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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, 1999
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:
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 $4,343,669,577 as of February 29, 2000.
The number of shares outstanding of FSCO common stock $1.25 Par Value was
196,013,036 (net of 1,685,346 treasury shares) as of February 29, 2000.
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FIRST SECURITY CORPORATION (FSCO) - INDEX
Part I
Item 1. Business
Important Notices
Forward-Looking Statements
Glossary
Table 1: Financial Highlights - Five-Year Summary
Item 1.a. General Development of Business
Operating Subsidiaries
Table 2: Consolidating Statements
Item 1.b. Financial Information About Industry Segments
Line of Business Segments
Table 3: Line of Business Segments
Item 1.c. Narrative Description of Business (Included in Item 1.a.)
Item 1.d. Financial Information About Foreign and Domestic Operations
TABLE OF CONTENTS:
Highlights
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
Off-Balance Sheet Items
Inflation Accounting And Capital Commitments
Table 16: Quarterly Financial Highlights
Mergers And Acquisitions
First Security Corporation And Zions Bancorporation Merger
Other Mergers And Acquisitions
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Factors That May Affect Future Results Of Operations And Financial
Condition
National And Regional Economies
Competitive Position
Technology
Year 2000 Issues: FSCO'S Year 2000 Project Completion Disclosure
Year 2000 Issues: FSCO's Year 2000 Forward-Looking Statements
Regulatory and Legislative Attitudes
Financial Market Perceptions
Item 2. Properties (Included in Note 6-Premises And Equipment)
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders (None)
Part II.
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
(See also Part I, Item 1d, heading "Common And Preferred Stock",
Table 16-Selected Quarterly Information, and Item 8.-heading "Corporate
Information)
Item 6. Selected Financial Data (Included in Table 1 of Part I. Item 1.d.)
Item 7. Management's Discussion And Analysis Of Results Of Operations And
Financial Condition (combined with Part I. Item 1.d.)
Item 7.a. Quantitative And Qualitative Disclosures About Market Risk (combined
with Part I. Item 1.d.)
Item 8. Financial Statements And Supplementary Data
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
CORPORATE INFORMATION
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosures (None)
Part III.
Item 10. Directors And Executive Officers Of The Registrant
Table 17: Directors of First Security Corporation
Table 18: Executive Officers of First Security Corporation
Item 11. Executive Compensation
Table 19: Summary Compensation Table
Table 20: Options Granted to Certain Executive Officers During 1999
Table 21: Options Exercised by Certain Executive Officers During 1999 and
Year-End Options Values
Table 22: Pension Plan Table
Item 12. Security Ownership of Certain Beneficial Owners and Management
Table 23: Principal Shareholders of First Security Corporation
Table 24: Five Year Stock Price Performance
Item 13. Certain Relationships and Related Transactions
Part IV.
Item 14. Financial Statement Schedules, Exhibits, and Reports on Form 8-K
Signatures
<PAGE> 4
Part I.
Item 1. Business
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 1999, 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 California State Bank (CSB; 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 1999 classifications.
* Five-year compound growth rates shown on tables in this MDA may not
represent actual trends due to acquisitions and certain nonrecurring
events.
MERGER WITH ZIONS BANCORPORATION
On June 6, 1999, FSCO entered into a definitive Agreement and Plan of
Merger (the "Agreement") with Zions Bancorporation ("Zions"), pursuant to
which FSCO and Zions will combine, with the combined company retaining the FSCO
name. Under the terms of the Agreement, each outstanding share of Zions
common stock will be converted into one share of common stock of the combined
company, and each share of FSCO common stock will be reclassified and
converted into 0.442 of a share of common stock of the combined company. The
combined company, to be named First Security Corporation, will be
headquartered in Salt Lake City, Utah, and will be the second largest bank
holding company headquartered in the western United States, with assets of
approximately $40 billion.
The board of directors of FSCO has scheduled a stockholder meeting for
March 22, 2000 to consider and vote on certain matters relating to the
proposed transaction with Zions. FSCO had initially anticipated that,
contemporaneously with the FSCO stockholder meeting, Zions would also be
convening a shareholder meeting, at which time Zions shareholders would be
asked to consider and vote upon the merger of FSCO and Zions. Zions has
since announced that it has rescheduled its shareholders meeting for March
31, 2000 and has indicated that Goldman, Sachs & Co., the financial advisors
for Zions, has withdrawn its fairness opinion with respect to the proposed
merger.
The FSCO board of directors has unanimously reaffirmed its recommendation
of the pending combination with Zions and has urged the Zions' board to take
the steps necessary to cause the transaction to be consummated as contemplated
by the terms of the merger agreement between the parties. FSCO stated
publicly that First Security believes there is no basis for the withdrawal of
the fairness opinion by Goldman, Sachs, & Co. and that there has been no
material adverse effect under the terms of the merger agreement.
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On March 3, 2000, FSCO issued an update concerning its anticipated earnings
forecast:
FSCO reported that recently updated revenue and income projections indicate
a decline in the first quarter of 2000 from prior period amounts. On a
standalone basis, for the first quarter of 2000, FSCO is projecting a decline
in revenue of 8% from the fourth quarter of 1999. FSCO reported that it is
experiencing a revenue decline in certain business lines, most notably
mortgage banking, as well as margin compression due to the rising interest
rate environment. FSCO also believes that its revenue momentum and its
funding mix have been adversely affected by the delay in closing the merger
with Zions. FSCO is also experiencing increased charge-offs in its indirect
auto and consumer lending, which it attributes in large part to a temporary
systems problem that occurred in October 1999, when a system enhancement was
being installed. This systems problem has since been corrected, but higher
charge-offs are expected to persist through the first quarter, normalizing for
the balance of the year. FSCO indicated that earnings for the quarter on a
pre-merger basis will be down some $0.07 to $0.09 per share from the reported
earnings of $0.33 in the fourth quarter of 1999.
At the time of this announcement, Harris Simmons, president and chief
executive officer of Zions, stated, "Zions remains committed to supporting
the merger."
Zions and its counsel later confirmed to the market that this announcement
did not constitute a Material Adverse Effect under the terms of the merger
agreement.
There is a significant risk that the actions that have been taken by Zions
and its financial advisors since March 3, 2000 may make it difficult for Zions
to obtain the requisite shareholder approval that is needed under Utah law for
Zions to consummate the transaction with First Security as contemplated by the
merger agreement.
FSCO owns 1.5 million shares of Zions common stock, which are held in
FSCO's available for sale portfolio and marked to market on a regular basis.
In the event that the proposed transaction with Zions is not consummated, it
is likely that FSCO will experience additional unrealized losses with respect
to the Zions shares when those shares are marked to market.
In the event that the proposed transaction with Zions is not consummated,
FSCO will incur material expenses related to disengagement of the merger
integration work that has been completed to date.
Other milestones with regard to the combination with Zions are summarized
below:
* On December 8, 1999, FSCO and Zions announced that they had reached an
agreement with the U.S. Department of Justice to divest a combined total
of 68 branches, holding approximately $2.1 billion in deposits. The
combined assets to be sold in connection with the divestiture include a
total of approximately $660 million in loans.
* On December 13, 1999, the Board of Governors of the Federal Reserve System
approved FSCO's application to merge with Zions.
* On December 23, 1999, Zions announced that it was delaying the shareholder
meeting-initially scheduled for December 28, 1999-to vote on the merger in
order to restate certain of its historical financial statements to
reclassify certain acquisitions that it consummated in 1997 and 1998, that
it had previously accounted for as "pooling-of-interests", as "purchases".
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* On January 18, 2000, FSCO and Zions announced that BancWest Corporation
will acquire the 68 FSCO and Zions branches being divested in connection
with the merger. FSCO and Zions further announced plans for the
consolidation of the retail delivery system for the combined company which
will include the closing of 39 branch offices and their consolidation into
nearby locations.
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 and business segments
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.
As set forth in the registration statement on Form S-4, filed by FSCO and
Zions with regard to the merger, other risks and uncertainties in connection
with FSCO's merger with Zions include, but are not limited to:
* combining the business of FSCO and Zions may cost more than FSCO and Zions
expect;
* the timing of the completion of the merger and new operations may be
delayed or prohibited;
* there may be increases in competitive pressures among financial
institutions;
* general economic conditions, either nationally or locally in areas in
which FSCO and Zions conduct their operations, or conditions in securities
markets may be less favorable than FSCO and Zions currently anticipate;
* combining the businesses of FSCO and Zions may require divestiture of
branches, deposits or loans as a result of the merger in an amount greater
than FSCO and Zions expect;
* expected costs savings from the merger may not be fully realized or
realized within the expected time frame;
* legislation or regulatory changes may adversely affect the ability of the
combined company to conduct, or the accounting for, business combinations
and new operations;
* the continuing transition in the year 2000 may have an adverse impact on
FSCO, Zions or the banking industry in general;
* integrating the business of FSCO and Zions and retaining key personnel may
be more difficult than FSCO and Zions expect;
* the revenues of the combined company may be lower than FSCO and Zions
expect;
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* the combined company may lose more business or customers after the merger
than FSCO and Zions expect, or the combined company's operation costs may
be higher that FSCO and Zions expect; or
* changes in the interest rate environment may reduce interest rate margins.
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.
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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.
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.
Loan Servicing Right: The asset value associated with the right to
service loans, classified as an intangible asset by the Federal Reserve.
Servicing rights 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.
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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.
SFAS: Statement of Financial Accounting Standards. Accounting
pronouncements issued by the Financial Accounting Standards Board.
Shock Analysis: An evaluation of asset and liability 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.
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<TABLE>
<CAPTION>
TABLE 1: FINANCIAL HIGHLIGHTS - FIVE YEAR SUMMARY
(in thousands, except per share data and ratios) (A)
5-Year
Compound
99/98 Growth
1999 1998 1997 1996 1995 % Chg Rate
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<S> <C> <C> <C> <C> <C> <C> <C>
COMMON & PREFERRED STOCK DATA:
Earnings per common share basic $ 1.42 $ 1.32 $ 1.18 $ 1.03 $ 0.71 7.6 11.3
Earnings per common share diluted 1.38 1.28 1.14 1.00 0.69 7.8 11.2
Tangible EPS diluted 1.63 1.47 1.23 1.09 0.77 10.9 13.1
Dividends paid per common share 0.56 0.52 0.44 0.38 0.33 7.7 12.7
Book value per common share [EOP] 9.03 8.54 7.59 6.72 6.13 5.7 11.0
Tangible book value per common share [EOP] 6.17 6.35 6.05 5.68 5.26 (2.8) 7.1
Market price (bid) [EOP] 25.500 23.313 27.917 15.167 11.259 9.4 30.5
High bid for the period 29.750 26.167 27.917 15.167 11.259 13.7 25.7
Low bid for the period 17.563 15.500 14.222 10.167 6.519 13.3 22.5
Market capitalization (mktprice x #shrs) 4,997,261 4,352,817 5,148,509 2,748,928 1,988,655 14.8 33.5
Market price / book value per com share % 282.39 272.99 367.81 225.70 183.67
Dividend payout ratio (DPS/EPS basic) % 39.44 39.39 37.37 37.09 46.76
Dividend yield (DPS/mktprice) [EOP] % 2.20 2.23 1.58 2.52 2.95
Price/earnings ratio (mktprice/EPS basic) 18.0x 17.5x 23.7x 14.7x 15.9x
Common shares basic [EOP] 195,971 186,712 184,422 181,244 176,628 5.0 2.3
Common shares basic [Avg] 192,739 187,572 182,240 179,767 176,082 2.8 2.2
Common shares diluted [Avg] 198,034 193,840 188,739 185,000 180,025 2.2 2.3
Common shareholders of record(unrounded) 12,253 12,663 10,786 10,843 10,222 (3.2) 4.3
Preferred shares [EOP] 9 9 10 10 11 - (5.6)
Preferred shareholders of record(unrounded)[EOP] 449 466 497 541 588 (3.6) (6.7)
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INCOME STATEMENT:
Interest income $1,585,235 $1,420,660 $1,213,378 $1,039,391 $ 974,015 11.6 14.6
Interest expense 798,788 716,961 587,439 485,328 469,812 11.4 19.9
Net interest income 786,447 703,699 625,939 554,063 504,203 11.8 10.4
Fully taxable equivalent (FTE) adjustment 9,956 10,381 10,492 7,822 8,382 (4.1) 4.6
Net interest income, FTE 796,403 714,080 636,431 561,885 512,585 11.5 10.3
Provision for loan losses 59,447 71,923 63,386 41,300 22,682 (17.3) 107.5
Noninterest income 532,975 474,390 357,157 306,444 270,638 12.3 21.4
Noninterest expenses 844,445 723,088 588,904 531,219 555,192 16.8 13.1
Provision for income taxes 142,188 135,398 115,532 103,516 72,336 5.0 11.9
Net income 273,342 247,680 215,274 184,472 124,631 10.4 13.7
Preferred stock dividend requirement 27 28 30 33 35 (3.6) (7.1)
Common stock dividend 107,960 95,581 77,955 66,775 57,375 13.0 15.5
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BALANCE SHEET [EOP]:
Trading account securities $ 22,650 $ 329,109 $ 255,320 $ 447,486 $ 638,393 (93.1) (47.2)
Available for sale (AFS) securities 5,528,269 4,764,127 4,351,525 3,324,797 2,733,631 16.0 18.6
Memo: fair value adj. AFS securities (212,342) 48,251 37,678 1,687 22,932 (540.1) 19.1
Loans, net of unearned income 14,578,537 14,013,417 11,230,766 9,697,351 8,616,763 4.0 11.5
Reserve for loan losses (174,443) (173,350) (157,525) (142,693) (135,011) 0.6 4.8
Total interest-earning assets 20,300,307 19,337,468 16,044,477 13,752,286 12,175,603 5.0 12.2
Intangible assets 560,722 409,367 285,156 187,427 153,429 37.0 26.8
Total assets 22,992,927 21,689,088 18,151,783 15,456,649 13,529,699 6.0 12.8
Noninterest-bearing deposits 2,272,811 2,752,009 2,431,006 2,423,596 2,015,487 (17.4) 4.4
Interest-bearing deposits 10,937,605 9,906,565 8,986,628 7,679,411 7,187,357 10.4 10.6
Total deposits 13,210,416 12,658,574 11,417,634 10,103,007 9,202,844 4.4 9.4
Short-term borrowed funds 4,787,365 4,265,589 3,605,199 2,833,368 2,207,989 12.2 15.2
Long-term debt 2,585,755 2,609,558 1,304,463 944,055 720,521 (0.9) 30.4
Total interest-bearing liabilities 18,310,725 16,781,712 13,896,290 11,456,834 10,115,867 9.1 13.7
Preferred stockholders' equity 451 484 501 540 571 (6.8) (6.4)
Common stockholders' equity 1,769,449 1,595,011 1,400,345 1,217,300 1,082,424 10.9 13.6
Parent company investment in subsidiaries 2,210,472 1,945,390 1,555,112 1,283,229 1,124,052 13.6 17.7
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PROBLEM ASSETS & POTENTIAL PROBLEM ASSET [EOP]:
Total nonaccruing loans $ 59,220 $ 45,812 $ 36,876 $ 35,750 $ 24,660 29.3 17.8
Other real estate 8,055 3,617 7,981 10,672 12,206 122.7 (3.5)
Total nonperforming assets 67,275 49,429 44,857 46,422 36,866 36.1 13.5
Accruing loans past due 90 days or more 31,948 23,758 20,841 20,393 13,622 34.5 21.0
Total problem assets 99,223 73,187 65,698 66,815 50,488 35.6 15.6
Potential problem assets 37,303 47,319 7,423 8,271 12,319 (21.2) 25.4
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RECONCILIATION OF THE RESERVE FOR LOAN LOSSES:
Reserve for loan losses, beginning $ 173,350 $ 157,525 $ 142,693 $ 135,011 $ 138,107 10.0 4.7
Total loans charged off (103,646) (94,790) (86,195) (64,209) (53,865) 9.3 21.5
Total recoveries of loans charged off 36,869 33,889 33,182 27,098 28,087 8.8 3.6
Net loans charged off (66,777) (60,901) (53,013) (37,111) (25,778) 9.6 52.2
Provision for loan losses 59,447 71,923 63,386 41,300 22,682 (17.3) 107.5
Acquisitions & reclassifications 8,423 4,803 4,459 3,493 0 75.4 4.7
Reserve for loan losses, ending 174,443 173,350 157,525 142,693 135,011 0.6 4.8
===============================================================================================================================
<FN>
EOP: End Of Period. Avg: Average. EPS: Earnings Per Common Share. DPS: Dividends Per Common Share.
(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).
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
TABLE 1: FINANCIAL HIGHLIGHTS - FIVE YEAR SUMMARY (continued)
(in thousands, except per share data & ratios) (A)
5-Year
Compound
99/98 Growth
1999 1998 1997 1996 1995 % Chg Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET [AVG]:
Trading account securities $ 173,450 $ 158,605 $ 217,337 $ 197,308 $ 487,992 9.4 (22.7)
Available for sale (AFS) securities 5,702,497 4,634,580 3,703,409 3,006,242 2,437,812 23.0 19.3
Memo: fair value adj. AFS securities (75,347) 44,898 7,061 (3,086) (21,335) (267.8) 20.0
Loans, net of unearned income 13,739,743 12,552,230 10,428,044 9,075,277 8,477,057 9.5 13.0
Reserve for loan losses (174,531) (165,585) (148,055) (139,486) (136,181) 5.4 4.8
Deferred taxes on leases (238,788) (197,343) (187,588) (170,588) (160,244) 21.0 10.5
Total interest-earning assets,
excluding fair value adjustments on
AFS securities & deferred tax on leases 19,774,115 17,203,589 14,234,308 12,240,614 11,440,040 14.9 13.7
Intangible assets 521,213 345,578 229,895 168,696 154,684 50.8 33.9
Total assets 22,444,792 19,301,016 15,983,748 13,715,134 12,700,669 16.3 14.3
Noninterest-bearing deposits 2,476,714 2,312,666 2,203,031 1,970,492 1,760,233 7.1 7.8
Interest-bearing deposits 10,410,909 9,447,832 8,103,960 7,499,417 7,028,556 10.2 10.5
Total deposits 12,887,623 11,760,498 10,306,991 9,469,909 8,788,789 9.6 9.9
Short-term borrowed funds 4,603,216 3,826,474 2,969,746 2,057,407 1,906,634 20.3 17.9
Long-term debt 2,595,460 1,680,421 1,040,147 746,885 728,788 54.5 47.8
Total interest-bearing liabilities 17,609,585 14,954,727 12,113,853 10,303,709 9,663,978 17.8 15.1
Preferred stockholders' equity 466 494 524 554 599 (5.7) (7.1)
Common stockholders' equity 1,689,127 1,527,170 1,296,192 1,135,736 1,036,124 10.6 13.0
- -------------------------------------------------------------------------------------------------------------------------------
OTHER DATA (NOT ROUNDED) [EOP]:
Full-time equivalent employees 9,602 9,424 7,996 7,391 7,904 1.9 4.1
Domestic bank offices:
FS Bank (Utah offices) 139 134 129 124 127 3.7 3.2
FS Bank (Idaho offices) 88 88 88 87 91 - (0.7)
FS Bank (Oregon offices) 14 14 13 13 13 - 1.5
FS Bank (Wyoming offices) 8 8 8 7 6 - 5.9
FSB New Mexico 46 45 31 28 27 2.2 11.2
FSB Nevada 22 15 14 7 8 46.7 34.5
FSB California 16 18 17 18 14 (11.1) 4.2
Total domestic bank offices 333 322 300 284 286 3.4 4.0
- -------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS (%):
Return on average assets(ROAA) 1.22% 1.28% 1.35% 1.35% 0.98%
Tangible ROAA 1.48 1.50 1.48 1.48 1.11
Return on avg. stockholders' equity(ROAE) 16.18 16.21 16.60 16.23 12.02
Tangible ROAE 27.70 24.07 21.81 20.76 15.77
Net interest margin, FTE 4.03 4.15 4.47 4.59 4.48
Net interest spread, FTE 3.53 3.53 3.75 3.85 3.73
Operating expense ratio 63.52 60.84 59.27 61.18 70.89
Productivity ratio 3.76 3.75 3.68 3.87 4.37
Loans/deposits [EOP] 110.36 110.70 98.36 95.98 93.63
Loans/assets [EOP] 63.40 64.61 61.87 62.74 63.69
Reserve for loan losses [EOP]/:
Total loans 1.20 1.24 1.40 1.47 1.57
Nonaccruing loans 294.57 378.39 427.17 399.14 547.49
Nonaccruing + accr. lns. past due 90 days 191.34 249.17 272.93 254.16 352.67
Nonaccruing loans/total loans 0.41 0.33 0.33 0.37 0.29
Nonaccruing + accr lns past due/total loans 0.63 0.50 0.51 0.58 0.44
Nonperforming assets [EOP]/:
Total loans + other real estate 0.46 0.35 0.40 0.48 0.43
Total assets 0.29 0.23 0.25 0.30 0.27
Total equity 3.80 3.10 3.20 3.81 3.40
Total equity + reserve for loan losses 3.46 2.79 2.88 3.41 3.03
Problem assets [EOP]/:
Total loans + other real estate 0.68 0.52 0.58 0.69 0.59
Total assets 0.43 0.34 0.36 0.43 0.37
Total equity 5.61 4.59 4.69 5.49 4.66
Total equity + reserve for loan losses 5.10 4.14 4.22 4.91 4.15
Net loans charged off/average loans 0.49 0.49 0.51 0.41 0.30
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS & RISK-BASED CAPITAL RATIOS (%):
Stockholders' equity/assets [EOP] 7.70% 7.36% 7.72% 7.88% 8.00%
Stockholders' equity/assets [Avg] 7.53 7.91 8.11 8.28 8.16
Tangible common equity/tang. assets [EOP] 5.39 5.57 6.24 6.74 6.95
Leverage ratio 7.27 6.90 7.53 8.15 7.22
Tier 1 risk-based capital ratio 8.61 8.62 10.62 11.34 10.44
Total (Tier 1 + 2) risk-based capital ratio 11.41 10.72 13.42 14.41 13.85
==============================================================================================================================
<FN>
EOP: End Of Period. Avg: Average.
(A) All FSCO financial data have been previously restated for the May 30, 1998
pooling-of-interests merger with FSB California (formerly California
State Bank).
</TABLE>
<PAGE> 12
Item 1.a. General Development of Business
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. FSCO has filed an application
with the Federal Reserve Board to become a Financial Holding Company under
the Gramm-Leach-Bliley Act of 1999. At December 31, 1999, FSCO's banks
operated 333 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, an insurance
subsidiary, an investment management company, a full-service retail
securities broker/dealer/investment banking company, a bankcard transaction
processing company, an information technology subsidiary, and a small
business investment corporation.
<TABLE>
<CAPTION>
TABLE 2: CONSOLIDATING STATEMENTS (in thousands, except ratios) (A)
For the Year Ended December 31, 1999 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 $17,707,469 $11,792,913 $123,728 $ 52,233 $ 9,440,726 $ 1,427,932 $ 235,231 1.38 17.28
FSB New Mexico 2,805,267 1,315,575 21,396 5,406 1,642,468 206,309 33,172 1.18 15.48
FSB Nevada 1,455,923 603,395 14,002 5,181 1,154,064 239,529 12,561 0.95 6.27
FSB California 1,198,421 694,027 11,285 2,186 1,018,101 134,959 17,258 1.39 12.92
Consolidating adjustments (38,601) - - - (18,363) - - - NM
- ---------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
TOTAL BANK SUBSIDIARIES 23,128,479 14,405,910 170,411 65,006 13,236,996 2,008,729 298,222 1.33 15.62
- ---------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
NONBANK SUBSIDIARIES:
AllTime ATMS 1,058 - - - - 1,050 50 7.00 7.12
FS Investment Services 1,538 - - - - 1,060 393 6.28 6.67
FS Capital I 155,236 154,640 - - - 4,640 - - -
FS Van Kasper 152,989 1,606 - - - 125,417 7,862 2.54 7.24
FS Life Insurance 19,925 - - - - 16,426 1,614 8.12 10.05
FS Leasing 190,119 163,776 4,032 2,269 - 39,303 2,771 1.73 7.26
FS Processing Services 5,699 - - - - 939 (3,751) (64.85) NM
FS Specialized Services 11 - - - - 11 - - -
FS Business Investment 2,967 406 - - - 2,963 2 0.07 0.07
FS Service 64,184 6,860 - - - 9,843 (7,254) (11.47) (78.24)
FS Information Technology 23,628 - - - - 474 (5,555) (25.39) NM
Consolidating adjustments (5,585) - - - - (383) (279) 4.05 5.21
- ---------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
TOTAL NONBANK SUBSIDIARIES 611,769 327,288 4,032 2,269 - 201,743 (4,147) (0.56) (2.29)
- ---------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
FSCO Parent Company only 2,838,819 500,293 - - - 1,769,900 58,947 2.21 3.46
Consolidating adjustments (3,586,140) (654,954) - - (26,580) (2,210,472) (79,680) 2.37 3.79
- ---------------------------- ------------ ------------ ---------- --------- ------------ ------------ ---------- -------- --------
FSCO CONSOLIDATED $22,992,927 $14,578,537 $ 174,443 $ 67,275 $13,210,416 $ 1,769,900 $ 273,342 1.22 16.18
============================ ============ ============ ========== ========= ============ ============ ========== ======== ========
<FN>
(A) FSCO owns 100% of the stock of all of its subsidiaries.
</TABLE>
OPERATING SUBSIDIARIES
FSCO's subsidiaries and their principal activities as of December 31,
1999, 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. CrossLand Mortgage loan originations are sold into the
secondary market. At December 31, 1999, CrossLand Mortgage operated 135
offices in 28 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.
<PAGE> 13
* First Security Bank of New Mexico, N.A. (FSB New Mexico) is a national
bank, headquartered in Albuquerque, New Mexico. In 1998, FSCO acquired Rio
Grande Bancshares, Inc. and its subsidiaries, temporarily operated them as
FSB So. New Mexico and then in 1999 merged them into FSB 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.
* First Security Van Kasper, Inc. (FS Van Kasper), was acquired on
February 12, 1999 (see: "Mergers and Acquisitions"). On July 1, 1999, three
previously-existing FSCO divisions, First Security Capital Markets, Inc.,
First Security Investor Services, and First Security Insurance, Inc., were
merged into FS Van Kasper to create a single company with a wide array of
investment management, securities underwriting and brokerage, municipal
financial advisory services, and insurance products and services.
* First Security Investment Services, Inc. (FS Investment Services) has
one operating subsidiary, First Security Investment Management, Inc., which
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 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> 14
<TABLE>
<CAPTION>
TABLE 3: LINE OF BUSINESS SEGMENTS - SELECTED DATA (in thousands) (A)
Capital Markets,
Treasury,
Community Retail Business Investment Parent Total
Banking Lending Banking Management & Other FSCO
- ------------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1999
Total assets (Avg) $ 1,012,144 $ 8,748,031 $ 4,116,719 $ 5,856,328 $ 2,711,570 $22,444,792
Total deposits (Avg) 9,402,245 218,372 887,413 342,071 2,037,522 12,887,623
External interest income 28,259 753,265 317,266 374,747 111,698 1,585,235
External interest expense 367,266 54 30,983 226,199 174,286 798,788
Intersegment net interest income
(expense) 551,259 (450,641) (144,221) (100,627) 144,230 -
Provision for income taxes 29,294 56,307 31,475 14,240 10,872 142,188
Net income 46,474 89,945 52,026 22,746 62,151 273,342
========================================== ============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Finance
Community Retail Business and 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 net interest income
(expense) 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
========================================== ============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Finance
Community Retail Business and Capital Parent Total
Banking Lending Banking Markets & Other FSCO
- ------------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
========================================== ============ ============ ============ ============ ============ ============
<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>
<PAGE> 15
Item 1.b. Financial Information About Industry Segments
LINE OF BUSINESS SEGMENTS
FSCO's organizational management structure for 1999 consisted of the
following five "Line of Business" segments (see: "Table 3: Line of Business
Segments"):
* Community Banking Services provides transaction deposit, electronic
banking, and customer services. This line of business segment was
restructured in 1999 with all personal investment, private banking, personal
trust, and insurance functions being moved to the 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.
* Capital Markets, Treasury, and Investment Management includes capital
markets, treasury, personal investment, private banking, personal trust,
insurance, investment management functions, and FS Van Kasper. This line of
business was restructured in 1999 from the previous Finance and Capital
Markets segment.
* Parent and Other combines corporate administration, technology and
processing services, accounting, tax, purchasing, acquired banks that have
not been converted to FSCO's systems, and intersegment eliminations. This
line of business segment was restructured during the year.
FSCO advises readers that its line of business segment data for periods
prior to 1999 has undergone material changes in internal reporting and cost
allocation systems. As a result, data for those periods may not be
comparable with 1999. In addition, FSCO further advises readers that its
actual results for future periods could differ materially from those
anticipated or projected.
Item 1.d. Financial Information About Foreign and Domestic Operations
HIGHLIGHTS
Highlights of First Security Corporation's performance in 1999, and
comparisons to corresponding 1998 periods, included:
RESULTS OF OPERATIONS - FULL YEAR 1999
* Record net income of $273.3 million, up $25.7 million or 10.4%.
* Earnings per common share diluted of $1.38, up $0.10 or 7.8%.
* Noninterest income of $533.0 million, up $58.6 million or 12.3%.
RESULTS OF OPERATIONS - FOURTH QUARTER OF 1999
* Net income of $66.3 million, down $1.0 million or 1.5%.
* Earnings per common share diluted of $0.33, down $0.02 or 5.7%.
* Noninterest income of $129.2 million, down $3.2 million or 2.4%.
