<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 June 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 number 03502
First National of Nebraska, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nebraska 47-0523079
- ---------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One First National Center Omaha, NE 68102
- ----------------------------------------- -------------------------------
(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 August 2, 1999, the number of outstanding shares of the registrant's
common stock ($5.00 par value) was 334,500.
1
<PAGE>
Part I. FINANCIAL INFORMATION
Part I. Item 1. Financial Statements
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands except share and per share data) (unaudited)
Assets
<S> <C> <C>
Cash and due from banks $ 293,735 $ 434,275
Federal funds sold and other short-term investments 172,216 382,234
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 465,951 816,509
Securities available-for-sale (amortized cost $905,917 and $852,374) 895,116 854,183
Securities held-to-maturity (fair value $252,623 and $423,554) 252,489 420,918
Loans 5,654,321 5,746,054
Less: Allowance for loan losses 104,628 121,877
Unearned income 13,231 13,450
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 5,536,462 5,610,727
Premises and equipment, net 142,159 138,853
Other assets 342,659 346,625
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 7,634,836 $ 8,187,815
===========================================================================================================================
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing $ 772,842 $ 896,485
Interest-bearing 5,889,654 5,971,396
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 6,662,496 6,867,881
Federal funds purchased and securities sold under repurchase agreements 115,089 358,975
Other liabilities 86,469 250,753
Other borrowings 70,833 33,039
Capital notes 92,070 92,864
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 7,026,957 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 610,591 578,951
Accumulated other comprehensive income (loss) (6,896) 1,162
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 607,879 584,303
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 7,634,836 $ 8,187,815
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands except share and per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans and lease financing $182,780 $193,439 $367,392 $367,780
Interest on securities:
Taxable interest income 16,321 16,209 31,900 34,073
Nontaxable interest income 256 228 478 443
Interest on federal funds sold
and other short-term investments 1,992 2,919 4,162 6,797
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 201,349 212,795 403,932 409,093
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 69,884 76,097 140,936 150,488
Interest on federal funds purchased and
securities sold under repurchase agreements 1,758 2,362 3,364 4,232
Interest on other borrowings and capital notes 2,719 2,507 5,066 4,955
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 74,361 80,966 149,366 159,675
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 126,988 131,829 254,566 249,418
Provision for loan losses 30,643 39,489 71,209 77,629
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 96,345 92,340 183,357 171,789
Noninterest income:
Processing services 17,672 20,086 35,997 37,671
Credit card securitization income 14,995 14,723 31,239 29,468
Deposit services 6,699 6,281 12,893 12,049
Trust and investment services 5,592 5,565 11,590 11,402
Commissions 2,873 2,707 9,880 10,435
Miscellaneous 9,931 8,255 19,672 34,625
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 57,762 57,617 121,271 135,650
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 51,453 43,980 104,576 89,058
Communications and supplies 15,213 9,742 29,374 33,562
Loan servicing expense 7,321 5,939 14,418 11,370
Processing expense 6,884 8,121 14,290 13,951
Net occupancy expense of premises 7,084 7,546 14,802 14,714
Equipment rentals, depreciation and maintenance 10,138 9,401 19,605 17,633
Professional services 7,735 13,041 17,718 25,354
Miscellaneous 10,028 10,098 20,169 19,257
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 115,856 107,868 234,952 224,899
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 38,251 42,089 69,676 82,540
Income tax expense (benefit):
Current 12,181 16,289 24,153 32,688
Deferred 2,299 (18) 2,283 308
- ---------------------------------------------------------------------------------------------------------------------------------
Total income tax expense 14,480 16,271 26,436 32,996
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 23,771 $ 25,818 $ 43,240 $ 49,544
=================================================================================================================================
Average number of common shares outstanding 334,500 335,000 334,746 335,000
=================================================================================================================================
Net income per common share $ 71.06 $ 77.07 $ 129.17 $ 147.89
=================================================================================================================================
Cash dividends declared per common share $ 17.50 $ 17.50 $ 29.97 $ 26.25
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
1999 1998
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 43,240 $ 49,544
Adjustments to reconcile net income to net cash
flows from operating activities:
Provision for loan losses 71,209 77,629
Depreciation and amortization 25,038 21,684
Provision for deferred taxes 2,283 308
Origination of mortgage loans for resale (79,265) (50,739)
Proceeds from the sale of mortgage loans for resale 89,400 49,018
Other asset and liability activity, net (158,631) 22,066
- ------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities (6,726) 169,510
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash received (3,967) --
Maturities and sales of securities available-for-sale 337,109 119,025
Purchases of securities available-for-sale (389,429) (30,087)
Maturities of securities held-to-maturity 172,213 244,968
Purchases of securities held-to-maturity (3,503) (132,348)
Net change in loans 23,964 (17,796)
Credit card securitization activities -- (295,000)
Purchases of loan portfolios (35,089) (357,534)
Purchases of premises and equipment (18,228) (15,543)
Other, net 702 814
- ------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities 83,772 (483,501)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (248,824) 246,645
Assumption of deposits 39,712 --
Net change in federal funds purchased and
securities sold under repurchase agreements (243,886) (51,088)
Issuance of other borrowings 103,173 48,903
Principal repayments of other borrowings
and capital notes (66,173) (38,722)
Repurchase of common stock (1,575) --
Cash dividends paid (10,031) (8,794)
- ------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (427,604) 196,944
- ------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (350,558) (117,047)
Cash and cash equivalents at beginning of period 816,509 755,842
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 465,951 $ 638,795
==================================================================================================================
Cash paid during the period for:
Interest $ 153,191 $ 160,364
Income taxes $ 25,699 $ 31,195
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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 six months ended June 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 six
months ended June 30, 1999 and June 30, 1998.
