DESCRIPTION OF BUSINESS
First Commerce Bancshares, Inc. (the Company) is a multi-bank holding company
organized as a Nebraska corporation. The Company's primary business is the
ownership and management of seven commercial bank subsidiaries, a mortgage
company and an asset management company. These subsidiaries provide a
comprehensive range of trust, commercial, consumer, correspondent, and mortgage
banking services. The Company provides computer services to banks throughout
Nebraska and surrounding states through its subsidiary, First Commerce
Technologies, Inc. First Commerce Technologies presently has four computer
centers in Nebraska, one in Colorado, two in Kansas, one in Arkansas and one in
Florida.
The Company is geographically located throughout Nebraska with full service
banking offices in Alliance, Bridgeport, Grand Island, Hastings, Kearney,
Lincoln, McCook, North Platte and West Point. Loan/deposit production offices
are located in Hyannis, Mullen, Snyder, Valentine and Wood River.
FINANCIAL HIGHLIGHTS (In Thousands Except Per Share Data)
PERCENT
AT DECEMBER 31, 1996 1995 CHANGE
---- ----
Assets $2,028,012 $1,815,575 11.7%
Investments 649,861 566,176 14.8
Loans 1,121,239 1,017,367 10.2
Deposits 1,574,544 1,463,205 7.6
Stockholders' equity 197,398 180,021 9.7
Per share data:
Stockholders' equity before net unrealized gains
(losses) on securities available for sale 13.92 12.58 10.7
Total stockholders' equity 14.57 13.27 9.8
Closing bid price
Class A 26.50 20.00 32.5
Class B 19.50 14.25 36.8
PERCENT PERCENT
YEAR ENDED DECEMBER 31, 1996 CHANGE 1995 CHANGE 1994
----- ------- ----- -------- -----
Net interest income $70,106 15.1% $60,889 5.4% $57,793
Provision for loan losses 6,839 95.7 3,495 952.7 332
Noninterest income 44,030 30.1 33,850 7.9 31,363
Noninterest expense 73,912 14.8 64,393 7.9 59,663
Net income 21,756 24.9 17,420 (8.5) 19,032
Return on average equity before
net unrealized gains (losses) on
securities available for sale 12.1% 10.5% 13.4%
Per share data:
Net income $1.60 $1.29 $1.46
Dividends .26 .227 .216
Global fund (cost) $33,163 $27,327 $23,376
Global fund (fair value) 44,000 34,191 24,834
DEAR STOCKHOLDERS,
Our Company had a remarkably successful year in 1996. Before providing in-
depth information, let me share some of the more noteworthy achievements in
summary form.
w NET INCOME INCREASED 24.9% TO $21.8 MILLION.
w TOTAL ASSETS INCREASED 11.7% TO $2.028 BILLION.
w LOANS INCREASED 10.2% TO $1.12 BILLION AND "MANAGED LOANS" INCREASED
15%.
w THREE NEW LOAN/DEPOSIT PRODUCTION OFFICES WERE OPENED BY WESTERN
NEBRASKA NATIONAL BANK - ONE IN VALENTINE, ONE IN MULLEN AND ONE IN
HYANNIS. LPO/DPOS HAVE ALSO BEEN OPENED IN WOOD RIVER AND IN SNYDER.
THESE ARE OPERATING UNITS OF OVERLAND NATIONAL BANK IN
GRAND ISLAND AND FIRST NATIONAL BANK IN WEST POINT, RESPECTIVELY.
w NEW SENIOR MANAGEMENT HAS BEEN INSTALLED AT FIRST COMMERCE
TECHNOLOGIES.
w EXCELLENT GROWTH AND PROFITABILITY WAS ACHIEVED BY OUR CREDIT CARD
JOINT VENTURE WITH CABELA'S.
w OUR MORTGAGE COMPANY HAD EXCELLENT GROWTH AND NOW SERVICES 16,000 LOANS
TOTALING OVER $1 BILLION. PROFITS EXCEEDED $1 MILLION FOR THE YEAR.
w FIRST COMMERCE OPENED NEARLY 9,000 NET NEW CHECKING ACCOUNTS.
w NEW FUNDING SOURCES WERE ADDED OR ENHANCED TO PROVIDE US THE ABILITY TO
CONTINUE TO GROW.
w A NEW RETAIL BANKING EMPHASIS WAS BEGUN TO ENABLE US TO BETTER COMPETE
IN THE CONSUMER MARKET IN FUTURE YEARS.
w OUR GLOBAL FUND INCREASED TO $44 MILLION. INVESTMENT RETURNS WERE
APPROXIMATELY 17%.
w OUR PRIMARY CO-MINGLED EQUITY TRUST FUND MANAGED BY FIRST COMMERCE
INVESTORS WAS UP 25% FOR THE YEAR.
w OUR CASH DIVIDEND RATE IN 1996 WAS 26 CENTS, UP FROM 22.7 CENTS IN
1995. IN DECEMBER, THE FCB BOARD APPROVED AN INCREASED DIVIDEND FOR
1997 OF 30 CENTS.
w LOAN LOSSES, EXCLUDING CREDIT CARD LOSSES, REMAINED AT LOW LEVELS.
w GOOD PROGRESS WAS MADE IN OUR TECHNOLOGY ADVANCEMENTS NEEDED TO SUPPORT
OUR NEW RETAIL THRUST AND TO SUPPORT FCT CUSTOMERS.
For those of you who just want the big picture on 1996 results, you may
choose to stop reading here. What follows is a more detailed explanation of the
bullet points above and other Company information. Detailed financial reports
and footnotes to the statements follow my letter and you may review these at any
depth you choose. Our Annual Meeting is scheduled for Tuesday, April 15, 1997,
at The Country Club of Lincoln and I invite you to attend. Formal notices will
be mailed in March.
Needless to say, your management team is proud of this report card. As I
have mentioned before, bottom line growth of FCB is not always as consistent as
we would like, due at times (such as the previous two years) to upward shifts in
interest rates which usually cause our spreads to shrink and interest margin to
decline. In 1996, interest rates were generally stable, and our net yield
spreads improved 17 basis points to 4.10%. This spread improvement coupled with
the strong growth in loans and securities enabled our net interest income to
increase by $9 million over 1995 to $70 million in 1996. This improvement,
caused partly by our successful growth strategies begun in the early 90's, and
partly by an interest rate environment that was favorable to us, was key to our
bottom line success in 1996.
Our loan growth during the year was excellent, up 10.2% to $1.12 billion at
December 31, 1996. During the year, $56 million of credit card receivables were
securitized and "sold" into the secondary market. We continue to manage this
credit card paper and thus we include this volume in our definition of "managed
assets" which increased 15%. Over the past five years, our managed loan assets
have increased from $632 million at December 31, 1991 to $1.18 billion, an
increase of $548 million, or 87% - an average increase of 17% over the five year
period.
In addition to the strong asset growth and spread improvement, our fee income
was also important to our strong earnings. Many of our business units
contributed to our success including our mortgage company, our trust business,
our retail investment area, our credit card operation, service charge income due
to adding significant new customers and fee income from our loan activities.
In addition to these ongoing operating functions, we had an unexpected, but
pleasant, tax refund of $405,000, after tax, booked during the first quarter of
the year at our McCook bank. Also, $916,000 of after tax gains were taken in
Global. At year end, we chose to make a $301,000 after tax donation to the NBC
Foundation. The net positive impact on earnings from these three events was
$1,020,000.
Now, let me comment on some of our operating units and on some of our newer
initiatives.
FIRST COMMERCE MORTGAGE
FCM had a record year with bottom line profits of $1,079,000 and new
servicing volume of $226 million, bringing servicing as of December 31, 1996 to
$1.038 billion. Doug Alford, President, and his capable staff run an efficient
company and provide a very important service to our bank customers, our many
correspondent bank customers, and the customers of FCM. We have been in this
business for ten years. Over time, we should be able to continue to grow this
business both in servicing and in profitability. This business is not only a
profit center on its own, but provides important revenue to each of our
affiliate banks which originate mortgages for FCM.
RETAIL BANKING
In the third quarter of 1996, we launched a new initiative designed to make
us more competitive in retail banking in future years. We selected Jo Kinsey to
run this operation for us. She has a wealth of banking experience, and the
enthusiasm and drive to accomplish her mission. Included in this retail thrust
will be new services for our customers including telephone bill paying, personal
computer banking, and a 24 hour Customer Call Center. Doing a better job for
the customer is our focus and our strong level of personal service to our
customers will not be lost in this new retail thrust. Investments of additional
resources of both people and technology will be needed to make this new approach
successful. A year from now we expect to see the beginning of more rapid growth
in our retail markets - and over the long run, we intend to be one of the best
retail banks in the country.
TECHNOLOGY
This past year we have paid for new or upgraded personal computers for the
entire Company to enable all of us to function in an upgraded Windows
environment. Although expensive, it is imperative that we be able to drive the
more powerful software programs to maintain excellence in customer service and
internal efficiency. In addition, substantial work was done in 1996 and will be
completed in 1997 to implement the major new products discussed under our retail
strategies including personal computer banking and telephone bill paying. Also
scheduled for completion in 1997 is the development of a data base marketing
system for use by both our retail banking and our credit card businesses.
None of this is moonshot stuff which could cause inordinate risk to the
Company. But, it will be important to develop just what we need at reasonable
costs. Brad Korell, President of National Bank of Commerce, keeps a watchful
eye on these projects to make certain these projects don't take on a life of
their own at excessive costs.
NBC CREDIT CARD DIVISION
NBC's credit card business is now comprised of two basic businesses; 1)
management of our proprietary card base (our customers exclusively) and 2)
management of our credit card joint venture with Cabela's which we call the
Cabela's LLC (Limited Liability Company).
On our proprietary card side, we have 78,000 active card customers and $81
million of credit card receivables as of December 31, 1996. This business over
the past four years has become extremely competitive with many large players
entering the market with attractive features associated with their cards to
attract customers. As this has occurred, our losses in this business have
increased and attrition has increased causing the business profitability to
decline. Our losses are lower than national averages, but have gone up. The
increased loan loss provision for FCB, up $3.3 million over 1995 to $6.8 million
is nearly all due to credit card and consumer loan charge offs.
New technology including a data base warehouse and better prediction tools
are seeming to be helpful. Profitability in this business, even with the
increased losses, remains very good and thus we are hopeful we can get the
losses stabilized or reduced, and then find some card offerings that will be
attractive to the market place. We have a new concept planned for rollout in
1997 which we are quite enthusiastic about.
Performance of our joint venture with Cabela's has been excellent. Our first
rollout took place in May of 1995. We ended 1996 with 66,000 active cards, had
$74 million of receivable volume and we achieved our earnings objectives while
being fully reserved. Losses in this portfolio are less than in our proprietary
business.
We continue to be very pleased with the quality of our partner and are
anticipating future growth in 1997 and beyond.
LOAN QUALITY
During the year our loan quality (without credit card) continued to be very
good. Non credit card charge offs were $1,518,000, only .14% of total loans. Our
troubled loan category (our "Watch List") actually declined to less than .6% of
total loans.
1996 was generally a good crop year for our farmers, and fat cattle prices
were at levels that enabled our cattle feeding customers to return to
profitability. All of this, as well as a strong regional and national economy,
strengthened our portfolio.
NBC TRUST DIVISION
Our Trust Division, led by Steve Caswell, has many highly skilled customer
service oriented people. The business increased revenues to $5.8 million in
1996, up 11% over the previous year and produced profits of almost $2 million
after all expenses and overhead allocations. Some of this success is due to a
higher level of managed assets due to excellent stock and bond market returns,
but we also have added new customers fleeing from some of our competitor banks -
customers looking for quality service from our trust experts. Our hats are off
to this wonderful group of professionals.
FIRST COMMERCE TECHNOLOGIES
In June of 1996, we hired Patric Jerge to manage our technology company.
Since his arrival we have been very pleased with the progress made at FCT.
Continued and new emphasis has been placed on customer service and quality. To
achieve these results, we have invested in additional people and additional
computer power. A new sales leader and a new leader of our software people have
also joined the team and have made good progress in our development objectives.
At this point, we have signed some important pieces of new business and
renewed nearly all existing bank contracts. This continues to be a complicated
and competitive business, but we like what we see and the potential for success,
if we continue to make progress, is substantial.
WESTERN NEBRASKA NATIONAL BANK
Western had a good year last year. Net income was $886,000 after goodwill
amortization of $267,000. We opened LPOs in Valentine, Mullen and Hyannis to
provide service locations to the ranching needs of the entire Sandhills area.
We strengthened the home loan origination and retail investment functions and
added some technical talent in our operations area. Our note case improved a
good deal due to good crops and better prices for our cattle feeders.
Our new headquarters building in North Platte will be completed this spring
and will add to our operating efficiencies and enable us to serve our customers
better. Our new business objectives have been largely successful and Mike
Jacobson, President, is the perfect person to continue to lead this drive for
more good new business. Added depreciation expense due to the new building and
continued amortization expense will require us to continue with our rapid growth
in order to cover this overhead.
FIRST COMMERCE INVESTORS
FCI, our investment company, had a very good year. They (10 people) have two
primary customers - The National Bank of Commerce Trust Division where they
manage the co-mingled funds and individual trust assets, and First Commerce
Bancshares where they help me manage the Global Fund. The Company is led by
James Stuart, III, Chairman and CEO, and H. Cameron Hinds, President and Chief
Investment Officer. Equity Fund C increased in value by 25%, putting that fund
performance in the top 12% of similar type funds.
Global achieved returns of approximately 17%, which was better than the
global indexes we measure ourselves against.
We plan to convert our co-mingled equity funds and our bond funds to mutual
funds in 1997 providing us with a larger market for our managed funds and making
our products more user friendly. We have a singular purpose at FCI: selecting
and buying stocks that produce excellent returns to our customers over a three
to five year timeframe. We are investment driven - good investment returns will
attract new business.