<PAGE> 16
FINANCIAL CONDITION AT DECEMBER 31, 1999
* Total assets of $23.0 billion, up $1.3 billion or 6.0%.
* Interest-earning assets of $20.3 billion, up $1.0 billion or 5.0%.
* Stockholders' equity of $1.8 billion, up $0.2 billion or 10.9%.
* Asset quality: ratio of total problem assets to total loans and ORE of
0.68%, up from 0.52%.
MERGER & ACQUISITION HIGHLIGHTS:
* June 6, 1999, Zions Bancorporation and FSCO announced the signing of a
definitive agreement to merge.
* February 12, 1999, FSCO acquired Van Kasper & Company.
* June 1, 1999, FSCO acquired Comstock Bancorp and subsidiary.
* June 14, 1999, FSCO acquired XEON Financial Corporation and subsidiary.
* January 24, 2000, FSCO announced the signing of a definitive agreement to
acquire Black & Company, Inc.
ANALYSIS OF STATEMENTS OF INCOME
EARNINGS SUMMARY
FSCO's net income was a record $273.3 million for 1999, up $25.7 million
or 10.4% from $247.7 million in 1998, which in turn was up $32.4 million or
15.1% from $215.3 million in 1997 (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 $1.38 for
1999, up $0.10 or 7.8% from $1.28 for 1998, which in turn was up $0.14 or
12.3% from $1.14 for 1997. This net income generated a 1.22% ROAA and a
16.18% ROAE for 1999, compared with a 1.28% ROAA and a 16.21% ROAE for 1998
and a 1.35% ROAA and a 16.60% ROAE for 1997. For 1999, 1998, and 1997,
respectively, the tangible ROAA was 1.48%, 1.50%, and 1.48%, the tangible
ROAE was 27.70%, 24.07%, and 21.81%, while tangible EPS diluted were $1.63,
$1.47, and $1.23.
FSCO's net income was $66.3 million for the fourth quarter of 1999, down
$1.0 million or 1.5% from $67.3 million in the fourth quarter of 1998. This
net income generated EPS diluted of $0.33 for the quarter, down $0.02 or 5.7%
from $0.35 for the year-ago quarter, and a 1.13% ROAA and a 14.87% ROAE for
the quarter, compared with a 1.31% ROAA and a 16.50% ROAE for the year-ago
quarter. Tangible EPS diluted were $0.38, tangible ROAA was 1.35%, and
tangible ROAE was 25.46% for the quarter, up from $0.41, 1.56%, and 25.08%,
respectively, for the year-ago quarter.
REVENUES
FSCO's revenues (net interest income plus noninterest income) were $1.3
billion for 1999, up $141 million or 12.0% from $1.2 billion 1998, which in
turn were up $195.0 million or 19.8% from $1.0 billion in 1997 (see: "Net
Interest Income" and "Noninterest Income"). Revenues were $345.8 million for
the fourth quarter of 1999, up $26.6 million or 8.3% from $319.2 million in
the year-ago quarter. The components of FSCO's revenues are discussed below
in the "Net Interest Income And Net Interest Margin" and "Noninterest Income"
sections.
<PAGE> 17
<TABLE>
<CAPTION>
TABLE 4: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, YIELDS AND RATES
(in thousands) (A)
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------ ----------------------------- ----------------------------
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
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning Assets:
Federal funds sold & securities purchased $ 312,849 $ 15,912 5.09 $ 98,731 $ 5,538 5.61 $ 78,620 $ 4,249 5.40
Interest-bearing deposits in other banks 9,017 408 4.52 1,684 177 10.51 1,547 69 4.46
Trading account securities 173,450 11,470 6.61 158,605 9,184 5.79 217,337 12,724 5.85
Available for sale (AFS) securities (B) 5,777,844 371,548 6.43 4,589,682 302,064 6.58 3,696,348 248,631 6.73
Loans, net of unearned income &
deferred taxes on leases (C) 13,500,955 1,195,853 8.86 12,354,887 1,114,078 9.02 10,240,456 958,197 9.36
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Total Interest-Earning Assets, Excluding
Fair Value Adjustment for AFS Securities
& Deferred Taxes On Leases (B) 19,774,115 1,595,191 8.07 17,203,589 1,431,041 8.32 14,234,308 1,223,870 8.60
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Cash & due from banks 897,634 822,841 775,908
Premises & equipment, net 416,237 292,801 272,314
Other real estate 5,097 3,603 7,787
Reserve for loan losses (174,531) (165,585) (148,055)
Other assets 1,362,799 901,526 646,837
Deferred taxes on leases, deducted above 238,788 197,343 187,588
Fair value adjustment for AFS securities (75,347) 44,898 7,061
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
TOTAL ASSETS $22,444,792 $19,301,016 15,983,748
========================================= =========== ========== ====== =========== ========== ====== =========== ========== ======
LIABILITIES:
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest-bearing demand accounts $ 366,205 4,817 1.32 $ 335,484 5,560 1.66 $ 475,950 9,849 2.07
Savings & money market accounts 4,840,025 124,733 2.58 4,292,234 124,560 2.90 3,570,722 111,367 3.12
Time deposits of $100,000 or more 1,567,173 84,928 5.42 1,328,028 76,757 5.78 975,454 56,223 5.76
Other time deposits 3,637,506 194,609 5.35 3,492,086 197,009 5.64 3,081,834 175,217 5.69
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Total Interest-Bearing Deposits 10,410,909 409,087 3.93 9,447,832 403,886 4.27 8,103,960 352,656 4.35
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Federal funds purchased & securities sold 4,076,095 201,521 4.94 3,442,992 182,050 5.29 2,649,889 141,207 5.33
Other short-term borrowings 527,121 33,027 6.27 383,482 22,852 5.96 319,857 21,889 6.84
Long-term debt 2,595,460 155,153 5.98 1,680,421 108,173 6.44 1,040,147 71,687 6.89
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Total Interest-Bearing Liabilities 17,609,585 798,788 4.54 14,954,727 716,961 4.79 12,113,853 587,439 4.85
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Noninterest-bearing deposits 2,476,714 2,312,666 2,203,031
Other liabilities 668,900 505,959 370,148
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
TOTAL LIABILITIES 20,755,199 17,773,352 14,687,032
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
STOCKHOLDERS' EQUITY:
Preferred stockholders' equity 466 494 524
Common stockholders' equity 1,689,127 1,527,170 1,296,192
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
TOTAL STOCKHOLDERS' EQUITY 1,689,593 1,527,664 1,296,716
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $22,444,792 $19,301,016 $15,983,748
========================================= =========== ========== ====== =========== ========== ====== =========== ========== ======
Interest income FTE / earning assets 8.07 8.32 8.60
Interest expense FTE / earning assets 4.04 4.17 4.13
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
Net interest income / earning assets 796,403 4.03 714,080 4.15 636,431 4.47
Less FTE adjustment 9,956 10,381 10,492
- ----------------------------------------- ----------- ---------- ------ ----------- ---------- ------ ----------- ---------- ------
NET INTEREST INCOME $ 786,447 $ 703,699 $ 625,939
========================================= =========== ========== ====== =========== ========== ====== =========== ========== ======
Loan fees included in interest income $ 61,719 $ 48,925 $ 39,864
========================================= =========== ========== ====== =========== ========== ====== =========== ========== ======
<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%.
(B) Yields on available for sale securities exclude average fair value
adjustments.
FSCO has elected to classify all investment securities as AFS securities.
(C) Loans include nonaccruing loans.
</TABLE>
<PAGE> 18
<TABLE>
TABLE 4: AVERAGE BALANCE SHEETS, NET INTEREST INCOME, YIELDS AND RATES (continued)
(in thousands) (A)
<CAPTION>
For the years ended December 31, 1996 1995
- ----------------------------------------- ------------------------------ ------------------------------
Fully Fully
Taxable Avg% Taxable Avg%
Average Equivalent Yield, Average Equivalent Yield,
Balance Interest Rate Balance Interest Rate
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning Assets:
Federal funds sold & securities purchased $ 109,810 $ 5,734 5.22 $ 161,103 $ 9,381 5.82
Interest-bearing deposits in other banks 19,479 1,080 5.54 14,985 883 5.89
Trading account securities 197,308 10,094 5.12 487,992 29,130 5.97
Available for sale (AFS) securities (B) 3,009,328 197,173 6.55 2,459,147 153,616 6.25
Loans, net of unearned income &
deferred taxes on leases (C) 8,904,689 833,132 9.36 8,316,813 789,387 9.49
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
Total Interest-Earning Assets, Excluding
Fair Value Adjustment for AFS Securities
& Deferred Taxes On Leases (B) 12,240,614 1,047,213 8.56 11,440,040 982,397 8.59
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
Cash & due from banks 655,931 604,295
Premises & equipment, net 222,209 201,749
Other real estate 4,702 3,923
Reserve for loan losses (139,486) (136,181)
Other assets 563,662 447,934
Deferred taxes on leases, deducted above 170,588 160,244
Fair value adjustment for AFS securities (3,086) (21,335)
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
TOTAL ASSETS $13,715,134 $12,700,669
========================================= ============ ========== ====== ============ ========== ======
LIABILITIES:
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Interest-bearing demand accounts $ 895,506 25,525 2.85 $ 1,121,519 21,430 1.91
Savings & money market accounts 2,983,353 93,639 3.14 2,493,210 92,159 3.70
Time deposits of $100,000 or more 812,673 45,221 5.56 763,895 44,997 5.89
Other time deposits 2,807,885 162,404 5.78 2,649,932 150,845 5.69
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
Total Interest-Bearing Deposits 7,499,417 326,789 4.36 7,028,556 309,431 4.40
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
Federal funds purchased & securities sold 1,801,694 90,840 5.04 1,699,989 95,267 5.60
Other short-term borrowings 255,713 17,558 6.87 206,645 13,663 6.61
Long-term debt 746,885 50,141 6.71 728,788 51,451 7.06
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
Total Interest-Bearing Liabilities 10,303,709 485,328 4.71 9,663,978 469,812 4.86
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
Noninterest-bearing deposits 1,970,492 1,760,233
Other liabilities 304,643 239,735
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
TOTAL LIABILITIES 12,578,844 11,663,946
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
STOCKHOLDERS' EQUITY:
Preferred stockholders' equity 554 599
Common stockholders' equity 1,135,736 1,036,124
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
TOTAL STOCKHOLDERS' EQUITY 1,136,290 1,036,723
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $13,715,134 $12,700,669
========================================= ============ ========== ====== ============ ========== ======
Interest income FTE / earning assets 8.56 8.59
Interest expense FTE / earning assets 3.97 4.11
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
Net interest income / earning assets 561,885 4.59 512,585 4.48
Less FTE adjustment 7,822 8,382
- ----------------------------------------- ------------ ---------- ------ ------------ ---------- ------
NET INTEREST INCOME $ 554,063 $ 504,203
========================================= ============= ========= ====== ============ ========== ======
Loan fees included in interest income $ 29,799 $ 26,540
========================================= ============= ========= ====== ============ ========== ======
<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%.
(B) Yields on available for sale securities exclude average fair value
adjustments.
FSCO has elected to classify all investment securities as AFS securities.
(C) Loans include nonaccruing loans.
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
TABLE 5: ANALYSIS OF INTEREST CHANGES DUE TO VOLUMES AND RATES (in thousands) (A)
1999 over 1998 1998 over 1997
- ------------------------------------------------- ------------------------------------ -----------------------------------
Changes Due to: Total Changes Due to: Total
Volume Rate Change Volume Rate Change
- ------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold & securities purchased $ 12,010 $ (1,636) $ 10,374 $ 1,087 $ 202 $ 1,289
Interest-bearing deposits in other banks 771 (540) 231 6 102 108
Trading account securities 860 1,426 2,286 (3,438) (102) (3,540)
Available for sale (AFS) securities 78,197 (8,713) 69,484 60,089 (6,656) 53,433
Loans, net of unearned income &
deferred taxes on leases 103,344 (21,569) 81,775 197,847 (41,966) 155,881
- ----------------------------------------- --------- --------- --------- --------- --------- ---------
Total Interest-Earning Assets, Excluding
Fair Value Adjustments for AFS Securities
& Deferred Taxes On Leases $ 195,182 (31,032) 164,150 255,591 (48,420) 207,171
- ----------------------------------------- --------- --------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-Bearing Deposits:
Interest-bearing demand accounts 509 (1,252) (743) (2,907) (1,382) (4,289)
Savings & money market accounts 15,897 (15,724) 173 22,503 (9,310) 13,193
Time deposits of $100,000 or more 13,822 (5,651) 8,171 20,322 212 20,534
Other time deposits 8,204 (10,604) (2,400) 23,325 (1,533) 21,792
- ----------------------------------------- --------- --------- --------- --------- --------- ---------
Total Interest-Bearing Deposits 38,432 (33,231) 5,201 63,243 (12,013) 51,230
- ----------------------------------------- --------- --------- --------- --------- --------- ---------
Federal funds purchased & securities sold 33,476 (14,005) 19,471 42,263 (1,420) 40,843
Other short-term borrowings 8,560 1,615 10,175 4,354 (3,391) 963
Long-term debt 58,903 (11,923) 46,980 44,128 (7,642) 36,486
- ----------------------------------------- --------- --------- --------- --------- --------- ---------
Total Interest-Bearing Liabilities 139,371 (57,544) 81,827 153,988 (24,466) 129,522
- ----------------------------------------- --------- --------- --------- --------- --------- ---------
CHANGE IN NET INTEREST INCOME $ 55,811 $ 26,512 $ 82,323 $ 101,603 $ (23,954) $ 77,649
========================================= ========= ========= ========= ========= ========= =========
<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%.
</TABLE>
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 $796.4 million for 1999, up $82.3
million or 11.5% from 1998 (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 9.3% growth in average
loans net of deferred taxes on leases and various loan sales and
securitizations, the 25.9% growth in average AFS securities before SFAS115
fair value adjustments, and the positive impact of recent acquisitions
accounted for as purchases, partially offset by additional interest expense
from the 17.8% increase in average interest-bearing liabilities. In addition,
in the fourth quarter, FSCO made a necessary accounting adjustment to reflect
gains on disposition of leased assets. These adjustments to interest income
represented full year 1999 dispositions, resulting in the full year impact of
approximately $0.02 EPS diluted occurring in the fourth quarter.
<PAGE> 20
By comparison, FSCO's net interest income FTE totaled $714.1 million for
1998, up $77.6 million or 12.2% from 1997. The 1998 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.
FSCO's net interest margin was 4.03% for 1999, down 12 basis points from
1998. This decrease was due to several factors including lower average
yields on interest-earning assets, reflecting sales of higher-yielding
earning assets through securitizations and refinancing of mortgages at lower
rates, and volume growth and rate increases for interest-bearing liabilities.
During 1999, a one basis point (0.01%) change in FSCO's net interest margin
FTE equaled approximately $2.0 million of net interest income FTE.
The rise in interest rates over the last several months, coupled with
uncertainty regarding the duration of interest rate volatility and overall
economic conditions, has resulted in a slowing in mortgage loan originations
at CrossLand Mortgage and FSCO's bank subsidiaries. This decreased level of
mortgage loan originations may negatively impact net interest income and
noninterest income until origination volumes resume.
FSCO also has taken steps to reposition its investment portfolio to
support the balance sheet management approach it will implement in the new
First Security after consummation of the merger with Zions. This reduction
in the investment portfolio likely will result in lower net interest income
compared with previous periods.
By comparison, 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.
In anticipation of the merger with Zions, FSCO has been repositioning its
balance sheet, resulting, temporarily, in increased reliance on short-term
funding. With the Federal Reserve Board's increase in the targeted Federal
Funds rate of 75 basis points since late 1999 and with its forward bias
toward increasing interest rates to address inflationary concerns, interest
expense may be under pressure in the near term. Also, FSCO completed an
issuance of $200 million of subordinated debt in December of 1999, which debt
carries certain favorable call features with commensurate interest rate
pricing. In a rapidly rising interest rate environment, the ongoing work of
FSCO to reprice its loan portfolio will lag the increases in funding cost.
PROVISION FOR LOAN LOSSES
FSCO's provision for loan losses totaled $59.4 million for 1999, down
$12.5 million or 17.3% from $71.9 million in 1998, which in turn was up $8.5
million or 13.5% from $63.4 million in 1997 (see: "Interest-Earning Assets
and Asset Quality - Provision for Loan Losses" and "Table 11: Reconciliation
of the Reserve for Loan Losses").
FSCO anticipates that for the first part of 2000 that the provision for
loan losses will experience a moderate increase, reflecting some seasonality
and a temporary problem with the consumer collection system. This temporary
increase in FSCO's chargeoff of consumer loans is expected to be resolved by
early second quarter of 2000. FSCO charges off its consumer loans when said
loans are 120 days past due.
<PAGE> 21
<TABLE>
<CAPTION>
TABLE 6: NONINTEREST INCOME (in thousands)
For the Years Ended December 31, 1999 1998 1997
<S> <C> <C> <C>
- ----------------------------------------------------- ---------- ----------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts $ 88,334 $ 90,755 $ 90,835
Other service charges, collections, commissions & fees 66,491 53,934 40,539
Asset sale / securitization gains 47,375 47,619 17,515
Bankcard servicing fees & third-party processing fees 4,875 31,247 34,295
Commissions & fees-insurance 19,957 16,966 16,975
Commissions & fees-securities 77,947 17,863 14,934
Mortgage banking & loan servicing activities 216,268 215,538 117,859
Loan servicing rights amortization (51,907) (41,495) (16,146)
Trust (fiduciary) commissions & fees 34,365 29,474 26,195
Trading account securities gains (losses) 8,633 994 1,446
Available for sale securities gains (losses) 13,426 8,075 3,150
Other 7,211 3,420 9,560
- ----------------------------------------------------- ----------- ---------- ----------
TOTAL NONINTEREST INCOME $ 532,975 $ 474,390 $ 357,157
===================================================== =========== ========== ==========
</TABLE>
NONINTEREST INCOME
FSCO's noninterest income was $533.0 million for 1999, up $58.6 million or
12.3% from 1998 (see: "Table 6: Noninterest Income"). For the fourth quarter
of 1999, noninterest income was $129.2 million, down $3.2 million or 2.4%
from the year-ago quarter. As FSCO does in each accounting period, in the
fourth quarter FSCO adjusted the amortization of mortgage servicing rights
to properly reflect portfolio experience. This adjustment resulted in a
modest increase in noninterest income in the fourth quarter. These year over
year changes reflected FSCO's continued emphasis on increasing and
diversifying its sources of noninterest income and included the following:
substantial growth in commissions and fees from securities and insurance
transactions; gains from two separate $1.0 billion loan securitizations during
the first and second quarters of 1999; growth in other service charges,
collections, commissions, and fees; securities gains; and growth in trust
income. These increases in noninterest income were partially offset by
decreased bankcard servicing & third-party processing fees (reflecting a
joint venture in a merchant servicing business that FSCO entered into in the
first quarter of 1998) and decreased service charges on deposit accounts.
FSCO's noninterest income amounted to 40.39% of total revenues for 1999, up
from 40.27% for 1998, and was 37.36% of total revenues for the fourth quarter,
down from 41.50% for the year-ago quarter.
By comparison, FSCO's noninterest income was a record $474.4 million for
1998, up $117.2 million or 32.8% from 1997. This increase was 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.
Over the past several years, FSCO has benefited from increases in
noninterest income resulting from its growing mortgage banking business.
With the rapid rise in interest rates experienced since mid-year 1999,
mortgage loan originations have slowed significantly. In this unstable and
rising interest rate environment, FSCO anticipates this slowing in
originations will result in a reduction in noninterest income from fees and
related charges.
<PAGE> 22
<TABLE>
<CAPTION>
TABLE 7: NONINTEREST EXPENSES (in thousands)
For the Years Ended December 31, 1999 1998 1997
- -------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
NONINTEREST EXPENSES:
Salaries & employee benefits $ 475,575 $ 386,715 $ 304,903
Amortization of intangibles 19,119 11,666 7,537
Armored & messenger 7,868 6,658 6,065
Bankcard interbank interchange & fees 16,824 32,147 34,130
Computer service & software 27,060 17,037 12,000
Credit, appraisal, & repossession 31,122 27,931 17,176
Fees 16,407 14,645 11,589
Furniture & equipment 71,052 58,181 46,263
Insurance 7,055 4,372 4,655
Marketing 13,538 14,757 14,258
Occupancy, net 48,483 39,063 36,729
Other real estate expense & loss
provision (recovery) net (582) 845 2,022
Postage 15,208 13,508 11,367
Professional 17,998 18,918 15,082
Stationery & supplies 22,349 22,311 18,259
Telephone 25,132 17,306 16,317
Travel 12,522 12,773 9,797
Other 17,715 24,255 20,755
- -------------------------------------------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSES $ 844,445 $ 723,088 $ 588,904
============================================ ========== ========== ==========
</TABLE>
NONINTEREST EXPENSES
FSCO's noninterest expenses were $844.4 million for 1999, up $121.4
million or 16.8% from 1998 (see: "Table 7: Noninterest Expenses"). These
increases were primarily due to the following: additions of revenue-
generating personnel; additional personnel and operating expenses of recent
purchase acquisitions; and the cost of strategic technological investments
and upgrades, including Year 2000 expenditures. Included in noninterest
expenses were merger-related actions and expenses and certain non-recurring
items which had a combined impact on EPS of approximately $0.04 during the
fourth quarter of 1999. FSCO expects that this continued absorption of the
impact of several major investments in support of strong growth, multiple
acquisitions, and strategic expenditures in technology will be significant to
its success after its merger with Zions (see: "Mergers And Acquisitions:
Zions Bancorporation And First Security Corporation Merger"). FSCO remained
committed to effectively managing its ongoing noninterest expenses, balanced
against the need to make strategic investments and meet growth requirements.
The components of FSCO's noninterest expenses for 1999, compared with 1998,
are discussed below.
* Salaries and benefits expense was $475.6 million, up $88.9 million or
23.0%. This increase was primarily due to personnel added from recent
purchase acquisitions and from growth in loan production and other revenue-
generating operations. As a result, full-time equivalent employees (FTEEs)
were increased to 9,602 at December 31, 1999, up 178 or 1.9% from year-end
1998. The average number of FTEEs showed a much larger increase year over
year, growing to 9,992 from 8,814 for 1998, an increase of 1,178 employees or
13.4%, matching more closely the increase in base salary expenses, with the
remainder of the increase attributable to production-based compensation and
commissions. The third and fourth quarters of 1999 actually showed net
decreases from 10,101 full-time equivalent employees at the end of the second
quarter of 1999 because of a corporate-wide hiring freeze implemented in
contemplation of the proposed merger with Zions Bancorporation.
* FSCO's nonpersonnel expenses totaled $368.9 million, up $32.5 million or
9.7%. 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, in
addition to additional goodwill amortization; additions to production and
services facilities; volume growth in loans, loan servicing and related
<PAGE> 23
amortization, deposits, and banking services; and $12.6 million expensed in
1999 as part of FSCO's efforts to resolve its Year 2000 issues (see:
"Technological Change And Year 2000 Issue"). 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 was $386.7 million for
1998, up $81.8 million or 26.8% from 1997, due primarily to the additional
employees added with purchase acquisitions, with increased mortgage and
consumer loan production, and with additional branches and other revenue-
generating operations. 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; $23.7 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 CSB 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.
FSCO's operating expense ratio (the ratio of noninterest expenses to the
sum of net interest income FTE and noninterest income) was 63.52% for 1999,
up 268 basis points from 60.84% for 1998, which in turn was up 157 basis
points from 59.27% for 1997.
CrossLand Mortgage, FSCO's mortgage banking subsidiary, and FS Van Kasper,
FSCO's full-service investment banking and brokerage subsidiary, have higher
inherent operating expense ratios than FSCO's bank subsidiaries. Excluding
CrossLand Mortgage and FS Van Kasper, FSCO's operating expense ratio was
57.23% for 1999, up 110 basis points from 56.13% for 1998, which in turn was
up 11 basis points from 56.02% for 1997.
The productivity ratio was 3.76% for 1999, comparing closely with 3.75%
for 1998 and 3.68% for 1997.
FSCO remains committed to effectively managing its ongoing noninterest
expenses, balanced against the need to make strategic investments and meet
growth requirements.
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 1999,
FSCO continued to employ these and other tax planning strategies.
ANALYSIS OF BALANCE SHEETS
SUMMARY
FSCO's total assets were $23.0 billion at December 31, 1999, up $1.3
billion or 6.0% from year-end 1998. Interest-earning assets were $20.3
billion at year end, up $1.0 billion or 5.0% from the prior year end, while
loans were $14.6 billion at year end, up $0.6 billion or 4.0% from the prior
year end (see: "Interest-Earning Assets and Asset Quality" and "Factors That
May Affect Future Results of Operations And Financial Condition").
FSCO's total liabilities were $21.2 billion at December 31, 1999, up $1.1
billion or 5.6% from year-end 1998. Total interest-bearing liabilities were
<PAGE> 24
$18.3 billion at year end, up $1.5 billion or 9.1% from the prior year end
(see: "Asset/Liability Management").
FSCO's stockholders' equity was increased to $1.8 billion at December 31,
1999, up $0.2 billion or 10.9% from year-end 1998 (see: "Stockholders' Equity
and Capital Adequacy").
INTEREST-EARNING ASSETS:
TRADING ACCOUNT SECURITIES AND OTHER MONEY MARKET INVESTMENTS
Historically, FSCO's investment policies for trading account securities
were designed to monitor daily interest rate fluctuations and market value
volatility. Trading positions and strategies were continually monitored as
to the changing interest rate environment, were kept flexible to meet
changing economic conditions, and were carefully reviewed by management
daily.
FSCO's trading account securities were $22.7 million at December 31, 1999,
down $306.5 million or 93.1% from year-end 1998, In anticipation of the
merger with Zions, FSCO has effectively discontinued its securities trading
activity except for securities held in trading pending sales to customers.
The average balance of trading account securities held in 1999 was $173
million, up from $159 million in 1998. Fluctuations in trading
opportunities, reflected in the level of securities held, are a normal part
of this function.
Fluctuations in Federal funds sold and interest-bearing deposits held in
other banks occur in response to changing yield opportunities and liquidity
requirements.
<PAGE> 25
<TABLE>
<CAPTION>
TABLE 8: AVAILABLE FOR SALE SECURITIES (in thousands) (A)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Debt Securities Issued by the U.S. Treasury
and Other U.S. Government Agencies and
Corporations $ 469,380 $ 64 $ (10,165) $ 459,279
Debt Securities Issued by States of the U.S.
and Political Subdivisions 310,813 1,803 (6,499) 306,117
Corporate Debt Securities 221,243 606 (20,556) 201,293
- -------------------------------------------- ----------- ----------- ----------- -----------
Total Debt Securities 1,001,436 2,473 (37,220) 966,689
- -------------------------------------------- ----------- ----------- ----------- -----------
Mortgage-backed securities 4,391,450 405 (184,459) 4,207,396
Equity securities 212,266 7,985 (1,526) 218,725
Federal Home Loan Bank and
Federal Reserve Bank Stock 135,459 - - 135,459
- -------------------------------------------- ----------- ----------- ----------- -----------
TOTAL AFS SECURITIES $ 5,740,611 $ 10,863 $ (223,205) $ 5,528,269
============================================ =========== =========== =========== ===========
As of December 31, 1998:
Debt Securities Issued by the U.S. Treasury
and Other U.S. Government Agencies and
Corporations $ 641,514 $ 8,273 $ (1,227) $ 648,560
Debt Securities Issued by States of the U.S.
and Political Subdivisions 352,746 8,098 (352) 360,492
Corporate Debt Securities 10,559 212 (22) 10,749
- -------------------------------------------- ----------- ----------- ----------- -----------
Total Debt Securities 1,004,819 16,583 (1,601) 1,019,801
- -------------------------------------------- ----------- ----------- ----------- -----------
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 Bank Stock 100,951 - - 100,951
- -------------------------------------------- ----------- ----------- ----------- -----------
TOTAL AFS SECURITIES $ 4,715,876 $ 55,274 $ (7,023) $ 4,764,127
============================================ =========== =========== =========== ===========
As of December 31, 1997:
Debt Securities Issued by the 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 of the U.S.
and Political Subdivisions 297,482 6,309 (207) 303,584
Corporate Debt Securities 7,521 89 (20) 7,590
- -------------------------------------------- ----------- ----------- ----------- -----------
Total Debt Securities 1,313,586 13,777 (461) 1,326,902
- -------------------------------------------- ----------- ----------- ----------- -----------
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 Bank Stock 71,849 - - 71,849
- -------------------------------------------- ----------- ----------- ----------- -----------
TOTAL AFS SECURITIES $ 4,313,847 $ 42,870 $ (5,192) $ 4,351,525
============================================ =========== =========== =========== ===========
<FN>
(A) FSCO has elected to classify all investment securities as available
for sale securities.
