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, retail
deposit services 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 Cairo, Hyannis, Mullen, Snyder, Valentine and Wood River,
Nebraska; Burlington, Colorado; and Goodland, Kansas.
FINANCIAL HIGHLIGHTS (IN THOUSANDS EXCEPT PER SHARE DATA)
PERCENT
AT DECEMBER 31, 1997 1996 CHANGE
------- - -------- --------
Assets $2,251,100 $2,028,012 11.0%
Investments 699,625 649,861 7.7
Loans 1,236,443 1,121,239 10.3
Deposits 1,649,494 1,574,544 4.8
Stockholders' equity 232,580 197,398 17.8
Per share data:
Stockholders' equity before
net unrealized gains
on securities available for sale 15.57 13.92 11.9
Total stockholders' equity 17.19 14.57 18.0
Closing bid price
Class A 29.00 26.50 9.4
Class B 32.50 19.50 66.7
PERCENT PERCENT
YEAR ENDED DECEMBER 31, 1997 CHANGE 1996 CHANGE 1995
------ -------- ------ ------- ------
Net interest income $76,586 9.2% $70,106 15.1% $60,889
Provision for loan losses 8,297 21.3 6,839 95.7 3,495
Noninterest income 53,839 22.3 44,030 30.1 33,850
Noninterest expense 81,103 9.7 73,912 14.8 64,393
Net income 26,597 22.3 21,756 24.9 17,420
Return on average equity before
net unrealized gains (losses) on
securities available
for sale 13.28% 12.14% 10.52%
Per share data:
Basic net income $1.96 $1.60 $1.29
Dividends .30 .26 .227
Marketable equities (cost $51,698 $39,996 $30,755
Marketable equities
(fair value) 82,394 50,856 37,652
Dear Stockholders,
Our Company had another excellent year of financial and operational progress.
Net income for the year 1997 was $26.6 million, up 22.1% over the $21.8 million
earned in 1996. On a per share basis, earnings were $1.96 versus $1.60 in 1996,
up 22%. Total assets increased 11% to $2.25 billion and loans increased 10% to
$1.24 billion. Also, the Global Fund increased in value by $12.7 million and
one of our venture investments increased from $429,000 in cost to a market value
of $17 million at year end 1997. Results such as these are enviable. They
reflect a continuing pattern of our own success in an industry and an economic
environment which has enjoyed a strong seven years.
FCB Earnings Per Share
1992 $1.47
1993 1.52
1994 1.46
1995 1.29
1996 1.60
1997 1.96
As in past annual letters, the remainder of this report will discuss in detail
the progress, or lack thereof, of many of our operating units. I should point
out that as our company continues to grow, in size and complexity, it is
difficult to review each of our business units. Probable cause for a business
unit not being discussed in this report is likely due to the fact that they are
performing admirably, under strong leadership. Unfortunately, this letter does
not allow me to comment on each of our excellent leaders and employees. A
standing ovation is in order for most that work for this Company.
Corporate Earnings
As mentioned earlier, FCB achieved very strong earnings of $26.6 million, up 22%
over 1996. These good results are generally due to nearly every part of our
business working very well (with the exception of First Commerce Technologies,
which I will discuss later). Our basic banking business, which continues to
produce the largest share of bottom line results, produced excellent profits due
to good loan growth and minimal credit losses. Our Global Fund achieved strong
investment returns of 21.6% and $4.7 million in profits were taken from the sale
of securities. We also had a very positive result from one of our venture
investments (Transcrypt International) which was offered to the public via an
I.P.O. which at December 31, 1997, was worth $17 million. In addition, fee
income for FCB was very strong across the board, uniquely so in our trust and
brokerage business.
With the increasing and diverse income sources in our organization due to the
varied businesses we are in, it is sometimes confusing to understand how we are
really performing on a fair "apples to apples" comparison. In an attempt to
clarify this, I would like to focus for a moment on what I call our "normalized"
earnings, as this is a reasonable way to judge the performance of our basic
business over consistent time periods. During 1997, securities gains from our
Global Fund were $4.7 million, $3.1 million more than the previous year. In
future years, it is probable that in addition to Global gains, we will also have
gains from the sale of our venture capital portfolio which will also impact our
bottom line. In addition, occasionally we take bond profits which I do not call
a "normal" part of our bottom line.
I wish to not cause any misunderstanding here, for profits are good, no matter
if they result from our normal banking business, from Global gains, or from
successful venture capital investment sales. But, a "normalized" earnings
figure is important as it allows us, and you, to see how well we are doing in
our "core" business activities. This new measurement tool will not enable a
"unique profit" to mask the basic ongoing performance of our Company. The
results of this "normalizing" process are scheduled below, followed by a graph
for the three years 1995, 1996, and 1997.
FCB NORMALIZED EARNINGS SCHEDULE
1995 1996 1997
------ ------- ------
Net income $17,420 $21,756 $26,597
Less global gains
net of tax 332 1,063 3,067
Less venture capital
gains (losses) 76 (116) -
Less securities gains
net of tax 46 24 94
------- ------ ------
Normalized earnings $16,966 $20,785 $23,436
As you can see, "normalized earnings" for 1997 were $23.4 million, up 12.8% over
the 1996 year, and 1996 "normalized earnings" were $20.8 million, up 22.5% over
1995. This new performance measurement will be referred to from time to time in
future reports and press releases.
Loan Growth
Loan volume at year-end 1997 was $1.2 billion, up 10% over the previous year.
Over the past five years, loan volume has increased at an average growth rate of
16.7%. We continue to encourage all lending sectors to grow as rapidly as
possible without negatively impacting credit quality as we have adequate
management and capital to accommodate strong growth. This past year, our growth
was enhanced by the excellent growth of our co-branded credit card product,
which increased our "managed outstandings" year over year by $23 million.
FCB Managed Loans
1992 674
1993 778
1994 850
1995 1,017
1996 1,177
1997 1,311
Loan growth in the past few years has been excellent due to a strong economy,
good execution of marketing plans by our bankers, and to some degree a positive
short term competitive environment. Future accelerated loan growth will be more
difficult to achieve as competition has heightened considerably, and today's low
interest rates provide many of our commercial real estate and ag borrowers
opportunities to refinance current loans with low fixed rates from insurance
companies or government agencies. We work hard at growing our note case as we
know that good loan growth is vital to our continued bottom line improvement.
Loan Quality
As we know, equally important to good bottom line results from loan growth, is
the maintenance of solid credit quality. We have a strong, ingrained credit
culture in our Company that has a bias toward minimal loan losses. During the
past year (excluding credit card losses), our organization had $986,000 of
actual loan charge offs net of collections, and over the past five years our net
losses (excluding credit card) have also been minimal.
FCB Net Charge-offs
Excluding Credit Cards
1993 -393
1994 -407
1995 -43
1996 1,518
1997 985
FCB Net Losses as a Percent of Loans Excluding Credit Cards
1993 -.06%
1994 -.05%
1995 0.00%
1996 .14%
1997 .09%
Industry averages would generally be double our loss level. This excellent
result reflects favorably on our strong national and regional economy and also
the quality of our credit granting system and the skill of our lenders and
managers.
Credit Card
The National Bank of Commerce (our lead bank with $1.3 billion in assets) has
one of the most operationally efficient credit card businesses in the country.
We have 63,500 active accounts with volume of $84 million. Two years ago we
entered into a co-branded credit card partnership arrangement with Cabela's,
"The Worlds Foremost Outfitter of Hunting, Fishing and Outdoor Gear." Our co-
branded card product has been very successful with nearly 72,000 active accounts
and $96 million of current outstandings. Needless to say, we are very pleased
with past results, the quality of our partner, and future prospects of this
partnership.
National Statistics from Visa Peer Group Information.
As discussed last year, the card business nationally has experienced heavy
increases in loss rates during the past three years. Below is a graph of
national loss averages and a graph of our loss rates over the same three year
period.
National vs. FCB Credit Card
Net Charge-offs as a Percent
of Outstanding Loans
National FCB
1995 Q1 3.4% 3.2%
1995 Q2 3.5 3.2
1995 Q3 3.7 3.7
1995 Q4 4.0 3.7
1996 Q1 4.5 4.2
1996 Q2 5.2 4.7
1996 Q3 5.3 5.1
1996 Q4 5.7 5.1
1997 Q1 6.3 4.9
1997 Q2 6.8 6.4
1997 Q3 6.6 5.3
1997 Q4 6.1
As you can see by the graphs, losses have more than doubled nationally and for
us as well. Our losses are less than the averages, but are still too high.
Easier NBC credit standards are not the cause of our increased losses. What has
caused the problem is excessive use of credit cards by consumers in general, and
an excess of easy credit granting by some of our competitors. In addition, the
nation has experienced a three-fold increase in personal bankruptcy filings
since the early 90's. Many issuers in the industry have had poor bottom line
results due to their poor credit policies. Our card business continues to be
profitable for us, even with existing high level of losses. We continue to try
to find ways to bring our loss rates down. We are, however, content to continue
in this business that, although is less profitable than a few years ago,
continues to be a solid profit center for us.
FCB Managed Credit Card Outstandings (In millions)
Porfolio Managed Combined
1993 $81.9 0 $ 81.9
1994 80.1 0 80.1
1995 108.6 0 108.6
1996 98.9 56 154.9
1997 109.7 75 181.7
Tom Boatman, Senior Vice President in charge of our credit card division at NBC,
and his capable staff have done a good job managing rapid growth, providing
quality customer service, while working hard to bring loss levels under control.
Fee Income Growth
This past year was an excellent year for fee income growth which increased 14.5%
over 1996 to $47 million in 1997. Although the improvement occurred in nearly
all business areas, two of our business units produced outstanding results
during the year and should be congratulated for this performance.
First is the Trust Division of National Bank of Commerce which produced pre-tax
net income for the year of $2.25 million, up 50% over 1996. Our Trust Division
staff, capably led by Steve Caswell, continues to have a wonderful reputation of
providing impeccable customer service. This past year our people also did an
extraordinary job of attracting new business. Although this was a major team
effort, Vicki Huff and Dick Rabe were absolutely brilliant in their new business
activities. They love this business and their customers - and are a marvel to
watch.
