FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    X    No          .

As of November 6, 2000, 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

FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Income
(unaudited)

FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Cash Flows
(unaudited)

See Notes to Consolidated Financial Statements.

(1) In acquisitions during 2000, the Company acquired non-cash assets of $104 million and assumed liabilities of $66.1 million.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
September 30, 2000

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, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 1999 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, 2000 and September 30, 1999.

Note D: Acquisitions

In February 2000, a subsidiary of the parent company, First National Bank of Omaha, acquired Cornerstone Mortgage Company in a transaction accounted for as a purchase. Cornerstone Mortgage Company is a full service mortgage banking company headquartered in Houston, Texas with assets of approximately $20 million at acquisition.

In July 2000, the parent company acquired InfiCorp Holdings, Inc., parent of InfiStar Corporation, InfiLink Corporation and InfiBank, a limited purpose state chartered credit card bank, in a transaction accounted for as a purchase. InfiCorp Holdings, Inc., located in Atlanta, Georgia, provides comprehensive credit card portfolio management services and at acquisition had consolidated assets of approximately $49 million.

Note E: New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” In June 1999, the FASB issued Statement No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133.” In June 2000, the FASB issued Statement No. 138, an amendment of Statement No. 133. Statement No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other 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 derivative instrument’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument’s gains and losses 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 the transactions that receive hedge accounting.

Statement No. 133, as amended, is effective for fiscal years beginning after June 15, 2000. Statement No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts. The Company plans to adopt Statement No. 133 as of January 1, 2001. Management does not expect the adoption of Statement No. 133 to have a significant impact on the financial position or results of operations of the Company.

In September 2000, the FASB issued Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This new Statement replaces Statement No. 125, issued in June 1996. Statement No. 140 resolves certain implementation and other issues, that have arisen since the initial adoption of Statement No. 125, but it carries over most of Statement No. 125’s provisions without change. Statement No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management does not expect the adoption of Statement No. 140 to have a significant impact on the financial position or results of operations of the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis contains forward-looking statements which reflect management’s current views and estimates of future economic circumstances, industry conditions, company performance and financial results. The statements are based on many assumptions and factors, including general economic conditions, consumer behavior, the 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, 2000 was $20.1 million, or $59.96 per common share, decreasing 12.5% from $22.9 million, or $68.54 per common share, for the same period ended in 1999. Net income for the nine months ended September 30, 2000 was $62.9 million, or $188.09 per common share, decreasing 4.9% from $66.2 million, or $197.71 per common share, for the same period ended in 1999. The decrease in net income for the quarter ended and nine months ended September 30, 2000 compared to the same periods in 1999 results from compressed net interest margins and increased noninterest expense partially offset by increased noninterest income and a reduction in provision for loan losses for the periods.

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.

The decrease in net interest margin relates to declines in higher yielding outstanding credit card balances net of increases in lower yielding outstanding non-credit card loan average balances. In addition, the decrease in net interest margin is due to an increase in the cost of interest-bearing liabilities which is primarily the result of rising market interest rates and competitive pressures.

Provision for loan losses

On a monthly basis, the Company evaluates its allowance for loan losses based upon a review of collateral values, delinquencies, nonaccruals, payment histories and various other analytical and subjective measures relating to the various loan portfolios within the Company. For the quarter ended September 30, 2000, the provision for loan losses decreased $5.9 million, or 16.6%, to $29.6 million compared to $35.5 million for the same period in 1999. For the nine months ended September 30, 2000, the provision for loan losses decreased $20.5 million, or 19.2%, to $86.2 million compared to $106.7 million for the same period in 1999. The reduction in the provision for loan losses for the quarter ended and nine months ended September 30, 2000 compared to the same periods in 1999 is due to improved delinquency and charge-off rates and a reduction in the outstanding balances of credit card loans and related plans which historically have been a higher credit risk relative to the entire portfolio. These reductions in delinquency and charge-off rates have resulted in a decline in the Company’s allowance for loan losses as a percentage of loans.

Noninterest income for the quarter ended September 30, 2000, increased $19.2 million, or 31.1%, to $81.1 million compared to the same period in 1999. For the nine months ended September 30, 2000, noninterest income increased $44.7 million, or 24.4%, to $227.8 million compared to the same period in 1999. A portion of the increase in noninterest income is due to increased credit card and merchant processing volumes for new and existing customers which increased processing services income by $7.3 million, or 39.9%, for the quarter ended September 30, 2000 and $11.7 million, or 21.5%, for the nine months ended September 30, 2000. In addition, credit card securitization income increased $6.6 million, or 41.7%, to $22.5 million for the quarter ended September 30, 2000 and $15.7 million, or 33.4%, to $62.9 million for the nine months ended September 30, 2000 when compared to the same periods in 1999. The increase in credit card securitization income for the quarter ended September 30, 2000 resulted from the net impact of a $3.2 million increase in securitization gains to $5.7 million from $2.5 million and a $3.4 million increase in servicing income to $16.8 million from $13.4 million. The increase in credit card securitization income for the nine months ended September 30, 2000 resulted from the net impact of a $12.1 million increase in securitization gains to $20.4 million from $8.3 million and a $3.6 million increase in servicing income to $42.4 million from $38.8 million. The increase in securitization gains relates to an increased volume of credit card loans sold for the quarter and nine months ended September 30, 2000. Income related to deposit services increased $1.3 million, or 18.4%, for the quarter ended September 30, 2000 and $4.2 million, or 20.9%, for the nine months ended September 30, 2000 as a result of growth in the Company’s customer base and overall transaction volume. Commission income increased $1.1 million, or 39.5%, for the quarter ended September 30, 2000 and $3.1 million, or 24.7%, for the nine months ended September 30, 2000 primarily due to a renegotiated contract and timing differences in the receipt of insurance commissions compared to the same periods in 1999. In addition, commissions increased as a result of investment sales activities for the nine months ended September 30, 2000 compared to the same period in 1999. Miscellaneous income increased $2.9 million, or 24%, for the quarter ended September 30, 2000 and $10.6 million, or 33.1%, for the nine months ended September 30, 2000 which was largely attributable to net gains recognized on the sale of mortgage loans of $2.3 million for the quarter ended September 30, 2000 and $5.2 million for the nine months ended September 30, 2000. Additionally, for the nine months ended September 30, 2000, net gains on the sale of investment securities increased $1.1 million.

