<PAGE>
To Our Stockholders
- --------------------------------------------------------------------------------
Net income in 1997 totaled $75,187,000, an increase of 7.1% over the $70,232,000
earned in 1996. Return on average stockholders' equity was 15.2%.
For the twenty-sixth straight year total assets on December 31 reached a record
high - $7,332,021,000 - an increase of 6.1% over the 1996 high of
$6,912,057,000. In addition, during the year management made a decision to
diversify funding sources and to securitize another $750,000,000 in credit card
loans. For 1997, managed assets, which include securitized credit card loans,
total $8,282,021,000, an increase of $1,169,964,000 or 16.5% over the 1996 total
managed assets of $7,112,057,000. This is the greatest single year of asset
dollar growth in the Company's history.
Consumer bankruptcies and charge-offs continue to have a negative impact on
First National's net income. Our provision to the Allowance for Loan Losses,
which is a deduction from earnings, totaled $201,494,000 in 1997. This compares
to a provision of $180,059,000 in 1996, and $102,767,000 in 1995. We will not
see a significant improvement in net income until consumer bad debts return to a
more normal level.
On June 27, 1997, First National of Nebraska purchased 11,767 shares of its own
stock costing $42,362,000. The stock was retired, leaving 335,000 shares
outstanding.
During 1997 we acquired a credit card portfolio totaling $265,000,000 from Old
Kent Bank in Grand Rapids, Michigan. We are enjoying a good working relationship
with Old Kent and look forward to a strong continuing association.
We also opened a new office building at First National Business Park: 140th and
West Dodge Road in Omaha. This building is serving to consolidate leased space
in several Omaha buildings and gives us room for expansion during the next two
years.
As a result of our strong growth, we created 586 new jobs which means more
opportunities for personal growth. I want to thank the more than 5,200
associates who have worked so successfully to make the Company grow during 1997.
Bruce R. Lauritzen
<PAGE>
First National of Nebraska and Subsidiaries
Performance Trends
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BAR GRAPHS DEPICTING:
Managed Assets* 1997: $8,282,021,000 Earnings 1997: $75,187,000 Capital & Loan Loss Allowance
1997: $639,047,000
YEAR $ MILLIONS YEAR $ MILLIONS YEAR $ MILLIONS
- ---------------------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1972 298 1972 1.959 1972 20
1973 366 1973 2.213 1973 22
1974 360 1974 2.405 1974 20
1975 351 1975 2.597 1975 18
1976 372 1976 3.155 1976 20
1977 439 1977 3.614 1977 23
1978 503 1978 3.976 1978 27
1979 583 1979 4.473 1979 31
1980 625 1980 5.075 1980 35
1981 666 1981 5.743 1981 41
1982 715 1982 6.575 1982 46
1983 844 1983 7.000 1983 49
1984 873 1984 8.700 1984 59
1985 1,081 1985 10.076 1985 69
1986 1,118 1986 11.637 1986 80
1987 1,314 1987 15.133 1987 95
1988 1,726 1988 23.253 1988 121
1989 2,076 1989 28.123 1989 147
1990 2,548 1990 33.217 1990 186
1991 3,033 1991 40.017 1991 225
1992 3,574 1992 52.126 1992 272
1993 4,272 1993 70.082 1993 345
1994 5,262 1994 77.133 1994 415
1995 6,311 1995 82.241 1995 498
1996 7,112 1996 70.232 1996 593
1997 8,282 1997 75.187 1997 639
<CAPTION>
Managed Loans* 1997: $5,960,982,000 Deposits 1997: $6,401,045,000 Return On Average Equity 1997:
15.2%
YEAR $ MILLIONS YEAR $ MILLIONS YEAR %
- ---------------------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1972 152 1972 251 1972 13.5
1973 183 1973 296 1973 16.5
1974 172 1974 299 1974 17.4
1975 175 1975 280 1975 18.5
1976 202 1976 302 1976 19.5
1977 215 1977 336 1977 19.2
1978 265 1978 369 1978 18.2
1979 327 1979 411 1979 17.9
1980 297 1980 428 1980 17.7
1981 377 1981 411 1981 17.4
1982 426 1982 432 1982 17.1
1983 528 1983 557 1983 16.3
1984 645 1984 608 1984 18.6
1985 738 1985 741 1985 18.0
1986 813 1986 799 1986 18.0
1987 988 1987 970 1987 19.8
1988 1,321 1988 1,308 1988 25.7
1989 1,581 1989 1,642 1989 24.3
1990 1,890 1990 2,097 1990 23.2
1991 2,224 1991 2,575 1991 23.3
1992 2,602 1992 3,070 1992 24.7
1993 3,184 1993 3,652 1993 26.8
1994 3,945 1994 4,383 1994 24.1
1995 4,651 1995 5,090 1995 20.8
1996 5,307 1996 5,836 1996 15.4
1997 5,961 1997 6,401 1997 15.2
</TABLE>
* Reported Assets/Loans plus securitized credit card loans
<PAGE>
First National of Nebraska and Subsidiaries
Financial Highlights
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Total assets $ 7,332,021 $ 6,912,057 $ 6,110,542 $ 5,261,907 $ 4,271,853
Net income $ 75,187 $ 70,232 $ 82,241 $ 77,133 $ 70,082
Stockholders' equity $ 510,057 $ 487,966 $ 429,831 $ 359,216 $ 295,355
Allowance for
loan losses $ 128,990 $ 104,812 $ 67,740 $ 55,265 $ 49,589
================================================================================================================================
================================================================================================================================
Per share data:
Net income $ 220.68 $ 202.53 $ 237.17 $ 222.43 $ 202.10
Dividends $ 33.76 $ 37.22 $ 33.73 $ 38.07 $ 16.86
Stockholders' equity $ 1,522.56 $ 1,407.19 $ 1,239.54 $ 1,035.90 $ 851.74
================================================================================================================================
================================================================================================================================
Profit ratios:
Return on average
equity 15.2% 15.4% 20.8% 24.1% 26.8%
Return on average
assets 1.1% 1.1% 1.5% 1.7% 1.9%
================================================================================================================================
Banking Locations
<CAPTION>
MAP DEPICTING:
Nebraska South Dakota Kansas Colorado
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Omaha Yankton Fairway Fort Collins
North Platte Overland Park Greeley
Columbus Olathe Loveland
Kearney Windsor
Fremont Boulder
Beatrice
David City
Chadron
Alliance
Scottsbluff
Gering
Norfolk
</TABLE>
3
<PAGE>
First National of Nebraska and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
Assets 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands)
<S> <C> <C>
Cash and due from banks $ 428,832 $ 397,886
Federal funds sold and other short-term investments 327,010 277,028
- -------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 755,842 674,914
Securities available-for-sale (amortized cost $378,714,000 and
$255,653,000) 381,337 256,919
Securities held-to-maturity (fair value $874,646,000 and $650,897,000) 872,907 649,799
Loans 5,010,982 5,107,041
Less: Allowance for loan losses 128,990 104,812
Unearned income 13,380 11,494
- -------------------------------------------------------------------------------------------------------------------
Net loans 4,868,612 4,990,735
Premises and equipment, net 129,163 111,700
Other assets 324,160 227,990
- -------------------------------------------------------------------------------------------------------------------
Total assets $7,332,021 $6,912,057
===================================================================================================================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing $ 842,195 $ 721,448
Interest-bearing 5,558,850 5,114,721
- -------------------------------------------------------------------------------------------------------------------
Total deposits 6,401,045 5,836,169
Federal funds purchased and securities sold under repurchase agreements 217,891 146,015
Commercial paper and commercial paper based borrowings -- 273,298
Other liabilities 80,530 64,733
Other borrowings 28,446 7,260
Capital notes 94,052 96,616
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 6,821,964 6,424,091
Contingencies and commitments
Stockholders' equity:
Common stock, $5 par value, 346,767 shares authorized,
335,000 and 346,767 shares issued and outstanding, respectively 1,675 1,734
Additional paid-in capital 2,515 2,604
Retained earnings 504,184 482,819
Net unrealized appreciation on available-for-sale securities, net of tax 1,683 809
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 510,057 487,966
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $7,332,021 $6,912,057
===================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
First National of Nebraska and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands Except Share and Per Share Data)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans and lease financing $735,638 $700,472 $634,157
Interest on securities:
Taxable interest income 64,165 49,809 45,492
Nontaxable interest income 1,036 1,116 1,436
Interest on federal funds sold
and other short-term investments 14,268 14,017 10,298
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 815,107 765,414 691,383
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 286,226 250,170 234,694
Interest on commercial paper and
commercial paper based borrowings 13,479 15,943 18,435
Interest on federal funds purchased and
securities sold under repurchase agreements 7,841 5,667 3,642
Interest on other borrowings and capital notes 9,549 8,451 7,689
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 317,095 280,231 264,460
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 498,012 485,183 426,923
Provision for loan losses 201,494 180,059 102,767
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 296,518 305,124 324,156
Noninterest income:
Processing services 126,125 100,447 72,187
Deposit services 22,879 19,928 17,372
Trust and investment services 20,616 17,818 15,086
Commissions 14,212 11,064 9,823
Gain on sales of loans 17,245 -- --
Miscellaneous 30,857 25,800 19,884
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 231,934 175,057 134,352
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 155,956 135,718 119,698
Communications and supplies 55,922 61,273 56,382
Loan services purchased 36,099 32,637 29,810
Purchased processing 26,560 21,000 19,388
Net occupancy expense of premises 22,355 21,570 19,362
Equipment rentals, depreciation and maintenance 29,880 26,117 23,879
Other professional services purchased 48,701 44,072 31,400
Miscellaneous 29,074 23,441 28,498
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 404,547 365,828 328,417
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 123,905 114,353 130,091
Income tax expense (benefit):
Current 53,947 57,641 54,284
Deferred (5,229) (13,520) (6,434)
- -------------------------------------------------------------------------------------------------------------------------------
Total income tax expense 48,718 44,121 47,850
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 75,187 $ 70,232 $ 82,241
===============================================================================================================================
Average number of common shares outstanding 340,706 346,767 346,767
===============================================================================================================================
Net income per common share $ 220.68 $ 202.53 $ 237.17
===============================================================================================================================
Cash dividends declared per common share $ 33.76 $ 37.22 $ 33.73
===============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
First National of Nebraska and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Additional Appreciation Total
Common Stock Paid-in Retained on Available- Stockholders'
($5 par value) Capital Earnings For-Sale Equity
Securities
- ------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $1,734 $2,604 $354,948 $ (70) $359,216
Net Income -- -- 82,241 -- 82,241
Net changes in unrealized
appreciation on securities
available-for-sale, net of taxes -- -- -- 70 70
Cash dividends - $33.73 per share -- -- (11,696) -- (11,696)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,734 2,604 425,493 -- 429,831
Net Income -- -- 70,232 -- 70,232
Net changes in unrealized
appreciation on securities
available-for-sale, net of taxes -- -- -- 809 809
Cash dividends - $37.22 per share -- -- (12,906) -- (12,906)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,734 2,604 482,819 809 487,966
Net Income -- -- 75,187 -- 75,187
Repurchase and retirement of
common stock (59) (89) (42,214) -- (42,362)
Net changes in unrealized
appreciation on securities
available-for-sale, net of taxes -- -- -- 874 874
