75,219
- - ----------------------------------------- --------- --------- --------- --------- --------- ---------
CHANGE IN NET INTEREST INCOME $34,226 ($9,202) $25,024 $96,458 ($37,800) $58,658
========================================= ========= ========= ========= ========= ========= =========
<FN>
(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 1998-1993.
</TABLE>
<PAGE>
PROVISION FOR LOAN LOSSES
FSCO's provision for loan losses totaled $71.9 million for 1998, up $8.5
million or 13.5% from $63.4 million in 1997, which in turn was up $22.1 million
or 53.5% from $41.3 million for 1996 (see: "Interest-Earning Assets and Asset
Quality - Provision for Loan Losses" and "Table 11: Reconciliation of the
Reserve for Loan Losses").
NONINTEREST INCOME
FSCO's noninterest income was a record $474.4 million for 1998, up $117.2
million or 32.8% from 1997 (see: "Table 6: Noninterest Income"). In addition,
noninterest income was a record $132.4 million for the fourth quarter of 1998,
up $25.6 million or 23.9% from the year-ago quarter. These increases were due
to several factors including: strong growth in mortgage banking activities;
gains from ongoing asset sales and securitizations; growth in other service
charges and trust fees; and securities gains. FSCO's noninterest income
amounted to a record 40.27% of total revenues for 1998, up from 36.33% for
1997, and was a record 41.50% of total revenues for the quarter, up from 39.23%
for the year-ago quarter.
By comparison, FSCO's noninterest income totaled a record $357.2 million for
1997, up $50.7 million or 16.5% from 1996, and 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 1997 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 sales and securitizations. FSCO's noninterest
income for 1997 amounted to 36.33% of total revenues, up from 35.61% for 1996.
NONINTEREST EXPENSES
FSCO's noninterest expenses were $723.1 million for 1998, up $134.2 million
or 22.8% from 1997 (see: "Table 7: Noninterest Expenses"). This increase was
primarily due to the following: additional ongoing expenses of recent purchase
acquisitions; additions of revenue-generating personnel; additional costs
related to ongoing volume growth; the cost of necessary technological advances
and upgrades including Year 2000 expenditures; and one-time costs for the FSB
California and other mergers and for the creation of a "Section 20" securities
broker/dealer subsidiary. Noninterest expenses, before one-time FSB California
merger noninterest expenses of $6.9 million, were $716.1 million for 1998, up
$127.2 million or 21.6% from 1997 (see: "Mergers and Acquisitions").
During the year, FSCO continued its efforts to effectively manage ongoing
noninterest expenses while expending the funds needed to support strong growth,
multiple acquisitions, and strategic investments in technology appropriate for
a high performance financial services company. The components of FSCO's
noninterest expenses for 1998, compared with 1997, are discussed below.
* FSCO's salaries and benefits expense was $386.7 million for 1998, up $81.8
million or 26.8% from 1997. This increase was primarily due to the additional
employees added with purchase acquisitions, with increased mortgage and
consumer loan production, and with additional branches and other revenue-
generating operations. As a result, full-time equivalent employees were
increased to 9,424 at December 31, 1998, up 1,428 or 17.9% from year-end 1997.
* FSCO's nonpersonnel expenses totaled $336.4 million for 1998, up $52.4
million or 18.4% from 1997. This increase was due to many factors including:
recent purchase acquisitions, which impacted most noninterest expense
categories with one-time acquisition costs and the addition of their ongoing
expenses; additions to production and services facilities; volume growth in
loans, loan servicing and related amortization, deposits, and banking services;
$16.9 million expensed in 1998 as part of FSCO's efforts to resolve its Year
2000 issues (see: "Technological Change And Year 2000 Issue"); and one-time
costs for the FSB California merger (see: "Mergers and Acquisitions") and the
creation of a "Section 20" securities broker/dealer subsidiary. These increases
were partially offset by reductions in bankcard interbank interchange and fees
and a decrease in ORE expense and loss provision.
By comparison, FSCO's salaries and benefits expense totaled $304.9 million
for 1997, up $27.2 million or 9.8% from 1996, due primarily to personnel
increases in mortgage and consumer loan production, customer service, personal
financial services, and acquisitions. FSCO's nonpersonnel expenses totaled
$284.0 million for 1997, up $30.5 million or 12.0% from 1996, due to: additions
to production and services facilities; volume growth in bankcard interbank
interchange and fees; volume growth in loans, deposits, and banking services;
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 expensed on FSCO's efforts to resolve its Year 2000
issues. These increases were partially offset by a reduction of stationery and
supplies expense and a decrease in the amortization of intangibles.
The operating expense ratio is one measure of FSCO's effectiveness and
ongoing efforts to manage its noninterest expenses. FSCO's operating expense
ratio was 60.84% for 1998, up 157 basis points from 59.27% for 1997, which in
turn was an improvement of 191 basis points from 61.18% for 1996.
CrossLand Mortgage, FSCO's mortgage banking subsidiary, 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 CrossLand Mortgage, FSCO's operating expense ratio was 56.85% for
1998, up 83 basis points from 56.02% for 1997, which in turn was an improvement
of 213 basis points from 58.15% for 1996. Excluding CrossLand Mortgage and the
FSB California merger charges, FSCO's operating expense ratio was 56.16% for
1998, up only 14 basis points from 1997.
The productivity ratio was 3.75% for 1998, comparing closely with 3.68% for
1997 and 3.87% for 1996.
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.
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, and
investments in tax credit producing affordable housing. In 1998, FSCO continued
to employ these and other tax planning strategies.
<PAGE>
<TABLE>
TABLE 6: NONINTEREST INCOME (in thousands)
<CAPTION>
5-Year
Compound
98/97 Growth
For the Years Ended December 31, 1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts $90,755 $90,835 $83,921 $70,301 $64,382 (0.1) 9.2
Other service charges, collections, commissions & fees 71,797 55,473 46,478 36,208 27,544 29.4 23.8
Asset sale & securitization gains 47,619 17,515 2,765 0 0 171.9 NM
Bankcard servicing fees & third-party processing fees 31,247 34,295 30,469 25,974 31,129 (8.9) (1.1)
Insurance commissions & fees 16,966 16,975 15,016 13,655 12,631 (0.1) 11.3
Mortgage banking & loan servicing activities 215,538 117,859 97,580 86,235 41,968 82.9 54.5
Loan servicing rights amortization (41,495) (16,146) (11,896) (9,316) (9,073) 157.0 119.0
Trust (fiduciary) commissions & fees 29,474 26,195 23,104 20,894 20,706 12.5 9.2
Trading account securities gains (losses) 994 1,446 2,383 6,390 (2,386) (31.3) NM
Available for sale securities gains (losses) 8,075 3,150 4,618 (952) (1,187) 156.3 51.8
Other 3,420 9,560 12,006 21,249 16,329 (64.2) (13.2)
- - ----------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -------- --------
TOTAL NONINTEREST INCOME $474,390 $357,157 $306,444 $270,638 $202,043 32.8 22.5
===================================================== =========== =========== =========== =========== =========== ======== ========
<FN>
NM: Not Meaningful
</TABLE>
<TABLE>
TABLE 7: NONINTEREST EXPENSES (in thousands)
<CAPTION>
5-Year
Compound
98/97 Growth
For the Years Ended December 31, 1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -------- --------
NONINTEREST EXPENSES:
Salaries & employee benefits $386,715 $304,903 $277,706 $274,048 $233,035 26.8 15.9
Amortization of intangibles 11,666 7,537 9,249 9,140 7,084 54.8 27.2
Armored & messenger 6,658 6,065 5,865 5,499 5,093 9.8 7.4
Bankcard interbank interchange & fees 32,147 34,130 29,396 18,148 16,965 (5.8) 16.9
Credit, appraisal & repossession 27,931 17,176 14,459 14,267 12,920 62.6 30.9
Fees 14,645 11,589 8,832 8,638 8,597 26.4 16.7
Furniture & equipment 58,181 46,263 43,252 37,487 31,969 25.8 15.1
Insurance 4,372 4,655 5,534 16,232 24,293 (6.1) (26.5)
Marketing 14,757 14,258 12,478 11,444 12,216 3.5 6.2
Occupancy, net 39,063 36,729 33,096 30,357 28,011 6.4 8.3
Other real estate expense & loss provision(recovery), net 845 2,022 422 (2,296) (6,211) (58.2) (37.3)
Postage 13,508 11,367 11,100 11,272 9,708 18.8 12.7
Professional 18,918 15,082 9,020 12,931 12,008 25.4 5.5
Stationery & supplies 22,311 18,259 19,583 18,910 16,336 22.2 6.7
Telephone 17,306 16,317 14,189 13,278 11,834 6.1 15.0
Travel 12,773 9,797 8,261 8,178 7,884 30.4 15.2
Other 41,292 32,755 28,777 23,659 23,580 26.1 2.6
Restructuring charge 0 0 0 44,000 0 NM NM
- - ----------------------------------------------------- ----------- ----------- ----------- ----------- ----------- -------- --------
TOTAL NONINTEREST EXPENSES $723,088 $588,904 $531,219 $555,192 $455,322 22.8 12.2
===================================================== =========== =========== =========== =========== =========== ======== ========
<FN>
NM: Not Meaningful
</TABLE>
<PAGE>
ANALYSIS OF BALANCE SHEETS
SUMMARY
As of December 31, 1998, 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 total assets were a record $21.7 billion at December 31, 1998, up
$3.5 billion or 19.5% from year-end 1997. Interest-earning assets were a record
$19.3 billion at year end, up $3.3 billion or 20.5% from the prior year end,
while loans were a record $14.0 billion at year end, up $2.8 billion or 24.8%
from the prior year end (see: "Interest-Earning Assets and Asset Quality").
FSCO's liabilities totaled $20.1 billion at December 31, 1998, up $3.3
billion or 20.0% from year-end 1997. Total interest-bearing liabilities were
$16.8 billion at year end, up $2.9 billion or 20.8% from the prior year end
(see: "Asset/Liability Management").
FSCO's stockholders' equity was increased to a record $1.6 billion at
December 31, 1998, up $0.2 billion or 13.9% from year-end 1997 (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 $329 million at December 31,
1998, up $74 million or 28.9% from year-end 1997. Fluctuations in trading
opportunities are a normal part of this function. Market conditions at year-end
1998 were conducive with traders increasing their level of securities held in
position.
In 1999, 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 manages its 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 2.8 years as of
December 31, 1998, slightly shorter than the prior year end. 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 1998.
FSCO's AFS securities were $4.8 billion at December 31, 1998, up $0.4
billion or 9.5% from year-end 1997 (see: "Table 8: 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 and non-agency issued collateralized
mortgage obligations, and agency mortgage-backed securities.
In 1999, FSCO's AFS securities priorities continue to be a balance between
liquidity, interest rate risk, and maximizing return. U.S. Treasury, municipal
bonds, Federal agency, and agency and non-agency issued mortgage-backed
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.
<PAGE>
<TABLE>
TABLE 8: AVAILABLE FOR SALE SECURITIES (in thousands) (A)
<CAPTION>
As of December 31, 1998 1998 1998 1997 1997 1997 1996 1996 1996
Amortized Estimated Yield% Amortized Estimated Yield% Amortized Estimated Yield%
Cost Fair Value (B) Cost Fair Value (B) Cost Fair Value (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 $69,071 $69,427 6.57 $55,043 $55,161 6.11 $183,967 $184,472 6.43
After 1 year through 5 years 552,903 559,378 6.22 884,474 890,607 6.81 610,458 612,433 7.08
After 5 years through 10 years 12,029 12,165 6.58 63,080 63,747 6.64 10,120 10,069 6.42
After 10 years 7,511 7,590 7.04 5,986 6,213 7.57 7,500 7,570 7.27
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Total 641,514 648,560 6.27 1,008,583 1,015,728 6.77 812,045 814,544 6.93
Memo: Unrealized gains 8,273 7,379 3,774
Memo: Unrealized losses (1,227) (234) (1,275)
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Debt Securities Issued by States of the U.S. and Political Subdivisions:
One year or less 56,632 56,764 4.71 41,862 41,944 5.06 46,551 46,642 5.13
After 1 year through 5 years 97,352 99,380 5.30 74,691 75,735 5.36 81,899 83,001 5.58
After 5 years through 10 years 115,301 119,359 5.07 120,728 124,255 5.28 78,216 79,000 5.27
After 10 years 83,461 84,989 5.62 60,201 61,650 5.87 38,461 38,965 6.07
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Total 352,746 360,492 5.21 297,482 303,584 5.39 245,127 247,608 5.47
Memo: Unrealized gains 8,098 6,309 3,180
Memo: Unrealized losses (352) (207) (699)
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Corporate Debt Securities:
One year or less 1,652 1,658 6.90 100 101 9.09 2,103 2,107 6.46
After 1 year through 5 years 2,190 2,226 6.41 2,492 2,501 6.43 1,657 1,647 6.43
After 5 years through 10 years 4,622 4,758 6.84 4,337 4,381 6.83 4,262 4,281 6.83
After 10 years 2,095 2,107 6.24 592 607 6.84 0 0 0.00
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Total 10,559 10,749 6.65 7,521 7,590 6.73 8,022 8,035 6.65
Memo: Unrealized gains 212 89 53
Memo: Unrealized losses (22) (20) (40)
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Total Debt Securities:
One year or less 127,355 127,849 5.75 97,005 97,206 5.66 232,621 233,221 6.17
After 1 year through 5 years 652,445 660,984 6.08 961,657 968,843 6.70 694,014 697,081 6.90
After 5 years through 10 years 131,952 136,282 5.27 188,145 192,383 5.77 92,598 93,350 5.47
After 10 years 93,067 94,686 5.75 66,779 68,470 6.04 45,961 46,535 6.27
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Total Debt Securities 1,004,819 1,019,801 5.90 1,313,586 1,326,902 6.46 1,065,194 1,070,187 6.59
Memo: Unrealized gains 16,583 13,777 7,007
Memo: Unrealized losses (1,601) (461) (2,014)
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Mortgage-backed securities 3,557,242 3,585,105 6.53 2,859,331 2,874,996 6.77 2,147,689 2,138,421 6.60
Memo: Unrealized gains 30,271 20,115 8,322
Memo: Unrealized losses (2,408) (4,450) (17,590)
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Equity securities 52,864 58,270 5.53 69,081 77,778 6.10 50,147 56,109 7.53
Memo: Unrealized gains 8,420 8,978 6,068
Memo: Unrealized losses (3,014) (281) (106)
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
Federal Home Loan Bank and
Federal Reserve Stock 100,951 100,951 11.48 71,849 71,849 5.98 60,080 60,080 7.46
Memo: Unrealized gains 0 0 0
Memo: Unrealized losses 0 0 0
- - ----------------------------- ----------- ----------- ------ ----------- ----------- ------ ----------- ----------- ------
TOTAL AFS SECURITIES $4,715,876 $4,764,127 6.49 $4,313,847 $4,351,525 6.65 $3,323,110 $3,324,797 6.63
Memo: Unrealized gains 55,274 42,870 21,397
Memo: Unrealized losses (7,023) (5,192) (19,710)
============================= =========== =========== ====== =========== =========== ====== =========== =========== ======
<FN>
(A) FSCO has elected to classify all investment securities as available for sale securities.
(B) Average yields have been calculated using coupon rates, not adjusted to a fully-taxable equivalent basis.
</TABLE>
<PAGE>
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, consumers, automobile
dealerships, and home builders. There is substantial economic diversification
across FSCO's seven-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 $14.0 billion at December 31, 1998, up $2.8 billion
or 24.8% from year-end 1997 (see: "Table 1: Financial Highlights", "Table 9:
Loans", and "Note 5: Loans"). Record outstanding balances were achieved in all
major components of the loan portfolio, as loans originated or added with
acquisitions were partially offset by asset sales and securitizations.
The ratio of total loans to total assets was 64.61% at December 31, 1998, up
from 61.87% at year-end 1997. The components of FSCO's loan portfolio at
December 31, 1998, compared with December 31, 1997, are discussed below.
* Commercial loans were a record $3.2 billion, up $0.4 billion or 14.7%.
This increase was primarily due to a continued broad-based business expansion
in FSCO's market areas. Commercial loans consisted primarily of loans to small
and middle-market businesses and agricultural-related businesses.
* Real estate secured loans were a record $6.1 billion, up $1.6 billion or
34.5%. This increase was primarily due to record loan originations generated by
strong demand and lower interest rates. However, loan originations were, and
will be, mostly offset by 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. In 1998,
1-to-4 family residential term loan originations grew to a record $15.8
billion, up $9.4 billion or 147.2% from approximately $6.4 billion in 1997,
offset by record loan sales of $13.9 billion, up $9.6 billion or 228.5% from
approximately $4.2 billion in 1997. At year-end 1998, $2.4 billion of real
estate secured loans were held for sale, up $1.3 billion or 112.5% from $1.1
billion at the prior year end.
* Consumer loans were a record $3.4 billion, up $0.5 billion or 18.5%. This
increase was primarily due to record vehicle loan originations, partially
offset by a combination of maturing loans and loan sales and securitizations.
For indirect vehicle loans in 1998, originations were $2.8 billion, up $0.5
billion or 22.0% from approximately $2.3 billion in 1997, while loan sales and
securitizations were $1.3 billion, up $0.5 billion or 65.9% from approximately
$0.8 billion. FSCO remained the leading consumer lender in its primary market
area.
* Leases were a record $1.3 billion, up $0.3 billion or 26.7%. This increase
was primarily due to FSCO's growth in the vehicle and equipment leasing
markets, partially offset by sales during the year.
<PAGE>
<TABLE>
TABLE 9: LOANS (in thousands)
<CAPTION>
5-Year
Compound
98/97 Growth
As of December 31, 1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
COMMERCIAL LOANS:
Commercial & industrial $2,562,274 $2,251,179 $1,744,943 $1,623,181 $1,461,612 13.8 16.0
Agricultural 404,038 362,820 337,511 301,427 291,807 11.4 9.6
Other commercial 198,673 144,866 186,706 112,597 153,888 37.1 5.6
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL COMMERCIAL LOANS (A) 3,164,985 2,758,865 2,269,160 2,037,205 1,907,307 14.7 14.3
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
REAL ESTATE SECURED LOANS:
1 to 4 family residential term 3,505,920 2,177,415 1,473,523 1,471,625 1,574,888 61.0 22.9
1 to 4 family residential home equity 424,102 506,999 496,931 460,948 369,487 (16.4) 8.0
1 to 4 family residential construction 577,940 425,343 349,771 221,551 186,342 35.9 29.2
Commercial & other term 1,325,071 1,112,042 1,132,787 1,085,961 1,036,942 19.2 9.2
Commercial & other construction 265,879 313,686 210,214 276,099 146,731 (15.2) 21.6
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL REAL ESTATE SECURED LOANS 6,098,912 4,535,485 3,663,226 3,516,184 3,314,390 34.5 18.1
Memo: Total real estate term 5,255,093 3,796,456 3,103,241 3,018,534 2,981,317 38.4 17.0
Memo: Loans held for sale included
in total real estate term 2,391,508 1,125,616 338,722 270,530 176,376 112.5 NM
Memo: Total real estate construction (A) 843,819 739,029 559,985 497,650 333,073 14.2 26.5
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
CONSUMER LOANS:
Credit card & related 328,853 320,656 312,647 314,382 309,598 2.6 3.4
Vehicle & other consumer 3,114,506 2,585,139 2,699,257 2,335,732 2,567,690 20.5 10.3
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL CONSUMER LOANS 3,443,359 2,905,795 3,011,904 2,650,114 2,877,288 18.5 9.5
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL LEASES 1,306,161 1,030,621 753,061 413,260 343,297 26.7 36.4
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
LOANS, NET OF UNEARNED INCOME 14,013,417 11,230,766 9,697,351 8,616,763 8,442,282 24.8 15.7
Memo: Unearned income (127,593) (106,369) (69,940) (19,169) (11,680) 20.0 57.6
Reserve for loan losses (173,350) (157,525) (142,693) (135,011) (138,107) 10.0 4.7
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL LOANS, NET $13,840,067 $11,073,241 $9,554,658 $8,481,752 $8,304,175 25.0 15.9
================================================ ============ ============ ============ ============ ============ ======== ========
<FN>
NM: Not Meaningful.
<CAPTION>
(A) MATURITIES AND INTEREST RATE SENSITIVITIES OF SELECTED LOAN CATEGORIES (in thousands)
1 Year After 1 Year After
As of December 31, 1998 Total or Less Thru 5 Years 5 Years
<S> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------
Remaining Maturity:
Commercial loans $3,164,985 $2,422,701 $524,889 $217,395
Real estate construction loans 843,819 755,895 84,759 3,165
- - ------------------------------------------------ ------------ ------------ ------------ ------------
TOTAL $4,008,804 $3,178,596 $609,648 $220,560
- - ------------------------------------------------ ------------ ------------ ------------ ------------
Interest Rate Sensitivities Of Commercial Loans And Real Estate Construction Loans Maturing In More Than One Year:
With fixed rates $330,102 - $214,237 $115,865
With floating rates 500,106 - 395,411 104,695
- - ------------------------------------------------ ------------ ------------ ------------ ------------
TOTAL INTEREST RATE SENSITIVITIES $830,208 - $609,648 $220,560
================================================ ============ ============ ============ ============
</TABLE>
<PAGE>
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 strong asset quality in 1998, as its ratio of
total problem assets to total loans and ORE was 0.52% at December 31, 1998,
down from 0.58% at year-end 1997 (see: "Table 1: Financial Highlights"). The
ratio of nonperforming assets to total loans and ORE was 0.35% at year end,
down from 0.40% from the prior year end.
Problem assets totaled $73.2 million at December 31, 1998, up $7.5 million
or 11.4% from year-end 1997 (see: "Table 10: Problem Assets and Potential
Problem Assets"). The components of FSCO's problem assets at December 31, 1998,
compared with December 31, 1997, are discussed below.
* Nonaccruing loans totaled $45.8 million, up $8.9 million or 24.2%. This
increase was due to growth in the loan portfolio, with the result that the
ratio of nonaccruing loans to total loans remained unchanged at 0.33%.
* Other real estate was reduced to a low $3.6 million, down $4.4 million or
54.7%. 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 $23.8 million, up $2.9
million or 14.0%. The ratio of accruing loans past due 90 days or more to total
loans was 0.17%, down from 0.19%.
A comparison of FSCO to its BHCPR peer group as of September 30, 1998 showed
that: FSCO's ratio of nonaccruing loans to total loans was 0.32%, which
compared favorably with the peer group average of 0.59%; and FSCO's ratio of
accruing loans past due 90 days or more to total loans was 0.16%, which
compared favorably with the peer group average of 0.23%.
Potential problem loans identified by FSCO were $47.3 million at December
31, 1998, up $39.9 million or 537.5% from year-end 1997. This increase was
primarily caused by one large secured loan to a Utah-based commercial borrower
that experienced product problems in its operations, and several agricultural
loans. Potential problem loans consisted primarily of commercial and
agricultural related loans.
