<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission file number 03502
First National of Nebraska, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nebraska 47-0523079
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One First National Center Omaha, NE 68102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (402) 341-0500
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
As of November 6, 1998, the number of outstanding shares of the registrant's
common stock ($5.00 par value) was 335,000.
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Financial Condition
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------
Assets September 30, December 31,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Cash and due from banks $ 339,409 $ 428,832
Federal funds sold and other short-term investments 150,303 327,010
- --------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 489,712 755,842
Securities available-for-sale (amortized cost $772,430,000 and
$378,714,000) 778,511 381,337
Securities held-to-maturity (fair value $528,968,000 and $874,646,000) 525,089 872,907
Loans 5,627,023 5,010,982
Less: Allowance for loan losses 117,826 128,990
Unearned income 14,021 13,380
- --------------------------------------------------------------------------------------------------------------
Net loans 5,495,176 4,868,612
Premises and equipment, net 140,015 129,163
Other assets 327,336 324,160
- --------------------------------------------------------------------------------------------------------------
Total assets $ 7,755,839 $ 7,332,021
==============================================================================================================
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing $ 793,693 $ 842,195
Interest-bearing 5,942,088 5,558,850
- --------------------------------------------------------------------------------------------------------------
Total deposits 6,735,781 6,401,045
Federal funds purchased and securities sold under repurchase agreements 228,076 217,891
Other liabilities 103,628 80,530
Other borrowings 22,362 28,446
Capital notes 92,963 94,052
- --------------------------------------------------------------------------------------------------------------
Total liabilities 7,182,810 6,821,964
Stockholders' equity:
Common stock, $5 par value, 346,767 shares authorized,
335,000 shares issued and outstanding 1,675 1,675
Additional paid-in capital 2,515 2,515
Retained earnings 564,968 504,184
Net unrealized appreciation on available-for-sale securities,
net of tax 3,871 1,683
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Total stockholders' equity 573,029 510,057
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 7,755,839 $ 7,332,021
==============================================================================================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Income
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share and Per Share Data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans and lease financing $ 196,240 $ 182,532 $ 564,020 $ 549,974
Interest on securities:
Taxable interest income 15,669 16,750 49,742 45,927
Nontaxable interest income 202 297 645 804
Interest on federal funds sold
and other short-term investments 3,161 4,403 9,958 9,604
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 215,272 203,982 624,365 606,309
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 78,201 73,039 228,689 211,190
Interest on commercial paper and commercial paper
based borrowings -- 4,053 -- 11,819
Interest on federal funds purchased and securities
sold under repurchase agreements 1,996 2,119 6,228 5,663
Interest on other borrowings and capital notes 2,433 2,858 7,388 6,883
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 82,630 82,069 242,305 235,555
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 132,642 121,913 382,060 370,754
Provision for loan losses 41,815 44,313 119,444 141,205
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Net interest income after provision for loan losses 90,827 77,600 262,616 229,549
Noninterest income:
Processing services 38,614 36,510 106,518 89,630
Deposit services 6,475 5,973 18,524 17,400
Trust and investment services 5,506 5,776 16,908 15,638
Commissions 1,133 2,374 11,568 11,185
Gain on sales of loans 900 -- 7,773 --
Miscellaneous 9,724 8,371 42,940 22,924
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Total noninterest income 62,352 59,004 204,231 156,777
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 45,401 39,392 134,459 115,610
Communications and supplies 12,039 13,630 45,601 41,468
Loan services purchased 11,424 8,710 30,432 25,379
Purchased processing 7,696 7,960 21,647 18,918
Net occupancy expense of premises 8,081 5,890 22,795 16,523
Equipment rentals, depreciation and maintenance 9,435 7,464 27,068 21,727
Other professional services purchased 12,628 12,519 37,982 35,766
Miscellaneous 9,727 7,870 27,575 19,981
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 116,431 103,435 347,559 295,372
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 36,748 33,169 119,288 90,954
Income tax expense(benefit):
Current 12,904 10,812 45,592 36,519
Deferred 880 2,030 1,188 (202)
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Total income tax expense 13,784 12,842 46,780 36,317
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 22,964 $ 20,327 $ 72,508 $ 54,637
===============================================================================================================================
Average number of common shares outstanding 335,000 335,000 335,000 342,629
===============================================================================================================================
Net income per common share $ 68.55 $ 60.68 $ 216.44 $ 159.46
===============================================================================================================================
Cash dividends declared per common share $ 8.75 $ 8.44 $ 35.00 $ 33.76
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended September 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 72,508 $ 54,637