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
TABLE 8: AVAILABLE FOR SALE SECURITIES (in thousands) (continued)
Maturities and Coupon Yields
As of December 31, 1999
Amortized Estimated Yield%
Cost Fair Value (B)
- -------------------------------------------- ----------- ----------- ------
<S> <C> <C> <C>
Debt Securities Issued by the U.S. Treasury
and Other U.S. Government Agencies and
Corporations:
One year or less $ 13,194 $ 13,063 6.21
After 1 year through 5 years 445,235 435,376 6.20
After 5 years through 10 years 4,157 4,076 5.96
After 10 years 6,794 6,764 7.22
- -------------------------------------------- ----------- ----------- ------
Total 469,380 459,279 6.21
- -------------------------------------------- ----------- ----------- ------
Debt Securities Issued by States of the U.S.
and Political Subdivisions:
One year or less 54,761 54,908 4.77
After 1 year through 5 years 102,448 102,522 5.10
After 5 years through 10 years 89,168 88,250 5.14
After 10 years 64,436 60,437 5.45
- -------------------------------------------- ----------- ----------- ------
Total 310,813 306,117 5.13
- -------------------------------------------- ----------- ----------- ------
Corporate Debt Securities:
One year or less 576 689 6.38
After 1 year through 5 years 3,422 3,318 6.46
After 5 years through 10 years 3,883 3,385 6.67
After 10 years 213,362 193,901 7.73
- -------------------------------------------- ----------- ----------- ------
Total 221,243 201,293 7.69
- -------------------------------------------- ----------- ----------- ------
Total Debt Securities:
One year or less 68,531 68,660 5.06
After 1 year through 5 years 551,105 541,216 6.00
After 5 years through 10 years 97,208 95,711 5.24
After 10 years 284,592 261,102 7.20
- -------------------------------------------- ----------- ----------- ------
Total Debt Securities 1,001,436 966,689 6.20
- -------------------------------------------- ----------- ----------- ------
Mortgage-backed securities 4,391,450 4,207,396 6.50
Equity securities 212,266 218,725 3.69
Federal Home Loan Bank and
Federal Reserve Stock 135,459 135,459 7.77
- -------------------------------------------- ----------- ----------- ------
TOTAL AFS SECURITIES $ 5,740,611 $ 5,528,269 6.37
============================================ =========== =========== ======
<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>
INTEREST-EARNING ASSETS:
AVAILABLE FOR SALE (AFS) SECURITIES
Since December 1995, FSCO has managed its investment securities portfolio
under the "available for sale" (AFS) and trading classifications. 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 moderate
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 5.6 years as of
December 31, 1999. With the exception of U.S. Government and U.S.
Government-sponsored agency securities, FSCO had no concentrations of AFS
<PAGE> 27
securities from any single issuer that constituted 10% or more of
stockholders' equity at year-end 1999.
FSCO's AFS securities were $5.5 billion at December 31, 1999, up $0.8
billion or 16.0% from year-end 1998 (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. Since October of 1999, FSCO has sold about
$500 million of AFS securities and has not replaced maturing securities. The
SFAS No. 115 net unrealized gain (loss) on AFS securities generally responds
inversely to changes in interest rates. The recent increase in unrealized
losses was due to higher interest rates and longer average maturities. AFS
securities purchased included a mix of U.S. Treasuries, Federal agencies,
municipal and corporate bonds, agency and non-agency issued collateralized
mortgage obligations, and agency mortgage-backed securities.
In 2000, FSCO's AFS securities priorities will be a balance between
liquidity, interest rate risk, and maximizing return, as well as a gradual
reduction in the overall volume of securities held. 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.
FSCO owns 1.5 million shares of Zions common stock, which are held in
FSCO's available for sale portfolio and marked to market on a regular basis.
In the event that the proposed transaction with Zions is not consummated, it
is likely that FSCO will experience additional unrealized losses with respect
to the Zions shares when those shares are marked to market.
<PAGE> 28
<TABLE>
<CAPTION>
TABLE 9: LOANS (in thousands)
As of December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL LOANS:
Commercial & industrial $ 2,852,681 $ 2,562,274 $ 2,251,179 $ 1,744,943 $ 1,623,181
Agricultural 300,685 404,038 362,820 337,511 301,427
Other commercial 160,738 198,673 144,866 186,706 112,597
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
TOTAL COMMERCIAL LOANS (A) 3,314,104 3,164,985 2,758,865 2,269,160 2,037,205
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
REAL ESTATE SECURED LOANS:
1 to 4 family residential term 2,252,057 3,505,920 2,177,415 1,473,523 1,471,625
1 to 4 family residential home equity 407,066 424,102 506,999 496,931 460,948
1 to 4 family residential construction 842,669 577,940 425,343 349,771 221,551
Commercial & other term 1,661,991 1,325,071 1,112,042 1,132,787 1,085,961
Commercial & other construction 633,632 265,879 313,686 210,214 276,099
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
TOTAL REAL ESTATE SECURED LOANS 5,797,415 6,098,912 4,535,485 3,663,226 3,516,184
Memo: Total real estate term 4,321,114 5,255,093 3,796,456 3,103,241 3,018,534
Memo: Loans held for sale included
in total real estate term 772,696 2,391,508 1,125,616 338,722 270,530
Memo: Total real estate construction (A) 1,476,301 843,819 739,029 559,985 497,650
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
CONSUMER LOANS:
Credit card & related 338,570 328,853 320,656 312,647 314,382
Vehicle & other consumer 3,495,348 3,114,506 2,585,139 2,699,257 2,335,732
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
TOTAL CONSUMER LOANS 3,833,918 3,443,359 2,905,795 3,011,904 2,650,114
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
TOTAL LEASES 1,633,100 1,306,161 1,030,621 753,061 413,260
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
LOANS, NET OF UNEARNED INCOME 14,578,537 14,013,417 11,230,766 9,697,351 8,616,763
Memo: Unearned income (177,669) (127,593) (106,369) (69,940) (19,169)
Reserve for loan losses (174,443) (173,350) (157,525) (142,693) (135,011)
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
TOTAL LOANS, NET $14,404,094 $13,840,067 $11,073,241 $ 9,554,658 $ 8,481,752
================================================= ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
(A) MATURITIES AND INTEREST RATE SENSITIVITIES OF SELECTED LOAN CATEGORIES (in thousands)
1 Year After 1 Yr After
As of December 31, 1999 Total or Less Thru 5 Yrs 5 Years
- ------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Remaining Maturity:
Commercial loans $ 3,314,104 $ 3,027,396 $ 229,979 $ 56,729
Real estate construction loans 1,476,301 1,462,398 11,600 2,303
- ------------------------------------------------- ------------ ------------ ------------ ------------
TOTAL $ 4,790,405 $ 4,489,794 $ 241,579 $ 59,032
================================================= ============ ============ ============ ============
Interest Rate Sensitivities Of Commercial
Loans And Real Estate Construction Loans:
With fixed rates $ 1,670,139 $ 1,369,528 $ 241,579 $ 59,032
With floating rates 3,120,266 3,120,266 - -
- ------------------------------------------------- ------------ ------------ ------------ ------------
TOTAL INTEREST RATE SENSITIVITIES $ 4,790,405 $ 4,489,794 $ 241,579 $ 59,032
================================================= ============ ============ ============ ============
</TABLE>
INTEREST-EARNING ASSETS:
LOANS
FSCO's borrowers reside primarily in the states where it has banking and
mortgage offices and in markets contiguous to those states. FSCO's borrowers
are primarily small- and medium-sized businesses, consumers, automobile
dealerships, and homebuilders. 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 total loan portfolio, net of unearned income but before the reserve
for loan losses, was $14.6 billion at December 31, 1999, up $0.6 billion or
4.0% from year-end 1998 (see: "Table 1: Financial Highlights", "Table 9:
Loans", and "Note 5: Loans"). Because of acquisitions and continued strong
loan demand, the increase from one year ago came in spite of two separate
$1.0 billion vehicle loan securitizations during the first and second
<PAGE> 29
quarters of 1999, ongoing sales of 1-to-4 family residential term loans into
secondary markets, and a slowing in mortgage loan production.
The ratio of total loans to total assets was 63.40% at December 31, 1999,
down slightly from 64.61% at year-end 1998. The components of FSCO's loan
portfolio at December 31, 1999, compared with December 31, 1998, are
discussed below.
* Commercial loans were $3.3 billion, up $0.1 billion or 4.7%. 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 $5.8 billion, down $0.3 billion or 4.9%.
Fluctuations in these loan balances occurred as loan originations, generated
by strong demand and low interest rates during the periods, were offset by
loan sales, particularly in the first half of 1999. For balance sheet
management purposes, FSCO does not retain all newly originated mortgage loans
but regularly securitizes and sells most loans in the secondary markets on an
ongoing flow-through basis. For 1-to-4 family residential term loans, FSCO
originated $14.5 billion in 1999, down from $15.8 billion in 1998, and sold
$14.4 billion, compared with $13.9 billion one year ago. At year-end 1999,
$0.8 billion of real estate secured loans were held for sale, down $1.6
billion or 67.7% from the prior year end. Mortgage loan origination volume
is slowing in the first part of 2000, which will result in lower real estate
secured loan balances.
* Consumer loans were $3.8 billion, up $0.4 billion or 11.3%. This
increase was largely the result of high levels of vehicle loan originations
that exceeded vehicle loan securitizations and maturing loans. For balance
sheet management purposes, FSCO does not retain all newly originated indirect
vehicle loans but regularly pools and securitizes such loans in the secondary
markets. For indirect vehicle loans, FSCO originated $3.1 billion in 1999,
up from $2.8 billion in 1998, and sold $2.1 billion, compared with $1.3
billion one year ago. FSCO is a leading consumer lender in its primary market
area.
* Leases were $1.6 billion, up $0.3 billion or 25.0%. This increase was
primarily due to FSCO's growth in the vehicle and equipment leasing markets,
partially offset by sales during the year.
<PAGE> 30
<TABLE>
<CAPTION>
TABLE 10: PROBLEM ASSETS AND POTENTIAL PROBLEM ASSETS (in thousands)
As of December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
PROBLEM ASSETS:
Nonaccruing Loans:
Commercial $ 30,204 $ 19,562 $ 13,670 $ 14,360 $ 9,740
Real estate term 22,806 18,670 16,288 17,067 11,907
Real estate construction 3,626 6,213 4,669 3,935 2,349
Consumer 256 137 2 137 254
Leases 2,328 1,230 331 251 400
Renegotiated - - 1,916 - 10
- ------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total Nonaccruing Loans 59,220 45,812 36,876 35,750 24,660
Other real estate 8,055 3,617 7,981 10,672 12,206
- ------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total Nonperforming Assets 67,275 49,429 44,857 46,422 36,866
Accruing loans past due 90 days or more 31,948 23,758 20,841 20,393 13,622
- ------------------------------------------------- ----------- ----------- ----------- ------------ ------------
TOTAL PROBLEM ASSETS $ 99,223 $ 73,187 $ 65,698 $ 66,815 $ 50,488
================================================= =========== =========== =========== =========== ===========
POTENTIAL PROBLEM ASSETS $ 37,303 $ 47,319 $ 7,423 $ 8,271 $ 12,319
================================================= =========== =========== =========== =========== ===========
GROSS INTEREST INCOME THAT WOULD HAVE BEEN
RECORDED IF LOANS HAD BEEN CURRENT IN
ACCORDANCE WITH ORIGINAL TERMS:
Nonaccruing loans $ 2,348 $ 3,772 $ 2,810 $ 3,242 $ 2,500
- ------------------------------------------------- ----------- ----------- ----------- ----------- -----------
INTEREST INCOME ACTUALLY RECOGNIZED:
Nonaccruing loans $ 2,668 $ 3,053 $ 1,772 $ 2,158 $ 2,766
================================================= =========== =========== =========== =========== ===========
</TABLE>
ASSET QUALITY:
PROBLEM ASSETS AND POTENTIAL PROBLEM ASSETS
Strong asset quality continues to be a primary objective for FSCO.
However, economic cycles and loan-specific events can cause periodic
fluctuations in problem assets.
FSCO's ratio of total problem assets to total loans and ORE was 0.68% at
December 31, 1999, up from 0.52% at year-end 1998 (see: "Table 1: Financial
Highlights"). The ratio of nonperforming assets to total loans and ORE was
0.46% at year end, up from 0.35% from the prior year end.
Problem assets totaled $99.2 million at December 31, 1999, up $26.0
million or 35.6% from year-end 1998 (see: "Table 10: Problem Assets and
Potential Problem Assets"). The components of FSCO's problem assets at
December 31, 1999, compared with December 31, 1998, are discussed below.
* Nonaccruing loans were $59.2 million, up $13.4 million or 29.3%,
primarily due to the addition of one large commercial loan secured by timber.
The ratio of nonaccruing loans to total loans was 0.41%, up from 0.33%.
* Other real estate was $8.1 million, up $4.4 million or 122.7%. 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 $31.9 million, up $8.2
million or 34.5%. The ratio of accruing loans past due 90 days or more to
total loans was 0.22%, up from 0.17%.
FSCO anticipates that a temporary increase in delinquencies and resulting
chargeoffs in its consumer loan portfolio will be resolved by early second
quarter.
Potential problem loans identified by FSCO were $37.3 million at December
31, 1999, down $10.0 million or 21.2% from year-end 1998. The decrease was
due mainly to the payoff of one large commercial credit in Utah. Potential
problem loans consisted primarily of commercial and agricultural related
loans.
<PAGE> 31
<TABLE>
<CAPTION>
TABLE 11: RECONCILIATION OF THE RESERVE FOR LOAN LOSSES (in thousands)
For the years ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
RESERVE FOR LOAN LOSSES, BEGINNING $ 173,350 $ 157,525 $ 142,693 $ 135,011 $ 138,107
LOANS CHARGED OFF:
Commercial (13,410) (10,021) (12,313) (6,195) (4,636)
Real estate term (2,050) (3,255) (3,067) (1,808) (3,574)
Real estate construction (325) (164) (109) (314) (100)
Consumer credit card & related (14,682) (14,087) (14,222) (13,519) (10,377)
Consumer vehicle & other (72,760) (66,792) (53,507) (41,759) (34,221)
Leases (419) (471) (2,977) (614) (957)
- ------------------------------------------------ ------------ ------------ ------------ ------------ ------------
TOTAL LOANS CHARGED OFF (103,646) (94,790) (86,195) (64,209) (53,865)
- ------------------------------------------------ ------------ ------------ ------------ ------------ ------------
RECOVERIES OF LOANS CHARGED OFF:
Commercial 3,649 5,294 5,316 6,756 7,712
Real estate term 593 1,825 1,850 889 2,963
Real estate construction 282 23 12 847 163
Consumer credit card & related 3,291 2,735 2,477 2,293 2,117
Consumer vehicle & other 29,047 23,997 22,046 15,993 14,669
Leases 7 15 1,481 320 463
- ------------------------------------------------ ------------ ------------ ------------ ------------ ------------
TOTAL RECOVERIES OF LOANS CHARGED OFF 36,869 33,889 33,182 27,098 28,087
- ------------------------------------------------ ------------ ------------ ------------ ------------ ------------
NET LOANS CHARGED OFF (66,777) (60,901) (53,013) (37,111) (25,778)
Provision for loan losses 59,447 71,923 63,386 41,300 22,682
Acquisitions & reclassifications 8,423 4,803 4,459 3,493 -
- ------------------------------------------------ ------------ ------------ ------------ ------------ ------------
RESERVE FOR LOAN LOSSES, ENDING $ 174,443 $ 173,350 $ 157,525 $ 142,693 $ 135,011
================================================ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
TABLE 12: ALLOCATION OF THE RESERVE FOR LOAN LOSSES (in thousands)
As of December 31, ------1999------ ------1998------ ------1997------ ------1996------ ------1995------
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 $ 49,897 22.7% $ 59,247 22.6% $ 43,136 24.6% $ 46,617 23.4% $ 38,523 23.6%
Real estate term 18,085 29.7 16,276 37.5 13,873 33.8 12,737 32.0 8,345 35.0
Real estate construction 9,948 10.1 6,325 6.0 4,725 6.6 4,378 5.8 4,148 5.8
Consumer 43,776 26.3 49,936 24.6 44,933 25.9 44,457 31.1 43,349 30.8
Leases 19,053 11.2 11,807 9.3 8,963 9.2 8,224 7.8 6,068 4.8
Unallocated 33,684 29,759 41,895 26,280 34,578
- ------------------------------------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------
TOTALS $ 174,443 100.0% $ 173,350 100.0% $ 157,525 100.0% $ 142,693 100.0% $ 135,011 100.0%
==================================== ========= ====== ========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
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.
<PAGE> 32
FSCO's reserve for loan losses was $174.4 million at December 31, 1999, up
$1.1 million or 0.6% from year-end 1998 (see: "Table 11: Reconciliation of
the Reserve for Loan Losses"). This increase included $8.4 million in
reserves added with the various purchase acquisitions during the year (see:
"Mergers and Acquisitions").
Based on its analysis of reserve adequacy, FSCO considered its reserve for
loan losses at December 31, 1999 to be adequate to absorb estimated loan
losses in the current loan portfolio. FSCO's coverage ratio of the reserve
to nonaccruing loans was 294.57% at year-end 1999, down from 378.39% at the
prior year end, while the ratio of the reserve to total loans was 1.20% at
year end, down from 1.24% at the prior year end (see: "Table 1: Financial
Highlights" and "Table 9: Loans").
Net loans charged off against the reserve totaled $66.8 million for 1999,
up $5.9 million or 9.6% from 1998 (see: "Table 11: Reconciliation of the
Reserve For Loan Losses"). This increase was primarily due to higher net
loans charged off on commercial loans and consumer vehicle loans. The
annualized ratio of net loans charged off to average loans was 0.49% for
1999, unchanged from 1998. As previously identified (see: "ANALYSIS OF
STATEMENTS OF INCOME: PROVISION FOR LOAN LOSSES"), FSCO expects a temporary
increase in net loans charged off in the consumer loan area during the first
part of 2000. This temporary increase in consumer loan chargeoffs should be
resolved by early second quarter of 2000.
While reserve adequacy and allocation are measured using the above
criteria, FSCO's reserve for loan losses is available for use by its entire
loan portfolio, as needed, regardless of allocation.
ASSET QUALITY:
PROVISION FOR LOAN LOSSES
FSCO uses the provision for loan losses to adjust the reserve when a
replenishment or addition is appropriate. FSCO's provision for loan losses
totaled $59.4 million for 1999, down $12.5 million or 17.3% from $71.9
million in 1998, which in turn was up $8.5 million or 13.5% from $63.4
million in 1997 (see: "Table 11: Reconciliation of the Reserve for Loan
Losses"). The 1999 decrease was partially offset by $8.4 million in reserves
added with the various purchase acquisitions during the period, while the
1998 provision increased the reserve by $11.0 million above net loans charged
off during that year.
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. FS Capital Markets Treasury Division
provides the corporate-wide ALCO process for FSCO and its bank subsidiaries
under the direction of FSCO's ALCO committee and board of directors.
<PAGE> 33
<TABLE>
<CAPTION>
TABLE 13: DEPOSITS (in thousands)
For the years ended December 31, 1999 1998 1997
- ----------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Noninterest-bearing deposits $ 2,272,811 $ 2,752,009 $ 2,431,006
INTEREST-BEARING DEPOSITS:
Interest-bearing demand accounts 472,917 539,371 436,382
Savings accounts 1,342,394 1,457,870 1,369,760
Money market accounts 3,541,424 2,927,577 2,348,183
Time deposits of $100,000 or more 1,939,070 1,464,865 1,399,989
Memo: including foreign deposits 659,580 258,660 168,016
Other time deposits 3,641,800 3,516,882 3,432,314
- ----------------------------------------------------------- ------------ ------------ ------------
TOTAL INTEREST-BEARING DEPOSITS 10,937,605 9,906,565 8,986,628
- ----------------------------------------------------------- ------------ ------------ ------------
TOTAL DEPOSITS $ 13,210,416 $ 12,658,574 $ 11,417,634
=========================================================== ============ ============ ============
Maturities of time deposits of $100,000 or more,
including foreign deposits:
Maturing in 3 months or less $ 1,255,328
Over 3 months through 6 months 182,593
Over 6 months through 12 months 275,458
Over 12 months 225,691
=========================================================== ============
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
TABLE 14: SHORT-TERM BORROWINGS (in thousands)
For the years ended December 31, 1999 1998 1997
- ----------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
END OF PERIOD BALANCE:
Federal funds purchased & securities sold $ 3,697,346 $ 3,747,084 $ 3,252,259
Other short-term borrowings 1,090,019 518,505 352,940
- ----------------------------------------------------------- ------------ ------------ ------------
WEIGHTED AVERAGE RATE:
Federal funds purchased & securities sold 5.37% 4.79% 5.38%
Other short-term borrowings 5.70 7.75 6.08
- ----------------------------------------------------------- ------------ ------------ ------------
AVERAGE OUTSTANDINGS FOR THE YEAR:
Federal funds purchased & securities sold $ 4,076,095 $ 3,442,992 $ 2,649,889
Other short-term borrowings 527,121 383,482 319,857
- ----------------------------------------------------------- ------------ ------------ ------------
WEIGHTED AVERAGE RATE FOR THE YEAR:
Federal funds purchased & securities sold 4.94% 5.29% 5.33%
Other short-term borrowings 6.27 5.96 6.85
- ----------------------------------------------------------- ------------ ------------ ------------
HIGHEST MONTH-END BALANCE FOR THE YEAR:
Federal funds purchased & securities sold $ 4,508,377 $ 4,100,554 $ 3,252,506
Other short-term borrowings 1,090,019 518,505 480,292
=========================================================== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
TABLE 15: LONG-TERM DEBT (in thousands)
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
PARENT COMPANY:
Medium term notes due 1998-2003 $ 23,750 $ 28,750 $ 32,750
Floating rate notes due 1999-2005 200,000 6,758 6,842
7.875% senior notes due 1999 - 98,962 98,962
7.50% subordinated notes due 2002 75,000 75,000 75,000
5.875% senior notes due 2003 325,000 325,000 -
7.00% subordinated notes due 2005 125,000 125,000 125,000
6.875% senior notes due 2006 150,000 150,000 150,000
SUBSIDIARIES:
Guaranteed preferred beneficial interests -
8.41% subord. capital income sec's due 2026 150,000 150,000 150,000
Floating rate European medium term notes due 2002 300,000 300,000 300,000
Floating rate European medium term notes due 2003 285,000 285,000 -
Other long-term notes: banks 2,006,764 1,558,203 647,397
Other long-term notes: nonbanks 266 309 402
- ----------------------------------------------------------- ------------ ------------ ------------
TOTAL DEBT WITH ORIGINAL MATURITY OVER 1 YEAR 3,640,780 3,102,982 1,586,353
Less contractual maturities under 1 year
included in short-term borrowings 1,055,025 493,424 281,890
- ----------------------------------------------------------- ------------ ------------ ------------
TOTAL LONG-TERM DEBT $ 2,585,755 $ 2,609,558 $ 1,304,463
=========================================================== ============ ============ ============
</TABLE>
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 the corporation's Capital Markets, Treasury and Investment Management
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
<PAGE> 35
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
the corporation's Capital Markets, Treasury and Investment Management
Division and on a monthly basis through its ALCO process.
FSCO had continued success during 1999 in obtaining core deposits, without
having to offer above-market interest rates, through market growth, special
advertising 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. Since its announcement
of the merger with Zions, FSCO has experienced increasing pressure from bank
and other financial services competitors for lower cost core deposits. FSCO
expects these competitive pressures to have a negative impact on its ability
to increase its core deposits in the near term. As part of its overall
liquidity management, FSCO has plans in place to effect vehicle, consumer and
mortgage loan sales and securitizations during 2000.
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 total deposits were $13.2 billion at December 31, 1999, up $0.6
billion or 4.4% from year-end 1998 (see: "Table 13: Deposits"). This
increase was due to FSCO's continued emphasis on its deposit gathering
functions and the acquisition of banks with strong deposit characteristics.
The ratio of loans to deposits was 110.36% at December 31, 1999, virtually
unchanged from 110.70% at year-end 1998, primarily due to increased deposit
and loan levels, two separate $1.0 billion loan securitizations during the
first and second quarters of 1999, and ongoing sales of 1-to-4 family
residential term loans. The ratio of loans to assets was 63.40% at year-end
1999, down from 64.61% at year-end 1998, and only marginally lower than
FSCO's five-year average of 64.50%. 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, customer borrowing needs, and economic
opportunities.
FSCO's total debt, which included short-term borrowings and long-term
debt, was $7.4 billion at December 31, 1999, up $0.5 billion or 7.2% from
year-end 1998 (see: "Table 14: Short-Term Borrowings", and "Table 15: Long-
Term Debt"). The components of FSCO's debt at December 31, 1999, compared
with December 31, 1998, are discussed below.
* Federal funds purchased and securities sold under repurchase agreements
were $3.7 billion, down only $50 million or 1.3%. FSCO utilizes these funds,
on an interim basis, to offset the consumer loan and mortgage refinance
growth generated by business-cycle opportunities in its market areas, loans
held for sale or securitization, and growth in AFS securities funded by
repurchase agreements.
* All other short-term borrowed funds were $1.1 billion, up $0.6 billion
or 110.2%. This increase was primarily due to current maturities of long-
term debt and additional borrowings from the Federal Home Loan Banks.
<PAGE> 36
* Long-term debt was $2.6 billion, down $24 million or 0.9%. This
decrease was due to reclassification of maturing long term debt to short-term
borrowed funds, offset by the addition of $200 million in floating rate notes
and nearly $450 million of long-term FHLB debt. These long-term debt
instruments provided favorable asset/liability rate risk management
opportunities during the year.
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 and
market value modeling as its primary tools 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 the corporation's
Capital Markets, Treasury and Investment Management 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 1999. During the year, a strong regional economy and
acquisitions resulted in net average loan growth of $1.2 billion or 9.5%,
while successful deposit promotions and acquisitions helped to generate
average deposit growth of $1.1 billion or 9.6%. FSCO also utilized loan
sales and securitizations and external funding sources to support asset
growth (see: "Asset/Liability Management - Liquidity").
FSCO took advantage of its strong capital ratios and further leveraged the
balance sheet resulting in an increase in the average AFS securities of $1.1
billion or 23.0% in 1999. 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 loan sales and securitizations, and access to external sources of
funding.
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
<PAGE> 37
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 $2.0 billion notional amount at
December 31, 1999, down from $2.8 billion at year-end 1998. When
appropriate, new derivative transactions will be considered.
Three interest rate risk monitoring tools, static interest rate gap
analysis, net interest income simulation, and market value of equity modeling
are currently used by FSCO to measure the level of interest rate risk.
FSCO's static interest rate gap analysis measures the exposure to interest
rate risk based upon the mismatch between the maturity or repricing of
interest-earning assets and interest-bearing liabilities on the balance sheet
at a given point in time. The mismatch is calculated using the contractual
maturity and repricing dates for all such assets, liabilities, and derivative
instruments. The static gap portrayal does not capture many of the factors
that determine interest rate risk. FSCO places more emphasis on the use of
sophisticated simulation and market value models.
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, 1999 and 1998, 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:
1999 1998
----- -----
Static 90 day Cumulative Gap (11.7%) 5.6%
Static 1 year Cumulative Gap (12.7%) 6.0%
This swing from positive to negative gap positions is the result of
increased reliance on short-term funding on a temporary basis to support
loans scheduled for securitization.
These results were 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 interest income simulation model forecasts 12 month net
interest 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-interest-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.
<PAGE> 38
At December 31, 1999 and 1998, 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:
1999 1998
----- -----
If rates were shocked down 200 basis points 1.7% (3.2%)
If rates were shocked up 200 basis points (7.1%) 1.4%
The results of these shock scenarios remain well within FSCO's policy
guideline of 10%.
At December 31, 1999, FSCO exhibited liability sensitivity for the one-
year time horizon and minimal overall interest rate risk.
Market value of equity modeling complements the simulation model by
measuring exposure to interest rate changes outside of the one-to-two year
time frame measured by simulation. The economic value of equity is
determined by modeling the net present value of future cash flows for on- and
off-balance sheet positions based on the implied forward yield curve. The
measurement of change in market value given an increase of 100 basis points
in interest rate is referred to as duration and measured in years. At
December 31, 1999, the duration of equity was 4.22 years, well within
acceptable industry standards.
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.
ASSET/LIABILITY MANAGEMENT:
MARKET RISK - TRADING ACCOUNT SECURITIES
Trading account securities (EOP) decreased from $329 million at the end of
1998 to $23 million at December 31, 1999 due to the discontinuance of the
trading activity except for securities held in trading pending sales to
customers. The average trading account securities held in 1999 was $173
million, up from $159 million in 1998. FSCO's trading account securities
consist of cash securities, financial futures, and option contracts. At the
end of 1999, FSCO had no financial futures and options contracts related to
FSCO's trading account securities, down from $1.2 billion notional value at
year-end 1998. Market risk for trading account securities was monitored on a
daily basis through an assessed dollar value of risk per basis point method.
The FSCO had no net risk position of FSCO's trading account securities
(including futures, options, and on-balance sheet securities) at December 31,
1999, compared with $30,408 per basis point (0.01%) change in yield at year-
end 1998.
OTHER ASSETS AND LIABILITIES
FSCO's intangible assets were $560.7 million at December 31, 1999, up
$151.4 million or 37.0% from year-end 1998, due to goodwill associated with
recent acquisitions and increased loan servicing rights from strong loan
production and sales. Fluctuations in other assets and other liabilities
were due in part to the effect of acquisitions and timing differences from
unsettled transactions in the purchase and sale of securities.
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".
<PAGE> 39
From time to time, 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. FSCO has been very cautious with stock repurchase programs to
assure that it meets all pooling-of-interests accounting principles
applicable to FSCO's acquisition program.
On January 25, 1999, FSCO increased its quarterly common stock dividend
for the fifth time since year-end 1995 to $0.14 per share, up $0.01 per share
or 7.7% from the previous $0.13 per share. FSCO paid quarterly common stock
dividends of $0.14 per share in each of the four quarters of 1999, for a
total of $0.56 per share during the year. Common stock dividends paid
totaled $108.0 million in 1999, for a dividend payout ratio of 39.50%.
The 1999 dividends marked the 65th 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 $25.50 per share at the close of
the market on December 31, 1999, versus a book value of $9.03 per share,
resulting in a market-to-book ratio of 282.39%. In comparison, 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%. At December 31, 1999, FSCO's common stock
market capitalization was $5.0 billion, up $0.6 billion or 14.8% from year-
end 1998, while maintaining a five-year compound growth rate of 33.5%.