CORPORATE - GENERAL
We are pleased to see that our stock price (Class B) improved nicely in 1996
from $14.25 in January to $19.50 in December, an increase of 37%. We continue
to be surprised and disappointed over the spread between Class A and Class B
shares - a spread that should be minimal. Your Board in December increased the
cash dividend rate to 30 cents per year, beginning in March of 1997. This is
approximately a 17% dividend payout rate. As earnings improve, dividends will
keep pace.
We looked at a few acquisitions this past year and made none. Due to the
fact that we choose not to use our Class A voting stock when making
acquisitions, we are not allowed to use an accounting method called "pooling" in
our acquisitions. This makes the future earnings results of a high priced cash
acquisition generally look very disappointing, since all of the purchase price
in excess of fair value of net assets must be booked as goodwill, and written
off against earnings over 15 years. When excellent synergies exist, we will
look hard; otherwise, it is a lot more profitable to grow from within or to buy
our own stock at half the price of most acquisitions. Needless to say, we don't
agree with this accounting treatment.
We purchased 22,682 shares of FCB Class B stock during the year and will buy
more as the price is right. This investment of Company funds compares very
favorably to paying 2x book value or more for another bank and having to write
off half of it.
We have very little term debt - $18.5 million at December 31, 1996. We will
retire $2.5 million of this in 1997. This issue becomes callable in 1999. Our
modest leverage position adds excellent flexibility and stability to our
Company.
We currently have $4 million of FCB Commercial Paper outstanding which we
intend to use as a funding source for our subsidiary banks.
Last summer we completed our first "sale" of securitized credit card
receivables. In excess of fifty million dollars was sold, enabling us to
continue our asset growth when raising deposits to fund this growth becomes too
costly.
EXPENSES
Another area of ongoing importance to me is control of our expenses. Our
expense reduction program was quite successful this past year with costs being
reduced by $1 million. However, when you look at total non interest expenses,
the increases were substantial, up 14.8%, nearly $10 million. Accounting rules
require that we add up the similar expense categories such as equipment rental
and depreciation, salaries and benefits, etc. of each of our businesses that are
not necessarily similar, and it sometimes causes distortions. That is why I
like to point out in this letter the financial results of some specific
operating units and how they on a stand alone basis really performed, such as
the mortgage company and our credit card division.
Included in this other noninterest expense, for example, are increased BankCard
fees which were up $3.3 million, almost entirely due to costs incurred in the
Cabela's LLC, and which had fee income on the revenue side to offset this.
Another big number in the other expense category was an increase in minority
interest expense of $764,000, a large part being Cabela's share of the LLC
profit. On Page 43 of this report is a very detailed explanation of this entire
category of expenses if you care to study further.
We are watching and working on expenses. We also don't mind spending or
investing reasonable amounts of money to enable us to make more, or to improve
service levels, so we can keep what we have. This is called investing.
We are, however, geared for growth, as without growth, over the long run,
expenses such as heat, lights, telephones, technology and people costs, will eat
us up. Short term, expenses can be cut, but the impact on long term success of
a major "re-engineering" through expense slashing can be a disaster if you plan
to create long term success. The graphs to the right highlight the foregoing.
What clearly is important is balance which we believe we have. When we
compare ourselves to our peer group, our net non interest expense is much less
than the averages.
For the past few years, our asset growth has been excellent, and in 1996, due
to some degree having favorable interest rates, the results of the excellent
growth impacted the bottom line favorably. We need to be mindful that the
economy, other than the cattle markets, has been excellent. Just as with stock
markets, we all know things just aren't great all the time. We have had things
our way for some time now.
Our forecasts for this new year look pretty good. We budgeted for managed
loan growth of about 10%. I don't know where these loan increases are coming
from at this writing, but we do have good momentum, and we do have many good
people out knocking on doors, looking for good business. The technology advances
we are making are important, but at the same time, our continued commitment to
outstanding personal customer service will be unwavering and important to our
continued success. Brad Korell and I get many, many letters and people stop us
on the street to share with us their appreciation of the excellent service they
receive from our people. Our people are really good, and it keeps our customers
and their friends coming back for more. There are many wonderful service
success stories all across our organization. This is a large part of what we
are about and a major part of why we are winning.
We keep working on being better and finding new people or businesses to
serve. If you have any ideas where you think you can help us, drop me a note or
give me a call.
As always, we have lots of work to do. Many thanks for your support.
Sincerely,
James Stuart, Jr.
Chairman and CEO
INDEX TO FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS.............................10
CONSOLIDATED STATEMENTS OF INCOME.......................11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.........12
CONSOLIDATED STATEMENTS OF CASH FLOWS...................13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..............14
INDEPENDENT AUDITORS' REPORT............................26
SELECTED QUARTERLY FINANCIAL DATA.......................27
SELECTED FINANCIAL DATA.................................28
MANAGEMENT'S DISCUSSION AND ANALYSIS....................32
OFFICERS AND DIRECTORS..................................46
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------
1996 1995
----- ----
(Amounts In Thousands)
ASSETS
Cash and due from banks $ 131,309 $ 102,451
Federal funds sold 28,528 32,738
Cash and cash equivalents 159,837 135,189
Mortgages held for sale 16,293 25,574
Securities available for sale (cost of
$366,181,000 and $351,076,000) 379,849 365,494
Securities held to maturity (fair value of
$271,886,000 and $200,739,000) 270,012 200,682
Loans 1,121,239 1,017,367
Less allowance for loan losses 20,157 19,017
--------- ---------
Net loans 1,101,082 998,350
Accrued interest receivable 20,193 18,690
Premises and equipment 48,695 48,036
Other assets 32,051 23,560
---------- ----------
$2,028,012 $1,815,575
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 328,826 $ 277,679
Interest bearing 1,245,718 1,185,526
--------- ---------
1,574,544 1,463,205
Securities sold under agreement to
repurchase 134,212 92,726
Federal funds purchased and other
short-term borrowings 45,980 5,214
Accrued interest payable 7,650 7,530
Accrued expenses and other liabilities 15,255 11,360
Long-term debt 52,973 55,519
--------- ---------
Total liabilities 1,830,614 1,635,554
Commitments and contingencies
Stockholders' equity:
Common stock:
Class A voting, $.20 par value; authorized
10,000,000 shares; issued and
outstanding 2,606,336 shares; 521 521
Class B nonvoting, $.20 par value; authorized
40,000,000 shares; issued and outstanding
10,940,651 and 10,963,348 shares 2,188 2,193
Paid-in capital 21,628 21,665
Retained earnings 164,176 146,269
Net unrealized gains (losses) on
securities available for sale (net of tax) 8,885 9,373
------- -------
Total stockholders' equity 197,398 180,021
---------- ----------
$2,028,012 $1,815,575
========== ==========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
----- ---- ----
(Amounts In Thousands Except Per Share Data)
Interest income:
Loans $ 97,228 $ 85,494 $ 68,380
Securities:
Taxable 32,885 31,943 28,264
Nontaxable 1,483 1,610 1,510
Dividends 913 771 602
Mortgages held for sale 1,953 1,213 865
Federal funds sold 2,037 2,966 2,161
------- ------- ------
Total interest income 136,499 123,997 101,782
Interest expense:
Deposits 55,315 55,156 38,833
Short-term borrowings 7,341 4,835 3,195
Long-term debt 3,737 3,117 1,961
------- ------- ------
Total interest expense 66,393 63,108 43,989
------- ------- -------
Net interest income 70,106 60,889 57,793
Provision for loan losses 6,839 3,495 332
------- ------- -------
Net interest income after
provision for loan losses 63,267 57,394 57,461
Noninterest income:
Computer services 8,491 8,147 8,293
Credit card 10,591 4,965 4,289
Mortgage banking 4,868 3,571 2,997
Service charges on deposits 5,231 4,893 4,849
Other services charges and fees 6,217 5,293 5,007
Trust services 5,840 5,272 5,007
Gains on securities sales 1,672 581 182
Other income 1,120 1,128 739
------ ------- -------
Total noninterest income 44,030 33,850 31,363
------ ------ -------
Noninterest expense:
Salaries and employee benefits 35,808 33,101 29,647
Net occupancy expense 3,980 3,815 3,552
Equipment rentals, depreciation and
maintenance 5,523 4,770 4,900
Communications 4,159 3,647 3,215
Business development 3,990 2,649 2,624
Supplies 2,404 2,395 1,911
Fees and insurance 10,825 8,868 9,366
Other expenses 7,223 5,148 4,448
------ ------- -------
Total noninterest expense 73,912 64,393 59,663
------ ------ ------
Income before income taxes 33,385 26,851 29,161
Income tax provision 11,629 9,431 10,129
------ ------ ------
Net income $ 21,756 $ 17,420 $ 19,032
======= ====== ========
Weighted average shares outstanding 13,566 13,497 13,071
======= ====== ======
Net income per share $1.60 $1.29 $1.46
===== ===== =====
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET UNREALIZED
CLASS A CLASS B GAINS (LOSSES)
COMMON COMMON PAID-IN RETAINED TREASURY ON SECURITIES
STOCK STOCK CAPITAL EARNINGS STOCK AVAILABLE FOR SALE
------------ ------- ------- -------- -------- ------------------
(Amounts in Thousands)
Balance, January 1, 1994 $521 $2,085 $14,183 $116,699 $ - $ 3,805
Purchase of treasury stock - - - - (1,088) -
Issuance of Class B common stock
in bank acquisition, net of cost
of $87,000 - 65 3,829 - - -
Cash dividends ($.216 per share) - - - (2,823) - -
Change in net unrealized
gains (losses) on securities
available for sale, net of tax
effect of $3,744,000 - - - - - (6,954)
Net income - - - 19,032 - -
Balance, December 31, 1994 521 2,150 18,012 132,908 (1,088) (3,149)
Purchase of treasury stock - - - - (82) -
Retirement of treasury stock - (19) (154) (997) 1,170 -
Cash dividends ($.227 per share) - - - (3,062) - -
Issuance of Class B common
stock in bank acquisition,
net of cost of $35,000 - 62 3,807 - - -
Change in net unrealized
gains (losses) on securities
available for sale, net of
tax effect of $6,742,000 - - - - - 12,522
Net income - - - 17,420 - -
Balance, December 31, 1995 521 2,193 21,665 146,269 - 9,373
Purchase and retirement of stock - (5) (37) (321) - -
Cash dividends ($.26 per share) - - - (3,528) - -
Change in net unrealized
gains (losses) on securities
available for sale, net of
tax effect of $262,000 - - - - - (488)
Net income - - - 21,756 -
---- ------ ------- -------- ------------ --------
Balance, December 31, 1996 $521 $2,188 $21,628 $164,176 $ - $ 8,885
==== ====== ======= ======== ========== ======
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
(Amounts in Thousands)
Net income $ 21,756 $ 17,420 $ 19,032
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization 7,901 6,034 5,868
Provision for loan losses 6,839 3,495 332
Deferred income taxes (491) (81) 512
Gain on sales of mortgages and securities (1,445) (605) (17)
Changes in assets and liabilities:
Accrued interest receivable (1,503) (3,725) (1,097)
Accrued interest payable 120 1,623 1,541
Other assets (759) (3,581) 1,558
Accrued expenses and other liabilities 224 1,187 (973)
Purchase of mortgages held for sale (350,675) (216,875) (154,550)
Proceeds from sales of mortgages held for sale 359,803 196,128 174,760
Other (1,450) 2,871 (345)
-------- -------- --------
Total adjustments 18,564 (13,529) 27,589
-------- -------- --------
Net cash flows from operating activities 40,320 3,891 46,621
Cash flows from investing activities:
Proceeds from sale of securities held to maturity 502 6,015 21,038
Proceeds from maturities of securities held to maturity 123,744 91,751 131,443
Purchases of securities held to maturity (193,574) (33,659) (129,548)
Proceeds from sale of securities available for sale 8,913 18,706 76,264
Proceeds from maturities of securities available for sale 71,553 80,850 53,348
Purchases of securities available for sale (93,591) (165,555) (166,591)
Net increase in loans (165,571) (140,074) (59,341)
Securitization and sale of credit card loans 56,000 - -
Purchase of premises and equipment (6,229) (7,761) (3,368)
Cash and cash equivalents from bank acquisition,
net of cash expenses - 1,775 3,939
Other (4,484) (2,457) 562
--------- --------- --------
Net cash flows from investing activities (202,737) (150,409) (72,254)
Cash flows from financing activities:
Net increase in deposits 111,339 69,550 300
Change in short-term borrowings 82,252 24,808 (1,267)
Proceeds from long-term debt 10,000 24,269 10,000
Repayment of long-term debt (12,546) (2,000) (2,000)
Repurchase of common stock (363) (82) (1,088)
Cash dividends paid (3,528) (3,062) (2,823)
Other (89) (81) (97)
-------- -------- --------
Net cash flows from financing activities 187,065 113,402 3,025
-------- ------- --------
Net change in cash and cash equivalents 24,648 (33,116) (22,608)
Cash and cash equivalents at beginning of year 135,189 168,305 190,913
------- -------- --------
Cash and cash equivalents at end of year $159,837 $135,189 $168,305
======== ======== ========
Supplemental disclosure:
Interest paid $66,210 $61,422 $42,380
Income taxes paid 12,540 9,484 10,186
Common stock exchanged for acquisition of bank
net of cash and cash equivalents - 3,869 3,894
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Columnar amounts in footnotes are in thousands except per share amounts)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - First Commerce Bancshares, Inc. (the Company) is a multi-bank holding
company whose primary business is providing the normal banking functions of
trust, commercial, consumer, correspondent, and mortgage banking services
through its Nebraska based banks and affiliated organizations.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and all of its wholly-owned and majority-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation. Certain prior years' amounts have been
reclassified to conform to current year's classifications.
Assets held in agency or fiduciary capacities are not assets of the subsidiary
banks and accordingly, are not included in the accompanying financial
statements.
USE OF ESTIMATES -In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the balance sheet and income and expense for the period. Actual
results could differ significantly from those estimates. A material estimate
that is particularly susceptible to significant change relates to the adequacy
of the allowance for loan losses.
CASH AND CASH EQUIVALENTS - For purposes of the statements of cash flows, the
Company considers cash, due from banks, federal funds sold and certain
securities that are purchased and sold for one-day periods to be cash
equivalents.