<PAGE>
<TABLE>
TABLE 10: PROBLEM ASSETS AND POTENTIAL PROBLEM ASSETS (in thousands)
<CAPTION>
5-Year
Compound
98/97 Growth
As of December 31, 1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
PROBLEM ASSETS:
Nonaccruing Loans:
Commercial $19,562 $13,670 $14,360 $9,740 $9,469 43.1 8.9
Real estate term 18,670 16,288 17,067 11,907 13,601 14.6 (5.2)
Real estate construction 6,213 4,669 3,935 2,349 1,914 33.1 23.2
Consumer 137 2 137 254 270 6,750.0 (26.9)
Leases 1,230 331 251 400 837 271.6 (3.7)
Renegotiated 0 1,916 0 10 12 (100.0) (100.0)
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
Total Nonaccruing Loans 45,812 36,876 35,750 24,660 26,103 24.2 1.4
Other real estate 3,617 7,981 10,672 12,206 9,606 (54.7) (32.8)
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
Total Nonperforming Assets 49,429 44,857 46,422 36,866 35,709 10.2 (6.5)
Accruing loans past due 90 days or more 23,758 20,841 20,393 13,622 12,323 14.0 25.8
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL PROBLEM ASSETS $73,187 $65,698 $66,815 $50,488 $48,032 11.4 (0.9)
================================================ ============ ============ ============ ============ ============ ======== ========
POTENTIAL PROBLEM ASSETS $47,319 $7,423 $8,271 $12,319 $12,018 537.5 19.8
================================================ ============ ============ ============ ============ ============ ======== ========
GROSS INTEREST INCOME THAT WOULD HAVE BEEN RECORDED IF LOANS HAD BEEN CURRENT IN ACCORDANCE WITH ORIGINAL TERMS:
Nonaccruing loans $3,772 $2,810 $3,242 $2,500 $2,146 34.2 10.1
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
INTEREST INCOME ACTUALLY RECOGNIZED:
Nonaccruing loans $3,053 $1,772 $2,158 $2,766 $2,264 72.3 35.1
================================================ ============ ============ ============ ============ ============ ======== ========
APPROXIMATE PERCENTAGE OF NONPERFORMING ASSETS OVER $500,000 BY LOCATION (A):
Utah 18% 13% 7% 11% 24%
Idaho 52 82 63 45 15
Oregon & Washington 5 5 6 0 9
New Mexico 0 0 3 18 34
Nevada 13 0 16 26 8
California 12 NA NA NA NA
All others 0 0 5 0 10
================================================ ============ ============ ============ ============ ============ ======== ========
APPROXIMATE PERCENTAGE OF NONPERFORMING ASSETS OVER $500,000 BY TYPE OF SECURITY (A):
Office buildings 5% 0% 0% 10% 0%
Shopping centers 12 0 0 0 17
Land 0 0 0 14 32
Single family dwellings 31 32 42 21 8
Other real estate secured 31 10 9 10 13
All others 21 58 49 45 30
================================================ ============ ============ ============ ============ ============ ======== ========
<FN>
(A) Does not include FSB California prior to 1998.
</TABLE>
<PAGE>
ASSET QUALITY:
RESERVE FOR LOAN LOSSES
The adequacy of FSCO's 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 $173.4 million at December
31, 1998, up $15.8 million or 10.0% from year-end 1997 (see: "Table 11:
Reconciliation of the Reserve for Loan Losses"). This increase included $11.0
million in net additions to the reserve as FSCO responded to 20.4% average loan
growth during the year, and $4.8 million in reserves added with the FSB So. New
Mexico and MNB acquisitions (see: "Mergers and Acquisitions").
Based on its analysis of reserve adequacy, FSCO considered its reserve for
loan losses at December 31, 1998 to be adequate to absorb estimated loan losses
in the current loan portfolio. FSCO's coverage ratio of the reserve to
nonaccruing loans was 378.39% at year-end 1998, down from 427.17% at the prior
year end. The ratio of the reserve to total loans was 1.24% at year-end 1998,
down from 1.40% at the prior year end, due in large part to the strong volume
growth in loans (see: "Table 1: Financial Highlights" and "Table 9: Loans").
These decreases were due in large part to the significant growth in consumer
loans, many of which are periodically securitized and sold, and warehoused
residential mortgage loans, which are held for sale and which require lower
levels of reserve coverage in comparison to other loan types.
Net loans charged off against the reserve totaled $60.9 million for 1998, up
$7.9 million or 14.9% from 1997 (see: "Table 11: Reconciliation of the Reserve
For Loan Losses"). These increases were primarily due to increased net loans
charged off for consumer vehicle and other loans. The annualized ratio of net
loans charged off to average loans was 0.49% for 1998, down from 0.51% for
1997.
A comparison of FSCO to its BHCPR peer group as of September 30, 1998 showed
that: FSCO's coverage ratio of the reserve to nonaccruing loans was 410.48%,
which compared favorably with the peer group average of 355.55%; its ratio of
the reserve to total loans was 1.31%, compared with the peer group average of
1.66%; and its annualized ratio of net loans charged off to average loans was
0.44% for the first nine months of 1998, which compared closely to the peer
group average of 0.46%. 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.
<PAGE>
<TABLE>
TABLE 11: RECONCILIATION OF THE RESERVE FOR LOAN LOSSES (in thousands)
<CAPTION>
5-Year
Compound
98/97 Growth
For the years ended December 31, 1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
RESERVE FOR LOAN LOSSES, BEGINNING $157,525 $142,693 $135,011 $138,107 $138,051 10.4 3.8
LOANS CHARGED OFF:
Commercial (10,021) (12,313) (6,195) (4,636) (6,280) (18.6) (0.3)
Real estate term (3,255) (3,067) (1,808) (3,574) (2,054) 6.1 (14.3)
Real estate construction (164) (109) (314) (100) (506) 50.5 (21.3)
Consumer credit card & related (14,087) (14,222) (13,519) (10,377) (6,926) (0.9) 14.9
Consumer vehicle & other (66,792) (53,507) (41,759) (34,221) (23,112) 24.8 34.4
Leases (471) (2,977) (614) (957) (239) (84.2) (20.3)
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL LOANS CHARGED OFF (94,790) (86,195) (64,209) (53,865) (39,117) 10.0 18.0
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
RECOVERIES OF LOANS CHARGED OFF:
Commercial 5,294 5,316 6,756 7,712 11,302 (0.4) (14.9)
Real estate term 1,825 1,850 889 2,963 5,651 (1.4) (11.1)
Real estate construction 23 12 847 163 201 91.7 (62.6)
Consumer credit card & related 2,735 2,477 2,293 2,117 1,794 10.4 7.7
Consumer vehicle & other 23,997 22,046 15,993 14,669 11,144 8.8 23.3
Leases 15 1,481 320 463 837 (99.0) (33.2)
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL RECOVERIES OF LOANS CHARGED OFF 33,889 33,182 27,098 28,087 30,929 2.1 3.4
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
NET LOANS CHARGED OFF (60,901) (53,013) (37,111) (25,778) (8,188) 14.9 36.6
Provision for loan losses 71,923 63,386 41,300 22,682 1,545 13.5 40.8
Acquisitions & reclassifications 4,803 4,459 3,493 0 6,699 7.7 (7.7)
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
RESERVE FOR LOAN LOSSES, ENDING $173,350 $157,525 $142,693 $135,011 $138,107 10.0 4.7
================================================ ============ ============ ============ ============ ============ ======== ========
</TABLE>
<TABLE>
TABLE 12: ALLOCATION OF THE RESERVE FOR LOAN LOSSES (in thousands)
<CAPTION>
As of December 31, 1998 1998 1997 1997 1996 1996 1995 1995 1994 1994
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>
- - ----------------------------------------- ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
LOAN TYPE:
Commercial $59,247 22.6% $43,136 24.6% $46,617 23.4% $38,523 23.6% $38,088 22.6%
Real estate term 16,276 37.5 13,873 33.8 12,737 32.0 8,345 35.0 15,133 35.3
Real estate construction 6,325 6.0 4,725 6.6 4,378 5.8 4,148 5.8 4,951 3.9
Consumer 49,936 24.6 44,933 25.9 44,457 31.1 43,349 30.8 42,726 34.1
Leases 11,807 9.3 8,963 9.2 8,224 7.8 6,068 4.8 7,117 4.1
Unallocated 29,759 41,895 26,280 34,578 30,092
- - ----------------------------------------- ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
TOTALS $173,350 100.0 $157,525 100.0 $142,693 100.0 $135,011 100.0 $138,107 100.0
========================================= ========== ====== ========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
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 $71.9 million for 1998, up $8.5
million or 13.5% from $63.4 million in 1997, which in turn was up $22.1 million
or 53.5% from $41.3 million for 1996 (see: "Table 11: Reconciliation of the
Reserve for Loan Losses"). The increase included additions to the reserve for
loan losses of $11.0 million over and above net loans charged off during 1998.
<PAGE>
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, FS Capital Markets was contracted to provide the corporate-wide
ALCO process for FSCO and its bank subsidiaries under the direction of FSCO's
ALCO committee and board of directors.
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 FS Capital
Market's Treasury Division.
FSCO maintains an adequate liquidity position in large part through stable
deposits generated from its widespread branch network (see: "Table 13:
Deposits"), the prudent use of debt (see: "Table 14: Short-Term Borrowings",
and "Table 15: 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, a portion of which is sold or
securitized when appropriate. 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 and each subsidiary
bank monitors liquidity levels on a daily basis through FS Capital Market's
Treasury Division and on a monthly basis through its ALCO process.
FSCO has had continued success during 1998 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, in its normal course of business, utilizes both domestic and
European external funding sources, such as corporate and bank notes, Federal
Home Loan Bank advances, as well as asset sales and securitizations. These
funding sources and processes have enabled FSCO to maximize its earning assets
and its ability to service its markets while continuing to maintain
satisfactory liquidity goals. Additionally, plans are in place to effect
vehicle and mortgage loan sales and securitizations during 1999.
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 were a record $12.7 billion at December 31, 1998, up $1.2
billion or 10.9% from year-end 1997 (see: "Table 13: Deposits"). This increase
was due to FSCO's continued emphasis on its deposit gathering functions, the
success of several deposit programs, and $343 million and $200 million in
deposits added with the FSB So. New Mexico and MNB acquisitions, respectively
(see: "Mergers and Acquisitions"). The ratio of loans to deposits was 110.70%
at December 31, 1998, up from 98.36% at year-end 1997, due to continued strong
loan demand, significant increases in mortgage loan refinance activity, and
loans held temporarily for sale or securitization. The ratio of loans to assets
was 64.61% at year-end 1998, up from 61.87% at year-end 1997, yet only
marginally higher than FSCO's five year average of 63.98%. These ratios, as
well as other loan and liquidity ratios, vary with changes in economic cycles
and are monitored closely through FSCO's ALCO process to ensure that the proper
balance is maintained between risk and economic opportunities.
FSCO's total debt was $6.9 billion at December 31, 1998, up $2.0 billion or
40.0% from year-end 1997 (see: "Table 14: Short-Term Borrowings", and "Table
15: Long-Term Debt"). The components of FSCO's debt at December 31, 1998,
compared with December 31, 1997, are discussed below.
* Federal funds purchased and securities sold under repurchase agreements
were $3.7 billion, up $0.5 billion or 15.2%. This increase occurred as FSCO
funded, on an interim basis, the loan and mortgage refinance growth generated
by business-cycle opportunities in its market areas, loans held for sale or
securitization, and funded growth in AFS securities through repurchase
agreements.
* All other short-term borrowed funds were $0.5 billion, up $0.2 billion or
46.9%. This increase was primarily due to maturing issues formerly classified
as long-term debt, combined with the expanded use of alternative, attractively
priced or structured, short-term funding vehicles.
* Long-term debt was $2.6 billion, up $1.3 billion or 100.0% with the
October 29, 1998 issuance of $325 million in senior debt, the November 24, 1998
issuance of $285 million of European Medium Term Notes, and Federal Home Loan
Bank Note advances. This increase was due to enhanced use of diverse funding
sources, strategic growth opportunities to support asset growth opportunities
in primary markets served, and improved utilization of collateral funding at
attractive interest rates, partially offset by the ongoing maturity of existing
long-term debt. These long-term debt instruments also provided favorable
asset/liability rate risk management opportunities during the year.
<PAGE>
<TABLE>
TABLE 13: DEPOSITS (in thousands)
<CAPTION>
5-Year
Compound
98/97 Growth
For the years ended December 31, 1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
Noninterest-bearing deposits $2,752,009 $2,431,006 $2,423,596 $2,015,487 $1,834,861 13.2 9.3
INTEREST-BEARING DEPOSITS:
Interest-bearing demand accounts 539,371 436,382 1,170,978 1,144,814 1,149,084 23.6 (13.0)
Savings accounts 1,457,870 1,369,760 1,493,117 1,380,067 1,302,771 6.4 1.5
Money market accounts 2,927,577 2,348,183 1,222,468 1,167,378 1,257,656 24.7 19.6
Time deposits of $100,000 or more:
Maturing in 3 months or less 463,212 380,344 268,195 279,617 328,170 21.8 16.8
Over 3 months through 6 months 294,613 194,661 147,297 152,090 77,180 51.3 33.9
Over 6 months through 12 months 338,920 414,546 198,074 188,846 87,941 (18.2) 35.0
Over 12 months 368,120 410,438 258,642 135,925 121,537 (10.3) 37.1
Memo: Foreign office 258,660 168,016 75,565 88,949 0 53.9 NM
Other time deposits 3,516,882 3,432,314 2,920,640 2,738,620 2,282,836 2.5 12.4
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL INTEREST-BEARING DEPOSITS 9,906,565 8,986,628 7,679,411 7,187,357 6,607,175 10.2 10.4
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL DEPOSITS $12,658,574 $11,417,634 $10,103,007 $9,202,844 $8,442,036 10.9 10.2
================================================ ============ ============ ============ ============ ============ ======== ========
<FN>
NM: Not Meaningful.
</TABLE>
<TABLE>
TABLE 14: SHORT-TERM BORROWINGS (in thousands)
<CAPTION>
5-Year
Compound
98/97 Growth
For the years ended December 31, 1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
END OF PERIOD BALANCE:
Federal funds purchased & securities sold $3,747,084 $3,252,259 $2,545,327 $1,946,756 $2,175,597 15.2 22.0
Other short-term borrowings 518,505 352,940 288,041 261,233 184,552 46.9 39.0
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
WEIGHTED AVERAGE RATE:
Federal funds purchased & securities sold 4.79% 5.38% 5.12% 5.44% 5.37%
Other short-term borrowings 7.75 6.08 9.40 6.89 6.00
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
AVERAGE OUTSTANDINGS FOR THE YEAR:
Federal funds purchased & securities sold $3,442,992 $2,649,889 $1,801,694 $1,699,989 $1,945,621 29.9 26.4
Other short-term borrowings 383,482 319,857 255,713 206,645 72,874 19.9 46.9
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
WEIGHTED AVERAGE RATE FOR THE YEAR:
Federal funds purchased & securities sold 5.29% 5.33% 5.04% 5.60% 4.23%
Other short-term borrowings 5.96 6.85 6.87 6.61 5.59
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
HIGHEST MONTH-END BALANCE FOR THE YEAR:
Federal funds purchased & securities sold $4,100,554 $3,252,506 $2,552,987 $2,450,703 $2,648,541 26.1 24.2
Other short-term borrowings 518,505 480,292 321,962 349,678 184,552 8.0 39.0
================================================ ============ ============ ============ ============ ============ ======== ========
</TABLE>
<TABLE>
TABLE 15: LONG-TERM DEBT (in thousands)
<CAPTION>
5-Year
Compound
98/97 Growth
For the years ended December 31, 1998 1997 1996 1995 1994 % Chg Rate
<S> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
PARENT COMPANY:
Medium term notes due 1994-2003 $28,750 $32,750 $32,750 $50,000 $50,000 (12.2) (1.7)
Floating rate notes due 1999 6,758 6,842 6,984 7,175 7,475 (1.2) (3.1)
7.875% senior notes due 1999 98,962 98,962 98,962 99,462 100,000 0.0 NM
7.50% subordinated notes due 2002 75,000 75,000 75,000 75,000 75,000 0.0 0.0
5.875% senior notes due 2003 325,000 0 0 0 0 NM NM
7.00% subordinated notes due 2005 125,000 125,000 125,000 125,000 0 0.0 NM
6.875% senior notes due 2006 150,000 150,000 150,000 0 0 0.0 NM
SUBSIDIARIES:
Guaranteed preferred beneficial interests - 8.41%
subordinated capital income securities due 2026 150,000 150,000 150,000 0 0 0.0 NM
Floating rate European medium term notes due 2002 300,000 300,000 0 0 0 0.0 NM
Floating rate European medium term notes due 2003 285,000 0 0 0 0 NM NM
Other long-term notes: banks 1,558,203 647,397 583,476 583,623 602,170 140.7 62.6
Other long-term notes: nonbanks 309 402 1,039 689 1,775 (23.1) (23.2)
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL DEBT WITH ORIGINAL MATURITY OVER 1 YEAR 3,102,982 1,586,353 1,223,211 940,949 836,420 95.6 65.2
Less maturities under 1 year included in
short-term borrowings 493,424 281,890 279,156 220,428 150,994 75.0 77.9
- - ------------------------------------------------ ------------ ------------ ------------ ------------ ------------ -------- --------
TOTAL LONG-TERM DEBT $2,609,558 $1,304,463 $944,055 $720,521 $685,426 100.0 63.3
================================================ ============ ============ ============ ============ ============ ======== ========
<FN>
NM: Not Meaningful.
</TABLE>
<PAGE>
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 (EXCLUDING 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 FS Capital Market's
Treasury Division, where on- and off-balance sheet tools, including
investments, debt, capital, and derivatives, are utilized to achieve ALCO
objectives.
FSCO continued to maintain a relatively neutral interest rate risk position
during 1998. During the year, a strong regional economy resulted in net average
loan growth of $2.1 billion or 20.4%, while successful deposit promotions
helped to generate average deposit growth of $1.5 billion or 14.1%, which was a
healthy increase but not sufficient to entirely fund the loan growth. FSCO
utilized asset sales and securitizations and external funding sources to
support the remainder of its asset growth (see: "Asset/Liability Management -
Liquidity").
FSCO took advantage of its strong capital ratios and further leveraged the
balance sheet in 1998 through an increase in the average AFS securities
portfolio of $0.9 billion or 25.1%. This increase was primarily funded through
the use of repurchase agreements and other short-term borrowings.
FSCO is well positioned to support continued strong loan growth through
growth of regular deposit programs, the sale or maturity of securities,
additional asset sales and securitizations, and access to external sources of
funding.
FSCO's derivatives portfolio was increased in 1998 due to the use of
interest rate swaps to compliment the larger volume of vehicle loan
originations and to support the securitization execution. 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. A third rate risk tool for market value volatility will be
in place in 1999.
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 and investment portfolios.
At December 31, 1998 and 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, generally indicating that
rising interest rates during a given interval will increase (decrease) net
interest income:
1998 1997
----- -----
Static 90 day Cumulative Gap 5.6% (2.2%)
Static 1 year Cumulative Gap 6.0% (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 cumulative 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
interest income of alternative interest rate scenarios against a base net
interest 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 and investment
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, 1998 and 1997, FSCO's net income simulation projected the
following approximate percentage increase (decrease) in net interest income
compared with its base case net interest income over one year:
1998 1997
----- -----
If rates were shocked down 200 basis points (3.2%) 2.8%
If rates were shocked up 200 basis points 1.4% (4.4%)
The result of these shock scenarios remain well within FSCO's policy
guideline of 10%.
At December 31, 1998, FSCO exhibited slight asset 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 to manage
interest rate risk through the ALCO process (see: "Note 11: Commitments,
Contingent Liabilities, and Financial Instruments with Off-Balance Sheet
Risk"). 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
derivatives used to manage FSCO's interest rate risk, including interest rate
swaps, caps, corridors, floors, forwards, futures, and options totaled $2.8
billion notional amount at December 31, 1998, up from $1.5 billion at year-end
1997. These increases were primarily associated with hedging mortgage loan
servicing rights.
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 $1.2 billion notional par value at
December 31, 1998, down from $12.6 billion notional value at year-end 1997.
This position consisted of futures and options contracts on short-term Federal
funds, one month LIBOR, and three month Eurodollars. 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, 1998, was $30,408 per basis point (0.01%) change in
yield, compared with $35,873 at year-end 1997, and well within FSCO's $55,400
limit. For comparative purposes, this risk equates to that of FSCO owning a $73
million position in five year U.S. Treasury Notes. Fluctuations in these
positions are common as FSCO's 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 as well as
a value-at-risk report 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 $409 million at December 31, 1998, up $124
million or 43.6% from year-end 1997, due to goodwill associated with recent
acquisitions and increased loan servicing rights from higher loan production
and sales. Fluctuations in other assets and other liabilities were in part due
to the effect of acquisitions, and timing differences on cash, accounts
receivable, and accounts payable resulting from unsettled transactions in the
purchase and sale of securities.
<PAGE>
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 25, 1999, FSCO increased its quarterly common stock dividend to
$0.14 per share, up $0.01 per share or 7.7% from the previous $0.13 per share.
This dividend was paid March 1, 1999 to shareholders of record on February 16,
1999, and equated to an annual dividend rate of $0.56. This was the fifth
dividend increase since year-end 1995.
On December 3, 1998, FSCO announced that it would begin to repurchase up to
3.7 million shares of its outstanding common stock to facilitate the purchase
acquisition of Van Kasper & Company (see: "Mergers and Acquisitions"). No time
limit was set to complete this stock buyback program. As of December 31, 1998,
FSCO had repurchased approximately 83% of the 3.7 million share buyback
program.
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 the November 18,
1997 stock buyback program. FSCO had completed approximately 80% of the 3.375
million share buyback program.
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 $0.13 per share after adjusting for the stock split, up $0.017 per share or
15.0% from the previous $0.113 per share.
FSCO paid quarterly common stock dividends of $0.13 per share in each of the
four quarters of 1998, for a total of $0.52 per share in 1998. Common stock
dividends paid totaled $95.6 million in 1998, for a dividend payout ratio of
39.39%.
The 1998 dividends marked the 64th 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.
The bid price of FSCO common stock was $23.313 per share at the close of the
market on December 31, 1998, versus a book value of $8.54 per share, resulting
in a market-to-book ratio of 272.99%. In comparison, 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%. At December 31, 1998, FSCO's common stock market
capitalization was $4.4 billion, down $0.8 billion or 15.5% from year-end 1997,
but maintaining a five-year compound growth rate of 27.3%.
The approximate number of beneficial shareholders of FSCO common stock was
estimated to be 12,663 at year-end 1998, compared with an estimated 10,786 at
year-end 1997.
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.
<PAGE>
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
FSCO's stockholders' equity was increased to a record $1.6 billion at
December 31, 1998, up $0.2 billion or 13.9% from year-end 1997 (see: Financial
Statements "Consolidated Balance Sheets"). This growth was due to the
following: earnings retained; issuances of new FSCO common stock shares for
acquisitions; and the impact of accumulated other comprehensive income which
consisted of unrealized net gains in the fair value of AFS securities;
partially offset by repurchases of common stock in the public markets in 1997,
early 1998, and late 1998 (see: "Common and Preferred Stock").