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Net Income $ 23,771 $ 25,818 $ 43,240 $ 49,544
Other comprehensive income (loss), before tax
Net unrealized holding gains (losses) arising during the period (8,337) 125 (11,706) 408
Less: Reclassification adjustment for net gains realized in net income 10 513 904 1,113
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, before tax (8,347) (388) (12,610) (705)
Less: Income tax benefit for other comprehensive loss (3,017) (132) (4,552) (243)
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax (5,330) (256) (8,058) (462)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 18,441 $ 25,562 $ 35,182 $ 49,082
===================================================================================================================================
</TABLE>
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
5
<PAGE>
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 June 30, 1999 was $23.8 million, or $71.06 per
common share, decreasing 7.9% from $25.8 million, or $77.07 per common share,
for the same period in 1998. Net income for the six months ended June 30, 1999
was $43.2 million, or $129.17 per common share, decreasing 12.7% from $49.5
million, or $147.89 per common share, for the same period in 1998. This decline
in net income for the six months ended June 30, 1999 when 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 net of increased net interest income
after provision for loan losses for the period.
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.
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Net interest income on a tax-equivalent basis $ 127,126 $ 131,951 $ 254,825 $ 249,657
Average earning assets 6,978,332 6,756,484 6,976,145 6,669,190
Net interest margin (annualized) 7.31% 7.83% 7.37% 7.55%
</TABLE>
Net interest margins decreased primarily due 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 the
various loan portfolios within the Company. For the quarter ended June 30, 1999,
the provision for loan losses decreased $8.8 million, or 22.4%, to $30.6 million
compared to $39.5 million for the same period in 1998. For the six months ended
June 30, 1999, the provision for loan losses decreased $6.4 million, or 8.3%, to
$71.2 million compared to $77.6 million for the same period in 1998. The
reduction in the provision for loan loss for the quarter ended and the six
months ended June 30, 1999 is primarily due to a decline in the allowance for
loan loss as a percentage of loans due to improved delinquency rates and a
reduction in outstanding balances on credit card loans and related plans. The
level of net charge-offs as a percentage of average loans has improved slightly
but remains high primarily due to the high volume of delinquencies on consumer
credit card loans and consumer bankruptcies which continue to adversely affect
the credit card industry.
6
<PAGE>
Noninterest income:
Noninterest income for the quarter ended June 30, 1999, was comparable to the
noninterest income recognized in the same period in 1998. For the six months
ended June 30, 1999, noninterest income decreased $14.4 million, or 10.6%, to
$121.3 million compared to the same period in 1998. The decrease is primarily
attributable to miscellaneous income recognized in 1998 which included proceeds
received from the settlement of litigation. Additionally, a decrease of $2.4
million, or 12%, for the quarter ended June 30, 1999 and a decrease of $1.7
million, or 4.4%, for the six months ended June 30, 1999 occurred in processing
services as a result of changes in the Company's merchant processing client
base. These decreases were partially offset by an increase in credit card
securitization income of $1.8 million, or 6%, to $31.2 million for the six
months ended June 30, 1999 when compared to the same period in 1998. This
increase in credit card securitization income resulted from the net impact of a
$2.8 million, or 12.4%, increase in servicing income to $25.4 million from $22.6
million and a $1 million, or 14.8%, decrease in securitization gains to $5.9
million from $6.9 million.
