SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
x
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
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 No. 03502
First National of Nebraska, Inc.
(Exact name of registrant as specified in its
charter)
| Nebraska
(State or other jurisdiction of
incorporation or organization)
One First National Center
Omaha, NE
(Address of principal executive offices)
|
|
47-0523079
(I.R.S. Employer
Identification No.)
68102
(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 5, 1999, the number of outstanding shares of
the registrant’s common stock ($5.00 par value) was 334,500.
PART I. FINANCIAL INFORMATION
Part I. Item 1. Financial Statements
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Financial Condition
|
|
|
September 30,
1999 |
|
December 31,
1998 |
|
|
|
(unaudited)
|
|
|
| (in thousands
except share and per share data) |
|
|
|
|
|
| |
| ASSETS
|
|
|
|
|
|
| Cash and due from
banks |
|
$
295,954 |
|
|
$
434,275 |
| Federal funds
sold and other short-term investments |
|
90,618 |
|
|
382,234
|
|
|
Total cash and cash
equivalents |
|
386,572
|
|
|
816,509
|
|
| Securities
available-for-sale (amortized cost $1,034,786 and $852,374)
|
|
1,025,399
|
|
|
854,183
|
| Securities
held-to-maturity (fair value $206,376 and $423,554) |
|
206,785
|
|
|
420,918
|
|
| Loans |
|
5,843,848
|
|
|
5,746,054
|
|
Less: Allowance for
loan losses |
|
102,427
|
|
|
121,877
|
|
Unearned income
|
|
13,092 |
|
|
13,450 |
|
|
Net loans |
|
5,728,329
|
|
|
5,610,727
|
|
| Premises and
equipment, net |
|
142,704
|
|
|
138,853
|
| Other assets
|
|
368,203
|
|
|
346,625
|
|
|
Total assets |
|
$7,857,992
|
|
|
$8,187,815
|
|
|
| LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
| Deposits:
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
767,975 |
|
|
$
896,485 |
|
Interest-bearing
|
|
5,823,638
|
|
|
5,971,396
|
|
|
Total deposits |
|
6,591,613
|
|
|
6,867,881
|
|
| Federal funds
purchased and securities sold under repurchase agreements
|
|
224,272
|
|
|
358,975
|
| Other liabilities
|
|
93,659 |
|
|
250,753
|
| Federal Home Loan
Bank advances and other borrowings |
|
227,590
|
|
|
33,039 |
| Capital notes
|
|
92,070 |
|
|
92,864 |
|
|
Total liabilities
|
|
7,229,204
|
|
|
7,603,512
|
|
| Stockholders’
equity: |
|
|
|
|
|
Common stock, $5 par
value, 346,767 shares authorized, 334,500 and 335,000
shares issued and outstanding,
respectively |
|
1,673 |
|
|
1,675 |
|
Additional paid-in
capital |
|
2,511 |
|
|
2,515 |
|
Retained earnings
|
|
630,591
|
|
|
578,951
|
|
Accumulated other
comprehensive income (loss) |
|
(5,987 |
) |
|
1,162 |
|
|
Total stockholders’
equity |
|
628,788
|
|
|
584,303
|
|
|
Total liabilities and
stockholders’ equity |
|
$7,857,992
|
|
|
$8,187,815
|
|
|
See notes to consolidated financial statements.