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
included in the "Accumulated other comprehensive income" component of equity.
FSCO's ratio of stockholders' equity to total assets was 7.36% at December
31, 1998, compared with 7.72% at year-end 1997. The ratio of tangible common
equity to tangible assets was 5.57% at year-end 1998, down from 6.24% at year-
end 1997, reflecting repurchases of common stock, year end balance sheet
growth, goodwill recognized with various mergers, and the ongoing origination
of loan servicing rights.
A comparison of FSCO to its BHCPR peer group as of September 30, 1998 showed
that: FSCO's ratio of average stockholders' equity to average total assets was
8.11%, compared with the peer group average of 8.27%; and its ratio of tangible
common equity to tangible assets was 6.42%, which was above the peer group
average of 6.06%.
Regulations permit FSCO's $150 million of Guaranteed Preferred Beneficial
Interest - 8.41% Subordinated Capital Income Securities due 2026, issued in
1997, 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, 1998 due to
earnings retained and the above-mentioned Capital Income Securities (see:
"Table 16: Capital Ratios and Risk-Based Capital Ratios"). FSCO's risk-based
capital ratios at December 31, 1998 and 1997, respectively, were: Tier 1 at
9.10%, down from 10.62%; and Total Capital at 11.31%, down from 13.42%. The
leverage ratio at December 31, 1998 was 6.90%, down from 7.53% at year-end
1997.
FSCO and its subsidiary banks continued to be classified as "well
capitalized" according to the regulatory requirements of their respective
primary regulatory authorities. FS Bank maintained its "well capitalized"
status for 1998, although it experienced a temporary decrease in its Total
Capital ratio to 9.93% due to extraordinary mortgage loan production in
December. Subsequent to 1998, its outstanding mortgage loan balance has been
reduced by loan sales that occurred in the ordinary course of business. 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 16: CAPITAL RATIOS AND RISKED-BASED CAPITAL RATIOS
<CAPTION>
FSCO FS Bank FSB NewMexico FSB SoNewMex FSB Nevada FSB California
As of December 31, 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
CAPITAL RATIOS:
Stockholders' equity / assets [EOP] 7.36% 7.72% 7.70% 7.75% 6.60% 6.51% 18.76% NA 13.20% 12.87% 12.24% 9.82%
Stockholders' equity / assets [Avg] 7.91 8.11 7.84 8.18 6.64 6.52 16.39 NA 13.57 12.14 10.27 10.31
Tangible common equity / tangible assets [EOP] 5.57 6.24 6.25 6.42 6.59 6.50 11.36 NA 8.13 7.45 9.26 8.08
Leverage ratio (A) 6.90 7.53 6.97 7.04 6.33 6.29 11.29 NA 7.70 7.04 8.59 7.65
RISK-BASED CAPITAL RATIOS:
Tier 1 risk-based capital ratio 9.10 10.62 8.87 9.64 12.41 13.28 18.72 NA 14.04 13.05 12.15 11.11
Total (Tier 1 + 2) risk-based capital ratio 11.31 13.42 9.93 11.03 13.69 14.54 19.88 NA 15.30 14.31 13.41 12.36
=============================================== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<FN>
EOP: End Of Period. Avg: Average.
(A) 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>
OFF-BALANCE SHEET ITEMS
During 1998, 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 1998 or
1997, other than those related to FSCO's Year 2000 project (see: "Year 2000
Issues).
<PAGE>
<TABLE>
TABLE 17: QUARTERLY FINANCIAL HIGHLIGHTS (in thousands, except per share data & ratios) (A)
<CAPTION>
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
1998 1998 1998 1998 1997 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
COMMON & PREFERRED STOCK DATA:
Earnings per common share basic $0.36 $0.34 $0.30 $0.33 $0.31 $0.30 $0.29 $0.28
Earnings per common share diluted 0.35 0.33 0.29 0.32 0.30 0.29 0.28 0.27
Tangible EPS diluted 0.41 0.37 0.33 0.35 0.31 0.33 0.30 0.29
Dividends paid per common share 0.130 0.130 0.130 0.130 0.113 0.113 0.113 0.102
Book value per common share [EOP] 8.54 8.54 8.21 8.02 7.59 7.48 7.26 6.67
Tangible book value per common share [EOP] 6.35 6.64 6.34 6.21 6.05 6.04 5.84 5.63
Market price (bid) [EOP] 23.313 16.688 21.375 23.813 27.917 19.833 18.209 14.278
High bid for the period 23.313 23.938 24.750 26.167 27.917 21.333 19.000 16.555
Low bid for the period 15.938 15.500 21.000 21.833 19.083 17.583 14.445 14.222
Market capitalization (mktprice x #shrs)[EOP]4,352,817 3,144,703 4,016,256 4,457,936 5,148,509 3,664,543 3,365,296 2,564,143
Market price / book value per com shr [EOP]% 272.99 195.41 260.35 296.92 367.81 265.17 250.64 213.92
Dividend payout ratio (DPS / EPS basic) % 36.11 38.24 43.33 39.39 36.45 37.67 38.97 36.43
Dividend yield (DPS / mktprice) [EOP] % 2.23 3.12 2.43 2.18 1.62 2.28 2.48 2.86
Price / earnings ratio (mktprice/4qtrsEPS) 17.5x 13.0x 17.2x 19.4x 23.7x 17.1x 16.1x 13.1x
Common shares basic [EOP] 186,712 188,441 187,895 187,206 184,422 184,770 184,815 179,587
Common shares basic [Avg] 188,370 187,931 187,623 186,336 184,583 184,717 179,359 180,225
Common shares diluted [Avg] 193,756 193,621 194,471 193,510 191,671 191,268 185,609 186,323
Preferred shares [EOP] 9 9 9 10 10 10 10 10
- - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME STATEMENT:
Interest income $369,193 $366,416 $350,950 $334,101 $328,965 $315,683 $294,255 $274,475
Interest expense 182,478 186,661 178,012 169,810 163,388 152,373 141,775 129,904
Net interest income 186,715 179,755 172,938 164,291 165,577 163,310 152,480 144,571
Fully taxable equivalent (FTE) adjustment 2,716 2,259 2,827 2,579 4,298 2,336 1,851 2,007
Net interest income, FTE 189,431 182,014 175,765 166,870 169,875 165,646 154,331 146,578
Provision for loan losses 22,861 18,068 18,396 12,598 21,243 13,921 14,074 14,148
Noninterest income 132,444 114,896 118,534 108,516 106,876 87,543 82,006 80,733
Noninterest expenses 193,489 179,516 184,277 165,806 164,944 149,830 140,658 133,472
Provision for income taxes 35,496 33,976 32,892 33,034 28,235 31,066 28,550 27,681
Net income 67,313 63,091 55,907 61,369 58,031 56,036 51,204 50,003
Preferred stock dividend requirement 7 7 7 7 7 7 8 8
Common stock dividend 24,580 24,472 22,943 23,586 20,038 20,318 19,569 17,760
- - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET - END OF PERIOD:
Trading account securities $329,109 $73,067 $53,343 $318,224 $255,320 $87,154 $274,014 $388,264
Available for sale (AFS) securities 4,764,127 4,912,396 4,806,559 4,386,629 4,351,525 4,109,176 3,642,437 3,504,187
Memo: fair value adjust AFS securities 48,251 79,150 39,154 34,640 37,678 19,196 2,081 (29,988)
Loans, net of unearned income 14,013,417 12,926,926 12,530,360 12,436,407 11,230,766 11,159,090 10,528,449 9,504,520
Reserve for loan losses (173,350) (169,058) (166,658) (163,256) (157,525) (152,951) (150,170) (144,225)
Total interest-earning assets 19,337,468 17,954,191 17,417,190 17,219,384 16,044,477 15,374,616 14,729,459 13,479,168
Intangible assets 409,367 357,459 351,547 338,844 285,156 265,492 263,523 188,281
Total assets 21,689,088 19,859,300 19,360,006 19,132,896 18,151,783 17,145,647 16,413,522 15,210,069
Noninterest-bearing deposits 2,752,009 2,431,637 2,402,497 2,339,665 2,431,006 2,391,563 2,435,479 2,239,273
Interest-bearing deposits 9,906,565 9,511,979 9,514,706 9,483,289 8,986,628 8,531,915 8,039,087 7,779,223
Total deposits 12,658,574 11,943,616 11,917,203 11,822,954 11,417,634 10,923,478 10,474,566 10,018,496
Short-term borrowed funds 4,265,589 4,026,919 3,905,250 3,986,966 3,605,199 3,399,509 3,285,243 2,564,633
Long-term debt 2,609,558 1,749,478 1,513,044 1,339,892 1,304,463 954,463 959,897 986,417
Total interest-bearing liabilities 16,781,712 15,288,376 14,933,000 14,810,147 13,896,290 12,885,887 12,284,227 11,330,273
Preferred stockholders' equity 484 491 493 501 501 510 532 532
Common stockholders' equity 1,595,011 1,609,515 1,542,377 1,500,734 1,400,345 1,381,980 1,342,678 1,198,625
Parent company investment in subsidiaries 1,945,390 1,788,947 1,719,975 1,678,122 1,555,112 1,503,053 1,450,529 1,295,226
- - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET - AVERAGE:
Trading account securities $139,293 $64,310 $138,157 $295,414 $163,330 $178,070 $360,339 $168,094
Available for sale (AFS) securities 4,870,349 4,824,517 4,524,500 4,310,715 4,190,292 3,728,035 3,521,411 3,364,555
Memo: fair value adjust AFS securities 62,380 41,719 33,956 41,342 28,511 13,808 (17,755) 3,328
Loans, net of unearned income 13,310,822 12,844,942 12,374,882 11,656,881 11,214,784 10,829,751 10,006,397 9,639,518
Reserve for loan losses (170,129) (167,555) (164,256) (160,269) (153,922) (151,204) (144,385) (142,549)
Deferred taxes on leases (200,571) (193,572) (198,673) (196,556) (192,903) (186,212) (187,553) (183,598)
Total interest-earning assets,
excluding fair value adjust AFS sec's
& deferred tax on leases 18,175,389 17,580,579 16,939,894 16,091,448 15,415,241 14,612,051 13,785,315 13,094,975
Intangible assets 371,371 351,880 349,850 308,452 271,770 262,789 195,413 188,328
Total assets 20,438,133 19,652,528 18,998,533 18,085,153 17,295,476 16,394,898 15,433,778 14,778,665
Noninterest-bearing deposits 2,510,491 2,302,410 2,252,282 2,181,985 2,231,130 2,260,560 2,215,276 2,103,117
Interest-bearing deposits 9,587,111 9,531,570 9,459,908 9,207,647 8,658,839 8,223,536 7,781,168 7,740,893
Total deposits 12,097,602 11,833,980 11,712,190 11,389,632 10,889,969 10,484,096 9,996,444 9,844,010
Short-term borrowed funds 3,779,161 4,146,642 3,851,257 3,522,497 3,350,840 3,210,660 2,889,451 2,415,102
Long-term debt 2,350,927 1,611,966 1,433,195 1,314,965 1,246,482 971,356 989,408 950,850
Total interest-bearing liabilities 15,717,199 15,290,178 14,744,360 14,045,109 13,256,161 12,405,552 11,660,027 11,106,845
Preferred stockholders' equity 487 492 497 501 506 524 532 535
Common stockholders' equity 1,617,608 1,557,403 1,519,335 1,411,739 1,384,287 1,362,645 1,214,361 1,220,949
=========================================== ========== ========== ========== ========== ========== ========== ========== ==========
<FN>
EOP: End Of Period. Avg: Average. EPS: Earnings Per Common Share. DPS: Dividends Per Common Share. NM: Not Meaningful.
(A) ALL FSCO FINANCIAL DATA HAS BEEN RESTATED FOR:
* two separate 3-for-2 common stock splits in the form of 50% stock dividends, paid in May 1997 and February 1998.
* SFAS No. 128, "Earnings Per Share", restating EPS primary to EPS basic and EPS fully diluted to EPS diluted.
* the May 30, 1998 pooling-of-interests merger with FSB California (formerly California State Bank).
</TABLE>
<PAGE>
<TABLE>
TABLE 17: QUARTERLY FINANCIAL HIGHLIGHTS (in thousands, except per share data & ratios) (A) (continued)
<CAPTION>
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
1998 1998 1998 1998 1997 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
PROBLEM ASSETS & POTENTIAL PROBLEM ASSET - END OF PERIOD:
Total nonaccruing loans $45,812 $41,185 $39,713 $36,553 $36,876 $38,088 $38,829 $33,846
Other real estate 3,617 2,798 3,908 4,342 7,981 6,789 8,449 8,759
Total nonperforming assets 49,429 43,983 43,621 40,895 44,857 44,877 47,278 42,605
Accruing loans past due 90 days or more 23,758 20,369 22,833 19,693 20,841 20,109 20,727 20,662
Total problem assets 73,187 64,352 66,454 60,588 65,698 64,986 68,005 63,267
Potential problem assets 47,319 55,150 37,229 11,493 7,423 11,654 9,742 12,450
- - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
RECONCILIATION OF THE RESERVE FOR LOAN LOSSES:
Reserve for loan losses, beginning $169,058 $166,658 $163,256 $157,525 $152,951 $150,170 $144,225 $142,693
Total loans charged off (29,508) (23,386) (23,011) (18,885) (24,363) (18,976) (22,520) (20,334)
Total recoveries of loans charged off 9,063 7,718 8,017 9,091 7,694 7,836 9,932 7,718
Net loans (charged off) recovered (20,445) (15,668) (14,994) (9,794) (16,669) (11,140) (12,588) (12,616)
Provision for loan losses 22,861 18,068 18,396 12,598 21,243 13,921 14,074 14,148
Acquisitions 1,876 0 0 2,927 0 0 4,459 0
Reserve for loan losses, ending 173,350 169,058 166,658 163,256 157,525 152,951 150,170 144,225
- - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
OTHER DATA (NOT ROUNDED) - END OF PERIOD:
Full-time equivalent employees 9,424 9,229 8,854 8,472 7,996 7,826 7,665 7,361
Total domestic bank offices 322 317 315 312 300 295 291 285
- - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SELECTED RATIOS (%):
Return on average assets (ROAA) 1.31% 1.27% 1.18% 1.38% 1.33% 1.36% 1.33% 1.37%
Tangible ROAA 1.56 1.49 1.40 1.56 1.39 1.56 1.46 1.50
Return on average stockholders' equity(ROAE) 16.50 16.07 14.75 17.62 16.63 16.31 16.91 16.60
Tangible ROAE 25.08 23.81 22.26 25.14 21.31 22.85 21.83 21.19
Net interest margin, FTE 4.17 4.14 4.15 4.15 4.41 4.53 4.48 4.48
Net interest spread, FTE 3.54 3.51 3.52 3.53 3.72 3.79 3.73 3.77
Operating expense ratio 60.11 60.46 62.62 60.21 59.60 59.18 59.52 58.72
Productivity ratio 3.76 3.62 3.89 3.72 3.78 3.63 3.66 3.66
Loans / deposits [EOP] 110.70 108.23 105.15 105.19 98.36 102.16 100.51 94.87
Loans / assets [EOP] 64.61 65.09 64.72 65.00 61.87 65.08 64.14 62.49
Reserve for loan losses [EOP] /:
Total loans 1.24 1.31 1.33 1.31 1.40 1.37 1.43 1.52
Nonaccruing loans 378.39 410.48 419.66 446.63 427.17 401.57 386.75 426.12
Nonaccruing + accruing lns past due 90 day 249.17 274.65 266.46 290.25 272.93 262.82 252.15 264.59
Nonaccruing loans / total loans 0.33 0.32 0.32 0.29 0.33 0.34 0.37 0.36
Nonaccruing + accr lns past due / total loan 0.50 0.48 0.50 0.45 0.51 0.52 0.57 0.57
Nonperforming assets [EOP] /:
Total loans + other real estate 0.35 0.34 0.35 0.33 0.40 0.40 0.45 0.45
Total assets 0.23 0.22 0.23 0.21 0.25 0.26 0.29 0.28
Total equity 3.10 2.73 2.83 2.72 3.20 3.25 3.52 3.55
Total equity + reserve for loan losses 2.79 2.47 2.55 2.46 2.88 2.92 3.17 3.17
Problem assets [EOP] /:
Total loans + other real estate 0.52 0.50 0.53 0.49 0.58 0.58 0.65 0.67
Total assets 0.34 0.32 0.34 0.32 0.36 0.38 0.41 0.42
Total equity 4.59 4.00 4.31 4.04 4.69 4.70 5.06 5.28
Total equity + reserve for loan losses 4.14 3.62 3.89 3.64 4.22 4.23 4.55 4.71
Net loans charged off / average loans 0.61 0.48 0.49 0.34 0.59 0.41 0.50 0.53
- - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
CAPITAL RATIOS & RISK-BASED CAPITAL RATIOS (%):
Stockholders' equity / assets [EOP] 7.36% 8.11 7.97 7.85 7.72 8.06 8.18 7.88
Stockholders' equity / assets [Avg] 7.92 7.93 8.00 7.81 8.01 8.31 7.87 8.27
Tangible common equity / tangible assets[EOP 5.57 6.42 6.26 6.18 6.24 6.61 6.68 6.73
Leverage ratio 6.90 7.67 7.62 7.50 7.53 7.90 8.02 8.31
Tier 1 risk-based capital ratio 9.10 10.19 10.45 10.40 10.62 10.70 10.98 11.45
Total (Tier 1 + 2) risk-based capital ratio 11.31 12.60 12.97 13.07 13.42 13.60 14.00 14.62
=========================================== ========== ========== ========== ========== ========== ========== ========== ==========
<FN>
EOP: End Of Period. Avg: Average. EPS: Earnings Per Common Share. DPS: Dividends Per Common Share. NM: Not Meaningful.
(A) All FSCO financial data have been restated for the May 30, 1998 pooling-of-interests merger with FSB California (formerly
California State Bank).
</TABLE>
<PAGE>
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 near
term dilution of FSCO's book value and earnings per common share may occur.
FSCO's merger and acquisition activities during 1998 are discussed below.
* 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, located in New Mexico. At January 31, 1998, RGB had
assets of $415 million, loans of $252 million, deposits of $343 million, and 11
branches. On July 1, 1998, FSCO merged and renamed RGB's subsidiaries as First
Security Bank of Southern New Mexico, N.A. (FSB So. New Mexico).
* On May 30, 1998, FSCO acquired California State Bank (CSB), headquartered
in West Covina, California. CSB has been 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.
At March 31, 1998, CSB had assets of $864 million, loans of $454 million,
deposits of $711 million, and 17 branches. 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 merger charges for this
transaction totaling $8.9 million pre-tax (including $6.9 million of
noninterest expenses) or $7.2 million or $0.037 per share after tax. These
merger charges consisted of approximately $3.5 million for legal, investment
banker and stock transfer fees, $2.6 million for unfunded and unaccrued
deferred compensation triggered by the acquisition, $0.9 million for additional
loan loss reserve to bring CSB's loan loss reserve to the FSCO standard, $1.0
million for accrued deferred taxes that will be payable as a direct result of
the acquisition, and $1.9 million for miscellaneous items. CSB was subsequently
merged with Marine National Bank (see below) and renamed as First Security Bank
of California, N.A. (FSB California).
* On December 21, 1998, FSCO acquired Marine National Bank (MNB), located in
Irvine, California. MNB was a wholly owned subsidiary of Shinhan Bank of Seoul,
Korea. At December 20, 1998, MNB had assets of $259 million, loans of $114
million, deposits of $200 million, and 3 branches. MNB and CSB were merged and
renamed as FSB California.
* On December 30, 1998, FSCO and its FSB Nevada subsidiary announced the
signing of a definitive agreement to acquire XEON Financial Corporation (XEON,
located in Stateline, Nevada) and its subsidiary Nevada Banking Company. At
December 31, 1998, XEON had assets of $106 million, loans of $72 million,
deposits of $94 million, and 3 branches. This merger is expected to close in
the spring of 1999, pending regulatory and shareholder approvals.
* On January 13, 1999, FSCO and its FSB Nevada subsidiary announced the
signing of a definitive agreement to acquire Comstock Bancorp (Comstock,
located in Reno, Nevada) and its subsidiary Comstock Bank. At December 31,
1998, Comstock had assets of $225 million, loans of $142 million, deposits of
$196 million, and 4 branches. This merger is expected to close in the spring of
1999, pending regulatory and shareholder approvals.
* On February 12, 1999, FSCO acquired Van Kasper & Company in a purchase
acquisition and renamed it First Security Van Kasper (FS Van Kasper,
headquartered in San Francisco, California; see: "Common and Preferred Stock").
Van Kasper is a full-service investment banking, private client and
institutional brokerage firm.
<PAGE>
NATIONAL AND REGIONAL ECONOMIES
FSCO and its subsidiaries are significantly influenced both by the financial
strength and economic stability of the regional economies in which they operate
and by interest rates and other economic conditions prevailing in regional,
national, and international financial markets. (see "Factors That May Affect
Future Results of Operations and Financial Condition.")
The U.S. economy in 1998 recorded exceptionally strong growth for the second
consecutive year. Real gross domestic product expanded by 3.9%, while the
unemployment rate at year end was 4.3%, tying a 28-year low. Nevertheless, the
rate of inflation actually fell from 2.3% to 1.6%. Long-term Treasury yields,
after varying near 6% in the early part of 1998, averaged 5.06% in December.
The consumer sector remained very strong and was aided by the lower inflation,
including falling gasoline prices, declining interest rates, rising real wages,
and positive wealth effect. In the third quarter, a major shift in investor
perceptions of international risks, precipitated by the Russian financial
crisis and illiquidity in many financial markets, pushed Treasury security
yields lower; at the same time, the yield spread with higher-risk bonds widened
significantly. The Federal Reserve, along with other central banks, reduced
interest rates and provided increased liquidity. Financial markets improved
rapidly in the fourth quarter, but Brazilian currency devaluation points to
continuing international financial uncertainty.
In 1999, the pace of U.S. growth will likely moderate to 2.5% - 3.0%, and
inflation will probably continue in the 1.0% - 1.5% range. The U.S. economy is
expected to record solid growth in the first half of 1999, but international
excess capacity, declining exports and narrowing profit margins could moderate
the pace of growth in the second half of the year.
The Intermountain West, which encompasses a significant portion of FSCO's
primary market areas, was the United States' fastest-growing regional economy
in 1998 for the sixth consecutive year. The following table illustrates labor-
market conditions in the states where FSCO banking offices are located.
1998 Job Growth Gains and Unemployment Rates
Job Gains (Preliminary)
----------------------- Unemployment
National Rates
Average(%) Rank Average(%)
-------------------------------------------------
National 2.6 4.5
Utah 3.0 11 3.2
Idaho 2.0 25 5.0
Oregon 2.5 17 5.4
Wyoming 1.1 46 4.4
New Mexico 1.7 32 6.4
Nevada 4.4 2 4.3
California 3.1 9 5.9
-------------------------------------------------
The overall 1998 economic performance in the Intermountain West was
generally favorable, but growth rates narrowed somewhat from the prior year.