Adjustments to reconcile net income to net cash
flows from operating activities:
Provision for loan losses 119,444 141,205
Depreciation and amortization 31,812 30,315
Amortization of interest only strip 9,460 --
Provision for deferred taxes 1,188 (202)
Origination of mortgage loans for resale (100,305) (29,380)
Proceeds from the sale of mortgage loans for resale 84,633 28,129
Gain on sales of loans (7,773) --
Other asset and liability activity, net 31,058 (6,871)
- ---------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 242,025 217,833
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition, net of cash received (855) --
Maturities and sales of securities available-for-sale 143,088 149,052
Purchases of securities available-for-sale (533,563) (296,536)
Maturities of securities held-to-maturity 517,797 188,042
Purchases of securities held-to-maturity (170,330) (241,046)
Net change in loans, excluding purchases (386,780) 65,878
Purchase of loan portfolios (379,648) (288,998)
Purchases of premises and equipment, net (25,582) (23,441)
Other, net 2,043 1,523
- ---------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (833,830) (445,526)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 334,736 339,434
Net change in federal funds purchased and
securities sold under repurchase agreements 10,186 (4,629)
Issuance of other borrowings and capital notes 63,748 107,111
Principal repayments of other borrowings
and capital notes (71,270) (68,760)
Net change in commercial paper and
commercial paper based borrowings -- (19,184)
Repurchase of common stock -- (42,361)
Cash dividends paid (11,725) (11,608)
- ----------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 325,675 300,003
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Net change in cash and cash equivalents (266,130) 72,310
Cash and cash equivalents at beginning of period 755,842 674,914
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 489,712 $ 747,224
=================================================================================================================
Cash paid during the period for:
Interest $ 241,988 $ 229,177
Income taxes $ 43,707 $ 35,784
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
Note A: Basis of Presentation
The accompanying unaudited consolidated financial statements of First National
of Nebraska, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements. For purposes of comparability, certain prior period
amounts have been reclassified.
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 as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial statements have
been included. Operating results for the nine months ended September 30, 1998,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. The notes to the consolidated financial statements
contained in the Annual Report on Form 10-K for the year ended December 31, 1997
should be read in conjunction with these consolidated financial statements.
Note B: Earnings per Common Share
Net income per share is calculated by dividing net income by the average number
of common shares outstanding during the period.
Note C: Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
This statement establishes standards for the 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. Comprehensive income
includes net income and other items of comprehensive income meeting the above
criteria. The Company's only component of other comprehensive income is the
change in unrealized appreciation or depreciation of available-for-sale
securities. For the nine months ended September 30, 1998, total comprehensive
income was $74.7 million which includes net income of $72.5 million plus the
increase in net unrealized appreciation of available-for-sale securities of $2.2
million.
Note D: New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes accounting and
reporting standards requiring that every derivative (including certain
derivatives embedded in contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. The statement requires that
changes in the fair value of derivatives be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gain or loss to offset related results
on the hedged item in the income statement, and requires that a company must
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting treatment.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, but it
may be implemented earlier at a company's election. A company must also
implement the statement as of the beginning of any quarter and it can not be
applied retroactively to financial statements of prior periods. SFAS No. 133
must be applied to (a) derivatives and (b) certain derivatives embedded in
hybrid contracts that were issued, acquired or substantively modified after
December 31, 1997 (and, at the company's election, before January 1, 1998). The
Company currently has no derivatives that would materially impact its financial
statements. The Company has not determined the timing or method of adoption for
this statement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 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.
5
<PAGE>
Results of Operations
- ---------------------
Overview:
Net income for the quarter ended September 30, 1998 was $23 million, or $68.55
per common share, increasing 13% from $20.3 million, or $60.68 per common share
for the same period in 1997. This favorable increase for the third quarter
relates primarily to increases in net interest income offset by increases in
noninterest expense compared to the same period last year. Net income for the
nine months ended September 30, 1998 was $72.5 million, or $216.44 per common
share, increasing 32.7% from $54.6 million, or $159.46 per common share for the
same period in 1997. This favorable increase for the nine months ended September
30, 1998 relates primarily to increases in net interest income, decreases in the
provision for loan losses and the recognition of income related to the
settlement of litigation in the first quarter of 1998. These favorable variances
for the nine months ended September 30, 1998 were offset by increases in
noninterest expense generally due to Company growth.