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Income
(unaudited)
|
|
|
Quarter Ended
September 30, |
|
Nine Months
Ended
September 30, |
|
|
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
| (in thousands
except share and per share data) |
|
|
|
| |
| Interest income:
|
|
|
|
|
|
|
|
|
|
|
Interest and
fees on loans and lease financing |
|
$188,425
|
|
|
$196,240
|
|
$555,817
|
|
$564,020
|
|
Interest on
securities: |
|
|
|
|
|
|
|
|
|
|
Taxable interest income |
|
16,786
|
|
|
15,669
|
|
48,686
|
|
49,742
|
|
Nontaxable interest income |
|
286 |
|
|
202 |
|
764 |
|
645 |
Interest on
federal funds sold
and other short-term investments
|
|
2,476 |
|
|
3,161 |
|
6,639 |
|
9,958 |
|
|
Total interest
income |
|
207,973
|
|
|
215,272
|
|
611,906
|
|
624,365
|
|
| Interest expense:
|
|
|
|
|
|
|
|
|
|
|
Interest on
deposits |
|
70,093
|
|
|
78,201
|
|
211,029
|
|
228,689
|
Interest on
federal funds purchased and
securities sold under repurchase
agreements |
|
2,270 |
|
|
1,996 |
|
5,634 |
|
6,228 |
|
Interest on
Federal Home Loan Bank advances |
|
2,283 |
|
|
270 |
|
3,644 |
|
644 |
|
Interest on
other borrowings and capital notes |
|
1,848 |
|
|
2,163 |
|
5,553 |
|
6,744 |
|
|
Total interest
expense |
|
76,494
|
|
|
82,630
|
|
225,860
|
|
242,305
|
|
| Net interest
income |
|
131,479
|
|
|
132,642
|
|
386,046
|
|
382,060
|
|
| Provision for
loan losses |
|
35,495
|
|
|
41,815
|
|
106,705
|
|
119,444
|
|
| Net interest
income after provision for loan losses |
|
95,984
|
|
|
90,827
|
|
279,341
|
|
262,616
|
|
| Noninterest
income: |
|
|
|
|
|
|
|
|
|
|
Processing
services |
|
18,275
|
|
|
21,021
|
|
54,272
|
|
58,692
|
|
Credit card
securitization income |
|
15,867
|
|
|
14,074
|
|
47,106
|
|
43,542
|
|
Deposit services
|
|
7,228 |
|
|
6,475 |
|
20,121
|
|
18,524
|
|
Trust and
investment services |
|
5,448 |
|
|
5,506 |
|
17,038
|
|
16,908
|
|
Commissions
|
|
2,794 |
|
|
1,133 |
|
12,674
|
|
11,568
|
|
Miscellaneous
|
|
12,214
|
|
|
10,837
|
|
31,886
|
|
45,462
|
|
|
Total
noninterest income |
|
61,826
|
|
|
59,046
|
|
183,097
|
|
194,696
|
|
| Noninterest
expense: |
|
|
|
|
|
|
|
|
|
|
Salaries and
employee benefits |
|
54,100
|
|
|
45,401
|
|
158,676
|
|
134,459
|
|
Communications
and supplies |
|
15,808
|
|
|
12,039
|
|
45,182
|
|
45,601
|
|
Loan servicing
expense |
|
7,473 |
|
|
7,005 |
|
21,891
|
|
18,375
|
|
Processing
expense |
|
6,952 |
|
|
7,696 |
|
21,242
|
|
21,647
|
|
Net occupancy
expense of premises |
|
7,730 |
|
|
8,081 |
|
22,532
|
|
22,795
|
|
Equipment
rentals, depreciation and maintenance |
|
10,449
|
|
|
9,435 |
|
30,054
|
|
27,068
|
|
Professional
services |
|
8,365 |
|
|
12,628
|
|
26,083
|
|
37,982
|
|
Miscellaneous
|
|
10,230
|
|
|
10,840
|
|
30,399
|
|
30,097
|
|
|
Total
noninterest expense |
|
121,107
|
|
|
113,125
|
|
356,059
|
|
338,024
|
|
| Income before
income taxes |
|
36,703
|
|
|
36,748
|
|
106,379
|
|
119,288
|
|
| Income tax
expense(benefit): |
|
|
|
|
|
|
|
|
|
|
Current
|
|
15,062
|
|
|
12,904
|
|
39,215
|
|
45,592
|
|
Deferred
|
|
(1,285
|
) |
|
880 |
|
998 |
|
1,188 |
|
|
Total income tax
expense |
|
13,777
|
|
|
13,784
|
|
40,213
|
|
46,780
|
|
| Net income
|
|
$
22,926 |
|
|
$
22,964 |
|
$
66,166 |
|
$
72,508 |
|
|
| Average number
of common shares outstanding |
|
334,500
|
|
|
335,000
|
|
334,663
|
|
335,000
|
|
|
| Net income per
common share |
|
$
68.54 |
|
|
$
68.55 |
|
$
197.71 |
|
$
216.44 |
|
|
| Cash dividends
declared per common share |
|
$
8.75 |
|
|
$
8.75 |
|
$
38.72 |
|
$
35.00 |
|
|
See notes to consolidated financial statements.