The volume of new residential construction, aided by the lower mortgage rates,
remained strong but, with narrowed population and employment gains, could
decline slightly in 1999. Automobile sales gains were small in 1998; lower oil
prices and continued robust income gains may sustain a generally strong sales
volume in 1999.
The rate of economic growth, both nationally and in the Intermountain West,
will likely decelerate in 1999. Modestly slower population and job growth and
higher consumer debt levels will probably restrain consumer-spending gains. Job
growth in the seven-state region should remain solid, but it will occur at a
reduced rate in 1999, influenced by declining exports and weak demand and
prices for raw-material manufactured products.
While the 1999 regional outlook remains generally favorable, the following
factors could adversely impact regional economic activity:
* Deflationary competitive forces from Asia and Latin America may reduce
exports and narrow U.S. corporate profits, resulting in slower national growth.
* Political uncertainty (i.e., Russia, Korea, China, the Middle East) may
disrupt financial markets.
* Access to Federal lands for the timber, mining, and livestock industries
may be reduced.
COMPETITIVE POSITION
FSCO is the West's second largest independent bank holding company.
Incorporated in 1928, FSCO is the oldest multistate bank holding company in the
United States.
FS Bank is the largest bank in Utah and Idaho, the 7th largest bank in
Oregon, and the 8th largest bank in Wyoming. FSB New Mexico is the third
largest bank in New Mexico, and FSB Nevada is the fifth largest bank in Nevada.
FSCO experiences substantial competition in attracting deposits and
originating loans. The primary factors in competing for deposits are interest
rates, the range and quality of services offered, the convenience of bank
facilities and automated teller machines, and hours of operation. Competition
for deposits comes principally from other commercial banks, savings and loans
(S&Ls), and credit unions. Additional competition comes from mutual funds,
money market funds, and various other corporate and government lenders. The
primary factors in competing for loans are interest rates, loan fees, and the
quality and range of lending services offered. Competition for the origination
of consumer and commercial loans comes from commercial banks, finance
companies, S&Ls, credit unions, and the vehicle financing industry, while
competition for the origination of mortgage loans comes from S&Ls, credit
unions, mortgage banking firms, insurance companies, and other commercial
banks.
FSCO, along with the rest of the banking industry, has felt the effects of
added competition as nonbank financial service companies enter what were
already highly competitive markets. Notwithstanding the increased competition,
banks still have only limited entry into nonbank financial markets. In spite of
the inequities of the present financial services market, FSCO has succeeded in
maintaining its position as a major catalyst in the financial services market
in the Intermountain West by being innovative and creative in providing new
products and services to its customers within the narrow constraints of current
banking regulations.
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During its 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, including
Year 2000 issues (discussed separately); 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.
COMPETITION
FSCO competes in its market areas and nationally with ever larger and
heavily capitalized financial services companies. The consolidation that is now
underway in the financial services industry has not only seen FSCO grow through
acquisitions of smaller banks and into new franchise areas, but has seen large
money-center banks acquire large national franchises, including footholds in
FSCO's traditional market areas. Moreover, the securities and insurance
industries increasingly compete in products and services that were
traditionally bank products and services, but without the regulatory capital
requirements and other constraints shouldered by banks. Thus, FSCO faces more
and stronger competition than ever before. These trends match with a socio-
economic trend toward the "commoditization" of financial services, with price
frequently being the dominant factor for customers. The competitive challenges
to FSCO change almost daily, and FSCO will continue to employ its resources to
meet these challenges.
ECONOMIC CONDITIONS
FSCO now has full-service banking operations in seven states, with a major
presence in four of those states. FSCO's mortgage origination and servicing
spans the nation. Currently, the United States is experiencing steady economic
growth in almost all areas, and the demand for FSCO's services remains high.
There have been periods in the past when economic conditions have changed
rapidly for the worse in one or more of FSCO's market areas, and results of
operations as well as financial condition have suffered in the short-term. The
reserve for loan losses attempts to estimate loan losses inherent in the loan
portfolio, but economic changes can also increase or reduce the demand for
loans and other banking services. Generally, FSCO experiences economic
conditions and does not cause or create them. There can be no assurance that
negative changes in economic conditions in the nation or in one or more of
FSCO's market areas will not have an adverse impact on FSCO's future results of
operations or financial condition.
TECHNOLOGY
Advances and changes in available technology can significantly impact the
business and operations of FSCO. The increasing demands for computer access to
bank accounts and for the ability to do banking transactions away from bank
premises also present challenges and opportunities. 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. Of particular concern are the Year 2000 Issues,
discussed below.
YEAR 2000 ISSUES:
FSCO'S YEAR 2000 PROJECT
All businesses and industries worldwide face a "Year 2000" problem in which
some computer hardware, software, and other systems and equipment may not
properly process date calculations before, during, or after the year 2000. In
1996, FSCO initiated a Year 2000 project which involves identifying and
remediating date recognition problems in its systems and applications. FSCO has
made the successful resolution of its Year 2000 issues its highest corporate
priority.
FSCO's Year 2000 project encompasses all internal operations and systems,
including computer hardware and software, data/voice systems, facilities
control, security, and other non-information technology systems and equipment
to resolve any potential date-handling problems. In addition, FSCO's year 2000
project includes interactions with "other parties" such as deposit and loan
customers, business partners, vendors and suppliers, other financial
institutions, regulatory agencies, utilities, service providers, and others.
FSCO's Year 2000 project strategy is to implement, where possible, the most
recent versions of currently used software that are Year 2000 compliant. This
strategy will enable FSCO to obtain increased functionality from the newer
versions as well as achieve Year 2000 compliance. In the strategic sense, this
approach has enabled FSCO to derive the most benefit from the dollars spent.
As of December 31, 1998, 97% of FSCO's critical business systems were
validated to be Year 2000 ready. FSCO remains on schedule to complete the
implementation phase for all critical systems by June 30, 1999, with final
testing of some systems continuing through September 1999, leaving time for
additional remediation if testing reveals it is necessary.
FSCO's total Year 2000 project expenditure is estimated at $40 to $45
million including $2.6 million accrued and spent in 1997; $23.7 million accrued
and spent in 1998; $13 to $18 million planned in 1999; and $1 million planned
in 2000. This estimate was up from the $20.9 million estimated at year-end 1997
due to: $9.3 million for systems where planned implementation was accelerated
for Year 2000 purposes; and $10 to $15 million for additional remediation and
testing identified subsequent to the previous estimate. These expenditures are
being funded through operating cash flows. FSCO's Year 2000 project
expenditures for 1998 were approximately 19% of its technology expenses for the
year. Of the $40 to $45 million total Year 2000 project expenditure, it is
expected that $12.5 million will be capitalized, including $6.9 million
capitalized in 1998, and the remainder reported as expense.
YEAR 2000 ISSUES:
FSCO'S YEAR 2000 RISKS
FSCO believes that in the event of the most reasonably likely worst case,
its businesses, results of operations, and financial position could be
materially adversely affected if FSCO and/or the above-mentioned other parties
fail to resolve their individual Year 2000 issues. Accordingly, FSCO has formed
a team charged with the task of monitoring its own progress and that of
significant other parties, assessing potential problems, and developing
contingency plans. FSCO is also assessing the Year 2000 progress and associated
risks of its major deposit and borrowing customers.
Because FSCO has given its Year 2000 project the highest priority, certain
other technology projects have been delayed. While such non-Year 2000 projects
are expected to enhance operational efficiencies, make new products and
services available to customers, and improve the quality of information
available to management, the delay of such projects is not expected to have a
material impact on FSCO's operations.
It has been widely reported that significant litigation is expected to occur
related to business interruptions caused by Year 2000 failures. It is uncertain
whether, or to what extent, FSCO will be affected by such litigation.
YEAR 2000 ISSUES:
FSCO'S YEAR 2000 CONTINGENCY PLANS
Each FSCO business unit has developed contingency plans to continue
operations in the event FSCO and/or significant other parties do not achieve
Year 2000 readiness. These plans principally involve the use of alternate
vendors, suppliers, and service delivery processes, manual processes, and/or
the internal remediation of systems. FSCO is also enhancing its existing
business resumption plans to incorporate Year 2000 issues. There can be no
assurance that FSCO's contingency plans will fully mitigate failures or
problems. However, FSCO management is confident that critical customer account
information will not be lost if failures are encountered. In addition, there
may be certain mission critical vendors or service providers, such as utilities
or government agencies, where alternate sources are limited or unavailable.
FSCO will update its contingency plans as facts and circumstances change.
YEAR 2000 ISSUES:
FSCO'S YEAR 2000 FORWARD-LOOKING STATEMENTS
The preceding discussion of "Year 2000 Issues" constitutes a Year 2000
Readiness Disclosure pursuant to the provisions of the Year 2000 Information
Readiness and Disclosure Act and includes forward-looking statements that
involve inherent risks and uncertainties. A number of important factors could
cause the actual cost of FSCO's Year 2000 project and the impact of Year 2000
issues to increase significantly from what is described in these forward-
looking statements. Those factors include, but are not limited to the
availability and cost of programmers and other systems personnel, changes to
FSCO's original Year 2000 project assessments, ineffective remediation of
computer code, and the ability of FSCO and/or other parties to successfully
resolve their individual Year 2000 issues.
REGULATORY AND LEGISLATIVE ATTITUDES
FSCO operates under significant national, international, and local
government regulations. Historically, the business of banking has been
legislatively separated from certain other businesses, like insurance and
securities activities, as well as other types of businesses. Changes in
technology and socio-economic trends have allowed insurance and securities
firms to enter traditional bank service markets, but banks have been legally
precluded from entering insurance and securities markets with the same freedom.
Now there is a changing regulatory attitude that is allowing banks greater
ability to compete in the securities and insurance fields. However, these
changes are happening disjointedly and slowly, with some competitors being
given regulatory powers that FSCO and its similarly sized competitors cannot
yet use. There are ongoing regulatory and legal battles between banking
interests on one side, and the securities, insurance and credit union interests
on the other.
Changing Federal and state laws in connection with the national effort to
combat hazardous wastes may impact the loan portfolio from time to time. While
recent legislation has reduced potential liabilities of banks themselves, owner
and/or developer borrowers remain liable under these laws. FSCO continues to
exercise due diligence in its real property lending activities and acquisitions
to attempt to uncover hazardous waste violations on subject properties and thus
minimize possible loan losses.
No one can predict how the regulatory landscape will look in the future, or
how such changes will affect FSCO's results of operations and financial
condition at that time.
FINANCIAL MARKET PERCEPTIONS
The price of FSCO's common stock in the public markets is largely a result
of perceptions of the market with respect to future results of FSCO in
particular and the financial services market generally. From time to time, the
market's perception does not match current reality, which may result in higher
or lower prices for FSCO shares. Such market perceptions are totally outside of
FSCO's control. Because of the existence of these factors, however, past
historical performance by FSCO should not be taken as a reliable indicator of
future performance, and investors should not use historical trends to attempt
to anticipate results or trends in future periods. Also FSCO is a participant
in a dynamic and changing industry, which could result in volatility in public
market prices for FSCO common stock.
<PAGE>
LEGAL PROCEEDINGS
From time to time, FSCO and its subsidiaries are subject to claims and legal
actions filed or threatened by customers and others in the ordinary course of
FSCO's business activities. Some legal actions filed against FSCO seek inflated
damages, often in an effort to force compromise of a troubled loan transaction.
Others recently have been filed as class actions alleging technical violations
of arcane Federal statutes with modest individual damages, but potentially
large class damage amounts. These are disclosed in filings with the SEC as
required by applicable rules. FSCO endeavors at all times to conduct its
business in a lawful manner, and will always vigorously defend itself against
unfounded claims, with a concomitant cost in legal fees and expenses. The
following items were deemed to be material litigation matters under current SEC
regulations, and involved FSCO and/or one or more of its subsidiaries:
The New Mexico case "Begay v. First Security Bank of New Mexico, et al.",
Case No. CIV 96 0348 MV, District of New Mexico (filed March 13, 1996), was
filed in United States District Court alleging unfair practices, fraud, RICO,
and Federal Truth in Lending violations in connection with the policies of FSB
New Mexico (and other FSCO entities) to force place insurance on vehicles
subject to loans whose owners fail to procure such insurance. FSCO's motion to
dismiss was denied and discovery on class certification issues is now under
way.
During October 1996, an Idaho jury verdict was entered against FS Bank
(formerly FSB Idaho) in a lender liability lawsuit. Based on advice of counsel,
FSCO sought post-trial relief and the Court reduced the verdict in response to
FSCO's post trial motion. FSCO has appealed the remaining verdict based on its
belief that error was committed at the trial court.
Based on advice of legal counsel, and its own analysis, FSCO management
continues to believe that no reasonably foreseeable ultimate outcome of any or
all of the cases discussed previously reported will have a material adverse
impact on the business or assets of FSCO.
<PAGE>
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
February 24, 1999
To Our Stockholders:
FINANCIAL STATEMENTS
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.
INTERNAL CONTROL
Management is responsible for establishing and maintaining an effective
internal control over financial reporting for financial presentations in
conformity with both generally accepted accounting principles and the Federal
Reserve Board's instructions for the FR Y-9 Report. The internal control
contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even an effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may
vary over time.
Management assessed FSCO's internal control over financial reporting for
financial presentations presented in conformity with both generally accepted
accounting principles and the Federal Reserve Board's instructions for the FR
Y-9 Report as of December 31, 1998. 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 effective internal control over financial
reporting for financial presentations in conformity with both generally
accepted accounting principles and the Federal Reserve Board's instructions for
the FR Y-9 Report as of December 31, 1998.
The audit committee of FSCO's board of directors is comprised entirely of
outside directors who are independent of FSCO's management; it includes members
with banking or related management experience and has access to its own outside
counsel. 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 over financial
reporting and any other matters which they believe should be brought to the
attention of the committee.
COMPLIANCE WITH LAWS AND REGULATIONS
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, 1998.
/s/ Morgan J. Evans /s/ Brad D. Hardy
- - ------------------------------------- ---------------------------------------
Morgan J. Evans Brad D. Hardy
President and Chief Operating Officer Executive Vice President,
Corporate Services,
General Counsel, and
Chief Financial Officer
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS (In thousands)
<CAPTION>
As of December 31, 1998 1997
<S> <C> <C>
- - --------------------------------------------------------------------- ------------ ------------
ASSETS
Cash and due from banks $ 1,026,335 $ 1,219,435
Federal funds sold and securities purchased under resale agreements 230,210 206,266
- - --------------------------------------------------------------------- ------------ ------------
Total Cash and Cash Equivalents 1,256,545 1,425,701
Interest-bearing deposits in other banks 605 600
Trading account securities 329,109 255,320
Available for sale securities, at fair value
(cost $4,715,876 and $4,313,847, respectively) 4,764,127 4,351,525
Loans held for sale 2,391,508 1,125,616
Loans
(net of reserve for loan losses of $173,350 and $157,525
and unearned income of $127,593 and $106,369, respectively) 11,448,559 9,947,625
Premises and equipment, net 378,032 288,433
Accrued income receivable 113,399 106,974
Other real estate 3,617 7,981
Other assets 594,220 356,852
Intangible assets 409,367 285,156
- - --------------------------------------------------------------------- ------------ ------------
TOTAL ASSETS $ 21,689,088 $ 18,151,783
===================================================================== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 2,752,009 $ 2,431,006
Interest-bearing 9,906,565 8,986,628
- - --------------------------------------------------------------------- ------------ ------------
Total Deposits 12,658,574 11,417,634
Federal funds purchased and securities sold under repurchase agreements 3,747,084 3,252,259
U.S. Treasury demand notes 25,081 21,050
Other short-term borrowings 493,424 331,890
Accrued income taxes 333,881 255,062
Accrued interest payable 58,778 51,928
Other liabilities 167,213 116,651
Long-term debt:
Guaranteed preferred beneficial interests 150,000 150,000
Other 2,459,558 1,154,463
- - --------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES 20,093,593 16,750,937
- - --------------------------------------------------------------------- ------------ ------------
Commitments and contingent liabilities (Note 11)
- - --------------------------------------------------------------------- ------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock: Series "A", $3.15 cumulative convertible
(9 and 10 shares issued, respectively) 484 501
- - --------------------------------------------------------------------- ------------ ------------
Common stockholders' equity:
Common stock
(191,008 and 186,076 shares issued, respectively) 238,760 232,595
Paid-in surplus 181,906 115,855
Retained earnings 1,233,264 1,081,195
Accumulated other comprehensive income
(net unrealized gain on available for sale securities, net of tax) 30,377 23,568
- - --------------------------------------------------------------------- ------------ ------------
Subtotal 1,684,307 1,453,213
Common treasury stock, at cost
(4,296 and 1,654 shares, respectively) (89,296) (52,868)
- - --------------------------------------------------------------------- ------------ ------------
Total common stockholders' equity 1,595,011 1,400,345
- - --------------------------------------------------------------------- ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,595,495 1,400,846
- - --------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,689,088 $ 18,151,783
===================================================================== ============ ============
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
- - --------------------------------------------------------------------- ------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 1,111,417 $ 954,992 $ 830,594
Federal funds sold and securities purchased under resale agreements 5,538 4,249 5,734
Interest-bearing deposits in other banks 177 69 1,080
Trading account securities 9,173 12,686 10,058
Available for sale securities 294,355 241,382 191,925
- - --------------------------------------------------------------------- ------------ ------------ ------------
TOTAL INTEREST INCOME 1,420,660 1,213,378 1,039,391
- - --------------------------------------------------------------------- ------------ ------------ ------------
INTEREST EXPENSE
Deposits 403,886 352,656 326,789
Short-term borrowings 204,902 163,096 108,398
Long-term debt 108,173 71,687 50,141
- - --------------------------------------------------------------------- ------------ ------------ ------------
TOTAL INTEREST EXPENSE 716,961 587,439 485,328
- - --------------------------------------------------------------------- ------------ ------------ ------------
NET INTEREST INCOME 703,699 625,939 554,063
Provision for loan losses 71,923 63,386 41,300
- - --------------------------------------------------------------------- ------------ ------------ ------------
Net Interest Income After Provision for Loan Losses 631,776 562,553 512,763
- - --------------------------------------------------------------------- ------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts 90,755 90,835 83,921
Other service charges, collections, commissions, and fees 71,797 55,473 46,478
Asset sale and securitization gains 47,619 17,515 2,765
Bankcard servicing fees and third-party processing fees 31,247 34,295 30,469
Insurance commissions and fees 16,966 16,975 15,016
Mortgage banking and loan servicing activities 215,538 117,859 97,580
Loan servicing rights amortization (41,495) (16,146) (11,896)
Trust (fiduciary) commissions and fees 29,474 26,195 23,104
Trading account securities gains (losses) 994 1,446 2,383
Available for sale securities gains (losses) 8,075 3,150 4,618
Other 3,420 9,560 12,006
- - --------------------------------------------------------------------- ------------ ------------ ------------
TOTAL NONINTEREST INCOME 474,390 357,157 306,444
- - --------------------------------------------------------------------- ------------ ------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits 386,715 304,903 277,706
Amortization of intangibles 11,666 7,537 9,249
Armored and messenger 6,658 6,065 5,865
Bankcard interbank interchange and fees 32,147 34,130 29,396
Credit, appraisal, and repossession 27,931 17,176 14,459
Fees 14,645 11,589 8,832
Furniture and equipment 58,181 46,263 43,252
Insurance 4,372 4,655 5,534
Marketing 14,757 14,258 12,478
Occupancy, net 39,063 36,729 33,096
Other real estate expenses and loss provision (recovery), net 845 2,022 422
Postage 13,508 11,367 11,100
Professional 18,918 15,082 9,020
Stationery and supplies 22,311 18,259 19,583
Telephone 17,306 16,317 14,189
Travel 12,773 9,797 8,261
Other 41,292 32,755 28,777
- - --------------------------------------------------------------------- ------------ ------------ ------------
TOTAL NONINTEREST EXPENSES 723,088 588,904 531,219
- - --------------------------------------------------------------------- ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 383,078 330,806 287,988
Provision for income taxes 135,398 115,532 103,516
- - --------------------------------------------------------------------- ------------ ------------ ------------
NET INCOME 247,680 215,274 184,472
Dividend requirement of preferred stock 28 30 33
- - --------------------------------------------------------------------- ------------ ------------ ------------
Net Income Applicable to Common Stock $ 247,652 $ 215,244 $ 184,439
===================================================================== ============ ============ ============
Earnings Per Common Share Basic $ 1.32 $ 1.18 $ 1.03
- - --------------------------------------------------------------------- ------------ ------------ ------------
Earnings Per Common Share Diluted $ 1.28 $ 1.14 $ 1.00
===================================================================== ============ ============ ============
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except per share data)
<CAPTION>
For the Years Ended December 31, 1996, 1997, and 1998
Accumulated
Other Common
Preferred Common Paid-in RetainedComprehensive Treasury
Total Stock Stock Surplus Earnings Income Stock
<S> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JANUARY 1, 1996 $ 1,082,995 $ 571 $ 222,492 $ 27,572 $ 828,279 $ 14,152 $ (10,071)
Comprehensive income:
Net income for the year 184,472 -- -- -- 184,472 -- --
Other comprehensive income, net of tax,
consisting of net unrealized loss on AFS
securities, net of reclassification
adjustment of $4,618 for net gains included
in net income (13,256) (13,256)
-------
Total comprehensive income 171,216
Sale of common stock through dividend
reinvestment and common stock purchase plan 3,339 -- 342 2,997 -- -- --
Sales of stock to employee benefit plans 7,808 -- 1,323 4,245 -- -- 2,240
Common stock issued 18,494 -- 3,956 14,538 -- -- --
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 -- -- --
Purchases of treasury stock (2,049) -- -- -- -- -- (2,049)
After-tax effect of stock option exercises 2,846 -- -- 2,846 -- -- --
- - ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 1,217,840 540 228,141 52,200 945,943 896 (9,880)
- - ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Comprehensive income:
Net income for the year 215,274 -- -- -- 215,274 -- --
Other comprehensive income, net of tax,
consisting of net unrealized gain on AFS
securities, net of reclassification
adjustment of $3,150 for net gains included
in net income 22,672 22,672
-------
Total comprehensive income 237,946
Sale of common stock through dividend
reinvestment and common stock purchase plan 3,741 -- 264 3,477 -- -- --
Sales of stock to employee benefit plans 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 and retirement of common stock (2,969) -- (261) (679) (2,029) -- --
Purchase of treasury stock (89,467) -- -- -- -- -- (89,467)
After-tax effect of stock option exercises 5,506 -- -- 5,506 -- -- --
- - ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 1,400,846 501 232,595 115,855 1,081,195 23,568 (52,868)
- - ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Comprehensive income:
Net income for the year 247,680 -- -- -- 247,680 -- --
Other comprehensive income, net of tax,
consisting of net unrealized gain on AFS
securities, net of reclassification
adjustment of $8,075 for net gains included
in net income 6,809 6,809
-------
Total comprehensive income 254,489
Sale of common stock through dividend
reinvestment and common stock purchase plan 4,265 -- 251 4,014 -- -- --
Sales of stock to employee benefit plans 23,635 -- 3,466 18,902 -- -- 1,267
Common stock issued for acquisitions 84,164 -- 2,432 31,521 -- -- 50,211
Cash dividends:
Preferred stock - $3.15 per share (28) -- -- -- (28) -- --
Common stock - $0.52 per share (95,583) -- -- -- (95,583) -- --
Conversion of preferred stock to common -- (17) 16 1 -- -- --
Purchase of common stock (87,906) -- -- -- -- -- (87,906)
After-tax effect of stock option exercises 11,613 -- -- 11,613 -- -- --
- - ----------------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ 1,595,495 $ 484 $ 238,760 $ 181,906 $ 1,233,264 $ 30,377 $ (89,296)
=============================================== =========== =========== =========== =========== =========== =========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
- - --------------------------------------------------------------------- ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 247,680 $ 215,274 $ 184,472
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Provision for loan losses 71,923 63,386 41,300
Provision for (recovery of) loss on other real estate 310 1,135 (20)
Provision for depreciation and amortization 40,543 35,419 32,841
Provision for amortization of intangible assets 11,666 7,537 9,249
Provision for deferred income taxes 79,980 58,494 58,293
Net change in deferred loan origination fees and costs 1,969 53,970 52,468
Net amortization of AFS securities discounts and premiums 1,700 2,931 (609)
Proceeds from sales of mortgage loans held for sale 13,672,856 5,175,757 3,709,605
Origination of mortgage loans held for sale (13,696,625) (5,295,498) (3,253,230)
AFS securities (gains) losses (8,075) (3,150) (4,618)
Net realized gains on sold loans (45,890) (43,126) (6,286)
Decrease (increase) in trading account securities (73,789) 192,166 190,907
Decrease (increase) in accrued income receivable (6,425) (12,195) (7,452)
Increase (decrease) in accrued interest payable 6,850 8,897 (7,295)
Increase (decrease) in accrued income taxes (5,431) 1,372 6,482
Other operating activities (360,549) (180,084) (245,317)
- - --------------------------------------------------------------------- ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (61,307) 282,285 760,790
- - --------------------------------------------------------------------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of AFS securities 375,948 384,267 157,211
Redemption of matured AFS securities 2,064,730 1,105,935 1,090,611
Purchases of AFS securities (2,542,188) (2,365,561) (1,779,925)
Net (increase) decrease in interest-bearing deposits in other banks (5) 31,107 (8,970)
Net (increase) decrease in loans and leases (3,743,360) (2,096,876) (1,490,563)
Proceeds from sale of vehicle loans 1,185,994 802,935 10,800
Purchase of premises and equipment (125,775) (39,967) (50,057)
Proceeds from sales of other real estate 10,720 11,530 12,542
Payments to improve other real estate (3,161) (3,627) (3,548)
Net cash (paid for) received from acquisitions 63,974 37,468 15,640
- - --------------------------------------------------------------------- ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,713,123) (2,132,789) (2,046,259)
- - --------------------------------------------------------------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 697,662 1,080,723 683,042
Net increase (decrease) in Federal funds purchased and securities sold
under repurchase agreements and U.S. Treasury demand notes 498,056 728,777 573,559
Proceeds from issuance of nonrecourse debt on leveraged leases 165,641 37,440 71,142
Payments on nonrecourse debt on leveraged leases (21,018) (24,557) (28,099)
Proceeds from issuance of long-term debt and short-term borrowings 1,506,600 566,439 585,387
Payments on long-term debt and short-term borrowings (86,050) (203,355) (310,033)
Proceeds from issuance of common stock and sales of treasury stock 27,900 12,693 10,770
Purchases of treasury stock (87,906) (89,467) (2,049)
Purchases of stock for retirement -- (2,969) --
Dividends paid (95,611) (77,881) (66,653)
- - --------------------------------------------------------------------- ------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,605,274 2,027,843 1,517,066
- - --------------------------------------------------------------------- ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (169,156) 177,339 231,597
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,425,701 1,248,362 1,016,765
- - --------------------------------------------------------------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,256,545 $ 1,425,701 $ 1,248,362
===================================================================== ============ ============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 710,111 $ 578,171 $ 493,045
Income taxes 60,849 56,456 37,915
===================================================================== ============ ============ ============
Supplemental Schedule of Noncash Investing and Financing Activities
Conversion of 333; 736; and 595 shares of convertible preferred stock
into 13,202; 30,149; and 23,876 shares of common stock,
respectively $ 17 $ 39 $ 31
Transfer of loans to other real estate 2,782 6,165 5,671
===================================================================== ============ ============ ============
<FN>
In 1998, FSCO purchased Rio Grande Bancshares, Inc. with total assets of approximately $416,995,000 and
liabilities of $369,652,000 through the issuance of 2,900,000 shares of FSCO's common stock. In 1997, FSCO
purchased 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 1996, CSB purchased
Landmark Bancorp with total assets of $238,153,000 and liabilities of $217,656,000 through the payment of
cash and the issuance of CSB stock.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1998, 1997 and 1996
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. Mortgage banking origination offices
are located in numerous other states. 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, the residual values of certain leased assets, and the valuation of
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 1998,
1997, and 1996 were retroactively restated during 1998 for the 1998 acquisition
of California State Bank (CSB) using the pooling-of-interest method of
accounting (See Note 15). All significant intercompany accounts and
transactions are eliminated in consolidation. 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 AND AVAILABLE FOR SALE 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 and of other comprehensive income. Gains or losses are determined on the
specific identification method.