Noninterest expense:
For the quarter ended June 30, 1999, noninterest expense increased $8 million,
or 7.4%, to $115.9 million compared to the same period in 1998. For the six
months ended June 30, 1999, noninterest expense increased $10.1 million, or
4.5%, to $235 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 $7.5 million, or 17%, for the quarter ended June 30, 1999 and $15.5
million, or 17.4%, for the six months ended June 30, 1999 as a result of overall
Company growth. Loan servicing expense increased $1.4 million, or 23.3%, for the
quarter ended June 30, 1999 and $3 million, or 26.8%, for the six months ended
June 30, 1999 due to the Company's increased collection efforts and the
resulting increases in collection costs. Additionally, communication and
supplies expense increased $5.5 million, or 56.2%, for the quarter ended June
30, 1999 and decreased $4.2 million, or 12.5%, for the six months ended June 30,
1999 as compared to the same period in 1998 primarily due to fluctuations in
marketing expenses. Professional services decreased $5.3 million, or 40.7%, for
the quarter ended June 30, 1999 and $7.6 million, or 30.1%, for the six months
ended June 30, 1999 largely due to decreased fees paid to merchant sales
representatives and organizations. Processing expenses declined $1.2 million, or
15.2%, for the quarter ended June 30, 1999 due to credit card processing
expenses temporarily paid in 1998 to external processors until conversion of
newly acquired credit card portfolios to the Company's own computer system.
Increases in remaining expense categories related to continued Company growth
and addressing Year 2000 issues. This growth was primarily due to increased
processing volumes, the acquisition of new customer relationships and loan
portfolios and continued investments in technology.
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
June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
Reported Securitized Managed Reported Securitized Managed
---------------------------------------------------------------------------------------
(in thousands)
Managed Loan Data
- -----------------
<S> <C> <C> <C> <C> <C> <C>
As of Period End:
Total loans outstanding $5,641,090 $653,022 $6,294,112 $5,732,604 $653,022 $6,385,626
Total credit cards and related
plans outstanding $2,515,120 $653,022 $3,168,142 $2,781,626 $653,022 $3,434,648
Year-to-Date Average:
Total loans outstanding $5,640,210 $653,022 $6,293,232 $5,440,079 $695,367 $6,135,446
Total credit cards and related
plans outstanding $2,662,571 $653,022 $3,315,593 $2,728,328 $695,367 $3,423,695
</TABLE>
In addition to credit card securitization activities, the Company acquired
credit card loan portfolios totaling $32.3 million during the six months ended
June 30, 1999.
7
<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.
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
rates and leveling off of 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 2.86% at June 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 5.12% at June 30, 1999 down from 5.94%
at December 31, 1998.
<TABLE>
<CAPTION>
Delinquent Loans:
June 30, 1999 December 31, 1998
-------------------------------------------- -------------------------------------
(in thousands)
Total Loans % of Loans % of Loans
- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Loans outstanding $5,641,090 $5,732,604
Loans delinquent:
30 - 89 days $105,818 1.88% $121,237 2.11%
90 days or more & still accruing 55,545 0.98% 72,482 1.26%
------------------------------------- --------------------------------------
Total delinquent loans $161,363 2.86% $193,719 3.37%
===================================== ======================================
Nonaccrual loans $6,188 .11% $7,027 .12%
===================================== ======================================
<CAPTION>
Credit Cards and Related Plans
- ------------------------------
Loans outstanding $2,515,120 $2,781,626
Loans delinquent:
30 - 89 days $77,502 3.08% $96,625 3.47%
90 days or more & still accruing 51,261 2.04% 68,578 2.47%
------------------------------------- --------------------------------------
Total delinquent loans $128,763 5.12% $165,203 5.94%
===================================== ======================================
Nonaccrual loans -- -- -- --
===================================== ======================================
</TABLE>
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 $89.4 million for
the six months ended June 30, 1999 compared to $85.1 million for the same period
in 1998. Net charge-offs as a percentage of average loans has improved slightly
to 1.59% for the six months ended June 30, 1999 compared to 1.61% for the same
period last year.
8
<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.