Cash dividends - $33.76 per share -- -- (11,608) -- (11,608)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $1,675 $2,515 $504,184 $1,683 $510,057
==============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
First National of Nebraska and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 75,187 $ 70,232 $ 82,241
Adjustments to reconcile net income to net cash
flows from operating activities:
Provision for loan losses 201,494 180,059 102,767
Depreciation and amortization 41,888 37,195 32,145
Provision for deferred taxes (5,229) (13,520) (6,434)
Origination of loans for resale (41,991) (46,887) (25,054)
Proceeds from the sale of loans for resale 40,851 47,053 26,730
Gain on sales of loans (17,245) -- --
Other asset and liability activity, net (24,195) (27,159) 5,001
- ---------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 270,760 246,973 217,396
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash received (1) $ -- $ (11,584) $ 28,041
Maturities and sales of securities available-for-sale 211,676 7,176 --
Purchases of securities available-for-sale (334,172) (226,734) --
Maturities of securities held-to-maturity 283,446 312,406 354,495
Purchases of securities held-to-maturity (507,975) (127,598) (395,064)
Net change in loans (586,113) (723,203) (691,893)
Securitization and sale of loans 750,000 -- 200,000
Purchase of loan portfolios (288,998) -- --
Purchases of premises and equipment, net (41,072) (26,363) (26,089)
Other, net 2,141 732 4,069
- ---------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (511,067) (795,168) (526,441)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits $ 564,876 $ 647,066 $ 539,118
Net change in federal funds purchased and
securities sold under repurchase agreements 71,876 2,548 33,924
Issuance of other borrowings and capital notes 135,771 61,799 115,914
Principal repayments of other borrowings
and capital notes (117,149) (68,889) (93,362)
Net change in commercial paper and
commercial paper based borrowings (280,169) (25,145) (22,822)
Repurchase and retirement of common stock (42,362) -- --
Cash dividends paid (11,608) (12,906) (11,696)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 321,235 604,473 561,076
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 80,928 56,278 252,031
Cash and cash equivalents at beginning of year 674,914 618,636 366,605
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 755,842 $ 674,914 $ 618,636
===========================================================================================================================
Cash paid during the year for:
Interest $ 312,318 $ 278,548 $ 255,354
Income taxes $ 44,979 $ 50,233 $ 53,213
Noncash investing and financing activities:
Noncash consideration for business acquisitions $ -- $ 724 $ 15,198
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
(1) In two separate acquisitions during 1996, the Company assumed liabilities of
$117,860,000 and noncash assets of $130,168,000. In two separate acquisitions
during 1995, the Company assumed liabilities of $169,394,000 and noncash assets
of $156,551,000.
7
<PAGE>
First National of Nebraska and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Columnar Amounts in Footnotes are in Thousands Except Per Share Data)
- --------------------------------------------------------------------------------
A. Summary of Significant Accounting Policies:
Principles of Consolidation - The consolidated financial statements of
First National of Nebraska and subsidiaries (the Company) include the
accounts of the parent company; its 99.66% owned subsidiary, First
National Bank of Omaha and wholly-owned subsidiaries (the Bank); its
wholly-owned other banking subsidiaries; and its nonbanking subsidiaries.
All material intercompany transactions and balances have been eliminated
in consolidation.
Nature of Business - The Company is a Nebraska-based interstate bank
holding company whose primary assets are its banking subsidiaries. The
banking subsidiaries are principally engaged in consumer, commercial,
real estate and agricultural lending and retail deposit activities. The
Company also has subsidiaries which provide merchant credit card
processing and other services.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - For the purpose of reporting cash flows, cash
and cash equivalents include cash and due from banks, federal funds sold
and other short-term investments with original maturities of three months
or less.
Securities - Debt securities for which the Company has the positive
intent and ability to hold to maturity are reported at amortized cost.
Premiums and discounts are recognized in interest income using the level
yield method over the period to maturity.
Debt and equity securities which the Company may not hold to maturity are
classified as available-for-sale if they are not considered to be part of
trading-related activities. Available-for-sale securities are reported at
their fair values, with unrealized holding gains and losses reported on a
net-of-tax basis as a separate component of stockholders' equity. Gains
and losses on the sale of available-for-sale securities are determined
using the specific-identification method. Premiums and discounts are
recognized in interest income using the level yield method over the
period to maturity.
Loans - Loans are reported at their outstanding principal balance net of
the allowance for loan losses and any deferred fees or costs on
originated loans. Loan fees and certain direct loan origination costs are
deferred and recognized as an adjustment of the yield of the related loan
over the estimated average life of the loan.
Accrual of interest is discontinued on a loan when management believes
collection of interest is doubtful after considering economic and
business conditions, collection efforts, and the financial condition of
the borrower.
Leases - Equipment acquired with no outside financing is leased to
customers under direct lease financing arrangements. The net investment
in direct financing leases is the sum of all minimum lease payments and
estimated residual values, less unearned income. Unearned income is
recognized as interest income over the terms of the leases by methods
that approximate the level yield method.
Allowance for Loan Losses - The allowance for loan losses is increased by
charges to income and decreased by charge-offs, net of recoveries.
Management's periodic evaluation of the adequacy of the allowance is
based on the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and
current economic conditions. The allowance for loan losses related to
impaired loans, excluding large groups of smaller balance homogeneous
loans (such as consumer loans) that are collectively evaluated for
impairment, is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or as a
practical expedient, at the observable market price of the loan or the
fair value of the underlying collateral.
8
<PAGE>
Premises and Equipment - Premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization computed using the straight-line method over the estimated
useful lives of the assets or the terms of the leases. Land is carried at
cost.
Credit Card Loan Securitization - The Company has sold, on a revolving
basis, credit card loans through a securitization program. These
securitizations have been recorded as sales in accordance with Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." A residual earnings stream and servicing have been retained
and recorded as part of the securitization. These retained interests are
recorded at estimated fair value based on the present value of estimated
expected future cash flows using a discount rate commensurate with the
risks involved. The resulting servicing liability was immaterial.
Income Taxes - The Company files consolidated federal and state tax
returns. Taxes of the subsidiaries, computed on a separate return basis,
are remitted to the parent company. Under the asset and liability method
used to calculate income taxes and deferred tax assets and liabilities,
the Company accounts for differences between the financial statement
carrying amount and tax bases of existing assets and liabilities by
applying currently enacted statutory tax rates applicable to future
periods.
Intangible Assets - Goodwill represents the excess of the purchase price
over the estimated fair value of identifiable net assets associated with
merger and acquisition transactions. Goodwill is amortized on a
straight-line basis over periods ranging up to 25 years. Core deposit
intangibles represent the intangible value of depositor relationships
resulting from deposit liabilities assumed in acquisitions and are
amortized over periods not exceeding 10 years using straight-line and
accelerated methods, as appropriate. Purchased credit card relationships
are amortized over a 15-year period using an accelerated method.
Fair Values of Financial Instruments - Fair values of financial
instruments that are not actively traded are based on market prices of
similar instruments and/or valuation techniques using market assumptions.
Although management uses its best judgment in estimating the fair value
of these financial instruments, there are inherent limitations in any
estimation technique. The Company assumes that the carrying amount of
cash and short-term financial instruments approximates their fair value.
Trust Assets - Property (other than cash deposits) held by banking
subsidiaries in fiduciary or agency capacities for their customers is not
included in the accompanying consolidated statements of financial
condition since such items are not assets of the Company.
Net Income Per Share - Net income per share of common stock has been
computed on the basis of the weighted-average number of shares of common
stock outstanding.
Other - Certain reclassifications were made to prior years' financial
statements to conform them to the improved classifications used in 1997.
These reclassifications had no effect on net income or total assets.
9
<PAGE>
B. Securities:
Debt and equity securities have been classified in the consolidated
statements of financial condition according to management's intent. The
amortized cost of securities and their approximate fair values at
December 31 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Government obligations $366,584 $2,623 $ -- $369,207
Obligations of states and political subdivisions 115 -- -- 115
Other securities 12,015 -- -- 12,015
------------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $378,714 $2,623 $ -- $381,337
===============================================================================================================================
Held-to-maturity securities:
U.S. Government obligations $809,581 $1,903 $ (265) $811,219
Obligations of states and political subdivisions 17,184 192 (21) 17,355
Mortgage-backed securities 45,692 31 (101) 45,622
Other securities 450 -- -- 450
------------------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $872,907 $2,126 $ (387) $874,646
===============================================================================================================================
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Government obligations $245,218 $1,265 $ (8) $246,475
Obligations of states and political subdivisions 305 9 -- 314
Other securities 10,130 -- -- 10,130
------------------------------------------------------------------------------------------------------------------------------
Total securities available-for-sale $255,653 $1,274 $ (8) $256,919
==============================================================================================================================
Held-to-maturity securities:
U.S. Government obligations $626,690 $1,231 $ (657) $627,264
Obligations of states and political subdivisions 19,588 214 (40) 19,762
Mortgage-backed securities 1,376 42 -- 1,418
Other securities 2,145 318 (10) 2,453
------------------------------------------------------------------------------------------------------------------------------
Total securities held-to-maturity $649,799 $1,805 $ (707) $650,897
==============================================================================================================================
</TABLE>
At December 31, 1997 and 1996, the Company did not hold any trading
securities. Gross realized gains on sales of available-for-sale
securities were $1,267,000 in 1997 and an immaterial amount in 1996 and
1995.