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 rates 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". 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 1997 and 1998 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.
<PAGE>
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. 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 and caps 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 rate
changes. 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 disclosures of the effects
of SFAS No. 123 are included in Note 13.
GOODWILL AND OTHER 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. Other identifiable intangibles are amortized on an accelerated or
straight-line basis over periods which do not exceed 15 years.
LONG-LIVED ASSETS. Impairment of long-lived assets, including goodwill and
other intangible assets, is determined by evaluating long-lived assets on a
periodic basis in accordance with APB 17, "Intangible Assets", and 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 1998, 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 and 1996 to conform with SFAS No. 128. Additional restatements were
made to reflect the effects of the 3-for-2 stock splits that were paid February
23, 1998, May 15, 1997 and February 17, 1996 (See Note 12).
COMPREHENSIVE INCOME. Effective January 1, 1998, FSCO adopted SFAS No. 130,
"Reporting Comprehensive Income", and reclassified comprehensive income for
1997 and 1996 to conform with SFAS No. 130. This statement requires FSCO to
display an amount representing total comprehensive income for each period.
Accumulated other comprehensive income consists entirely of net unrealized gain
or loss on available for sale securities, net of taxes.
RECLASSIFICATIONS. Certain reclassifications of previously reported 1997 and
1996 amounts have been made to conform to FSCO's 1998 classifications.
<PAGE>
2. SEGMENT REPORTING
Effective January 1, 1998, FSCO adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which requires disclosures
of certain information about FSCO's reportable operating segments. FSCO has the
following reportable segments: Community Banking, Retail Lending, Business
Banking, Finance and Capital Markets, and Parent and Other. The Community
Banking segment provides transaction, deposit, personal investment, private
banking, personal trust, insurance, electronic banking, and customer services.
Retail Lending provides a full range of credit products to retail customers
including consumer loans, residential real estate loans, and commercial loans
under $100,000. Business Banking provides a full range of products to business
customers including commercial loans over $100,000, commercial real estate
loans, leases, and banking, trust, and financial services for businesses.
Finance and Capital Markets combines Capital Markets, Treasury, Purchasing,
Accounting, Tax and Corporate Communications functions. Parent and Other
combines corporate administration, technology and processing services, acquired
banks that have not been converted to FSCO's systems, and intersegment
eliminations.
Interest income and expense as well as the total assets and total deposits
are reported following the same accounting policies described in Note 1 to the
financial statements. Intersegment interest income and expense are derived by
modeling loans and deposits to determine duration based funds transfer pricing
rates. Such rates are applied to loans and deposits to determine intersegment
interest income and expense. In addition, certain operating, general and
administrative expenses are allocated between and among the business segments
to derive net income.
It is not practical to derive intersegment interest income and expense,
provision for taxes, or net income for 1997 or 1996. Furthermore, FSCO has
realigned products and business units within these business segments year to
year. Accordingly, comparisons of year to year trends may be misleading.
<TABLE>
REPORTABLE SEGMENTS (In thousands)
<CAPTION> Finance and
Community Retail Business Capital Parent Total
Banking Lending Banking Markets and Other FSCO
<S> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
INFORMATION ABOUT FSCO'S REPORTABLE SEGMENTS FOR 1998:
Total assets (average) $ 1,084,218 $ 8,149,137 $ 3,667,735 $ 4,264,452 $ 2,135,474 $ 19,301,016
Total deposits (average) 8,900,954 6,482 629,702 86,646 2,136,714 11,760,498
Interest income 31,033 720,715 298,648 264,985 105,279 1,420,660
Interest expense 383,578 1 21,585 179,305 132,492 716,961
Intersegment interest income (expense), net 553,394 (428,084) (141,206) (85,709) 101,605 -
Provision for income taxes 30,947 61,064 29,310 (1,735) 15,812 135,398
Net income 48,705 101,029 53,516 (2,718) 47,148 247,680
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
INFORMATION ABOUT FSCO'S REPORTABLE SEGMENTS FOR 1997:
Total assets (average) $ 445,574 $ 6,458,695 $ 3,292,319 $ 3,751,800 $ 2,035,360 $ 15,983,748
Total deposits (average) 8,330,715 7,082 608,946 70,736 1,289,512 10,306,991
Interest income 26,856 593,580 281,248 240,680 71,014 1,213,378
Interest expense 352,742 31,196 23,740 160,499 19,262 587,439
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
INFORMATION ABOUT FSCO'S REPORTABLE SEGMENTS FOR 1996:
Total assets (average) $ 882,771 $ 5,706,091 $ 2,943,441 $ 3,100,044 $ 1,082,787 $ 13,715,134
Total deposits (average) 8,329,658 101,996 513,439 25,340 499,476 9,469,909
Interest income 457,975 534,430 290,446 683,448 (926,908) 1,039,391
Interest expense 476,516 144,373 64,870 667,467 (867,898) 485,328
===================================================== ============ ============ ============ ============ ============ ============
</TABLE>
<PAGE>
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, 1998 and 1997,
the required average reserve balances were approximately $56,612,000 and
$87,873,000, respectively.
<PAGE>
4. TRADING ACCOUNT AND AVAILABLE FOR SALE SECURITIES
The amortized cost and fair value of AFS securities were as follows:
<TABLE>
AVAILABLE FOR SALE SECURITIES (In thousands)
<CAPTION> Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
As of December 31, 1998:
Debt Securities issued by U.S. Treasury and
other U.S. Government agencies and corporations $ 641,514 $ 8,273 $ (1,227)$ 648,560
Debt securities issued by states and
political subdivisions 352,746 8,098 (352) 360,492
Corporate debt securities 10,559 212 (22) 10,749
Mortgage-backed securities 3,557,242 30,271 (2,408) 3,585,105
Equity securities 52,864 8,420 (3,014) 58,270
Federal Home Loan Bank and Federal Reserve stock 100,951 -- -- 100,951
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Totals $ 4,715,876 $ 55,274 $ (7,023)$ 4,764,127
===================================================== ============ ============ ============ ============
As of December 31, 1997:
Debt Securities issued by U.S. Treasury and
other U.S. Government agencies and corporations $ 1,008,583 $ 7,379 $ (234)$ 1,015,728
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
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
===================================================== ============ ============ ============ ============
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1998 by contractual maturity are shown below. 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 SECURITIES(In thousands) Amortized Estimated
Cost Fair Value
- - ---------------------------------------- ------------ ------------
Due in one year or less $ 127,355 $ 127,849
Due after one year through five years 652,445 660,984
Due after five years through ten years 131,952 136,282
Due after ten years 93,067 94,686
- - ---------------------------------------- ------------ ------------
Total debt securities 1,004,819 1,019,801
Mortgage-backed securities 3,557,242 3,585,105
Equity securities 153,815 159,221
- - ---------------------------------------- ------------ ------------
Totals $ 4,715,876 $ 4,764,127
======================================== ============ ============
Proceeds, gross gains, and gross losses from sales of securities using the
specific identification method were as follows (in thousands):
Available for Sale 1998 1997 1996
- - ---------------------------------------- ------------ ------------ ------------
Proceeds $ 375,948 $ 384,267 $ 157,211
======================================== ============ ============ ============
Gross gains $ 8,191 $ 5,596 $ 4,699
Gross losses (116) (2,446) (81)
- - ---------------------------------------- ------------ ------------ ------------
Net Gains (Losses) $ 8,075 $ 3,150 $ 4,618
======================================== ============ ============ ============
The change in net unrealized holding loss on trading account securities that
has been included in earnings for the years ended December 31, 1998, 1997, and
1996 totaled $142,963, $227,215, and $215,266, respectively.
Interest earned on tax exempt securities was approximately $15,593,000,
$13,716,000, and $10,802,000, respectively, for the years ended December 31,
1998, 1997, and 1996.
At December 31, 1998 and 1997, securities carried at $3,001,270,000 and
$2,819,619,000, respectively, were pledged for various purposes. Included in
these pledged securities were trading account securities totaling $87,760,000
and $38,775,000, respectively.
Securities sold under agreements to repurchase averaged approximately
$2,287,478,000 and $2,003,242,000 during 1998 and 1997, and the maximum amounts
outstanding at any month-end during 1998 and 1997 were $2,516,492,000 and
$2,252,682,000, 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.
<PAGE>
5. LOANS
Loans (net of unearned income) consisted of the following (in thousands):
As of December 31, 1998 1997
- - ---------------------------------------- ------------ ------------
Commercial, financial, and agricultural $ 3,164,985 $ 2,758,865
Real estate:
Commercial 1,325,071 1,112,042
Residential 1,538,514 1,558,798
Construction 843,819 739,029
Consumer 3,443,359 2,905,795
Leases 1,306,161 1,030,621
- - ---------------------------------------- ------------ ------------
Total 11,621,909 10,105,150
Reserve for loan losses (173,350) (157,525)
- - ---------------------------------------- ------------ ------------
Totals $ 11,448,559 $ 9,947,625
======================================== ============ ============
At December 31, 1998 and 1997, loans carried at approximately $1,668,690,000
and $895,308,000, respectively, were pledged for various purposes.
Included in loans were loans to directors, executive officers, and their
associates as follows (in thousands):
1998 1997
- - ---------------------------------------- ------------ ------------
Balance, January 1 $ 139,788 $ 126,117
Additions 75 22,262
Repayments (32,052) (8,591)
- - ---------------------------------------- ------------ ------------
Balance, December 31 $ 107,811 $ 139,788
======================================== ============ ============
None of the above loans to directors, executive officers, and to their
associates as of December 31, 1998 and 1997 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, 1998 1997
- - ---------------------------------------- ------------ ------------
Leveraged leases $ 280,993 $ 209,070
Non leveraged leases 1,019,942 819,824
Assets held for sale or lease 5,226 1,727
- - ---------------------------------------- ------------ ------------
Totals $ 1,306,161 $ 1,030,621
======================================== ============ ============
Changes in the reserve for loan losses were as follows (in thousands):
1998 1997 1996
- - ---------------------------------------- ------------ ------------ ------------
Balance, January 1 $ 157,525 $ 142,693 $ 135,011
Provision charged to expense 71,923 63,386 41,300
Reserves acquired through acquisitions
(Note 15) 4,803 4,459 3,493
Loans charged off, net of recoveries of
$33,889, $33,182, and $27,098,
respectively (60,901) (53,013) (37,111)
- - ---------------------------------------- ------------ ------------ ------------
Balance, December 31 $ 173,350 $ 157,525 $ 142,693
======================================== ============ ============ ============
FSCO's investment in impaired loans at December 31, 1998 and 1997, as
defined in SFAS Nos. 114 and 118, totaled $1,958,000 and $4,688,000,
respectively. The SFAS No. 114 allowance related to impaired loans at December
31, 1998 and 1997 was $1,743,000 and $4,175,000, respectively. During the years
ended December 31, 1998 and 1997, FSCO's average investment in impaired loans
was approximately $215,000 and $6,179,000, respectively. Interest income
recognized on impaired loans totaled $-0-, $261,000, and $130,000 for 1998,
1997, and 1996, respectively.
At December 31, 1998 and 1997, total nonaccruing loans were $45,812,000 and
$36,876,000, respectively. Gross interest income foregone on nonaccruing loans
during 1998, 1997, and 1996 was $3,772,000, $2,810,000, and $3,242,000,
respectively. In 1997, there was $1,916,000 of troubled debt restructuring and
none in 1998 and 1996.
During 1998 and 1997, FSCO securitized approximately $1,250,396,000 and
$802,935,000 of vehicle loans and sold certificates to investors bearing
interest rates ranging from 5.04% to 6.12% and 6.1% to 6.5%, respectively. FSCO
will continue to service the underlying vehicle loans for a fee through 2004
and 2003 for the 1998 and 1997 securitizations, respectively.
The estimated fair value of capitalized servicing rights related to the
vehicle loans securitized was $24,075,000 and $12,197,000 (net of a valuation
allowance of $4,200,000 and $772,000) at December 31, 1998 and 1997,
respectively. The risk characteristics used to value vehicle 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 vehicle loan servicing assets using loss rates
varying between 0.60% and 0.85%, prepayment assumption of 1.5% (using the
Asset-Backed Securities model), and a discount rate of 9% for 1998 and 1997.
Following is a summary of capitalized servicing rights related to both
vehicle and mortgage loans, net of accumulated amortization (in thousands):
1998 1997 1996
- - ---------------------------------------- ------------ ------------ ------------
BALANCE, JANUARY 1 $ 108,630 $ 78,586 $ 52,604
- - ---------------------------------------- ------------ ------------ ------------
Originated 242,069 103,084 42,678
Sold (131,622) (56,122) (4,800)
Amortization (41,495) (16,146) (11,896)
Additions to valuation allowance (3,428) (772) --
- - ---------------------------------------- ------------ ------------ ------------
BALANCE, DECEMBER 31 $ 174,154 $ 108,630 $ 78,586
======================================== ============ ============ ============
MORTGAGE BANKING ACTIVITIES. At December 31, 1998 and 1997, FSCO's
subsidiaries were servicing 153,102 and 127,858 mortgage loans, aggregating
$14,412,606,000 and $11,152,501,000, respectively. The amount of loan principal
that was delinquent on serviced loans at December 31, 1998 and 1997 was
approximately $428,195,000 and $447,968,000, respectively. Related trust funds
were on deposit with FSCO's subsidiary banks.
FSCO sold mortgage servicing rights on a bulk sale basis in 1996 related to
mortgage loans totaling approximately $0.5 billion with gains of $2.5 million.
During 1998 and 1997, FSCO sold mortgage loan servicing rights on a monthly
basis concurrent with the securitization and marketing of approximately $7.0
billion and $2.8 billion of mortgage loans, respectively. The value of such
servicing rights recognized in accordance with the provisions of FASB Statement
125 totaled approximately $131.6 million and $51.4 million, respectively.
The mortgage servicing rights capitalized at December 31, 1998, represent
the rights to service approximately $12.3 billion of mortgage loans. In
addition, FSCO has approximately $2.1 billion of loans for which the mortgage
servicing rights were not capitalized. No valuation allowance was required as
of December 31, 1998 or 1997. 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 approximately
$169,985,000, $122,141,000 and $96,728,000 at December 31, 1998, 1997, and
1996, respectively.
During the year ended December 31, 1998, FSCO issued 1,253 GNMA loan pools
with security proceeds of $4,313,787,000. Additionally, FSCO was servicing 166
GNMA loan pools with an outstanding security balance of $2,391,946,000 at
December 31, 1998. During the year ended December 31, 1998, FSCO originated
approximately 43,000 FHA/VA insured/guaranteed mortgage loans with loan
proceeds of $4,501,327,000. Additionally, FSCO was servicing 34,613 FHA/VA
insured/guaranteed mortgage loans with an unpaid principal balance of
$3,006,625,000 at December 31, 1998.
<PAGE>
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
As of December 31, 1998 1997
- - ---------------------------------------- ------------ ------------
Land $ 48,842 $ 46,678
Buildings and improvements 249,602 202,377
Equipment 230,239 204,029
Leasehold improvements 20,787 19,921
Construction in progress 52,641 33,591
- - ---------------------------------------- ------------ ------------
Totals 602,111 506,596
Accumulated depreciation and amortization (224,079) (218,163)
- - ---------------------------------------- ------------ ------------
Net $ 378,032 $ 288,433
======================================== ============ ============
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; Las Cruces and Albuquerque, New Mexico;
and West Covina, California.
At December 31, 1998, a total of 184 bank branches were in owned buildings,
with the remaining 138 bank branches 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, 1998, future minimum lease payments by year related to
operating leases for premises and equipment were as follows (in thousands):
- - ---------------------------------------- ------------
1999 $ 30,670
2000 22,301
2001 16,775
2002 10,130
2003 5,461
Thereafter 17,330
- - ---------------------------------------- ------------
Total $ 102,667
======================================== ============
Total rent expense under all operating leases for 1998, 1997, and 1996
approximated $30,738,000, $24,551,000, and $21,362,000, respectively.
<PAGE>
7. DEPOSITS
Deposits consisted of the following (in thousands):
As of December 31, 1998 1997
- - ----------------------------------------------------- ------------ ------------
Non interest-bearing demand deposit accounts $ 2,752,009 $ 2,431,006
Interest-bearing demand and savings 1,997,241 1,806,142
Money market accounts 2,927,577 2,348,183
Time certificates of deposit less than $100,000 3,516,882 3,432,314
Time certificates of deposit of $100,000 or more 1,464,865 1,399,989
- - ----------------------------------------------------- ------------ ------------
Totals $ 12,658,574 $ 11,417,634
======================================== ============ ============ ============
<PAGE>
8. LINE OF CREDIT
FSCO had a $200 million line of credit at December 31, 1998 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, 1998.
<PAGE>
9. INCOME TAXES
Accrued income taxes payable consisted of the following (in thousands):
As of December 31, 1998 1997
- - ---------------------------------------- ------------ ------------
Current $ (2,307)$ 3,124
Deferred 336,188 251,938
- - ---------------------------------------- ------------ ------------
Totals $ 333,881 $ 255,062
======================================== ============ ============
The income tax provisions consisted of the following components (in
thousands):
For the Year Ended December 31, 1998 1997 1996
- - ---------------------------------------- ------------ ------------ ------------
Current:
Federal $ 48,981 $ 51,064 $ 41,051
State 6,437 5,974 4,172
- - ---------------------------------------- ------------ ------------ ------------
Subtotals 55,418 57,038 45,223
- - ---------------------------------------- ------------ ------------ ------------
Deferred:
Federal 69,436 49,146 48,958
State 10,544 9,348 9,335
- - ---------------------------------------- ------------ ------------ ------------
Subtotals 79,980 58,494 58,293
- - ---------------------------------------- ------------ ------------ ------------
Totals $ 135,398 $ 115,532 $ 103,516
======================================== ============ ============ ============
The tax provisions were at effective rates as follows:
For the Year Ended December 31, 1998 1997 1996
- - ---------------------------------------- ------------ ------------ ------------
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) (1.5) (1.4)
Amortization of intangibles 1.0 0.7 0.9
State income taxes, net of U.S.