NBC Trust Assets Under Management (In Millions)
1988 599
1989 710
1990 616
1991 707
1992 736
1993 1,089
1994 1,101
1995 1,470
1996 1,641
1997 1,981
NBC Trust Division Pre-Tax Income
(In Millions)
1993 1.3
1994 1.3
1995 1.3
1996 1.5
1997 2.2
We like the trust business and are optimistic for continued good growth in the
years ahead. As you can see, it is a very important part of our business.
Discount Brokerage Fee Income (In thousands)
1995 760
1996 1,129
1997 1,776
In addition to our trust business, our brokerage business also experienced
another excellent year of growth. We began our brokerage activity only four
years ago, and last year we generated $1.8 million in FCB revenue, up 57% over
1996. Of this, about 42% hits our bottom line. We now have ten fulltime
brokers, most of whom are doing a wonderful job. We have learned a great deal
about this business in a short timeframe and we are excited about our continued
growth in this business.
First Commerce Mortgage
Net Income (In thousands)
1993 434
1994 190
1995 885
1996 1,079
1997 1,192
First Commerce Mortgage
Servicing Volume (In Millions)
1993 650
1994 707
1995 811
1996 1,038
1997 1,174
Our mortgage company had another excellent year in 1997. Net income was $1.2
million and mortgage servicing volume is now $1.17 billion. We service over
18,000 loans. During this past year, we selected Jeff Holmberg to replace Doug
Alford who will step down as President next fall after 10 years of excellent
performance with FCM, and 36 years with our Company. Doug has done a wonderful
job. He and I started this business ten years ago from scratch. He has done
most of the work. Fortunately, Doug has informed me that he does not plan to
stop working so we will continue to have his skill and energy in some helpful
role for some time to come. Jeff Holmberg is the past president of Lincoln Bank
South, a very knowledgeable banker, and very enthusiastic and well equipped to
continue the solid growth of our mortgage company. Current low levels of
interest rates have created mortgage volume at three times the level of normal
periods.
Global Fund
Our Global Fund at the end of the year had a market value of $56.7 million, up
$12.7 million from year-end 1996. Investment returns for the year were 21.6%,
quite a bit better than the Lipper Global Index to which we compare ourselves.
Below is a graph showing Global Fund investment returns over the past five
years, and a graph showing the volume of our Global investments and the increase
in value over our cost.
Global Fund Investment Returns
1993 20.2%
1994 2.9
1995 23.6
1996 17.0
1997 21.6
Global Fund
Level of Investment (In millions)
Cost Market
1993 7.9 9.9
1994 23.4 23.4
1995 27.3 34.2
1996 33.2 44.0
1997 42.6 56.4
Our Company policy calls for us to invest 20% of FCB profits each year into
Global. We are hopeful that over time we will be able to produce investment
returns that average 15%. During this past year, I turned over the major
responsibility for management of our Global Fund to Jim Stuart, III, Chairman of
First Commerce Investors, Inc. Jim is very bright and is well supported by
Cameron Hinds, President and Chief Investment Officer of First Commerce
Investors, and a crew of very capable stock analysts.
This past year we realized $3.1 million of after tax Global gains as some of our
investments "matured" and were sold. Under normal circumstances, we anticipate
taking about 20% of our unrealized market price appreciation in gains as we
estimate that a good investment idea will generally mature in five years. At
the end of 1997, Global had $14.1 million of unsold appreciation over cost in
the portfolio.
Global provides FCB with a unique income stream of interest, dividends, and
capital gains, while also providing important diversification for our Company.
If we are reasonably successful with our investment returns, i.e. only 12%, and
we grow FCB net income at only 5% per year, in 2017 - 20 years from now - Global
will have a market value of $650 million.
Venture Capital
Ten years ago we began to make certain types of "venture capital" investments.
Our general venture investment will range from $200,000 to $500,000 in an
operating company, which we believe has excellent long term prospects for
significant growth in value. (We do not invest in start-ups.) We currently
have investments in six companies with a total investment cost of $1,549,000.
In this venture business, you have to keep making new investments as out of 20
investments, typically 60% will fail, 35% will go sideways, and 5% (we hope)
will prove to be successful at some level. During 1997, one of our venture
investments, Transcrypt International, a Lincoln based company that sells voice
security systems for radios and telephones worldwide, sold shares in the public
stock market. Our original investment in Transcrypt of $429,000 had a market
value of $17 million at year end 1997. Although we continue to like
Transcrypt's prospects and may hold this investment for many years, it is
possible that some of this equity position will be sold in 1998.
We budget $750,000 per year for venture investments and will likely continue to
try to find some exciting ideas.
A great deal of patience is required to be successful in this field, and a
success such as Transcrypt is rare indeed.
Mutual Funds
This past year we converted our common trust funds into mutual funds. The
complex and lengthy process of this conversion will prove to be well worth our
efforts. At year end, assets in our family of funds totalled $412 million. Our
employee benefit and personal trust customers will now have greatly enhanced and
important product improvement, and we will be able to continue to provide
excellent professional investment management to bring quality investment returns
to our customers.
The conversion took place in October 1997. Four funds were created, all under
the name of the Great Plains Family of Funds. We have two equity funds, two
bond funds, and an international equity fund to be created later this year.
Equity and bond fund performance has been very good and we see good
opportunities to grow our investment management business through the growth of
these mutual funds. Our Trust Division people and the people at First Commerce
Investors did a great job creating the funds and executing the conversion. The
big job is now in front of us - continuing to produce excellent investment
results and then successfully marketing this new product series.
Retail Banking
Last year in the annual letter, I discussed our strategies to enhance the growth
potential of our retail banking business. Jo Kinsey, Senior Vice President of
National Bank of Commerce, has done a wonderful job launching our new and better
way to deliver quality service to our retail customers. We have rebuilt our
branches to make them more "user friendly", and we now have tellers and personal
bankers who like to cross-sell bank services.
Conversion of the other FCB banks to our new approach is now underway. We were
pretty good at retail banking before. We are on the way to being as good as
there is in the industry.
This past year we began a new telephone bill paying service, introduced a new PC
banking product, and soon to come will be interactive websites which will be
accessible via the Internet. These are very exciting products and will become
very important as the years go by.
First Commerce Technologies
This past year First Commerce Technologies lost $980,000. The losses began in
May of 1997 as we made the decision to invest in additional people and equipment
to improve service levels and enhance our product offerings. An in-depth
operational review was undertaken by Brad Korell, NBC President, and the FCT
senior management staff, to develop an accurate understanding of our competitive
position in this rapidly changing industry. Although the results of our study
are too long and detailed to report in its entirety, the summary of our findings
was as follows:
? We continue to re-sign 95% of existing customers, i.e. our product is
quite good.
? Service levels have improved importantly.
? Financial controls have improved.
? Management capability and staff morale is excellent.
? Industry opportunities for future new revenues appear quite good.
What we also learned was that with the rapid industry changes, we will need to
continue to invest heavily in improved products for our customers and potential
customers to create new sales potential of our integrated services to new
customers, and to maintain existing business long term. The FCT Board and the
NBC Board have agreed to move ahead with these important investments in
technology which will be integrated into our system during the next three years.
Additional new revenues will be required in future years to produce adequate
returns for these investment decisions.
Holding Company
This past year, your FCB Board voted to increase the cash dividend to $.30 per
share, up from $.26 last year. And, in January of 1998, the Board again
increased the dividend to $.34. It is our general approach to pay out 17%-20%
of sustainable FCB earnings.
Dividends Per Share
1992 .19
1993 .20
1994 .22
1995 .23
1996 .26
1997 .30
During the year, the share price of our "B" shares increased from $19.50 in
January 1997 to $32.50 on December 31, 1997, an increase of 67%. The spread now
between our "A" and "B" shares seems much more understandable than in the past.
From a financial performance point of view, FCB is an outstanding performer
versus peer group and industry averages. It is pleasing that the market price
of our shares more realistically reflects the quality and performance of our
Company.
Stock Prices -Year End Closing
Class B Class A
1993 12.50 14.00
1994 10.50 15.50
1995 14.25 20.00
1996 19.50 26.50
1997 32.50 29.00
This past year we looked at a few acquisition opportunities. Most sellers of
banks now believe that a selling price floor is in the 2.5x book value range
which puts most bank acquisitions beyond our reach. We continue to look at
purchase opportunities, but these lofty prices make little sense to us. Due to
our having to amortize all purchase costs over book value over an approximate 15
year period, "high priced" acquisitions penalize us rather than enhance our
financial results. We get a lot better bang per buck by investing in our Global
Fund.
Our capital account increased 17.8% to $233 million as of December 31, 1997,
producing a capital to asset ratio of 10.3%. We have a good deal of cash and
Class B stock to use in an acquisition should a good fit come into view at
reasonable prices. Bank acquisition prices will not always be in the 2.5x to 4x
book range.
Expense Control
Net Operating Expense* /Average Assets
FCB All Banks Cent Midwest $1-5 Billion
1993 1.90% 2.44% 2.18% 2.27%
1994 1.76 2.45 2.15 2.24
1995 1.83 2.52 2.13 2.27
1996 1.60 2.23 2.00 1.94
Sep-97 1.50 2.23 2.00 1.94
We continue to work on finding ways to become more efficient. Each of our
operating units has an expense control/revenue enhancement committee that meets
and takes action as appropriate. For the most part, these groups have done a
good job and when revenue growth is measured along with the expenses (with some
exceptions) we have done quite well. When we compare ourselves to our peer
group or the industry as a whole on a revenue/expense basis, we compare very
favorably.
I will point out that some of the growth in our costs over the past two years
has been due to our technology upgrades and the need to expand the physical
plants of our operating units. For example, this past year 50% of all our
personal computers (we have approximately 900 of them) have been traded in for
new ones which have enough power to run Windows 95 and our new software systems.
The other 50% will be replaced in 1998. This was not a "nice to have" decision.
If we are to keep pace with our competition and continue to provide quality
service, this decision was a "must". Our PCs are on a four year amortization
schedule and thus 25% of our capital outlay for this investment impacts our
equipment expense category on an annual basis. The specific cost of this
decision will be approximately $400,000 per year, once all PCs are installed.