At December 31, 1997 and 1996, securities totaling $554,677,000 and
$457,265,000, respectively, were pledged to secure public deposits and
for other purposes required or permitted by law.
10
<PAGE>
Contractual maturities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Held-to-maturity securities: Available-for-sale securities:
----------------------------------- -----------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $229,192 $229,785 $ 65,652 $ 65,783
Due after one year through five years 594,886 596,488 301,492 303,984
Due after five years through ten years 2,997 2,604 -- --
Due after ten years 140 147 11,570 11,570
--------------------------------------------------------------------------------------------------------------------------------
Total securities, excluding mortgage-backed
securities 827,215 829,024 378,714 381,337
Mortgage-backed securities 45,692 45,622 -- --
--------------------------------------------------------------------------------------------------------------------------------
Total securities $872,907 $874,646 $378,714 $381,337
================================================================================================================================
</TABLE>
C. Loans:
Loans are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Individual consumer $2,804,727 $3,290,410
Commercial and financial 722,193 668,676
Real estate - mortgage 794,167 632,520
Real estate - construction 196,720 152,211
Agricultural 408,602 285,008
Lease financing 75,637 66,061
Other 8,936 12,155
---------------------------------------------------------------------------------------------------------------------------
Gross loans 5,010,982 5,107,041
Less:
Allowance for loan losses 128,990 104,812
Unearned income 13,380 11,494
---------------------------------------------------------------------------------------------------------------------------
Net loans $4,868,612 $4,990,735
============================================================================================================================
</TABLE>
In addition to the above loans owned by the Company, credit card loans
securitized and serviced for others totaled $950,000,000 in 1997 and
$200,000,000 in 1996. Mortgage loans serviced for others totaled $355,208,000
in 1997 and $370,570,000 in 1996.
Lease financing is comprised of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Direct financing leases:
Lease payments receivable $64,836 $56,207
Estimated residual value of equipment 10,801 9,854
---------------------------------------------------------------------------------------------------------------------------
75,637 66,061
Less unearned income 10,243 9,011
---------------------------------------------------------------------------------------------------------------------------
Net leases $65,394 $57,050
===========================================================================================================================
</TABLE>
At December 31, 1997, minimum lease financing payments receivable for
each of the five succeeding years are approximately: $18,372,000 for
1998; $17,806,000 for 1999; $13,703,000 for 2000; $9,371,000 for 2001;
and $3,766,000 for 2002.
11
<PAGE>
Transactions in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance beginning of year $ 104,812 $ 67,740 $ 55,265
Addition due to loan portfolio purchase 10,895 -- --
Addition due to acquisition -- 1,738 1,568
Provision for loan losses 201,494 180,059 102,767
Loans charged off (215,144) (164,711) (108,757)
Loans recovered 26,933 19,986 16,897
--------------------------------------------------------------------------------------------------------------------------
Total net charge-offs (188,211) (144,725) (91,860)
--------------------------------------------------------------------------------------------------------------------------
Balance end of year $ 128,990 $ 104,812 $ 67,740
==========================================================================================================================
</TABLE>
The Company grants individual consumer, commercial, agricultural, and
residential loans to customers. The business loan portfolio is diversified,
consisting of numerous industries located or headquartered primarily in the
Company's operating region which includes Nebraska, Colorado, Kansas, and
South Dakota. The majority of individual consumer loans are to customers
located in the Midwest.
The Company evaluates each borrower's creditworthiness on a case-by-case
basis. The amount of collateral obtained is based upon management's
evaluation of the borrower. The individual consumer category is predominately
unsecured, and the allowance for potential losses associated with these loans
has been established accordingly. The majority of the non-consumer loan
categories are generally secured by real estate, operating assets, or
financial instruments.
As of December 1997 and 1996 and for the years then ended, the Company's
recorded investment in impaired loans as defined by SFAS No. 114, as amended
by SFAS No. 118, was immaterial.
Loan participations sold to banks owned by shareholders of the Company were
$81,574,000 and $82,640,000, respectively, at December 31, 1997 and 1996.
Loans to subsidiary bank directors and their associates were approximately
$34,992,000 and $31,279,000 at December 31, 1997 and 1996, respectively. The
Company believes these loans have been made under comparable terms and
conditions as loans made to unrelated parties.
D. Premises and Equipment:
Premises and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 14,428 $ 13,562
Buildings 73,342 66,513
Leasehold improvements 25,558 20,502
Equipment 138,026 116,037
------------------------------------------------------------------------------------------------------------------------------
251,354 216,614
Less accumulated depreciation 122,191 104,914
------------------------------------------------------------------------------------------------------------------------------
Net premises and equipment $129,163 $111,700
==============================================================================================================================
</TABLE>
12
<PAGE>
E. Deposits:
The aggregate amount of short-term jumbo certificates of deposit, each
with a minimum denomination of $100,000, was approximately $367,359,000
and $437,420,000 in 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of total certificates of
deposit are as follows:
<TABLE>
-----------------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 $ 2,336,891
1999 1,090,194
2000 343,625
2001 35,170
2002 and thereafter 44,616
-----------------------------------------------------------------------------------------------------------------------------
Total certificates of deposit $3,850,496
=============================================================================================================================
</TABLE>
F. Commercial Paper, Other Borrowings and Capital Notes:
In December 1997, the Company discontinued its commercial paper program. At
December 31, 1996, the Company had facilities to access the commercial paper
market up to a maximum of $315,000,000, of which $273,298,000 was
outstanding. Obligations were collateralized by $286,526,000 of consumer
loans receivable. All of the facilities were fully backed by unused bank
credit lines. The Company's commercial paper and commercial paper based
borrowings were distributed on a national basis with proceeds used to finance
consumer receivables.
The parent company replaced an existing $75 million revolving credit line
with a $100 million syndicated revolving credit facility in December 1997.
This revolving credit facility bears a variable rate of interest tied to
publicly announced debt ratings of the Bank. At December 31, 1997, the parent
company had $19 million outstanding under this credit facility reflected in
other borrowings. The credit facility will mature on December 4, 2000, at
which time, any outstanding balance will be due. Among other restrictions,
the loan agreement requires that the Company maintain certain financial
covenants.
As part of arranging the syndicated credit facility for the Company, a $150
million revolving credit facility for the Bank was also syndicated to the
same bank group. This credit facility will be used for general liquidity
purposes and bears a variable rate of interest tied to publicly announced
debt ratings of the Bank. At December 31, 1997, there was no balance
outstanding under this credit facility. The credit facility will mature on
December 4, 2000, at which time, any outstanding balance will be due. Among
other restrictions, the loan agreement requires that the Bank maintain
certain financial covenants.
In December 1995, the Bank issued $75,000,000 in subordinated capital notes,
due to mature on December 1, 2010. The subordinated capital notes pay
interest semi-annually on June 1 and December 1 at a fixed rate of 7.32%. The
subordinated capital notes are unsecured and subordinated to the claims of
depositors and general creditors of the Bank. No sinking fund has been
provided, and the subordinated capital notes may not be redeemed, in whole or
in part, prior to maturity.
The parent company issued a total of $26,172,000 of unsecured capital notes,
which require principal payments through 2006. The capital notes are
noncallable and carry interest rates ranging from 9.00% to 12.50%. At
December 31, 1997 and 1996, $19,052,000 and $21,616,000, respectively, were
outstanding on these notes.
At December 31, 1997 and 1996, Bank premises were subject to a mortgage which
required annual payments of $1,253,000, including interest at 7.75%, through
the year 2003. The Bank may prepay the mortgage with a prepayment premium.
The mortgage balance was $5,250,000 and $6,062,000 at December 31, 1997, and
1996, respectively.
The Company has outstanding advances from the Federal Home Loan Bank totaling
$3,957,000 and $740,000, at December 31, 1997 and 1996, respectively. These
advances are at interest rates ranging from 5.40% to 7.34% and are scheduled
to mature at various periods through the year 2012. These advances are
collateralized by certain real estate loans in compliance with Federal Home
Loan Bank requirements. Additionally, the Company holds shares of Federal
Home Loan Bank stock as required.
Principal amounts due on other borrowings and capital notes in each of the
succeeding five years and thereafter are approximately: 1998 -$2,606,000;
1999 - $2,056,000; 2000 - $21,323,000; 2001 - $2,044,000; and 2002 -
$8,854,000; thereafter - $85,615,000.
13
<PAGE>
G. Income Taxes:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $45,875 $37,111
Employee benefits 6,210 4,947
Other 4,870 4,724
------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 56,955 46,782
------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Basis difference between tax and financial reporting arising from acquisitions 778 1,013
Lease financing 2,158 2,755
Change for tax recognized over future periods 4,444 --
Retained interests in securitization 6,036 --
Other 1,822 2,786
------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 15,238 6,554
------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $41,717 $40,228
========================================================================================================================
</TABLE>
The following is a comparative analysis of the provision for federal and
state taxes:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $49,969 $54,302 $51,736
State 3,978 3,339 2,548
-------------------------------------------------------------------------------------------------------------------------
53,947 57,641 54,284
Deferred:
Federal (4,841) (13,257) (6,317)
State (388) (263) (117)
-------------------------------------------------------------------------------------------------------------------------
(5,229) (13,520) (6,434)
-------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $48,718 $44,121 $47,850
=========================================================================================================================
</TABLE>
The effective rates of total tax expense for the years ended December 31,
1997, 1996, and 1995 are different than the statutory federal tax rate.