Federal income tax benefit 3.1 2.9 2.7
Tax credits and miscellaneous items (2.3) (2.2) (1.3)
- - ---------------------------------------- ------------ ------------ ------------
Effective Tax Rates 35.3% 34.9% 35.9%
======================================== ============ ============ ============
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, 1998 1997
- - ---------------------------------------- ------------ ------------
Assets:
Loan loss reserve $ 64,875 $ 58,347
Other reserves 169 647
Deferred income 3,695 3,718
Other postretirement benefits 1,859 1,707
NOL carryforward 2,638 1,498
Deferred compensation 6,527 4,212
Other 4,655 5,153
- - ---------------------------------------- ------------ ------------
Total Deferred Tax Assets 84,418 75,282
- - ---------------------------------------- ------------ ------------
Liabilities:
Leasing operations 320,162 259,596
Depreciation 12,994 5,498
Pension plan contributions 4,243 2,848
Originated mortgage servicing rights 43,324 28,376
FHLB stock dividends 8,914 7,000
Deferred loan fees 5,340 6,084
Fair value adjustments
on available for sale securities 17,647 13,982
Other 7,982 3,836
- - ---------------------------------------- ------------ ------------
Total Deferred Tax Liabilities 420,606 327,220
- - ---------------------------------------- ------------ ------------
Net Deferred Tax Liability $ 336,188 $ 251,938
======================================== ============ ============
<PAGE>
10. LONG-TERM DEBT
The details of long-term debt, including related short-term maturities, were
as follows (in thousands):
As of December 31, 1998 1997
- - ---------------------------------------- ------------ ------------
Parent company:
Medium-term notes due 1998-2003 $ 28,750 $ 32,750
Floating rate notes due 1999 6,758 6,842
7.875% senior notes due 1999 98,962 98,962
7.50% subordinated notes due 2002 75,000 75,000
5.875% senior notes due 2003 325,000 --
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 585,000 300,000
Other (primarily, FHLB borrowings) 1,558,203 647,397
Guaranteed Preferred Beneficial Interests -
8.41% subordinated capital
income securities due 2026 150,000 150,000
Nonbank 309 402
- - ---------------------------------------- ------------ ------------
Totals 3,102,982 1,586,353
Less current maturities included
in other short-term borrowings (493,424) (281,890)
- - ---------------------------------------- ------------ ------------
Long-Term Portion $ 2,609,558 $ 1,304,463
======================================== ============ ============
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, 1998 have ranged
from 6.2% to 6.45% and at December 31, 1998 was 6.25%. 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.
5.875% SENIOR NOTES DUE 2003: During 1998, FSCO issued senior unsecured
notes of $325,000,000 with interest payable semi-annually at the stated rate on
May 1 and November 1 of each year. The notes are payable at maturity in
November 2003 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: In December 1998, November 1998,
and October 1997, First Security Bank, N.A., issued $35,000,000, $250,000,000,
and $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 ranged
from 5.44% to 5.63% at December 31, 1998. 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,
1998 consisted of approximately $1,549,820,000 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 $8,383,000 of miscellaneous notes
payable at various rates and maturities.
Scheduled maturities of long-term debt by year were as follows as of
December 31, 1998 (in thousands):
Parent
Company Consolidated
- - ---------------------------------------- ------------ ------------
1999 $ 110,720 $ 493,424
2000 -- 283,185
2001 8,750 279,438
2002 75,000 525,754
2003 340,000 875,329
Thereafter 275,000 645,852
- - ---------------------------------------- ------------ ------------
Totals $ 809,470 $ 3,102,982
======================================== ============ ============
11. COMMITMENTS, CONTINGENT LIABILITIES, AND FINANCIAL INSTRUMENTS WITH OFF-
BALANCE-SHEET RISK
At December 31, 1998 and 1997, 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, 1998 and 1997, such
commitments include the following (in thousands):
As of December 31, 1998 1997
- - ---------------------------------------- ------------ ------------
Standby letters of credit $ 328,952 $ 286,525
Undisbursed construction loans 580,920 340,584
Credit card lines 918,753 830,966
Other loan commitments to customers 5,078,927 3,582,539
Commitments to sell mortgage
loans and leases 2,773,922 1,042,014
======================================== ============ ============
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 $(655,000), $1,013,000, and $3,018,000 for the years
ended December 31, 1998, 1997, and 1996, respectively. For the years ended
December 31, 1998, 1997, and 1996, total income including gains and interest
from FSCO's overall trading activities (including non-derivative securities)
was $10,167,000, $14,132,000, and $12,369,000, 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 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, 1998 and
1997 were as follows (in thousands):
<TABLE>
<CAPTION> Contract Average Assessed
(notional) Fair Fair Net Dollar Value
Amount at Value at Value For Gains at Risk (3)
Year End (1) Year End (2) the Year (2) (Losses) (unaudited)
<S> <C> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------
As of December 31, 1998:
Assets (Long Position):
Financial futures contracts $ 319,000 $ (4)$ 6 $ 2,077 $ 4
Options contracts -- -- (1) (203) --
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------
Total Assets $ 319,000 $ (4)$ 5 $ 1,874 $ 4
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------
Liabilities (Short Position):
Financial futures contracts $ 835,600 $ 2 $ (5)$ (1,859)$ 12
Options contracts (written call) -- -- (2) (670) --
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------
Total Liabilities $ 835,600 $ 2 $ (7)$ (2,529)$ 12
===================================================== ============ ============ ============ ============ ============
As of 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
===================================================== ============ ============ ============ ============ ============
<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>
FSCO also enters into foreign exchange forward contracts to accommodate the
business needs of its customers for proprietary trading purposes. These
contracts provide for the future delivery or purchase of foreign currency. The
foreign exchange risk associated with such contracts is mitigated by entering
into other foreign exchange contracts with third parties. At December 31, 1998
and 1997, the notional amount of assets was $75,736,000 and $25,196,000 and
liabilities was $83,894,000 and $31,279,000. FSCO's foreign exchange forward
contracts had net gains of $3,089,000, $2,384,000 and $2,208,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
INTEREST RATE RISK MANAGEMENT ACTIVITIES: FSCO uses off-balance-sheet
derivative instruments to manage interest rate risk. Interest rate swaps, caps,
corridors, futures and options 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
payments are based. Credit risk arises from the potential inability of a
counterparty to meet the payment obligations on its transactions. FSCO settles
in cash with its counterparties on dates specified in each contract.
The off-balance-sheet derivative instruments in place on December 31, 1998
and 1997 fall into the following categories:
Futures And Options. During 1998, FSCO began using bundles of futures and
options to hedge interest rate risk related to mortgage servicing rights. Each
bundle is designated with a specific mortgage servicing right tranche and is
classified as a hedge. At December 31, 1998, the notional amount and the
deferred unrealized gains related to the futures and options were $404,700,000
and $2,073,000, respectively.
Receive Fixed Interest Rate Swaps are entered into to convert the repricing
characteristics of floating rate assets to less volatile fixed rates and fixed
rate liabilities to current short-term interest 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.
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.
The following table summarizes the terms and unrealized gains and losses of
interest rate swaps by category as of December 31, 1998. 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, 1998 and 1997,
three-month LIBOR was 5.07% and 5.81%, the six-month LIBOR was 5.07% and 5.84%,
and the prime rate was 7.75% and 8.50%, respectively.
Interest rate swaps used for interest rate management activities as of
December 31, 1998 and 1997 were as follows (in millions):
Maturities Estimated Fair Market
as of Value at December 31,
Type and Notional Amount December 31 1998 1997
- - ---------------------------------------- ------------ ------------ ------------
Receive Fixed Swaps:
Pay 3-month LIBOR:
$200.0 (fixed 6.24%)
(expired during 1998) $ -- $ 0.4
$100 (fixed 5.64%) October 2002 (1.9) --
$100 (fixed 5.625%) October 2002 (1.8) --
$100 (fixed 5.65%) October 2002 (1.9) --
$50.0 (fixed 7.125% - 7.35%)
(terminated during 1998) May/June 2007 -- 0.1
Pay 6-month LIBOR:
$50.0 (fixed 6.28%)
(expired during 1998) -- 0.1
Pay commercial paper + 0.4675: Variable through
$336.47 (fixed 5.042%) March 2003 0.9 --
- - ---------------------------------------- ------------ ------------ ------------
Pay Fixed Swaps:
Pay commercial paper:
$100 (fixed 4.603%) January 2002 (3.9) --
$236.47 (fixed 4.605%) January 2002 2.0 --
- - ---------------------------------------- ------------ ------------ ------------
Customer Transaction Hedges: Various maturities
$25.3 (1998); $67.6 (1997) through 2004 (1.3) (1.0)
- - ---------------------------------------- ------------ ------------ ------------
Total Positions ($998.2 and $367.6
in 1998 and 1997, respectively) $ (7.9)$ (0.4)
======================================== ============ ============ ============
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 1996.
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 and 1996 to
conform with SFAS No. 128. The computations of EPS under SFAS No. 128 are
summarized below:
<TABLE>
<CAPTION> 1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Average PerShare Average PerShare Average PerShare
Income Shares Amount Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income $ 247,680 $ 215,274 $ 184,472
Less preferred stock dividends 28 30 33
- - ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
EPS Basic:
Income available to common stockholders 247,652 187,572 $ 1.32 215,244 182,240 $ 1.18 184,439 179,767 $ 1.03
- - ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Effect of Dilutive Securities:
Options -- 5,882 -- 6,089 -- 4,800
Convertible preferred 28 386 30 410 33 433
- - ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total dilution 28 6,268 30 6,499 33 5,233
- - ---------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
EPS Diluted:
Income available to common stockholders
with assumed conversions $ 247,680 193,840 $ 1.28 $ 215,274 188,739 $ 1.14 $ 184,472 185,000 $ 1.00
======================================== ========= ========= ========= ========= ========= ========= ========= ========= =========
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, 1998 follows (in thousands):
</TABLE>
<TABLE>
<CAPTION> Preferred Stock
Common Stock Par Value $1.25 Series "A", $3.15
----------------------------- Cumulative
Issued HeldInTreasury Convertible No Par
<S> <C> <C> <C>
- - --------------------------------------------------------------------------------- -------------- -------------- -------------------
Balance, January 1, 1996 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
- - --------------------------------------------------------------------------------- -------------- -------------- -------------------
Sale of common stock through dividend reinvestment and common stock purchase plan 201 -- --
Purchase of common treasury stock -- 4,575 --
Common stock issued for acquisitions 1,940 (1,880) --
Conversion of preferred stock to common 13 -- (1)
Sale of stock to employee benefit plans 2,778 (53) --
- - --------------------------------------------------------------------------------- -------------- -------------- -------------------
Balance, December 31, 1998 191,008 4,296 9
================================================================================= ============== ============== ===================
Shares Authorized, December 31, 1998 600,000 18
================================================================================= ============== ============== ===================
Shares Authorized, December 31, 1997 and 1996 300,000 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, 1998, a
total of 1,695,047 shares were issued pursuant to the plan. Conversion of all
preferred stock outstanding at December 31, 1998 would require 377,586 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.
On October 26, 1998, FSCO adopted a successor shareholder rights agreement with
substantially similar terms to the rights plan except that the exercise price
will be $85 per preferred share. This successor plan will take effect
immediately upon expiration of the rights plan on August 28, 1999.
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.
POSTRETIREMENT BENEFITS PLAN: FSCO provides certain health care, dental, and
life benefits for substantially all of its retired employees.
In conformity with SFAS No. 132, "Employers' Disclosures About Pensions and
Other Postretirement Benefits," which was adopted as of January 1, 1998, the
following table sets forth the funded status of both the Retirement Plan and
the Postretirement Benefits Plan and amounts recognized in the consolidated
balance sheets at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION> Retirement Plan Postretirement Benefits
------------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 127,894 $ 105,263 $ 6,767 $ 5,970
Service cost 8,099 6,139 459 208
Interest cost 10,430 8,825 629 468
Actuarial loss 25,436 13,761 2,347 411
Benefits paid (5,650) (6,094) (367) (290)
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Benefit obligation at end of year 166,209 127,894 9,835 6,767
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year 127,296 99,802 -- --
Actual return on plan assets 11,140 26,788 -- --
Participant contributions -- -- 279 --
Employer contributions 19,200 6,800 366 290
Benefits paid (5,650) (6,094) (645) (290)
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Fair value of plan assets at end of year 151,986 127,296 -- --
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Funded status (14,223) (598) (9,835) (6,767)
Unrecognized transition (asset) or obligation (1,337) (1,810) 4,060 4,320
Unrecognized net actuarial (gain) loss 23,763 (1,774) 765 (1,582)
Unrecognized prior service cost 6,356 7,502 -- --
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Prepaid (accrued) benefit cost included
in the consolidated balance sheet $ 14,559 $ 3,320 $ (5,010)$ (4,029)
===================================================== ============ ============ ============ ============
</TABLE>
Assumptions used in determining the projected benefit obligations as of
December 31, 1998 and 1997 were:
<TABLE>
<CAPTION> Retirement Plan Postretirement Benefits
------------------------- -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Discount rate 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets 9.00 9.00 N/A N/A
Rate of compensation increase 4.50 4.50 N/A N/A
===================================================== ============ ============ ============ ============
</TABLE>
The net expense for the plans included the following components (in
thousands):
<TABLE>
<CAPTION> Retirement Plan Postretirement Benefits
-------------------------------------- --------------------------------------
For the Years Ended December 31, 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Components of net periodic benefit cost:
Service cost $ 8,099 $ 6,139 $ 6,433 $ 459 $ 208 $ 355
Interest cost 10,430 8,825 8,033 628 468 655
Expected return on plan assets (11,388) (8,975) (8,775) -- -- --
Amortization of prior service cost 1,146 1,146 1,146 -- 186 260
Amortization of transition asset (473) (473) (473) 260 -- --
Recognized actuarial loss 147 -- 167 -- -- 33
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net periodic benefit cost $ 7,961 $ 6,662 $ 6,531 $ 1,347 $ 862 $ 1,303
===================================================== ============ ============ ============ ============ ============ ============
</TABLE>
Assumptions used in determining the net pension expense were:
1998 1997 1996
- - ---------------------------------------- ------------ ------------ ------------
Discount rate 7.25% 7.75% 7.25%
Rate of increase in compensation levels 4.50 4.50 4.50
Expected long-term rate of return on assets 9.00 9.00 9.75
======================================== ============ ============ ============
The assumed health care cost trend rate used to measure the expected cost of
benefits covered by the Postretirement Benefits Plan for 1998 is 9%; the rate
is assumed to decrease each successive year until it reaches 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, 1998 by approximately $0.9 million and
service and interest cost components by $0.1 million for the year. A one
percent decrease in the assumed health care cost trend rate for each year would
decrease the accumulated postretirement benefit obligation as of December 31,
1998 by approximately $0.7 million and service and interest cost components by
$0.1 million for the year.
SUPPLEMENTAL RETIREMENT PLAN: FSCO also maintains a nonqualified
supplemental retirement plan for certain key employees. All benefits provided
under this plan are unfunded and any payments to plan participants are made by
FSCO. Approximately $8.4 and $4.9 million were included in other liabilities
for these plans at December 31, 1998 and 1997, respectively. For the years
ended December 31, 1998, 1997, and 1996, expenses related to these plans were
approximately $1.6, $1.3, and $1.5 million, respectively.
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 $4,926,000, $4,068,000, and $3,930,000 in 1998,
1997, and 1996, respectively.
STOCK-BASED COMPENSATION PLANS: At December 31, 1998, FSCO had three stock-
based compensation plans, which are described below. FSCO applies 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 the
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:
Year Ended December 31, 1998 1997 1996
- - ---------------------------------------- ------------ ------------ ------------
Net income:
As reported $ 247,680 $ 215,274 $ 184,472
Pro forma 243,923 213,076 183,779
- - ---------------------------------------- ------------ ------------ ------------
Earnings per common share basic:
As reported 1.32 1.18 1.03
Pro forma 1.30 1.17 1.02
- - ---------------------------------------- ------------ ------------ ------------
Earnings per common share diluted:
As reported 1.28 1.14 1.00
Pro forma 1.26 1.13 0.99
======================================== ============ ============ ============
COMPREHENSIVE MANAGEMENT INCENTIVE PLAN: FSCO and its subsidiaries have a
comprehensive management incentive plan (the Management 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.
In connection with the 1998 acquisition of California State Bank (CSB), FSCO
assumed CSB's obligations for its 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.
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 1998, 1997, and 1996, respectively: dividend
yield of 3.18%, 3.4%, and 3.72%; expected volatility of 37%, 37%, and 35%;
risk-free interest rates of 5.51%, 6.56%, and 6.27%, and expected lives of 10
years for 1998, 1997, and 1996.
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> 1998 1997 1996
Weighted Weighted Weighted
average average average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Outstanding at beginning of year 10,265,706 $ 7.79 10,050,407 $ 6.03 10,066,992 $ 5.19
Expired -- -- --
Granted 1,346,925 22.55 1,548,495 14.37 1,090,300 11.80
Exercised (2,046,150) 4.45 (1,242,635) 4.39 (1,076,838) 4.24
Forfeited (108,068) 17.93 (90,561) 10.57 (30,047) 6.89
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Outstanding at end of year 9,458,413 $ 10.05 10,265,706 $ 7.79 10,050,407 $ 6.03
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Options exercisable at year end 6,477,935 5,901,492 5,987,997
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Weighted average fair market value
of options granted during year $ 8.52 $ 5.46 $ 4.46
===================================================== ============ ============ ============ ============ ============ ============
</TABLE>
The following table summarizes information about the Comprehensive
Management Incentive Plan fixed stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION> Options Outstanding Options Exercisable
- - ----------------------------------------------------------------- -----------------------------------------------------------------
Weighted Average
Range of Number Remaining Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life (in years) Exercise Price Exercisable Exercise Price
<C> <C> <C> <C> <C> <C>
- - --------------------- --------------------- --------------------- --------------------- --------------------- ---------------------
$ 2.63 - 4.99 1,618,918 2.26 $ 3.52 1,517,150 $ 3.46
5.00 - 7.99 4,099,108 4.43 6.74 4,080,236 6.74
8.00 - 12.99 1,045,108 7.24 11.81 529,204 11.75
13.00 - 18.99 1,408,964 8.09 14.45 351,345 14.44
19.00 - 23.19 1,286,315 8.81 22.55 -- --
- - --------------------- --------------------- --------------------- --------------------- --------------------- ---------------------
$ 2.63 - 23.19 9,458,413 5.51 $ 10.05 6,477,935 $ 6.80
===================== ===================== ===================== ===================== ===================== =====================
</TABLE>
NON EMPLOYEE DIRECTOR STOCK OPTION PLAN: In 1995, FSCO adopted an incentive
plan for its 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 1998 and 1997,
respectively: dividend yield of 3.18% and 3.4%; expected volatility of 37% and
37%; risk-free interest rates of 5.51% and 6.79%, and expected lives of 10
years. A summary of these options follows:
<TABLE>
<CAPTION> 1998 1997 1996
Weighted Weighted Weighted
average average average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Outstanding at beginning of year 157,500 $ 7.20 165,375 $ 7.07 182,250 $ 7.07
Expired -- NA -- NA -- NA
Granted 54,000 24.50 2,250 15.83 -- NA
Exercised (39,500) 7.07 (10,125) 7.07 (16,875) 7.07
Forfeited -- NA -- NA -- NA
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Outstanding at end of year 172,000 $ 12.66 157,500 $ 7.20 165,375 $ 7.07
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Options exercisable at year end 116,500 94,500 43,875
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Weighted average fair market value
of options granted during year $ 9.09 $ 6.04 $ --
===================================================== ============ ============ ============ ============ ============ ============
</TABLE>
The following table summarizes information about the nonemployee director
fixed stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION> Options Outstanding Options Exercisable
- - ----------------------------------------------------------------- -----------------------------------------------------------------
Weighted Average
Range of Number Remaining Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life (in years) Exercise Price Exercisable Exercise Price
<C> <C> <C> <C> <C> <C>
- - --------------------- --------------------- --------------------- --------------------- --------------------- ---------------------
$ 7.07 - 14.99 115,750 6.42 $ 7.07 115,750 $ 7.07
15.00 - 23.99 2,250 8.42 15.83 750 15.83
24.00 - 24.50 54,000 9.42 24.50 -- --
===================== ===================== ===================== ===================== ===================== =====================
</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, 716,220 shares of
common stock were issued to employees in 1998, and no shares of stock were
issued to employees in 1997 or 1996.
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, 1998 and 1997, FSCO's equity
in all of its subsidiaries was $1,945,390,000 and $1,555,112,000, respectively,
of which $1,428,846,000 and $1,148,016,000 were restricted and $516,543,000 and
$407,096,000 were unrestricted by such regulations.
15. MERGERS AND ACQUISITIONS
In 1996, CSB (see below) 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 5,337,000 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
acquisitions created intangible assets for FSCO of approximately $69,519,000.
On February 2, 1998, FSCO acquired Rio Grande Bancshares, Inc. (RGB),
headquartered in Las Cruces, New Mexico. RGB's assets and liabilities at date
of acquisition approximated $416,995,000 and $369,652,000, respectively. On
December 21, 1998, FSCO acquired Marine National Bank (Marine) in California
for cash. Marine's assets and liabilities at date of acquisition approximated
$259,127,000 and $230,188,000, respectively. The acquisitions were accounted
for using the purchase method of accounting and resulted in intangible assets
for FSCO of approximately $54,425,000.
The results of operations of the above companies acquired using the purchase
method of accounting have been included in FSCO's consolidated financial
statements since the dates of acquisition. Pro forma results of operations for
1998, 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 May 30, 1998, FSCO acquired CSB (see Note 1) 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 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
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
Net income 177,843 6,629 -- 184,472
=========================== ============ ============ ============ ============
On September 23, 1998, FSCO announced it had signed a definitive agreement
to acquire Van Kasper & Company, a full-service investment banking, private
client, and institutional brokerage firm located in San Francisco, California.
This purchase acquisition was completed on February 12, 1999. Of the total
purchase price of approximately $90,000,000, approximately $66,000,000 is
anticipated to be allocated to intangible assets.
On December 30, 1998, FSCO announced it had signed a definitive agreement to
purchase XEON Financial Corporation for approximately $10.14 per XEON share. At
December 31, 1998, XEON had assets of $106,000,000. This merger is expected to
close in the spring of 1999.
On January 13, 1999, FSCO announced it had signed a definitive agreement to
purchase Comstock Bancorp for approximately $65 million in FSCO common stock.
Comstock had assets of $225,701,000 at December 31, 1998. This merger is
expected to close in the spring of 1999.
16. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
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", SFAS 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.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage
Backed Securities Retained after the Securitization of Mortgage Loans for Sale
by a Mortgage Banking Enterprise", which allows an entity engaged in mortgage
banking activities to classify the resulting mortgage-backed security or other
retained interest based on its ability and intent to sell or hold those
investments. SFAS No. 134 will be effective for the first fiscal quarter
beginning after December 15, 1998. The impact of SFAS No. 134 is not expected
to be material in relation to FSCO's consolidated financial statements.