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
Nine Months
Ended
September 30, |
|
|
|
|
1999
|
|
1998
|
|
| (in thousands)
|
|
|
|
| |
| CASH FLOWS
FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net Income
|
|
$
66,166 |
|
|
$
72,508 |
|
Adjustments to
reconcile net income to net cash flows from operating
activities: |
|
|
|
|
|
|
|
Provision for
loan losses |
|
106,705
|
|
|
119,444
|
|
|
Depreciation
and amortization |
|
38,695
|
|
|
31,812
|
|
|
Provision for
deferred taxes |
|
998 |
|
|
1,188
|
|
|
Origination of
mortgage loans for resale |
|
(114,565
|
) |
|
(100,305
|
) |
|
Proceeds from
the sale of mortgage loans for resale |
|
126,504
|
|
|
84,633
|
|
|
Other asset and
liability activity, net |
|
(180,935
|
) |
|
32,745
|
|
|
|
Net cash flows
from operating activities |
|
43,568
|
|
|
242,025
|
|
|
| CASH FLOWS
FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Acquisitions,
net of cash received |
|
(3,525
|
) |
|
(855 |
) |
|
Maturities and
sales of securities available-for-sale |
|
350,736
|
|
|
143,088
|
|
|
Purchases of
securities available-for-sale |
|
(531,849
|
) |
|
(533,563
|
) |
|
Maturities of
securities held-to-maturity |
|
221,361
|
|
|
517,797
|
|
|
Purchases of
securities held-to-maturity |
|
(7,132
|
) |
|
(170,330
|
) |
|
Net change in
loans |
|
(200,562
|
) |
|
(91,780
|
) |
|
Credit card
securitization activities |
|
—
|
|
|
(295,000
|
) |
|
Purchases of
loan portfolios |
|
(40,237
|
) |
|
(379,648
|
) |
|
Purchases of
premises and equipment |
|
(27,914
|
) |
|
(25,582
|
) |
|
Other, net
|
|
1,091
|
|
|
2,043
|
|
|
|
Net cash flows
from investing activities |
|
(238,031
|
) |
|
(833,830
|
) |
|
| CASH FLOWS
FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Net change in
deposits |
|
(319,707
|
) |
|
334,736
|
|
|
Assumption of
deposits, net |
|
39,712
|
|
|
—
|
|
Net change in
federal funds purchased and securities sold under repurchase
agreements |
|
(134,703
|
) |
|
10,186
|
|
|
Issuance of
Federal Home Loan Bank advances and other borrowings |
|
292,924
|
|
|
63,748
|
|
Principal
repayments of Federal Home Loan Bank advances, other borrowings
and capital notes |
|
(99,167
|
) |
|
(71,270
|
) |
|
Repurchase of
common stock |
|
(1,575
|
) |
|
—
|
|
|
Cash dividends
paid |
|
(12,958
|
) |
|
(11,725
|
) |
|
|
Net cash flows
from financing activities |
|
(235,474
|
) |
|
325,675
|
|
|
| Net change in
cash and cash equivalents |
|
(429,937
|
) |
|
(266,130
|
) |
|
| Cash and cash
equivalents at beginning of period |
|
816,509
|
|
|
755,842
|
|
|
| Cash and cash
equivalents at end of period |
|
$
386,572 |
|
|
$
489,712 |
|
|
|
| Cash paid
during the period for: |
|
|
|
|
|
|
|
Interest
|
|
$
229,332 |
|
|
$
241,988 |
|
|
Income taxes
|
|
$
37,737 |
|
|
$
43,707 |
|
|
|
See notes to consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
September 30, 1999
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, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. The
notes to the consolidated financial statements contained in the
Annual Report on Form 10-K for the year ended December 31, 1998
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
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. The following table reflects
consolidated statements of comprehensive income for the quarter
ended and nine months ended September 30, 1999 and September 30,
1998.