<TABLE>
<CAPTION>
Allowance for Loan Losses:
For the Six Months Ended June 30,
1999 1998
---------------------------------------------
(in thousands)
<S> <C> <C>
Balance at January 1 $ 121,877 $ 128,990
Addition due to loan purchases 953 11,771
Reduction due to sales of loans -- (8,990)
Provision for loan losses 71,209 77,629
Loans charged off:
Credit cards and related plans (102,480) (96,457)
All other loans (2,118) (2,390)
Loans recovered:
Credit cards and related plans 13,995 12,588
All other loans 1,192 1,159
---------------------------------------------
Total net charge-offs (89,411) (85,100)
---------------------------------------------
Balance at June 30 $ 104,628 $ 124,300
=============================================
Allowance as a percentage of loans 1.85% 2.24%
Total net charge-offs as a percentage
of average loans 1.59% 1.61%
</TABLE>
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 June 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 institution's
category. To be categorized as well capitalized, the Company's banking
subsidiaries must maintain minimum total risk-based capital of 10%, Tier I
risk-based capital of 6% and Tier I leverage capital of 5%.
During the six months ended June 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 prices of these
transactions were negotiated at arm's length and reflected 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 June 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.
9
<PAGE>
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, Federal Home Loan Bank
advances, 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 June 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 in other borrowings of $66.6 million as of June
30, 1999 and $28.5 million as of December 31, 1998. At June 30, 1999, the parent
company had no balance outstanding under a $100 million syndicated revolving
credit facility reflected in other borrowings. As part of this syndicated credit
facility arranged for the parent company, a $150 million revolving credit
facility for the Bank was also available. During the second quarter of 1999, the
$150 million portion of the credit facility for the Bank was discontinued.
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.
. 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.
. 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.
. 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.
. 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 June 30, 1999,
- ---------------------------------------------------
cumulative costs relating directly to Year 2000 issues since the project's
inception have totaled approximately $9.3 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
10
<PAGE>
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 $3.7 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 initial 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,
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 June 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.
11
<PAGE>
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 and 5: Not applicable or negative response.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the Company's stockholders was held
on June 16, 1999 for the purpose of electing three
directors for terms of three years. Proxies for the
meeting were solicited pursuant to Sections 14(a) of the
Securities Exchange Act of 1934, and there was no
solicitation in opposition to management's nominees. Each
of management's nominees for director as listed in the
Proxy Statement was elected. The voting tabulation for
the elected directors was as follows:
Shares Shares
Voted Voted
"FOR" "WITHHELD"
F. Phillips Giltner 312,349 71
J. William Henry 312,354 66
Daniel K. O'Neill 312,330 90
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits 3(i)(ii) 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.
4 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.
10(a) 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.
10(b) 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
12
<PAGE>
10(b) of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
10(c) 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.
10(d) 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.
10(e) 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.
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on On June 10, 1999 the registrant filed a current report on
Form 8-K Form 8-K, Item 1, reporting the changes in control of
registrant where Elizabeth D. Lauritzen, Bruce R.
Lauritzen and Ann Lauritzen Pape were appointed by court
order to act as co-conservators of all assets of John R.
Lauritzen.
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 Date: August 9, 1999
----------------------------- -------------------------------
Dennis A. O'Neal
Executive Vice President
and Treasurer, Principal
Financial Officer
13
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<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 293,735
<INT-BEARING-DEPOSITS> 5,889,654
<FED-FUNDS-SOLD> 172,216
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 895,116
<INVESTMENTS-CARRYING> 252,489
<INVESTMENTS-MARKET> 252,623
<LOANS> 5,641,090
<ALLOWANCE> 104,628
<TOTAL-ASSETS> 7,634,836
<DEPOSITS> 6,662,496
<SHORT-TERM> 0
<LIABILITIES-OTHER> 86,469
<LONG-TERM> 162,903<F1>
0
0
<COMMON> 1,673
<OTHER-SE> 606,206
<TOTAL-LIABILITIES-AND-EQUITY> 7,634,836
<INTEREST-LOAN> 367,392
<INTEREST-INVEST> 32,378
<INTEREST-OTHER> 4,162
<INTEREST-TOTAL> 403,932
<INTEREST-DEPOSIT> 140,936
<INTEREST-EXPENSE> 149,366
<INTEREST-INCOME-NET> 254,566
<LOAN-LOSSES> 71,209
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 234,952
<INCOME-PRETAX> 69,676
<INCOME-PRE-EXTRAORDINARY> 43,240
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,240
<EPS-BASIC> 129.17
<EPS-DILUTED> 129.17
<YIELD-ACTUAL> 0<F2>
<LOANS-NON> 6,188
<LOANS-PAST> 55,545
<LOANS-TROUBLED> 0<F2>
<LOANS-PROBLEM> 0<F2>
<ALLOWANCE-OPEN> 121,877
<CHARGE-OFFS> 104,598
<RECOVERIES> 15,187
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<F1>INCLUDES 92,070 IN CAPITAL NOTES
<F2>THE INFORMATION IS NOT REQUIRED FOR INTERIM REPORTING PURPOSES.
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