The reasons for the differences are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
(Percent of pretax income)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
Additions/(reductions) in taxes resulting from:
Tax-exempt interest income (0.8) (0.8) (0.7)
State taxes 2.1 1.9 1.9
Other items, net 3.0 2.5 0.6
---------------------------------------------------------------------------------------------------------------------------
Effective tax rate 39.3% 38.6% 36.8%
===========================================================================================================================
</TABLE>
14
<PAGE>
H. Employee Benefit Plans:
The Company has a noncontributory, self-trusteed pension plan (the Plan)
covering substantially all full-time employees with one or more years of
service. The Plan generally provides for employee retirement at age sixty-
five (early retirement at age fifty-five) and benefits based upon length of
service and compensation. Lump sum death benefits are available as well as
pre-retirement protection in the event of death before benefits commence. The
Company's policy is to fund accrued pension cost necessary to provide the
Plan, on an actuarial basis, with sufficient assets to meet the benefits to
be paid to the Plan participants (normally up to the extent deductible under
existing tax regulations). The benefits are funded under a self-administered
pension trust with the Bank's Trust Department acting as Trustee.
The net periodic pension credits, netted within noninterest expense, are
comprised of:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 3,817 $ 3,210 $ 2,925
Interest cost 2,676 2,288 2,103
Actual return on plan assets (7,512) (590) (21,135)
Net amortization and deferral 279 (6,960) 16,007
---------------------------------------------------------------------------------------------------------------------------
Net periodic pension credits $(740) $(2,052) $ (100)
============================================================================================================================
</TABLE>
The actuarial computation, using the "projected unit credit" actuarial method
for these years, assumed a discount rate on benefit obligations of 7.25% for
1997 and 1996 and 7.00% for 1995, an expected long-term rate of return on
plan assets of 8.00%, 7.25% and 7.00% for 1997, 1996 and 1995, respectively,
and annual compensation increases of 5% over the remaining service lives of
employees covered under the Plan for 1997, 1996 and 1995. Variances between
cost assumptions, expected return on assets and actual experience are
amortized over the remaining service lives of employees covered under the
Plan. At December 31, 1997, the Plan owned parent company common stock at a
cost of $269,548.
The table of actuarially computed benefit obligations and trusteed net assets
of the Plan is presented below:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $(27,220) $(22,347)
Nonvested benefits (4,135) (4,024)
----------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligations (31,355) (26,371)
Additional amounts related to projected salary increases (14,177) (9,500)
----------------------------------------------------------------------------------------------------------------------------
Projected benefit obligations (45,532) (35,871)
Plan assets at market value consisting primarily of
U.S. Government securities, common stocks and corporate bonds 78,875 72,553
----------------------------------------------------------------------------------------------------------------------------
Excess of Plan assets over projected benefit obligations 33,343 36,682
Unrecognized net gain from past experience different from that assumed (29,841) (33,590)
Unrecognized Plan net assets at January 1, 1987 being recognized over 15 years (1,123) (1,517)
Unrecognized prior service cost 549 613
----------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost included within other assets $ 2,928 $ 2,188
============================================================================================================================
</TABLE>
In addition to the pension plan, the Company also has a profit sharing plan
and 401(k) savings plan. Total cost for these plans, included within other
operating expense, for the years ended December 31, 1997, 1996 and 1995
approximated $1,293,000, $1,175,000 and $977,000, respectively.
15
<PAGE>
The Company also provides certain health care and death benefits to
retired employees. The estimated costs of these retiree benefits are
accrued during the employees' active service and benefit costs are funded
as they are incurred. The following tables summarize the accumulated
postretirement benefit obligation (APBO) and the related cost which is
recognized in the Company's consolidated statements of financial condition
and statements of income as of December 31:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (1,073) $ (896)
Active plan participants (4,300) (3,589)
----------------------------------------------------------------------------------------------------------------------------
Total unfunded accumulated postretirement benefit obligation (5,373) (4,485)
Unrecognized net obligation at transition 3,268 3,486
Unrecognized net gain (1,975) (2,411)
----------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $(4,080) $(3,410)
============================================================================================================================
<CAPTION>
For the years ended December 31,
1997 1996 1995
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net periodic postretirement benefit cost includes:
Service cost-benefits earned during the period $ 415 $ 314 $ 253
Interest cost on accumulated postretirement benefit obligation 306 300 269
Net amortization and deferral 112 122 112
----------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 833 $ 736 $ 634
============================================================================================================================
</TABLE>
The weighted average discount rate used to determine the APBO was 7.25%
for 1997 and 1996 and 7.0% for 1995. The assumed health care cost trend
rate used in measuring APBO was 8.0% in 1997 decreasing gradually to 5%
in 2000, and remaining constant thereafter. A one-percentage-point
increase in the assumed health care cost trend rate for each year would
increase the APBO as of December 31, 1997 by $757,000 and the aggregate
of the service and interest cost components of the net periodic
postretirement cost for the year then ended by $126,000.
I. Contingencies and Commitments:
In the normal course of business, there are various outstanding
commitments to extend credit in the form of unused loan commitments and
standby letters of credit that are not reflected in the consolidated
financial statements. Since commitments may expire without being
exercised, these amounts do not necessarily represent future cash
requirements. The Company uses the same credit and collateral policies in
making commitments as those described in Note C.
At December 31, 1997 and 1996, the Company had unused loan commitments,
excluding consumer credit card lines, of $1.3 billion. Additionally,
standby letters of credit of $49 million and $51 million at December 31,
1997 and 1996, respectively, had been issued. The majority of these
commitments are collateralized by various assets. No material losses are
anticipated as a result of these transactions.
The Company had unused consumer credit card lines of $17.5 billion and
$15.4 billion at December 31, 1997 and 1996, respectively. The Company
has the contractual right to change the conditions of the credit card
members' benefits or terminate the unused line at any time without prior
notice. Since many unused credit card lines are never actually drawn
upon, the unfunded amounts do not necessarily represent future funding
requirements.
The Company has operating leases for office space with terms ranging from
one to nine years, which may include renewal options. Certain leases also
include residual value guarantees up to $71 million, or alternatively,
the Company may elect to exercise purchase options totaling $81 million.
Operating leases on equipment and office space require minimum annual
rental payments as follows: 1998-$19,178,000; 1999-$17,786,000;
2000-$13,413,000; 2001-$6,618,000; 2002-$5,070,000; and $7,381,000
thereafter through the year 2014. Rental expense on leases for the years
ending December 31, 1997, 1996 and 1995 was approximately $14,771,000;
$12,848,000; and $13,476,000, respectively.
16
<PAGE>
In 1997, a trial court entered a $23.7 million judgment in favor of the
Company in a civil litigation matter in which the Company was a
plaintiff. The defendant has appealed. Although negotiations are in
progress, a settlement has not yet been consummated.
J. Regulatory Restrictions:
The Company is governed by various regulatory agencies. Bank holding
companies and their nonbanking subsidiaries are regulated by the Federal
Reserve Board. National banks are primarily regulated by the Office of
the Comptroller of the Currency (OCC). All federally-insured banks are
also regulated by the Federal Deposit Insurance Corporation (FDIC). The
Company's banking subsidiaries include eight national banks and three
state-chartered banks, all of which are insured by the FDIC. The
state-chartered banks are also regulated by state banking authorities.
The ability of the parent company to pay cash dividends to its
shareholders and service debt may be dependent upon cash dividends from
its subsidiary banks. Subsidiary national banks are subject to regulatory
restrictions on the amount they may pay in dividends. At December 31,
1997, approximately $49,628,000 of subsidiary national banks' retained
earnings were available for dividend declaration without prior regulatory
approval.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and its bank subsidiaries must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. These quantitative measures require the
Company and its bank subsidiaries to maintain minimum amounts and ratios
(set forth in the table below) 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 average assets (as defined). The Company and its
bank subsidiaries' capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
As of December 31, 1997, the most recent notification from the OCC
categorized the Company's banking subsidiaries as well capitalized under
the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes
have changed the institution's category. To be categorized as well
capitalized the Company's banking subsidiaries must maintain minimum
total risk-based capital of 10%, Tier I risk-based capital of 6%, and
Tier I leverage capital of 5.0%. The Company's and First National Bank of
Omaha's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Minimum Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital
Consolidated $601,555 10.7% $450,062 8.0% N/A
First National Bank of Omaha $315,763 11.3% $223,600 8.0% $279,499 10.0%
Tier I Capital
Consolidated $440,739 7.8% $225,031 4.0% N/A
First National Bank of Omaha $205,552 7.4% $111,800 4.0% $167,700 6.0%
Tier I Leverage Capital
Consolidated $440,739 6.1% $288,026 4.0% N/A
First National Bank of Omaha $205,552 5.6% $146,078 4.0% $182,598 5.0%
As of December 31, 1996
Total Capital
Consolidated $575,245 10.7% $431,779 8.0% N/A
First National Bank of Omaha $295,775 10.7% $220,807 8.0% $276,009 10.0%
Tier I Capital
Consolidated $415,147 7.7% $215,890 4.0% N/A
First National Bank of Omaha $186,025 6.7% $110,403 4.0% $165,605 6.0%
Tier I Leverage Capital
Consolidated $415,147 6.4% $257,547 4.0% N/A
First National Bank of Omaha $186,025 5.8% $127,758 4.0% $159,697 5.0%
</TABLE>
17
<PAGE>
Pursuant to Federal Reserve Bank requirements, the Company's banking
subsidiaries are required to maintain certain cash reserve balances with
the Federal Reserve system. At December 31, 1997 and 1996, the aggregate
required cash reserve balances were approximately $58,924,000 and
$55,784,000, respectively.
K. Fair Values of Financial Instruments:
The following presents the carrying amount and fair value of the
specified assets and liabilities held by the Company at December 31, 1997
and 1996. The information presented is based on pertinent information
available to management as of December 31, 1997 and 1996. Although
management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been
comprehensively revalued since that time, and the current estimated fair
value of these financial instruments may have changed since that point in
time.
Securities: The fair value of the Company's securities is based on the
quoted market prices at December 31, 1997 and 1996. Available-for-sale
securities are carried at their aggregate fair value. The carrying amount
and fair value of the Company's held-to-maturity securities at December
31, 1997 was $872,907,000 and $874,646,000, respectively. The carrying
amount and fair value of the Company's available-for-sale securities at
December 31, 1997 was $381,337,000. The carrying amount and fair value of
the Company's held-to-maturity securities at December 31, 1996 was
$649,799,000 and $650,897,000, respectively. The carrying amount and fair
value of the Company's available-for-sale securities at December 31, 1996
was $256,919,000.