As mentioned above, our excellent growth over the past ten years has also
generated a need to expand many of our existing facilities and/or add branches.
The projects completed in the past year or currently underway will require
capital costs of more than $10 million. The good news is that the majority of
our building projects will amortize (impact company expense) over a 30 to 40
year time period. These new, remodeled, or enhanced facilities, such as
Western's new building in North Platte and NBC's new branch at 70th and Van
Dorn, will enable us to continue to grow for many years. This growth is what
fuels future bottom line results. Decisions to not move ahead on the physical
plant expansion or to not stay competitive with our technology would put our
organization into a slow or no growth mode and would ultimately cause a "for
sale" sign to be placed at the corner of 13th & O.
Net Income (In Millions)
1987 6.5
1988 9.7
1989 10.0
1990 10.7
1991 13.0
1992 19.2
1993 19.8
1994 19.0
1995 17.4
1996 21.8
1997 26.6
During the past two years, our Company has produced asset returns in excess of
1.15 on assets, even during this period of new expensive technology needs and
physical plant enhancement. This is excellent financial performance, even while
spending /investing to continue to grow.
Conclusion
I think from reading this report you would agree with me that even with the
problems at FCT, 1997 was an outstanding year for our Company. The good news is
that 1997 was a continuation of a pattern of success which began in the late
80's in the post ag depression era.
Year End Assets (In millions)
1987 946
1988 955
1989 1,019
1990 1,106
1991 1,310
1992 1,452
1993 1,572
1994 1,624
1995 1,816
1996 2,028
1997 2,251
At that time, we set ambitious plans for profitability and growth and by any
measure we have accomplished what we set out to do - namely to become one of the
finest financial institutions in the nation. We have built a team of strong
managers, developed strong customer loyalty, and with the support of our
talented director group, we have made significant commitment to our communities.
This approach to the management of our institution has greatly enhanced the
Company value for our shareholders/partners.
Value of $10,000 Investment in First Commerce
On December 31, 1986
Value A Value B Combined
1987 11,698 0 11,698
1988 13,774 0 13,774
1989 21,132 0 21,132
1990 21,509 0 21,509
1991 26,792 0 26,792
1992 51,698 0 51,698
1993 10,566 37,736 48,302
1994 11,698 31,698 43,396
1995 15,094 43,019 58,113
1996 20,000 58,868 78,868
1997 21,887 98,113 120,000
Our recent success has not caused us to work less, or care less about this
current year and the years and decades ahead. This year and in the future
years, our operating plans call for continued aggressive growth, and we are
beginning another series of long range planning meetings with our Board to
reassess and revalidate our vision and plans for the future.
We have had a wonderful economic environment over the past seven years which has
been helpful to us. I believe the outlook for the U. S. economy continues to be
bright, even with the current difficulties in Asia, which at present appear to
be the unknown in our 1998 economic estimates. Obviously, we will not always
have the solid economic environment which we currently enjoy, and when the
economy experiences difficulty, we will to some degree experience a period less
robust, than when most economic sectors are experiencing solid growth.
Fortunately, our capital accounts and reserves are strong; and just as
important, our people are skilled, experienced, and motivated to continue to
build upon our base of strength and success.
I recently received an award for 25 years of service to First Commerce. I
cannot tell you how very proud I am to have been a part of the team that has
created this wonderful Company. My associates and I remain excited and
optimistic about the future of our Company and pledge the continued best of our
energies and skills.
Sincerely,
James Stuart, Jr.
Chairman and CEO
The First Commerce Bancshares Organization
The multi-resource organization
we are today traces its roots to
the founding of Lincoln's
National Bank of Commerce
in 1902. The individual
subsidiaries that now comprise
First Commerce Bancshares include:
Index To Financial Information
Consolidated Balance Sheets 12
Consolidated Statements of Income 13
Consolidated Statements of Stockholders' Equity 14
Consolidated Statements of Cash Flows 15
Notes to Consolidated Financial Statements 16
Independent Auditors' Report 28
Selected Quarterly Financial Data 29
Selected Financial Data 30
Management's Discussion and Analysis 34
Officers and Directors 48
Consolidated Balance Sheets
December 31,
-------------------------
1997 1996
------- ----------
(Amounts In Thousands)
ASSETS
Cash and due from banks $ 156,664 $131,309
Federal funds sold 36,495 28,528
-------- --------
Cash and cash equivalents 193,159 159,837
Mortgages held for sale 31,360 16,293
Securities available for sale (cost of
$303,172,000 and $366,181,000) 336,857 379,849
Securities held to maturity (fair value of
$367,489,000 and $271,886,000) 362,768 270,012
Loans 1,236,443 1,121,239
Less allowance for loan losses 22,458 20,157
--------- ----------
Net loans 1,213,985 1,101,082
Accrued interest receivable 21,476 20,193
Premises and equipment 54,468 48,695
Other assets 37,027 32,051
---------- ----------
$2,251,100 $2,028,012
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 353,109 $ 328,826
Interest bearing 1,296,385 1,245,718
---------- ----------
1,649,494 1,574,544
Securities sold under agreement
to repurchase 142,941 134,212
Federal funds purchased and other
short-term borrowings 137,904 45,980
Accrued interest payable 7,734 7,650
Accrued expenses and other liabilities 26,277 15,255
Long-term debt 54,170 52,973
--------- ---------
Total liabilities 2,018,520 1,830,614
Commitments and contingencies
Stockholders' equity:
Common stock:
Class A voting, $.20 par value; authorized
10,000,000 shares; issued and outstanding
2,591,336 and 2,606,336 shares; 518 521
Class B nonvoting, $.20 par value; authorized
40,000,000 shares, issued and outstanding
10,938,951 and 10,940,651 shares 2,188 2,188
Paid-in capital 21,601 21,628
Retained earnings 186,377 164,176
Net unrealized gains on securities
available for sale (net of tax) 21,896 8,885
--------- ---------
Total stockholders' equity 232,580 197,398
--------- ---------
$2,251,100 $2,028,012
========= =========
See notes to consolidated financial statements.
Consolidated Statements of Income
Year ended December 31,
-------------------------
1997 1996 1995
------ ------ ------
(Amounts In Thousands Except Per Share Data)
Interest income:
Loans $104,018 $ 97,228 $ 85,494
Securities:
Taxable 39,463 32,485 31,730
Nontaxable 1,381 1,483 1,610
Dividends 1,653 1,313 984
Mortgages held for sale 1,674 1,953 1,213
Federal funds sold 1,980 2,037 2,966
------- ------- -------
Total interest income 150,169 136,499 123,997
Interest expense:
Deposits 60,201 55,315 55,156
Short-term borrowings 10,425 7,341 4,835
Long-term debt 2,957 3,737 3,117
------- ------- -------
Total interest expense 73,583 66,393 63,108
------- ------- -------
Net interest income 76,586 70,106 60,889
Provision for loan losses 8,297 6,839 3,495
------- ------- -------
Net interest income after
provision for loan losses 68,289 63,267 57,394
Noninterest income:
Credit card 13,047 10,591 4,965
Computer services 8,904 8,491 8,147
Other services charges and fees 7,829 6,217 5,293
Trust services 6,469 5,840 5,272
Service charges on deposits 5,562 5,231 4,893
Mortgage banking 5,425 4,868 3,571
Gains on securities sales 4,861 1,672 581
Other income 1,742 1,120 1,128
------ ------ ------
Total noninterest income 53,839 44,030 33,850
------ ------ ------
Noninterest expense:
Salaries and employee benefits 39,475 35,808 33,101
Credit card processing fees 7,921 7,055 3,751
Equipment expense 5,538 5,523 4,770
Net occupancy expense 4,496 3,980 3,815
Communications 4,221 4,159 3,647
Fees and insurance 3,802 3,770 5,117
Business development 3,695 3,990 2,649
Supplies 2,539 2,404 2,395
Amortization of mortgage servicing rights 2,067 1,537 747
Other expenses 7,349 5,686 4,401
------ ------ -------
Total noninterest expense 81,103 73,912 64,393
------ ------ -------
Income before income taxes 41,025 33,385 26,851
Income tax provision 14,428 11,629 9,431
------ ------ ------
Net income $ 26,597 $21,756 $17,420
====== ====== ======
Weighted average shares outstanding 13,541 13,566 13,497
====== ====== ======
Basic net income per share $1.96 $1.60 $1.29
===== ===== =====
See notes to consolidated financial statements.
Consolidated Statements Of Stockholders' Equity
Net Unrealized
Class A Class B Gains
Common Common Paid-In Retained Treasury On Secur.
Stock Stock Capital Earnings Stock Available
For Sale
------- -------- -------- ------- ------- ----------
(Amounts in Thousands)
Balance, January 1, 1995 $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 on securities
available for sale, net of
tax effect of $6,742,000 - - - - - 12,522
Net income - - - 17,420 - -
------ ------ ------- -------- ------- -------
Balance, December
31, 1995 521 2,193 21,665 146,269 - 9,373
------ ------ ------- -------- ------- -------
Purchase and retire-
ment of stock - (5) (37) (321) - -
Cash dividends ($.26
per share) - - - (3,528) - -
Change in net unrealized
gains on securities
available for sale, net of
tax effect of $262,000 - - - - - (488)
Net income - - - 21,756 - -
------ ------ ------ -------- ------- ------
Balance, December
31, 1996 521 2,188 21,628 164,176 - 8,885
------ ------ ------- -------- ------- ------
Purchase and retire-
ment of stock (3) - (27) (330) - -
Cash dividends ($.30
per share) - - - (4,066) - -
Change in net unrealized
gains on securities
available for sale, net of
tax effect of $7,008,000 - - - - - 13,011
Net income - - - 26,597 - -
------ ------ ------- ------ -------- -------
Balance, December
31, 1997 $518 $2,188 $21,601 $186,377 $ - $21,896
====== ====== ======== ======== ======= ========
See notes to consolidated financial statements.