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. For
the quarter ended September 30, 1998, net interest income increased $10.7
million or 8.8% to $132.6 million compared to $121.9 million for the same period
in 1997 primarily due to an increase in net earning assets. For the nine months
ended September 30, 1998, net interest income was $382.1 million compared to
$370.8 million for the same period in 1997 due to an increase in net interest
earning assets offset by a decrease in net yields.
Provision for loan losses:
On a monthly basis, the Company evaluates its allowance for loan losses based
upon a review of collateral values, delinquencies, nonaccruals, payment
histories and various other analytical and subjective measures relating to the
various loan portfolios within the Company. For the quarter ended September 30,
1998, the provision for loan losses decreased $2.5 million or 5.6% to $41.8
million compared to $44.3 million for the same period in 1997. For the nine
months ended September 30, 1998, the provision for loan losses decreased $21.8
million or 15.4% to $119.4 million compared to $141.2 million for the same
period in 1997. These decreases are primarily due to increased credit card loan
sales and decreased net charge-off activity on total loans compared to the same
periods last year. However, the credit card industry continues to experience
high consumer debt levels and other unfavorable consumer credit conditions
resulting in high levels of delinquencies and charge-offs.
Noninterest income:
For the quarter ended September 30, 1998, noninterest income increased $3.3
million or 5.7% to $62.4 million compared to $59 million for the same period in
1997. For the nine months ended September 30, 1998, noninterest income increased
$47.5 million or 30.3% to $204.2 million compared to $156.8 million for the same
period in 1997. This increase for the nine months ended September 30, 1998 is
primarily attributable to the increase in miscellaneous income which largely
reflects the settlement of litigation in the first quarter. A portion of this
increase was also due to processing services income increasing by 5.8% for the
quarter and 18.8% for the nine months ended September 30, 1998 resulting
primarily from the growth in credit card loan servicing. Noninterest income also
includes gains recorded on sales of loans of $900,000 for the quarter ended
September 30, 1998 and $7.8 million for the nine months ended September 30,
1998.
Noninterest expense:
For the quarter ended September 30, 1998, noninterest expense increased $13
million or 12.6% to $116.4 million compared to $103.4 million for the same
period in 1997. For the nine months ended September 30, 1998, noninterest
expense increased $52.2 million or 17.7% to $347.6 million compared to $295.4
million for the same period in 1997. A majority of the increase in noninterest
expense is due to salaries and employee benefits which increased 15.3% for the
quarter ended and 16.3% for the nine months ended September 30, 1998 and relates
to overall Company growth. Net occupancy expenses for premises and equipment
rentals, depreciation and maintenance expenses also increased 37.2% and 26.4%
respectively for the quarter ended and 38% and 24.6% respectively for the nine
months ended September 30, 1998 as a result of Company growth. Additionally,
loan services purchased increased 31.2% for the quarter ended and 19.9% for the
nine months ended September 30, 1998 primarily due to increased collection
efforts and the resulting increase in collection commissions paid. Purchased
processing expenses and miscellaneous expenses increased 14.4% and 38%
respectively, for the nine months ended September 30, 1998 largely due to
expenses incurred related to credit card loan portfolio purchases during 1998.
Management continues to focus on expense control in their operating decisions to
improve the efficiencies of the Company.
6
<PAGE>
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 high levels of
delinquencies and charge-offs. As a major credit card issuer, the Company also
continues to experience high net charge-off and delinquency rates. Although net
charge-offs as a percentage of average total loans have improved during the
first nine months of 1998 compared to the same nine months last year, the
Company cannot predict whether this downward trend in total net charge-off
activity will continue. Selected segments of consumers may continue to
experience declines in credit quality which could result in continued
unfavorable net charge-off and delinquency rates. Management continues to
evaluate credit standards and monitor consumer behavior.
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
3.44% at September 30, 1998 compared with 3.56% at December 31, 1997. The
delinquency rate as a percentage of total credit cards loans and related plans
was 5.99% at September 30, 1998 compared to 6.26% at December 31, 1997.