Loans: The fair value of the Company's loans have been estimated using
two methods: 1) the carrying amount of short-term and variable rate loans
approximates fair value; and 2) for all other loans, discounting of
projected future cash flows. When using the discounting method, loans are
gathered by homogeneous groups with similar terms and conditions and
discounted at a target rate at which similar loans would be made to
borrowers at year end. In addition, when computing the estimated fair
value for all loans, the allowance for loan losses is subtracted from the
calculated fair value for consideration of credit issues. At December 31,
1997, the carrying amount and fair value of the Company's loans was
$4,806,355,000 and $4,997,061,000, respectively. The carrying amount of
loans for 1997 consists of gross loans of $5,010,982,000 less allowance
for loan losses of $128,990,000 less leases of $75,637,000. The fair
value of loans for 1997 consists of gross loans of $5,201,688,000 less
allowance for loan losses and leases. At December 31, 1996, the carrying
amount and fair value of the Company's loans was $4,936,168,000 and
$5,134,929,000, respectively. The carrying amount of loans for 1996
consists of gross loans of $5,107,041,000 less allowance for loan losses
of $104,812,000 less leases of $66,061,000. The fair value of loans for
1996 consists of gross loans of $5,305,802,000 less allowance for loan
losses and leases.
Deposits: The methodologies used to estimate the fair value of deposits
are similar to the two methods used to fair value loans. Deposits are
gathered in homogeneous groups and the future cash flows of these groups
are discounted using current market rates offered for similar products at
year end. The carrying amount and fair value of the Company's deposits at
December 31, 1997 was $6,401,045,000 and $6,417,361,000, respectively.
The carrying amount and fair value of the Company's deposits at December
31, 1996 was $5,836,169,000 and $5,851,127,000, respectively.
Other Borrowings and Capital Notes: The fair value of other borrowings
and capital notes is estimated by discounting future cash flows using
current market rates for similar debt instruments. The carrying amount
and fair value of other borrowings and capital notes at December 31, 1997
was $122,498,000 and $123,279,000, respectively. The carrying amount and
fair value of other borrowings and capital notes at December 31, 1996 was
$103,876,000 and $104,812,000, respectively.
Other Financial Instruments: All other financial instruments of a
material nature fall into the definition of short-term and fair value is
estimated as the carrying amount. The carrying amount and fair value at
December 31, 1997 of cash and due from banks was $428,832,000, federal
funds sold and other short-term investments was $327,010,000, and other
receivables and interest earned not collected was $158,914,000, which is
included in other assets. The carrying amount and fair value at December
31, 1996 of cash and due from banks was $397,886,000, federal funds sold
and other short-term investments was $277,028,000, and other receivables
and interest earned not collected was $90,763,000, which is included in
other assets.
The carrying amount and fair value at December 31, 1997 of federal funds
purchased and securities sold under repurchase agreements was
$217,891,000, and accounts payable and accrued interest payable was
$55,600,000, which is included in other liabilities. The carrying amount
and fair value at December 31, 1996 of federal funds purchased and
securities sold under repurchase agreements was $146,015,000, commercial
paper and commercial paper based borrowings was $273,298,000, and
accounts payable and accrued interest payable was $41,435,000, which is
included in other liabilities.
18
<PAGE>
Off-Balance Sheet Financial Instruments: All material amounts of
off-balance sheet financial instruments are characterized as short-term
instruments because of the conditions of the contract and repricing
ability. The carrying value of all off-balance sheet instruments
approximates the fair value. At December 31, 1997 and 1996, the Company
had unused loan commitments of $1.3 billion; standby letters of credit of
$49 million and $51 million, respectively; and unused consumer credit
card lines of $17.5 billion and $15.4 billion, respectively.
L. Acquisitions:
During 1996, a bank holding company subsidiary acquired a financial
institution in Colorado as part of the Company's strategy of expanding
the banking franchise into the growing areas of neighboring states. This
acquisition, which was accounted for as a purchase, occurred on August 6,
1996. Bolder Bancorporation, the holding company of the Bank of Boulder,
had consolidated assets of approximately $126 million. The Bank of
Boulder operates in two locations in Boulder, Colorado.
M. New Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," which is effective for fiscal
years beginning after December 15, 1997. This statement establishes
standards for reporting and display of comprehensive income and its
components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events or
circumstances from nonowner sources.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective
for financial statements for periods beginning after December 15, 1997.
This statement establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
The provisions of both of these statements are of a disclosure nature
only and will not have an effect on the Company's financial condition or
results of operations.
19
<PAGE>
N. Condensed Financial Information of First National of Nebraska:
First National of Nebraska (parent company only)
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
December 31,
Assets 1997 1996
----------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands)
<S> <C> <C>
Cash and due from banks $ 603 $ 744
Other short-term investments 1,400 51,340
----------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 2,003 52,084
Securities available-for-sale 445 414
Loans to nonbanking subsidiaries 2,295 2,708
Investment in subsidiaries:
First National Bank of Omaha 206,370 186,264
Other banking subsidiaries 338,002 310,336
Nonbanking subsidiaries 3,068 14,590
----------------------------------------------------------------------------------------------------------------------------
Total investment in subsidiaries 547,440 511,190
Other assets 6,047 1,120
----------------------------------------------------------------------------------------------------------------------------
Total assets $558,230 $567,516
============================================================================================================================
Liabilities and Stockholders' Equity
----------------------------------------------------------------------------------------------------------------------------
Payable to subsidiary $ -- $ 2,075
Commercial paper -- 45,000
Other liabilities 4,172 4,239
Deferred gain on sale of buildings 5,767 6,369
Other borrowings 19,182 251
Capital notes 19,052 21,616
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 48,173 79,550
Stockholders' equity:
Common stock 1,675 1,734
Additional paid-in capital 2,515 2,604
Retained earnings 504,184 482,819
Net unrealized appreciation on available-for-sale securities, net of tax 1,683 809
----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 510,057 487,966
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $558,230 $567,516
============================================================================================================================
</TABLE>
20
<PAGE>
First National of Nebraska (parent company only)
Condensed Statements of Operations
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands Except Share and Per Share Data)
<S> <C> <C> <C>
Revenues:
Income from subsidiaries:
Dividends from First National Bank of Omaha $ 21,491 $ 23,436 $ 81,724
Dividends from other banking subsidiaries 20,100 24,200 5,411
Dividends from nonbanking subsidiaries 13,069 5,600 2,800
Interest income on commercial paper 2,380 2,546 2,798
Recognized gain on sale of buildings 602 602 602
Recognized gain on sale of option -- -- 1,389
Investment interest and other income 796 569 795
---------------------------------------------------------------------------------------------------------------------------------
Total revenues 58,438 56,953 95,519
Expenses:
Interest 5,622 5,065 9,461
Other 2,243 2,338 837
---------------------------------------------------------------------------------------------------------------------------------
Total expenses 7,865 7,403 10,298
---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed
(overdistributed) earnings of subsidiaries 50,573 49,550 85,221
Income tax expense (benefit) 371 (174) (2,273)
---------------------------------------------------------------------------------------------------------------------------------
Total income before equity in undistributed
(overdistributed) earnings of subsidiaries 50,202 49,724 87,494
---------------------------------------------------------------------------------------------------------------------------------
Equity in undistributed (overdistributed) earnings of subsidiaries:
First National Bank of Omaha 19,528 21,669 (20,801)
Other banking subsidiaries 10,187 598 14,355
Nonbanking subsidiaries (4,730) (1,759) 1,193
---------------------------------------------------------------------------------------------------------------------------------
Total equity in undistributed
(overdistributed) earnings of subsidiaries 24,985 20,508 (5,253)
---------------------------------------------------------------------------------------------------------------------------------
Net income $ 75,187 $ 70,232 $ 82,241
=================================================================================================================================
Average number of shares outstanding 340,706 346,767 346,767
=================================================================================================================================
Net income per share $ 220.68 $ 202.53 $ 237.17
=================================================================================================================================
</TABLE>
21
<PAGE>
First National of Nebraska (parent company only)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
For the years ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
(Amounts in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 75,187 $ 70,232 $ 82,241
Adjustments to reconcile net income to net cash
flows from operating activities:
Equity in (undistributed) overdistributed
earnings of subsidiaries (24,985) (20,508) 5,253
Recognized gain on sale of buildings (602) (602) (602)
Recognized gain on sale of option -- -- (1,389)
Other, net (28) 415 (259)
- -----------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 49,572 49,537 85,244
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of option -- -- 2,889
Change in investment in subsidiaries and other assets (14,975) (35,102) (16,237)
- -----------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (14,975) (35,102) (13,348)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of other borrowings and capital notes $ 52,029 $ 23,000 $ 15,000
Principal repayments of other borrowings
and capital notes (80,662) (27,232) (66,894)
Repayment of payable to subsidiary (2,075) -- --
Repurchase and retirement of common stock (42,362) -- --
Cash dividends paid (11,608) (12,906) (11,696)
- -----------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (84,678) (17,138) (63,590)
- -----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (50,081) (2,703) 8,306
Cash and cash equivalents at beginning of year 52,084 54,787 46,481
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,003 $ 52,084 $ 54,787
===========================================================================================================
Cash paid during the year for:
Interest $ 5,735 $ 5,328 $ 9,171
Noncash investing and financing activities:
Noncash consideration for business acquisitions $ -- $ -- $ 15,198
===========================================================================================================
</TABLE>
22
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
First National of Nebraska, Inc.
Omaha, Nebraska
We have audited the accompanying consolidated statements of financial condition
of First National of Nebraska, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First National of
Nebraska, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche
Omaha, Nebraska
February 3, 1998
23
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
General:
The Company consists of the parent company, which is a Nebraska-based interstate
bank holding company, and its consolidated subsidiaries. Its principal
subsidiaries include First National Bank of Omaha and its wholly-owned
subsidiaries; First National Bank and Trust Company of Columbus; First National
Bank, North Platte; Platte Valley State Bank and Trust Company, Kearney; The
Fremont National Bank and Trust Company; First National Bank of Kansas, Overland
Park, Kansas; First National Bank South Dakota, Yankton, South Dakota; and First
National of Colorado, Inc., and its wholly-owned Colorado subsidiaries which
primarily include: First National Bank, Fort Collins; Union Colony Bank,
Greeley; The Bank of Boulder; and FNC Trust Group, N.A. The Company also has
nonbanking subsidiaries, which in the aggregate are not material.