Consolidated Statements Of Cash Flows
Year ended December 31,
1997 1996 1995
------- ------ --------
(Amounts in Thousands)
Net income $ 26,597 $ 21,756 $ 17,420
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 8,472 7,901 6,034
Provision for loan losses 8,297 6,839 3,495
Provision for deferred taxes 1,188 (679) (81)
Gain on sales of mortgages and securities (4,906) (1,445) (605)
Changes in assets and liabilities:
Interest receivable (1,283) (1,503) (3,725)
Interest payable 84 120 1,623
Other assets (3,329) (759) (3,581)
Accrued expenses and other liabilities 1,277 224 1,187
Purchase of mortgages held for sale (307,025) (350,675)(216,875)
Proceeds from sales of mortgages
held for sale 292,003 359,803 196,128
Other (271) (1,262) 2,871
-------- -------- --------
Total adjustments (5,493) 18,564 (13,529)
-------- -------- --------
Net cash flows from operating activities 21,104 40,320 3,891
Cash flows from investing activities:
Proceeds from sale of securities
held to maturity 180 502 6,015
Proceeds from maturities of securities
held to maturity 50,031 123,744 91,751
Purchases of securities held to maturity (142,967) (193,574) (33,659)
Proceeds from sale of securities
available for sale 101,701 8,913 18,706
Proceeds from maturities of securities
available for sale 67,403 71,553 80,850
Purchases of securities available for sale (99,784) (93,591)(165,555)
Net increase in loans (140,200) (165,571)(140,074)
Securitization and sale of credit card loans 19,000 56,000 -
Purchase of premises and equipment (11,054) (6,229) (7,761)
Cash and cash equivalents from
bank acquisition, net of cash expenses - - 1,775
Other (4,381) (4,484) (2,457)
-------- -------- ---------
Net cash flows from investing activities (160,071) (202,737)(150,409)
Cash flows from financing activities:
Net increase in deposits 74,950 111,339 69,550
Net increase in short-term borrowings 100,653 82,252 24,808
Proceeds from long-term debt 28,000 10,000 24,269
Repayment of long-term debt (26,803) (12,546) (2,000)
Purchase of common stock (360) (363) (82)
Cash dividends paid (4,066) (3,528) (3,062)
Other (85) (89) (81)
-------- -------- --------
Net cash flows from financing activities 172,289 187,065 113,402
-------- -------- --------
Net change in cash and cash equivalents 33,322 24,648 (33,116)
Cash and cash equivalents at
beginning of year 159,837 135,189 168,305
-------- -------- --------
Cash and cash equivalents at end of year $193,159 $159,837 $135,189
======== ========= ========
Supplemental disclosure:
Interest paid $73,540 $66,210 $61,422
Income taxes paid 13,465 12,540 9,484
Common stock exchanged for acquisition of bank
net of cash and cash equivalents - - 3,869
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, mortgage banking, and retail deposit
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 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.
Derivative Financial Instruments - The Company's only derivative financial
instrument, a collar relating to a certain public equity security held by the
Company, is held for purposes other than trading. This instrument is utilized
to reduce the Company's exposure to adverse fluctuations in market price to
approximately 10% of the $4,497,000 market value of the security at the
inception of the collar, which expires in July 1998. The Company utilizes the
deferral method of accounting for this instrument. Under the deferral method of
accounting, gains and losses resulting from changes in value of the derivative
financial instrument are deferred and recognized in the same period as the gains
and losses of the item being hedged.
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 credit card fees are recognized on a straight-line basis
over the period that cardholders may use the card.
Credit Card Loan Securitization - The Company has sold, on a revolving basis,
approximately $75,000,000 and $56,000,000 of credit card loans at December 31,
1997 and 1996, respectively, through a master trust securitization program.
These securitizations have been recorded as sales in accordance with Statement
of Financial Accounting Standards No. 125, "Accounting For Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." A residual
earning stream and servicing have been retained in the securitization, both
which are immaterial to the Company's consolidated financial statements.
Allowance for Loan Losses - The allowance for loan losses is established through
a provision for loan losses charged to expenses. 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 their impairment, and an evaluation
of the overall portfolio quality under current economic conditions. The
allowance for large groups of smaller homogeneous loans, such as consumer loans
and credit card loans are collectively evaluated for adequacy. For other loans,
specific reserves are established for any impaired loan for which the recorded
investment exceeds the measured value of the loan. 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. 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.
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, 1997 and 1996.
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 - Mortgage servicing rights represent the cost of acquiring the
right to service mortgage loans. Such costs are initially capitalized and
subsequently amortized in proportion to, and over the period of, estimated net
loan servicing income.
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS No. 125) on a prospective basis as
required. SFAS No. 125 supersedes the provisions of Statement of Financial
Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing
Rights, an amendment to FASB Statement No. 65," which was adopted by the Company
on July 1, 1995, on a prospective basis. The adoption of SFAS No. 125 did not
have a material effect on the Company's financial position or results of
operations. Both statements require that a mortgage banking enterprise
recognize as a separate asset the rights to service mortgage loans for unrelated
third parties that have been acquired through either the purchase or origination
of a loan. Previous to July 1, 1995, only purchased mortgage servicing rights
were capitalized as assets. Both statements also provide 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 will 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.
Amortization of mortgage servicing rights is based on the ratio of net servicing
income received in the current period to the net servicing income projected to
be realized from the mortgage servicing rights. Projected net servicing income
is in turn determined on the basis of the estimated future balance of the
underlying mortgage loan portfolio, which decreases over time from scheduled
loan amortization and prepayments. Additionally, SFAS No. 125 requires that
mortgage servicing rights be reported at the lower of cost or fair value. The
value of mortgage servicing rights is determined based on the present value of
estimated expected future cash flows, using assumptions as to current market
discount rates, prepayment speeds and servicing costs per loan. Mortgage
servicing rights are stratified by loan type and interest rate for purposes of
impairment measurement. Loan types include government, conventional and
adjustable-rate mortgage loans.
The unamortized purchased servicing rights included in other assets were
$7,521,000 and $5,666,000 at
December 31, 1997 and 1996, respectively. The amount of loans serviced for
others approximated $1,174,357,000, $1,038,021,000 and $812,351,000 at December
31, 1997, 1996, and 1995, respectively.
As of December 31, 1997 and 1996, the fair value of the Company's capitalized
mortgage servicing rights (including mortgage servicing rights purchased) was
approximately $15.4 million and $18.5 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.
Basic Net Income Per Share - Basic net income per share is based on the weighted
average number of shares of common stock outstanding.
Accounting Pronouncements - In June 1997, Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income" was issued. This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements. In June 1997,
Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures
About Segments of an Enterprise and Related Information" was issued. SFAS 131
requires disclosures for each segment that are similar to those required under
current standards with the addition of quarterly disclosure requirements. The
statements are effective for the Company's 1998 financial statements and are
only of a disclosure nature.
B. RESTRICTED CASH BALANCES
The average compensating balances held at correspondent banks during 1997 and
1996 were $11,322,000 and $11,498,000 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 $25,624,000 and $27,232,000 for
1997 and 1996, 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, 1997
U.S. government and
agency securities $159,718 $ 2,938 $ (44) $162,612
Mortgage-backed securities 91,756 323 (228) 91,851
Marketable equity securities 51,698 31,929 (1,233) 82,394
-------- ------- ------- ---------
Totals $303,172 $35,190 $(1,505) $336,857
======== ======= ======= =========
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
======== ======= ====== ========
Securities held to maturity:
December 31, 1997
U.S. government and
agency securities $183,037 $ 2,701 $ (22) $185,716
States and political
subdivision securities 27,448 456 (10) 27,894
Mortgage-backed securities 151,858 1,779 (172) 153,465
Other 425 - (11) 414
-------- ------- ------- ---------
Totals $362,768 $ 4,936 $ (215) $367,489
======== ======= ======= =========
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
======== ====== ======= ========
The amortized cost and estimated fair value of debt securities at December 31,
1997, 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 $8,171 $8,177 $23,187 $ 23,432
Due after one year
through five years 37,628 38,141 89,697 91,846
Due after five years
through ten years 160,899 163,410 46,834 47,334
Due after ten years 4,212 4,296 - -
-------- -------- -------- --------
210,910 214,024 159,718 162,612
Mortgage-backed securities 151,858 153,465 91,756 91,851
-------- -------- -------- --------
$362,768 $367,489 $251,474 $254,463
======== ========= ======== =========
The following table presents the securities portfolio sales activities for the
years ended December 31, 1997, 1996 and 1995. All sales of securities held to
maturity were within three months of the securities' maturities, or were early
calls of the securities.
1997 1996 1995
---------------- ---------------- --------------
Held Available Held Available Held Available
to for to for to for
Maturity Sale Maturity Sale Maturity Sale
------- ------ ------- ------- -------- -----
Proceeds from
sales of securities $180 $101,701 $502 $8,913 $6,015 $18,706
Gross gains on sales
of securities 0 5,270 2 1,821 20 1,069
Gross losses on sales
of securities 0 (409) 0 (151) (6) (502)
Securities with a carrying value of $438,402,000 at December 31, 1997, and
$411,135,000 at December 31, 1996, were pledged to secure obligations under
repurchase agreements or to secure public or trust deposits in the normal course
of business. Securities with a carrying value of $57,240,000 and 27,412,000
were pledged to secure advances from the Federal Home Loan Bank as of December
31, 1997 and 1996, respectively. As of December 31, 1997, marketable equity
securities with a fair value of $4,975,000 were pledged against a derivative
financial instrument, a collar relating to a certain marketable equity security.
At December 31, 1997 and 1996, state and political subdivision securities with
an amortized cost of $23,899,000 and $24,400,000, respectively,
and an estimated fair value of $24,231,000 and $24,549,000, respectively, were
issued by State of Nebraska political subdivisions.
D. LOANS
Loans at December 31 are summarized as follows:
1997 1996
---------- --------
Real estate mortgage $ 375,044 $ 332,913
Consumer 281,697 271,906
Commercial and financial 259,045 245,873
Agricultural 180,310 130,071
Credit card 106,737 98,895
Real estate construction 33,610 41,581
-------- ---------
$1,236,443 $1,121,239
========== =========
Virtually all of the Company's loans are to Nebraska-based organizations, except
credit card loans which are concentrated in the Midwest. The loan portfolio is
well diversified by industry. The Nebraska economy is dependent upon the general
state of the agricultural economy. As of December 31, 1997 and 1996, there were
$1,581,000 and $3,429,000, respectively, of nonaccruing loans. The amount of
restructured loans as of December 31, 1997 and 1996 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 $1,905,000 and $2,595,000 at December 31, 1997 and 1996,
respectively. The total allowance for loan losses related to these loans was
$388,000 and $402,000 at December 31, 1997 and 1996, respectively. Interest
income on impaired loans of $70,000, $194,000 and $192,000 was recognized for
cash payments received in 1997, 1996 and 1995, respectively. Average impaired
loans for 1997 and 1996 were $2,281,000 and $2,627,000, respectively.