| |
|
Quarter Ended
September 30, |
|
Nine Months Ended
September 30, |
|
| |
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
| (in
thousands) |
|
|
|
| |
| Net Income
|
|
$22,926
|
|
$22,964
|
|
$
66,166 |
|
|
$72,508
|
|
| Other
comprehensive income (loss), before tax |
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses)
arising during the period |
|
1,420
|
|
4,321
|
|
(10,286
|
) |
|
4,729
|
Less: Reclassification adjustment for net
gains realized in net
income |
|
5 |
|
166 |
|
909 |
|
|
1,279
|
|
| Other
comprehensive gain (loss), before tax |
|
1,415
|
|
4,155
|
|
(11,195
|
) |
|
3,450
|
| Less: Income
tax benefit (expense) for other comprehensive loss |
|
506 |
|
1,505
|
|
(4,046
|
) |
|
1,262
|
|
| Other
comprehensive gain (loss), net of tax |
|
909 |
|
2,650
|
|
(7,149
|
) |
|
2,188
|
|
| Comprehensive
income |
|
$23,835
|
|
$25,614
|
|
$
59,017 |
|
|
$74,696
|
|
|
Note D. New Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137,
“Accounting for Derivative Instruments and Hedging
Activities—Deferral of the Effective Date of FASB Statement
No. 133.” SFAS No. 137 postponed the effective date for
SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” to all fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS No. 133 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. The
Company currently has no derivatives that would materially
impact its financial statements.
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 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 quarter ended September
30, 1999 was $22.9 million, or $68.54 per common share, compared
to $23 million, or $68.55 per common share, for the same period
ended in 1998. Net income for the nine months ended September
30, 1999 was $66.2 million, or $197.71 per common share,
decreasing 8.8% from $72.5 million, or $216.44 per common share,
for the same period ended in 1998. The decline in net income for
the nine months ended September 30, 1999 compared to the same
period in 1998 relates primarily to proceeds received by the
Company for the settlement of litigation recognized in the first
quarter of 1998. The decline is also due to increased
noninterest expense offset by increased net interest income
after provision for loan losses for the nine months ended
September 30, 1999.
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 interest-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. The
following table presents a summary of net interest income on a
tax-equivalent basis, related average earning assets and net
interest margin.
| |
|
Quarter Ended
September 30, |
|
Nine Months Ended
September 30, |
|
| |
|
1999 |
|
1998 |
|
1999 |
|
1998 |
|
| (in
thousands) |
|
|
|
| |
| Net interest
income on a tax-equivalent basis |
|
$
131,631 |
|
|
$
132,750 |
|
|
$
386,457 |
|
|
$
382,406 |
|
| Average
earning assets |
|
7,104,295
|
|
|
6,851,257
|
|
|
7,019,332
|
|
|
6,730,545
|
|
| Net interest
margin (annualized) |
|
7.35
|
% |
|
7.69
|
% |
|
7.36
|
% |
|
7.60
|
% |
The decreases in net interest margins relate
to declines in higher yielding outstanding credit card and
related plan average balances net of increases in outstanding
non-credit card loan average balances. Net interest margin
decreases also relate to asset yields repricing downward in
response to market conditions at a faster rate than the
repricing of deposits.
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
its loans. For the quarter ended September 30, 1999, the
provision for loan losses decreased $6.3 million, or 15.1%, to
$35.5 million compared to $41.8 million for the same period in
1998. For the nine months ended September 30, 1999, the
provision for loan losses decreased $12.7 million, or 10.7%, to
$106.7 million compared to $119.4 million for the same period
in 1998. The reduction in the provision for loan losses for the
quarter ended and the nine months ended September 30, 1999 is
due to improved delinquency and charge-off rates and a
reduction in credit card loans and related plans outstanding
balances relative to the entire portfolio. This reduction
resulted in a decline in the allowance for loan losses as a
percentage of loans. Although the level of net charge-offs as a
percentage of average loans has improved, it remains high
primarily due to delinquencies on consumer credit card loans
and consumer bankruptcies which continue to adversely affect
the credit card industry.