The number of shareholders of record of FSCO common stock was 12,253 at
year-end 1999, compared with 12,663 at year-end 1998. These figures include
shares held by investors in street name with brokers, so the actual number of
beneficial shareholders is likely to be much higher than the shareholders of
record reported.
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.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
FSCO's stockholders' equity was increased to $1.8 billion at December 31,
1999, up $0.2 billion or 10.9% from year-end 1998 (see: Financial Statements
"Consolidated Balance Sheets", also Note 17-"Capital Requirements"). This
growth was due to earnings retained and issuances of new FSCO common stock
shares for acquisitions, partially offset by a decrease in accumulated other
comprehensive income, consisting of unrealized net losses in the fair value
of AFS securities, and by repurchases of common stock in the public markets
in 1998 and early 1999 (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 7.70% at December
31, 1999, compared with 7.36% at year-end 1998. The ratio of tangible common
equity to tangible assets was 5.39% at year end, down from 5.57% one year
<PAGE> 40
ago, reflecting changes in the fair value of AFS securities, repurchases of
common stock for the Van Kasper purchase acquisition, balance sheet growth,
goodwill recognized with various mergers, and the ongoing origination of loan
servicing rights.
FSCO's risk-based capital ratios remained strong at December 31, 1999 due
to earnings retained and the above-mentioned Capital Income Securities (see:
Note 17: Capital Requirements). FSCO's leverage and risk-based capital
ratios were as follows:
1999 1998
-------- --------
Leverage ratio 7.27% 6.90%
Tier 1 risk-based capital ratio 8.61% 8.62%
Total (Tier 1 + 2) risk-based capital ratio 11.41% 10.72%
FSCO and its subsidiary banks continued to be classified as "well
capitalized" according to the regulatory requirements of their respective
primary regulatory authorities. It is FSCO's policy to maintain the "well
capitalized" status at both the consolidated and subsidiary bank levels. On
November 19, 1999 FSCO modified the regulatory accounting treatment of
certain securitization transactions entered into by FS Bank for the purposes
of calculating the level of regulatory capital maintained by FS Bank for the
period of April 1, 1998 to September 30, 1999 (the Covered Period). As a
result, FS Bank amended and refiled its consolidated reports of condition and
income (Call Reports) with the Comptroller of the Currency for the Covered
Period to show the inclusion in FS Bank's total risk-weighted assets of
various assets previously sold by FS Bank in securitization transactions.
This amendment resulted in a temporary period in which FS Bank was not "well
capitalized". Except for the Covered Period, FS Bank has been well
capitalized.
OFF-BALANCE SHEET ITEMS
During 1999, 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 1999 or
1998, other than those related to FSCO's Year 2000 project (see: "Year 2000
Issues) and the Zions merger.
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
<PAGE> 41
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 1999 are
discussed below.
FIRST SECURITY CORPORATION AND ZIONS BANCORPORATION MERGER
On June 6, 1999, Zions Bancorporation (Zions; Nasdaq: ZION) and FSCO
announced the signing of a definitive agreement to merge. The new
organization will be known as First Security Corporation, headquartered in
Salt Lake City, Utah, and is expected to be the nation's 20th largest bank
holding company with assets of approximately $40 billion. Major items in the
approval progress to date are discussed below.
* On December 8, 1999, FSCO and Zions announced that they had reached an
agreement with the Department of Justice (DOJ) to divest a combined total of
68 branches, consisting of 60 branches in Utah and 8 branches in Idaho, and
approximately $2.1 billion in combined deposits in connection with the
pending merger of the two companies. The sale of certain branches is
required by the DOJ in selected geographic areas to ensure the merger of FSCO
and Zions will not have any anti-competitive effect in any market that is to
be served by the new FSCO. In addition to this divestiture of branches and
deposits, the combined assets to be sold include a total of approximately
$660 million in commercial, consumer, and agricultural loans in these
markets.
* On December 13, 1999, FSCO and Zions received approval on their merger
application from the Federal Reserve Board.
* On December 23, 1999, FSCO announced that it was delaying the
shareholder meeting scheduled for December 28, 1999 in connection with its
pending merger of equals agreement with Zions. The need for such delay was
to allow Zions to restate its historical financial statements to reclassify
certain of its 1997 and 1998 acquisitions that Zions had previously accounted
for as "pooling-of-interest" transactions as "purchase" transactions.
* The FSCO and Zions shareholder meetings to vote on the proposed merger
have been rescheduled for March 22, 2000, and the FSCO/Zions merger is
currently anticipated to be completed in the first quarter of 2000, pending
shareholder approvals.
In connection with this planned merger, FSCO's Board of Directors has
taken action under FSCO's Comprehensive Management Incentive Plan (CMIP) to
require that all accelerated and vested stock options be settled in shares of
common stock and not in cash. This action was taken to preserve pooling of
interests accounting treatment for the planned merger. The anticipated
financial statement effect of the accelerated and vested stock options under
the CMIP as a result of the planned merger was discussed in FSCO's Form 8-K
filing on August 30, 1999 (hereby incorporated by reference).
OTHER MERGERS AND ACQUISITIONS
Other mergers and acquisitions for 1999, including those previously
reported, are discussed below.
* 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). FS Van Kasper is FSCO's full-
service investment banking and brokerage subsidiary.
* On June 1, 1999, FSCO and its FSB Nevada subsidiary acquired Comstock
Bancorp (Comstock, located in Reno, Nevada; Nasdaq: LODE;) and its Comstock
Bank subsidiary in a purchase transaction. At March 31, 1999, Comstock had
assets of $217 million, loans of $152 million, deposits of $188 million, five
offices, and two lending centers.
<PAGE> 42
* On June 14, 1999, FSCO and its FSB Nevada subsidiary acquired XEON
Financial Corporation (XEON, located in Stateline, Nevada; Nasdaq: NVBC) and
its Nevada Banking Company subsidiary (NBC) in a purchase transaction. At
March 31, 1999, NBC had assets of $128 million, loans of $85 million,
deposits of $117 million, three offices, and one executive loan center.
* On July 1, 1999, three previously-existing FSCO subsidiaries, First
Security Capital Markets, Inc., First Security Investor Services, and First
Security Insurance, Inc., were merged into FS Van Kasper to create a single
company with a wide array of financial products and services.
* On November 5, 1999, FSCO merged its First Security Bank of Southern New
Mexico, N.A. into its First Security Bank of New Mexico, N.A. subsidiary.
* On January 24, 2000, FSCO and FS Van Kasper announced a definitive
agreement to acquire Black & Company, Inc., a securities firm headquartered
in Portland, Oregon. Black & Company services approximately 11,000 active
retail accounts with client assets aggregating over $375 million at the end
of 1999. The acquisition is expected to close early in the second quarter of
2000.
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: changing economic conditions in the local, national, and
international economies; the effects of competition; technological change and
its challenges; changing regulatory and legislative attitudes; financial
market perceptions; and socio-economic trends. FSCO endeavors to anticipate
and manage these many dynamic factors, yet FSCO's businesses remain subject
to rapid change, which may impact the results of operations and financial
condition of FSCO.
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.
U.S. economic growth was very strong in 1999, increasing 4.5 percent-the
fourth consecutive year that business expansion has exceeded the 4-percent
threshold. Despite a significant jump in crude oil prices to $30 per barrel,
broad measures of inflation remained generally steady with minimal
acceleration. The labor market was tight, with the national jobless rate
dipping to 4 percent, but because of ongoing strong productivity gains, unit
labor costs actually declined. During the second half of the year, interest
rates rose as the Federal Reserve increased short-term interest rates three
times, with the intent of moderating growth to a more sustainable level.
In 2000, we anticipate continued favorable business conditions, but growth
will likely narrow from the prior year. It appears probable that the Federal
Reserve will further increase interest rates, and the pace of inflation may
edge higher.
The Intermountain West, which encompasses a significant portion of FSCO's
primary market area, was the United States' fastest-growing regional economy
in 1999 for the sixth consecutive year, based on preliminary data.
<PAGE> 43
The following table illustrates labor-market conditions in the states in
which FSCO banking offices are located.
<TABLE>
<CAPTION>
1999 Job Growth Gains and Unemployment Rates
Job Gains (Preliminary)
----------------------- Unemployment
National Rates
Average % Rank Average %
- -------------------------------------------------------
<S> <C> <C> <C>
National 2.2 - 4.2
Utah 2.7 9 3.3
Idaho 2.2 15 4.8
New Mexico 1.3 31 6.1
Nevada 4.8 1 4.1
Oregon 1.9 24 5.5
California 2.9 6 5.3
Wyoming 1.3 34 4.6
- -------------------------------------------------------
The pace of economic growth in the above-listed states was favorable in
1999, but the rate of expansion was generally stable or slightly less than in
the prior year. Net in-migration slowed in many states but increased in
California. In the year ahead, little fundamental change is anticipated in
business conditions. High-tech manufacturing, which was adversely impacted
in 1998 by the international financial crisis, should continue to improve.
The growth rate in the construction industry may narrow, however.
While the 2000 outlook remains generally positive, the following factors
could adversely impact regional economic activity:
1. Excessive monetary policy tightening, which could sharply reduce
economic growth;
2. Volatility in equity markets, thus reducing the wealth effect on
consumer spending;
3. Oil and gasoline prices rising higher after more than doubling in the
last year;
4. A profit margin squeeze in the small business market.
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.
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 seventh largest bank in
Oregon, and the eighth largest bank in Wyoming. FSB New Mexico is the third
<PAGE> 44
largest bank in New Mexico, and FSB Nevada is the fifth largest bank in
Nevada.
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. Of particular importance in this regard
is the enactment of the Gramm-Leach-Bliley Act of 1999 that grants greater
authority to bank holding companies to engage in securities and insurance
activities. FSCO has filed an application with the Federal Reserve Board to
change its form to become a financial holding company under the act in order
to be able to take advantage of the new provisions.
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.
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.
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.
YEAR 2000 ISSUES:
FSCO'S YEAR 2000 PROJECT COMPLETION DISCLOSURE
All businesses and industries worldwide faced a "Year 2000" problem in
which some computer hardware, software, and other systems and equipment
potentially could not properly process date calculations before, during, or
after the year 2000. In 1996, FSCO made the successful resolution of its
Year 2000 issues and maintenance of effective technology contingency plans
its highest corporate priority. FSCO's Year 2000 project expenditures
totaled $38.9 million from 1996 through to its completion on June 30, 1999.
This amount included: $2.6 million in 1997; $23.7 million in 1998; and $12.6
million in 1999. These expenditures were funded through operating cash
<PAGE> 45
flows. Of the $38.9 million total expenditures, $11.9 million was
capitalized, including approximately $0.4 million capitalized in 1999, and
the remainder reported as expense.
As of the date of this report, FSCO had encountered no significant
problems in any of its operations in connection with the year 2000 date
change. FSCO will continue to monitor all systems to ensure performance
beyond this date 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 from what is described in these forward-looking
statements. Those factors include, but are not limited to, ineffective
remediation of computer code and the ability of FSCO and/or other parties to
successfully continue to 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. With the
enactment of the Gramm-Bliley-Leach Act of 1999, banks, subject to certain
limitations, will be able to affiliate with insurance and securities firms.
FSCO has applied to become a financial holding company to take advantage
of these new powers and will expand its securities and insurance activities
as authority becomes available.
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 environment 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> 46
</TABLE>
<TABLE>
<CAPTION>
TABLE 16: QUARTERLY FINANCIAL HIGHLIGHTS (in thousands, except per share data & ratios) (A)
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
1999 1999 1999 1999 1998 1998 1998 1998
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Interest income $ 432,022 $ 407,911 $ 376,273 $ 369,029 $ 369,193 $ 366,416 $ 350,950 $ 334,101
Net interest income 216,592 201,938 186,142 181,775 186,715 179,755 172,938 164,291
Provision for loan losses 19,196 12,778 10,596 16,877 22,861 18,068 18,396 12,598
Noninterest income 129,205 133,369 146,235 124,166 132,444 114,896 118,534 108,516
Noninterest expenses 224,432 210,235 217,363 192,415 193,489 179,516 184,277 165,806
Net income 66,306 73,315 68,843 64,878 67,313 63,091 55,907 61,369
Earnings per common share basic 0.34 0.38 0.36 0.34 0.36 0.34 0.30 0.33
Earnings per common share diluted 0.33 0.37 0.35 0.34 0.35 0.33 0.29 0.32
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
COMMON & PREFERRED STOCK DATA:
Market price (bid) [EOP] $ 25.500 $ 23.750 $ 27.188 $ 19.250 $ 23.313 $ 16.688 $ 21.375 $ 23.813
High bid for the period 29.750 27.375 27.188 23.750 23.313 23.938 24.750 26.167
Low bid for the period 23.000 21.375 17.875 17.563 15.938 15.500 21.000 21.833
Book value per common share [EOP] 9.03 8.99 8.90 8.77 8.54 8.54 8.21 8.02
Dividends paid per common share 0.14 0.14 0.14 0.14 0.13 0.13 0.13 0.13
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE SHEET [EOP]:
Loans, net of unearned income $14,578,537 $13,817,241 $13,309,843 $13,160,919 $14,013,417 $12,926,926 $12,530,360 $12,436,407
Reserve for loan losses (174,443) (174,443) (174,443) (173,350) (173,350) (169,058) (166,658) (163,256)
Total interest-earning assets 20,300,307 20,601,393 19,550,618 19,404,947 19,337,468 17,954,191 17,417,190 17,219,384
Total assets 22,992,927 23,346,617 22,134,994 21,959,222 21,689,088 19,859,300 19,360,006 19,132,896
Total deposits 13,210,416 13,212,965 12,982,950 12,573,973 12,658,574 11,943,616 11,917,203 11,822,954
Short-term borrowed funds 4,787,365 5,149,732 4,134,494 4,236,283 4,265,589 4,026,919 3,905,250 3,986,966
Long-term debt 2,585,755 2,536,949 2,582,370 2,706,320 2,609,558 1,749,478 1,513,044 1,339,892
Preferred stockholders' equity 451 456 472 476 484 491 493 501
Common stockholders' equity 1,769,449 1,759,123 1,735,590 1,665,303 1,595,011 1,609,515 1,542,377 1,500,734
================================== =========== =========== =========== =========== =========== =========== =========== ===========
<FN>
EOP: End Of Period. Avg: Average. EPS: Earnings Per Common Share.
DPS: Dividends Per Common Share.
(A) All FSCO financial data have been previously restated for the May 30,
1998 pooling-of-interests merger with FSB California (formerly California
State Bank).
</TABLE>
<PAGE> 47
Item 2. PROPERTIES (Please refer to Note 6-Premises and Equipment
Item 3. 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, including those previously reported, were
deemed to be material litigation matters under current SEC regulations, and
involved FSCO and/or one or more of its subsidiaries:
In "Bunn v. First Security Bank of New Mexico, N.A., et al.," Case No. CV
97-10975, Second Judicial District Court, County of Bernalillo, State of New
Mexico, which involves claims of unfair trade practices and violation of
state laws with respect to the order in which First Security Bank of New
Mexico, N.A. processed checks, motions for summary judgement and to deny
class certification are pending and will not likely be ruled on until the
second quarter of 2000.
Another 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),
involves force placed insurance on vehicles subject to loans whose owners
fail to procure insurance. Motions to dismiss resulted in a significant
reduction in damage claims. A settlement has been reached in principle and
is pending final documentation and court approval. A failure of the
settlement process would trigger additional proceedings on FSCO's opposition
to class certification and the substantive issues of the case.
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> 48
Item 8. Financial Statements and Supplementary Data.
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
February 18, 2000
To Our Stockholders:
FINANCIAL STATEMENTS
The management of First Security Corporation (FSCO) is responsible for the
preparation, integrity, and fair presentation of its published consolidated
financial statements and all other information presented in this annual
report. The consolidated 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 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, 1999. 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, 1999.
The audit committee of FSCO's board of directors is comprised entirely of
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.
<PAGE> 49
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, 1999.
/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> 50
<TABLE>
<CAPTION>
First Security Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998 (in thousands)
- ---------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 926,148 $ 1,026,335
Federal funds sold and securities purchased
under resale agreements 167,949 230,210
- ---------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 1,094,097 1,256,545
- ---------------------------------------------------------------------------------------------
Interest-bearing deposits in other banks 2,902 605
Trading account securities 22,650 329,109
Available for sale securities, at fair value
(cost $5,740,611 and $4,715,876, respectively) 5,528,269 4,764,127
- ---------------------------------------------------------------------------------------------
Loans held for sale 772,696 2,391,508
Loans (net of reserve for loan losses of $174,443 and
$173,350 and unearned income of $177,669 and
$127,593, respectively) 13,631,398 11,448,559
Premises and equipment, net 429,422 378,032
Accrued income receivable 119,895 113,399
Other real estate 8,055 3,617
Other assets 822,821 594,220
Intangible assets 560,722 409,367
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 22,992,927 $ 21,689,088
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Noninterest-bearing $ 2,272,811 $ 2,752,009
Interest-bearing 10,937,605 9,906,565
- ---------------------------------------------------------------------------------------------
TOTAL DEPOSITS 13,210,416 12,658,574
- ---------------------------------------------------------------------------------------------
Federal funds purchased and securities sold
under repurchase agreements 3,697,346 3,747,084
U.S. Treasury demand notes 34,993 25,081
Other short-term borrowings 1,055,026 493,424
Accrued income taxes 349,986 333,881
Accrued interest payable 57,844 58,778
Other liabilities 231,661 167,213
Long-term debt:
Guaranteed preferred beneficial interests 150,000 150,000
Other 2,435,755 2,459,558
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 21,223,027 20,093,593
- ---------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock: Series "A", $3.15 cumulative
convertible (9 shares issued) 451 484
- ---------------------------------------------------------------------------------------------
Common stockholders' equity:
Common stock (197,646 and 191,008 shares
issued, respectively) 247,058 238,760
Paid-in surplus 296,822 181,906
Retained earnings 1,398,619 1,233,264
Accumulated other comprehensive income (loss)-net
unrealized gain or (loss) on available for sale
securities, net of tax (131,652) 30,377
- ---------------------------------------------------------------------------------------------
Subtotal 1,810,847 1,684,307
Common treasury stock, at cost
(1,675 and 4,296 shares, respectively) (41,398) (89,296)
- ---------------------------------------------------------------------------------------------
Total common stockholders' equity 1,769,449 1,595,011
- ---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,769,900 1,595,495
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,992,927 $ 21,689,088
=============================================================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
First Security Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998, and 1997
(in thousands, except for per share amounts)
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 1,193,016 $ 1,111,417 $ 954,992
Federal funds sold and securities purchased
under resale agreements 15,912 5,538 4,249
Interest-bearing deposits in other banks 408 177 69
Trading account securities 11,470 9,173 12,686
Available for sale (AFS) securities 364,429 294,355 241,382
- ---------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 1,585,235 1,420,660 1,213,378
- ---------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 409,087 403,886 352,656
Short-term borrowings 234,548 204,902 163,096
Long-term debt 155,153 108,173 71,687
- ---------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 798,788 716,961 587,439
- ---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 786,447 703,699 625,939
Provision for loan losses 59,447 71,923 63,386
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 727,000 631,776 562,553
- ---------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 88,334 90,755 90,835
Other service charges, collections,
commissions, and fees 66,491 53,934 40,539
Asset sale and securitization gains 47,375 47,619 17,515
Bankcard servicing fees and third-party
processing fees 4,875 31,247 34,295
Insurance commissions and fees 19,957 16,966 16,975
Securities commissions and fees 77,947 17,863 14,934
Mortgage banking and loan servicing activities 216,268 215,538 117,859
Loan servicing rights amortization (51,907) (41,495) (16,146)
Trust (fiduciary) commissions and fees 34,365 29,474 26,195
Trading account securities gains (losses) 8,633 994 1,446
Available for sale securities gains (losses) 13,426 8,075 3,150
Other 7,211 3,420 9,560
- ---------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 532,975 474,390 357,157
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
First Security Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
(in thousands, except for per share amounts)
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONINTEREST EXPENSES:
Salaries and employee benefits $ 475,575 $ 386,715 $ 304,903
Amortization of intangibles 19,119 11,666 7,537
Armored and messenger 7,868 6,658 6,065
Bankcard interbank interchange and fees 16,824 32,147 34,130
Computer service and software expense 27,060 17,037 12,000
Credit, appraisal, and repossession 31,122 27,931 17,176
Fees 16,407 14,645 11,589
Furniture and equipment 71,052 58,181 46,263
Insurance 7,055 4,372 4,655
Marketing 13,538 14,757 14,258
Occupancy, net 48,483 39,063 36,729
Other real estate expenses and loss
provision (recovery), net (582) 845 2,022
Postage 15,208 13,508 11,367
Professional 17,998 18,918 15,082
Stationery and supplies 22,349 22,311 18,259
Telephone 25,132 17,306 16,317
Travel 12,522 12,773 9,797
Other 17,715 24,255 20,755
- ---------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES 844,445 723,088 588,904
- ---------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 415,530 383,078 330,806
Provision for income taxes 142,188 135,398 115,532
- ---------------------------------------------------------------------------------------------------------------
NET INCOME 273,342 247,680 215,274
Dividend requirement of preferred stock 27 28 30
- ---------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 273,315 $ 247,652 $ 215,244
===============================================================================================================
Earnings Per Common Share Basic $ 1.42 $ 1.32 $ 1.18
Earnings Per Common Share Diluted $ 1.38 $ 1.28 $ 1.14
===============================================================================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
First Security Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1998, and 1999 (in thousands, except for per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Compre- Common
Preferred Common Paid-in Retained hensive Treasury
Total Stock Stock Surplus Earnings Income Stock
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $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 common 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 treasury 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)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income for the year 273,342 273,342
Other comprehensive income (loss), net
of tax, consisting of net unrealized
loss on AFS securities, net of
reclassification adjustment of
$13,426 for net gains included in
net income (162,029) (162,029)
------------
Total comprehensive income 111,313
Sale of common stock through dividend
reinvestment and common stock
purchase plan 2,670 199 2,471
Sales of stock to employee benefit plans 8,051 1,610 6,441
Common stock issued for acquisitions 171,376 6,457 97,572 67,347
Cash dividends:
Preferred stock - $3.15 per share (27) (27)
Common stock - $0.56 per share (107,960) (107,960)
Conversion of preferred stock to common - (33) 32 1
Purchase of common treasury stock (19,449) (19,449)
After-tax effect of stock option exercises 8,431 8,431
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $1,769,900 $ 451 $247,058 $296,822 $1,398,619 $(131,652) $(41,398)
===================================================================================================================================
See notes to consolidated financial statements.
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
First Security Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998, and 1997 (in thousands, except for number of shares)
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 273,342 $ 247,680 $ 215,274
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 59,447 71,923 63,386
Provision for (recovery of) loss on other real estate (1,264) 310 1,135
Provision for depreciation and amortization 49,149 40,543 35,419
Provision for amortization of intangible assets 19,119 11,666 7,537
Provision for deferred income taxes 110,581 79,980 58,494
Net change in deferred loan origination fees and costs 49,076 1,969 53,970
Net amortization (accretion) of AFS securities
discounts and premiums (670) 1,700 2,931
Proceeds from sales of mortgage loans held for sale 14,117,546 13,672,856 5,175,757
Origination of mortgage loans held for sale (12,141,834) (13,696,625) (5,295,498)
AFS securities (gains) losses (13,426) (8,075) (3,150)
Net realized gains on sold loans (8,358) (45,890) (43,126)
Decrease (increase) in trading account securities 313,281 (73,789) 192,166
Decrease (increase) in accrued income receivable (6,496) (6,425) (12,195)
Increase (decrease) in accrued interest payable (932) 6,850 8,897
Increase (decrease) in accrued income taxes 4,059 (5,431) 1,372
Other operating activities (16,891) (360,549) (180,084)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,805,729 (61,307) 282,285
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of AFS securities 1,117,026 375,948 384,267
Redemption of matured AFS securities 1,292,604 2,064,730 1,105,935
Purchases of AFS securities (3,369,762) (2,542,188) (2,365,561)
Net (increase) decrease in interest-bearing deposits
in other banks (2,026) (5) 31,107
Net (increase) decrease in loans and leases (4,787,018) (3,743,360) (2,096,876)
Proceeds from sale of vehicle loans 2,040,498 1,185,994 802,935
Net purchase of premises and equipment (87,371) (125,775) (39,967)
Proceeds from sales of other real estate 9,112 10,720 11,530
Payments to improve other real estate (2,407) (3,161) (3,627)
Net cash received from acquisitions 25,875 63,974 37,468
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,763,469) (2,713,123) (2,132,789)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 256,171 697,662 1,080,727
Net increase (decrease) in Federal funds purchased
and securities sold under repurchase agreements
and U.S. Treasury demand notes (39,826) 498,056 728,777
Proceeds from issuance of nonrecourse debt on
leveraged leases 271,087 165,641 37,440
Payments on nonrecourse debt on leveraged leases (113,223) (21,018) (24,557)
Proceeds from issuance of long-term debt and
short-term borrowings 1,096,848 1,506,600 566,439
Payments on long-term debt and short-term borrowings (559,050) (86,050) (203,355)
Proceeds from issuance of common stock and sales of
treasury stock 10,721 27,900 12,693
Purchases of treasury stock (19,449) (87,906) (89,467)
Purchases of stock for retirement - - (2,969)
Dividends paid (107,987) (95,611) (77,885)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 795,292 2,605,274 2,027,843
- ---------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (162,448) (169,156) 177,339
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,256,545 1,425,701 1,248,362
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,094,097 $ 1,256,545 $ 1,425,701
===============================================================================================================
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
First Security Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the years ended December 31, 1999, 1998, and 1997
(in thousands, except for number of shares)
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 799,720 $ 710,111 $ 578,171
===============================================================================================================
Income taxes $ 16,646 $ 60,849 $ 56,456
===============================================================================================================
Supplemental Schedule of Noncash Investing
and Financing Activities:
Conversion of 612; 333; and 736 shares of convertible
preferred stock into 25,092; 13,202; and 30,149 shares
of common stock, respectively $ 32 $ 17 $ 39
===============================================================================================================
Transfer of loans to other real estate $ 7,560 $ 2,782 $ 6,165
===============================================================================================================
</TABLE>
In 1999, FSCO purchased the following:
(1) Van Kasper & Company, a full-service investment banking and
brokerage subsidiary with total assets of approximately $19,609,000 and
liabilities of $12,782,000 through the issuance of 3,338,000 shares of
FSCO's common stock;
(2) Comstock Bancorp with total assets of approximately $208,092,000
and liabilities of $193,371,000 through the issuance of 3,477,000
shares of FSCO's common stock;
(3) Xeon Financial Corporation with total assets of approximately
$121,740,000 and liabilities of $112,801,000 through the issuance of
1,563,000 shares of FSCO's common stock.
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 4,350,000 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.
See notes to consolidated financial statements. (Concluded)
<PAGE> 56
First Security Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
First Security Corporation (FSCO), a bank holding company, provides
a full range of financial services to individual and business customers
through its bank and nonbank subsidiaries and their branches in Utah,
Idaho, New Mexico, Oregon, Nevada, Wyoming, and California. Mortgage
banking origination offices and investment banking and brokerage
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 and 1997 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 (loss). 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.
<PAGE> 57
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. FSCO accounts for the
transfer and servicing of financial assets in accordance with 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. All
sales of financial assets during 1999, 1998, and 1997 have met the
qualifications for sale treatment.
Lease Financing (See Note 5). Certain of FSCO's subsidiaries lease
various types of equipment to customers under both leveraged and
nonleveraged arrangements. For leveraged leases, a significant part of
the cost of the equipment is financed by other institutional lenders
who depend on the related lease and equipment as collateral for their
loans, with no recourse to the subsidiaries. The investment in lease
financing consists principally of rentals receivable and estimated
residual values, less related unearned income. Unearned income is
amortized into income so as to produce a constant periodic rate of
return on the unrecovered investment. Investment tax credits on lease
financing equipment are deferred and amortized to income over the
investment recovery period.
Reserve for Loan Losses (See Note 5). The reserve for loan losses is
established to absorb known and inherent losses primarily resulting
from outstanding loans and leases. Reserves for loan losses on
consumer, credit card, residential mortgage, leases, and other loans
with similar homogeneous characteristics are established for the
respective loan portfolio based on historical loss experience
considering current and anticipated economic conditions. Reserves for
loan losses on commercial, commercial real estate, construction loans,
and loan commitments are evaluated on both a specific loan basis and
historical loss experience considering the credit quality, collateral,
financial strength of the borrower and current economic conditions.
Losses are charged and recoveries are credited directly to the reserve.
The provision for loan losses charged to expense is an amount which, in
management's judgment, is sufficient to maintain the balance in the
reserve at an adequate level. While management uses the best
information available on which to base estimates, future adjustments to
the reserve may be necessary if economic conditions, particularly in
<PAGE> 58
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 and interest
rate swap agreements 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.
<PAGE> 59
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 lock, 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 and reversed 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. SFAS No. 123, "Accounting for Stock-Based
Compensation", 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
Accounting Principles Board (APB) Opinion No. 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.
<PAGE> 60
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 5 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 10 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. Assets determined to be impaired are
written down to their fair value. There were no significant impairments
during 1999, 1998, or 1997.
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 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 and May 15, 1997 (see Note 12).
Comprehensive Income. Effective January 1, 1998, FSCO adopted SFAS
No. 130, "Reporting Comprehensive Income", and reclassified
comprehensive income for 1997 to conform with SFAS No. 130. This
statement requires FSCO to display an amount representing total
comprehensive income (loss) for each period. Accumulated other
comprehensive income (loss) consists entirely of net unrealized gain or
loss on available for sale securities, net of taxes.
Reclassifications. Certain reclassifications of previously reported
1998 and 1997 amounts have been made to conform to FSCO's 1999
classifications.