Mortgage loans with a carrying value of $123,597,000 and $103,764,000 were
pledged against advances from the Federal Home Loan Bank as of December 31, 1997
and 1996, respectively.
E. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
1997 1996 1995
------- ------ --------
Balance, January 1 $20,157 $19,017 $17,190
Provision for loan losses 8,297 6,839 3,495
Bank acquisition - - 843
-------- ------- -------
Total 28,454 25,856 21,528
Net charge-offs:
Loans charged-off 8,630 7,794 4,657
Less recoveries 2,634 2,095 2,146
-------- ------- -------
Net loans charged-off 5,996 5,699 2,511
-------- ------- -------
Balance, December 31 $22,458 $20,157 $19,017
======== ======= =======
F. PREMISES AND EQUIPMENT
Premises and equipment at December 31 consists of the following:
1997 1996
------- ------
Land $ 7,176 $ 7,308
Buildings and leasehold improvements 60,936 57,086
Equipment and furnishings 38,285 32,449
------ ------
106,397 96,843
Less accumulated depreciation 51,929 48,148
------ ------
$54,468 $48,695
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, 1997, 1996 and
1995, was approximately $1,646,000, $1,587,000, and $1,352,000, respectively.
The approximate future minimum rental commitments under noncancelable leases are
as follows:
Premises Equipment Total
-------- --------- -------
1998 $ 669 $288 $ 957
1999 418 99 517
2000 290 61 351
2001 223 22 245
2002 167 8 175
Thereafter 2,962 - 2,962
G. DEPOSIT MATURITIES
Maturities of time deposits at December 31, 1997 are as follows:
1998 $716,060
1999 88,292
2000 17,226
2001 12,479
2002 946
Thereafter 48
H. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Amounts and interest rates related to securities sold under agreement to
repurchase are as follows:
1997 1996
-------- -------
Amount outstanding at year-end $142,941 $134,212
Average interest rate outstanding at year-end 4.9% 4.7%
Highest amount outstanding as of any
month-end during the year 176,572 146,151
Average amount outstanding during the year 143,666 125,639
Approximate average interest rate 4.9% 4.7%
I. LONG-TERM DEBT
Long-term debt at December 31 is as follows:
1997 1996
------ -----
Capital notes, 7.70% to 8.70%, due 1998 to 2002 $16,000 $18,500
Federal Home Loan Bank advances, due 1998 to 2002 38,000 34,269
Other 170 204
------- -------
$54,170 $52,973
======= =======
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 below 30% as of
December 31, 1997 and 1996.
The Federal Home Loan Bank (FHLB) advances of $38,000,000 were made to
subsidiary banks. These advances are due or callable in 1998 and 1999. Interest
is paid monthly of which $5,000,000 bears interest based upon national prime
rates, 5.66% at December 31, 1997. The balance bears fixed interest rates of
5.71% to 5.85%. The advances are collateralized by a blanket pledge of mortgage
loans and certain investment securities. The advances due in 2002 are callable
in 1999.
Subsidiary banks have unused lines of credit with the FHLB of $20,950,000 as of
December 31, 1997.
Scheduled principal payments for the five years following December 31, 1997 are:
1998 $12,540
1999 30,544
2000 2,048
2001 2,038
2002 7,000
J. INCOME TAXES
Consolidated income tax expense for the years ended December 31 consists of the
following:
1997 1996 1995
----- ----- -----
Current provision:
Federal $12,503 $11,418 $ 8,857
State 737 700 655
------- ------- -------
13,240 12,118 9,512
Deferred income taxes 1,188 (489) (81)
------- ------- -------
Total consolidated income tax provision $14,428 $11,629 $9,431
======= ======= =======
The effective rate of total tax expense differs from the statutory federal tax
rate as follows:
1997 1996 1995
----- ----- -----
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 (liability) as
of December 31, 1997 and 1996 are as follows:
Deferred tax assets: 1997 1996
------- -----
Allowance for loan losses $ 7,779 $6,929
Other 1,773 1,495
------ ------
Total deferred tax assets 9,552 8,424
Deferred tax liabilities:
Net unrealized gains and losses on
securities available for sale 11,789 4,781
Mortgage servicing rights 2,383 94
Premises and equipment 1,619 1,833
Other 1,069 828
------ ------
Total deferred tax liabilities 16,860 7,536
------ ------
Net deferred tax asset (liability) $(7,308) $ 888
======= ======
During 1997, the Company received approval from the Internal Revenue Service to
change its method of expensing purchased mortgage servicing rights for tax
reporting purposes.
K. ADVERTISING COSTS
The Company expenses costs of advertising, except for direct-response
advertising relating to its bankcard portfolios, 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, 1997
and 1996, $2,730,000 and $1,952,000 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
$449,325,000 and $360,310,000 (exclusive of $866,217,000 and $799,306,000 of
unused approved lines of credit related to credit card loan agreements) at
December 31, 1997 and 1996, 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 $46,878,000, and $31,350,000 at December 31, 1997 and
1996, 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 $66,043,000 and $38,425,000 as of December 31, 1997 and 1996,
respectively. The Company has an agreement to sell on a best efforts basis
$1,220,000 as of December 31, 1997.
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 $21,609,000 and $22,607,000 in letters of credit outstanding at
December 31, 1997 and 1996, 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 or results of operations of
the Company.
M. RELATED PARTY TRANSACTIONS
As of December 31, 1997, 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 related parties of the Company and its significant
subsidiaries for the year ended December 31, 1997 is shown below:
Beginning Ending
Balance Additions Payments Balance
--------- --------- --------- --------
$23,259 $63,903 $61,486 $25,676
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
$1,156,000 in 1997, $1,020,000 in 1996 and $968,000 in 1995.
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 $1,308,000 in 1997, $1,289,000 in
1996 and $1,009,000 in 1995.
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 1998, the
subsidiary banks have retained defined net income from 1997 and 1996 of
approximately $20,672,000.
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, 1997, 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, 1997, 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
Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
------------ ------------------ ------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ----- ----- ------ -----
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $226,623 14.9% $121,724 8.0% N/A N/A
National Bank of Commerce 108,772 12.1 71,956 8.0 $89,945 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 205,459 13.5 60,862 4.0 N/A N/A
National Bank of Commerce 97,499 10.8 35,978 4.0 53,967 6.0
Tier I Capital(to Quarterly Average Assets):
Consolidated 205,459 9.7 84,362 4.0 N/A N/A
National Bank of Commerce 97,499 8.1 48,046 4.0 60,058 5.0
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $200,441 14.7% $108,954 8.0% N/A 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 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 N/A
National Bank of Commerce 89,677 8.0 45,006 4.0 56,258 5.0
P. CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS (Parent Company Only)
December 31,
------------------
1997 1996
------ -------
ASSETS
Cash on deposit with subsidiaries $ 142 $ 102
Securities purchased under agreement
to resell to subsidiary bank 5,380 4,770
Short-term investments - 463
------- --------
Cash and cash equivalents 5,522 5,335
Securities available for sale
(cost of $47,063,000 and $36,849,000) 77,676 47,686
Investment in subsidiaries:
Equity in net assets of bank subsidiaries 157,480 147,703
Equity in net assets of nonbank subsidiaries 1,291 1,050
Excess cost over fair value of net assets 3,700 3,840
Premises and equipment 11,404 11,768
Other assets 9,140 7,796
-------- ---------
$266,213 $225,178
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 12,624 $ 5,171
Commercial paper outstanding 4,839 3,905
Long-term debt 16,170 18,704
-------- --------
Total liabilities 33,633 27,780
Stockholders' equity 232,580 197,398
-------- ---------
$266,213 $225,178
======== =========
CONDENSED STATEMENTS OF INCOME (Parent Company Only)
Year ended December 31,
--------------------------
1997 1996 1995
-------- ------- -------
Income:
Dividends from bank subsidiaries $15,542$14,186$11,220
Dividends from nonbank subsidiaries 225 150 300
Rent:
Subsidiaries 1,635 1,291 1,760
Other 1,449 1,678 1,162
Interest and dividend income 1,963 1,541 1,335
Other 4,733 1,219 415
------ ------ ------
25,547 20,065 16,192
Expenses:
Salaries and employee benefits 2,682 1,807 1,758
Interest 1,780 1,669 1,811
Interest paid to subsidiaries - 204 554
Building expense 2,412 2,246 2,079
Other 1,597 1,945 1,850
------- ------- -------
8,471 7,871 8,052
------- ------- -------
Income before income tax benefit (expense)
and equity in undistributed
earnings of subsidiaries 17,076 12,194 8,140
Income tax benefit (expense) (327) 706 1,097
------- ------ -------
Income before equity in undistributed
earnings of subsidiaries 16,749 12,900 9,237
Equity in undistributed earnings
of subsidiaries 9,848 8,856 8,183
------- ------ -----
Net income $26,597$21,756$17,420