<TABLE>
<CAPTION>
Delinquent Loans:
September 30, 1998 December 31, 1997
---------------------------------------------------------------------
(Amounts in Thousands)
Total Loans % of Loans % of Loans
- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Loans outstanding $5,627,023 $5,010,982
Loans delinquent:
30 - 89 days $120,642 2.14% $112,300 2.24%
90 days or more & still accruing 73,164 1.30% 66,221 1.32%
----------------------------- ------------------------------
Total delinquent loans $193,806 3.44% $178,521 3.56%
============================= ==============================
Nonaccrual loans $5,869 .10% $5,289 .11%
============================= ==============================
Credit Cards and Related Plans
- ------------------------------
Loans outstanding $2,734,144 $2,442,527
Loans delinquent:
30 - 89 days $96,499 3.53% $89,902 3.68%
90 days or more & still accruing 67,153 2.46% 62,969 2.58%
----------------------------- ------------------------------
Total delinquent loans $163,652 5.99% $152,871 6.26%
============================= ==============================
Nonaccrual loans -- -- -- --
============================= ==============================
</TABLE>
The Company's policy is to charge off credit card and related plans 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 $134 million for
the nine months ended September 30, 1998 compared to $141.4 million for the same
period in 1997. Net charge-offs as a percentage of average total loans were
2.49% for the nine months ended September 30, 1998 compared to 2.76% for the
same period last year. The allowance as a percentage of loans decreased to 2.09%
as of September 30, 1998 compared to 2.24% for the same period last year.
7
<PAGE>
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:
For the Nine Months Ended September 30,
1998 1997
---------------------------------------------
(Amounts in Thousands)
Balance at January 1 $128,990 $104,812
Addition due to acquisitions 12,421 10,895
Reduction due to sales of loans (8,990) --
Provision for loan losses 119,444 141,205
Loans charged off:
Credit cards and related plans (155,606) (154,959)
All other loans (3,496) (6,018)
Loans recovered:
Credit cards and related plans 23,361 17,886
All other loans 1,702 1,699
----------------- ---------------
Total net charge-offs (134,039) (141,392)
----------------- ---------------
Balance at September 30 $117,826 $115,520
================= ===============
Allowance as a percentage
of loans 2.09% 2.24%
Total net charge-offs as a percentage
of average total loans 2.49% 2.76%
Capital Resources
- -----------------
The Company and its banking subsidiaries are required to maintain minimum
capital in accordance with regulatory guidelines. 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. As of September
30, 1998, the most recent notification from the OCC categorized the Company's
banking subsidiaries as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized", the Company's
banking subsidiaries must maintain minimum total risk-based capital of 10%, Tier
1 risk-based capital of 6%, and Tier 1 leverage capital of 5%. There are no
conditions or events since this notification that management believes have
changed the Company's category. The Company intends to maintain sufficient
capital in each of its banking subsidiaries to remain in the "well capitalized"
category.
In 1995, First National Bank of Omaha issued $75 million of 15 year subordinated
capital notes. These subordinated capital notes, along with $18 million in
capital notes outstanding as of September 30, 1998 issued in connection with the
Company's previous acquisitions, count towards meeting the required capital
standards, subject to certain limitations.
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 utilizes credit card-backed securitization vehicles to assist in its
management of liquidity, interest rate risk and capital. At September 30, 1998
and 1997, $655 million and $620 million, respectively, of the Company's managed
credit card portfolio was securitized on a revolving basis. In addition, during
the nine months ended September 30, 1998, the Company purchased credit card loan
portfolios totaling $349 million. At September 30, 1998, the parent company had
no balance outstanding under a $100 million syndicated revolving credit
facility. As part of this syndicated credit facility arranged for the parent
company, a $150 million revolving credit facility for the Bank is also available
for general liquidity purposes. The Bank had no balance outstanding under this
revolving credit facility at September 30, 1998.
8
<PAGE>
Year 2000 Readiness
- -------------------
The Company's State of Readiness. As is the case for most financial service
- --------------------------------
companies that are heavily dependent on computer systems, the Year 2000 computer
problem presents significant issues for the Company. Accordingly, the Company
has established a Year 2000 Project Management Office (PMO) to monitor, evaluate
and manage the risks, solutions and costs associated with Year 2000 issues. The
PMO has developed a project plan for the Company and serves as a resource to
assist the Company's various business units in assessment, remediation and
testing for Year 2000 readiness. The PMO also monitors and incorporates into the
Company's plans the numerous regulatory guidelines issued by the Federal
Financial Institutions Examination Council. The Company's various business units
have been examined and will be subject to ongoing examinations with regard to
their Year 2000 readiness by appropriate regulatory authorities and internal
auditors. The Company's Year 2000 project includes internal IT (information
technology) systems, internal non-IT systems (such as microcontrollers in
telephone, security and alarm equipment) and external services and systems that
are necessary to carry on the Company's business.