NOTE 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, Capital Markets,
Treasury, and Investment Management, and Parent and Other. The
Community Banking segment provides transaction, deposit, 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. Capital Markets, Treasury, and Investment Management
includes capital markets, treasury, personal investment, private
banking, personal trust, insurance, investment management functions,
and First Security Van Kasper; this line of business was restructured
in 1999 from the previous Finance and Capital Markets segment. Parent
and Other combines corporate administration, technology and processing
services, accounting, tax, purchasing, acquired banks that have not
been converted to FSCO's systems, and intersegment eliminations; this
line of business segment was also restructured during the year.
Management has determined that it is impractical to restate prior
periods to reflect the restructuring among the reportable segments as
<PAGE> 61
well as presenting the 1999 segment information under the old
structure.
Interest income and expenses 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. Furthermore, as
mentioned above, 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>
<CAPTION>
Information about FSCO's reportable segments for 1999 is as follows
(in thousands):
Capital
Markets,
Treasury, and Parent
Community Retail Business Investment and Total
Banking Lending Banking Management Other FSCO
<S> <C> <C> <C> <C> <C> <C>
Total assets (average) $1,012,144 $8,748,031 $4,116,719 $ 5,856,328 $2,711,570 $22,444,792
Total deposits (average) 9,402,245 218,372 887,413 342,071 2,037,522 12,887,623
Interest income 28,259 753,265 317,266 374,747 111,698 1,585,235
Interest expense 367,266 54 30,983 226,199 174,286 798,788
Intersegment interest income
(expense), net 551,259 (450,641) (144,221) (100,627) 144,230 -
Provision for income taxes 29,294 56,307 31,475 14,240 10,872 142,188
Net income 46,474 89,945 52,026 22,746 62,151 273,342
</TABLE>
<TABLE>
<CAPTION>
Information about FSCO's reportable segments for 1998 is as follows
(in thousands):
Finance and Parent
Community Retail Business Capital and Total
Banking Lending Banking Markets Other FSCO
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Information about FSCO's reportable segments for 1997 is as follows
(in thousands):
Finance and Parent
Community Retail Business Capital and Total
Banking Lending Banking Markets Other FSCO
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE> 62
NOTE 3. CASH AND DUE FROM BANKS
The Federal Reserve requires FSCO's national banking subsidiaries to
maintain certain average reserve balances with the Federal Reserve or
through approved correspondent banks. For the years ended December 31,
1999 and 1998, the required average reserve balances were approximately
$54,490,000 and $56,612,000, respectively.
NOTE 4. TRADING ACCOUNT AND AVAILABLE FOR SALE SECURITIES
The amortized cost and fair value of AFS securities were as follows
(in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Available for Sale Securities Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Debt Securities issued by U.S. Treasury
and other U.S. Government
agencies and corporations $ 469,380 $ 64 $ (10,165) $ 459,279
Debt securities issued by states
and political subdivisions 310,813 1,803 (6,499) 306,117
Corporate debt securities 221,243 606 (20,556) 201,293
Mortgage-backed securities 4,391,450 405 (184,459) 4,207,396
Equity securities 212,266 7,985 (1,526) 218,725
Federal Home Loan Bank and
Federal Reserve stock 135,459 - - 135,459
- -------------------------------------------- -------------- -------------- -------------- --------------
Totals $ 5,740,611 $ 10,863 $ (223,205) $ 5,528,269
============================================ ============== ============== ============== ==============
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
============================================ ============== ============== ============== ==============
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999 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.
<TABLE>
<CAPTION>
Available for Sale Securities (in thousands)
Amortized Estimated
Cost Fair Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 68,531 $ 68,660
Due after one year through five years 551,105 541,216
Due after five years through ten years 97,208 95,711
Due after ten years 284,592 261,102
- ------------------------------------------------------------ --------------
Total debt securities 1,001,436 966,689
Mortgage-backed securities 4,391,450 4,207,396
Equity securities 347,725 354,184
- ------------------------------------------------------------ --------------
Totals $ 5,740,611 $ 5,528,269
============================================= ============== ==============
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
Proceeds, gross gains, and gross losses from sales of securities using
the specific identification method were as follows (in thousands):
Available for Sale
1999 1998 1997
<S> <C> <C> <C>
Proceeds $ 1,117,026 $ 375,948 $ 384,267
============================================= ============== ============== ==============
Gross gains $ 15,659 $ 8,191 $ 5,596
Gross losses (2,233) (116) (2,446)
- ------------------------------------------------------------------------------------------------
Net Gains (Losses) $ 13,426 $ 8,075 $ 3,150
============================================= ============== ============== ==============
</TABLE>
The change in net unrealized holding (gain) or loss on trading
account securities that has been included in earnings for the years
ended December 31, 1999, 1998, and 1997 totaled $(5,000), $143,000, and
$227,000, respectively.
Interest earned on tax exempt securities was approximately
$14,209,000, $15,593,000, and $13,716,000, respectively, for the years
ended December 31, 1999, 1998, and 1997.
At December 31, 1999 and 1998, securities carried at $3,526,442,000
and $3,001,270,000, respectively, were pledged for various purposes.
Included in these pledged securities were trading account securities
totaling $-0- and $87,760,000, respectively.
Securities sold under agreements to repurchase averaged
approximately $2,610,317,000 and $2,287,478,000 during 1999 and 1998,
and the maximum amounts outstanding at any month-end during 1999 and
1998 were $3,117,644,000 and $2,516,492,000, respectively.
Approximately 40% of the securities sold under repurchase agreements
were delivered to broker-dealers who arranged the transactions. The
broker-dealers may have sold, loaned, or otherwise disposed of such
securities to other parties in the normal course of their operations
and have agreed to resell to FSCO substantially identical securities at
the maturities of the agreements. The remaining securities sold are
either held by FSCO or delivered into a third-party custodian's account
designated by FSCO under a written custodial agreement that explicitly
recognizes FSCO's interest in the securities.
NOTE 5. LOANS
Loans (net of unearned income) consisted of the following (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1999 1998
<S> <C> <C>
Commercial, financial, and agricultural $ 3,314,104 $ 3,164,985
Real estate:
Commercial 1,661,991 1,325,071
Residential 1,886,427 1,538,514
Construction 1,476,301 843,819
Consumer 3,833,918 3,443,359
Leases 1,633,100 1,306,161
- ------------------------------------------------------- ------------- -------------
Total 13,805,841 11,621,909
Reserve for loan losses (174,443) (173,350)
- ------------------------------------------------------- ------------- -------------
Totals $ 13,631,398 $ 11,448,559
======================================================= ============= =============
</TABLE>
At December 31, 1999 and 1998, loans carried at approximately
$2,124,591,000 and $1,668,690,000, respectively, were pledged for various
purposes.
<PAGE> 64
Included in loans were loans to directors, executive officers, and to
their associates as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Balance, January 1 $ 107,811 $ 139,788
Additions 61,363 75
Repayments (5,197) (32,052)
- ------------------------------------------------------- ------------- -------------
Balance, December 31 $ 163,977 $ 107,811
======================================================= ============= =============
</TABLE>
None of the above loans to directors, executive officers, and to
their associates as of December 31, 1999 and 1998 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):
<TABLE>
<CAPTION>
As of December 31, 1999 1998
<S> <C> <C>
Leveraged leases $ 373,768 $ 280,993
Non leveraged leases 1,249,797 1,019,942
Assets held for sale or lease 9,535 5,226
- ------------------------------------------------------- ------------- -------------
Totals $ 1,633,100 $ 1,306,161
======================================================= ============= =============
</TABLE>
<PAGE> 65
Changes in the reserve for loan losses were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance, January 1 $ 173,350 $ 157,525 $ 142,693
Provision charged to expense 59,447 71,923 63,386
Reserves acquired through acquisitions - -
(Note 15) 8,423 4,803 4,459
Loans charged off, net of recoveries of - -
$36,869, $33,889, and $33,182, respectively (66,777) (60,901) (53,013)
- ------------------------------------------------------- ------------- ------------- -------------
Balance, December 31 $ 174,443 $ 173,350 $ 157,525
======================================================= ============= ============= =============
</TABLE>
FSCO's investment in impaired loans at December 31, 1999 and 1998,
as defined in SFAS Nos. 114 and 118, totaled $13,672,000 and
$1,958,000, respectively. The SFAS No. 114 allowance related to
impaired loans at December 31, 1999 and 1998 was $4,500,000 and
$1,743,000, respectively. During the years ended December 31, 1999 and
1998, FSCO's average investment in impaired loans was approximately
$5,062,000 and $215,000, respectively. Interest income recognized on
impaired loans totaled $-0-, $-0-, and $261,000 for 1999, 1998, and
1997, respectively.
At December 31, 1999 and 1998, total nonaccruing loans were
$59,220,000 and $45,812,000, respectively. Gross interest income
foregone on nonaccruing loans during 1999, 1998, and 1997 was
$2,348,000, $3,772,000, and $2,810,000, respectively. In 1997, there
was $1,916,000 of troubled debt restructuring and none in 1999 and
1998.
During 1999 and 1998, FSCO securitized approximately $2,040,499,000
and $1,250,396,000 of vehicle loans and sold certificates to investors
bearing interest rates ranging from 4.96% to 6.00% and 5.04% to 6.12%,
respectively. FSCO will continue to service the underlying vehicle
loans for a fee through 2004 and 2003 for the 1999 and 1998
securitizations, respectively.
The estimated fair value of capitalized servicing rights related to
the vehicle loans securitized was $27,637,000 and $24,075,000 (net of a
valuation allowance of $10,959,000 and $4,200,000) at December 31, 1999
and 1998, 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 1999 and 1998.
Following is a summary of capitalized servicing rights related to
both vehicle and mortgage loans, net of accumulated amortization (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
BALANCE, JANUARY 1 $ 174,154 $ 108,630 $ 78,586
Originated 253,312 242,069 103,084
Sold (172,544) (131,622) (56,122)
Amortization (51,907) (41,495) (16,146)
Additions to valuation allowance (6,759) (3,428) (772)
- ------------------------------------------------------- ------------- ------------- -------------
BALANCE, DECEMBER 31 $ 196,256 $ 174,154 $ 108,630
======================================================= ============= ============= =============
</TABLE>
<PAGE> 66
Mortgage Banking Activities. At December 31, 1999 and 1998, FSCO's
subsidiaries were servicing 171,925 and 153,102 mortgage loans,
aggregating $16,349,917,000 and $14,412,606,000, respectively. The
amount of loan principal that was delinquent on serviced loans at
December 31, 1999 and 1998 was approximately $492,024,000 and
$428,195,000, respectively. Related trust funds were on deposit with
FSCO's subsidiary banks.
FSCO sold mortgage servicing rights on a bulk sale basis in 1999
related to mortgage loans totaling approximately $1.9 billion with
gains of $2.2 million. During 1999 and 1998, FSCO sold mortgage loan
servicing rights on a monthly basis concurrent with the securitization
and marketing of approximately $7.4 billion and $7.0 billion of
mortgage loans, respectively. The value of such servicing rights
recognized in accordance with the provisions of SFAS No. 125 totaled
approximately $135.1 million and $131.6 million, respectively.
The mortgage servicing rights capitalized at December 31, 1999,
represents the rights to service approximately $12.7 billion of
mortgage loans. In addition, FSCO has approximately $3.6 billion of
loans for which the mortgage servicing rights were not capitalized. No
valuation allowance was required as of December 31, 1999 or 1998.
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 $208,267,000,
$169,985,000 and $122,141,000 at December 31, 1999, 1998, and 1997,
respectively.
During the year ended December 31, 1999, FSCO issued 2,251 GNMA loan
pools with security proceeds of $4,759,534,000. Additionally, FSCO was
servicing 2,312 GNMA loan pools with an outstanding security balance of
$3,561,620,000 at December 31, 1999. During the year ended December
31, 1999, FSCO originated approximately 44,000 FHA/VA
insured/guaranteed mortgage loans with loan proceeds of $1,796,457,000.
Additionally, FSCO was servicing 43,647 FHA/VA insured/guaranteed
mortgage loans with an unpaid principal balance of $3,989,068,000 at
December 31, 1999.
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1999 1998
<S> <C> <C>
Land $ 51,406 $ 48,842
Buildings and improvements 288,506 249,602
Equipment 306,335 230,239
Leasehold improvements 26,080 20,787
Construction in progress 17,620 52,641
- ------------------------------------------------------- ------------- -------------
Totals 689,947 602,111
Accumulated depreciation and amortization (260,525) (224,079)
- ------------------------------------------------------- ------------- -------------
Net $ 429,422 $ 378,032
======================================================= ============= =============
</TABLE>
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, 1999, a total of 198 bank branches were in owned
buildings, with the remaining 135 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.
<PAGE> 67
At December 31, 1999, future minimum lease payments by year related
to operating leases for premises and equipment were as follows (in
thousands):
<TABLE>
<S> <C>
2000 $ 33,827
2001 28,419
2002 21,524
2003 12,806
2004 5,521
Thereafter 13,003
- ------------------------------------------------------- -------------
Total $ 115,100
======================================================= =============
</TABLE>
Total rent expense under all operating leases for 1999, 1998, and
1997 approximated $40,997,000, $30,738,000, and $24,551,000,
respectively.
NOTE 7. DEPOSITS
Deposits consisted of the following (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1999 1998
<S> <C> <C>
Non interest-bearing demand deposit accounts $ 2,272,811 $ 2,752,009
Interest-bearing demand and savings 1,815,311 1,997,241
Money market accounts 3,541,424 2,927,577
Time certificates of deposit less than $100,000 3,641,800 3,516,882
Time certificates of deposit of $100,000 or more 1,939,070 1,464,865
- ------------------------------------------------------- ------------- -------------
Totals $ 13,210,416 $ 12,658,574
======================================================= ============= =============
</TABLE>
NOTE 8. LINE OF CREDIT
FSCO had a $200 million line of credit at December 31, 1999 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, 1999.
NOTE 9. INCOME TAXES
Accrued income taxes payable consisted of the following (in
thousands):
<TABLE>
<CAPTION>
As of December 31, 1999 1998
<S> <C> <C>
Current $ 1,752 $ (2,307)
Deferred 348,234 336,188
- ------------------------------------------------------- ------------- -------------
Totals $ 349,986 $ 333,881
======================================================= ============= =============
</TABLE>
<PAGE> 68
The income tax provisions consisted of the following components
(in thousands):
<TABLE>
<CAPTION>
For the year ended December 31: 1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ 28,640 $ 48,981 $ 51,064
State 2,967 6,437 5,974
- ------------------------------------------------------- ------------- ------------- -------------
Subtotals 31,607 55,418 57,038
- ------------------------------------------------------- ------------- ------------- -------------
Deferred:
Federal 97,430 69,436 49,146
State 13,151 10,544 9,348
- ------------------------------------------------------- ------------- ------------- -------------
Subtotals 110,581 79,980 58,494
- ------------------------------------------------------- ------------- ------------- -------------
Totals $ 142,188 $ 135,398 $ 115,532
======================================================= ============= ============= =============
</TABLE>
The tax provisions were at effective rates as follows:
<TABLE>
<CAPTION>
For the year ended December 31: 1999 1998 1997
<S> <C> <C> <C>
U.S. Federal income tax rate 35.0% 35.0% 35.0%
Change in rate resulting from:
Tax-exempt state and municipal bond income (1.4) (1.5) (1.5)
Amortization of intangibles 1.3 1.0 0.7
State income taxes, net of U.S. Federal
income tax benefit 2.9 3.1 2.9
Tax credits and miscellaneous items (3.6) (2.3) (2.2)
- ------------------------------------------------------- -------------- -------------- --------------
Effective Tax Rates 34.2% 35.3% 34.9%
======================================================= ============== ============== ==============
</TABLE>
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):
<TABLE>
<CAPTION>
As of December 31, 1999 1998
<S> <C> <C>
Assets:
Loan loss reserve $ 65,464 $ 64,875
Other reserves 1,197 169
Deferred income 3,754 3,695
Other postretirement benefits 2,435 1,859
NOL and AMT credit carryforward 22,923 2,638
Deferred compensation 7,936 6,527
Fair value adjustments on available
for sale securities 80,888
Other 3,917 4,655
- ------------------------------------------------------- ------------- -------------
Total Deferred Tax Assets 188,514 84,418
- ------------------------------------------------------- ------------- -------------
Liabilities:
Leasing operations 421,778 320,162
Depreciation 15,022 12,994
Pension plan contributions 845 4,243
Originated mortgage servicing rights 54,022 43,324
FHLB stock dividends 11,487 8,914
Deferred loan fees 7,448 5,340
Fair value adjustments on available
for sale securities - 17,647
Loan securitization 8,595
Other 17,551 7,982
- ------------------------------------------------------- ------------- -------------
Total Deferred Tax Liabilities 536,748 420,606
- ------------------------------------------------------- ------------- -------------
Net Deferred Tax Liability $ 348,234 $ 336,188
======================================================= ============= =============
</TABLE>
<PAGE> 69
NOTE 10. LONG-TERM DEBT
The details of long-term debt, including contractually related
short-term maturities, were as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1999 1998
<S> <C> <C>
Parent company:
Medium-term notes due 1999-2003 $ 23,750 $ 28,750
Floating rate notes due 1999 - 6,758
Floating rate notes due 2005 200,000 -
7.875% senior notes due 1999 - 98,962
7.50% subordinated notes due 2002 75,000 75,000
5.875% senior notes due 2003 325,000 325,000
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 585,000 585,000
Other (primarily, FHLB borrowings) 2,006,764 1,558,203
Guaranteed Preferred Beneficial Interests -
8.41% subordinated capital income
securities due 2026 150,000 150,000
Nonbank 266 309
- ------------------------------------------------------- ------------- -------------
Totals 3,640,780 3,102,982
Less current maturities included
in other short-term borrowings (1,055,025) (493,424)
- ------------------------------------------------------- ------------- -------------
Long-Term Portion $ 2,585,755 $ 2,609,558
======================================================= ============= =============
</TABLE>
Medium Term Notes Due 1999-2003: Senior medium term notes are
unsecured and bear interest at fixed rates ranging from 5.71% to 6.40%
with a weighted average coupon of 6.18%. The notes mature from 1999 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 was
the higher of 1.25% above the defined U.S. Treasury Bill rate or a rate
as determined by FSCO. The notes were unsecured. These notes were
fully redeemed in 1999.
Floating Rate Notes Due 2005: During 1999, FSCO issued $200,000,000
in floating rate notes. The interest rate on these notes is based on
the 6-month LIBOR rate and was 7.70% for the year with interest paid on
June 1 and December 1. The notes are callable on the interest payment
dates at par on or after June 1, 2000. The notes are unsecured.
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. The note was fully redeemed in 1999.
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: Senior notes of $325,000,000 are
unsecured, 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
<PAGE> 70
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 rates are based
upon the three month LIBOR and ranged from 6.28% to 6.56% at December
31, 1999 and are due in December 2003, November 2003, and October 2002,
respectively. 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, 1999 consisted of approximately $2,000,086,000 of advances
from the Federal Home Loan Bank which are collateralized primarily by
mortgage loans, bear interest at rates generally ranging from 4.8% to
6.84%, and are payable principally through November 2019; and
$6,678,000 of miscellaneous notes payable at various rates and
maturities. Federal Home Loan Bank advances with contractual
maturities in 2000 of $1,055,026,000 are recorded as other short-term
borrowings. Additionally, $167,056,000 is callable in 2000 at the
option of the creditor.
Scheduled contractual maturities of long-term debt by year were as
follows as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Parent
Company Consolidated
<S> <C> <C>
2000 $ - $ 1,055,025
2001 8,750 285,133
2002 75,000 526,873
2003 340,000 851,471
2004 - 176,608
Thereafter 475,000 745,670
- ------------------------------------------------------- --------------- -------------
Totals $ 898,750 $ 3,640,780
======================================================= =============== =============
</TABLE>
NOTE 11. COMMITMENTS, CONTINGENT LIABILITIES, AND FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
At December 31, 1999 and 1998, 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
<PAGE> 71
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, 1999 and
1998, such commitments include the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Standby letters of credit $ 403,994 $ 328,952
Undisbursed construction loans 893,483 580,920
Credit card lines 980,832 918,753
Other loan commitments to customers 4,955,797 5,078,927
Commitments to sell mortgage loans and leases 897,727 2,773,922
</TABLE>
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 trading futures and options had net gains (losses) of $242,000,
$(2,725,000), and $1,013,000 for the years ended December 31, 1999,
1998, and 1997, respectively. For the years ended December 31, 1999,
1998, and 1997, total income including gains and interest from FSCO's
overall trading activities (including non-derivative securities) was
$20,104,000, $10,167,000, and $14,132,000, 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.
<PAGE> 72
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, including
proprietary trading and hedging activities, as of December 31, 1999 and
1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Assessed
Dollar
Contract Average Value at
(Notional) Fair Fair Risk at
Amount Value Value Net Year
at Year at Year for the Gains End (3)
December 31, 1999 End (1) End (2) Year (2) (Losses) (Unaudited)
<S> <C> <C> <C> <C> <C>
Assets (Long Position):
Financial futures contracts $ 75,000 $ (1,619) $ (59) $ (21,503) $ 50
Options contracts 36,000 (180) (7) (2,473) 2
- --------------------------------------------- ------------- ------------- ------------- ------------- -------------
Total Assets $ 111,000 $ (1,799) $ (66) $ (23,976) $ 52
============================================= ============= ============= ============= ============= =============
Liabilities (Short Position):
Financial futures contracts $ - $ - $ 3 $ 1,075 $ -
Options contracts (written call) 49,000 (490) (9) (3,385) 24
- --------------------------------------------- ------------- ------------- ------------- ------------- -------------
Total Liabilities $ 49,000 $ (490) $ (6) $ (2,310) $ 24
============================================= ============= ============= ============= ============= =============
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
============================================= ============= ============= ============= ============= =============
</TABLE>
(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.
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
<PAGE> 73
contracts with third parties. At December 31, 1999 and 1998, the
notional amount of assets was $85,672,000 and $75,736,000 and
liabilities was $96,174,000 and $83,894,000. FSCO's foreign exchange
forward contracts had net gains of $4,520,000, $3,089,000, and
$2,384,000 for the years ended December 31, 1999, 1998, and 1997,
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, 1999 and 1998 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,
1999 and 1998, the notional amount related to the futures and options
were $160,000,000 and $404,700,000, and the deferred unrealized gains
(losses) were $(26,528,000) and $2,073,000, respectively. During 1999,
FSCO amortized $2,592,000 of realized gains related to the futures and
options.
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
<PAGE> 74
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, 1999. 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, 1999 and 1998, three-month
LIBOR was 6.00% and 5.07%, the six-month LIBOR was 6.13% and 5.07%, and
the prime rate was 8.50% and 7.75%, respectively.
Interest rate swaps used for interest rate management activities as
of December 31, 1999 and 1998 were as follows (in millions):
<TABLE>
<CAPTION>
Estimated Fair
Maturities as of Market Value at
December 31, December 31,
Type and Notional Amount 1999 1999 1998
<S> <C> <C> <C>
Receive Fixed Swaps:
Pay 3-month LIBOR:
$100 (fixed 5.64%) October 2002 $ 2.9 $ (1.9)
$100 (fixed 5.625%) October 2002 3.0 (1.8)
$100 (fixed 5.65%) October 2002 2.9 (1.9)
Pay 6-month LIBOR:
$100.0 (fixed 6.06%) May 2004 (3.5) -
$100.0 (fixed 6.07%) May 2004 (3.5) -
$100.0 (fixed 6.57%) June 2004 (1.7) -
Pay commercial paper + 0.4675: Variable through
$336.47 (fixed 5.042%) March 2003 (7.8) 0.9
Pay Fixed Swaps:
Pay commercial paper:
$100 (fixed 4.603%) January 2002 2.1 (3.9)
$236.47 (fixed 4.605%) January 2002 5.0 2.0
Customer Transaction Hedges: Various maturities
$55.8 (1999); $25.3 (1998) through 2004 (0.3) (1.3)
- --------------------------------------------- -------------------------------------------
Total Positions ($1,328.7 and $998.2
in 1999 and 1998, respectively) $ (0.9) $ (7.9)
============================================= ===========================================
</TABLE>
NOTE 12. STOCKHOLDERS' EQUITY
In 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 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 1997.
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 to conform with SFAS No. 128.
<PAGE> 75
The computations of EPS under SFAS No. 128 are summarized below (in
thousands, except for per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------- -------------------------------- --------------------------------
Per Per Per
Average Share Average Share Average Share
Income Shares Amount Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income $273,342 $247,680 $215,274
Less preferred stock
dividends 27 28 30
---------- ---------- ----------
EPS Basic:
Income available to
common stockholders 273,315 192,739 $ 1.42 247,652 187,572 $ 1.32 215,244 182,240 $ 1.18
---------------------- ---------------------- ----------------------
Effect of Dilutive Securities:
Options - 4,931 - 5,882 - 6,089
Convertible preferred 27 364 28 386 30 410
---------------------- ---------------------- ----------------------
Total dilution 27 5,295 28 6,268 30 6,499
---------------------- ---------------------- ----------------------
EPS Diluted:
Income available to
common stockholders
with assumed
conversions $273,342 $198,034 $ 1.38 $247,680 $193,840 $ 1.28 $215,274 $188,739 $ 1.14
======================================================= ================================ ================================
</TABLE>
Earnings per common share diluted are computed assuming all
outstanding preferred stock is converted into common shares on the
basis of 41.00625 shares of common for each share of preferred with the
elimination of dividends on the preferred stock, except in those years
where the effect of such conversion is antidilutive, and the effect of
stock options outstanding using the treasury stock method.
<PAGE> 76
Changes in Shares of Stock: A summary of the changes in shares of
stock during the three years ended December 31, 1999 follows (in
thousands):
<TABLE>
<CAPTION>
Preferred
Stock -
Common Stock - Series "A"
Par Value $1.25 $3.15
----------------------------- Cumulative
Held In Convertible
Issued Treasury No Par
<S> <C> <C> <C>
Balance, January 1, 1997 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
Sale of common stock through dividend
reinvestment and common stock
purchase plan 159 - -
Purchase of common treasury stock - 717 -
Common stock issued for acquisitions 5,165 (3,338) -
Conversion of preferred stock to common 25 - -
Sale of stock to employee benefit plans 1,289 - -
- ---------------------------------------------------------------- -------------- -------------
Balance, December 31, 1999 197,646 1,675 9
================================================================ ============== =============
Shares Authorized, December 31, 1999 and 1998 600,000
Shares Authorized, December 31, 1997 300,000
</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, 1999, a total of 1,854,222
shares were issued pursuant to the plan.
Conversion of all preferred stock outstanding at December 31, 1999
would require 352,490 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
<PAGE> 77
price will be $85 per preferred share. This successor plan took effect
immediately upon expiration of the rights plan on August 28, 1999.
NOTE 13. EMPLOYEE BENEFIT PLANS
Retirement Plan: FSCO and its subsidiaries have a retirement plan
(the Plan) which covers generally all employees with one year or more
of service of at least 1,000 hours who are at least 21 years of age.
The retirement benefits are based on years of service and the average
of the employee's highest three consecutive years of base salary with
100% vesting at 5 years of service. FSCO's policy is to fund the
actuarially computed retirement cost accrued. Contributions are
intended to provide not only for benefits attributed to service to date
but also for those expected to be earned in the future.
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,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Retirement Plan Postretirement Benefits
-------------------------- --------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 166,209 $ 127,894 $ 9,835 $ 6,767
Service cost 9,688 8,099 596 459
Interest cost 11,687 10,430 761 629
Actuarial (gain) loss (26,029) 25,436 541 2,347
Benefits paid (6,163) (5,650) (191) (367)
- --------------------------------------------- ------------ ------------- ------------ -------------
Benefit obligation at end of year 155,392 166,209 11,542 9,835
- --------------------------------------------- ------------ ------------- ------------ -------------
Change in plan assets:
Fair value of plan assets at
beginning of year 151,986 127,296 - -
Actual return on plan assets 21,712 11,140 - -
Participant contributions - - 332 278
Employer contributions - 19,200 191 367
Benefits paid (6,163) (5,650) (523) (645)
- --------------------------------------------- ------------ ------------- ------------ -------------
Fair value of plan assets at end of year 167,535 151,986 - -
- --------------------------------------------- ------------ ------------- ------------ -------------
Funded status 12,143 (14,223) (11,542) (9,835)
Unrecognized transition (asset) or
obligation (864) (1,337) 3,800 4,060
Unrecognized net actuarial (gain) loss (10,711) 23,763 1,256 765
Unrecognized prior service cost 5,210 6,356 - -
- ----------------------------------------------------------------------- --------------------------
Prepaid (accrued) benefit cost included
in the consolidated balance sheet $ 5,778 $ 14,559 $ (6,486) $ (5,010)
======================================================================= ==========================
</TABLE>
Assumptions used in determining the projected benefit obligations as
of December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
Retirement Plan Postretirement Benefits
-------------------------- --------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Discount rate 8.00% 7.00% 8.00% 7.00%
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>
<PAGE> 78
The net expense for the plans included the following components
(in thousands):
<TABLE>
<CAPTION>
Retirement Plan Postretirement Benefits Plan
------------ ------------ ------------- ------------ ------------ -------------
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Components of net
periodic benefit cost:
Service cost $ 9,688 $ 8,099 $ 6,139 $ 596 $ 459 $ 208
Interest cost 11,687 10,430 8,825 761 628 468
Expected return on plan assets (13,593) (11,388) (8,975) - - -
Amortization of prior service cost 1,146 1,146 1,146 - - 186
Amortization of transition asset (473) (473) (473) 260 260 -
Recognized actuarial loss 327 147 - 51 - -
- ------------------------------------------- ------------ ------------ ------------- ------------ ------------ -------------
Net periodic benefit cost $ 8,782 $ 7,961 $ 6,662 $ 1,668 $ 1,347 $ 862
=========================================== ============ ============ ============= ============ ============ =============
</TABLE>
Assumptions used in determining the net pension expense were:
1999 1998 1997
Discount rate 7.00% 7.25% 7.75%
Rate of increase in compensation levels 4.50 4.50 4.50
Expected long-term rate of return on assets 9.00 9.00 9.00
The assumed health care cost trend rate used to measure the expected
cost of benefits covered by the Postretirement Benefits Plan for 1999
is 8.5%; the rate is assumed to decrease each successive year until it
reaches 6% in 2004, 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, 1999 by approximately $1.0 million and service and
interest cost components by $0.2 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, 1999 by approximately $0.9 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 $9.0 and $8.4 million
were included in other liabilities for these plans at December 31, 1999
and 1998, respectively. For the years ended December 31, 1999, 1998,
and 1997, expenses related to these plans were approximately $1.6,
$1.6, and $1.3 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 $5,474,000, $4,926,000, and $4,068,000 in 1999,
1998, and 1997, respectively.