Noninterest income:
Noninterest income for the quarter ended
September 30, 1999, increased $2.8 million, or 4.7%, to $61.8
million compared to the same period in 1998. For the nine
months ended September 30, 1999, noninterest income decreased
$11.6 million, or 6%, to $183.1 million compared to the same
period in 1998. The decrease is primarily attributable to
miscellaneous income recognized in the first quarter of 1998
which included proceeds received from the settlement of
litigation. In addition, processing services decreased $2.7
million, or 13.1%, to $18.3 million for the quarter ended
September 30, 1999 and decreased $4.4 million, or 7.5%, to
$54.3 million for the nine months ended September 30, 1999 due
to changes in the Company’s merchant processing client
base. These decreases were partially offset by an increase in
credit card securitization income of $3.6 million, or 8.2%, to
$47.1 million for the nine months ended September 30, 1999 when
compared to the same period in 1998. This increase in credit
card securitization income resulted from the net impact of a $3
million, or 8.4%, increase in net servicing income to $38.8
million from $35.8 million and a $500,000, or 7.1%, increase in
securitization gains to $8.3 million from $7.8 million. Income
related to commissions and deposit services increased generally
as a result of growth in the Company’s customer base and
overall transaction volume.
Noninterest expense:
For the quarter ended September 30, 1999,
noninterest expense increased $8 million, or 7.1%, to $121.1
million compared to the same period in 1998. For the nine
months ended September 30, 1999, noninterest expense increased
$18 million, or 5.3%, to $356.1 million compared to the same
period in 1998. A portion of the increase in noninterest
expense is due to salaries and employee benefits which
increased $8.7 million, or 19.2%, for the quarter ended
September 30, 1999 and $24.2 million, or 18%, for the nine
months ended September 30, 1999 as a result of growth in
certain areas of the Company. Loan servicing expense increased
$3.5 million, or 19.1%, for the nine months ended September 30,
1999 due to the Company’s increased collection efforts and
associated costs as well as increased costs for credit
applications and acquiring additional agent bank relationships.
Communication and supplies expense increased $3.8 million, or
31.3%, for the quarter ended September 30, 1999 and decreased
$400,000, or 1%, for the nine months ended September 30, 1999
as compared to the same period in 1998 primarily due to
fluctuations in marketing expenses. Professional services
decreased $4.3 million, or 33.8%, for the quarter ended
September 30, 1999 and decreased $11.9 million, or 31.3%, for
the nine months ended September 30, 1999 largely due to
decreased fees paid to merchant sales representatives and
organizations. Increases in remaining expense categories
related to the acquisition of new customer relationships and
loan portfolios, continued investments in technology and
addressing Year 2000 issues.
Credit Card Loan Activities:
The Company securitizes credit card loans on
a revolving basis as a funding vehicle to supplement its use of
core deposits as its primary source of funding. These
securitizations are accounted for as sales in accordance with
SFAS No. 125, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.”
Since the Company continues to service these securitized loans,
it takes the role of a loan servicer rather than a lender. As
loans are securitized, gains which represent the present value
of retained cash flows are recorded, and the loans along with
the related allowance for credit losses are removed from the
balance sheet. The securitizations result in differences in the
amount of reported loans versus managed loans. Reported loans
reflect the removal of these securitized loans from the balance
sheet in accordance with generally accepted accounting
principles while managed loans include both securitized loans
and reported loans. The following table reflects the
reconciliation of the loan portfolio between reported and
managed loans at September 30, 1999 and December 31, 1998.
| |
|
September 30, 1999 |
|
December 31, 1998 |
| |
|
Reported
|
|
Securitized
|
|
Managed
|
|
Reported
|
|
Securitized
|
|
Managed
|
| |
|
| (in
thousands) |
|
|
| Managed Loan
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of Period
End: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
outstanding |
|
$5,830,756
|
|
$653,022
|
|
$6,483,778
|
|
$5,732,604
|
|
$653,022
|
|
$6,385,626
|
Total credit
cards and related
plans outstanding |
|
$2,500,732
|
|
$653,022
|
|
$3,153,754
|
|
$2,781,626
|
|
$653,022
|
|
$3,434,648
|
|
|
Year-to-Date
Average: |
|
Total loans
outstanding |
|
$5,660,842
|
|
$653,022
|
|
$6,313,864
|
|
$5,440,079
|
|
$695,367
|
|
$6,135,446
|
Total credit
cards and related
plans outstanding |
|
$2,536,241
|
|
$653,022
|
|
$3,189,263
|
|
$2,728,328
|
|
$695,367
|
|
$3,423,695
|
In addition to credit card securitization
activities, the Company acquired credit card loan portfolios
totaling $37.1 million during the nine months ended September
30, 1999.