MORTGAGES HELD FOR SALE - Mortgages held for sale are stated at the lower of
aggregate cost or market. Net unrealized losses are recognized through a
valuation allowance by charges to expense.
SECURITIES - Debt securities for which the Company has the positive intent and
ability to hold to maturity are classified as held to maturity, and are reported
at amortized cost. Securities that are acquired and held principally for the
purpose of selling them in the near term are classified as trading securities
and are reported at their fair values, with unrealized gains and losses included
in earnings. Debt and equity securities not classified as either held to
maturity or trading securities are classified as available for sale securities
and reported at fair value, with unrealized gains and losses reported, net of
tax, as a separate component of stockholders' equity. Realized gains and losses
on sales of investments are recognized on the specific identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
LOANS - Loans are stated at the principal amount outstanding, net of the
allowance for loan losses. Interest on loans is calculated by the interest
method on the daily outstanding principal balance. Accrual of interest is
discontinued on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful. Certain direct loan
costs and fees are deferred and recognized over the life of the loan on the
interest method. Annual bank card fees are recognized on a straight-line basis
over the period that cardholders may use the card.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established through
a provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. The allowance is an estimate of the amount that
management believes will be adequate to absorb possible losses based on prior
loan loss experience, the nature and volume of the loan portfolio, review of
specific problem loans and an evaluation of the overall portfolio quality under
current economic conditions. A change in the economy can quickly affect the
financial status of borrowers and loan quality. Such changes can require
significant adjustments in the allowance for loan losses on very short notice
and are possible in the future.
Impaired loans are measured based on either the present value of expected future
cash flows discounted at the loan's effective rate, the market price of the
loan, or, the method predominately used by the Company, the fair value of the
underlying collateral if the loan is collateral dependent. Specific reserves
are established for any impaired loan for which the recorded investment exceeds
the measured value of the loan.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the terms of the
respective leases or the useful lives of the improvements, whichever is shorter.
OTHER REAL ESTATE OWNED - Other real estate owned is carried at the lower of
fair value, minus estimated costs to sell, or the balance of the loan on the
property at the date of acquisition. Gains or losses from the sale of other
real estate owned or further reductions in the carrying value from a decline in
the property value are charged against operating expenses. The Company did not
have any other real estate owned at December 31, 1996 and 1995.
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE - The Company enters into sales of
securities under agreement to repurchase with customers of the subsidiary banks,
which provide for the repurchase of the same security. These agreements may be
open ended or of a specific term in length. Securities sold under agreement to
repurchase identical securities are collateralized by assets which are held in a
safekeeping agent account at the Federal Reserve.
LOAN SERVICING - Effective July 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage
Servicing Rights, an amendment to FASB Statement No. 65," on a prospective
basis. SFAS 122 provides that an institution that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and sells or
securitizes those loans with servicing rights retained should allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
Mortgage servicing rights should be amortized in proportion to and over the
period of estimated net servicing income and should be evaluated for impairment
based on their fair value. The impairment evaluation should stratify the
mortgage servicing rights based upon one or more of the predominant risk
characteristics of the underlying loans. The effect of adopting SFAS 122 was not
significant to the financial statements or results of operations.
The unamortized purchased servicing rights included in other assets were
$5,666,000 and $2,999,000 at
December 31, 1996 and 1995, respectively. The amount of mortgage loans serviced
for others approximated $1,038,021,000, $812,351,000 and $707,327,000 at
December 31, 1996, 1995, and 1994, respectively. As of December 31, 1996,
credit card loans of $56,000,000 were serviced for others.
As of December 31, 1996 and 1995, the fair value of the Company's capitalized
mortgage servicing rights (including mortgage servicing rights purchased) was
approximately $18.5 million and $11.0 million, respectively. There was no
valuation allowance for impairment relative to such rights. Fair value was
estimated by determining the present value of the estimated future cash flows
using discount rates commensurate with the risks involved. The predominant risk
characteristics which the Company uses to stratify mortgage servicing rights are
loan type, interest rate and origination date.
INCOME TAXES - The Company and its subsidiaries file a consolidated income tax
return. The amount of income taxes payable or refundable is recognized in the
current year and deferred tax assets and liabilities are reflected on items that
are recognized in different time periods for financial accounting and income tax
purposes using the then current enacted tax rates on the asset and liability
method.
NET INCOME PER SHARE - Net income per share is based on the weighted average
number of shares of common stock outstanding.
ACCOUNTING PRONOUNCEMENTS - In June 1996, Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was issued. The statement establishes
accounting standards of the transfers and servicing of financial assets and
extinguishments of liabilities. The Company does not expect the adoption of
this statement to be material to the consolidated financial statements.
B. RESTRICTED CASH BALANCES
The average compensating balances held at correspondent banks during 1996 and
1995 were $11,498,000 and $9,844,000 respectively. The subsidiary banks
maintain such compensating balances to offset charges for services rendered by
the correspondent banks. In addition, the Federal Reserve Bank required the
subsidiary banks to maintain average balances of $27,232,000 and $23,717,000 for
1996 and 1995, respectively, as a reserve requirement.
C. SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities and
their estimated fair values at December 31 were as follows.
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
SECURITIES AVAILABLE FOR SALE:
DECEMBER 31, 1996
- -----------------
U.S. government and agency securities $242,680 $ 4,160 $ (259) $246,581
Mortgage-backed securities 83,505 122 (1,215) 82,412
Marketable equity securities 39,996 11,343 (483) 50,856
-------- ------- --------- --------
Totals $366,181 $15,625 $(1,957) $379,849
DECEMBER 31, 1995
- ------------------
U.S. government and agency securities $210,976 $ 8,415 $ (86) $219,305
Mortgage-backed securities 109,345 223 (1,031) 108,537
Marketable equity securities 30,755 7,193 (296) 37,652
-------- ------- ---------- --------
Totals $351,076 $15,831 $(1,413) $365,494
SECURITIES HELD TO MATURITY:
DECEMBER 31, 1996
- -----------------
U.S. government and agency securities $118,840 $1,436 $(236) $120,040
States and political subdivision securities 28,747 346 (45) 29,048
Mortgage-backed securities 121,738 890 (506) 122,122
Other 687 2 (13) 676
-------- ------- ------- --------
Totals $270,012 $2,674 $(800) $271,886
DECEMBER 31, 1995
- -----------------
U.S. government and agency securities $ 39,188 $ 491 $ (89) $ 39,590
States and political subdivision securities 32,777 499 (90) 33,186
Mortgage-backed securities 126,752 209 (970) 125,991
Other 1,965 23 (16) 1,972
-------- ------- --------- --------
Totals $200,682 $1,222 $(1,165) $200,739
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
HELD TO MATURITY AVAILABLE FOR SALE
----------------------- ------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- -------- --------- --------
Due in one year or less $ 12,598 $ 12,646 $ 31,761 $ 31,990
Due after one year through five years 39,923 40,492 200,918 204,548
Due after five years through ten years 92,110 92,970 10,001 10,043
Due after ten years 3,643 3,656 - -
------- ------- -------- ---------
148,274 149,764 242,680 246,581
Mortgage-backed securities 121,738 122,122 83,505 82,412
------- -------- ------- -------
$270,012 $271,886 $326,185 $328,993
======== ======== ======== =======
The following table presents the securities portfolio sales activities for the years ended December 31, 1996, 1995 and 1994. All
sales of securities held to maturity were within three months of the securities' maturities, or were early calls of the securities.
1996 1995 1994
HELD AVAILABLE HELD AVAILABLE HELD AVAILABLE
TO FOR TO FOR TO FOR
MATURITY SALE MATURITY SALE MATURITY SALE
Proceeds from sales of securities $502 $8,913 $6,015 $18,706 $21,038 $76,264
Gross gains of sales of securities 2 1,821 20 1,069 73 943
Gross losses on sales of securities 0 (151) (6) (502) (30) (804)
Income taxes on securities' net gains 1 584 5 198 15 49
First Commerce Bancshares & Subsidiaries o 36
Securities with a carrying value of $438,547,000 at December 31, 1996, and $437,476,000 at December 31, 1995, were pledged to secure
obligations under repurchase agreements or to secure public or trust deposits in the normal course of business.
At December 31, 1996 and 1995, state and political subdivision securities with an amortized cost of $24,400,000 and $27,667,000,
respectively, and an estimated fair value of $24,549,000 and $27,854,000, respectively, were issued by State of Nebraska political
subdivisions.
D. LOANS
Loans at December 31 are summarized as follows:
1996 1995
---------- ---------
Real estate mortgage $ 332,913 $ 295,268
Consumer 271,906 263,320
Commercial and financial 245,873 201,910
Agricultural 130,071 126,414
Credit card 98,895 108,641
Real estate construction 41,581 21,814
---------- ----------
$1,121,239 $1,017,367
Although the loan portfolio is well diversified by industry, virtually all of
the Company's loans are to Nebraska-based organizations, except credit card
loans which are concentrated in the Midwest. The Nebraska economy is dependent
upon the general state of the agricultural economy. As of December 31, 1996 and
1995, there were $3,429,000 and $1,700,000, respectively, of nonaccruing loans.
The amount of restructured loans as of December 31, 1996 and 1995 was not
significant.
The Company's policy for requiring collateral and guarantees varies with the
creditworthiness of each borrower. The portfolio is generally secured by
accounts receivable, inventory, property, plant and equipment, income producing
commercial properties, marketable securities or interest-bearing time deposits.
Impaired loans were $2,595,000 and $2,472,000 at December 31, 1996 and 1995,
respectively. The total allowance for loan losses related to these loans was
$402,000 and $463,000 at December 31, 1996 and 1995, respectively. Interest
income on impaired loans of $194,000 and $192,000 was recognized for cash
payments received in 1996 and 1995, respectively. Average impaired loans for
1996 and 1995 were $2,627,000 and $1,844,000, respectively.
E. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
1996 1995 1994
------- ------- -------
Balance, January 1 $19,017 $17,190 $18,461
Provision for loan losses 6,839 3,495 332
Bank acquisition - 843 326
------ ------ ------
Total 25,856 21,528 19,119
Net charge-offs:
Loans charged-off 7,794 4,657 3,723
Less recoveries 2,095 2,146 1,794
------ ------ ------
Net loans charged-off 5,699 2,511 1,929
------- ------- -------
Balance, December 31 $20,157 $19,017 $17,190
======= ======= =======
F. PREMISES AND EQUIPMENT
Premises and equipment at December 31 consists of the following:
1996 1995
-------- ------
Land $ 7,308 $ 6,973
Buildings and leasehold improvements 57,086 53,450
Equipment and furnishings 32,449 34,420
-------- -------
96,843 94,843
Less accumulated depreciation 48,148 46,807
-------- -------
$48,695 $48,036
======= =======
The Company has certain obligations under noncancelable operating leases for
premises and equipment. Most of these leases have renewal or purchase options.
Rental expense on all leases for the years ended December 31, 1996, 1995 and
1994, was approximately $1,587,000, $1,352,000, and $1,361,000, respectively.
The approximate future minimum rental commitments under noncancelable leases are
as follows:
PREMISES EQUIPMENT TOTAL
--------- --------- -------
1997 $ 611 $888 $1,499
1998 461 231 692
1999 342 61 403
2000 267 48 315
2001 217 6 223
Thereafter 4,685 - 4,685
G. DEPOSIT MATURITIES
Maturities of time deposits at December 31, 1996 are as follows:
1997 $708,030
1998 95,083
1999 15,669
2000 4,841
2001 886
Thereafter 41
H. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Amounts and interest rates related to securities sold under agreement to
repurchase are as follows:
1996 1995
-------- ---------
Amount outstanding at year-end $134,212 $ 92,726
Average interest rate outstanding at year-end 4.7% 5.0%
Highest amount outstanding as of any
month-end during the year 146,151 101,912
Average amount outstanding during the year 125,639 85,384
Approximate average interest rate 4.7% 5.1%
I. LONG-TERM DEBT
Long-term debt at December 31 is as follows:
1996 1995
------- -------
Capital notes, 7.50% to 8.70%, due 1997 to 2002 $18,500 $21,000
Federal Home Loan Bank advances, due 1997 and 1998 34,269 34,269
Other 204 250
------ ------
$52,973 $55,519
======= =======
The capital notes were issued on June 1, 1992, in series pursuant to an
indenture dated May 1, 1992. Each series of capital notes is payable May 1.
Interest is payable semi-annually on May 1 and November 1. The capital notes
are subject to redemption at the option of the Company at any time on or after
May 1, 1999, at a redemption price equal to 100% of the principal amount thereof
together with the accrued interest to the redemption date. The indenture
provides that the Company will not create, assume, incur or suffer to exist any
mortgage or other liens upon the shares of capital stock of any significant bank
subsidiary (of which the National Bank of Commerce is the only one at present)
owned by the Company unless certain conditions are met. The indenture also
provides that the Company will not permit its debt to tangible equity ratio to
exceed 30%. The Company's debt to tangible equity ratio was 10% as of December
31, 1996.
The Federal Home Loan Bank (FHLB) advances of $34,269,000 were made to
subsidiary banks. These advances are due in 1997 and 1998. Interest is paid
monthly of which $10,000,000 bears interest based upon the national prime rate,
5.90% at December 31, 1996. The balance bears fixed interest rates of 5.71% to
6.15%. The advances are collateralized by a blanket pledge of mortgage loans and
certain investment securities.