17. CAPITAL REQUIREMENTS
FSCO and its banking subsidiaries are 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 and
its banking subsidiaries 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
accompanying table) 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, 1998,
that FSCO meets all capital adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, 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 accompanying table). 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. FS Bank maintained its
"well capitalized" status for 1998, although it experienced a temporary
decrease in its total capital ratio to 9.93% due to extraordinary mortgage loan
production in December. Subsequent to 1998, its outstanding mortgage loan
balance has been reduced by loan sales that occurred in the ordinary course of
business. It is FSCO's policy to maintain the "well capitalized" status at both
the consolidated and subsidiary bank levels. Except as previously mentioned,
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" Under
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- - ----------------------------------------------------- ------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
As of December 31, 1998:
Total Capital (Tier 1 + Tier 2) to Risk Weighted Assets:
Consolidated $ 1,836,157 11.31% $ 1,298,312 8.0% $ 1,622,890 10.0%
FS Bank 1,334,107 9.93 1,074,164 8.0 1,342,705 10.0
FSB New Mexico 148,243 13.69 86,635 8.0 108,294 10.0
FSB Nevada 89,580 15.30 46,843 8.0 58,554 10.0
FSB California 109,303 13.41 65,230 8.0 81,538 10.0
FSB So. New Mexico 50,065 19.88 20,145 8.0 25,181 10.0
Tier 1 Capital to Risk Weighted Assets:
Consolidated 1,477,552 9.10 649,156 4.0 973,734 6.0
FS Bank 1,191,683 8.87 537,082 4.0 805,623 6.0
FSB New Mexico 134,436 12.41 43,318 4.0 64,977 6.0
FSB Nevada 82,226 14.04 23,422 4.0 35,132 6.0
FSB California 99,097 12.15 32,615 4.0 48,923 6.0
FSB So. New Mexico 47,138 18.72 10,072 4.0 15,108 6.0
Tier 1 Capital to End of Period Assets (Leverage Ratio):
Consolidated 1,477,552 6.90 913,149 4.0 1,141,437 5.0
FS Bank 1,191,683 6.97 734,832 4.0 918,540 5.0
FSB New Mexico 134,436 6.33 88,382 4.0 110,478 5.0
FSB Nevada 82,226 7.70 43,622 4.0 54,528 5.0
FSB California 99,097 8.59 48,373 4.0 60,466 5.0
FSB So. New Mexico 47,138 11.29 17,028 4.0 21,285 5.0
- - ----------------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
As of December 31, 1997:
Total Capital (Tier 1 + Tier 2) to Risk Weighted Assets:
Consolidated $ 1,708,458 13.42% $ 1,018,117 8.0% $ 1,272,646 10.0%
FS Bank 1,155,466 11.03 837,871 8.0 1,047,339 10.0
FSB New Mexico 135,440 14.54 74,529 8.0 93,161 10.0
FSB Nevada 79,186 14.31 44,268 8.0 55,335 10.0
FSB California 68,952 12.36 44,633 8.0 55,792 10.0
Tier 1 Capital to Risk Weighted Assets:
Consolidated 1,350,932 10.62 509,058 4.0 763,587 6.0
FS Bank 1,010,042 9.64 418,936 4.0 628,403 6.0
FSB New Mexico 123,709 13.28 37,264 4.0 55,897 6.0
FSB Nevada 72,229 13.05 22,134 4.0 33,201 6.0
FSB California 61,960 11.11 22,317 4.0 33,475 6.0
Tier 1 Capital to End of Period Assets (Leverage Ratio):
Consolidated 1,350,932 7.53 726,071 4.0 907,589 5.0
FS Bank 1,010,042 7.04 578,330 4.0 722,912 5.0
FSB New Mexico 123,709 6.29 78,864 4.0 98,580 5.0
FSB Nevada 72,229 7.04 42,278 4.0 52,847 5.0
FSB California 61,960 7.65 32,397 4.0 40,497 5.0
===================================================== ============ ============ ============ ============ ============ ============
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>
<TABLE>
<CAPTION> 1998 1997
------------------------- -------------------------
Carrying Estimated Carrying Estimated
As of December 31, Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Financial Assets:
Cash and short-term investments $ 1,257,150 $ 1,257,150 $ 1,426,301 $ 1,426,301
Trading account securities 329,109 329,110 255,320 224,535
Available for sale securities 4,764,127 4,764,127 4,351,525 4,351,525
Net loans (excluding leases) 12,545,713 12,721,556 10,051,740 10,214,498
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Total Financial Assets $ 18,896,099 $ 19,071,943 $ 16,084,886 $ 16,216,859
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Financial Liabilities:
Total deposits, excluding certificates $ 7,676,827 $ 7,170,305 $ 6,585,331 $ 6,585,331
Certificates of deposit 4,981,747 5,037,810 4,832,303 4,866,491
Short-term borrowings 1,950,076 1,950,076 1,352,764 1,352,764
Securities sold under repurchase agreements 2,315,513 2,315,513 2,252,435 2,252,435
Long-term debt 2,609,558 2,697,168 1,304,463 1,283,335
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Total Financial Liabilities $ 19,533,721 $ 19,170,872 $ 16,327,296 $ 16,340,356
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Off-Balance Sheet Financial Instruments:
Financial futures and options (non-trading) $ 2,073 $ 210 $ -- $ --
Foreign Exchange Contracts:
Assets 1,263 958 1,693 787
Liabilities (1,151) (300) (1,543) (634)
Interest rate swaps, caps, and corridors -
interest rate risk management:
In a net receivable position 119 2,877 337 642
In a net payable position (358) (10,764) (193) (998)
Letters of credit and other commitments to extend credit -- (32,374) -- (21,959)
- - ----------------------------------------------------- ------------ ------------ ------------ ------------
Total Off-Balance-Sheet Financial Instruments $ 1,946 $ (39,393)$ 294 $ (22,162)
===================================================== ============ ============ ============ ============
</TABLE>
<PAGE>
19. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
<TABLE>
CONDENSED BALANCE SHEETS (In thousands)
<CAPTION>
As of December 31, 1998 1997
<S> <C> <C>
- - --------------------------------------------------------------------- ------------ ------------
Assets:
Cash $ 54 $ 54
Securities purchased under resale agreement with subsidiary bank 32,036 15,919
- - --------------------------------------------------------------------- ------------ ------------
Cash and cash equivalents 32,090 15,973
Commercial loans receivable from subsidiaries:
Banks 464,570 374,682
Nonbanks 123,920 102,544
Investments in subsidiaries:
Banks 1,843,134 1,468,125
Nonbanks 102,256 86,987
Other assets 7,206 6,474
- - --------------------------------------------------------------------- ------------ ------------
Total Assets $ 2,573,176 $ 2,054,785
===================================================================== ============ ============
Liabilities and Stockholders' Equity:
Accrued interest and preferred dividends payable $ 13,571 $ 10,745
Short-term borrowings 110,720 10,842
Long-term debt:
With subsidiary 154,640 154,640
Other 698,750 477,712
- - --------------------------------------------------------------------- ------------ ------------
Total Liabilities 977,681 653,939
- - --------------------------------------------------------------------- ------------ ------------
Stockholders' Equity:
Preferred stock-Series "A", $3.15 cumulative convertible
(9 and 10 shares issued, respectively) 484 501
- - --------------------------------------------------------------------- ------------ ------------
Common stock
(191,008 and 186,076 shares issued, respectively) 238,760 232,595
Paid-in surplus 181,906 115,855
Retained earnings 1,233,264 1,081,195
Accumulated other comprehensive income 30,377 23,568
- - --------------------------------------------------------------------- ------------ ------------
Subtotal 1,684,307 1,453,213
Common treasury stock, at cost
(4,296 and 1,654 shares, respectively) (89,296) (52,868)
- - --------------------------------------------------------------------- ------------ ------------
Total Common Stockholders' Equity 1,595,011 1,400,345
- - --------------------------------------------------------------------- ------------ ------------
Total Stockholders' Equity 1,595,495 1,400,846
- - --------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,573,176 $ 2,054,785
===================================================================== ============ ============
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME (In thousands)
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
- - --------------------------------------------------------------------- ------------ ------------ ------------
Income:
Cash dividends from subsidiaries:
Banks $ 99,013 $ 80,636 $ 51,231
Nonbanks -- -- --
Other income (principally interest from subsidiaries) 31,945 36,955 27,415
- - --------------------------------------------------------------------- ------------ ------------ ------------
Total income 130,958 117,591 78,646
Interest expense 50,729 48,154 27,415
Noninterest expenses 510 174 --
Provision (benefit) for taxes (6,753) (4,336) --
- - --------------------------------------------------------------------- ------------ ------------ ------------
Income before equity in undistributed earnings of subsidiaries 86,472 73,599 51,231
Equity in undistributed earnings of subsidiaries:
Banks 164,685 148,342 134,771
Nonbanks (3,477) (6,667) (1,530)
- - --------------------------------------------------------------------- ------------ ------------ ------------
Net Income $ 247,680 $ 215,274 $ 184,472
===================================================================== ============ ============ ============
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
- - --------------------------------------------------------------------- ------------ ------------ ------------
Cash Flows From Operating Activities:
Net income $ 247,680 $ 215,274 $ 184,472
Adjustments to reconcile net income to
net cash provided by operating activities (158,398) (140,329) (128,186)
- - --------------------------------------------------------------------- ------------ ------------ ------------
Net Cash Provided By Operating Activities 89,282 74,945 56,286
- - --------------------------------------------------------------------- ------------ ------------ ------------
Cash Flows From Investing Activities:
Purchases of securities -- (700) (20,000)
Proceeds from sales of securities 350 20,000 --
Loans and capital contributions made to subsidiaries (486,655) (263,147) (388,516)
Principal collected on loans to subsidiaries 304,127 319,710 130,912
Cash investments in subsidiaries (54,040) (1,478) (13,210)
- - --------------------------------------------------------------------- ------------ ------------ ------------
Net Cash Provided By (Used In) Investing Activities (236,218) 74,385 (290,814)
- - --------------------------------------------------------------------- ------------ ------------ ------------
Cash Flows From Financing Activities:
Proceeds from long-term debt 325,000 -- 304,640
Payments on long-term debt and short-term borrowings (4,084) 174 (17,940)
Proceeds from issuance of common stock and sales of treasury stock 25,654 11,708 10,466
Purchase of treasury stock and stock retired (87,906) (89,467) (2,049)
Dividends paid (95,611) (75,726) (64,926)
- - --------------------------------------------------------------------- ------------ ------------ ------------
Net Cash Provided By (Used In) Financing Activities 163,053 (153,311) 230,191
- - --------------------------------------------------------------------- ------------ ------------ ------------
Net Increase (Decrease) In Cash And Cash Equivalents 16,117 (3,981) (4,337)
Cash And Cash Equivalents, Beginning Of Year 15,973 19,954 24,291
- - --------------------------------------------------------------------- ------------ ------------ ------------
Cash And Cash Equivalents, End Of Year $ 32,090 $ 15,973 $ 19,954
===================================================================== ============ ============ ============
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the year for:
Interest $ 47,902 $ 47,675 $ 26,504
Income taxes (8,332) 1,964 19
===================================================================== ============ ============ ============
<FN>
Supplemental Schedule of Non Cash Investing and Financing Activities (Note 15):
In 1998, FSCO purchased Rio Grande Bancshares, Inc. with total assets of approximately $416,995,000 and
liabilities of $369,652,000 through the issuance of 2,900,000 shares of FSCO's common stock.
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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
FIRST SECURITY CORPORATION AND SUBSIDIARIES
To the Board of Directors and Stockholders of First Security Corporation:
We have audited the accompanying consolidated balance sheets of First
Security Corporation and subsidiaries (FSCO) as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of FSCO's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of First Security Corporation and
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
/s/
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
February 24, 1999
<PAGE>
OFFICERS AND DIRECTORS
CORPORATE OFFICERS
MANAGEMENT COMMITTEE
Spencer F. Eccles
Chairman and Chief Executive Officer
Morgan J. Evans
President and Chief Operating Officer
Michael P. Caughlin
Executive Vice President Technology and Processing Services
David R. Golden
Executive Vice President Risk Management
Brad D. Hardy
Executive Vice President Corporate Services
General Counsel, Chief Financial Officer, and Secretary of First Security
Mark D. Howell
Executive Vice President Business Banking Services
J. Pat McMurray
Executive Vice President Community Banking Services
Scott Nelson
Executive Vice President Retail Lending Services
Scott C. Ulbrich
Executive Vice President Capital Markets, Treasury and Investment Management
OTHER OFFICERS
Jay S. Bachman
Senior Vice President Corporate Development
Kelly K. Matthews
Executive Vice President and Chief Economist
Leslie F. Paskett
Senior Vice President and Controller
Dennis G. Reeves
Senior Vice President and Chief Auditor
Alonzo W. Watson, Jr.
Assistant Secretary
David R. Wilson
President, First Security Capital Markets
Chester A. Wood, Jr.
Senior Vice President Portfolio and Treasury Management
SUBSIDIARIES
BANKS
First Security Bank, N.A. (Utah, Idaho, Oregon, Wyoming)
Scott Nelson, Chairman and President - Utah
J. Pat McMurray, President - Idaho
Edwin V. Davis, II, President - Oregon
Vern Osmond, President - Wyoming
First Security Bank of New Mexico, N.A.
Edward T. O'Leary, President and Chief Executive Officer
First Security Bank of Southern New Mexico, N.A.
Ben H. Haines, Jr., President and Chief Executive Officer
First Security Bank of Nevada
David J. Smith, President and Chief Executive Officer
First Security Bank of California, N.A.
Thomas A. Bishop, President and Chief Executive Officer
NONBANKS
First Security Van Kasper, Inc.
Scott C. Ulbrich, Chairman and Chief Executive Officer
First Security Investment Management, Inc.
Sterling K. Jenson, President and Chief Executive Officer
First Security Investor Services
Joseph Cooney, President and Chief Executive Officer
First Security Insurance, Inc.
Daniel S. Schull, President and Chief Executive Officer
First Security Life Insurance Company of Arizona
Daniel S. Schull, President and Chief Executive Officer
CrossLand Mortgage Corp.
Christopher J. Sumner, President and Chief Executive Officer
First Security Leasing Company
Michael W. Chaney, President and Chief Executive Officer
First Security Trade Services, Ltd. (Hong Kong)
Randal Roberts, President and Chief Executive Officer
First Security Business Investment Corporation
Louis "Butch" Alder, President and Chief Executive Officer
First Security Information Technology, Inc.
Michael P. Caughlin, Chief Business Officer
Al Pino, Chief Operations Officer
<PAGE>
BOARD OF DIRECTORS
James C. Beardall (1,2,4)
Chairman, President and Chief Executive Officer
Anderson Lumber Company (Lumber Products)
Ogden, Utah
Rodney H. Brady (1,3,4)
President and Chief Executive Officer
Deseret Management (Private Holding Company)
Salt Lake City, Utah
James E. Bruce
Former Chairman and Chief Executive Officer
Idaho Power Company (Electric Power Service - Utility)
Boise, Idaho
Thomas D. Dee II (1,3,4)
President
The Dee Company (Investments)
Ogden, Utah
Spencer F. Eccles (1,4)
Chairman and Chief Executive Officer
First Security Corporation
Salt Lake City, Utah
Morgan J. Evans (1,4)
President and Chief Operating Officer
First Security Corporation
Salt Lake City, Utah
Dr. David P. Gardner
President
The William & Flora Hewlett Foundation (Philanthropy)
Chairman and Chief Executive Officer
The George S. & Delores Dore Eccles Foundation (Philanthropy)
Robert H. Garff
Chief Executive Officer
Garff Enterprises, Inc. (Automobile Dealerships and Other Enterprises)
Salt Lake City, Utah
Jay Dee Harris
President
Harris Truck & Equipment Company (Construction Equipment)
Tremonton, Utah
Robert T. Heiner (1,2,4)
Former President and Chief Administrative Officer
First Security Corporation
Salt Lake City, Utah
Karen H. Huntsman
Vice President and Director
Huntsman Chemical Corporation (Petrochemicals)
Salt Lake City, Utah
G. Frank Joklik (3)
President and Chief Executive Officer
MK Gold Company (Gold Exploration and Development)
Salt Lake City, Utah
B.Z. Kastler (2)
Former Chairman and Chief Executive Officer
Questar Corporation (Natural Gas)
Salt Lake City, Utah
Dr. J. Bernard Machen
President
University of Utah (Education)
Salt Lake City, Utah
Joseph G. Maloof
President and Chief Executive Officer
Maloof Companies (Diversified Investments - Entertainment)
Albuquerque, New Mexico
Michele Papen-Daniel, Ph.D. (2)
Former President
Rio Grande Bancshares (Banking)
Scott S. Parker (1,2,4)
Former President
Intermountain Health Care, Inc. (Health Care Provider)
Salt Lake City, Utah
James L. Sorenson
Chairman and Chief Executive Officer
Sorenson Development, Inc. (Investments)
Salt Lake City, Utah
Harold J. Steele
Former President
First Security Bank of Utah, N.A.
Salt Lake City, Utah
James R. Wilson (3)
Chairman, President and Chief Executive Officer
Cordant Technologies, Inc. (Aerospace and Industrial Manufacturing)
(1) Member of Corporate Executive Committee
(2) Member of Corporate Audit Committee
(3) Member of Corporate Compensation Committee
(4) Member of Corporate Nominating Committee
HONORARY DIRECTOR
Dr. Chase N. Peterson
President Emeritus
University of Utah (Education)
Salt Lake City, Utah
<PAGE>
CORPORATE INFORMATION
CORPORATE OFFICES
79 S. Main Street
Salt Lake City, Utah 84111
ANNUAL STOCKHOLDERS' MEETING
Monday, April 26, 1999, 3:00 p.m.
Joseph Smith Memorial Building
15 E. South Temple
Salt Lake City, Utah
GENERAL LEGAL COUNSEL
Ray, Quinney & Nebeker
400 Deseret Building
Salt Lake City, Utah 84111
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
50 S. Main Street
Salt Lake City, Utah 84144
RATINGS
Fitch
Moody's Investor
Thomson Standard Investors Service,
BankWatch & Poor's Service L.P.
- - ------------------------------------------------------------------------------
Overall B -- -- --
Senior Debt -- BBB+ A3 --
Subordinated Debt -- BBB Baal --
Subordinated Capital Income Securities -- BBB- a3 A-
- - ------------------------------------------------------------------------------
STOCK INFORMATION
First Security shares are traded on the Nasdaq National Market System under
the symbol "FSCO". Nasdaq market makers include:
Bear, Stearns & Co.
Cantor Fitzgerald & Co.
C.S. First Boston Corp.
Dain Rauscher, Inc.
Dean Witter Reynolds, Inc.
Edward D. Jones & Co.
F.J. Morrissey & Co.
Fox-Pitt, Kelton, Inc.
Herzog, Heine, Geduld, Inc.
J.P. Morgan Securities, Inc.
Keefe, Bruyette & Woods, Inc.
Lehman Brothers, Inc.
Merrill Lynch, Pierce, Fenner & Smith
Morgan Stanley & Co., Inc.
Nationsbanc Montgomery Securities
Pacific Crest Securities
Piper, Jaffray & Hopwood, Inc.
Prudential Securities
Salomon Smith Barney
Sherwood Securities Corp.
Stearn, Agee & Leach, Inc.
Troster Singer Corp.
Warburg Dillon Read
The Transfer Agent and Registrar for First Security Corporation is:
First Chicago Trust Co. of New York
Stock Transfer Services
P.O. Box 2500
Jersey City, NJ 07303-2500
Toll free 1-800-756-8200
SHAREHOLDER SERVICES
First Security offers the following services to its shareholders:
* Dividend Reinvestment Plan: Automatically reinvests common stock cash
dividends in additional shares of First Security common stock at the
current market price.
* Common Stock Purchase Plan: Allows shareholders to invest $50 to $5,000
per month in additional shares of First Security common stock, with no
brokerage commissions or service charges.
* Dividend Direct Deposit Plan: Automatically transfers dividend payments to
an account, at any bank in the country, the same day dividends are paid.
Inquire about these free shareholder services by contacting:
Corporate Communications and Investor Relations
First Security Corporation
P.O. Box 30006
Salt Lake City, Utah 84130-0006
(801) 246-5044 / toll free 1-800-574-6695
e-mail: [email protected]
<PAGE>
TO REQUEST ADDITIONAL INFORMATION
Form 10-K - Stockholders can obtain a copy of any exhibits filed with the
Corporation's report on Form 10-K upon written request to:
Financial Division
First Security Corporation
P.O. Box 30006
Salt Lake City, Utah 84130-0006
Financial Information - Analysts, investors and others seeking financial
information about First Security should contact:
Leslie R. Nelson
Senior Vice President and Manager
Corporate Communications and Investor Relations
15 E. 100 South, 2nd Floor
Salt Lake City, Utah 84111
(801) 246-5048
e-mail: [email protected]
News Releases - As a courtesy to shareholders and prospective investors,
copies of First Security's recent news releases are available by fax at no
charge. Call Company News On Call at 1-800-758-5804 ext. 313925. Information is
also posted on the Internet at www.prnewswire.com or www.firstsecuritybank.com.
General Information - News media representatives and others seeking general
information should contact:
Adrian R. Gostick
Vice President and Manager
Communications and Public Relations
15 E. 100 South, 2nd Floor
Salt Lake City, Utah 84111
(801) 246-5535
e-mail: [email protected]
Internet Address - Company news, financial updates and information about
First Security products and services can be found on the Corporation's web site
at www.firstsecuritybank.com.