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 credit cards and related plans loan
portfolio with the use of statistically-based computer
simulation models.
While delinquencies as a percentage of loans
have improved since December 31, 1998, the consumer credit
industry and the Company’s credit card portfolio continue
to experience high levels of delinquencies and charge-offs. The
Company’s management cannot predict whether this downward
trend in delinquency and charge-off rates will continue. It is
likely that selected segments of consumers may continue to
experience declines in credit quality. Therefore, management
continues to closely evaluate and monitor consumer behavior,
credit standards and marketing strategies.
The following table reflects the delinquency
rates for the Company’s overall loan portfolio as well as
a breakdown of the credit cards and related plans component. 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 improved to a level of 2.80% at September 30, 1999
compared with 3.37% at December 31, 1998. The delinquency rate
as a percentage of total credit card loans and related plans
was 5.27% at September 30, 1999 down from 5.94% at December 31,
1998.
Delinquent Loans:
| |
|
September 30, 1999 |
|
December 31, 1998 |
| |
|
| |
|
|
|
%
of Loans |
|
|
|
%
of Loans |
| |
|
| (in
thousands) |
|
|
|
| |
| Total
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans
outstanding |
|
$5,830,756
|
|
|
|
|
$5,732,604
|
|
|
|
| Loans
delinquent: |
|
|
|
|
|
|
|
|
|
|
|
30–89
days |
|
$
101,302 |
|
1.74
|
% |
|
$
121,237 |
|
2.11
|
% |
|
90 days or
more & still accruing |
|
61,765
|
|
1.06
|
% |
|
72,482
|
|
1.26
|
% |
| |
|
|
Total
delinquent loans |
|
$
163,067 |
|
2.80
|
% |
|
$
193,719 |
|
3.37
|
% |
| |
|
| |
|
| Nonaccrual
loans |
|
$
7,081 |
|
.12
|
% |
|
$
7,027 |
|
.12
|
% |
| |
|
| |
|
| Credit
Cards and Related Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans
outstanding |
|
$2,500,732
|
|
|
|
|
$2,781,626
|
|
|
|
| Loans
delinquent: |
|
|
|
|
|
|
|
|
|
|
|
30–89
days |
|
$
77,639 |
|
3.10
|
% |
|
$
96,625 |
|
3.47
|
% |
|
90 days or
more & still accruing |
|
54,270
|
|
2.17
|
% |
|
68,578
|
|
2.47
|
% |
| |
|
|
Total
delinquent loans |
|
$
131,909 |
|
5.27
|
% |
|
$
165,203 |
|
5.94
|
% |
| |
|
| |
|
| Nonaccrual
loans |
|
—
|
|
—
|
|
|
—
|
|
—
|
|
| |
|
| |
|
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 $127.2 million for the nine months
ended September 30, 1999 compared to $134 million for the same
period in 1998. Net charge-offs as a percentage of average
loans has improved to 2.25% for the nine months ended
September 30, 1999 compared to 2.49% for the same period last
year.
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, |
| |
|
| |
|
1999 |
|
1998 |
| |
|
| (in
thousands) |
|
|
|
| |
| Balance
at January 1 |
|
$
121,877 |
|
|
$
128,990 |
|
| Addition
due to loan purchases |
|
1,091
|
|
|
12,421
|
|
| Reduction
due to sales of loans |
|
—
|
|
|
(8,990
|
)
|
| Provision
for loan losses |
|
106,705
|
|
|
119,444
|
|
|
| Loans
charged off: |
|
|
|
|
|
|
|
Credit
cards and related plans |
|
(145,910 |
)
|
|
(151,724 |
)
|
|
All other
loans |
|
(2,970
|
)
|
|
(3,496
|
)
|
| Loans
recovered: |
|
|
|
|
|
|
|
Credit
cards and related plans |
|
20,107
|
|
|
19,479
|
|
|
All other
loans |
|
1,527
|
|
|
1,702
|
|
| |
|
| Total net
charge-offs |
|
(127,246
|
)
|
|
(134,039
|
)
|
| |
|
| Balance
at September 30 |
|
$
102,427 |
|
|
$
117,826 |
|
| |
|
| |
|
| Allowance
as a percentage of loans |
|
1.76
|
%
|
|
2.10
|
%
|
| Total net
charge-offs as a percentage of average loans |
|
2.25
|
%
|
|
2.49
|
%
|
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 banking 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 banking subsidiaries to maintain minimum amounts and
ratios 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 banking subsidiaries’ capital
amounts and classifications are also subject to qualitative
judgements by the regulators about components, risk
weightings and other factors.