The Company is governed by various regulatory agencies. Bank holding companies
and their nonbanking subsidiaries are regulated by the Federal Reserve Board.
National banks are primarily regulated by the OCC. All federally-insured banks
are also regulated by the FDIC. The Company's banking subsidiaries include eight
national banks and three state-chartered banks, all of which are insured by the
FDIC. The state-chartered banks are also regulated by state banking authorities.
The Company has 45 years of experience providing credit card services and was
one of the originators of the bank credit card industry. Through a banking
subsidiary, the Company conducts a significant consumer credit card service
under license arrangements with VISA USA and MasterCard International, Inc. The
Company's credit card customers are located throughout the United States, but
primarily in the Midwest. At December 31, 1997, the Company ranked among the top
25 card issuing entities based on the amount of managed credit card loans
outstanding. The Company generally originates new credit card accounts for
itself with the exception of a $265 million credit card portfolio purchased in
June 1997. The Company performs credit card servicing activities on behalf of
its affiliate banks including data processing, payment processing, statement
rendering, marketing, customer service, credit administration and card
embossing. The Company primarily funds its credit card loans through the core
deposits of its affiliate banks.
Competitors of the Company include commercial banks, savings and loan
associations, consumer and commercial finance companies, credit unions and other
financial services companies. The Company's credit card operation competes with
other issuers of credit cards ranging from other national issuers of bank cards
to local retailers which provide their own credit cards. Like other companies
with significant credit card operations, declining asset quality due to
increased consumer delinquencies and charge-offs has resulted in industry-wide
pressure on the profitability of credit card operations.
The Company continues to make substantial investments in data processing
technology for its own data processing needs and to provide various data
processing services for unaffiliated parties. The services provided include
automated clearinghouse transactions, merchant credit card processing, and check
processing. The Company has ranked among the top six merchant credit card
processors in the United States with over $16 billion transactions processed in
1997 and $15 billion transactions processed in 1996. It has also ranked among
the 25 largest automated clearinghouse processors in the country and is one of
the largest check processors in its market area. Furthermore, the Company
provides data processing services to 40 non-affiliated banks located in nine
states. Fee income continues to increase through the ongoing expansion of these
processing services. The Company continues to closely monitor the risks and
competitive conditions as they relate to pricing and technological issues
associated with these processing services.
Year 2000:
A significant technological issue impacting all companies worldwide is the need
to modify their computer information systems to properly process transactions
relating to the year 2000 and beyond. The Company has implemented a Company-wide
program to prepare its computer systems and applications for the year 2000. The
Company is incurring internal staff costs as well as consulting and other
expenses related to the execution of the implementation plan. A portion of these
expenses may be incorporated in the cost of normal software upgrades and involve
the redeployment of existing information technology resources. Presently,
management has not yet completely determined the year 2000 implementation costs,
but they are not expected to have a material financial impact on the Company.
The Company's plans include necessary reviews of vendors, customers, third party
processors and other external parties with whom the Company conducts business.
Until sufficient information is accumulated to assess the degree to which the
Company is susceptible to potential problems, the Company is unable to quantify
possible losses associated with these external relationships.
24
<PAGE>
Management's discussion and analysis contains forward looking statements which
reflect management's current views and estimates of future economic
circumstances, industry conditions, company performance and the financial
results. The statements are based on many assumptions and factors, including
general economic conditions, consumer behavior, competitive environment and
related market conditions, operating efficiencies, and actions of governments.
Any changes in such assumptions or factors could produce different results.
Results of Operations:
Overview:
Net income for the year 1997 was $75.2 million, or $220.68 per share, compared
to $70.2 million, or $202.53 per share, for 1996. Net income for 1997 increased
$5 million, or 7.1%, compared to 1996. The increase of $18.15 in earnings per
share from 1996 is partially attributable to the repurchase and retirement of
11,767 shares of the Company's common stock in 1997. In 1996, net income
decreased by $12 million, or 14.6%, compared to 1995. Return on average equity
for 1997 was 15.2% compared to 15.4% for 1996 and 20.8% for 1995. Return on
average assets for 1997 and 1996 was 1.1% decreasing from 1.5% in 1995. The
return on average assets and equity ratios remain favorable in spite of a
reduction from prior years primarily due to increases in the provision for loan
losses as a result of increased delinquencies and charge-offs on credit card and
other consumer loans. Notwithstanding the increased provision for loan losses,
earnings have remained strong due to continued growth in net interest income and
noninterest income which continues to surpass the growth rate of operating
expenses.
Net interest income:
The Company's primary source of income is net interest income which is defined
as the difference between interest income and fees derived from earning assets
and interest expense on interest-bearing liabilities. Interest income and
expense are affected by changes in the volume and mix of interest-earning assets
and interest-bearing liabilities, in addition to changes in interest rates.
In 1997, net interest income was $498 million, a 2.6% increase over 1996. In
1996, net interest income was $485.2 million, a 13.7% increase over 1995. These
increases are primarily attributable to increased earning assets net of an
increase in the volume of interest-bearing liabilities. The favorable trend of
increased net interest income over the three-year period ending December 31,
1997 corresponds to the Company's strong loan growth and successful asset and
liability management strategies.
Provision for loan losses:
On a monthly basis, the Company evaluates its allowance for loan losses based
upon a review of collateral values, delinquencies, non-accruals, payment
histories and various other analytical and subjective measures relating to the
various loan portfolios within the Company.
The provision for loan losses increased $21.4 million to $201.5 million for 1997
compared to $180.1 million for 1996. In 1996, the provision for loan losses
increased $77.3 million compared to 1995. The increases in the provision for
loan losses relates to higher net charge-offs and continued strengthening of the
loan loss allowance for potential future losses. The increase in net charge-offs
is primarily attributable to the continued rise in delinquencies on credit card
loans which is being experienced throughout the credit card industry.
Noninterest income:
Noninterest income was $231.9 million in 1997, an increase of 32.5%, or $56.9
million, compared to 1996. In 1996, noninterest income was $175.1 million, an
increase of 30.3%, or $40.7 million, from 1995. These increases were primarily
due to processing services income increasing by 25.6% in 1997 and 39.2% in 1996
reflecting increased loan servicing income and the growth in volumes processed
from new and existing customers in merchant processing. Deposit services income
increased 14.8% in 1997 and 14.7% in 1996 due primarily to the growth in total
deposits. Income related to trust and investment services and commissions
increased in 1997 and 1996 as a result of growth in the Company's customer base
and the expansion of services provided to customers. Noninterest income also
includes a gain recorded on sales of credit card loans of $17.2 million during
1997. Miscellaneous income increased by 19.6% in 1997 partially due to increased
gains on sales of investment securities and miscellaneous fee income.
Miscellaneous income increased by 29.8% in 1996 primarily due to income derived
from a change in merchant authorization processing.
25
<PAGE>
Noninterest expense:
Noninterest expense was $404.5 million in 1997, an increase of 10.6% or $38.7
million, from 1996. Noninterest expense in 1996 was $365.8 million, an increase
of 11.4% or $37.4 million from 1995. A significant portion of the increase in
noninterest expense was due to salaries and employee benefits which increased
14.9% in 1997 and 13.4% in 1996 resulting from overall Company growth. Purchased
processing expense increased 26.5% in 1997 partially due to credit card
processing expenses temporarily paid to an external processor until conversion
of a newly acquired credit card portfolio to the Company's computer system.
Other professional services increased 10.5% in 1997 and 40.4% in 1996 due to
increased merchant acquisition costs. Miscellaneous expense increased 24% due to
amortization of the premium related to credit card relationships purchased in
1997. Increases in remaining expense categories relate to continued Company
growth. This growth is primarily due to increased processing volumes, the
acquisition of new customer relationships, continued investments in technology,
and acquisitions. These increases were partially offset by a decrease of 8.7% in
communication and supplies expense from 1997 to 1996 due to reductions in
marketing expenditures. Management continues to focus on expense control in
their operating decisions to improve the efficiencies of the Company.
Asset Quality:
The Company's loan delinquency rates and net charge-off activity reflect, among
other factors, general economic conditions, the quality of the loans, the
average seasoning of the loans and the success of the Company's collection
efforts. The Company's objective in managing its loan portfolio is to balance
and optimize the profitability of the loans within the context of acceptable
risk characteristics. The Company continually monitors the risks embedded in the
loan portfolio with the use of statistically-based computer simulation models.
The consumer credit industry continues to experience historically high levels of
delinquencies and charge-offs. As a major credit card issuer, the Company also
continues to experience increased net charge-off and delinquency rates. As a
result, the Company has increased its allowance for loan losses by $24.2
million, or 23.1%, from December 31, 1996 to December 31, 1997. The increased
charge-off trends are likely to continue through the next year. The Company also
expects that selected segments of consumers may continue to experience declines
in credit quality. Therefore, management continues to evaluate credit standards
and reduce marketing expenditures. Consumer behavior is being closely monitored
to determine if future changes in credit standards or marketing strategies will
be required.
The following table reflects the delinquency rates for the Company's overall
loan portfolio and for credit cards and related plans. An account is
contractually delinquent if the minimum payment is not received by the specified
billing date. The overall delinquency rate as a percentage of total loans was
3.56% at December 31, 1997 compared with 3.86% at December 31, 1996. The
reduction in the outstanding balance of credit cards and related plans of $488
million during 1997 is primarily related to additional sales of $750 million of
credit card loans, net of a $265 million increase related to the purchase of a
credit card loan portfolio.