Scheduled principal payments of long-term debt for the five years following
December 31, 1996 are:
1997 $26,807
1998 12,541
1999 2,545
2000 2,048
2001 2,032
J. INCOME TAXES
Consolidated income tax expense for the years ended December 31 consists of the
following:
1996 1995 1994
------- ------ ------
Current provision:
Federal $11,420 $8,857 $ 8,985
State 700 655 632
------ ----- ------
12,120 9,512 9,617
Deferred income taxes (491) (81) 512
------- ------ -------
Total consolidated income tax provision $11,629 $9,431 $10,129
======= ====== =======
The effective rate of total tax expense differs from the statutory federal tax
rate as follows:
1996 1995 1994
----- ----- -----
Tax at federal statutory rate 35% 35% 35%
Tax-exempt interest on obligations
of state and political subdivisions (2) (2) (2)
Other 2 2 2
---- ---- ----
Effective tax rate 35% 35% 35%
==== ==== ====
Significant items comprising the Company's net deferred tax asset as of December
31, 1996, 1995 and 1994 are as follows:
DEFERRED TAX ASSETS: 1996 1995 1994
---- ---- -----
Allowance for loan losses $6,929 $6,509 $5,912
Net unrealized gains and losses on
securities available for sale - - 1,696
Other 1,495 1,132 1,213
------ ----- -----
Total deferred tax assets 8,424 7,641 8,821
DEFERRED TAX LIABILITIES:
Net unrealized gains and losses on
securities available for sale 4,783 5,046 -
Premises and equipment 1,833 2,133 2,175
Other 920 328 255
----- ----- -----
Total deferred tax liabilities 7,536 7,507 2,430
------ ------ ------
Net deferred tax asset $ 888 $ 134 $6,391
======= ====== ======
K. ADVERTISING COSTS
The Company expenses costs of advertising, except for direct-response
advertising relating to its bankcard joint venture, which is capitalized and
amortized over its expected period of future benefits. Direct-response
advertising consists primarily of direct-response mailings and telemarketing
costs. The capitalized costs of the advertising are amortized over the five
year period following completion of the advertising campaign. At December 31,
1996 and 1995, $1,952,000 and $1,700,000, respectively, of advertising costs are
reported in other assets.
L. COMMITMENTS AND CONTINGENT LIABILITIES
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business to meet the financing needs of customers. These include commitments to
extend credit and standby letters of credit. These instruments involve, in
varying degrees, elements of credit, interest rate and liquidity risk in excess
of the amount recognized in the consolidated balance sheet. The extent of the
Company's involvement in various commitments or contingent liabilities is
expressed by the contract amount of such instruments.
Commitments to extend credit, excluding mortgage banking operations, amounted to
$360,310,000 and $341,073,000 (exclusive of $799,306,000 and $718,957,000 of
unused approved lines of credit related to credit card loan agreements) at
December 31, 1996 and 1995, respectively. These commitments are agreements to
lend to a customer as long as all conditions established in the contract are
fulfilled. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis in
conjunction with the normal lending function. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
upon management's credit evaluation of the customer. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing commercial properties, marketable securities and interest-
bearing time deposits.
The Company's commitments to extend credit in its mortgage banking operations
amounted to approximately $31,350,000, and $51,800,000 at December 31, 1996 and
1995, respectively. Credit policies in the Company's mortgage banking operations
are designed to satisfy the requirements of the secondary mortgage market.
These requirements, among others, include that the loans which are subject to
these commitments be secured by a first position in the underlying property and
meet certain maximum loan-to-value and insurance requirements.
Mandatory commitments to deliver residential mortgages are binding agreements to
sell mortgage loans to investors at fixed prices and expiration dates. The
Company could incur pair-off costs should it be unable to fulfill its
obligation, which could occur if an insufficient level of conforming closed
loans is available for delivery by the specified date. This exposure is less
than the contract amount of the commitment and is determined by the delivery
shortfall and the then current market interest rates. The Company monitors its
position relative to these commitments to deliver on a daily basis. The Company
had mandatory commitments to deliver residential mortgage loans totaling
approximately $38,425,000 and $54,105,000 as of December 31, 1996 and 1995,
respectively. The Company has an agreement to sell on a best efforts basis
$1,119,000 as of December 31, 1996.
Standby and commercial letters of credit are conditional commitments issued by
the Company guaranteeing the performance of a customer to a third party. These
guarantees primarily consist of performance assurances made on behalf of
customers who have a contractual commitment to produce or deliver goods or
services. Most guarantees are for one year or less. The risk to the Company
arises from its obligation to make payment in the event of the customers'
contractual default. The amount of collateral obtained, if deemed necessary by
the Company, is based upon management's credit evaluation of the customer. The
Company had $22,607,000 and $18,238,000 in letters of credit outstanding at
December 31, 1996 and 1995, respectively.
The Company is involved in various legal actions in the normal course of
business. Management is of the opinion that none of these legal actions will
result in losses material to the financial position of the Company.
M. RELATED PARTY TRANSACTIONS
As of December 31, 1996, the subsidiary banks had various loans outstanding to
related parties (executive officers, directors, loans guaranteed by directors
and companies employing a director of the Company and its significant
subsidiaries). The Company believes these loans have been made under comparable
terms and conditions as loans made to unrelated parties. An analysis of
aggregate loans to these related parties of the Company and its significant
subsidiaries for the year ended December 31, 1996 is shown below:
BEGINNING ENDING
BALANCE ADDITIONS PAYMENTS BALANCE
-------- --------- -------- -------
$33,026 $105,606 $115,373 $23,259
N. EMPLOYEE BENEFIT PLANS
The Company has two employee retirement plans. The Retirement Accumulation Plan
is a noncontributory defined contribution plan covering substantially all
employees with six months of service. Annual contributions are based upon
defined compensation of covered employees. Company cost for this plan was
$1,020,000 in 1996, $968,000 in 1995 and $953,000 in 1994.
The Profit Sharing and Thrift Plan is a contributory, defined contribution plan
covering substantially all employees with six months of service. Employee
contributions vary from 0 to 12% of compensation. The Company contribution,
subject to certain limitations, is based upon employee contributions and
profitability. Company cost for this plan was $1,289,000 in 1996, $1,009,000 in
1995 and $1,016,000 in 1994.
O. REGULATORY MATTERS
One of the principal sources of cash of the Company is dividends from its
subsidiary banks. The total dividends that can be declared by the subsidiary
banks without receiving prior approval from regulatory authorities are limited
to a bank's defined net income of that year combined with its retained defined
net income from the previous two years. For the calendar year 1997, the
subsidiary banks have retained defined net income from 1996 and 1995 of
approximately $18,147,000.
The Company and its subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. The
regulations require the Company to meet specific capital adequacy guidelines
that involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
As of December 31, 1996, 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 institutions'
categories. Management believes, as of December 31, 1996, that the Company and
its subsidiary banks meet all capital adequacy requirements to which they are
subject. The Company's and the National Bank of Commerce's (the Company's most
significant bank subsidiary) actual capital amounts and ratios are presented in
the following table:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ------ ------ -----
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $200,441 14.7% $108,954 8.0% N/A
National Bank of Commerce 99,860 12.3 65,170 8.0 $81,463 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 181,269 13.3 54,477 4.0 N/A
National Bank of Commerce 89,677 11.0 32,585 4.0 48,878 6.0
Tier I Capital (to Quarterly Average Assets):
Consolidated 181,269 9.4 77,167 4.0 N/A
National Bank of Commerce 89,677 8.0 45,006 4.0 56,258 5.0
AS OF DECEMBER 31, 1995:
Total Capital (to Risk Weighted Assets):
Consolidated $178,307 14.8% $96,236 8.0% N/A
National Bank of Commerce 90,309 12.5 57,994 8.0 $72,492 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 161,128 13.4 48,118 4.0 N/A
National Bank of Commerce 81,248 11.2 28,997 4.0 43,495 6.0
Tier I Capital (to Quarterly Average Assets):
Consolidated 161,128 9.2 70,379 4.0 N/A
National Bank of Commerce 81,248 8.0 40,621 4.0 50,776 5.0
P. CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS (Parent Company Only) DECEMBER 31,
-----------------
1996 1995
----- -----
ASSETS
Cash on deposit with subsidiaries $ 102 $ 56
Securities purchased under agreement to
resell to subsidiary bank 4,770 4,130
Short-term investments 463 1,375
------ --------
Cash and cash equivalents 5,335 5,561
Securities available for sale (cost of $36,849,000
and $29,704,000) 47,686 36,568
Investment in subsidiaries:
Equity in net assets of bank subsidiaries 147,703 142,059
Equity in net assets of nonbank subsidiaries 1,050 9,202
Excess cost over fair value of net assets 3,840 3,979
Premises and equipment 11,768 12,234
Other assets 7,796 3,477
-------- --------
$225,178 $213,080
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 5,171 $ 4,459
Short-term borrowings from non-bank subsidiaries - 7,350
Commercial paper outstanding 3,905 -
Long-term debt 18,704 21,250
-------- --------
Total liabilities 27,780 33,059
Stockholders' equity 197,398 180,021
-------- --------
$225,178 $213,080
======== ========
CONDENSED STATEMENTS OF INCOME (Parent Company Only)
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
----- ---- ----
Income:
Dividends from bank subsidiaries $14,186 $11,220 $11,055
Dividends from nonbank subsidiaries 150 300 1,200
Rent:
Subsidiaries 1,291 1,760 1,748
Other 1,678 1,162 1,152
Interest and dividend income 1,541 1,335 1,130
Other 1,219 415 259
------ ------ ------
20,065 16,192 16,544
Expenses:
Salaries and employee benefits 1,807 1,758 1,782
Interest 1,669 1,811 1,939
Interest paid to subsidiaries 204 554 222
Building expense 2,246 2,079 2,188
Other 1,945 1,850 1,703
----- ----- -----
7,871 8,052 7,834
----- ----- -----
Income before income tax benefit and equity
in undistributed earnings of subsidiaries 12,194 8,140 8,710
Income tax benefit 706 1,097 1,227
------ ------ -----
Income before equity in undistributed
earnings of subsidiaries 12,900 9,237 9,937
Equity in undistributed earnings of subsidiaries 8,856 8,183 9,095
------- ------- -------
Net income $21,756 $17,420 $19,032
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS (Parent Company Only)
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
Net income $21,756 $17,420 $19,032
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 864 728 751
Equity in undistributed earnings of subsidiaries (8,856) (8,183) (9,095)
Other (530) (681) 184
------- ------ -------
Total adjustments (8,522) (8,136) (8,160)
Net cash flows from operating activities 13,234 9,284 10,872
Cash flows from investing activities:
Proceeds from sales and maturities of securities
available for sale 8,915 12,065 12,181
Purchase of securities available for sale (14,277) (13,014) (22,529)
Purchase of premises and equipment (244) (1,597) (119)
Purchase of loans from subsidiary bank (4,980) - -
Cash and cash equivalents from nonbank
subsidiaries merger 245 - -
Other (587) (2,417) (89)
-------- ------- --------
Net cash flows from investing activities (10,928) (4,963) (10,556)
-------- -------- --------
Cash flows from financing activities:
Changes in short-term borrowings 3,905 450 6,900
Repayment of long-term debt (2,546) (2,000) (2,000)
Purchase of common stock (363) (82) (1,088)
Cash dividends paid (3,528) (3,062) (2,823)
------- ------- -------
Net cash flows from financing activities (2,532) (4,694) 989
------- ------- -------
Net change in cash and cash equivalents (226) (373) 1,305
Cash and cash equivalents at beginning of year 5,561 5,934 4,629
------- ------- -------
Cash and cash equivalents at end of year $ 5,335 $ 5,561 $ 5,934
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest $ 2,479 $1,842 $1,940
Income taxes 12,140 8,805 9,521
Common stock exchanged for acquisition of bank - 3,869 3,894
Debt exchanged for other assets - 250 -
Q. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures
about Fair Value of Financial Instruments," requires certain entities to
disclose the estimated fair value of its financial instruments. For the Company,
as with most financial institutions, most of its assets and its liabilities are
considered financial instruments as defined in SFAS 107. Many of the Company's
financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. It is also the Company's general practice and intent to hold most
of its financial instruments to maturity and not engage in trading or sales
activities. Therefore, significant estimations and present value calculations
were used by the Company for purposes of this disclosure. Changes in
assumptions or estimation methodologies may have a material effect on these
estimated fair values.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996 and 1995. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------ -------- --------
ASSETS:
Cash and cash equivalents $ 159,837$ 159,837 $135,189 $ 135,189
Mortgages held for sale 16,293 16,340 25,574 25,731
Securities available for sale 379,849 379,849 365,494 365,494
Securities held to maturity 270,012 271,886 200,682 200,739
Net loans 1,101,082 1,096,399 998,350 1,000,930
Other financial instruments 34,630 34,630 25,210 25,210
LIABILITIES:
Demand deposits with no stated maturities749,674 749,674 668,305 668,305
Time deposits 824,870 827,039 794,900 798,283
Federal funds purchased and
securities sold under agreement
to repurchase 134,212 134,212 92,726 92,726
Other short-term borrowings 45,980 45,980 5,214 5,214
Long-term debt 52,973 53,559 55,519 56,760
Other financial instruments 19,033 19,033 16,318 16,318
CASH AND CASH EQUIVALENTS. For cash and cash equivalents, the carrying amount is
considered a reasonable estimate of fair value.
MORTGAGES HELD FOR SALE. The estimated fair value of these instruments is based
upon current quoted prices for the instrument or similar instruments.
SECURITIES. The estimated fair value of securities is based on quoted market
prices, dealer quotes and prices obtained from independent pricing services.
LOANS. For those loans with floating interest rates, carrying value was used as
approximate fair value. For all other loans, the estimated fair value is based
on the discounted value of projected cash flows. When using the discounting
method, loans are gathered by homogeneous groups and discounted at a rate that
would be used for similar loans at December 31, 1996 and 1995. In addition, when
computing the estimated fair value for all loans, general reserves for loan
losses are subtracted from the calculated fair value for consideration of credit
issues.
DEPOSITS. The estimated fair value of deposits with no stated maturity, such as
noninterest bearing, savings, NOW and money market checking accounts, is the
amount payable on demand. The estimated fair value of time deposits is based on
the discounted value of projected cash flows. The discount rate is the market
rate currently offered for deposits with similar original maturities.
SHORT-TERM BORROWINGS. Due to the short-term nature of repricing and maturities
of these instruments, fair value is considered carrying value.
LONG-TERM DEBT. The estimated fair value of long-term debt is based on rates
currently believed to be available to the Company for debt with similar terms
and maturities.