The Company's Year 2000 Project includes four phases -- awareness, assessment,
remediation and testing. Executive management of the Company reviews and
approves these various phases of the project plan as they are completed.
. The Company considers the awareness phase of its Year 2000 Project to be
substantially complete from an internal standpoint. Awareness efforts with
regard to the Company's customers and vendors will be ongoing as
circumstances dictate.
. The Company considers the assessment phase of its Year 2000 Project to be
substantially complete for internal mission critical systems (IT and
non-IT). Assessment of external services and systems has been dependent, in
part, on vendor management surveys. The Company has substantially completed
this survey process and has received a 100% response rate from mission
critical vendors. The Company's assessment phase has also included a review
of its business processes, with the goal being an identification of the
Company's key operational tasks, risks and priorities for mission critical
systems.
. The remediation phase of the Company's project includes the analysis,
planning and actual remediation necessary to bring mission critical internal
systems (both IT and non-IT) into a Year 2000 ready status. Remediation may
include upgrading, renovating or replacing existing systems. Based on the
current levels of remediation, the Company believes that this phase of its
Year 2000 project will be substantially complete by December 31, 1998 with
respect to internal mission critical systems. In limited situations,
however, completion of remediation is dependent on the performance of third
party vendors, which is not completely within the control of the Company.
. The testing phase of the Company's project involves various types of
testing of internal and external mission critical systems and services with
Year 2000 date information in various Year 2000 date scenarios. The Company
has begun the testing phase of its project and to the extent feasible plans
to substantially complete testing of mission critical systems and services
by June 30, 1999.
As remediated and tested internal mission critical systems are brought into
production, the Company plans to implement additional quality control management
practices to avoid the re-introduction of Year 2000-related problems. This is
important because normal operations and regulatory considerations may require
that modifications continue to be made to the Company's systems in 1999. To some
extent, therefore, all four phases of the Company's project will need to
continue on an ongoing basis throughout 1999 and beyond.
The Costs to Address the Company's Year 2000 Issues. Through September 30, 1998,
- ---------------------------------------------------
cumulative costs relating directly to Year 2000 issues since the project's
inception have totaled approximately $6 million. A significant portion of this
estimated total includes the cost of existing staff that have been redeployed to
the Year 2000 project from other technology development plans. These costs do
not include system upgrades and replacements that were made in the normal course
of operations for other purposes in addition to addressing Year 2000 issues. The
Company estimates that remaining Year 2000 costs will total approximately $9
million and therefore, the total estimated Year 2000 Project costs from
inception through completion should approximate $15 million.
The Risks of the Company's Year 2000 Issues. As is the case with many financial
- -------------------------------------------
services companies, the Company is heavily dependent on internal and external
computer systems and services. If those systems or services are interrupted, the
Company's ability to serve its retail banking customers and its nationwide base
of credit card customers could be directly affected. System failures could also
directly affect the Company's ability to fulfill its service commitments to
commercial customers. Many of the Company's commercial financial services are
either dependent upon computerized data processing, or are financial data
processing services in and of themselves. Some of these services include the
Company's national credit card merchant processing business, commercial cash
management services, financial institution data processing services, and
marketing and support of financial software products. Year 2000 failures
associated with internal and external systems and services could generate claims
or create other material adverse effects
9
<PAGE>
for the Company. Even though the Company's Year 2000 Project will include
contingency plans for third party Year 2000 failures, there can be no assurances
that mission critical third party vendors or other significant third parties
(such as the telecommunications or utilities industries, the Federal Reserve
System or national credit card associations) will adequately address their Year
2000 issues. Increased credit losses associated with possible Year 2000 failures
of major borrowers or increased consumer cash demands resulting from publicity
concerning Year 2000 problems could also have a material adverse effect on the
Company. Uncertainty prevents the Company from identifying any of these events
as a reasonably likely worst case scenario or quantifying their financial impact
in any reasonable manner. The Company generally advises commercial entities with
which it does business that it cannot guarantee that they or the Company will be
completely unaffected by the Year 2000. The Company nonetheless continues to
monitor these issues on an ongoing basis and, through its Year 2000 Project,
will strive to minimize their impact.