As of September 30, 1999, 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 Company’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%.
During the nine months ended
September 30, 1999, the Company repurchased 500 shares of the
Company’s common stock. These shares were retired
decreasing the total number of shares issued and outstanding
to 334,500. The purchase price 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 $17.1
million in capital notes outstanding as of September 30, 1999
issued 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.
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, credit card-backed securitizations, Federal Home
Loan Bank advances, other debt agreements 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, 1999 and 1998, $653 million and $655 million,
respectively, of the Company’s managed credit card
portfolio was securitized with an additional $275 million and
$295 million, respectively, in unused securitization lines
available. The Company had Federal Home Loan Bank advances of
$223.6 million as of September 30, 1999 and $28.5 million as
of December 31, 1998. Federal Home Loan Bank advances at
September 30, 1999 included an advance for $100 million which
will mature in February 2000. At September 30, 1999, the
parent company had no balance outstanding under a $100
million syndicated revolving credit facility.
Year 2000 Readiness
The Company’s State
of Readiness. As is the case for most financial services
companies that are heavily dependent on computer systems, the
Year 2000 computer problem presents significant issues for
the Company. The Company began working on Year 2000
challenges in 1994 and 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
served 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
information technology (IT) 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
reviewed and approved these various phases of the project
plan as they were completed.
Ÿ
|
The Company considers the awareness
phase of its Year 2000 Project to be complete from an
internal standpoint. Awareness efforts with regard to the
Company’s customers and vendors will be ongoing as
circumstances dictate.
|
Ÿ
|
The Company considers the assessment
phase of its Year 2000 Project to be 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 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.
|
Ÿ
|
The remediation phase of the Company
’s project included 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 includes upgrading, renovating or replacing
existing systems. The Company has completed this phase of
its Year 2000 Project with respect to internal mission
critical systems. In limited situations, completion of
remediation is dependent on the performance of third party
vendors, which is not completely within the control of the
Company.
|
Ÿ
|
The testing phase of the Company’s
project involved 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 completed testing and implementation of mission
critical systems on June 30, 1999.
|
As remediated and tested
internal mission critical systems were brought into
production, the Company implemented 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 continue on an ongoing
basis throughout 1999 and beyond.
The Costs to Address the
Company’s Year 2000 Issues. Through September 30,
1999, cumulative costs relating directly to Year 2000 issues
since the project’s inception have totaled approximately
$10.6 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 $2.4 million and therefore,
the total estimated Year 2000 Project costs from inception
through completion should approximate $13 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 for the Company. Even though the Company’
s Year 2000 Project includes 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, strives to minimize their impact.
The Company’s
Contingency Plans. The Company is substantially complete
in developing contingency plans to address potential Year
2000 interruptions of its internal and external mission
critical systems and services. For example, the Company has
developed plans designed to meet possible unusually high cash
demands generated by the publicity concerning potential Year
2000 issues for financial institutions. The contingency
planning process is well under way. These plans are subject
to ongoing review, testing and adjustment. Contingency plans
are limited or problematic for some systems or services because
there are 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 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, results of Year 2000 testing, adequate resolution
of Year 2000 issues by governmental agencies, businesses 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, 1999, 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.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5:
|
Not applicable or negative response.
|
Item 6: Exhibits and Reports on Form 8-K
| (a)
Exhibits |
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3(i)(ii)
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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) are
incorporated herein by reference. |
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4
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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. |
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10(a)
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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. |
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10(b)
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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. |
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10(c)
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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.
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10(d)
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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. |
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10(e)
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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.
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27
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Financial Data Schedule (EDGAR filing only).
|
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(b) Reports on Form
8-K
|
No reports on Form 8-K were
filed during the quarter for which this report was
filed.
|
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
.
| /S
/ DENNIS
A. O’NEAL
By:
Dennis A. O’Neal
Executive Vice
President and Treasurer,
Principal Financial
Officer
|
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November 4, 1999
Date:
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