OTHER FINANCIAL INSTRUMENTS. All other financial instruments of a material
nature, including both assets and liabilities shown above, fall into the
definition of short-term and fair value is estimated as carrying value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS. The estimated fair value of these
instruments such as loan commitments and standby letters of credit approximates
their off-balance sheet carrying value because of repricing ability and other
terms of the contracts.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
First Commerce Bancshares, Inc.
Lincoln, Nebraska
We have audited the accompanying consolidated balance sheets of First
Commerce Bancshares, Inc., and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of First Commerce Bancshares, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Lincoln, Nebraska
February 14, 1997
SELECTED QUARTERLY FINANCIAL DATA
(In Thousands Except Per Share Data)
FIRST SECOND THIRD FOURTH ANNUAL
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(Unaudited)
1996
Total interest income $32,997 $33,755 $34,514 $35,233 $136,499
Net interest income 16,686 17,457 17,845 18,118 70,106
Provision for loan losses 1,821 1,355 1,502 2,161 6,839
Noninterest income 11,173 10,816 10,611 11,430 44,030
Noninterest expense 17,555 17,484 18,814 20,059 73,912
Net income 5,727 6,059 5,225 4,745 21,756
Net income per share .42 .45 .39 .35 1.60
Common stock trading range *
Class A voting
high 24.00 29.50 29.50 29.50 29.50
low 20.00 22.00 26.50 25.00 20.00
Class B nonvoting
high 16.25 16.75 16.75 20.50 20.50
low 13.50 13.50 14.75 15.00 13.50
Dividends declared per share .065 .065 .065 .065 .26
1995
Total interest income $28,131 $31,286 $32,284 $32,296 $123,997
Net interest income 14,617 15,113 15,430 15,729 60,889
Provision for loan losses 696 686 700 1,413 3,495
Noninterest income 7,985 8,351 8,107 9,407 33,850
Noninterest expense 15,706 15,827 15,530 17,330 64,393
Net income 4,098 4,467 4,739 4,116 17,420
Net income per share .31 .33 .35 .30 1.29
Common stock trading range *
Class A voting
high 20.00 18.00 20.00 22.50 22.50
low 16.25 16.00 16.00 17.00 16.00
Class B nonvoting
high 14.00 13.00 14.00 16.25 16.25
low 10.50 10.75 11.00 12.00 10.50
Dividends declared per share .054 .054 .054 .065 .227
* The Company's common stock is traded in the over-the-counter market under the
NASDAQ symbol "FCBIA" for the Class A voting common stock and "FCBIB" for the
Class B nonvoting common stock. The market value ranges are based upon the high
and low trading prices per share for the calendar quarters indicated as released
by NASDAQ. As of December 31, 1996, the Company had 549 Class A shareholders of
record and 1,077 Class B shareholders of record.
SELECTED FINANCIAL DATA
Three-Year Average Balance Sheets / Yields and Rates
YEAR ENDED DECEMBER 31,
1996
------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
----------- ---------- -------
(Amounts in thousands)
ASSETS
Interest-earning assets:
Loans, including non-accrual loans $1,066,896 $ 97,228 9.11%
Taxable investment securities 517,083 32,885 6.36
Nontaxable investment securities (non-taxable basis)29,190 1,483 5.08
Federal funds sold 34,863 2,037 5.84
Mortgages held for sale 24,860 1,953 7.86
Equity securities 37,269 913 2.45
---------- ------- -----
Total interest-earning assets 1,710,161 136,499 7.98
Less allowance for loan losses (19,680)
Cash and due from banks 102,269
Premises and equipment 48,146
Other assets 46,467
----------
Total assets $1,887,363
==========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Interest-bearing demand $ 325,590 8,332 2.56%
Savings 84,039 2,334 2.78
Time 797,944 44,649 5.60
--------- ------ -----
Total interest-bearing deposits 1,207,573 55,315 4.58
Federal funds purchased and other
short-term borrowings 24,574 1,336 5.44
Securities sold under agreement to repurchase 128,109 6,005 4.69
Long-term debt 54,879 3,737 6.81
--------- ------ -----
Total interest-bearing liabilities 1,415,135 66,393 4.69
Noninterest bearing demand deposits 265,013
Other liabilities 20,786
---------
Total liabilities 1,700,934
Total stockholders' equity 186,429
----------
Total liabilities and stockholders' equity $1,887,363
==========
Net interest income $ 70,106
Net interest spread 3.29%
Net yield on interest-earning assets 4.10%
SELECTED FINANCIAL DATA
Three-Year Average Balance Sheets / Yields and Rates
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994
--------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- --------
(Amounts in thousands)
$ 917,742 $ 85,494 9.32%$ 797,369 $ 68,380 8.58%
512,193 31,943 6.24 486,918 28,264 5.80
31,788 1,610 5.06 29,980 1,510 5.04
47,134 2,966 6.29 50,866 2,161 4.25
12,533 1,213 9.68 9,435 865 9.17
29,639 771 2.60 22,197 602 2.71
--------- ------- ----- --------- ------- -----
1,551,029 123,997 7.99 1,396,765 101,782 7.29
(18,306) (17,988)
94,107 98,908
45,809 44,475
37,569 34,582
---------- ----------
$1,710,208 $1,556,742
========== ==========
$ 312,994 8,350 2.67%$ 333,987 8,401 2.52%
80,049 2,269 2.83 82,865 2,270 2.74
758,347 44,537 5.87 598,918 28,162 4.70
--------- ------ ---- --------- ------- ------
1,151,390 55,156 4.79 1,015,770 38,833 3.82
10,231 595 5.82 12,135 534 4.40
81,992 4,240 5.17 78,651 2,661 3.38
42,036 3,117 7.42 24,023 1,961 8.16
--------- ------ ---- --------- ----- ----
1,285,649 63,108 4.91 1,130,579 43,989 3.89
242,602 268,053
16,414 15,745
--------- ---------
1,544,665 1,414,377
165,543 142,365
---------- ---------
$1,710,208 $1,556,742
========== ==========
$ 60,889 $ 57,793
3.08% 3.40%
3.93% 4.14%
SELECTED FINANCIAL DATA
(In Thousands Except Per Share Data)
1996 1995 1994 1993
---------- ---------- --------- -----------
At December 31,
Assets $2,028,012 $1,815,575 $1,624,138 $1,572,298
Investments 649,861 566,176 537,797 520,176
Loans 1,121,239 1,017,367 850,292 777,695
Deposits 1,574,544 1,463,205 1,355,965 1,324,196
Long-term debt 52,973 55,519 33,000 25,000
Stockholders' equity 197,398 180,021 149,354 137,293
Year Ended December 31,
Net interest income $70,106 $60,889 $57,793 $57,727
Provision for loan losses 6,839 3,495 332 1,143
Total noninterest income 44,030 33,850 31,363 33,345
Total noninterest expenses 73,912 64,393 59,663 60,806
Net income 21,756 17,420 19,032 19,760
Per share data:
Net income $1.60 $ 1.29 $ 1.46 $ 1.52
Dividends .26 .227 .216 .20
Stockholders' equity before net unrealized gains
and losses on available for sale securities 13.92 12.58 11.49 10.24
Total stockholders' equity 14.57 13.27 11.26 10.53
Selected Ratios:
Rate of return on average:
Total assets 1.15% 1.02% 1.22% 1.33%
Stockholders' equity(1) 12.14 10.52 13.37 15.77
Average total stockholders' equity
to average total assets(1) 9.49 9.46 9.15 8.46
Common dividends payout ratio 16.21 17.58 14.83 13.19
Allowance for loan
losses to total loans 1.80 1.87 2.02 2.37
Nonaccrual and restructured
loans as a percentage of total loans .45 .29 .30 .34
Net charge-offs to
average total loans .53 .27 .24 .16
Capital Ratios:
Core capital (Tier I) (2) 13.31% 13.39% 14.78% 13.43%
Total risk based capital (3) 14.72 14.82 16.26 14.90
Leverage (4) 9.40 9.16 9.23 8.31
(1) Stockholders' equity before net unrealized gains and losses on securities available for sale.
(2) Stockholders' equity before net unrealized gains and losses on securities available for sale, plus minority interest, less
goodwill and deposit intangibles to risk-weighted assets (using 1996 requirements).
(3) Tier I capital plus allowance for loan losses (limited to 1.25% of risk-weighted assets) to risk-weighted assets (using 1996
requirements).
(4) Tier I capital to quarterly average assets less goodwill.
1992 1991 1990 1989 1988 1987
---------- ---------- ----------- ----------- ----------- ---------
$1,452,058 $1,309,613 $1,106,354 $1,019,288 $955,367 $946,037
495,784 384,951 375,624 354,865 400,485 439,213
674,352 631,713 538,056 489,537 423,333 384,887
1,196,111 1,123,728 938,881 864,011 788,962 781,307
26,500 11,725 10,583 10,757 12,956 14,907
116,335 99,702 95,576 88,578 83,008 75,134
$55,303 $47,547 $37,933 $34,648 $35,309 $34,456
3,152 3,810 1,770 1,630 2,146 6,800
33,767 27,722 24,293 22,378 20,048 18,230
57,304 52,239 44,896 40,930 39,698 37,186
19,150 12,980 10,672 10,025 9,669 6,482
$1.47 $ .93 $ .75 $ .69 $ .64 $ .43
.188 .136 .112 .102 .10 .061
8.93 7.65 6.78 6.13 5.52 4.97
8.93 7.65 6.78 6.13 5.52 4.97
1.41% 1.06% 1.02% 1.04% 1.03% .72%
17.69 12.84 11.49 11.75 12.08 8.94
7.96 8.23 8.88 8.82 8.56 8.03
12.79 14.25 15.05 14.76 15.60 14.29
2.74 2.68 2.74 2.94 3.37 3.40
.50 .73 .43 .85 .71 1.50
.25 .48 .37 .26 .19 1.11
12.70% 10.05% 11.16%
13.95 11.30 12.41
7.98 7.40 8.59
MANAGEMENT'S DISCUSSION AND ANALYSIS
CORPORATE RESULTS SUMMARY (Columnar amounts are in thousands)
The Company's net income during 1996 was $21,756,000 versus $17,420,000 in 1995
and $19,032,000 during 1994. On a per share basis this equates to $1.60, $1.29,
and $1.46 for 1996, 1995 and 1994, respectively. Additionally, year-end assets
reached $2,028,012,000, versus $1,815,575,000 in 1995. Average stockholders'
equity to average assets was approximately 9.5% for both 1996 and 1995. The
cash dividend was $0.26 per share versus $0.227 per share. In January 1997, the
Company raised its annualized dividend to 30 cents. This equates to a 15%
increase on a per share basis.
The $4.3 million or 25% increase in net income in 1996 from 1995 can be
primarily attributed to an increase in net interest income. The net yield on
interest earning assets increased from 3.93% in 1995 to 4.10% in 1996. This
resulted in a $9.2 million or 15% increase in net interest income. The
increase in net interest income was partially offset by a $3.3 million increase
in loan loss expense. Even though overall loan quality remains high in the
organization, significant growth in loans combined with a significant increase
in bank card charge-offs created the need to provide additional expense to keep
reserves at desired levels.
Year-end loans increased almost $104 million in 1996 from 1995, which is on top
of a $167 million increase during 1995. The $104 million increase does not
include $56 million of credit card loans which were securitized and sold during
the year. On a managed loan basis, loans increased $160 million during 1996.
Although average deposit growth was a respectable 5.6%, it did not keep up with
loan growth. Therefore, the Company utilized other non-traditional methods to
fund some of its loan growth. Besides the securitization of credit card loans
mentioned above, average securities sold under agreement to repurchase and other
short-term borrowings increased approximately $60 million from 1995.
EARNING ASSETS
Average earning assets in 1996 were $1.71 billion, a 10% increase over 1995
primarily caused by the loan growth referred to above. Average earning assets
were $1.55 billion in 1995, an 11% increase over 1994. Average loans were
$1,067 million, $918 million and $797 million in 1996, 1995 and 1994,
respectively, a 16.3%, 15.1% and 13.7% increase over each respective previous
year. Loan demand has been strong during the past three years as shown by these
increases in average loans. Loan demand was led by the real estate mortgage,
commercial and consumer markets. The increase in agricultural loans in 1995 can
primarily be attributed to the Western Bank acquisition. The increase in credit
card loans can be attributed to a new joint venture with Cabela's, a catalog
sales company, and the issuance of a new Cabela's co-branded credit card.
Average loans accounted for 62% of average earning assets during 1996 and 59% in
1995. Average investment securities were $584 million at December 31, 1996, a
$10 million increase over 1995. Investment securities accounted for 34% of
average earning assets during 1996 and 37% during 1995.
SECURITY PORTFOLIO
The Company's investment securities portfolio consists of high quality
securities with primarily short to medium maturities. The Company utilized
buying opportunities during the year to extend the average life of its
investment portfolio. As rates dropped in the latter part of the year, the
Company began buying higher yielding U. S. Government agencies with a 10 year
stated maturity, which are callable within two years. These securities are
presented on the following maturity schedule under the 5 through 10 year column,
but the Company expects that these securities will be called when they reach
their call date, absent significant movements in interest rates which are not
anticipated.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table presents the amortized cost of the securities portfolio by
type of security as of December 31, for the years indicated.
DECEMBER 31,
----------------------
1996 1995 1994
---- ---- ----
U.S. Treasury $172,534 $183,580 $226,075
U.S. Agency 188,986 66,584 -
State and municipal 28,747 32,777 29,676
Mortgage-backed securities 205,243 236,097 258,719
Corporate bonds - 1,000 999
Marketable equity securities 39,996 30,755 25,960
Other securities 687 965 1,326
------- ------- --------
$636,193 $551,758 $542,755
======== ======== =======
The following tables present the amortized cost of each investment category by
maturity range and the weighted average yield for each range (except for
mortgage-backed securities and marketable equity securities).