======= ===== ======
CONDENSED STATEMENTS OF CASH FLOWS (Parent Company Only)
Year ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Net income $26,597 $21,756 $17,420
Adjustments to reconcile net income
to net cash flows
from operating activities:
Depreciation and amortization 884 864 728
Equity in undistributed earnings
of subsidiaries (9,848) (8,856) (8,183)
Gains on sale of securities (4,717) (1,635) (510)
Other (450) 1,105 (171)
------- ------ ------
Total adjustments (14,131) (8,522) (8,136)
------- ------ ------
Net cash flows from operating activities 12,466 13,234 9,284
Cash flows from investing activities:
Proceeds from sales and maturities of
securities available for sale 17,824 8,915 12,065
Purchase of securities available for sale (22,892)(14,277)(13,014)
Purchase of premises and equipment (365) (244) (1,597)
Purchase of loans from subsidiary bank - (4,980) -
Cash and cash equivalents from
nonbank subsidiaries merger - 245 -
Other (820) (587) (2,417)
------ ------ -------
Net cash flows from investing activities (6,253)(10,928) (4,963)
Cash flows from financing activities:
Net increase in short-term borrowings 934 3,905 450
Repayment of long-term debt (2,534) (2,546) (2,000)
Purchase of common stock (360) (363) (82)
Cash dividends paid (4,066) (3,528) (3,062)
------ ------ -------
Net cash flows from financing activities (6,026) (2,532) (4,694)
------ ------ -------
Net change in cash and cash equivalents 187 (226) (373)
Cash and cash equivalents at
beginning of year 5,335 5,561 5,934
------ ------ ------
Cash and cash equivalents at end of year $ 5,522 $ 5,335 $ 5,561
====== ====== =======
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest $ 1,763 $ 1,716 $1,842
Income taxes 12,708 12,140 8,805
Common stock exchanged for
acquisition of bank - - 3,869
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, 1997 and 1996. 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, 1997 December 31, 1996
--------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ---------- ---------- -----------
Assets:
Cash and cash equivalents $ 193,159 $ 193,159 $ 159,837 $ 159,837
Mortgages held for sale 31,360 31,427 16,293 16,340
Securities available for sale 336,857 336,857 379,849 379,849
Securities held to maturity 362,768 367,489 270,012 271,886
Net loans 1,213,985 1,215,790 1,101,082 1,096,399
Other financial instruments 40,713 40,713 34,630 34,630
Liabilities:
Demand deposits with no
stated maturities 814,437 814,437 749,674 749,674
Time deposits 835,051 837,194 824,870 827,039
Securities sold under
agreement to repurchase 142,941 142,941 134,212 134,212
Other short-term borrowings 137,904 137,904 45,980 45,980
Long-term debt 54,170 54,445 52,973 53,559
Other financial instruments 21,850 21,850 19,033 19,033
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, 1997 and 1996. 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, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Lincoln, Nebraska
February 6, 1998
SELECTED QUARTERLY FINANCIAL DATA
(In Thousands Except Per Share Data)
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Total
-------- ------- ------- ------- -------
(Unaudited)
1997
Total interest income $35,518 $37,266 $37,979 $39,406 $150,169
Net interest income 18,234 19,094 19,126 20,132 76,586
Provision for loan losses 2,584 1,640 1,840 2,233 8,297
Gains (losses) on
securities sales 3,255 1,358 389 (141) 4,861
Noninterest income 11,936 11,303 12,535 13,204 48,978
Noninterest expense 19,149 19,398 20,223 22,333 81,103
Net income 7,563 6,900 6,379 5,755 26,597
Basic net income
per share (1) .56 .51 .47 .43 1.96
Common stock trading range (2)
Class A voting
high 28.50 31.00 26.00 33.00 33.00
low 21.00 20.00 21.00 22.50 20.00
Class B nonvoting
high 20.00 23.50 23.50 32.50 32.50
low 16.00 16.75 19.00 21.25 16.00
Dividends declared
per share .075 .075 .075 .075 .30
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
Gains (losses) on
securities sales 767 774 189 (58) 1,672
Noninterest income 10,406 10,042 10,422 11,488 42,358
Noninterest expense 17,555 17,484 18,814 20,059 73,912
Net income 5,727 6,059 5,225 4,745 21,756
Basic net income
per share (1) .42 .45 .39 .35 1.60
Common stock trading range (2)
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
(1) Quarterly per share amounts may not add to annual total due to rounding.
(2) 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, 1997, the Company had 498 Class A
shareholders of record and 1,059 Class B shareholders of record.
SELECTED FINANCIAL DATA
Three-Year Average Balance Sheets / Yields and Rates
Year Ended December 31,
--------------------------------
1997
--------------------------------
Average Average
Balance Interest Rate
-------- -------- -------
(Amounts in thousands)
ASSETS
Interest-earning assets:
Loans, including non-accrual loans $1,139,272 $104,018 9.13%
Taxable investment securities 584,743 39,463 6.75
Nontaxable investment securities
(non-taxable basis) 26,698 1,381 5.17
Federal funds sold 34,282 1,980 5.78
Mortgages held for sale 20,679 1,674 8.10
Equity securities 71,819 1,653 2.30
--------- --------
Total interest-earning assets 1,877,493 150,169 8.00
Less allowance for loan losses (21,401)
Cash and due from banks 116,253
Premises and equipment 51,272
Other assets 56,787
----------
Total assets $2,080,404
==========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Interest-bearing demand $ 350,708 9,627 2.75%
Savings 89,666 2,558 2.85
Time 844,476 48,016 5.69
--------- -------
Total interest-bearing deposits 1,284,850 60,201 4.69
Securities sold under agreement
to repurchase 143,666 6,993 4.87
Federal funds purchased and
other short-term borrowings 58,832 3,432 5.83
Long-term debt 41,657 2,957 7.10
--------- -------
Total interest-bearing liabilities 1,529,005 73,583 4.81
-------
Noninterest bearing demand deposits 293,474
Other liabilities 28,541
---------
Total liabilities 1,851,020
Total stockholders' equity 229,384
----------
Total liabilities and stockholders' equity $2,080,404
==========
Net interest income $ 76,586
=======
Net interest spread 3.19%
=====
Net yield on interest-earning assets 4.08%
=====
Selected Financial Data
Three-Year Average Balance Sheets / Yields and Rates
Year Ended December 31,
-----------------------------------------------------------
1996 1995
------------------------------ --------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- ------- ----
(Amounts in thousands)
$1,066,896 $ 97,228 9.11% $ 917,742 $ 85,494 9.32%
517,083 32,485 6.28 512,193 31,730 6.19
29,190 1,483 5.08 31,788 1,610 5.06
34,863 2,037 5.84 47,134 2,966 6.29
24,860 1,953 7.86 12,533 1,213 9.68
37,269 1,313 3.52 29,639 984 3.32
--------- -------- --------- -------
1,710,161 136,499 7.98 1,551,029 123,997 7.99
(19,680) (18,306)
102,269 94,107
48,146 45,809
46,467 37,569
-------- --------
$1,887,363 $1,710,208
========== ==========
$ 325,590 8,332 2.56% $ 312,994 8,350 2.67%
84,039 2,334 2.78 80,049 2,269 2.83
797,944 44,649 5.60 758,347 44,537 5.87
--------- ------- --------- -------
1,207,573 55,315 4.58 1,151,390 55,156 4.79
128,109 6,005 4.69 81,992 4,240 5.17
24,574 1,336 5.44 10,231 595 5.82
54,879 3,737 6.81 42,036 3,117 7.42
--------- ------- --------- -------
1,415,135 66,393 4.69 1,285,649 63,108 4.91
------- -------
265,013 242,602
20,786 16,414
---------- ---------
1,700,934 1,544,665
186,429 165,543
---------- ---------
$1,887,363 $1,710,208
========== ==========
$ 70,106 $ 60,889
========= =========
3.29% 3.08%
===== =====
4.10% 3.93%
===== =====
Selected Financial Data
(In Thousands Except Per Share Data)
1997 1996 1995 1994
------ ------ ------ ------
At December 31,
Assets $2,251,100 $2,028,012 $1,815,575 $1,624,138
Investments 699,625 649,861 566,176 537,797
Loans 1,236,443 1,121,239 1,017,367 850,292
Deposits 1,649,494 1,574,544 1,463,205 1,355,965
Long-term debt 54,170 52,973 55,519 33,000
Stockholders' equity 232,580 197,398 180,021 149,354
Year Ended December 31,
Net interest income $76,586 $70,106 $60,889 $57,793
Provision for loan losses 8,297 6,839 3,495 332
Total noninterest income 53,839 44,030 33,850 31,363
Total noninterest expenses 81,103 73,912 64,393 59,663
Net income 26,597 21,756 17,420 19,032
Per share data:
Net income $1.96 $1.60 $ 1.29 $ 1.46
Dividends .30 .26 .227 .216
Stockholders' equity before
net unrealized gains
and losses on available
for sale securities 15.57 13.92 12.58 11.49
Total stockholders' equity 17.19 14.57 13.27 11.26
Selected Ratios:
Rate of return on average:
Total assets 1.28% 1.15% 1.02% 1.22%
Stockholders' equity(1) 13.28 12.14 10.52 13.37
Average total stockholders' equity
to average total assets(1) 10.33 9.49 9.46 9.15
Common dividends payout ratio 15.29 16.21 17.58 14.83
Allowance for loan
losses to total loans 1.82 1.80 1.87 2.02
Nonaccrual and restructured
loans as a percentage of
total loans .25 .45 .29 .30
Net charge-offs to
average total loans .76 .53 .27 .24
Capital Ratios:
Core capital (Tier I) (2) 13.50% 13.31% 13.39% 14.78%
Total risk based capital (3) 14.89 14.72 14.82 16.26
Leverage (4) 9.74 9.40 9.16 9.23
(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 1997 requirements).
(3) Tier I capital plus allowance for loan losses (limited to 1.25% of risk-
weighted assets) to risk-weighted assets (using 1997 requirements).
(4) Tier I capital to quarterly average assets less goodwill.