Delinquent Loans:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------------------------------------------------------------
(Amounts in Thousands)
Total Loans % of Loans % of Loans
- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Loans outstanding $ 5,010,982 $ 5,107,041
Loans delinquent:
30 - 89 days $ 112,300 2.24% $ 123,420 2.42%
90 days or more & still accruing 66,221 1.32% 73,580 1.44%
----------------- ------------------- -------------- -------------------
Total delinquent loans $ 178,521 3.56% $ 197,000 3.86%
================= =================== ============== ===================
Nonaccrual loans $ 5,289 .11% $ 7,231 .14%
================= =================== ============== ===================
Credit Cards and Related Plans
- ------------------------------
Loans outstanding $ 2,428,437 $ 2,916,392
Loans delinquent:
30 - 89 days $ 89,902 3.70% $ 102,538 3.52%
90 days or more & still accruing 62,969 2.59% 68,827 2.36%
----------------- ------------------- -------------- --------------------
Total delinquent loans $ 152,871 6.29% $ 171,365 5.88%
================= =================== ============== ====================
Nonaccrual loans -- -- -- --
================= =================== ============== ====================
</TABLE>
26
<PAGE>
The Company's policy is to charge off credit card and related loans when they
become 180 days contractually past due. Net loan charge-offs include the
principal amount of losses resulting from borrowers' unwillingness or inability
to pay, in addition to bankrupt and deceased borrowers, less current period
recoveries of previously charged-off loans. The allowance for loan losses is
intended to cover losses inherent in the Company's loan portfolio as of the
reporting date. The provision for loan losses is charged against earnings to
cover both current period net charge-offs and to maintain the allowance at an
acceptable level to cover losses inherent in the portfolio as of the reporting
date. Net charge-offs for the Company's overall portfolio were $188.2 million
for the year ended December 31, 1997 compared to $144.7 million for the same
period in 1996. Net charge-offs as a percentage of average loans were 3.67% for
1997 compared to 3.15% for 1996. The allowance as a percentage of loans
increased to 2.57% for 1997 compared to 2.05% for 1996.
The following table presents the activity in the Company's allowance for loan
losses with a breakdown of charge-off and recovery activity related to credit
cards and related plans.
Allowance for Loan Losses:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996
---------------------------------------------------------
(Amounts in Thousands)
<S> <C> <C>
Balance at January 1 $ 104,812 $ 67,740
Addition due to loan portfolio purchase 10,895 --
Addition due to acquisition -- 1,738
Provision for loan losses 201,494 180,059
Loans charged off:
Credit cards and related plans (207,479) (157,763)
All other loans (7,665) (6,948)
Loans recovered:
Credit cards and related plans 24,550 18,562
All other loans 2,383 1,424
-------------------- --------------------
Total net charge-offs (188,211) (144,725)
-------------------- --------------------
Balance at December 31 $ 128,990 $ 104,812
==================== ====================
Allowance as a percentage
of loans 2.57% 2.05%
Total net charge-offs as a percentage
of average loans 3.67% 3.15%
</TABLE>
Capital Resources:
As described in Note J, the Company and its banking subsidiaries are required to
maintain minimum capital in accordance with regulatory guidelines. At December
31, 1997, First National Bank of Omaha and all other banking subsidiaries of the
Company exceeded the minimum requirements for the "well-capitalized" category as
established by supervisory agencies. The Company intends to maintain sufficient
capital in each of its banking subsidiaries to remain in the "well capitalized"
category.
On June 27, 1997, the Company repurchased 11,767 shares of the Company's common
stock. The 11,767 shares repurchased were retired decreasing the total number of
shares issued and outstanding to 335,000. In addition, the Company's Senior
Management Incentive Plan purchased 2,750 shares of the Company's common stock.
The purchase prices of these transactions were negotiated at arm's length and
reflected the fair value of the Company's common stock.
In 1995, First National Bank of Omaha issued $75 million in 15 year subordinated
capital notes. These subordinated capital notes, along with $19.1 million in
capital notes outstanding as of December 31, 1997 in connection with the
Company's previous acquisitions, count towards meeting the required capital
standards, subject to certain limitations. The Company has historically retained
approximately 85% of net income in capital to fund the growth of future
operations and to maintain minimum capital standards.
27
<PAGE>
Liquidity Management:
Adequate liquidity levels are necessary to ensure that sufficient funds are
available for loan growth and deposit withdrawals. These funding needs are
offset by funds generated from loan repayments, investment maturities, and core
deposit growth. The Company's Asset/Liability Committee is responsible for
monitoring the current and forecasted balance sheet structure to ensure
anticipated funding needs can be met at a reasonable cost. Contingency plans are
in place to meet unanticipated funding needs or loss of funding sources.
Domestic retail deposits are used as the primary source of funding for all
banking subsidiaries. In order to maintain flexibility and diversity in
liquidity management the Company also has access to a variety of other funding
sources. These other sources include securities sold under repurchase
agreements, federal funds purchased, securitization, other short-term and
long-term debt, and subordinated capital notes. The parent company's cash flows
are dependent upon the receipt of dividends from its banking subsidiaries which
are subject to regulatory restrictions.
The Company's securitization program was established in 1995, providing further
diversity of credit card funding. At December 31, 1997 and 1996, $950 million
and $200 million, respectively, of the Company's managed credit card portfolio
was securitized. The parent company replaced an existing $75 million revolving
credit line with a $100 million syndicated revolving credit facility in December
1997. As part of the syndicated credit facility arranged for the parent company,
a $150 million revolving credit facility for the Bank was also arranged for
general liquidity purposes in December 1997.
Interest Rate Risk Management:
The Company's primary component of market risk is interest rate volatility. It
is the goal of the Company to maximize profits while effectively managing rather
than eliminating interest rate risk. Two primary measures are used to measure
and manage interest rate risk: Net Interest Income Simulation Modeling and
Interest Rate Sensitivity Gap Analysis.
Net Interest Income Simulation:
The Company uses a simulation model to analyze net interest income sensitivity
to movements in interest rates. The simulation model projects net interest
income based on both upward and downward interest rate shifts over a twelve
month period. Alternative scenarios are simulated by applying immediate shifts
in interest rates (rate shocks) and gradual shifts in interest rates (rate
ramps). These interest rate shifts are applied to a projected balance sheet for
the Company for the twelve month simulation period. Based on the information and
assumptions in effect at December 31, 1997, management believes that a 200 basis
point rate shock or rate ramp over a twelve month period, up or down, would not
significantly affect the Company's annualized net interest income.
The Company has established guidelines that limit the acceptable potential
change in net interest margin and net income under these interest rate and
balance sheet scenarios. Given the minimal potential for significant risk
exposure relating to potential losses in future earnings, fair values or cash
flows of interest-rate-sensitive instruments illustrated by the simulations, the
Company does not engage in derivative transactions such as hedges, swaps, or
futures.
Interest Rate Sensitivity Gap Analysis:
The Company uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that time period. A gap is considered positive when the amount of
interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive
liabilities, and is considered negative when the amount of interest-rate-
sensitive liabilities exceeds the amount of interest-rate-sensitive assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income, while a positive gap would result in an
increase in net interest income. Conversely, during a period of falling interest
rates, a negative gap would result in an increase in net interest income, while
a positive gap would negatively affect net interest income. Management's goal is
to maintain a reasonable balance between exposure to interest rate fluctuations
and earnings.
28
<PAGE>
The following table represents management's estimate of projected maturity or
repricing of the Company's interest-earning assets and interest-bearing
liabilities at December 31, 1997. Management believes that the table will
approximate actual experience; however, it should be noted that the gap analysis
is a point in time measurement that does not capture all aspects of interest
rate risk.
<TABLE>
<CAPTION>
Greater Than
Three Months One Year Over
Three Months Less Than Through Five
As of December 31, 1997 or Less One Year Five Years Years Total
- --------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Earning assets:
Investment activities $ 384,130 $ 234,967 $ 896,432 $ 65,725 $1,581,254
Lending activities 2,399,059 465,738 1,853,266 292,919 5,010,982
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 2,783,189 700,705 2,749,698 358,644 6,592,236
Interest-bearing liabilities 2,294,833 1,717,052 1,797,859 89,495 5,899,239
- --------------------------------------------------------------------------------------------------------------------------------
Interest sensitive gap 488,356 (1,016,347) 951,839 269,149 692,997
Gap as a percent of
total earning assets 7.4% (15.4)% 14.4% 4.1% 10.5%
================================================================================================================================
Cumulative interest sensitive gap 488,356 (527,991) 423,848 692,997
Cumulative gap as a percent
of total earning assets 7.4% (8.0)% 6.4% 10.5%
================================================================================================================================
</TABLE>
29
<PAGE>
First National of Nebraska and Subsidiaries
Selected Financial Data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Total interest income and
noninterest income $ 1,047,041 $ 940,471 $ 825,735 $ 645,806 $ 546,106
Provision for loan losses 201,494 180,059 102,767 71,698 67,083
Net income 75,187 70,232 82,241 77,133 70,082
Net income per share 220.68 202.53 237.17 222.43 202.10
Cash dividends per share 33.76 37.22 33.73 38.07 16.86
Total assets 7,332,021 6,912,057 6,110,542 5,261,907 4,271,853
Managed assets (1) 8,282,021 7,112,057 6,310,542 5,261,907 4,271,853
Other borrowings and capital notes 122,498 103,876 109,216 60,966 60,705
</TABLE>
The Company's stock is traded over-the-counter.
Bid price quotes per share, high and low, by quarter (2)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
High Low High Low
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st quarter $3,550 $3,300 $4,300 $3,650
2nd quarter 3,900 3,450 4,100 3,900
3rd quarter 4,100 3,800 3,900 3,400
4th quarter 4,000 3,600 3,400 3,400
<CAPTION>
Dividends per share
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------
1st quarter $ 8.44 $11.90
2nd quarter 16.88 16.88
3rd quarter 8.44 8.44
</TABLE>
Number of stockholders
- --------------------------------------------------------------------------------
As of January 31, 1998, there were 335,000 shares of common stock issued and
outstanding which were held by more than 400 shareholders of record. The
shareholders of record number does not reflect the persons or entities who hold
their stock in nominee or "street" name.
(1) Reported assets plus securitized credit card loans
(2) Source: Kirkpatrick Pettis Inc., Omaha, Nebraska
Such over-the-counter market quotations reflect interdealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The parent company's common stock
experiences limited trading activities.