DECEMBER 31, 1996
-------------------------
AFTER 1 AFTER 5
UNDER THROUGH THROUGH AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
------- ------- --------- ------- -----
Securities held to maturity:
U.S. Treasury and Agency $ 5,809 $28,350 $84,681 $ - $118,840
State and municipal 6,634 11,387 7,338 3,388 28,747
Other securities 155 186 91 255 687
------- ------- ------- ------- ---------
$12,598 $39,923 $92,110 $3,643 $148,274
======= ======= ====== ====== ========
Weighted average yield to maturity:
U.S. Treasury and Agency 5.4% 6.7% 7.2% -% 7.0%
State and municipal (1) 5.0 5.0 5.3 5.4 5.1
Other securities 7.2 6.2 6.1 6.7 6.6
Securities available for sale:
U.S. Treasury and Agency $31,761 $200,918 $10,001 $ - $242,680
======= ======== ======= ====== ========
Weighted average yield to maturity:
U.S. Treasury and Agency 6.6% 6.9% 7.1% -% 6.9%
===== ==== ==== ==== ====
(1) Not based on taxable equivalents.
The Company owned $205 million in mortgage-backed securities at December 31,
1996. Yields in these securities can be reduced due to early prepayment. The
prepayment risk associated with mortgage-backed securities is monitored
continuously by updating the analytics concerning prepayment speeds. Bond
accounting and asset/liability reports are adjusted accordingly.
A large portion of the mortgage-backed securities are collateralized mortgage
obligations (CMO's) which are planned amortization class (PAC) bonds. Under the
terms of a PAC contract, if the collateral prepays faster or slower than the
defined range, the contract is suspended until the collateral prepayment speed
returns to the defined range.
In addition, high premium CMO's are avoided. The Company has not experienced
any significant adverse prepayment characteristics in the last two years.
MANAGEMENT'S DISCUSSION AND ANALYSIS
LOANS
As indicated previously, the Company experienced strong internal loan growth in
1996 and 1995, which for 1995 was assisted by the Western Bank acquisition and
the Cabela's joint venture. The following table presents the amount of loans by
categories and percentage of loans by categories as of December 31, for the year
indicated.
1996 1995 1994 1993 1992
---------- ---------- --------
Real estate mortgage $ 332,913 $ 295,268 $270,603 $236,202 $214,264
Consumer 271,906 263,320 228,332 187,021 173,920
Commercial and financial 245,873 201,910 166,682 169,466 124,942
Agricultural (except loans secured by
real estate; includes loans for household
and other personal expenditures) 130,071 126,414 87,758 87,338 72,346
Credit card 98,895 108,641 80,135 81,932 73,480
Real estate construction 41,581 21,814 16,782 15,736 15,400
--------- --------- --------
1,121,239 1,017,367 850,292 777,695 674,352
Less allowance for loan losses (20,157) (19,017) (17,190) (18,461) (18,470)
---------- --------- --------
$1,101,082 $ 998,350 $833,102 $759,234 $655,882
========== ========== =========
The above table does not include $56 million of credit card loans which were
securitized and sold during 1996. Managed loans at December 31, 1996 were
$1,177,239,000. Total managed credit card loans were $154,895,000 as of the
same date.
DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
As a percentage of total loans:
Real estate mortgage 29.7% 29.0% 31.8% 30.4% 31.8%
Consumer 24.3 25.9 26.9 24.1 25.7
Commercial and financial 21.9 19.9 19.6 21.8 18.5
Agricultural 11.6 12.4 10.3 11.2 10.7
Credit card 8.8 10.7 9.4 10.5 11.0
Real estate construction 3.7 2.1 2.0 2.0 2.3
----- ----- ----- ------ ------
100.0% 100.0% 100.0% 100.0% 100.0%
The Company has no foreign loans.
The following table presents loan maturities by ranges (except for real estate
mortgage loans, credit card loans and consumer loans). Also included for loans
due after one year are the amounts which have predetermined interest rates and
floating or adjustable rates.
AS OF DECEMBER 31, 1996
-----------------------------------------------
DUE AFTER 1 YEAR
--------------------
PRE- FLOATING
DUE DUE 1 DUE DETERMINED OR
WITHIN THROUGH AFTER INTEREST ADJUSTABLE
1 YEAR 5 YEARS 5 YEARS RATE RATE
------ ------- -------- -------- ----------
Commercial and financial $146,347 $75,553 $23,973 $61,747 $37,779
Agricultural 96,317 29,620 4,134 25,950 7,804
Real estate construction 18,001 5,736 17,844 3,731 19,849
MANAGEMENT'S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Overall risk management is an essential part of the operation of any financial
services organization. There are three primary risk exposures: credit quality,
interest rate sensitivity and liquidity risk. Credit quality risk involves the
risk of either not collecting interest when it is due or not receiving the
principal balance of the loan or investment when it matures or is due. Interest
rate sensitivity risk is the risk of reduced net interest income because of
differences in the repricing characteristics of assets and liabilities, as well
as the change in the market value of assets and liabilities as interest rates
fluctuate. Liquidity risk is the risk that the Company will not be able to fund
its obligations.
ASSET QUALITY
The quality of the Company's loan portfolio remains strong. A key measure of
the effectiveness of credit risk management is the percentage of the loan
portfolio that is classified as nonperforming. Nonperforming loans include
nonaccrual loans, loans 90 days or more past due and restructured loans. The
Company's nonperforming loans totaled $5.9 million at December 31, 1996, as
compared to $3.6 million at the end of 1995. As a percentage of total loans,
nonperforming loans represent only .5% and .4% of the loan portfolio at December
31, 1996 and 1995, respectively.
Virtually all of the Company's loans, except credit card loans which are
concentrated in the Midwest, are to Nebraska-based organizations. The Nebraska
economy is somewhat dependent upon the general state of the agricultural
economy, which has been good for the past several years. The agricultural
economy is dependent upon commodity prices, weather and input costs. Crop
yields were generally excellent throughout the region during 1996. The prices
for crops were generally higher than normal. Most of the Company's cattle
feeders lost money throughout the year due to high corn prices, but had returned
to profitable operations by the end of 1996. Loans to cattle feeders represent
the Company's largest loan segment concentration, but the Company has been
applying selective underwriting criteria to this segment. The Company's direct
agricultural loans grew almost $40 million during 1995, primarily due to the
acquisition of Western Bank in Bridgeport and Alliance. In addition to the
Company's direct agricultural loans, many of its nonagricultural borrowers are
affected by the overall agricultural economy in Nebraska. The Company's
borrowers are to a lesser extent affected by the overall national economy. Farm
income represents 7% of Nebraska's personal income.
Another area of loan concentration of the Company is in real estate related
activities. This is normally one of the first areas affected by a downturn in
the economy, but the Company applies selective underwriting in evaluating
projects. Another area of significant risk in a downturn of the economy would be
in the consumer and credit card areas. Credit card loans traditionally have a
higher ratio of net charge-offs to loans outstanding than other areas in the
loan portfolio. The credit card portfolio experienced $4.2 million in charge-
offs during 1996, up from $2.6 million in 1995 and $2.3 million in 1994. The
national trend in credit card charge-offs also increased during 1996. The
Company's credit card charge-offs followed this trend, and are comparable to
industry averages. Consumer loan charge-offs increased in 1996 and 1995 from
abnormally low levels in the prior years. Consumer loan charge-offs are below
industry levels.
Management reviews loans regularly, placing them on nonaccrual when it considers
the collection of principal or interest questionable. Thereafter, income is not
recorded unless it is received in cash or until such time as the borrower
demonstrates an ability to pay interest and principal. During 1996, 1995 and
1994, the Company received approximately $457,000, $458,000 and $186,000 in
interest on loans which had been previously charged-off or placed on nonaccrual.
This interest was included in interest and fees on loans in the consolidated
statements of income. As a general rule, credit card and consumer loans are
evaluated for charge-off once the delinquency period reaches 90 days.
Management classifies loans as impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Impaired loans
are measured predominantly using the fair value of the underlying collateral, if
the impaired loan is collateral dependent. Impaired loans were $2,595,000 and
$2,472,000 at December 31, 1996 and 1995, respectively. The allowance for loan
losses related to these loans was $402,000 and $463,000 at December 31, 1996 and
1995, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management is not aware of any significant risks in the current commercial loan
portfolio due to concentrations within any particular industry other than those
previously discussed. Loans classified as commercial could be affected by
downturns in the real estate, agricultural and consumer economies due to being
directly or indirectly related to these areas.
Management believes that it carries adequate, even reasonably conservative, loan
loss reserves. However, such reserves are estimates and a change in the economy
can quickly affect the financial status of borrowers and loan quality. Such
changes can require significant adjustments in the loan loss reserve on very
short notice and are possible in the future.
The following table presents the amount of nonperforming loans for the periods
indicated:
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
1. Nonaccrual, Past Due and
Restructured Loans
(a) Loans accounted for on
a nonaccrual basis $3,429 $1,700 $1,150 $1,315 $1,944
(b) Accruing loans which are
contractually past due 90 days
or more as to principal or
interest payments 846 690 384 432 782
(c) Loans not included above which
are "troubled debt restructurings" 1,597 1,256 1,377 1,342 1,449
i.Gross interest income that would
have been recorded in the period
then ended if the loans listed in
categories (a) and (c) had been
current in accordance with
their original terms 628 350 285 305 405
ii.Amount of interest income on
loans listed in categories (a) and (c)
that was included in net income
for the period. 395 155 153 140 198
2. Potential Problem Loans(1) 6,660 7,953 6,265 6,162 8,058
3. Foreign Outstandings - - - - -
4. Loan Concentrations - -
(1)Balances shown are loans in which the primary source of repayment may not be
sufficient to meet the present terms of the loan. The Company believes it has
sufficient security collateral to support the current loan balance.
MANAGEMENT'S DISCUSSION AND ANALYSIS
PROVISION FOR LOAN LOSSES
The Company maintains an allowance for loan losses at a level considered by
management to be adequate to provide for the risk of possible loan losses. The
amount of the provision charged to operating expense is determined on the basis
of several factors, including reviews of individual loans, past due and
nonaccruing loans outstanding, the level of the allowance for losses in relation
to loans, actual loss experience, appraisals of the loan portfolio conducted by
the Company's internal audit staff and by Federal bank examiners, and
management's estimate of the impact of the current and future economic
conditions. The Company expensed $6,839,000, $3,495,000 and $332,000 for
estimated loan losses in 1996, 1995 and 1994, respectively.
Average loans increased $120.4 million or 15.1% during 1995 from 1994 and
increased another $149.2 million or 16.3% during 1996. Net charge-offs were
$5.7 million, $2.5 million and $1.9 million during 1996, 1995 and 1994,
respectively. The increase in net charge-offs over the past three years is
primarily in credit card charge-offs, although the Company's charge-off ratios
remain comparable to national averages. Consumer loan charge-offs have also
increased which can be primarily attributed to higher levels of consumer
bankruptcies. In 1996, Nebraska bankruptcy filings rose by over 40%.
Management feels the overall credit quality of the Company's loan portfolio
remains good. The increase in loan loss expense during 1996 and 1995 is
primarily due to the increase in charge-offs, combined with the significant
growth in loans in order to keep the loan loss reserve at desired levels. The
loan loss reserve as a percentage of loans was 1.80%, 1.87% and 2.02% at
December 31, 1996, 1995 and 1994, respectively.
The following table presents an analysis of loan loss experience.
1996 1995 1994 1993 1992
---------- -------- --------- -------- --------
Average loans and leases
for the year $1,066,896 $917,742 $797,369 $701,305 $649,167
========== ========= ======== ========= ========
Reserve for loan losses:
Balance, beginning of year $19,017 $17,190 $18,461 $18,470 $16,912
Provision charged to expense 6,839 3,495 332 1,143 3,152
Bank acquisitions - 843 326 - -
Loans charged off:
Real estate construction - - - (332) (300)
Real estate mortgage (43) (66) (27) (102) (70)
Agricultural (73) (98) (120) (142) (101)
Commercial and financial (734) (70) (64) (135) (279)
Consumer (2,117) (1,168) (631) (502) (1,048)
Credit card (4,827) (3,255) (2,881) (1,913) (1,579)
Loan recoveries:
Real estate construction - - - 632 -
Real estate mortgage 282 185 245 41 196
Agricultural 77 186 176 223 64
Commercial and financial 193 438 397 340 665
Consumer 897 636 431 370 481
Credit card 646 701 545 368 377
------- ------- ------- ------- -------
Net loans charged off (5,699) (2,511) (1,929) (1,152) (1,594)
------- -------- ------- ------- -------
Balance, end of year $20,157 $19,017 $17,190 $18,461 $18,470
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans .53% .27% .24% .16% .25%
MANAGEMENT'S DISCUSSION AND ANALYSIS
This table presents an allocation for loan losses by loan categories; however,
the breakdown is based on a number of qualitative factors, and the amounts as
such are not necessarily indicative of actual future charge-offs in any
particular category.
1996 1995 1994 1993 1992
------- ------ ------ ------- --------
Real estate construction $ 628 $ 419 $ 331 $ 221 $ 121
Real estate mortgage 2,493 2,902 2,927 2,476 2,073
Agricultural 3,169 3,941 2,658 2,468 1,501
Commercial and financial 4,896 3,781 3,887 4,790 4,931
Consumer 3,302 3,152 2,472 2,162 1,791
Credit card 5,398 4,623 3,511 2,712 1,638
Unallocated 271 199 1,404 3,632 6,415
------- ------- ------- ------- --------
$20,157 $19,017 $17,190 $18,461 $18,470
INTEREST RATE RISK
The Company's principal objective for interest rate risk management is to
control exposure of net interest income to risks associated with interest rate
movements. The Company trys to limit this exposure by matching the maturities
of its assets and liabilities, along with the use of floating rate assets which
will move with interest rate movements.
Interest rate risk is measured and reported to each of the Company's subsidiary
banks' Asset and Liability Management Committees (ALCO) through the use of
traditional gap analysis which measures the difference between assets and
liabilities that reprice in a given time period, simulation modeling which
produces projections of net interest income under various interest rate
scenarios and balance sheet strategies, and valuation modeling which measures
the sensitivity of various components to the balance sheet under various rate
scenarios. Significant assumptions include rate sensitivities, prepayment
risks, and the timing of changes in prime and deposit rates compared with
changes in money market rates.