Selected Financial Data
(In Thousands Except Per Share Data)
1993 1992 1991 1990 1989 1988
------- ------- -------- ------- --------- --------
$1,572,298 $1,452,058 $1,309,613 $1,106,354 $1,019,288 $955,367
520,176 495,784 384,951 375,624 354,865 400,485
777,695 674,352 631,713 538,056 489,537 423,333
1,324,196 1,196,111 1,123,728 938,881 864,011 788,962
25,000 26,500 11,725 10,583 10,757 12,956
137,293 116,335 99,702 95,576 88,578 83,008
$57,727 $55,303 $47,547 $37,933 $34,648 $35,309
1,143 3,152 3,810 1,770 1,630 2,146
33,345 33,767 27,722 24,293 22,378 20,048
60,806 57,304 52,239 44,896 40,930 39,698
19,760 19,150 12,980 10,672 10,025 9,669
$1.52 $1.47 $ .93 $ .75 $ .69 $ .64
.20 .188 .136 .112 .102 .10
10.24 8.93 7.65 6.78 6.13 5.52
10.53 8.93 7.65 6.78 6.13 5.52
1.33% 1.41% 1.06% 1.02% 1.04% 1.03%
15.77 17.69 12.84 11.49 11.75 12.08
8.46 7.96 8.23 8.88 8.82 8.56
13.19 12.79 14.25 15.05 14.76 15.60
2.37 2.74 2.68 2.74 2.94 3.37
.34 .50 .73 .43 .85 .71
.16 .25 .48 .37 .26 .19
13.43% 12.70% 10.05% 11.16%
14.90 13.95 11.30 12.41
8.31 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 1997 was $26,597,000 versus $21,756,000 in 1996
and $17,420,000 during 1995. On a per share basis this equates to $1.96, $1.60,
and $1.29 for 1997, 1996 and 1995, respectively. Additionally, year-end assets
reached $2,251,100,000, versus $2,028,012,000 in 1996. Average stockholders'
equity to average assets was approximately 10.3% for 1997 and 9.5% for 1996.
The 1997 cash dividend was $0.30 per share versus $0.26 per share in 1996. In
January 1998, the Company raised its annualized dividend to 34 cents. This
equates to a 13% increase on a per share basis.
The $4.8 million or 22% increase in net income in 1997 from 1996 can be
primarily attributed to an increase in net interest income, combined with an
increase in gains on securities sales and increased credit card services. The
net yield on interest earning assets decreased slightly from 4.10% in 1996 to
4.08% in 1997. Average earning assets increased $167 million during 1997. This
resulted in a $6.5 million or 9% increase in net interest income. The increase
in net interest income was partially offset by a $1.5 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 credit card charge-offs created the need to provide additional expense to
keep reserves at appropriate levels. Gains on securities sales increased $3.2
million. These gains were primarily taken in the Company's Global fund, which
is a pool of national and foreign equity securities. Net income, excluding the
income from these securities sales, would have been $23.4 million in 1997 and
$20.7 million in 1996, up 13%.
Year-end loans increased $115 million in 1997 from 1996, which is on top of a
$104 million increase during 1996. The increase in loans the past two years
does not include $75 million of credit card receivables which were securitized
and sold. On a managed loan basis, loans increased $160 million during 1996 and
another $134 million in 1997. Although average deposit growth was a respectable
5.6%, in 1996 and 7.2% in 1997, it did not keep up with earning asset growth.
Therefore, the Company utilized other non-traditional methods to fund some of
its loan growth. Besides the securitization of credit cards mentioned above,
average securities sold under agreement to repurchase and other short-term
borrowings increased approximately $60 million in 1996 from 1995, and increased
another $50 million in 1997.
EARNING ASSETS
Average earning assets in 1997 were $1.88 billion, a 9.8% increase over 1996
primarily caused by the loan growth referred to above and an increase in taxable
investment securities of $68 million. Average earning assets were $1.71 billion
in 1996, a 10% increase over 1995. Average loans were $1,139 million, $1,067
million and $918 million in 1997, 1996 and 1995, respectively, a 6.8%, 16.3%
and 15.1% 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 credit card loans can be attributed to a joint venture
with Cabela's in the issuance of a Cabela's co-branded credit card. Average
loans accounted for 61% of average earning assets during 1997 and 62% in 1996.
Average investment securities were $683 million at December 31, 1997, a $100
million increase over 1996. Investment securities accounted for 36% of average
earning assets during 1997 and 34% during 1996.
SECURITIES 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 last two years to extend the average life of its
investment portfolio. The Company has purchased high yielding callable U. S.
Government agencies with stated maturities much longer than the call dates.
These securities are classified on the following maturity schedule by
contractual maturity under the 5 through 10 year column, but the Company fully
expects that these securities will be called when they reach their call date.
The Company's average yield on its taxable security portfolio increased from
6.28% in 1996 to 6.75% during 1997.
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,
----------------------------
1997 1996 1995
------- ------- ------
U.S. Treasury $103,366 $172,533 $183,580
U.S. Agency 239,389 188,986 66,584
State and municipal 27,448 28,747 32,777
Mortgage-backed securities 243,614 205,244 236,097
Corporate bonds - - 1,000
Marketable equity securities 51,698 39,996 30,755
Other securities 425 687 965
-------- -------- --------
$665,940 $636,193 $551,758
======== ======== ========
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, 1997
-------------------------------------------
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 $3,500 $28,362 $151,175 $ - $183,037
State and municipal 4,670 9,124 9,638 4,016 27,448
Other securities 1 142 86 196 425
------ ------- -------- ------ --------
$8,171 $37,628 $160,899 $4,212 $210,910
====== ======= ======== ====== ========
Weighted average yield to maturity:
U.S. Treasury 5.1% 6.9% 7.2% - % 7.1%
State and municipal (1) 5.0 5.0 5.2 5.3 5.1
Other securities 9.4 6.0 6.1 6.8 6.4
Securities available for sale:
U.S. Treasury
and Agency $23,187 $89,697 $46,834 $ - $159,718
======= ======= ======= ======= ========
Weighted average yield to maturity:
U.S. Treasury and Agency 7.3% 7.1% 7.0% -% 7.1%
(1) Not based on taxable equivalents.
The Company owned $244 million in mortgage-backed securities at December 31,
1997. 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.
Loans
The following table presents the amount of loans by categories and percentage
of loans by categories as of December 31, for the year indicated.
December 31,
---------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Real estate mortgage $375,044 $332,913 $295,268 $270,603 $236,202
Consumer 281,697 271,906 263,320 228,332 187,021
Commercial and financial 259,045 245,873 201,910 166,682 169,466
Agricultural (except
loans secured by
real estate; includes
loans for household
and other personal
expenditures) 180,310 130,071 26,414 87,758 87,338
Credit card 106,737 98,895 108,641 80,135 81,932
Real estate construction 33,610 41,581 21,814 16,782 15,736
--------- -------- ---------- ------- --------
1,236,443 1,121,239 1,017,367 850,292 777,695
Less allowance for
loan losses (22,458) (20,157) (19,017) (17,190) (18,461)
--------- ---------- ---------- -------- --------
$1,213,985$1,101,082 $ 998,350 $833,102 $759,234
========== ========= ========= ======= =======
December 31,
-------------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ------
As a percentage of total loans:
Real estate mortgage 30.3% 29.7% 29.0% 31.8% 30.4%
Consumer 22.8 24.3 25.9 26.9 24.1
Commercial and
Financial 21.0 21.9 19.9 19.6 21.8
Agricultural (except
loans secured by
real estate; includes
loans for household
and other personal
expenditures) 14.6 11.6 12.4 10.3 11.2
Credit card 8.6 8.8 10.7 9.4 10.5
Real estate construction 2.7 3.7 2.1 2.0 2.0
----- ----- ----- ----- -----
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, 1997
--------------------------------------------------
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 $157,253 $79,253 $22,539 $66,831 $34,961
Agricultural 137,680 39,246 3,384 33,817 8,813
Real estate
construction 16,187 8,716 8,707 6,865 10,558
RISK MANAGEMENT
Overall risk management is an essential part of the operation of any financial
services organization. There are three primary financial risk exposures: credit
quality, interest rate sensitivity or market risk, 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 exceptionally 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 $4.2 million at December 31, 1997, as
compared to $5.9 million at the end of 1996. As a percentage of total loans,
nonperforming loans represents only .3% and .5% of the loan portfolio at
December 31, 1997 and 1996, 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 in the past several years. The agricultural economy
is dependent upon commodity prices, weather and input costs. Crop yields were
generally fair throughout the region during 1997. The prices for crops were not
as high as they were in 1996. The decrease in grain prices helped the Company's
cattle feeders to be profitable throughout most of the year. Loans to cattle
feeders represent the Company's largest loan segment concentration, but the
Company applies selective underwriting criteria to this segment. In addition to
the Company's direct agricultural loans, some 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 Company has seen an increase in credit card charge-offs in
the past two years. Credit card loans had $5.0 million total net charge-offs
during 1997, $4.2 million in 1996 and $2.6 million in 1995. Nationally credit
card charge-offs also increased during the past two years. The Company's credit
card charge-offs are comparable to industry averages. Consumer loan charge-offs
showed a decrease in 1997 from 1996, but were still higher than the abnormally
low levels in the years prior to 1996. 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 1997, 1996 and
1995, the Company received approximately $398,000, $457,000 and $458,000 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.
For other loans, specific reserves are established for any impaired loan for
which the recorded investment exceeds the measured value of the loan. 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.
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:
1997 1996 1995 1994 1993
----- ------ ----- ----- -----
1.Nonaccrual, Past Due and
Restructured Loans
(a) Loans accounted for on
a nonaccrual basis $1,581 $3,429 $1,700 $1,150 $1,315
(b) Accruing loans which are
contractually past due 90 days
or more as to principal or
interest payments 1,106 846 690 384 432
(c) Loans not included above which
are "troubled debt restructurings" 1,530 1,597 1,256 1,377 1,342
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 529 628 350 285 305
ii. Amount of interest income on
loans listed in categories (a) and (c)
that was included in net income
for the period. 244 395 155 153 140
2. Potential Problem Loans(1) 4,631 6,660 7,953 6,265 6,162
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 Com-pany believes it
has sufficient security collateral to support the current loan balance.
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 and an evaluation of
their impairment, 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 $8,297,000, $6,839,000 and
$3,495,000 for estimated loan losses in 1997, 1996 and 1995, respectively.
Average loans increased 6.8% in 1997, 16.3% during 1996 and 15.1% in 1995. Net
charge-offs were $6.0 million, $5.7 million and $2.5 million during 1997, 1996
and 1995, respectively. The increase in net charge-offs over the past three
years is primarily in credit card charge-offs, although the Company's credit
card charge-off ratios are comparable to national averages. Consumer loan
charge-offs increased significantly in 1996 due to increased consumer
bankruptcies, but they trended back down in 1997. In 1996, Nebraska bankruptcy
filings rose by over 40%. Management feels the overall credit quality of the
Company's loan portfolio remains very good. The increase in loan loss expense
during the last three years 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 appropriate levels. The loan loss reserve as a percentage of loans
was 1.82%, 1.80% and 1.87% at December 31, 1997, 1996 and 1995, respectively.