Stock-Based Compensation Plans: At December 31, 1999, FSCO had three
stock-based compensation plans, which are described below. FSCO applies
APB Opinion No. 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
<PAGE> 79
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:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Net income:
As reported $ 273,342 $ 247,680 $ 215,274
Pro forma 266,901 243,923 213,076
Earnings per common share basic:
As reported $ 1.42 $ 1.32 1.18
Pro forma 1.38 1.30 1.17
Earnings per common share diluted:
As reported $ 1.38 $ 1.28 1.14
Pro forma 1.35 1.26 1.13
</TABLE>
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 1999, 1998, and 1997,
respectively: dividend yield of 2.46%, 3.18%, and 3.4%; expected
volatility of 42%, 37%, and 37%; risk-free interest rates of 5.92%,
5.51%, and 6.56%, and expected lives of 7 years for 1999 and of 10
years for 1998 and 1997.
<PAGE> 80
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>
1999 1998 1997
----------------------- ----------------------- -----------------------
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 9,458,413 $10.05 10,265,706 $ 7.79 10,050,407 $ 6.03
Expired - - - - - -
Granted 1,901,580 22.68 1,346,925 22.55 1,548,495 14.37
Exercised (1,285,099) 5.63 (2,046,150) 4.45 (1,242,635) 4.39
Forfeited (112,955) 21.50 (108,068) 17.93 (90,561) 10.57
-------------- -------------- --------------
Outstanding at end
of year 9,961,939 $12.86 9,458,413 $10.05 10,265,706 $ 7.79
============== ============== ==============
Options exercisable at year end 6,257,814 6,477,935 5,901,492
============== ============== ==============
Weighted average fair market
value of options granted
during year $ 9.40 $ 8.52 $ 5.46
============== ============== ==============
</TABLE>
The following table summarizes information about the Comprehensive
Management Incentive Plan fixed stock options outstanding at December 31,
1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------ -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 2.63 - $ 4.99 939,855 1.55 $ 3.16 939,855 $ 3.16
5.00 - 7.99 3,612,862 3.49 6.83 3,607,536 6.83
8.00 - 12.99 977,838 6.23 11.87 736,706 11.84
13.00 - 18.99 1,355,319 7.01 14.50 672,772 14.44
19.00 - 25.31 3,076,065 8.69 22.65 300,945 22.57
- ------------------------------------------------------------ -----------------------
$ 2.63 - $25.31 9,961,939 5.66 $12.86 6,257,814 $ 8.44
============================================================ =======================
</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. There were no grants under
this plan in 1999. 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: dividend yield of 3.18% and 3.4%, respectively; expected
volatility of 37%; risk-free interest rates 5.51% and 6.79%,
respectively; and expected lives of 10 years.
<PAGE> 81
A summary of these options follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ ------------------------
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 172,000 $ 12.66 157,500 $ 7.20 165,375 $ 7.07
Expired - - NA - NA
Granted - 54,000 24.50 2,250 15.83
Exercised (1,000) 24.50 (39,500) 7.07 (10,125) 7.07
Forfeited - - NA - NA
- ---------------------------------------------------------------- ------------------------ ------------------------
Outstanding at end of year 171,000 $ 12.59 172,000 $ 12.66 157,500 $ 7.20
================================================================ ======================== ========================
Options exercisable at year end 135,000 116,500 94,500
================================================================ ======================== ========================
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, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 7.07 - $14.99 115,750 5.42 $ 7.07 115,750 $ 7.07
15.00 - 23.99 2,250 7.42 15.83 2,250 15.83
24.00 - 24.50 53,000 8.42 24.50 17,000 24.50
- ----------------------------------------------------------------------------------- -------------------------------
$ 7.07 - $24.50 171,000 6.38 $ 12.59 135,000 $ 9.41
=================================================================================== ===============================
</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, no shares of stock were issued to employees in 1999, 716,220
shares of common stock were issued to employees in 1998, and no shares
of stock were issued to employees in 1997.
NOTE 14. RESTRICTIONS ON THE TRANSFER OF FUNDS
National and state banking and insurance regulations impose
restrictions on the ability of FSCO's bank and insurance subsidiaries
to transfer funds to FSCO in the form of loans or dividends. At
December 31, 1999 and 1998, FSCO's equity in all of its subsidiaries
was $2,210,472,000 and $1,945,390,000, respectively, of which
$1,664,345,000 and $1,428,846,000 were restricted and $546,127,000 and
$516,543,000 were unrestricted by such regulations.
NOTE 15. MERGERS AND ACQUISITIONS
On June 6, 1999, FSCO announced that it has signed a definitive
agreement to merge with Zions Bancorporation (Zions). The new
organization will be known as First Security Corporation, headquartered
in Salt Lake City, and is expected to be the nation's 20th largest bank
holding company with assets totaling approximately $40 billion. This
merger is expected to close in the first quarter of 2000, pending
shareholder approval, and to be accounted for as a pooling-of-interests.
As part of the merger, each outstanding share of Zions common stock
<PAGE> 82
will be converted into one share of common stock of the combined
company and each outstanding share of FSCO common stock will be
converted into 0.442 of a share of common stock of the combined
company.
Under FSCO's stock-based plans, unvested stock options become fully
vested and exercisable on a change of control of FSCO. In addition,
upon a change of control of FSCO, each option holder will have the
right (the rights) to elect, during the 60-day period following
shareholder approval of the merger, to exercise each outstanding option
and receive in respect thereof the number of shares of FSCO common
stock with a fair market value equal to the difference between (a) the
higher of the merger price or the highest reported sales price during
the 60-day period prior to and including the date of shareholder
approval and (b) the exercise price. The merger will constitute a
change in control, under severance agreements, between FSCO and a
number of its executive officers. The merger will also constitute a
change of control under the FSCO's stock-based plans.
Accordingly, upon shareholder approval of the merger, FSCO will
incur a charge to income, an increase in deferred tax assets, and an
increase in equity related to accelerated vesting and activation of the
rights. The amounts are not precisely determinable at this time
because they depend on the price of FSCO stock in the quarter in which
the FSCO stockholders vote on the merger. If this price were the same
as the closing price of FSCO common stock on February 18, 2000, FSCO
would recognize an after-tax charge to earnings of approximately $52
million, an increase in deferred tax assets of approximately $33
million, and a net increase in equity of approximately $33 million.
On February 12, 1999, FSCO acquired Van Kasper & Company, a full-
service investment banking and brokerage subsidiary headquartered in
San Francisco, California, through the issuance of 3,338,000 shares of
FSCO common stock with a contingent issuance of 1,159,000 shares after
three years if earnings targets are met. Van Kasper's assets and
liabilities at the date of acquisition approximated $19,609,000 and
$12,782,000, respectively. On June 1, 1999, FSCO and its First
Security Bank Nevada (FSBN) subsidiary acquired Comstock Bancorp and
its Comstock Bank subsidiary headquartered in Reno Nevada, through the
issuance of 3,476,000 shares of FSCO common stock. Comstock's assets
and liabilities at the date of acquisition approximated $208,092,000
and $193,371,000, respectively. On June 14, 1999, FSCO and FSBN
acquired Xeon Financial Corporation headquartered in Stateline, Nevada,
through the issuance of 1,562,000 shares of FSCO common stock. Xeon's
assets and liabilities at the date of acquisition approximated
$121,740,000 and $112,801,000, respectively. The acquisitions were
accounted for using the purchase method of accounting and resulted in
intangible assets for FSCO of approximately $148,474,000 and are
amortized over 25 years, except for core deposits which are amortized
over 10 years.
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 were made to amounts
previously reported by CSB to conform to FSCO accounting practices and
policies.
<PAGE> 83
Results of operations previously reported and as restated in
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Previously Reported
------------------------------ Reclass/ FSCO
FSCO CSB Adjust Restated
<S> <C> <C> <C> <C>
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
</TABLE>
On February 2, 1998, FSCO acquired Rio Grande Bancshares, Inc.
(RGB), headquartered in Las Cruces, New Mexico, through the issuance of
4,350,000 shares of FSCO common stock. 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 and are amortized over 25 years except for
core deposits which are amortized over 10 years.
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 and are amortized over 25 years except for core deposits
which are amortized over 10 years.
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 1999, 1998, and 1997 as if the companies had combined
at the beginning of the periods are not presented because the effect
was not material.
NOTE 16. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 1999, FSCO adopted 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. The adoption
of SFAS No. 134 did not have a material effect on FSCO's consolidated
financial statements.
On July 7, 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133", an amendment of FASB Statement No. 133
which establishes accounting and reporting standards for derivative
instruments and hedging activities and requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
<PAGE> 84
value. SFAS No. 133 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. SFAS No. 133, as amended by SFAS No. 137, is
effective for all quarterly and annual financial statements of fiscal
years beginning after June 15, 2000. FSCO management is currently
evaluating the effects of this change in its accounting for derivatives
and hedging activities and does not plan to implement SFAS No. 133
early.
NOTE 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, 1999, that FSCO meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999 and 1998, 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 1998. Subsequent to 1998, its mortgage loan
balance outstanding 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.
<PAGE> 85
<TABLE>
<CAPTION>
Minimum
To Be "Well
Capitalized" Under
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- ----------------------
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total Capital (Tier 1 + Tier 2)
to Risk Weighted Assets:
Consolidated $ 2,231,672 11.41% $ 1,564,153 8.0% $ 1,955,191 10.0%
FS Bank 1,757,428 11.19 1,256,828 8.0 1,571,034 10.0
FSB New Mexico 229,926 13.07 140,706 8.0 175,882 10.0
FSB Nevada 123,703 15.20 65,122 8.0 81,403 10.0
FSB California 113,028 13.00 69,579 8.0 86,974 10.0
Tier 1 Capital to Risk
Weighted Assets:
Consolidated $ 1,684,323 8.61% $ 782,077 4.0% $ 1,173,115 6.0%
FS Bank 1,421,700 9.05 628,414 4.0 942,621 6.0
FSB New Mexico 208,530 11.86 70,353 4.0 105,529 6.0
FSB Nevada 113,480 13.94 32,561 4.0 48,842 6.0
FSB California 102,151 11.75 34,790 4.0 52,184 6.0
Tier 1 Capital to End of Period
Assets (Leverage Ratio):
Consolidated $ 1,684,323 7.27% $ 1,045,309 4.0% $ 1,306,636 5.0%
FS Bank 1,421,700 7.98 834,277 4.0 1,042,847 5.0
FSB New Mexico 208,530 7.37 117,270 4.0 146,588 5.0
FSB Nevada 113,480 8.32 56,022 4.0 70,027 5.0
FSB California 102,151 8.73 50,410 4.0 63,012 5.0
As of December 31, 1998
Total Capital (Tier 1 + Tier 2)
to Risk Weighted Assets:
Consolidated $ 1,836,157 10.72% $ 1,370,656 8.0% $ 1,713,320 10.0%
FS Bank 1,338,155 9.39 1,150,978 8.0 1,438,722 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 Southern 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 8.62% $ 685,328 4.0% $ 1,027,992 6.0%
FS Bank 1,191,683 8.37 575,489 4.0 863,233 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 Southern 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 Southern New Mexico 47,138 11.29 17,028 4.0 21,285 5.0
</TABLE>
NOTE 18. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. In
the case of cash and short-term investments, the carrying amount is
considered a reasonable estimate of fair value. For securities, the
quoted market price is used to estimate fair value. Trading account
securities are marked to market, therefore the carrying amount is
considered a reasonable estimate of fair value. The carrying amount of
deposits with no stated maturity, such as demand deposits, money market
accounts, and savings accounts, is considered a reasonable estimate of
fair value. The carrying amounts of securities sold under repurchase
agreements and short-term borrowings are considered a reasonable
estimate of fair value. The fair value of the remainder of on-balance-
sheet instruments, such as loans, certificates of deposit, and long-
term borrowings, is estimated by using a discounted cash flow approach.
<PAGE> 86
FSCO employs a modeling tool which discounts estimated future cash
flows through the projected maturity using market discount rates that
approximately reflect the credit risk, operating cost, and interest
rate risk potentially inherent in the instrument.
The estimated fair value of FSCO's financial futures and options
used in trading activities is obtained from market quotes. The
estimated fair value of interest rate swaps, caps, and corridors are
obtained from market quotes representing the estimated amount FSCO
would receive or pay to terminate the contracts or agreements, taking
into account current interest rates. The estimated fair value of
commitments to extend credit and letters of credit are estimated using
the maximum fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements, the present
creditworthiness of the counterparties, and the difference between
current levels of interest rates and the committed rates.
Fair value estimates are made as of a specific point in time.
Because no market exists for a significant portion of FSCO's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, interest rate levels,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of judgment and therefore cannot be
determined or relied on with any degree of certainty. Changes in
assumptions could significantly affect the estimates.
A summary of the carrying amounts and estimated fair values for FSCO
was as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
Carrying/ Carrying/
Notional Estimated Notional Estimated
As of December 31, Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments $ 1,096,999 $ 1,096,999 $ 1,257,150 $ 1,257,150
Trading account securities 22,650 22,650 329,109 329,110
Available for sale securities 5,528,269 5,528,269 4,764,127 4,764,127
Net loans (excluding leases) 12,790,047 12,730,509 12,545,713 12,721,556
- ---------------------------------------------------------------------------------- ------------------------------
Total Financial Assets $ 19,437,965 $ 19,378,427 $ 18,896,099 $ 19,071,943
================================================================================== ==============================
Financial Liabilities:
Total deposits, excluding certificates $ 7,629,546 $ 6,705,422 $ 7,676,827 $ 7,170,305
Certificates of deposit 5,580,870 5,570,763 4,981,747 5,037,810
Short-term borrowings 2,476,120 2,476,120 1,950,076 1,950,076
Securities sold under repurchase agreements 2,311,267 2,311,267 2,315,513 2,315,513
Long-term debt 2,585,755 2,578,277 2,609,558 2,697,168
- ---------------------------------------------------------------------------------- ------------------------------
Total Financial Liabilities $ 20,583,558 $ 19,641,849 $ 19,533,721 $ 19,170,872
================================================================================== ==============================
Off-Balance Sheet Financial Instruments:
Financial futures and options (non-trading) $ (26,528) $ (2,289) $ 2,073 $ 210
Foreign Exchange Contracts:
Assets 2,885,512 1,412,535 1,263 958
Liabilities (2,128,620) 1,461,261 (1,151) (300)
Interest rate swaps, caps, and corridors-
interest rate risk management:
In a net receivable position 530,428 16,418 119 2,877
In a net payable position (242,888) (17,319) (358) (10,764)
Letters of credit and other commitments
to extend credit - (34,815) - (32,374)
- ---------------------------------------------------------------------------------- ------------------------------
Total Off-Balance-Sheet Financial Instruments $ 1,017,904 $ 2,835,791 $ 1,946 $ (39,393)
================================================================================== ==============================
</TABLE>
<PAGE> 87
NOTE 19. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
<TABLE>
<CAPTION>
Condensed Balance Sheets:
December 31, 1999 and 1998 (in thousands)
- --------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 54 $ 54
Securities purchased under resale
agreement with subsidiary bank 34,396 32,036
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents 34,450 32,090
Commercial loans receivable from subsidiaries:
Banks 325,000 464,570
Nonbanks 175,293 123,920
Investments in subsidiaries:
Banks 2,008,729 1,843,134
Nonbanks 201,743 102,256
Other assets 93,604 7,206
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,838,819 $ 2,573,176
==================================================================================================
Liabilities and Stockholders' Equity:
Accrued interest and preferred dividends payable $ 13,070 $ 13,571
Short-term borrowings - 110,720
Long-term debt:
With subsidiary 154,640 154,640
Other 898,750 698,750
Other liabilities 2,459 -
- --------------------------------------------------------------------------------------------------
Total Liabilities 1,068,919 977,681
- --------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock-Series "A", $3.15 cumulative convertible
(9 shares issued) 451 484
Common stock (197,646 and 191,008 shares issued, respectively) 247,058 238,760
Paid-in surplus 296,822 181,906
Retained earnings 1,398,619 1,233,264
Accumulated other comprehensive income (loss) (131,652) 30,377
- --------------------------------------------------------------------------------------------------
Subtotal 1,810,847 1,684,307
Common treasury stock, at cost (1,675 and 4,296
shares, respectively) (41,398) (89,296)
- --------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity 1,769,449 1,595,011
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,769,900 1,595,495
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,838,819 $ 2,573,176
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income:
For the years ended December 31, 1999, 1998, and 1997
(in thousands)
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Cash dividends from subsidiaries - banks $ 81,923 $ 99,013 $ 80,636
Other income (principally interest from subsidiaries) 30,630 31,945 36,955
- -----------------------------------------------------------------------------------------------------------------
Total income 112,553 130,958 117,591
Interest expense 65,860 50,729 48,154
Noninterest expense 301 510 174
Provision (benefit) for taxes (12,555) (6,753) (4,336)
- -----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries 58,947 86,472 73,599
Equity in undistributed earnings of subsidiaries:
Banks 216,241 164,685 148,342
Nonbanks (1,846) (3,477) (6,667)
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 273,342 $ 247,680 $ 215,274
=================================================================================================================
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows:
For the years ended December 31, 1999, 1998, and 1997
(in thousands)
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 273,342 $ 247,680 $ 215,274
Adjustments to reconcile net income to
net cash provided by operating activities (213,407) (158,398) (140,329)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 59,935 89,282 74,945
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of securities (82,547) - (700)
Proceeds from sales of securities - 350 20,000
Loans and capital contributions made to subsidiaries (424,960) (486,655) (263,147)
Principal collected on loans to subsidiaries 513,157 304,127 319,710
Cash investments in subsidiaries (35,790) (54,040) (1,478)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Investing Activities (30,140) (236,218) 74,385
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from long-term debt 200,000 325,000 -
Payments on long-term debt and short-term borrowings (110,720) (4,084) 174
Proceeds from issuance of common stock and
sales of treasury stock 10,721 25,654 11,708
Purchase of treasury stock (19,449) (87,906) (89,467)
Dividends paid (107,987) (95,611) (75,726)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing Activities (27,435) 163,053 (153,311)
- -----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash And Cash Equivalents 2,360 16,117 (3,981)
Cash And Cash Equivalents, Beginning Of Year 32,090 15,973 19,954
- -----------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents, End Of Year $ 34,450 $ 32,090 $ 15,973
=================================================================================================================
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the year for:
Interest $ 66,360 $ 47,902 $ 47,675
=================================================================================================================
Income taxes (12,984) (8,332) 1,964
=================================================================================================================
</TABLE>
Supplemental Schedule of Non Cash Investing and Financing Activities
(Note 15):
In 1999, FSCO purchased the following:
(1) Van Kasper & Company, a full-service investment banking and
brokerage subsidiary with total assets of approximately $19,609,000 and
liabilities of $12,782,000 through the issuance of 3,338,000 shares of
FSCO's common stock;
(2) Comstock Bancorp with total assets of approximately $208,092,000
and liabilities of $193,371,000 through the issuance of 3,477,000
shares of FSCO's common stock;
(3) Xeon Financial Corporation with total assets of approximately
$121,740,000 and liabilities of $112,801,000 through the issuance of
1,563,000 shares of FSCO's common stock.
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 4,350,000 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> 89
INDEPENDENT AUDITORS' REPORT
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,
1999 and 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1999. 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 auditing standards
generally accepted in the United States of America. 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, 1999 and 1998,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States of
America.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
February 18, 2000
<PAGE> 90
CORPORATE INFORMATION
CORPORATE OFFICES
79 S. Main Street
Salt Lake City, Utah 84111
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
Moody's
Thomson Standard Investors
BankWatch & Poor's Service
- --------------------------------------------------------------------
Senior Debt A BBB+ A2
Subordinated Debt A- BBB A3
Subordinated Capital Income Securities -- BBB- a2
- --------------------------------------------------------------------
STOCK INFORMATION
First Security shares are traded on the Nasdaq National Market System
under the symbol "FSCO". Nasdaq market makers include:
A. G. Edwards & Sons, Inc.
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., Inc.
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 & Companies, Inc.
Prudential Securities
Salomon Smith Barney
Sherwood Securities Corp.
Stearn, Agee & Leach, Inc.
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
<PAGE> 91
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]
TO REQUEST ADDITIONAL INFORMATION
Annual Report on Form 10-K: Stockholders can obtain a copy of any exhibits
filed with First Security'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) 246-5044
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 from 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:
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) 246-5044
e-mail: [email protected]
Internet Address: 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> 92
Part III.
Item 10. Directors and Executive Officers of the Registrant
MANAGEMENT OF FIRST SECURITY CORPORATION
Board of Directors
The business of First Security is managed under the direction of its Board
of Directors. The Board has responsibility for establishing broad corporate
policies, for the overall performance of First Security and for the election
and compensation of officers of First Security. It is not, however, involved
in managing First Security and its operating units on a day-to-day basis.
The Board is kept advised of First Security's operations and results through
regular written reports from, and discussions with, the Chairman, the
President, the Chief Financial Officer and other executive officers of First
Security.
The Board of Directors meets regularly during the year to review
significant developments affecting First Security and to act on matters
requiring Board approval. It also holds special meetings when one or more
important matters requires Board action between scheduled meetings.
Executive officers responsible for significant operations or supervisory
activities are frequently invited to meet with the Board of Directors to
discuss their areas of responsibility.
As disclosed to First Security, at year end the current Directors of First
Security beneficially owned as a group the equivalent of 10,910,306 shares,
or approximately 5.3% of First Security's outstanding Common Stock plus
options plus stock equivalency units(5) at December 31, 1999, including
2,376,683 option shares exercisable within 60 days but which were
unexercised, 191,993 stock equivalency units(5) held in deferred compensation
accounts and including 757 shares beneficially owned by Dr. Chase N.
Peterson, First Security's only Honorary Director.
During 1999, the Board of Directors held seven meetings and one set of
actions taken by unanimous written consent. All Directors attended all of
the seven Board meetings except Messrs. Dee, Gardner, Maloof and Parker, who
attended six meetings, and Ms. Huntsman, who attended five meetings.
The Executive Committee of the Board of Directors exercises the powers of
the Board in the management of the business and affairs of First Security
between Board of Directors meetings or when the Board could not reasonably or
timely be convened. The Executive Committee keeps regular minutes of its
meetings and reports to the Board of Directors at the regular meetings of the
Board. The Executive Committee met fourteen times during 1999. All members
of the Committee attended all fourteen meetings except Messrs. Heiner and
Parker, who attended thirteen; and Mr. Dee, who attended twelve meetings.
The Audit Committee of the Board, which met six times during 1999, reports
to the Board of Directors with respect to various auditing and accounting
matters, the scope of audit procedures, the performance of the internal
auditors and examiners, and accounting and compliance practices of First
Security. All members of the Audit Committee attended all of the scheduled
meetings, except Mr. Parker, who attended four meetings. None of the members
of the Audit Committee are employees of First Security, but Mr. Heiner is a
former President and Chief Administrative Officer of FSCO, having retired
from those positions in 1991.
The Compensation Committee administers the various incentive award and
equity plans of First Security on behalf of the Board of Directors. The
Compensation Committee also determines compensation for the Executive
Officers of First Security who serve on the Management Committee (Messrs.
Caughlin, Eccles, Evans, Golden, Hardy, Howell, McMurray, Nelson and
Ulbrich). The Compensation Committee met on January 19, 1999, and all
<PAGE> 93
members of the Committee attended the meeting. None of the members of the
Compensation Committee are employees or former employees of First Security.
The Nominating Committee selects and nominates candidates to fill
vacancies on the Board of Directors and proposes these nominees to the Board
of Directors and Shareholders. This Committee is willing to consider
nominees for future election to the Board of Directors, and Shareholders may
submit in writing the names and qualifications of proposed nominees to the
Secretary of First Security. The Nominating Committee meets as needed. The
membership in the Nominating Committee is the same as for the Executive
Committee. The Nominating Committee met on January 19, 1999, and all members
of the Nominating Committee attended the meeting except Mr. Parker.
Honorary Directors are provided information about First Security on the
same basis as regular Directors, and are invited to meetings of the Board of
Directors, although Honorary Directors do not vote on any matter before the
Board. Currently Dr. Chase N. Peterson is serving as the only Honorary
Director of First Security. He beneficially owned 757 shares of First
Security's Common Stock at year-end 1999.
The following table lists each of the 20 Directors of First Security,
his/her age, the year he/she first became a Director of First Security,
his/her principal occupation, his/her business experience during the past
five years, other material officerships or directorships in other companies
held at this time, and beneficial stock ownership in First Security as of
December 31, 1999. (With the exception of Mr. Eccles, none of the directors
was individually the beneficial owner of more than one percent of outstanding
shares of First Security.) Directors serving on the Executive(*), Audit(+),
Compensation(#), or Nominating (@) Committees of the Board of Directors are
also so identified:
TABLE 17: DIRECTORS OF FIRST SECURITY CORPORATION
*@+JAMES C. BEARDALL, 60, has been a Director of First Security since 1989
and is Chairman of the Board's Audit Committee. He is Chairman, President
and Chief Executive Officer of Anderson Lumber Company. At year-end 1999,
Mr. Beardall was the beneficial owner of 52,787 shares of First Security's
Common Stock, including 11,125 option shares exercisable within 60 days, but
not yet exercised, and 38,625 stock equivalency units(5) held in his deferred
compensation account.
*@#RODNEY H. BRADY, 67, has been a Director of First Security since 1985.
He is Chairman of the Board's Compensation Committee and President and Chief
Executive Officer of Deseret Management Corporation (private holding company
for several businesses). Mr. Brady is also a Director of Bergen Brunswig
Corporation (pharmaceuticals), Deseret Mutual Benefit Association (employee
benefit insurance) and Management Training Corporation (operator of training
centers). At year-end 1999, he beneficially owned 154,336 shares of First
Security's Common Stock, including 11,125 option shares exercisable within 60
days, but not yet exercised, and 48,545 stock equivalency units(5) held in
his deferred compensation account.
JAMES E. BRUCE, 79, has been a Director of First Security since 1983. He
is a retired Chairman and Chief Executive Officer of Idaho Power Company. At
year-end 1999, Mr. Bruce beneficially owned 64,139 shares of First Security's
Common Stock, including 4,750 option shares exercisable within 60 days, but
not yet exercised.
*@#THOMAS D. DEE II, 79, has been a Director(1) of First Security since
1976. He is President of The Dee Company (investments). At year-end 1999,
Mr. Dee beneficially owned 237,937 shares of First Security's Common Stock.
<PAGE> 94
*@SPENCER F. ECCLES, 65, has been a Director of First Security since 1967.
He is Chairman and Chief Executive Officer of First Security and Chairman of
the Executive Committee and of the Management Committee. Mr. Eccles serves
as a Director of First Security Bank, N.A. Mr. Eccles also serves as a
Director of Anderson Lumber Company (lumber) and Union Pacific Corporation
(railroad and operations). At year-end 1999, he was the beneficial owner of
6,999,381 shares of First Security's Common Stock(2,3), including 1,661,967
option shares exercisable within 60 days, but not yet exercised, and 67,716
shares held in his account in First Security's Incentive Savings Plan, and 63
shares of First Security's Preferred Stock. This number of shares represents
3.3% of the total outstanding shares of Common Stock plus options plus stock
equivalency units(5) at December 31, 1999.
*@MORGAN J. EVANS, 62, has been a director since 1991. He is President
and Chief Operating Officer of First Security and is a member of First
Security's Management Committee. Mr. Evans also serves as a Director of
First Security Bank, N.A. At year-end 1999, Mr. Evans was the beneficial
owner of 675,151 shares of First Security's Common Stock, including 597,591
option shares exercisable within 60 days, but not yet exercised, and 18,296
shares held in his account in First Security's Incentive Savings Plan. This
number of shares represents 0.3% of the total outstanding shares of Common
Stock plus options plus stock equivalency units(5) at December 31, 1999.
DR. DAVID P. GARDNER, 66, has been a Director of First Security since
1976(1). He is a former President of the University of California System,
and is presently President of the William and Flora Hewlett Foundation and
Chairman and Chief Executive Officer of the George S. and Delores Dore'
Eccles Foundation (philanthropy). Dr. Gardner is also a Director of Fluor
Corporation (construction) and of the United Funds (registered investment
company). At year-end 1999, Dr. Gardner beneficially owned 21,754(3) shares
of First Security's Common Stock, which number includes 3,514 shares held in
a trust established by his deceased spouse as to which Dr. Gardner acts as
trustee, 11,125 option shares exercisable within 60 days, but not yet
exercised, and 7,115 stock equivalency units(5) held in his deferred
compensation account.