The Company's Contingency Plans. The Company is in the process of developing
- -------------------------------
contingency plans to address potential Year 2000 interruptions of its internal
and external mission critical systems and services. For example, the Company is
developing plans designed to meet possible unusually high cash demands generated
by the publicity concerning potential Year 2000 issues for financial
institutions. The initial contingency planning process is expected to be
substantially complete by December 31, 1998, although these plans will be
subject to ongoing review and adjustment and, where feasible, additional
testing. Contingency plans may well be limited or problematic for some systems
or services because there may be no reasonable economic alternatives for these
systems or services. There can be no assurance that contingency plans will fully
mitigate Year 2000 problems.
The foregoing Year 2000 discussion contains forward-looking statements,
including without limitation, anticipated costs and the dates by which the
Company expects to substantially complete the remediation and testing of systems
and are based on management's best current estimates, which were derived
utilizing numerous assumptions about future events, including the continued
availability of certain resources, representations received from third party
service providers and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Specific matters that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to identify and convert all relevant
computer systems, results of Year 2000 testing, adequate resolution of Year 2000
issues by governmental agencies, business or other third parties who are service
providers, suppliers, borrowers or customers of the Company, unanticipated
system costs, the need to replace hardware and the adequacy of and ability to
implement contingency plans and similar uncertainties.
Item 3. Market Risk
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 September 30, 1998, 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
10
<PAGE>
affect net interest income. Management's goal is to maintain a reasonable
balance between exposure to interest rate fluctuations and earnings.
Part II. OTHER INFORMATION
Items 1, 2, 3 and 4. Not applicable or negative response.
Item 5. OTHER INFORMATION.
The proxy for the 1999 annual meeting of
shareholders will confer discretionary authority on
the Board of Directors to vote on any matter
proposed by any shareholder for consideration at
the meeting if the Company did not receive written
notice of the matter from the proponent on or
before March 31, 1999. Such notice must be
submitted in writing and mailed by certified mail
to the Secretary of the Company, One First National
Center, Omaha, Nebraska 68102.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws of the Parent Company
(previously filed as Exhibits to form 10-Q filed
with the Securities and Exchange Commission by the
Company on June 30, 1997) is incorporated herein by
reference.
Fiscal and Paying Agency Agreement entered into in
connection with the issuance of $75 million of
Subordinated Notes by First National Bank of Omaha
(the "Bank") dated December 7, 1995 between the
Bank as "Issuer" and the Bank as "Fiscal and Paying
Agent" incorporated by reference to the Company's
Report on Form 8-K, filed December 12, 1995.
Deferred Compensation and Consultative Services
Agreement between the Bank and John R. Lauritzen
and Amendment to Deferred Compensation and
Consultative Services Agreement between the Bank
and John R. Lauritzen, incorporated by reference to
Exhibit 10(a) of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1992.
Deferred Compensation and Consultative Services
Agreement between the Bank and F. Phillips Giltner
and Amendment to Deferred Compensation and
Consultative Services Agreement between the Bank
and F. Phillips Giltner, incorporated by reference
to Exhibit 10(b) of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1992.
First National of Nebraska Senior Management Long
Term Incentive Plan, incorporated by reference to
Exhibit 10(c) of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1992.
Management Incentive Plan, incorporated by
reference to Exhibit 10(d) of the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1992.
Amended Split Dollar Agreement between the Bank, F.
Phillips Giltner, and First National Bank of Omaha,
as Trustee of the F. Phillips Giltner Irrevocable
Insurance Trust, incorporated by reference to
Exhibit 10(f) of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1992.
Employment Contract between the Parent Company and
Bruce R. Lauritzen, incorporated by reference to
Exhibit 10(i) of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1992.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter for which this report was filed.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST NATIONAL OF NEBRASKA, INC.
By /s/ Dennis A. O'Neal
---------------------------------------
Dennis A. O'Neal
Executive Vice President and Treasurer,
Principal Financial Officer
Date: November 11, 1998
-----------------
12
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<S> <C>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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<INT-BEARING-DEPOSITS> 5,942,088
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<LOANS> 5,627,023
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<DEPOSITS> 6,735,781
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0
0
<COMMON> 1,675
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<EXPENSE-OTHER> 347,559
<INCOME-PRETAX> 119,288
<INCOME-PRE-EXTRAORDINARY> 72,508
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<CHANGES> 0
<NET-INCOME> 72,508
<EPS-PRIMARY> 216.44
<EPS-DILUTED> 216.44
<YIELD-ACTUAL> 0<F2>
<LOANS-NON> 5,869
<LOANS-PAST> 73,164
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