Below is a table showing the Company's interest rate-sensitive assets (excluding
assets on nonaccrual and overdrafts) and liabilities for various time periods in
which they either mature or are repriceable (in thousands):
1 TO 91 TO 181 TO 1 TO 5 OVER
90 DAYS 180 DAYS 360 DAYS YEARS 5 YEARS TOTAL
--------- ---------- --------- ------- -------- -----------
Assets:
Investments $ 68,524 $ 23,375 $ 41,233 $375,083 $141,646 $ 649,861
Loans 490,961 66,070 98,983 422,728 37,651 1,116,393
Mortgages held for sale 16,293 - - - - 16,293
Federal funds sold 28,528 - - - - 28,528
-------- -------- -------- -------- --------- ---------
604,306 89,445 140,216 797,811 179,297 1,811,075
Liabilities:
Interest-bearing
demand deposits 34,626 - 76,587 223,151 - 334,364
Savings deposits - - - 86,804 - 86,804
Time deposits 254,628 169,531 283,871 116,479 41 824,550
Short-term
borrowings 180,192 - - - - 180,192
Long-term debt 23,769 3,038 - 19,166 7,000 52,973
------- ------- -------- ------- ----- ---------
493,215 172,569 360,458 445,600 7,041 1,478,883
--------- --------- ---------- ---------- -------- ---------
Repricing gap $111,091 $(83,124) $(220,242) $352,211 $172,256 $ 332,192
======== ========= ========== ======== ======== =========
Cumulative repricing gap $111,091 $27,967 $(192,275) $159,936 $332,192 $ 332,192
GAP as a % of earning assets 6.1% 1.5% (10.6)% 8.8% 18.3% 18.3%
This table estimates the repricing maturities of the Company's interest
sensitive assets and liabilities based upon the company's interest rate-
sensitive assets and liabilities, based upon the Company's assessment of the
repricing characteristics of contractual and non-contractual instruments. Non-
contractual deposit liabilities are allocated among the various maturity ranges.
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary business is ownership of banks. The assets of any
commercial bank are primarily funded through the use of borrowings in the form
of demand and time deposits, negotiable certificates of deposit, and short-term
funds. The Banks have demonstrated the ability to acquire short-term funds when
needed and rely primarily upon negotiable certificates of deposit, brokered
certificates of deposit, federal funds acquired from correspondent banks,
securities sold under agreement to repurchase, and borrowed funds from the
Federal Home Loan Bank. These sources should remain accessible as long as the
Banks offer competitive rates. In addition, the Company has utilized the
securitization of credit card receivables to provide liquidity and fund the
receivable growth in the Cabela's LLC credit cards.
The Company relies primarily on the Banks for its source of cash needs. The cash
flow from the Banks to the Company comes in the form of dividends, tax benefits
and rental payments. Total dividends that can be declared by the subsidiary
banks without receiving prior approval from regulatory authorities are limited
to each Bank's defined net income of that year combined with its retained
defined net income from the previous two years subject to minimum regulatory
capital requirements. For the calendar year 1997, the Banks have retained
defined net income from the previous two years of approximately $18.1 million.
The parent company holds approximately $53.0 million in cash, short-term
investments and marketable securities as of December 31, 1996. The Company has
the ability to issue commercial paper which could be used to provide liquidity
to subsidiary banks. The Company has issued $4 million in commercial paper as of
December 31, 1996. Long-term debt at December 31, 1996 includes $18.5 million
of capital notes which have a payment of $2.5 million due in 1997 and $34.3
million of FHLB borrowings (at subsidiary banks) which have $24.3 million
principal due in 1997.
The Company's risk-based capital ratios, which take into account the different
credit risks among banking organizations' assets, have remained strong over the
past three years. Tier 1 and total risk-based capital ratios were 13.3% and
14.7%, respectively, at December 31, 1996. These ratios are down slightly from
the 13.4% and the 14.8%, respectively, at December 31, 1995, and the 14.8% and
the 16.3%, respectively, at December 31, 1994, due to the significant loan
growth the Company incurred during 1996 and 1995. Loans typically carry a
higher risk rating than other earning assets. In accordance with the regulatory
guidelines, unrealized gains and losses on the available for sale securities
portfolio are excluded from the risk-based capital calculations.
The Company's leverage ratio, the ratio of Tier 1 capital to total quarterly
average assets, was 9.4% at December 31, 1996 and 9.2% at December 31, 1995.
The Federal Deposit Insurance Corporation typically defines a bank to be "well
capitalized" if it maintains a Tier 1 capital ratio of a least 6.0%, a total
risk-based capital ratio of at least 10.0% and a leverage ratio of at least
5.0%. It is the Company's intention to maintain sufficient capital in each of
its subsidiary banks to permit them to maintain a "well-capitalized"
designation. All of the Company's bank subsidiaries met the "well-capitalized"
designation at December 31, 1996.
LEVERAGE RATIOS
These ratios measure the extent to which the Company has been financed by long-
term debt (before net unrealized gains and losses on securities available for
sale).
1996 1995 1994
Long-term debt to long-term debt plus equity 21.9% 24.5% 17.8%
Total long-term debt to equity 28.1 32.5 21.6
Long-term debt to equity (parent only) 9.9 12.4 15.1
FUNDING SOURCES
Average deposits were $1.47 billion in 1996 as compared to $1.39 billion during
1995 as compared to $1.28 billion in 1994, a 5.7% and 8.6% increase,
respectively. Average interest-bearing deposits increased from $1,016 million
in 1994 to $1,151 million in 1995, to $1,208 million in 1996, a 13.3% and 4.9%
increase, respectively. Noninterest-bearing demand deposits decreased $25.4
million or 9.5% in 1995 from 1994 but increased 9.2% or $22.4 million in 1996.
The increase or decrease in noninterest-bearing demand deposits can be primarily
attributed to the fluctuation in short-term interest rates. The Company's
largest subsidiary bank, the National Bank of Commerce, provides many services
to nonaffiliated banks which are paid for by maintaining balances in the
National Bank of Commerce. As interest rates increase or decrease, the National
Bank of Commerce requires the nonaffiliated banks to maintain higher or lower
balances to pay for the services being provided. If interest rates rise the
amount of deposits required to be maintained will go down. If interest rates
decrease, then the amount of deposits required to be maintained will increase.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Average time deposits increased 5.2% during 1996 as compared to 1995, while
interest-bearing demand and savings deposits increased 4.2%. The Company uses
time deposits of $100,000 or more as a significant funding source. The
following table presents time deposits of $100,000 or more by time remaining
until maturity.
AS OF DECEMBER 31, 1996
-------------------------------------------------
OVER 3 OVER 6
3 MONTHS THROUGH THROUGH OVER
OR LESS 6 MONTHS 12 MONTHS 12 MONTHS TOTAL
-------- -------- --------- ---------- --------
$111,917 $60,474 $44,418 $12,832 $229,641
During 1996, the Company used a funding source it has not previously used
before, securitization and sale of credit card loans. On July 18, 1996 the
Company completed the establishment of the National Bank of Commerce Master
Credit Card Trust (trust). The initial pooling and servicing agreement will
allow the National Bank of Commerce (Bank) to sell up to $100,000,000 of credit
card receivables to the trust. As these loan receivables are securitized, the
Company's on-balance sheet funding needs are reduced by the amount of loans
securitized. As of December 31, 1996, the Company had sold $56 million of
credit card receivables to the trust.
The securitization involved the sale of a group of credit card receivables.
These credit card receivables arise from accounts whose ownership is retained by
the Company. In addition to selling the existing receivables, rights to new
receivables, including most income generated by and payments made from these
accounts, were sold. Certificates representing undivided interests in the trust
were issued. The Investor Certificates are sold by the trust to investors who
are financing the purchase through the issuance of commercial paper. Interest
is paid to the Investor Certificate holders during the life of the transaction.
The Seller Certificate is retained by the Company. The Company continues to
service the accounts and receives a servicing fee for doing so.
During the revolving period, which is 36 months on the first series issued by
the Company, no principal payments are made to the Investor Certificate holders.
Payments received on the accounts are used to pay interest to the Investor
Certificate holders and to purchase new receivables generated by the accounts,
so that the principal dollar amount of the Investor Certificate remains
unchanged. Once the revolving period begins, principal payments will be
allocated for distribution to the Investor Certificate holders according to the
terms of the transaction. As principal payments are allocated to the Investor
Certificate holders, the Company's credit card receivables will increase by the
amount of the principal allocation.
Distribution of principal to the Investor Certificate holders may begin sooner
if the average annualized yield (generally this includes interest income,
interchange income, and other fees) for three consecutive months falls below a
base rate (generally equal to the sum of the certificate rate payable to
investors and contractual servicing fees) or other certain events occur. For
the three month period ended December 31, 1996, the average annualized yield
exceeded the base minimum yield by approximately 14.5%. This yield is
calculated on a cash basis.
The securitization did not have a material impact on earnings reported for the
Company.
EARNINGS PERFORMANCE
The Company's net income was $21,756,000, up 25% or $4,336,000 from 1995. The
Company's net income for 1995 was $17,420,000, down $1,612,000 from 1994's net
income of $19,032,000. The increase in net income in 1996 from 1995 can be
primarily attributed to an increase in net interest income. The net yield on
interest earning assets increased from 3.93% in 1995 to 4.10% in 1996. This
resulted in a $9.2 million or 15% increase in net interest income. The
increase in net interest income was partially offset by a $3.3 million increase
in loan loss expense. Even though overall loan quality remains high in the
organization, significant growth in loans combined with a significant increase
in bank card charge-offs created the need to provide additional expense to keep
reserves at desired levels.
The decline in income in 1995 was due to an increase in loan loss expense of
over $3 million in order to keep reserves at desired levels given the loan
growth experienced by the Company. Increases in noninterest expenses offset
increases in net interest income.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
Net interest income, the principal source of earnings, is the difference between
the interest income generated by earning assets and the total cost of the
liabilities obtained to fund the earning assets. Net interest income in 1996
was $70.1 million as compared to $60.9 million and $57.8 million in the prior
two years.
The Company's net yield on interest-earning assets (net interest income as a
percent of average earning assets) decreased from 4.14% in 1994 to 3.93% in 1995
but recovered to 4.10% in 1996. A flat yield curve and stiff competition for
deposits contributed to the decline in spreads and the net yield on earning
assets in 1995. The Company's growth in earning assets forced it to run deposit
specials at rates higher than it would normally pay on deposits with comparable
length maturities. These specials were run early in the year and by the end of
1995 most of these specials had matured with the deposits retained at more
normal rates. This resulted in the increase in the net yield on earning assets
to 4.10% in 1996. However, in both years, the increase in volume created by the
loan growth previously discussed was the predominant factor in the increase in
net interest income.
The following tables attribute changes in net interest income either to changes
in average balances or to changes in average rates for earning assets and
interest-bearing liabilities. The change in interest due jointly to volume and
rate has been allocated to volume and rate in proportion to the relationship of
the absolute dollar amount of change in each.
1996/95 1995/94
------------------------------ --------------------------------------
AMOUNTS AMOUNTS
ATTRIBUTABLE ATTRIBUTABLE
TO CHANGES IN TO CHANGES IN
---------------------- ------------------------
TOTAL TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
-------- --------- -------- -------- -------- -------
Interest and fees on loans $13,628 $(1,894) $11,734 $10,890 $6,224 $17,114
Interest on taxable
investment securities 307 635 942 1,513 2,166 3,679
Interest on state
and municipal obligations (131) 5 (126) 92 8 100
Equity securities 189 (47) 142 192 (23) 169
Interest on mortgages held for sale 994 (254) 740 (169) 974 805
Interest on short-term investments (730) (200) (930) 298 50 348
------ ------- ------- ------- ------ -------
Total interest income 14,257 (1,755) 12,502 12,816 9,399 22,215
Interest on deposits:
Interest-bearing demand 329 (347) (18) (544) 493 (51)
Savings deposits 111 (46) 65 (78) 77 (1)
Other time deposits 2,268 (2,156) 112 8,461 7,914 16,375
Interest on federal funds purchased 782 (41) 741 (93) 154 61
Interest on short-term borrowings 2,194 (429) 1,765 117 1,462 1,579
Interest on long-term debt 891 (271) 620 1,350 (194) 1,156
----- ------- ----- ------ ------ ------
Total interest expense 6,575 (3,290) 3,285 9,213 9,906 19,119
------- -------- ------- ------- ------ -------
Net interest income $ 7,682 $ 1,535 $ 9,217 $ 3,603 $ (507) $ 3,096
Nonaccruing loans have been included in average total loans. Loan fees on new
loans have been included in interest income, but the amounts of such fees are
not deemed material to total interest income. Tax-exempt interest is not on a
tax-equivalent basis.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NONINTEREST INCOME
Noninterest income continues to be a significant source of revenues. Management
has stressed the importance of growth of noninterest income to enhance the
Company's profitability. As a percentage of net revenues (net interest income
plus noninterest income), noninterest income was 39%, 36%, and 35% during 1996,
1995 and 1994, respectively. The following table shows the breakdown of
noninterest income and the percentage change for 1996, 1995 and 1994.
PERCENT INCREASE
(DECREASE)
-----------------
1996 1995 1994 1996/95 1995/94
----- ---- ---- ------- --------
Computer services $ 8,491 $8,147 $ 8,293 4.2% (1.8)%
Credit card 10,591 4,965 4,289 113.3 15.8
Mortgage banking 4,868 3,571 2,997 36.3 19.2
Service charges on deposits 5,231 4,893 4,849 6.9 .9
Other service charges and fees 6,217 5,293 5,007 17.5 5.7
Trust services 5,840 5,272 5,007 10.8 5.3
Gains on securities sales 1,672 581 182 187.8 219.2
Other income 1,120 1,128 739 (.7) 52.6
------- ------- -------
Total noninterest income $44,030 $33,850 $31,363 30.1 7.9
The increase in noninterest income in 1996 from 1995 can be primarily attributed
to an increase in activity. Credit card income increased $5,626,000 due to an
increase in merchant discount income, combined with an increase in interchange
income from the joint venture initiated in 1995 with a large catalog sales
organization to issue a co-branded credit card to its customer base. Mortgage
banking revenues increased due to an increase in servicing income, origination
fees and underwriting fee income, all due to an increase in activity. The
increase in other service charges and fees can be primarily related to a volume
increase in discount brokerage sales which resulted in an increase in fee income
and fee income from sales of bonds to correspondent banks. Trust services
income increased due to an increase in activity and managed assets. Gains on
securities sales are attributable to sales of equity securities out of the
Company's Global fund. Included in other income is interest on an income tax
refund.