30
<PAGE>
======================================================
First National of Nebraska
OFFICERS AND DIRECTORS
======================================================
BRUCE R. LAURITZEN
CHAIRMAN, PRESIDENT & DIRECTOR
ELIAS J. ELIOPOULOS
EXECUTIVE VICE PRESIDENT & DIRECTOR
F. PHILLIPS GILTNER
CHAIRMAN EMERITUS & DIRECTOR
J. WILLIAM HENRY
EXECUTIVE VICE PRESIDENT & DIRECTOR
MARGARET M. LAURITZEN
DIRECTOR
DENNIS A. O'NEAL
EXECUTIVE VICE PRESIDENT, TREASURER & DIRECTOR
DANIEL K. O'NEILL
DIRECTOR
CHARLES R. WALKER
EXECUTIVE VICE PRESIDENT, SECRETARY & DIRECTOR
31
<PAGE>
<TABLE>
FIRST NATIONAL BANK OF OMAHA
SENIOR OFFICERS AND DIRECTORS
==================================================================================================================================
<S> <C>
BRUCE R. LAURITZEN...............CHAIRMAN, PRESIDENT & DIRECTOR
Elias J. Eliopoulos.....Executive Vice President & Director Dennis A. O'Neal........Executive Vice President & Director
J. William Henry........Executive Vice President & Director Charles R. Walker.......Executive Vice President & Director
- ----------------------------------------------------------------------------------------------------------------------------------
F. Phillips Giltner.....Chairman Emeritus & Director Robert W. Tritsch.......Director Herbert J. Young........Director
- ----------------------------------------------------------------------------------------------------------------------------------
Marc M Diehl.................Senior Vice President & Director, Trust
James L. Doody...............Senior Vice President & Director, First Bankcard Center
Charles H. Fries, Jr.........Senior Vice President & Director, Corporate & Financial Institutions
Frances A. Marshall..........Senior Vice President & Director, First Integrated Systems
Laurie A. Minarik............Senior Vice President & Director, Retail Banking
James C.C. Schmidt...........Senior Vice President & Director, Technology Services
Timothy D. Hart..............Senior Vice President & Comptroller, Corporate Administration
Russell K. Oatman............Senior Vice President & Cashier, First Financial Services
Robert J. Urban..............Senior Vice President, Personnel
==================================================================================================================================
THE BANK OF BOULDER BOULDER, COLORADO
- ----------------------------------------------------------------------------------------------------------------------------------
DAVID M. GILMAN, CHAIRMAN & PRESIDENT
- ----------------------------------------------------------------------------------------------------------------------------------
Directors
Larry F. Frey Richard E. Geesaman David M. Gilman Caroline J. Hoyt
Earl E. McLaughlin Dennis A. O'Neal Carroll V. SoRelle Thomas W. Ward
==================================================================================================================================
FIRST NATIONAL BANK FORT COLLINS-LOVELAND, COLORADO
- ----------------------------------------------------------------------------------------------------------------------------------
THOMAS J. GLEASON, CHAIRMAN MARK P. DRISCOLL, PRESIDENT
- ----------------------------------------------------------------------------------------------------------------------------------
Directors
Mark P. Driscoll John A. Duffey Dwight L. Ghent Thomas J. Gleason
Roger G. Gunlikson Douglas E. Markley Dennis A. O'Neal Merlin G. Otteman, MD
Stephen J. Schrader Wayne K. Schrader David L. Wood Mark J. Soukup, Director Emeritus
==================================================================================================================================
FIRST NATIONAL BANK AND TRUST COMPANY OF COLUMBUS COLUMBUS-NORFOLK, NEBRASKA
- ----------------------------------------------------------------------------------------------------------------------------------
JOHN M. PECK, PRESIDENT - COLUMBUS JAMES R. MANGELS, PRESIDENT - NORFOLK
- ----------------------------------------------------------------------------------------------------------------------------------
Directors
James M. Bator Donald N. Dworak Randal J. Emrich Clark D. Lehr
John F. Lohr Robert P. Loshbaugh James R. Mangels Larry D. Marik
John M. Peck Steven K. Ritzman Noyes W. Rogers Donald M. Schupbach
Dwayne G. Smith Charles R. Walker
==================================================================================================================================
FIRST NATIONAL BANK OF KANSAS OVERLAND PARK, KANSAS
- ----------------------------------------------------------------------------------------------------------------------------------
STUART C. LANG, PRESIDENT
- ----------------------------------------------------------------------------------------------------------------------------------
Directors
Linda A. Acker Ben T. Embry Blair L. Gogel J. William Henry
Stuart C. Lang James A. Polsinelli Marilyn Scafe
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
====================================================================================================================================
FIRST NATIONAL BANK NORTH PLATTE - ALLIANCE - CHADRON - GERING - SCOTTSBLUFF, NEBRASKA
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
L.H. "RICK" KOLKMAN, PRESIDENT
- ------------------------------------------------------------------------------------------------------------------------------------
Directors
J. William Henry Orville A. Kaschke James D. Keenan Donald D. Kilgore
L.H. "Rick" Kolkman William J. Pfister William C. Snodgrass Gary M. Trego
Ralph M. Tysdal
====================================================================================================================================
THE FREMONT NATIONAL BANK AND TRUST COMPANY FREMONT, NEBRASKA
- ------------------------------------------------------------------------------------------------------------------------------------
THOMAS J. MILLIKEN, CHAIRMAN DAVID N. SIMMONS, PRESIDENT
- ------------------------------------------------------------------------------------------------------------------------------------
Directors
Marc M Diehl Rupert L. Dunklau William R. Emanuel H. Haines Hill
Jim A. Hoshor Helen J. Krause Thomas J. Milliken David N. Simmons
William F. Snyder Charles R. Walker
====================================================================================================================================
PLATTE VALLEY STATE BANK & TRUST COMPANY KEARNEY, NEBRASKA
- ------------------------------------------------------------------------------------------------------------------------------------
WAYNE R. MCKINNEY, CHAIRMAN MARK A. SUTKO, PRESIDENT
- ------------------------------------------------------------------------------------------------------------------------------------
Directors
Jeff G. Beattie Gerald L. Dulitz Byron D. Hansen Peter G. Kotsiopulos
Robin W. Marshall Wayne R. McKinney Dennis A. O'Neal John H. Schulte, MD
Mark A. Sutko Gerald J. Tomka Sidney R. Hellman, Honorary Jack M. Horner, Honorary
Robert P. Sahling, Honorary Carl C. Spelts, Honorary
====================================================================================================================================
FIRST NATIONAL BANK SOUTH DAKOTA YANKTON, SOUTH DAKOTA
- ------------------------------------------------------------------------------------------------------------------------------------
RANDALL A. JOHNSON, PRESIDENT
- ------------------------------------------------------------------------------------------------------------------------------------
Directors
James L. Doody Elias J. Eliopoulos Wilbur P. Foss Randall A. Johnson Joleen M. Smith Charles R. Walker
====================================================================================================================================
UNION COLONY BANK GREELEY-WINDSOR, COLORADO
- ------------------------------------------------------------------------------------------------------------------------------------
LAWRENCE W. MENEFEE, CHAIRMAN JAMES L. TUGGLE, PRESIDENT
- ------------------------------------------------------------------------------------------------------------------------------------
Directors
Victor J. Campbell George W. Doering Harold G. Evans Kay Kosmicki
James R. Listen Lawrence W. Menefee Dennis A. O'Neal Robert A. Ruyle
Masoud S. Shirazi Michael V. Shoop F. Scott Thomas John M. Todd
James L. Tuggle John C. Todd, Director Emeritus
- ------------------------------------------------------------------------------------------------------------------------------------
33
</TABLE>
<PAGE>
<TABLE>
<S> <C>
=======================================================================================================================
COLLECTION CORPORATION OF AMERICA
- -----------------------------------------------------------------------------------------------------------------------
JAMES W. SHANAHAN, PRESIDENT
JOSEPH W. BARRY, VICE PRESIDENT JOHN K. KEADY, VICE PRESIDENT
DOUGLAS E. KOZENY, VICE PRESIDENT MARK L. MATHIA, SECOND VICE PRESIDENT
=======================================================================================================================
DATA MANAGEMENT PRODUCTS
- -----------------------------------------------------------------------------------------------------------------------
JAMES A. MILLS, PRESIDENT MICHAEL J. REYNOLDS, VICE PRESIDENT
=======================================================================================================================
FIRST OF OMAHA MERCHANT PROCESSING
- -----------------------------------------------------------------------------------------------------------------------
ELIAS J. ELIOPOULOS, PRESIDENT DONALD M. GERHARD, EXECUTIVE VICE PRESIDENT
NICHOLAS W. BAXTER, SENIOR VICE PRESIDENT MICHAEL C. PHELAN, SENIOR VICE PRESIDENT
=======================================================================================================================
FIRST NATIONAL SERVICES CORPORATION
- -----------------------------------------------------------------------------------------------------------------------
STEVEN K. RITZMAN, VICE PRESIDENT & SENIOR CREDIT OFFICER
DONALD A. FEES, DIRECTOR OF LOAN REVIEW R. RAY LOCKHART, DIRECTOR OF INTERNAL AUDIT
=======================================================================================================================
FIRST TECHNOLOGY SOLUTIONS
- -----------------------------------------------------------------------------------------------------------------------
JAMES C.C. SCHMIDT, PRESIDENT
CHARLES M. HUETTER, NETWORK SERVICES DIVISION MANAGER JEFFREY L. ROBERTS, REGIONAL SALES MANAGER
WILLIAM A. SWICK, SOFTWARE SERVICES DIVISION MANAGER LARRY D. WATSON, BUSINESS DEVELOPMENT MANAGER
KIMBERLY M. WHITTAKER, REGIONAL SALES MANAGER
=======================================================================================================================
PLATTE VALLEY FINANCE COMPANY
- -----------------------------------------------------------------------------------------------------------------------
DIANN KOLKMAN, PRESIDENT ROGER L. MILLER, MANAGER
=======================================================================================================================
RETRIEVER PAYMENT SYSTEMS
- -----------------------------------------------------------------------------------------------------------------------
ELIAS J. ELIOPOULOS, CHAIRMAN WILLIAM H. HIGGINS, PRESIDENT
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
34