ROBERT H. GARFF, 55, has been a Director of First Security since 1996. He
is Chief Executive Officer of Garff Enterprises, Inc. (management of
automobile dealerships and other enterprises). At year-end 1999, Mr. Garff
beneficially owned 22,018 shares of First Security's Common Stock, including
11,125 option shares exercisable within 60 days, but not yet exercised, and
8,616 stock equivalency units(5) held in his deferred compensation account.
JAY DEE HARRIS, 82, has been a Director of First Security since 1975. He
is the President and a Director of Harris Truck and Equipment, Inc.
(construction equipment). At year-end 1999, Mr. Harris beneficially owned
29,529 shares of First Security's Common Stock, including 11,125 option
shares exercisable within 60 days, but not yet exercised, and 14,609 stock
equivalency units(5) held in his deferred compensation account.
*@+ROBERT T. HEINER, 75, has been a Director of First Security since 1981.
He is a retired President and Chief Administrative Officer of First Security.
Mr. Heiner is a Director of Management Training Corporation (operator of
training centers). At year-end 1999, Mr. Heiner was the beneficial owner of
113,206 shares of First Security's Common Stock, including 5,000 option
shares exercisable within 60 days, but not yet exercised, and 23,831 stock
equivalency units(5) held in his deferred compensation account.
KAREN H. HUNTSMAN, 62, has been a Director of First Security since 1992.
She is a Director and Executive Officer of Huntsman Chemical Corporation
(private diversified chemical company). At year-end 1999, Mrs. Huntsman
beneficially owned 28,000 shares of First Security's Common Stock, including
1,000 options shares exercisable within 60 days, but not yet exercised.
<PAGE> 95
#G. FRANK JOKLIK, 72, has been a Director of First Security since 1981.
Mr. Joklik is President and Chief Executive Officer of MK Gold Company (gold
exploration and development). He retired as President and Chief Executive
Officer of Kennecott Corporation (mining) in 1994. Mr. Joklik is also a
director of Cleveland Cliffs, Inc., a company engaged in mining and related
businesses. At year-end 1999, Mr. Joklik beneficially owned 11,125 shares of
First Security's Common Stock, including 11,125 option shares exercisable
within 60 days, but not yet exercised.
+B.Z. KASTLER, 79, has been a Director of First Security since 1979. Mr.
Kastler is a retired Chairman, Chief Executive Officer and Director of
Questar Corporation (integrated oil and gas company). He is a Director of
Bonneville International Corporation (broadcasting). At year-end 1999, Mr.
Kastler beneficially owned 17,877 shares of First Security's Common Stock,
including 1,000 option shares exercisable within 60 days, but not yet
exercised, and 698 stock equivalency units(5) held in his deferred
compensation account.
DR. J. BERNARD MACHEN, 55, has been a Director of First Security since
1998. Dr. Machen was installed as the President of the University of Utah on
January 1, 1998. Prior to this position, he was a tenured professor at the
University of Michigan. At year-end 1999, Dr. Machen was the beneficial
owner of no shares of First Security's Common Stock.
JOSEPH G. MALOOF, 44, has been a Director of First Security since 1996.
Mr. Maloof is President and Chief Executive Officer of the Maloof Companies
of Albuquerque, New Mexico (diversified investments-entertainment). At year-
end 1999, Mr. Maloof beneficially owned 1,597,998 shares of First Security's
Common Stock, including 11,125 option shares exercisable within 60 days, but
not yet exercised.
+MICHELE PAPEN-DANIEL, PH.D, 56, has been a Director of First Security
since 1998. Since 1986, Dr. Papen-Daniel has been engaged in private
practice as a psychoanalyst in the Los Angeles area. Since 1992, she has
also lectured in psychotherapy as an adjunct professor at Antioch University.
From 1996 until its acquisition by First Security in February 1998, Dr.
Papen-Daniel was President and a Director of Rio Grande Bancshares, Inc. At
year-end 1999, Dr. Papen-Daniel beneficially owned 322,626 shares of First
Security's Common Stock, including 1,000 option shares exercisable within 60
days, but not yet exercised.
*@+SCOTT S. PARKER, 65, has been a Director of First Security since 1985.
He was formerly President of Intermountain Health Care, Inc. (integrated
health care provider). He is currently a Director of Questar Corporation
(integrated oil and gas company). At year-end 1999, Mr. Parker beneficially
owned 58,464 shares of First Security's Common Stock, including 11,125 option
shares exercisable within 60 days, but not yet exercised, and 45,569 stock
equivalency units(5) held in his deferred compensation account.
JAMES L. SORENSON, 77, has been a Director of First Security since 1980.
He is Chairman and Chief Executive Officer of Sorenson Development, Inc.
(holding company and investments). At year-end 1999, Mr. Sorenson
Beneficially owned 111,125 shares of First Security's Common Stock, including
1,000 option shares exercisable within 60 days, but not yet exercised.
HAROLD J. STEELE, 86, has been a Director of First Security since 1959.
He is a retired President of First Security Bank of Utah, and is a Director
of Anderson Lumber Company. Mr. Steele is married to a cousin of Spencer F.
Eccles. At year-end 1999, Mr. Steele beneficially owned 380,964(4) shares of
First Security's Common Stock, including 11,125 option shares exercisable
within 60 days, but not yet exercised.
<PAGE> 96
#JAMES R. WILSON, 59, has been a Director of First Security since 1996.
He is Chairman, President and Chief Executive Officer and a Director of
Cordant Technologies, Inc. (aerospace and industrial manufacturing), having
been elected President, CEO and a Director in 1993 and Chairman in 1995.
Previously he was Executive Vice President of Cordant. In addition to First
Security, Mr. Wilson is also a director of Cooper Industries Inc. (industrial
manufacturing), The B.F. Goodrich Company (aerospace and chemicals) and
Howmet International Inc. (aerospace and industrial). At year-end 1999, Mr.
Wilson beneficially owned 11,007 shares of First Security's Common Stock,
including 3,250 options shares exercisable within 60 days, but not yet
exercised, and 4,385 stock equivalency units(5) held in his deferred
compensation account.
(1) A daughter of Dr. Gardner is married to a son of Mr. Dee.
(2) Includes 3,260,550 shares of Common Stock as to which Mr. Eccles has
power of attorney or is trustee for living and/or deceased family members and
has shared voting and investment powers; does not include 205,030 shares of
First Security's Common Stock owned by the Marriner S. Eccles Charitable
Trust, as to which Mr. Eccles serves as a Director and disclaims beneficial
ownership; does not include 563,229 shares of First Security's Common Stock
owned by the Emma Eccles Jones Foundation, as to which Mr. Eccles serves as a
Trustee and disclaims beneficial ownership; and does not include 499,500
shares of First Security's Common Stock owned by the Nora Eccles Treadwell
Foundation, as to which Mr. Eccles serves as a Director and disclaims
beneficial ownership.
(3) Does not include 3,523,807 shares of First Security's Common Stock held
of record by the George S. and Dolores Dore' Eccles Foundation as to which
Messrs. Eccles and Gardner serve as Directors and disclaim beneficial
ownership.
(4) Includes 324,325 shares of Common Stock owned by Mr. Steele's spouse for
which Mr. Steele has voting power, but does not include 205,030 shares of
Common Stock of First Security held of record by the Marriner S. Eccles
Charitable Trust, of which Mr. Steele is a Director, and as to which shares
Mr. Steele disclaims beneficial ownership.
(5) Stock equivalency units will always be settled in cash and do not
represent voting securities.
EXECUTIVE OFFICERS
Following are the names, ages, primary areas of responsibility, and
economic and beneficial stock ownership of First Security's Executive
Officers except Messrs. Eccles (Chairman and Chief Executive Officer) and
Evans (President and Chief Operating Officer) whose biographical and share
ownership information is found with the other Directors listed earlier in
this report. As of December 31, 1999, none of the executive officers of
First Security, except Mr. Eccles, was individually the beneficial owner of
more than one percent of outstanding shares of First Security. Executive
Officers serve at the pleasure of the Board of Directors, although as
disclosed later in this report, certain Executive Officers have entered into
agreements governing the termination of their employment with First Security.
TABLE 18: EXECUTIVE OFFICERS OF FIRST SECURITY CORPORATION
Jay S. Bachman, 50, is Senior Vice President for First Security and
Manager of Corporate Development. At year-end 1999, Mr. Bachman was the
beneficial owner of 44,351 shares of Common Stock, including 34,426 option
shares exercisable within 60 days, but not yet exercised, 4,392 shares held
in his account in First Security's Incentive Savings Plan, and 533 stock
equivalency units(1) held in his deferred compensation account.
<PAGE> 97
Michael P. Caughlin, 47, is Executive Vice President-Technology and
Processing Services of First Security, a member of First Security's
Management Committee and is a Director of First Security Bank, N.A. At year-
end 1999, Mr. Caughlin beneficially owned 111,829 shares of Common Stock,
including 74,800 option shares exercisable within 60 days, but not yet
exercised, 7,530 shares held in his account in First Security's Incentive
Savings Plan, and 2,441 stock equivalency units(1) in his deferred
compensation account.
David R. Golden, 43, is Executive Vice President-Risk Management of First
Security, a member of First Security's Management Committee, and a Director
of First Security Bank, N.A. At year-end 1999, Mr. Golden beneficially owned
28,918 shares of Common Stock, including 25,064 option shares exercisable
within 60 days, but not yet exercised, and 3,854 shares held in his account
in First Security's Incentive Savings Plan.
Brad D. Hardy, 46, is Executive Vice President-Corporate Services, General
Counsel, Chief Financial Officer, and Secretary of First Security, a member
of First Security's Management Committee and a Director of First Security
Bank, N.A. At year-end 1999, Mr. Hardy beneficially owned 123,774 shares of
Common Stock, including 119,546 option shares exercisable within 60 days, but
not yet exercised, 507 shares held in his account in First Security's
Incentive Savings Plan, and 2,046 stock equivalency units(1) held in his
deferred compensation account.
Mark D. Howell, 47, is Executive Vice President-Business Lending Services
of First Security, a member of First Security's Management Committee and a
Director of First Security Bank, N.A. At year-end 1999, Mr. Howell
beneficially owned 200,639 shares of Common Stock, including 189,384 option
shares exercisable within 60 days, but not yet exercised, 5,206 shares held
in his account in First Security's Incentive Savings Plan, and 2,834 stock
equivalency units(1) held in his deferred compensation account. These share
numbers do not include 19,628 shares of First Security's Common Stock held by
a revocable trust as to which Mr. Howell is a named beneficiary upon the
death of the currently living trustor, and as to which Mr. Howell disclaims
any beneficial interest.
Sylvia I. Iannucci, 54, is Senior Vice President, Associate General
Counsel and Assistant Secretary of First Security. At year-end 1999, Ms.
Iannnucci owned 2,608 shares of Common Stock, including 2,608 option shares
exercisable within 60 days, but not yet exercised.
Kelly K. Matthews, 55, is Executive Vice President and Chief Economist of
First Security. At year-end 1999, Mr. Matthews was the beneficial owner of
96,825 shares of Common Stock, including 44,064 option shares exercisable
within 60 days, but not yet exercised, and 13,953 shares held in his account
in First Security's Incentive Savings Plan.
J. Patrick McMurray, 51, is Executive Vice President-Community Banking
Services of First Security, and also serves as Director and President of
First Security Bank, N.A., as Chairman of First Security Bank of Nevada, and
as a member of First Security's Management Committee. At year-end 1999, he
was the beneficial owner of 422,454 shares of Common Stock, including 363,937
option shares exercisable within 60 days, but not yet exercised, and 25,970
shares held in his account in First Security's Incentive Savings Plan.
L. Scott Nelson, 61, is Executive Vice President-Retail Lending Services
of First Security, and also serves as Director and Chairman of First Security
Bank, N.A. and of First Security Bank of New Mexico, N.A., and as a member of
First Security's Management Committee. At year-end 1999, he was the
beneficial owner of 653,253 shares of Common Stock including certain shares
held by Mr. Nelson's spouse in her name, and including 611,377 option shares
exercisable within 60 days, but not yet exercised, 11,958 shares held in his
<PAGE> 98
account in First Security's Incentive Savings Plan, and 7,526 stock
equivalency units(1) held in his deferred compensation account.
Leslie F. Paskett, 55, is Senior Vice President and Comptroller. At year-
end 1999, he was the beneficial owner of 79,943 shares of Common Stock,
including 66,329 option shares exercisable within 60 days, but not yet
exercised, 8,306 shares held in his account in First Security's Incentive
Savings Plan, and 495 stock equivalency units(1) held in his deferred
compensation account.
Dennis G. Reeves, 60, is Senior Vice President and Chief Auditor of First
Security. At year-end 1999, Mr. Reeves was the beneficial owner of 35,862
shares of Common Stock, including 29,592 option shares exercisable within 60
days, but not yet exercised, 3,625 shares held in his account in First
Security's Incentive Savings Plan, and 645 stock equivalency units(1) held in
his deferred compensation account.
Scott C. Ulbrich, 45, is Executive Vice President-Capital Markets,
Treasury and Investment Management, and a member of First Security's
Management Committee. At year-end 1999, he was the beneficial owner of
268,054 shares of Common Stock, including 252,747 option shares exercisable
within 60 days, but not yet exercised, and 2,378 shares held in his account
in First Security's Incentive Savings Plan.
David R. Wilson, 60, is President and Chief Executive Officer of First
Security Capital Markets, Inc. and Executive Vice President for First
Security. At year-end 1999, he was the beneficial owner of 106,473 shares of
Common Stock including 86,348 option shares exercisable within 60 days, but
not yet exercised, 8,934 shares held in his account in First Security's
Incentive Savings Plan, and 2,153 stock equivalency units(1) held in his
deferred compensation account.
Chester A. Wood, Jr., 51, is Senior Vice President of First Security and
Senior Managing Director of Treasury Management. At year-end 1999, Mr. Wood
was the beneficial owner of 54,115 shares of Common Stock, including 48,113
option shares exercisable within 60 days, but not yet exercised, 2,331 shares
held in his account in First Security's Incentive Savings Plan, and 3,671
stock equivalency units(1) held in his deferred compensation account.
Based on their disclosed share holdings at December 31, 1999, all of First
Security's Executive Officers as a group (16 persons, including Messrs.
Eccles and Evans, whose stock holdings are described in the Directors of
First Security Corporation section, above), beneficially owned a total of
9,903,630 shares (including 4,207,893 shares subject to unexercised options
exercisable within 60 days, 184,956 shares held in accounts in First
Security's Incentive Savings Plan, and 22,344 stock equivalency units(1) held
in deferred compensation accounts), which equaled approximately 4.8%, of
First Security's Common Stock plus options plus stock equivalency units(1),
although only Mr. Eccles beneficially owned more than one percent. They also
owned 63 shares, or approximately 0.7% of First Security's Preferred Stock.
(1) Stock equivalency units will always be settled in cash and do not
represent voting securities.
Item 11. Executive Compensation
COMPENSATION OF MANAGEMENT
Director Compensation
Cash Compensation. During 1999, a cash retainer of $12,000 was paid to
each Director, as well as a $1,000 fee for attendance at each meeting of the
Board of Directors (or a fee of $300 for each scheduled meeting not
attended). Director compensation is paid in four quarterly installments in
arrears to those Directors who do not defer their compensation, as described
<PAGE> 99
below, but the full amount of the retainer is paid in advance at the start of
the year for those Directors who defer their compensation as described below.
Messrs. Eccles and Evans do not receive the annual retainer, but they are
paid the per meeting fees. The Bylaws permit payment of Directors' expenses
incurred in travelling to and attending Board of Directors meetings.
Directors of First Security who are not Executive Officers may enter into
a compensation deferral agreement with First Security whereby the payment of
retainers and fees otherwise receivable by a Director for service as a
Director may be deferred and held in an account for the benefit of the
Director. The Director may choose whether this deferred compensation will be
invested in stock equivalency units or earn interest at a predetermined rate.
A Director selecting stock equivalency units will be credited with that
number of stock equivalency units equal to the result of dividing the total
amount of deferred compensation in the Director's account on the Annual
Evaluation Date (usually May 1) by the market price of First Security's
common stock on that date. Moreover, additions are made to the Director's
account to represent the value of dividends that otherwise would be paid on
the stock equivalent units if they were actual shares of Common Stock. A
Director electing to earn interest only will have interest added annually on
the Valuation Date at a rate equal to First Security's cost of funds for the
applicable period. Directors may choose a lump-sum cash distribution upon
retirement from the Board of Directors or a periodic distribution program,
which could involve up to ten annual cash payment installments. Amounts
remaining in a Director's deferral account during any term of periodic
distributions will continue to be revalued annually.
Additional per meeting fees of $1,000 were paid in 1999 to Directors who
were members of the Audit Committee and the Compensation Committee, with the
Chairmen of these committees being paid an annual retainer of $2,000 in
addition to the per meeting fees. Directors who were members of the
Executive Committee and who are not Executive Officers of First Security were
paid an additional fee of $15,000 annually. Committee members who do not
attend a meeting will get no compensation for the missed committee meeting.
These additional fees for Directors' committee service may be deferred in the
same manner (discussed above) as are regular Directors' fees.
Honorary Directors are paid $1,000 per Board of Directors' Meeting that
they attend and $300 per Directors' Meeting not attended.
Director Stock Options. Each Non-Employee Director elected at the 1998
Annual Shareholders Meeting was granted, as of May 1, 1998, an Option to
purchase 3,000 shares of First Security's Common Stock. Thereafter, on May 1
immediately following the date as of which a new Non-Employee Director is
first elected to the Board of Directors, such new Non-Employee Director will
be granted an Option to purchase a number of shares of Company Common Stock
which corresponds to the remaining vesting period for any pre-existing as yet
unvested Director Options. If a Non-Employee Director remains a Director
through the three-year vesting period of an Option, that Director
automatically will be granted another Option to purchase an additional 3,000
shares of Company Common Stock vesting over another three-year period.
Each Option vests 33 1/3% (normally 1,000 shares) per year over a normal
vesting term of three years from the date of grant. Persons who are first
elected as a Non-Employee Director after the beginning of a three-year
vesting period for Options granted to pre-existing Non-Employee Directors
will receive an Option for fewer shares and with a shortened vesting schedule
to coincide with the operation of the then pending three-year vesting period
applicable to the pre-existing Non-Employee Directors' Options.
The term of each Option is ten years from the date the Option is granted,
subject to earlier termination under specified circumstances. Options become
immediately exercisable in full for their full term upon (i) the death or
<PAGE> 100
disability of the Director, or (ii) the liquidation, dissolution, merger,
consolidation or reorganization of First Security. Upon a Director's
retirement from the Board of Directors or an unsuccessful attempt by a
Director to win re-election to the Board, the Director's Options will be
honored strictly according to their terms.
Once vested, lifetime transfers of options are allowed, subject to
approval of legal counsel to First Security.
The exercise price per share of an Option will be equal to the fair market
value per share of Common Stock on the Grant Date. The fair market value per
share of Common Stock on any date is equal to the Last Sale price per share
of First Security's common stock as reported on the Nasdaq National Market
System on the date immediately preceding such date or, in the event such
immediately preceding date is not a day on which the Nasdaq National Market
System is operating, the next previous date on which the Nasdaq National
Market System was operating.
Summary of Compensation to Certain Executive Officers
Set out in the following Summary Compensation Table are the various
elements of compensation earned during 1999 and during the previous two years
by First Security's Chief Executive Officer and the next five highest paid
Executive Officers (whose compensation for each year was determined for this
purpose on the same basis as for the Chief Executive Officer):
<TABLE>
<CAPTION>
TABLE 19: SUMMARY COMPENSATION TABLE
=========================================================================== ==============================================
Annual Compensation Long-Term Compensation
Awards
=========================================================================== ==============================================
Name and Year Salary(1) Bonus(2) Restricted Options/ All Other
Principal Position ($) ($) Stock SARs(3) Compensation(4)
Award(s) (#) ($)
($)
- --------------------------------------- --------- ------------- ------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Spencer F. Eccles, 1999 613,000 343,880 -0- 188,288 26,226
Chairman and Chief Executive Officer 1998 594,504 343,901 -0- 150,528 17,338
1997 550,015 218,858 -0- 106,704 18.088
- --------------------------------------- --------- ------------- ------------- ------------------ ------------ ------------
Morgan J. Evans, 1999 508,396 204,041 -0- 146,496 33,529
President and Chief Operating 1998 452,520 204,054 -0- 69,984 27,411
Officer 1997 435,301 133,563 -0- 84,240 22,760
- --------------------------------------- --------- ------------- ------------- ------------------ ------------ ------------
L. Scott Nelson, 1999 339,655 149,511 -0- 47,296 22,878
Executive Vice President-Retail 1998 324,844 149,524 -0- 38,784 18,049
Lending Services 1997 320,206 98,751 -0- 61,632 17,436
- --------------------------------------- --------- ------------- ------------- ------------------ ------------ ------------
J. Patrick McMurray, 1999 295,327 130,098 -0- 35,456 10,106
Executive Vice President-Community 1998 284,379 130,108 -0- 28,800 6,554
Bank Services 1997 278,917 86,944 -0- 61,632 12,293
- --------------------------------------- --------- ------------- ------------- ------------------ ------------ ------------
Brad D. Hardy 1999 260,414 112,767 -0- 35,456 12,613
Executive Vice President- 1998 232,418 112,778 -0- 25,056 9,998
Corporate Services, Chief Financial 1997 219,450 74,379 -0- 61,632 9,581
Officer, General Counsel and Secretary
- --------------------------------------- --------- ------------- ------------- ------------------ ------------ ------------
Scott C. Ulbrich, 1999 260,414 112,767 -0- 35,456 12,460
Executive Vice President- 1998 232,418 112,778 -0- 25,056 9,998
Capital Markets, Treasury and 1997 219,450 74,679 -0- 61,632 9,427
Investment Management
=========================================================================== ==============================================
</TABLE>
(1) Includes Director's Fees paid by First Security or its affiliates, if
applicable.
(2) Bonuses are listed in the year earned and normally accrued, although
such bonuses may be paid in the following year. Stock bonuses are valued
at the market value on the date of receipt.
(3) First Security has never issued SARs to Executive Officers.
(4) Amounts shown include premiums paid on insurance policies, contributions
by First Security to the account of each of the named Executive Officers
in the First Security Incentive Savings Plan, a 401(k) plan open to all
full-time employees of First Security, and contributions made by First
Security to the deferred compensation accounts of these Executive
Officers under a program open to all Executive Officers of First Security.
<PAGE> 101
Company Contributions to Employee Savings Plan and Salary Deferral Agreements
Executive Officers, together with all full-time employees of First
Security, are permitted to participate in the Incentive Savings Plan, whereby
a portion of an employee's compensation may be contributed on a pre-tax basis
to an investment account in the employee's name, and that account can be
invested at the direction of the employee into one of several investment
funds, including a First Security Stock Fund composed of First Security's
Common Stock and other Company securities. First Security contributes an
amount equal to 50% of the participating employee's contribution to the plan,
up to a maximum of 3% of compensation. The employer contribution is
separately invested for the employee's benefit in an Employee Stock Ownership
Plan (ESOP) which is a part of the Incentive Savings Plan.
Executive Officers also may enter into a compensation deferral agreement
with First Security, separate and apart from the Incentive Savings Plan
described above, whereby compensation otherwise receivable for service as an
Executive Officer may be deferred and held in an account for the benefit of
the Executive Officer. First Security will match 50% of the Executive
Officer's annual deferred amount up to a maximum of 3% of total compensation,
and will add this amount to the Executive Officer's deferral account (less
any employer contribution to the Executive Officer's Incentive Savings Plan).
The Executive Officer may choose whether this deferred compensation will be
invested in stock equivalency units or earn interest at a predetermined rate.
An Executive Officer selecting stock equivalency units will be credited with
that number of stock equivalency units equal to the result of dividing the
total amount of deferred compensation on the Quarterly Evaluation Date (last
day of each quarter) by the market price of First Security's Common Stock on
that date. Moreover, additions are made to the Executive Officer's account
to represent the value of dividends that otherwise would be paid on the stock
equivalency units if they were actual shares of stock. An Executive Officer
electing to earn interest will have interest added quarterly on the Valuation
Date (last day of each quarter) at a rate equal to the yield on ten-year
treasury securities plus 1%. Treasury yields will be measured as the average
monthly yield each December, March, June and September, as published by the
Federal Reserve. Such rate shall be effective for the quarter commencing
three months later. Executive Officers using this deferred compensation
option may choose a lump sum distribution upon death, disability or
retirement, or in quarterly or annual installments over a period of up to
twenty years. Amounts remaining in a deferral account during any term of
periodic distributions will continue to be revalued quarterly. No switching
between the stock equivalency units and the interest rate option will be
permitted. All payouts to employees will be in cash. At December 31, 1999,
the named Executive Officers had the following balances in their deferred
income accounts: Mr. Eccles, $0; Mr. Evans, $1,105,399; Mr. Nelson,
$216,639; Mr. McMurray, $99,673; Mr. Hardy, $244,028, and Mr. Ulbrich,
$171,871.
Stock Options and Similar Awards To Management
The following two tables provide information concerning the stock options
and similar awards provided to the Executive Officers listed in Table 19
during 1999 (Table 20) and exercises of stock options and similar awards by
these listed Executive Officers during 1999 (Table 21):
<PAGE> 102
<TABLE>
<CAPTION>
TABLE 20: OPTIONS GRANTED TO CERTAIN EXECUTIVE OFFICERS DURING 1999
======================================================================================================================
% of
Total Black-
Options/SARs Scholes
Options/SARs Granted to Exercise Method Grant
Granted(1) All Employees Base Price(2) Expiration Date Value(3)
Name (#) In Fiscal Year ($/Sh) Date ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Spencer F. Eccles 188,288 9.9 22.75 01/19/09 1,562,790
- ----------------------------------------------------------------------------------------------------------------------
Morgan J. Evans 146,496 7.7 22.75 01/19/09 1,215,917
- ----------------------------------------------------------------------------------------------------------------------
L. Scott Nelson 47,296 2.5 22.75 01/19/09 392,557
- ----------------------------------------------------------------------------------------------------------------------
J. Patrick McMurray 35,456 1.9 22.75 01/19/09 294,285
- ----------------------------------------------------------------------------------------------------------------------
Brad D. Hardy 35,456 1.9 22.75 01/19/09 294,285
- ----------------------------------------------------------------------------------------------------------------------
Scott C. Ulbrich 35,456 1.9 22.75 01/19/09 294,285
======================================================================================================================
</TABLE>
(1) First Security has never issued SARs to Executive Officers. Options
granted in 1999 vest in four equal increments on January 15 of 2000,
2001, 2002 and 2003.
(2) The 1999 Options were awarded by the Compensation Committee on January
19, 1999. The exercise price is the "last sale" price quotation for
First Security's Common Stock on the last business day prior to the date
of grant.
(3) The Black-Scholes model assumes (a) stock volatility of 0.3776; (b) a
risk-free interest rate of 4.596%; (c) a dividend yield of 3.18%; (d) a
full 10-year term; and (e) no discount for the risk of forfeiture or
restrictions on transferability.
<TABLE>
<CAPTION>
TABLE 21: OPTIONS EXERCISED BY CERTAIN EXECUTIVE OFFICERS DURING 1999 AND
YEAR-END OPTIONS VALUES
- -----------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Unexercised In-the-Money Share
stock options options as of 12/31/99(1)
- -----------------------------------------------------------------------------------------------------------------------------
Shares
Acquired on Value
Name Exercise Realized1 Exercisable Unexercisable Exercisable Unexercisable
(#) ($) (#) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Spencer F. Eccles 284,189 5,382,103 1,512,463 392,660 27,930,827 1,770,487
- -----------------------------------------------------------------------------------------------------------------------------
Morgan J. Evans 147,682 2,957,553 495,448 268,068 7,932,660 1,262,311
- -----------------------------------------------------------------------------------------------------------------------------
L. Scott Nelson 0 0 559,725 121,924 10,106,282 698,926
- -----------------------------------------------------------------------------------------------------------------------------
J. Patrick McMurray 30,000 602,427 321,881 98,456 5,352,147 599,637
- -----------------------------------------------------------------------------------------------------------------------------
Brad D. Hardy 13,500 228,031 81,090 92,984 991,794 558,048
- -----------------------------------------------------------------------------------------------------------------------------
Scott C. Ulbrich 0 0 214,291 92,984 3,491,436 558,048
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net value is realized from the difference between the exercise price of
First Security option shares and the sale price or fair market value.
Stock options are awarded to key employees, including the named Executive
Officers, upon recommendation of the Compensation Committee under the First
Security Comprehensive Management Incentive Plan ("CMIP"). Under this plan,
First Security may grant key employees bonus shares of Common Stock, stock
options, stock appreciation rights, and other equity-based incentive awards.
This plan is geared to creating a unity of interest between management and
the Shareholders in looking toward maximizing the share price of First
Security's Common Stock. The grant of options and bonus shares is also a key
element of First Security's compensation policy for its senior managers.
(See "Report of the Compensation Committee.")
<PAGE> 103
Under the CMIP, shares of "Restricted Stock" may be granted to employees
of First Security and its subsidiaries, including the six Executive Officers
named in Table 19. Shares of Restricted Stock have been awarded to Executive
Officers of First Security in the past under the CMIP and its predecessor
plans, but no Restricted Stock awards were made in 1999.
Retirement Benefits
First Security provides a Retirement Plan to its employees, including to
Executive Officers, that is funded by First Security. First Security also
maintains an ERISA Excess Plan which provides for payment to highly paid
executive officers and their beneficiaries of that portion of otherwise
payable benefits under the terms of the Retirement Plan that cannot be paid
by the Retirement Plan because of benefit restrictions imposed on the
Retirement Plan by Section 415 of the Internal Revenue Code. Executive
Officers also have benefits available under a Supplemental Executive
Retirement Plan that provides for the payment of a competitive level of
retirement income to certain key managers in order to attract, retain and
motivate qualified executive officers.