<PAGE>
SIGNATURES
FIRST SECURITY CORPORATION
Registrant
Pursuant to the requirements of Section 13 or 15(d) 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, by
/s/ Brad D. Hardy March 19, 1999
Brad D. Hardy Date
Executive Vice President Corporate Services
General Counsel, Chief Financial Officer, and Secretary of First Security
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
First Security Corporation, by
/s/ Spencer F. Eccles March 23, 1999
Spencer F. Eccles Date
Chairman and Chief Executive Officer
/s/ Morgan J. Evans March 23, 1999
Morgan J. Evans Date
President and Chief Operating Officer
Director
/s/ James C. Beardall March 22, 1999
James C. Beardall Date
Director
/s/ Rodney H. Brady March 23, 1999
Rodney H. Brady Date
Director
/s/ James E. Bruce March 22, 1999
James E. Bruce Date
Director
/s/ Thomas D. Dee, II March 22, 1999
Thomas D. Dee, II Date
Director
/s/ Dr. David P. Gardner March 22, 1999
Dr. David P. Gardner Date
Director
/s/ Robert H. Garff March 22, 1999
Robert H. Garff Date
Director
/s/ Jay Dee Harris March 22, 1999
Jay Dee Harris Date
Director
/s/ Robert T. Heiner March 22, 1999
Robert T. Heiner Date
Director
/s/ Karen H. Huntsman March 26, 1999
Karen H. Huntsman Date
Director
/s/ G. Frank Joklik March 26, 1999
G. Frank Joklik Date
Director
/s/ B. Z. Kastler March 22, 1999
B. Z. Kastler Date
Director
/s/ Dr. J. Bernard Machen March 24, 1999
Dr. J. Bernard Machen Date
Director
/s/ Joseph G. Maloof March 22, 1999
Joseph G. Maloof Date
Director
/s/ Michele Papen-Daniel, Ph.D. March 23, 1999
Michele Papen-Daniel, Ph.D. Date
Director
/s/ Scott S. Parker March 19, 1999
Scott S. Parker Date
Director
/s/ James L. Sorenson March 22, 1999
James L. Sorenson Date
Director
/s/ Harold J. Steele March 22, 1999
Harold J. Steele Date
Director
/s/ James R. Wilson March 22, 1999
James R. Wilson Date
Director
</TABLE>
CHANGE OF CONTROL
EMPLOYMENT AGREEMENT
AGREEMENT by and between First Security Corporation, a Utah corporation (the
"Company"), and David R. Golden (the "Executive"), dated as of the 19th day of
January, 1999.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding
the possibility, threat or occurrence of a Change of Control (as defined below)
of the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the
first date during the Change of Control Period (as defined in Section 1 (b)) on
which a Change of Control (as defined in Section 2) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change of Control occurs and if
the Executive's employment with the Company is terminated prior to the date on
which the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control
or (ii) otherwise arose in connection with or anticipation of a Change of
Control, then for all purposes of this Agreement the "Effective Date" shall
mean the date immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period
commencing on the date hereof and ending on the third anniversary of the date
hereof, provided, however, that commencing on the date one year after the date
hereof, and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate three years from such Renewal Date,
unless at least 60 days prior to the Renewal Date the Company shall give notice
to the Executive that the Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a
"Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding shares of
common stock of the Company (the "Outstanding Company Common Stock") or
(ii) the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors
(the "Outstanding Company Voting Securities"); provided, however, that
for purposes of this subsection (a), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from the
Company, (ii) any acquisition by the Company, (iii) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company or (iv) any
acquisition pursuant to a transaction which complies with clauses (i),
(ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election
by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(c) Consummation by the Company of a reorganization, merger, or
consolidation or sale or other disposition of all or substantially all of
the assets of the Company or the acquisition of assets of another entity
(a "Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly,
more than 60% of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially all
of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may
be, (ii) no Person (excluding any employee benefit plan (or related
trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the
employ of the Company subject to the terms and conditions of this Agreement,
for the period commencing on the Effective Date and ending on the third
anniversary of such date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities
shall be at least commensurate in all material respects with the most
significant of those held, exercised and assigned to the Executive at any time
during the 90-day period immediately preceding the Effective Date and (B) the
Executive's services shall be performed at the location where the Executive was
employed immediately preceding the Effective Date or any office or location
less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and time during normal business hours to
the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment
Period, the Executive shall receive an annual base salary ("Annual Base
Salary"), which shall be paid at a monthly rate, at least equal to twelve times
the highest monthly base salary paid or payable, including any base salary
which has been earned but deferred, to the Executive by the Company and its
affiliated companies in respect of the 12-month period immediately preceding
the month in which the Effective Date occurs. During the Employment Period,
the Annual Base Salary shall be reviewed no more than 12 months after the last
salary increase awarded to the Executive prior to the Effective Date and
thereafter at least annually. Any increase in Annual Base Salary shall not
serve to limit or reduce any other obligation to the Executive under this
Agreement. Annual Base Salary shall not be reduced after any such increase and
the term Annual Base Salary as utilized in this Agreement shall refer to Annual
Base Salary as so increased. As used in this Agreement, the term "affiliated
companies" shall include any company controlled by, controlling or under common
control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Bonus") in cash at least equal to the
Executive's highest bonus under the Company's annual incentive plans for the
last three fiscal years prior to the Effective Date (annualized in the event
that the Executive was not employed by the Company for the whole of such fiscal
year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no
later than the end of the third month of the fiscal year next following the
fiscal year for which the Annual Bonus is awarded, unless the Executive shall
elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the
Employment Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans practices, policies and programs
provide the Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent, if any, that
such distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at
any time during the 90-day period immediately preceding the Effective Date or
if more favorable to the Executive, those provided generally at any time after
the Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period,
the Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by the Company and its
affiliated companies (including, without limitation, medical, prescription,
dental, disability, salary continuance, employee life, group life, accidental
death and travel accident insurance plans and programs) to the extent
applicable generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans, practices, policies and programs
provide the Executive with benefits which are less favorable, in the aggregate,
than the most favorable of such plans, practices, policies and programs in
effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, those
provided generally at any time after the Effective Date to other peer
executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the most favorable policies,
practices and procedures of the Company and its affiliated companies in effect
for the Executive at any time during the 90-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the
Executive shall be entitled to fringe benefits, including, without limitation,
tax and financial planning services, payment of club dues, and, if applicable,
use of an automobile and payment of related expenses, in accordance with the
most favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 90-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period,
the Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing
provided to the Executive by the Company and its affiliated companies at any
time during the 90-day period immediately preceding the Effective Date or, if
more favorable to the Executive, as provided generally at any time thereafter
with respect to other peer executives of the Company and its affiliated
companies.
(viii) Vacation. During the Employment Period, the
Executive shall be entitled to paid vacation in accordance with the most
favorable plans, policies, programs and practices of the Company and its
affiliated companies as in effect for the Executive at any time during the
90-day period immediately preceding the Effective Date or, if more favorable to
the Executive, as in effect generally at any time thereafter with respect to
other peer executives of the Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The
Executive's employment shall terminate automatically upon the Executive's death
during the Employment Period. If the Company determines in good faith that the
Disability of the Executive has occurred during the Employment Period (pursuant
to the definition of Disability set forth below), it may give to the Executive
written notice in accordance with Section 12(b) of this Agreement of its
intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the Executive
shall not have returned to full-time performance of the Executive's duties.
For purposes of this Agreement, "Disability" shall mean the absence of the
Executive from the Executive's duties with the Company on a full-time basis for
180 consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Executive or the
Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean:
(i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company or one of
its affiliates (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the manner
in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal
conduct or gross misconduct which is materially and demonstrably
injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Board or upon the instructions of the Chief Executive
Officer or a senior officer of the Company or based upon the advice of counsel
for the Company shall be conclusively presume d to be done, or omitted to be
done, by the Executive in good faith and in the best interests of the Company.
The cessation of employment of the Executive shall not be deemed to be for
Cause unless and until there shall have been delivered to the Executive a copy
of a resolution duly adopted by the affirmative vote of not less than three-
quarters of the entire membership of the Board at a meeting of the Board called
and held for such purpose (after reasonable notice is provided to the Executive
and the Executive is given an opportunity, together with counsel, to be heard
before the Board), finding that, in the good faith opinion of the Board, the
Executive is guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by
the Executive for Good Reason. For purposes of this Agreement, "Good Reason"
shall mean:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including
status, offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice thereof
given by the Executive;
(iii) the Company's requiring the Executive to be based at
any office or location other than as provided in Section 4(a)(i)(B)
hereof or the Company's requiring the Executive to travel on Company
business to a substantially greater extent than required immediately
prior to the Effective Date;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11 (c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in this Agreement
to the contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately following th
first anniversary of the Effective Date shall be deemed to be a termination for
Good Reason for all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for
Cause, or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination
of the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of
such notice, specifies the termination date (which date shall be not more than
thirty days after the giving of such notice). The failure by the Executive or
the Company to set forth in the Notice of Termination any fact or circumstance
which contributes to a showing of Good Reason or Cause shall not waive any
right of the Executive or the Company, respectively, hereunder or preclude the
Executive or the Company, respectively, from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
date on which the Company notifies the Executive of such termination and (iii)
if the Executive's employment is terminated by reason of death or Disability,
the date of death of the Executive or the Disability Effective Date, as the
case may be.
6. Obligations of the Company upon Termination. (a) Good
Reason; Other Than for Cause, Death or Disability. If, during the Employment
Period, the Company shall terminate the Executives employment other than for
Cause or Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the
following amounts:
A. the sum of (1) the Executive's Annual Base Salary through the
Date of Termination to the extent not theretofore paid, (2) the product
of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual
Bonus paid or payable, including any bonus or portion thereof which has
been earned but deferred (and annualized for any fiscal year consisting
of less than twelve full months or during which the Executive was
employed for less than twelve full months), for the most recently
completed fiscal year during the Employment Period, if any (such higher
amount being referred to as the "Highest Annual Bonus"), and (y) a
fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of which
is 365 and (3) any compensation previously deferred by the Executive
(together with any accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid (the sum of
the amounts described in clauses (1), (2), and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2)
the sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
C. an amount equal to the difference between (a) the
aggregate benefit under the Company's qualified defined benefit
retirement plans (collectively, the "Retirement Plan") and any excess or
supplemental defined benefit retirement plans in which the Executive
participates (collectively, the "SERP") which the Executive would have
accrued (whether or not vested) if the Executive's employment had
continued for -three years following the Date of Termination (provided,
that, for purposes of determining the SERP benefit the Executive would
have accrued, (i) if the Executive had not attained "Early Retirement
Date" under the First Security Supplemental Executive Retirement Plan
(after being credited with three years of age and service), the Executive
shall be treated as if the Executive had remained employed through the
Early Retirement Date, (ii) the SERP benefit shall be calculated as if
consent had been granted under the First Security Supplemental Executive
Retirement Plan and (iii) "Early Retirement Percentages" (as defined in
Section 5.02 of the First Security Supplemental Executive Retirement
Plan) will be treated as continuing to increase at a rate of 3% per year
for each year prior to age 50) and (b) the actual vested benefit, if any,
of the Executive under the Retirement Plan and the SERP, determined as of
the Date of Termination (with the foregoing amounts to be computed on an
actuarial present value basis, based on the assumption that the
Executive's compensation in each of the three years following such
termination would have been that required by Section 4(b)(i) and Section
4(b)(ii), and using actuarial assumptions no less favorable to the
Executive than the most favorable of those in effect for purposes of
computing benefit entitlements under the Retirement Plan and the SER-P at
any time from the day before the Effective Date) through the Date of
Termination;
(ii) for three years following the Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which
would have been provided to them in accordance with the plans, programs,
practices and policies described in Section 4(b)(iv) of this Agreement if
the Executive's employment had not been terminated or, if more favorable
to the Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its affiliated
companies and their families, provided, however, that if the Executive
becomes reemployed with another employer and is eligible to receive
medical or other welfare benefits under another employer-prov1ded plan,
the medical and other welfare benefits described herein shall be
secondary to those provided under such other plan during such applicable
period of eligibility, and for purposes of determining eligibility (but
not the time of commencement of benefits) of the Executive for retiree
benefits pursuant to such plans, practices, programs and policies, the
Executive shall be considered to have remained employed until three years
following the Date of Termination and to have retired on the last day of
such period;
(iii) the Company shall, at its sole expense as incurred, provide
the Executive with outplacement services the scope and provider of which
shall be selected by the Executive in the Executive's sole discretion;
and
(iv) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive any other amounts or
benefits required to be paid or provided or which the Executive is
eligible to receive under any plan, program, policy or practice or
contract or agreement of the Company and its affiliated companies (such
other amounts and benefits shall be hereinafter referred to as the "Other
Benefits").
(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations shall be
paid to the Executive's estate or beneficiary, as applicable, in a lump sum in
cash within 30 days of the Date of Termination. With respect to the provision
of Other Benefits, the term Other Benefits as utilized in this Section 6(b)
shall include, without limitation, and the Executive's estate and/or
beneficiaries shall be entitled to receive, benefits at least equal to the most
favorable benefits provided by the Company anti affiliated companies to the
estates and beneficiaries of peer executives of the Company and such affiliated
companies under such plans, programs, practices and policies relating to death
benefits, if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive, other
than for payment of Accrued Obligations and the timely payment or provision of
Other Benefits. Accrued Obligations shall be paid to the Executive in a lump
sum in cash within 30 days of the Date of Termination. With respect to the
provision of Other Benefits, the term Other Benefits as utilized in this
Section 6(c) shall include, and the Executive shall be entitled after the
Disability Effective Date to receive, disability and other benefits at least
equal to the most favorable of those generally provided by the Company and its
affiliated companies to disabled executives and/or their families in accordance
with such plans, programs, practices and policies relating to disability, if
any, as in effect generally with respect to other peer executives and their
families at any time during the 90-day period immediately pre ceding the
Effective Date or, if more favorable to the Executive and/or the Executive's
family, as in effect at any time thereafter generally with respect to other
peer executives of the Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's
employment shall be terminated for Cause during the Employment Period, this
Agreement shall terminate without further obligations to the Executive other
than the obligation to pay to the Executive (x) the Annual Base Salary through
the Date of Termination, (y) the amount of any compensation previously deferred
by the Executive, and (z) Other Benefits, in each case to the extent
theretofore unpaid. If the Executive voluntarily terminates employment during
the Employment Period, excluding a termination for Good Reason, this Agreement
shall terminate without further obligations to the Executive, other than for
Accrued Obligations and the timely payment or provision of Other Benefits. In
such case, all Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any
plan, program, policy or practice provided by the Company or any of its
affiliated companies and for which the Executive may qualify, nor, subject to
Section 12(f), shall anything herein limit or otherwise affect such rights as
the Executive may have under any contract or agreement with the Company or any
of its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
affiliated companies at or subsequent to the date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract
or agreement except as explicitly modified by this Agreement.
8. Full Settlement; Legal Fees. The Company's obligation to make
the payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Company may have
against the Executive or others. In no event shall the Executive be obligated
to seek other employment or take any other action by way of mitigation of the
amounts payable to the Executive under any of the provisions of this Agreement
and except as specifically provided in Section 6(a)(ii), such amounts shall not
be reduced whether or not the Executive obtains other employment. The Company
agrees to pay as incurred, to the full extent permitted by law, all legal fees
and expenses which the Executive may reasonably incur as a result of any
contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability or entitlement under,
any provision of this Agreement or any guarantee of performance thereof
(whether such contest is between the Company and the Executive or between
either of them and any third party, and including as a result of any contest by
the Executive about the amount of any payment pursuant to this Agreement), plus
in each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that any payment, award, benefit or
distribution by the Company (or any of its affiliated entities) or by any
entity which effectuates a Change of Control (or any of its affiliated
entities) to or for the benefit of the Executive (whether pursuant to the terms
of this Agreement or otherwise, but determined without regard to any additional
payments required under this Section 9) (a "Payment") would be subject to the
excise tax imposed by Section 4999 of the Code or any corresponding provisions
of state or local tax laws, or any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments. The payment of a
Gross-Up Payment under this Section 9(a) shall not be conditioned upon the
Executive's termination of employment. Notwithstanding the foregoing provisions
of this Section 9(a), if it shall be determined that the Executive is entitled
to a Gross-Up Payment, but that the portion of the Payments that would be
treated as "parachute payments" under Section 280G of the Code does not exceed
110% of the greatest amount (the "Safe Harbor Amount") that could be paid to
the Executive such that the receipt of Payments would not give rise to any
Excise Tax, then no Gross-Up Payment shall be made to the Executive and the
amounts payable under this Agreement shall be reduced so that the Payments, in
the aggregate, are reduced to the Safe Harbor Amount. The reduction of the
amounts payable hereunder, if applicable, shall be made by first reducing the
payments under Section 6(a)(i)(B), unless an alternative method of reduction is
elected by the Executive. For purposes of reducing the Payments to the Safe
Harbor Amount, only amounts payable under this Agreement (and no other
Payments) shall be reduced. If the reduction of the amounts payable under this
Agreement would not result in a reduction of the Payments to the Safe Harbor
Amount, no amounts payable under this Agreement shall be reduced pursuant to
this Section 9(a).
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Deloitte &
Touche LLP or such other certified public accounting firm as may be designated
by the Executive (the "Accounting Finn"), which shall provide detailed
supporting calculations both to the Company and the Executive within 15
business days of the receipt of notice from the Executive that there has been a
Payment, or such earlier time as is requested by the Company. In the event that
the Accounting Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change of Control, the Executive shall appoint
another nationally recognized accounting firm to make the determinations
required hereunder (which accounting, firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as determined pursuant
to this Section 9, shall be paid by the Company to the Executive within five
days of the receipt of the Accounting Firm's determination. Any determination
by the Accounting Firm shall be binding upon the Company and the Executive. As
a result of the uncertainty in the application of Section 4999 of the Code at
the time of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts its
remedies pursuant to Section 9(c) and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten business days after the
Executive is informed in writing of such claim and shall apprise the Company of
the nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the 30-
day period following the date on which the Executive gives such notice to the
Company (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If the Company notifies the Executive in
writing prior to the expiration of such period that it desires to contest such
claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 9(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and
hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with respect to
such advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the Executive
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Section 9(c), the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Company's complying with the requirements of Section 9(c)) promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section 9(c), a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the expiration
of 30 days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance shall offset,
to the extent thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its affiliated
companies, and their respective businesses, which shall have been obtained by
the Executive during the Executive's employment by the Company or any of its
affiliated companies and which shall not be or become public knowledge (other
than by acts by the Executive or representatives of the Executive in violation
of this Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than the
Company and those designated by it. In no event shall an asserted violation of
the provisions of this Section 10 constitute a basis for deferring or
withholding any amounts otherwise payable to the Executive under this
Agreement.
11. Successors. (a) This Agreement is personal to the Executive
and without the prior written consent of the Company shall not be assignable by
the Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean the
Company as hereinbefore defined and any successor to its business and/or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah, without reference
to principles of conflict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by
the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
David R. Golden
First Security Corporation
79 South Main Street, 2nd Fl.
Salt Lake City, Utah 84111
If to the Company:
First Security Corporation
79 South Main Street, 2" Fl.
Salt Lake City, Utah 84111
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance
herewith. Notice and communications shall be effective when actually received
by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provision hereof or any other provision of this
Agreement or the failure to assert any right the Executive or the Company may
have hereunder, including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this
Agreement, shall not be deemed to be a waiver of such provision or right or any
other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, prior to the Effective Date, the Executive's employment may be terminated
by either the Executive or the Company at any time prior to the Effective Date,
in which case the Executive shall have no further rights under this Agreement.
From and after the Effective Date this Agreement shall supersede any other
agreement between the parties with respect to the subject matter hereof,
including, without limitation, the right of the Executive to participate in any
severance plan of the Company or otherwise receive severance benefits from the
Company during the Employment Period.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the
Company has caused this Agreement to be executed in its name on its behalf, all
as of the day and year first above written.
/s/
David R. Golden
FIRST SECURITY CORPORATION
By:
/s/
Morgan J. Evans
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) (A,B)
<CAPTION>
For the Periods Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
- - ----------------------------------------------------------- ---------- ---------- ----------
NET INCOME:
Net income per consolidated income statements 247,680 215,274 184,472
Subtract dividend requirement of preferred stock 28 30 33
- - ----------------------------------------------------------- ---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK (BASIC) 247,652 215,244 184,439
Add dividend requirement of preferred stock 28 30 33
- - ----------------------------------------------------------- ---------- ---------- ----------
NET INCOME DILUTED 247,680 215,274 184,472
=========================================================== ========== ========== ==========
EARNINGS PER COMMON SHARE BASIC 1.32 1.18 1.03
EARNINGS PER COMMON SHARE DILUTED 1.28 1.14 1.00
=========================================================== ========== ========== ==========
SHARES OUTSTANDING (AVERAGE):
Common shares 189,246 185,171 181,063
Treasury shares (1,674) (2,931) (1,296)
- - ----------------------------------------------------------- ---------- ---------- ----------
COMMON SHARES BASIC (AVG) 187,572 182,240 179,767
Common share equivalents for options 5,882 6,089 4,800
Preferred share equivalents 386 410 433
- - ----------------------------------------------------------- ---------- ---------- ----------
COMMON SHARES DILUTED (AVG) 193,840 188,739 185,000
=========================================================== ========== ========== ==========
<FN>
(A) ALL FSCO FINANCIAL DATA HAVE BEEN PREVIOUSLY RESTATED FOR:
* two separate 3-for-2 common stock splits in the form of 50% stock dividends, paid in May 1997 and February 1998.
* SFAS No. 128, "Earnings Per Share", restating EPS primary to EPS basic and EPS fully diluted to EPS diluted.
* the May 30, 1998 pooling-of-interests merger with FSB California (formerly California State Bank).
(B) 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
As of December 31, 1998
<CAPTION>
Organized Percentage of
Under Voting Securities
Tier and Name of Subsidiary (A) Location Laws of Owned by FSCO
- - -------------------------------------------------------------------------- ------------------------ ----------- -------------------
<S> <C> <C> <C>
First Security Bank, National Association Odgen, 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, New Mexico U.S.A. 100.0
First Security Bank of Southern New Mexico, National Association Las Cruces, New Mexico 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
First Security Bank of California, National Association West Covina, California U.S.A. 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.
</TABLE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-35847, 333-70003, 333-28497, 333-29701, 033-52205, 033-52609, 333-58873,
and 333-03377 on Form S-3, in Post Effective Amendment No. 1 to Registration
Statement No. 002-62919 on Form S-3, and in Registration Statement Nos.
033-09501, 033-21556, 033-60659, 033-60681, and 033-57107 on Form S-8, of
First Security Corporation of our report dated February 24, 1999, appearing in
the Annual Report on Form 10-K of First Security Corporation for the year ended
December 31, 1998.
/s/
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,026,335
<INT-BEARING-DEPOSITS> 605
<FED-FUNDS-SOLD> 230,210
<TRADING-ASSETS> 329,109
<INVESTMENTS-HELD-FOR-SALE> 4,764,127
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 14,013,417
<ALLOWANCE> (173,350)
<TOTAL-ASSETS> 21,689,088
<DEPOSITS> 12,658,574
<SHORT-TERM> 4,265,589
<LIABILITIES-OTHER> 559,872
<LONG-TERM> 2,609,558
<COMMON> 1,595,011
0
484
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 21,689,088
<INTEREST-LOAN> 1,111,417
<INTEREST-INVEST> 294,355
<INTEREST-OTHER> 14,888
<INTEREST-TOTAL> 1,420,660
<INTEREST-DEPOSIT> 403,886
<INTEREST-EXPENSE> 716,961
<INTEREST-INCOME-NET> 703,699
<LOAN-LOSSES> 71,923
<SECURITIES-GAINS> 8,075
<EXPENSE-OTHER> 723,088
<INCOME-PRETAX> 383,078
<INCOME-PRE-EXTRAORDINARY> 383,078
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 247,680
<EPS-PRIMARY> 1.320
<EPS-DILUTED> 1.280
<YIELD-ACTUAL> 4.15
<LOANS-NON> 45,812
<LOANS-PAST> 23,758
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 73,187
<ALLOWANCE-OPEN> 157,525
<CHARGE-OFFS> (94,790)
<RECOVERIES> 33,889
<ALLOWANCE-CLOSE> 173,350
<ALLOWANCE-DOMESTIC> 173,350
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
EDGAR Tags used on this Financial Data Schedule do not comply with SFAS No. 128, so that:
"EPS-Primary" is actually earnings per common share basic; and
"EPS-Diluted" is actually earnings per common share diluted.
</TABLE>