Noninterest expense

For the quarter ended September 30, 2000 noninterest expense increased $25.8 million, or 21.3%, to $146.9 million compared to the same period in 1999. For the nine months ended September 30, 2000, noninterest expense increased $61.5 million, or 17.3%, to $417.6 million compared to the same period in 1999. A significant portion of the increase was due to salaries and employee benefits which increased $11.8 million, or 21.9%, for the quarter ended September 30, 2000 and $34 million, or 21.4%, for the nine months ended September 30, 2000 resulting from Company growth and expansion into new products, services and markets. Communication and supplies expense increased $4 million, or 25.3%, for the quarter ended September 30, 2000 and $6.4 million, or 14.1%, for the nine months ended September 30, 2000 compared to the same period in 1999 primarily due to increased marketing expenses. Increases in remaining expense categories generally relate to the acquisition of businesses, new customer relationships and 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 Statement 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 sold, 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 net of unearned income between reported and managed loans at September 30, 2000 and December 31, 1999.

The decrease in reported credit cards and related plans outstanding at September 30, 2000 is partially attributable to a net increase in securitization volume of $376.5 million during the nine months ended September 30, 2000. In addition to credit card securitization activities, the Company acquired credit card loan portfolios totaling $127.7 million during the same period in 2000.

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 card loan portfolio with the use of statistically-based computer simulation models.

The level of loan delinquencies and charge-offs has improved compared to 1999 levels. Delinquencies have now declined to a more acceptable range of 4% to 5% for the Company’s national credit card portfolio. Charge-offs are still slightly above desired levels, but are following delinquencies down to a reasonable rate.

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 2.48% at September 30, 2000 compared with 2.86% at December 31, 1999. The delinquency rate as a percentage of total credit card loans and related plans was 4.25% at September 30, 2000 down from 5.01% at December 31, 1999.

The Company’s policy is to charge off credit card and related plans when they become 180 days contractually past due. Net loan charge-offs include the principal amount of losses resulting from borrowers’ unwillingness or inability to pay, in addition to bankrupt and deceased borrowers, less current period recoveries of previously charged-off loans. The allowance for loan losses is intended to cover losses inherent in the Company’s loan portfolio as of the reporting date. The provision for loan losses is charged against earnings to 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 $91.8 million for the nine months ended September 30, 2000 compared to $127.2 million for the same period in 1999. Net charge-offs as a percentage of average loans has improved to 1.43% for the nine months ended September 30, 2000 compared to 2.25% 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.

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, 2000, the most recent notification from the bank regulators 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%. The Company is required to maintain sufficient capital in each of its banking subsidiaries to remain in the “well capitalized” category in order to retain its rights as a financial holding company.

In 1995, First National Bank of Omaha issued $75 million in 15 year subordinated capital notes. During 1999, another banking subsidiary of the Company issued $2.3 million in capital notes related to the acquisition and merger of a bank. These capital notes, along with the parent company’s $16.3 million in capital notes outstanding as of September 30, 2000 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 sources such as loan repayments, investment maturities, and core deposit growth. The Company’s Asset and 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. The parent company’s cash flows are dependent upon the receipt of dividends from its banking subsidiaries which are subject to regulatory restrictions.

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 Company utilizes credit card securitization vehicles to assist in its management of liquidity, interest rate risk and capital. At September 30, 2000 and December 31, 1999, $1 billion and $651 million, respectively, of the Company’s managed credit card portfolio was securitized under existing securitization vehicles with no additional unused capacity under the existing vehicles available at September 30, 2000 and $255 million available under existing securitization vehicles at December 31, 1999. The Company’s ability to securitize additional credit card loans is dependent upon the arrangement of new credit card securitization vehicles which the Company intends to arrange in the fourth quarter. Additionally, the Company had Federal Home Loan Bank advances of $130.8 million as of September 30, 2000 and $372.1 million as of December 31, 1999. At September 30, 2000, the parent company had $60 million outstanding under a $100 million syndicated revolving credit facility which will mature on December 4, 2000. The Company is in the process of negotiating a similar credit facility which is expected to close prior to the maturity of this revolving credit facility.

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, 2000, 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. The Company intends to use interest rate swap agreements on a limited basis in the future to change the characteristics of selected fixed rate exposures as an element of its risk management policy.

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.

The Company may use interest rate swap agreements on a limited basis to change the characteristics of selected fixed rate exposures as an element of its risk management policy. In December 1999, the Company entered into a forward interest rate swap agreement with a notional amount of $15 million as a hedge against market value fluctuations associated with a future loan commitment expected to be funded in the second quarter of 2001. Upon the Company’s adoption of Statement No. 133 on January 1, 2001, this interest rate swap agreement is not expected to have a significant impact on the Company’s financial position and results of operations.

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

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.