The following table illustrates the estimated annual retirement benefits
payable under historical plans to the Executive Officers listed in the table
of Executive Compensation shown above under all applicable retirement plans
based on various assumptions of final compensation levels and service years
upon which retirement benefits are based:
<TABLE>
<CAPTION>
TABLE 22: PENSION PLAN TABLE
======================================== ================== =================== =====================
Final Average Earnings 15 Years of 20 Years of 24 or More Years of
Service Service Service
======================================== ================== =================== =====================
<S> <C> <C> <C> <C>
$ 150,000 $ 56,250 $ 75,000 $ 90,000
200,000 75,000 100,000 120,000
225,000 84,375 112,500 135,000
250,000 93,750 125,000 150,000
300,000 112,500 150,000 180,000
400,000 150,000 200,000 240,000
450,000 168,750 225,000 270,000
500,000 187,500 250,000 300,000
600,000 225,000 300,000 360,000
750,000 281,250 375,000 450,000
======================================== ================== =================== =====================
</TABLE>
The estimated retirement benefits shown in Table 22 are subject to
reduction for Social Security payments received by the retiree and income
from accumulated employer contributions to the Incentive Savings Plan. These
benefits are computed on a single life annuity basis.
Compensation to Executive Officers for 1999 included in the earnings base
for the purpose of calculating total retirement benefits as shown in Table 22
is equal to the three-year final average salary including bonus. If they
remain employed until they reach the age of 65, the years of credited service
for the five named Executive Officers in Table 19 will be as follows: 39
years for Mr. Eccles, 39 years for Mr. Evans, 34 years for Mr. Nelson, 42
years for Mr. McMurray, 28 years for Mr. Hardy, and 34 years for Mr. Ulbrich.
In contemplation of the FSCO merger with Zions and a subsequent
restructuring of benefit plans, FSCO's retirement plan benefits were frozen
at December 31, 1999 to equal the then-accrued benefits.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors currently consists of
four non-employee Directors. The Committee meets one or more times annually
to review and determine matters pertaining to the compensation of the
<PAGE> 104
Executive Officers of First Security who are members of First Security's
Management Committee, including the six named officers in Table 19, above.
The Committee met on February 28, 2000 to discuss and adopt resolutions
affecting the 1999 short-term compensation for these Executive Officers, but
did not discuss or adopt resolutions affecting base salary or long-term
incentives in anticipation of the closing of the merger with Zions
Bancorporation.
To the Shareholders of First Security Corporation:
The Compensation Committee annually reviews the elements of compensation
for the Executive Officers of the Company who are members of First Security's
Management Committee, and sets the level of compensation for these Executive
Officers. The Committee is provided with detailed information and proposals
from independent compensation consultants as well as from internal
compensation specialists. The Committee's decisions are made within the
context of a uniform structure and set of compensation principles which apply
to all of First Security's executives, including the Executive Officers
subject to the Committee's review.
Chief among these principles is that First Security will provide total
compensation opportunities that are competitive with those provided by
comparable financial institutions and commensurate with First Security's
overall performance. The three main elements of the compensation package are
base salary, short-term (annual) incentives, and long-term incentives. Total
compensation for Executive Officers can be described as consisting of an
average or below-average base salary, an average annual cash incentive
opportunity based on performance, and an above-average long-term equity-based
incentive opportunity tied to increases in Shareholder value. The Committee
believes that this compensation mix is in the best interests of the
Shareholders and supports the business and financial objectives of the
Company.
BASE SALARY. Executive Officer base salaries at First Security are
managed using a structured approach. Each year, the Company participates in
formal third-party compensation surveys that provide compensation statistics
from over 100 financial institutions, both independent and affiliated,
nationwide. Salary data from these surveys are carefully matched by position
and adjusted for institutional size, or other appropriate scope measurement,
to provide a reliable measure of median executive officer salaries for
comparable positions at comparable financial institutions. These market
median salaries are used to establish salary ranges within which the
Company's Executive Officers' base salaries may be periodically increased
based on considerations of performance, experience, and internal equity.
(Participants in the two market surveys relied upon most heavily by the
Company typically include all, or nearly all, of the companies represented in
the KBW index that is used in the cumulative stock performance comparison
shown in Table 24.)
The base salary for each Executive Officer is allowed to vary only within
a 23% range determined by the appropriate market median salary for his/her
position. One of the Company's key salary administration policies is that
the market median represents the maximum base salary that any Executive
Officer can be paid. The Committee believes it is necessary to maintain
salaries within the designated ranges through periods of both strong and weak
corporate performance if the Company is to attract and retain top quality
executives. In times of excellent corporate performance, Executive Officers
may receive substantial supplemental rewards through the short-term and long-
term incentives.
Chief Executive Officer Salary Action. On June 6, 1999, an agreement and
plan of merger between First Security and Zions Bancorporation was approved
by the Board of Directors in a special meeting. At that time it was
<PAGE> 105
anticipated that the merger would be completed during the fourth quarter of
1999. Accordingly, no increase to base pay has been made for the Chief
Executive Officer since that time. Pursuant to an employment agreement and
in connection with the signing of the merger agreement, Mr. Eccles will serve
as Co-Chief Executive Officer in the combined company, and he will receive an
annual base salary equal to the annual base salary paid to the other Co-Chief
Executive Officer of First Security, but in no event less than Mr. Eccles'
annual base salary as in effect prior to the merger.
Other Named Executive Officers. The other five Executive Officers named
in Table 19 received increases averaging 7.2%, effective April 1, 1999.
These increases were based on an examination of incumbents' current salaries
relative to their salary range midpoints and our judgment of these Executive
Officers' contributions and worth to the Company. As a result of the
announced merger with Zions, no increase to base pay has been made for these
Executive Officers. Pursuant to an employment agreement signed by these
officers, except Mr. Evans, in connection with the signing of the merger
agreement, these officers will receive an annual base salary of no less than
the annual base salary in effect on the date of the merger agreement, and
each officer, except Mr. Evans, will receive options (see: "Long-Term
Incentives" below). Mr. Evans will retire a short time after merger closing.
SHORT-TERM INCENTIVES. All the named Executive Officers participate in
the Management Annual Cash Incentive Bonus Plan (MACIBP), which pays the
named Executive Officers for the achievement of pre-set corporate goals. In
1999, these corporate objectives comprised growth in First Security's net
income and performance relative to a peer group for the Company's return on
average assets (ROAA) and percent increase in earnings per share (EPS).
After review and discussion on the merits of the plan, the Committee has
approved the continuation of the MACIBP in 1999, with the following
provisions.
Growth in earnings per share (EPS) and return on average assets (ROAA)
were each weighted 25%, and net income was weighted 50%. In 1998, these
three components were all weighted equally. In reviewing First Security and
peer group results from throughout the year, it became apparent that the peer
group-based relative goals (i.e., EPS and ROAA) were subject to considerable
variation. For example, in the fourth quarter of 1998, a large number of
companies in the peer group reported significant non-recurring charges,
generally associated with merger and restructuring costs. This led to year-
end First Security bonus payments that were much higher than third quarter
projections. In general, it is believed that placing greater weight on the
net income component better met the objectives of the plan and the interests
of FSC, while still incorporating peer group results.
The peer group used for the relative measurements, ROAA and EPS included
the companies in the KBW index. The Committee still believes that a good
measurement of relative performance will be attained by including a large
number of banking companies in the peer group. Consequently, the companies
in the KBW index, which are already utilized in the cumulative stock
performance comparison (Table 24, below) and which collectively provide much
of the market data used for compensation comparisons, continued to be used as
the peer group for the MACIBP relative performance measurements. Threshold
and Target performance goals for 1999 were established as the 35th and 50th
percentiles, respectively, of the peer group result.
As in recent years, Target performance for net income represented full
achievement of the annual business plan; Threshold performance was set at 90%
of target. No bonus was paid in any category for performance which was below
threshold.
<PAGE> 106
Chief Executive Officer Bonus. Mr. Eccles was eligible to receive a bonus
of up to 92% of his salary range midpoint for outstanding performance under
the MACIBP. Mr. Eccles' bonus was based entirely on the Company's results in
the 1999 corporate performance categories outlined above. In 1999, the
Company's performance for both ROAA and percent increase in EPS fell below
the threshold objectives established by this Committee, while the result for
Net Income was above the threshold objective but less than the target.
Accordingly, Mr. Eccles earned a 1999 bonus equal to 20.5% of his maximum
bonus opportunity, the bonus amount being entirely determined by the
relationship of the performance results to the performance targets as
stipulated by the terms of the MACIBP.
Other Named Executive Officers. The other named Executive Officers were
eligible in 1999 to earn bonuses of up to 80% of their salary range midpoints
for outstanding performance under MACIBP, with the bonus amounts being
entirely determined by the Company's results in the 1999 corporate
performance categories outlined above. These five named Executive Officers
earned bonuses equal to 20.5% of their maximum bonus opportunities.
LONG-TERM INCENTIVES. Historically, the Committee awarded Non-Statutory
Stock Options (NSOs) as the only long-term incentive award for Executive
Officers. The Company made these awards to a group comprising all Executive
Officers and up to 85 other key executives every year since 1987, with the
exception of 1995.
In anticipation of the merger, it is believed that the Committee for the
combined company should approve any future awards. However, pursuant to the
Employment Agreement with Mr. Eccles, upon completion of the merger, First
Security will grant Mr. Eccles an option to acquire 60,000 shares of First
Security common stock, which will vest in three equal installments over the
period ending on the annual stockholders' meeting in 2002, will have an
exercise price equal to the fair market value of First Security common stock
on the date of grant and will have a term of, and remain exercisable for, 10
years from the date of grant without regard to Mr. Eccles' earlier
termination of employment.
Additionally, the Employment Agreements for each of the five Executive
Officers named in Table 19, except for Mr. Evans, provide for the grant of
25,000 options each, effective with the closing of the merger. Said options
will vest on the anniversary of the merger closing and will have a 10 year
term.
Repricing of Options. The Company has never repriced options (other than
as a result of stock splits). The Compensation Committee has no such
intention at this time.
/s/ Rodney H. Brady, Chair
/s/ James R. Wilson
/s/ G. Frank Joklik
/s/ Thomas D. Dee II
<PAGE> 107
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL SHAREHOLDERS
The following table provides information with respect to any person known
to First Security to be the beneficial owner (within the meaning of
applicable governmental regulations) of five percent or more of any class of
First Security's voting securities as of December 31, 1999:
<TABLE>
<CAPTION>
TABLE 23: PRINCIPAL SHAREHOLDERS OF FIRST SECURITY CORPORATION
================================================================================
Title of Amount and Nature of Percent
Name and Address Class Beneficial Ownership of Class
================================================================================
<S> <C> <C> <C>
First Security Bank, N.A.
Trust Group Common 16,515,576 shares(1) as 8.43%
79 S. Main Street Stock Trustee of separate
Salt Lake City, UT 84111 trust accounts
================================================================================
(1) Of the 16,515,576 shares that the Trust Group of First Security Bank, N.A.
holds in various fiduciary capacities, it has voting power over 12,626,947
shares (6.44% of the total outstanding shares) and no power to vote the
remaining 3,888,629 shares.
================================================================================
</TABLE>
COMPARATIVE PERFORMANCE OF FIRST SECURITY'S COMMON STOCK
Set out in the following table is a five-year comparison and graphic
display of the relative performance of $100 invested on January 1, 1994, in
First Security's Common Stock and the same amount invested on the same day in
the Nasdaq Broad Market Index and in the KBW 50 Index, respectively:
<TABLE>
<CAPTION>
TABLE 24: FIVE YEAR STOCK PRICE PERFORMANCE
Comparison of Five-Year Cumulative Total Return(1)
Among First Security Corporation, the Nasdaq Broad Market Index
And the KBW 50 Index(2)
=========================== ====== ======== ======== ======= ======= =======
INDEX 1994 1995 1996 1997 1998 1999
=========================== ====== ======== ======== ======= ======= =======
<S> <C> <C> <C> <C> <C> <C>
First Security Corporation 100.00 173.60 241.23 454.99 389.41 437.07
Nasdaq Broad Mkt. Index 100.00 145.68 187.03 286.11 277.73 274.63
KBW 50 Index 100.00 160.16 226.56 331.21 358.62 346.17
=========================== ====== ======== ======== ======= ======= =======
</TABLE>
(1) Total Return Assumes Quarterly Reinvestment of Dividends.
(2) The KBW 50 Index is published by Keefe, Bruyette & Woods, Inc., an
investment banking firm specializing in the bank and thrift industry. This
index is weighted according to market capitalization and is made up of 50 of
the nation's most important banking companies, including all money center and
most major regional banks, and is meant to be representative of the price
performance of the nation's large banks. Dividends are assumed to be
reinvested quarterly. First Security Corporation is included in the KBW 50.
Item 13. Certain Relationships and Related Transactions
Compensation Committee Interlocks and Insider Participation
Members of First Security's Board of Directors' Compensation Committee,
through companies with whom each of these Directors is affiliated, had
borrowing and other credit transactions with one or more of First Security's
subsidiary banks during 1999. The terms of each of these transactions is
believed by First Security to have been done in the ordinary course of the
subsidiary bank's lending business, and on the same or substantially similar
<PAGE> 108
terms to other similar loan or credit transactions with unrelated persons.
Specifically, Messrs. Dee and Joklik (or their affiliates) had credit
extensions and/or credit commitments during 1999 of less than $100,000; Mr.
Brady (or his affiliates) had credit extensions and/or credit commitments
during 1999 of approximately $19,000,000; and Mr. J. Wilson (or his
affiliates) had credit extensions and/or credit commitments during 1999 of
approximately $49,000,000.
CERTAIN TRANSACTIONS BY AND WITH MANAGEMENT AND OTHERS
Directors' and Officers' Liability Insurance
First Security has purchased directors' and officers' liability insurance,
including corporate reimbursement, on behalf of the directors and officers of
First Security and its subsidiaries. The program that includes this coverage
was effective August 1, 1998, and expires August 1, 2001. CNA is the lead
underwriter for this insurance program. Management believes the premium
expense for this policy to be worth the protection afforded to its directors
and officers.
Credit Extensions
Most of the Directors and Executive Officers of First Security, members of
their immediate families, and corporations and other organizations of which
they are affiliates, are borrowers from one or more of First Security's
subsidiary banks. During 1999, these persons, firms and corporations have
had loan transactions with one or more of these banks, all of which were done
in the ordinary course of business and were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unaffiliated persons, and did not involve more
than the normal risk of collectability or present other unfavorable features
to First Security. Specifically, Messrs. Evans, Golden, Hardy, Howell,
McMurray, Reeves, D. Wilson and Dr. Papen-Daniel (or their affiliates) had
credit extensions and/or credit commitments during 1999 in excess of $60,000
but less than $500,000; Messrs. Gardner, Kastler, Sorenson, and Ulbrich (or
their affiliates) had credit extensions and/or credit commitments during 1999
in excess of $500,000 but less than $10,000,000; Messrs. Brady, Harris,
Heiner, and Parker (or their affiliates) had credit extensions and/or credit
commitments during 1999 in excess of $10,000,000 but less than $20,000,000;
Mrs. Huntsman, Messrs. Maloof, and J. Wilson (or their affiliates) had credit
extensions and/or credit commitments during 1999 in excess of $20,000,000 but
less than $50,000,000; Messrs. Beardall, Garff, and Steele (or their
affiliates) had credit extensions and/or credit commitments during 1999 in
excess of $50,000,000 but less than $100,000,000; and Mr. Eccles (or his
affiliates) had credit extensions and/or credit commitments during 1999 in
excess of $100,000,000 but less than $200,000,000. None of these outstanding
loans or credit commitments are in default, and all are current in all
respects as of the date of this report. First Security's subsidiary banks
expect to continue to have such transactions on similar terms with Directors
and Executive Officers and their affiliates in the future.
Compliance with Section 16 Reporting Obligations
The Directors and Executive Officers of First Security are required under
the Securities Exchange Act of 1934 to file reports with the Securities and
Exchange Commission evidencing their ownership of, and their current
transactions in, First Security's equity securities. This is a personal
obligation of the Executive Officers and Directors. Based on information
provided to First Security by its Directors and Executive Officers, it
appears that all Directors and Executive Officers filed these reports in a
timely manner during 1999, except Dr. Michele Papen-Daniel, who, based on
information that recently became known to First Security, appears to have
failed to file eight Form 4 Reports for two purchase transactions in the
<PAGE> 109
first two quarters of 1998 and approximately twenty sales transactions in
1999.
Employment Agreements
Messrs. Caughlin, Eccles, Evans, Golden, Hardy, Howell, McMurray, Nelson
and Ulbrich have entered into agreements with First Security providing for
the terms of their compensation and providing that in the event of a "change
of control" of First Security, the Executive Office is entitled to special
severance compensation if he is terminated without cause, or if the Executive
Officer's duties are significantly changed. The merger of First Security and
Zions Bancorporation will constitute a change of control under these
agreements. Upon completion of the Zions merger, the employment of Messrs.
Caughlin, Eccles, Evans, Golden, Hardy, Howell, McMurray, Nelson and Ulbrich
will be deemed to be terminated other than for cause for purpose of the
change of control severance provisions of these agreements, and accordingly,
these officers will be entitled to receive payment of the amounts called for
by these agreements. Payments received by these officers under these
agreements will be offset by certain other payments to be received by these
Executive Officers through other plans maintained by First Security. The
complete text of these agreements is on file with the Securities and Exchange
Commission.
On June 6, 1999, in connection with the signing of the Zions merger
agreement, each of the Executive Officers entered into a new employment
agreement with First Security, which will be come effective on the date of
the Zions merger. The terms of the employment agreements for the Executive
Officers are as set forth in the description of such agreements contained in
the Registration Statement on Form S-4, Registration No. 333.91401, as filed
with the SEC on February 17, 2000. Upon completion of the Zions merger, the
new employment agreements will supersede the prior employment agreements
between the Executive Officers and First Security.
A Severance Pay Plan is available to Executive Officers who do not have an
employment contract providing benefits for certain involuntary terminations
of employment. In case of certain involuntary terminations of employment,
the basic benefit payable under this Plan varies by years of eligible
employment up to a maximum of eight weeks of then-current salary. In the
event of a change of control of First Security (as defined in the Plan), the
basic benefit payable under this Plan varies by years of eligible employment
up to a maximum of 104 weeks of then-current salary. This Plan is unfunded,
and benefits will be paid out of general corporate funds.
<PAGE> 110
Part IV.
Item 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, 1999 and 1998
* Consolidated Statements of Income
for the Years Ended December 31, 1999, 1998, and 1997
* Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1997, 1998, and 1999
* Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999, 1998, and 1997
* 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 (Ex. 4 to FSCO's Report on Form
8-K, dated Aug. 28, 1989, filed Sept. 1, 1989, incorporated by
reference) 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.
* 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: First Security Corporation Comprehensive Management
Incentive Plan (as Amended and Restated), dated Apr. 21, 1998 (Ex. 10.1
to FSCO's Quarterly Report on Form 10-Q for the quarter ended Sep. 30,
1999, incorporated by reference).
<PAGE> 111
* 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 (Ex. 10.11 to FSCO's Annual Report on Form 10-K for
the year ended Dec. 31, 1998, incorporated by reference).
* Exhibit 10.12: Agreement and Plan of Merger, dated as of June 6, 1999
by and among Zions Bancorporation (Zions) and FSCO (Ex. 99.1 to FSCO's
Report on Form 13D, filed June 16, 1999, incorporated by reference;
also Ex. 99.1 to FSCO's Report on Form 13D, filed June 18, 1999,
incorporated by reference).
* Exhibit 10.13: Stock Option Agreement, dated as of June 8, 1999, by and
between Zions and FSCO (Ex. 99.2 to FSCO's Report on Form 13D, filed
June 16, 1999, incorporated by reference).
* Exhibit 10.14: Stock Option Agreement, dated as of June 8, 1999, by and
between FSCO and Zions (Ex. 99.2 to FSCO's Report on Form 13D, filed
June 18, 1999, incorporated by reference).
* 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 filed during the fourth quarter of 1999 (all are Item
5 Other Information):
* Nov. 19, 1999 report that FSCO has determined to modify the regulatory
accounting treatment of certain securitization transactions entered
into by its wholly-owned subsidiary, First Security Bank, N.A. (FS
Bank) for purposes of calculating the level of regulatory capital
maintained by FS Bank for the period of Apr. 1, 1998 to June 30, 1999
(the Covered Period). As a result, FS Bank will amend and refile its
consolidated reports of condition and income (Call Reports) with the
Comptroller of the Currency for the Covered Period to show the
inclusion in FS Bank's total risk-weighted assets of various assets
previously sold by FS Bank in securitization transactions.
* Dec. 28, 1999 report of a Dec. 23, 1999 press release announcing that
FSCO was delaying the shareholder meeting scheduled for December 28,
1999 in connection with its pending merger of equals agreement with
Zions.
<PAGE> 112
* Jan. 20, 2000 report of a Jan. 18, 2000 press release announcing that
BancWest Corporation will acquire 68 Zions Bank and First Security Bank
branches and associated deposits and loans in Utah and Idaho, pending
consummation of the merger of equals of Zions Bancorporation and FSCO.
* Feb. 11, 2000 report of a Jan. 19, 2000 press release reporting 1999
earnings.
* Mar. 03, 2000 report of a Mar. 03, 2000 press release with respect to
revenues and earnings.
<PAGE> 113
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 3, 2000
- ------------------------------------------ ------------------
Brad D. Hardy Date
Executive Vice President Corporate Services,
General Counsel,
Chief Financial Officer, and
Secretary of First Security Corporation
(Principal Financial and Accounting Officer)
<PAGE> 114
SIGNATURES - CONTINUED
FIRST SECURITY CORPORATION
Registrant
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 3, 2000
- ------------------------------------------ ------------------
Spencer F. Eccles Date
Chairman and Chief Executive Officer
/s/ Morgan J. Evans March 3, 2000
- ------------------------------------------ ------------------
Morgan J. Evans Date
President and Chief Operating Officer
Director
/s/ James C. Beardall March 3, 2000
- ------------------------------------------ ------------------
James C. Beardall Date
Director
/s/ Rodney H. Brady March 3, 2000
- ------------------------------------------ ------------------
Rodney H. Brady Date
Director
/s/ James E. Bruce March 6, 2000
- ------------------------------------------ ------------------
James E. Bruce Date
Director
/s/ Thomas D. Dee, II March 3, 2000
- ------------------------------------------ ------------------
Thomas D. Dee, II Date
Director
/s/ Dr. David P. Gardner March 3, 2000
- ------------------------------------------ ------------------
Dr. David P. Gardner Date
Director
/s/ Robert H. Garff March 2, 2000
- ------------------------------------------ ------------------
Robert H. Garff Date
Director
/s/ Jay Dee Harris March 3, 2000
- ------------------------------------------ ------------------
Jay Dee Harris Date
Director
/s/ Robert T. Heiner March 3, 2000
- ------------------------------------------ ------------------
Robert T. Heiner Date
Director
<PAGE> 115
/s/ Karen H. Huntsman March 7, 2000
- ------------------------------------------ ------------------
Karen H. Huntsman Date
Director
/s/ G. Frank Joklik March 3, 2000
- ------------------------------------------ ------------------
G. Frank Joklik Date
Director
/s/ B. Z. Kastler March 7, 2000
- ------------------------------------------ ------------------
B. Z. Kastler Date
Director
/s/ Dr. J. Bernard Machen March 6, 2000
- ------------------------------------------ ------------------
Dr. J. Bernard Machen Date
Director
/s/ Joseph G. Maloof March 8, 2000
- ------------------------------------------ ------------------
Joseph G. Maloof Date
Director
/S/ Michele Papen-Daniel March 11, 2000
- ------------------------------------------ ------------------
Michele Papen-Daniel, Ph.D. Date
Director
/s/ Scott S. Parker March 6, 2000
- ------------------------------------------ ------------------
Scott S. Parker Date
Director
/s/ James L. Sorenson March 7, 2000
- ------------------------------------------ ------------------
James L. Sorenson Date
Director
/s/ Harold J. Steele March 6, 2000
- ------------------------------------------ ------------------
Harold J. Steele Date
Director
/s/ James R. Wilson March 3, 2000
- ------------------------------------------ ------------------
James R. Wilson Date
Director
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)
<CAPTION>
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME:
Net income per consolidated income statements $ 273,342 $ 247,680 $ 215,274
Subtract dividend requirement of preferred stock 27 28 30
- -------------------------------------------------------- ------------ ----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK (BASIC) 273,315 247,652 215,244
Add dividend requirement of preferred stock 27 28 30
- -------------------------------------------------------- ------------ ----------- -----------
NET INCOME DILUTED $ 273,342 $ 247,680 $ 215,274
======================================================== ============ =========== ===========
EARNINGS PER COMMON SHARE BASIC $ 1.42 $ 1.32 $ 1.18
EARNINGS PER COMMON SHARE DILUTED 1.38 1.28 1.14
======================================================== ============ =========== ===========
SHARES OUTSTANDING (AVERAGE):
Common shares 194,863 189,246 185,171
Treasury shares (2,124) (1,674) (2,931)
- ---------------------------------------------------------- ---------- ---------- ----------
COMMON SHARES BASIC (AVG) 192,739 187,572 182,240
Common share equivalents for options 4,931 5,882 6,089
Preferred share equivalents 364 386 410
- ---------------------------------------------------------- ---------- ---------- ----------
COMMON SHARES DILUTED (AVG) 198,034 193,840 188,739
========================================================== ========== ========== ==========
<FN>
(A) 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>
EXHIBIT 21. Subsidiaries
<TABLE>
FIRST SECURITY CORPORATION
For the year ended December 31, 1999
<CAPTION>
Organized Percentage of
Under Voting Securities
Tier and Name of Subsidiary (A) Location Laws of Owned by FSCO
- ---------------------------------------------------------------- ------------------------ ----------- -------------------
<S> <C> <C> <C>
AllTime ATM, Inc. Salt Lake City, Utah Utah 100.0
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 California, National Association West Covina, California 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 New Mexico, National Association (B) Albuquerque, NM U.S.A. 100.0
First Security Business Investment Corporation Salt Lake City, Utah Utah 100.0
First Security Capital I Salt Lake City, Utah Delaware 100.0
First Security Information Technology, Inc. Salt Lake City, Utah Utah 100.0
First Security Investment Services, Inc. Salt Lake City, Utah Utah 100.0
2nd Tier: First Security Investment Management, Inc. Salt Lake City, Utah Utah 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 Life Insurance Company of Arizona Salt Lake City, Utah Arizona 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 Processing Services, Inc. Salt Lake City, Utah Utah 100.0
First Security Service Company Salt Lake City, Utah Utah 100.0
First Security Specialized Services Inc. Salt Lake City, Utah Utah 100.0
First Security Van Kasper, Inc. (C) Salt Lake City, Utah Utah 100.0
2nd Tier: First Security Van Kasper Advisers Salt Lake City, Utah Utah 100.0
2nd Tier: First Security Van Kasper Investments Salt Lake City, Utah Utah 100.0
2nd Tier: First Security Insurance of New Mexico, Inc. Salt Lake City, Utah Utah 100.0
2nd Tier: First Security Investor Services of Nevada, Inc. Las Vegas, Nevada Nevada 100.0
2nd Tier: First Security Investor Services of Wyoming, Inc. Rock Springs, Wyoming Wyoming 100.0
2nd Tier: Intermountain Insurance Agency, Inc. (Inactive) Salem, Oregon Oregon 100.0
================================================================ ======================== =========== ===================
<FN>
(A) All subsidiaries are included in consolidated financial statements.
(B) On October 12, 1999 FS Bank of Southern New Mexico, N.A. was merged into
FS Bank of New Mexico, N.A.
(C) On July 1, 1999 FS Insurance, Inc.; FS Ins. Of Idaho, Inc.; FS Ins. Of
Oregon, Inc.; FS Benefits, Inc.; FS Capital Markets Inc.; and FS Investor
Services all merged into FS Van Kasper, Inc.
</TABLE>
EXHIBIT 23. 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,
333-03377, and 333-75271 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 18,
2000, appearing in the Annual Report on Form 10-K of First Security
Corporation for the year ended December 31, 1999.
/S/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 16, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 926,148
<INT-BEARING-DEPOSITS> 2,902
<FED-FUNDS-SOLD> 167,949
<TRADING-ASSETS> 22,650
<INVESTMENTS-HELD-FOR-SALE> 5,528,269
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 14,578,537
<ALLOWANCE> (174,443)
<TOTAL-ASSETS> 22,992,927
<DEPOSITS> 13,210,416
<SHORT-TERM> 4,787,365
<LIABILITIES-OTHER> 639,491
<LONG-TERM> 2,585,755
<COMMON> 1,769,449
0
451
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 22,992,927
<INTEREST-LOAN> 1,196,016
<INTEREST-INVEST> 364,429
<INTEREST-OTHER> 27,790
<INTEREST-TOTAL> 1,585,235
<INTEREST-DEPOSIT> 409,087
<INTEREST-EXPENSE> 798,788
<INTEREST-INCOME-NET> 786,447
<LOAN-LOSSES> 59,447
<SECURITIES-GAINS> 13,426
<EXPENSE-OTHER> 844,445
<INCOME-PRETAX> 415,530
<INCOME-PRE-EXTRAORDINARY> 273,342
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273,342
<EPS-BASIC> 1.42
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 4.03
<LOANS-NON> 59,220
<LOANS-PAST> 31,948
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 99,223
<ALLOWANCE-OPEN> 173,350
<CHARGE-OFFS> (103,646)
<RECOVERIES> 36,869
<ALLOWANCE-CLOSE> 174,443
<ALLOWANCE-DOMESTIC> 174,443
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