The increase in noninterest income in 1995 from 1994 can be primarily attributed
to an increase in activity and rates charged. Credit card income increased
$676,000 primarily due to an increase in merchant discount income. As discussed
previously, during 1995 the Company joined in a joint venture with a large
catalog sales organization to issue a co-branded credit card to its customer
base. During the year the Company issued almost 75,000 cards from this activity
which caused an increase in bank card fee income. During the year the Company's
mortgage banking subsidiary adopted SFAS 122. The Company estimates this caused
an increase in pre-tax profits of approximately $550,000. The increase in other
income can be attributed to a $371,000 settlement from a class action lawsuit
related to a loss on bonds in 1990.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NONINTEREST EXPENSE
The emphasis on growth in fee-based services income requires significant
investments in staff, training and technology. The following table shows the
breakdown of noninterest expense and the percentage change for 1996, 1995 and
1994.
PERCENT INCREASE
(DECREASE)
-----------------
1996 1995 1994 1996/95 1995/94
----- ---- ---- ------- -------
Salaries and employee benefits $35,808 $33,101 $29,647 8.2% 11.7%
Net occupancy expense 3,980 3,815 3,552 4.3 7.4
Equipment expense 5,523 4,770 4,900 15.8 (2.7)
Fees and insurance 10,825 8,868 9,366 22.1 (5.3)
Communications 4,159 3,647 3,215 14.0 13.4
Supplies 2,404 2,395 1,911 .4 25.3
Business development 3,990 2,649 2,624 50.6 1.0
Other expenses 7,223 5,148 4,448 40.3 15.7
------- ------- -------
Total noninterest expense $73,912 $64,393 $59,663 14.8 7.9
Efficiency ratio * 64.8% 68.0% 66.9%
Average number of full-time
equivalent employees 1,035 1,015 966
Personnel expense per
employee (in dollars) $34,597 $32,612 $30,690
* Computed as noninterest expense divided by the sum of net interest income and
noninterest income.
Noninterest expenses were $73.9 million in 1996 as compared to $64.4 million in
1995. Salaries and employee benefits increased $2.7 million or 8.2% due
primarily to increases in the level of pay, combined with an increase in the
number of employees. The increase in equipment expense was due primarily to a
write-down taken during the year on computer equipment which will have to be
upgraded during 1997 to handle software upgrades. Fees and insurance increased
primarily due to an increase in bankcard processing fees. The increase in
bankcard processing fees of $3.3 million was partially offset by a decrease in
FDIC fees of $1.5 million. Communications expense increased 14% due to First
Commerce Technologies currently processing for several Florida banks, combined
with an increase in postage costs related to the Cabela's joint-venture started
in 1995. Business development costs increased over $1.3 million. A
contribution to the NBC Foundation during 1996 accounted for $463,000 of this
increase. Bankcard advertising costs in both the National Bank of Commerce and
the Cabela's joint-venture accounted for the balance of the increase. The
increase in other expenses is due primarily to an increase in amortization costs
related to purchased mortgage service costs of $790,000, an increase in travel
costs of $200,000 and an increase in minority interest expense because of the
Cabela's joint-venture of $764,000.
Noninterest expenses were $64.4 million in 1995 versus $59.7 million in 1994.
The increase in salary costs is due to an increase in the number of employees
and normal year-to-year increases in the levels of pay. The increase in the
number of employees can be primarily attributed to the Western Bank acquisition
and the Cabela's joint venture which required the Company to increase its
bankcard staff to service this increase in bankcard activity. The increase in
communications is due to a general increase in telephone and courier expenses
due to normal business expansion and price inflation. The decrease in equipment
expense is due primarily to the State of Nebraska L.B. 775 agreement which
refunds sales tax based on qualified investment property purchased by the
Company. These refunds impact equipment expense through a reduction in basis and
subsequent lowering of depreciation expense. Fees and insurance expenses
included bankcard processing fees of $3.8 million in 1995, up from $3.1 million
in 1994 and $2.9 million in 1993. The increase in bankcard processing fees is
primarily due to the Cabela's joint venture initiated in 1995. The increase in
bankcard processing fees was offset by decreases in FDIC assessments
due to a decrease in the amount assessed per $100 of deposits from 23 cents to
4.4 cents in May 1995. The decrease in FDIC expense in 1995 from 1994 was $1.3
million. Supplies increased primarily due to the Company implementing check
imaging on statements during the year and the related up front costs associated
with this change, combined with a significant increase in paper costs during
1995. The increase in occupancy expense can be attributed to the Western Bank
acquisition and the NBC Superior Street branch being open for a full year.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAXES
The provision for income taxes was $11,629,000 in 1996, $9,431,000 in 1995 and
$10,129,000 in 1994. The changes from year to year can be primarily attributed
to the increase or decrease in income before income taxes. The income tax
provision for 1996 was reduced by a $238,000 income tax refund from prior years.
IMPACT OF INFLATION
The assets and liabilities of a financial institution are primarily monetary in
nature. As such, future changes in prices do not affect the obligations to pay
or receive fixed and determinable amounts of money. During periods of
inflation, monetary assets lose value in terms of purchasing power while
monetary liabilities have corresponding purchasing power gains. Since banks
generally have an excess of monetary assets over monetary liabilities, inflation
will, in theory, cause a loss of purchasing power in the value of shareholders'
equity. However, the concept of purchasing power is not an adequate indicator
of the effect of inflation on banks because it does not take into account
changes in interest rates, which are a more important determinant of bank
earnings. Other sections of the Management's Discussion and Analysis discuss
how the Company monitors the effect of changing interest rates on the Company's
earnings.
Noninterest related expenses are also influenced by the current rate of
inflation since they represent the Company's purchase of goods and services from
others. It is difficult to assess the true effect of inflation on the Company.
The Company believes, however, that based on past history, it has and will
continue to react to minimize any adverse effects of inflation.
MANAGEMENT'S DISCUSSION AND ANALYSIS
TRENDS AND UNCERTAINTIES
ECONOMY. The projected outlook for the Nebraska economy over the next couple of
years is for growth in employment (1.8% growth), personal income (6.5% annual
growth), and retail sales (6.4% growth). Construction activity has been solid,
while retail sales growth has been favorable. The manufacturing base in the
state continues to operate at expanding levels. Motor vehicle and farm
equipment sales have been strong. The state's fiscal position appears to be
favorable from the standpoint of the amount of excess tax receipts being
received over budgeted expenditures. The U. S. economy should realize moderate
growth as the Federal Reserve Board attempts to maintain balance between growth
and inflation.
The results of the 1996 Nebraska farm sector have been favorable. Crop prices
were much higher relative to last year, and crop yields were good. Cattle
feeders realized improved profitability in the latter part of the year, while
ranch operations have been reflecting losses (reduced cow inventories should
improve future prospects). Agricultural real estate values have risen, but ranch
land values may come under some pressure. Personal bankruptcy filings have
increased significantly (up 40% in Nebraska during 1996) during the past few
months due to overextended credit.
ENVIRONMENTAL. Many environmental issues are being discussed on the national
and local level. In Nebraska, water is used to irrigate nearly six million acres
of semi-arid cropland. The state is now discussing issues relating to domestic,
agricultural, and environmental uses of water. Legislation has been implemented
to recognize the inter-relationship between ground and surface water.
Discussions and regulations have also focused on water quality and preserving
wildlife habitat. These discussions may ultimately have an impact on current
agricultural practices.
EXPANSION ACTIVITIES. The Company is making efforts to expand activities and to
grow in order to increase net income. The Company has the capacity to expand
its computer processing business and continues to pursue and obtain additional
customers. The Company has obtained additional data processing business from
Florida banks, and the acquisition of additional data processing centers is
possible. The Company has actively attempted to increase its mortgage banking
and mortgage servicing business and is considering possible geographic
expansion. The Company may also attempt to acquire servicing from other
servicing companies in the future. The Western Nebraska National Bank will open
a new main bank facility in North Platte in April, 1997, two other banking
subsidiaries are expanding existing facilities and the National Bank of Commerce
will be opening a new branch facility. The National Bank of Commerce and
Cabela's, a catalog sales company, created a joint company in 1995 for the
purpose of issuing a "co-branded" credit card. This joint company has been
successful in obtaining 66,000 active accounts from Cabela's clients and will
continue to solicit new cardholders. The Company expects to make further
acquisitions in the future although there are no identified opportunities at
this time. In 1996, subsidiary banks opened four loan/deposit production
offices, and four additional offices are planned in 1997 (including two outside
of Nebraska). These offices are attracting new customers and allowing the
Company to expand geographically.
REGULATORY. During 1992, the FDIC (Federal Deposit Insurance Corporation)
implemented a new risk-based assessment system where each insured depository
institution pays an assessment rate based on the combination of its capital and
supervisory condition. The FDIC Board intends to review the rate schedules
every six months to ensure that the assigned rates are consistent with economic
conditions and allow the funds to maintain the statutory-mandated 1.25 percent
reserve ratio. All of the Company's subsidiary banks presently meet the
conditions required under the new system to pay the lowest possible rate. The
banking industry has been assessed a portion of the FICO bond debt service
costs. The plethora of recent bank regulations has resulted in the employment
of greater company resources to ensure regulatory compliance. Risk-based
capital guidelines established by regulatory agencies set minimum capital
standards based on the level of risk associated with a financial institution's
assets. As of December 31, 1996, the Company and all of its bank subsidiaries
exceed the minimum capital requirements as mandated by regulatory agencies (See
Footnote O).
STOCK REPURCHASE PROGRAM. During 1994, the Board of Directors announced its
intentions of purchasing shares of its common stock when appropriate and at a
price management believes advantageous to the Company. During 1996, the Company
acquired 22,682 shares of its Class B stock at an average price of $16.00.
SENIOR OFFICERS
* JAMES STUART JR.
Chairman and Chief Executive Officer
* STUART BARTRUFF
Executive Vice President and Secretary
* BRAD KORELL
Executive Vice President
* MARK HANSEN
Senior Vice President
THOMAS L. ALEXANDER
Senior Vice President, Human Resources
JOAN CROMWELL
Senior Vice President and Senior Auditor
MARY GERDES
Senior Vice President and Loan Services Manager
DONALD D. KINLEY
Vice President and Treasurer
KAREN KUHN
Vice President, Marketing
* Executive Officer
DIRECTORS
David Calhoun Kenneth W. Staab
Chairman and Chief Staab Restaurant
Executive Officer Management
Jacob North Printing
James Stuart
Connie Lapaseotes Chairman, Stuart
Lapaseotes, Ltd. Management Co.
Cattle Feeding, Managing of Outdoor
Ranching and Farming Advertising Companies
John G. Lowe, III James Stuart, Jr.
Owner, Lowe Investment Chairman and Chief
Co., Investment Firm Executive Officer
First Commerce
Bancshares, Inc.
Jack Osborne
President, Industrial Scott Stuart
Irrigation Services Managing Partner
KJS Partnership, Outdoor Advertising
Richard C. Schmoker
Attorney and Partner, Advisory Director:
Faegre and Benson Harold Wimmer
SUBSIDIARY SENIOR OFFICERS
Brad Korell, President
National Bank of Commerce
Lincoln, Nebraska
PATRIC J. JERGE, President
First Commerce Technologies
Lincoln, Nebraska
DOUGLAS G. ALFORD, President
First Commerce Mortgage Company
Lincoln, Nebraska
ROBERT MORRIS, President
and Chief Executive Officer
City National Bank
Hastings, Nebraska
LARRY L. JEPSON, Chairman
and Chief Executive Officer
JOHN CANNON, President
First National Bank
Kearney, Nebraska
RICK HARBAUGH, President
and Chief Executive Officer
The Overland National Bank
Grand Island, Nebraska
KENNETH W. FOSTER, Chairman
MARK JEPSON, President
and Chief Executive Officer
First National Bank
McCook, Nebraska
MICHAEL B. JACOBSON, President
and Chief Executive Officer
Western Nebraska National Bank
North Platte - Alliance - Bridgeport, Nebraska
ALLAN MCCLURE, President
and Chief Executive Officer
First National Bank
West Point, Nebraska
JAMES STUART, III, Chairman
and Chief Executive Officer
H. CAMERON HINDS, President
First Commerce Investors
Lincoln, Nebraska
CORPORATE FACTS
CORPORATE OFFICE:
NBC Center
1248 O Street
Lincoln, NE 68508
Telephone: (402) 434-4110
Fax: (402) 434-4181
E-mail Address: fcbi@navix.net
Website: www.fcbi.com
TRANSFER AGENT:
Chemical Mellon Shareholder Services
Mellon Bank, N.A.
P. O. Box 444
Pittsburgh, PA 15230
Telephone: (412) 236-8173
STOCK:
The Company's common stock is traded
on the over-the-counter market. Quotations
are furnished by NASDAQ Symbol FCBIA
and FCBIB.
FORM 10-K AVAILABLE:
A copy of the Company's Annual Report on
Form 10-K for the year ended December 31,
1996, as filed with the Securities and
Exchange Commission may be obtained
without charge by any shareholder requesting
it in writing. Please direct your request
to Donald Kinley, Vice President and
Treasurer, at the Corporate office.
ANNUAL SHAREHOLDERS MEETING:
April 15, 1997
Country Club of Lincoln
Lincoln, Nebraska
DIVIDEND REINVESTMENT PLAN:
The Company offers a dividend reinvestment
plan as a convenient method of investing cash
dividends paid and to make optional cash
contributions in additional shares of Class B
non-voting stock. For information on enrolling,
contact the plan administrator at the following
address:
ATTN.: Dividend Reinvestment
Plan Administration
Mellon Bank, N.A.
P.O. Box 750
Pittsburgh, PA 15230
First Commerce Bancshares & Subsidiaries o 125