The following table presents an analysis of loan loss experience.
1997 1996 1995 1994 1993
------- ------- -------- -------- -------
Average loans and
leases for the year $1,139,272 $1,066,896 $917,742 $797,369 $701,305
========== ========== ======== ======== ========
Reserve for loan losses:
Balance, beginning
of year $20,157 $19,017 $17,190 $18,461 $18,470
Provision charged
to expense 8,297 6,839 3,495 332 1,143
Bank acquisitions - - 843 326 -
Loans charged off:
Real estate construction - - - - (332)
Real estate mortgage (100) (43) (66) (27) (102)
Agricultural (158) (73) (98) (120) (142)
Commercial and financial (1,159) (734) (70) (64) (135)
Consumer (1,452) (2,117) (1,168) (631) (502)
Credit card (5,760) (4,827) (3,255) (2,881) (1,913)
Loan recoveries:
Real estate construction - - - - 632
Real estate mortgage 84 282 185 245 41
Agricultural 225 77 186 176 223
Commercial and financial 839 193 438 397 340
Consumer 736 897 636 431 370
Credit card 749 646 701 545 368
------- ------- ------ ------- -------
Net loans charged off (5,996) (5,699) (2,511) (1,929) (1,152)
------- ------- ------- ------- -------
Balance, end of year $22,458 $20,157 $19,017 $17,190 $18,461
======= ======= ======= ======= =======
Ratio of net charge-offs
to average loans .53% .53% .27% .24% .16%
==== ==== ==== ==== ====
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.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Real estate
construction $ 330 $ 628 $ 419 $ 331 $ 221
Real estate mortgage 3,009 2,493 2,902 2,927 2,476
Agricultural 3,286 3,169 3,941 2,658 2,468
Commercial and
financial 4,690 4,896 3,781 3,887 4,790
Consumer 3,478 3,302 3,152 2,472 2,162
Credit card 7,175 5,398 4,623 3,511 2,712
Unallocated 490 271 199 1,404 3,632
----- ------ ------ ------ ------
$22,458 $20,157 $19,017 $17,190 $18,461
====== ======= ====== ====== ======
MARKET RISK
The Company's principal objective for interest rate risk management is to manage
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 and
liabilities which will move with interest rate movements.
Interest rate risk is measured and reported to the Company's Asset and Liability
Management Committee (ALCO), which includes senior management representatives.
Measurement and reporting methods include 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
economic valuation modeling which measures the sensitivity of equity value to
changes in interest rates. Significant assumptions include rate sensitivities,
prepayment risks, and the timing of changes in prime and deposit rates compared
with changes in money market rates.
The Company's exposure to interest rate risk is reviewed on at least a quarterly
basis by the Board of Directors and the ALCO. In addition each subsidiary bank
has its own ALCO committee which reviews the interest rate risk of each
subsidiary bank. If interest rate risk measurements are not within established
guidelines, the Board may direct management to adjust its asset and liability
mix to bring interest rate risk within Board-approved limits. In order to
manage the exposure to interest rate fluctuations, the Company has developed
strategies to manage its liquidity, shorten its effective maturities of
interest-earning assets, and increase the interest rate sensitivity of its asset
base. The Company has almost $400 million of assets whose interest rates are
adjustable, primarily in a 30-day time frame.
One measure of interest rate sensitivity is an evaluation of the sensitivity of
the Economic Value of Equity (EVE). The interest rate risk is measured from the
dispersion of equity values above and below the value produced using current or
base rates. EVE is the difference between the total present values of cash
flowing into the Company and the total present values of cash flowing out of the
Company in the future. The analysis performed by the Company assesses the risk
of loss in interest rate sensitive instruments in the event of a sudden and
sustained 50 to 200 basis points increase or decrease in the market interest
rates. The Company's Board of Directors has adopted an interest rate risk
policy which establishes maximum decreases in the EVE of 6%, 12%, 18% and 25% in
the event of a sudden and sustained 50 to 200 basis points increase or decrease
in market interest rates.
The following table presents the Company's projected change in EVE, for all
assets and liabilities except for the Company's marketable equity securities,
for the various rate shock levels as of December 31, 1997.
Percent Change
----------------
Change in Economic Value Actual Board
Interest Rates Of Equity Change Actual Limit
------------- -------- ------- ------ -----
200 basis point increase $190,367 $(46,388) (19.6)% (25)%
150 basis point increase 204,005 (32,750) (13.8) (18)
100 basis point increase 217,815 (18,940) (8.0) (12)
50 basis point increase 231,273 (5,482) (2.3) (6)
Base scenario 236,755 - - -
50 basis point decrease 245,840 9,085 3.8 (6)
100 basis point decrease 252,409 15,654 6.6 (12)
150 basis point decrease 259,315 22,560 9.5 (18)
200 basis point decrease 265,741 28,986 12.2 (25)
The preceding table indicates that at December 31, 1997, in the event of a
sudden and sustained increase in prevailing market rates, the Company's EVE
would be expected to decrease, and that in the event of a sudden and sustained
decrease in prevailing market interest rates, the Company's EVE would be
expected to increase. At December 31, 1997, the Company's estimated changes in
EVE were within the targets established by the Board of Directors.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented the
computation of EVE. Actual values may differ from those projections presented,
should market conditions vary from assumptions used in the calculation of the
EVE. Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
EVE. Finally, the ability of many borrowers, with adjustable rate loans, to
repay their loans may decrease in the event of interest rate increases.
Below is a gap analysis, which is another means of analyzing interest rate risk,
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, are repriceable or are callable (in thousands):
1 to 91 to 181 to 1 to 5 Over
90 Days 180 Days 360 Days Years 5 Years Total
-------- -------- -------- -------- -------- ------
Assets:
Investments $ 66,574 $ 15,675 $ 113,256 $351,590 $118,845 $ 665,940
Loans 556,694 96,847 117,689 438,777 22,906 1,232,913
Mortgages held
for sale 31,360 - - - - 31,360
Federal funds sold 36,495 - - - - 36,495
-------- ------- ------- ------- ------- ---------
691,123 112,522 230,945 790,367 141,751 1,966,708
Liabilities:
Interest-bearing
demand deposits 39,980 - 79,287 249,680 - 368,947
Savings deposits - - 7,630 84,757 - 92,387
Time deposits 279,260 159,897 276,903 118,943 48 835,051
Short-term
borrowings 280,845 - - - - 280,845
Long-term debt 5,000 12,540 - 36,630 - 54,170
-------- ------- --------- -------- ------- ---------
605,085 172,437 363,820 490,010 48 1,631,400
-------- ------- --------- -------- ------- ---------
Repricing gap $ 86,038 $(59,915) $(132,875) $300,357 $141,703 $ 335,308
======== ======== ========= ======== ======== =========
Cumulative
repricing gap $ 86,038 $ 26,123 $(106,752) $193,605 $335,308 $ 335,308
======== ======== ========= ======== ======== =========
GAP as a % of
earning assets 4.4% 1.3% (5.4)% 9.8% 17.0% 17.0%
==== ==== ==== ==== ==== ====
This table estimates the repricing maturities of the Company's interest
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
based upon the Company's analysis of the repricing characteristics of the non-
contractual deposit liability.
The above gap analysis indicates that the Company's one year cumulative gap is
negative by $106.8 million dollars. Generally, during a period of rising
interest rates, a negative gap would adversely effect net interest income.
Conversely, during a period of falling interest rates, a negative gap would
result in an increase in net interest income. Management's goal is to maintain
a reasonable balance between exposure to interest rate fluctuations and
earnings.
The Company owns $82 million of marketable equity securities. The fair value of
this portfolio has exposure to price risk. The following table shows the effect
of stock price fluctuations of plus or minus 5%, plus or minus 10% and plus or
minus 15%. These were selected based upon the probability of their occurrence.
Fair Actual
Change in Prices Value Change
----- ------
15% increase $94,753 $ 12,359
10% increase 90,633 8,239
5% increase 86,514 4,120
Current fair value 82,394 -
5% decrease 78,274 (4,120)
10% decrease 74,155 (8,239)
15% decrease 70,035 (12,359)
Within the Company's public equity investment portfolio, a 5% or less increase
in the value of the portfolio has occurred in 50% of the quarters over the past
three years; a 5% to 10% increase in the value of the portfolio has occurred in
33% of the quarters over the past three years; a 10% to 15% increase in the
value of the portfolio has occurred in one quarter in the past three years; and
a 5% or less decrease has occurred in one quarter in the last three years.
Of the $82 million in marketable equity securities at December 31, 1997,
approximately $17 million is in one holding. This stock position came about
from a venture capital investment which made its initial public offering in
January 1997. The Company's cost basis in this stock is $429,000. The Company
has put a Zero Cost Collar (purchase of a put option and the selling of a call
option from the same investment bank) on part of the shares of this stock owned,
representing approximately $5 million in fair value, which locks the market
value of these shares between $4,046,000 and $4,946,000. If the price of the
stock remains within the put price and the call price, the collar will expire in
July 1998, at no cost to the Company. If the Company sells these shares as a
result of the exercise of the call option the Company will realize a gain of
$3.9 million to $4.8 million.
In conclusion, the analysis of the above data indicates that the Company's
earnings could be adversely effected by an increase in interest rates. All of
the estimated changes fall within the guidelines of the Company's Board of
Directors and the risks they are willing to take in order to generate profits
for the Company.
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 1998, the Banks have retained
defined net income from the previous two years of approximately $20.7 million.
The parent company holds approximately $83.0 million in cash, short-term
investments and marketable securities as of December 31, 1997. The Company has
the ability to issue commercial paper which could be used to provide liquidity
to subsidiary banks. The Company has issued $4.8 million in commercial paper as
of December 31, 1997. Long-term debt at December 31, 1997 includes $16.0
million of capital notes which have a payment of $2.5 million due in 1998 and
$38.0 million of FHLB borrowings (at subsidiary banks) which have a payment of
$10 million due in 1998.
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 13.5% and
14.9%, respectively, at December 31, 1997. These ratios are up slightly from
13.3% and 14.7%, respectively, at December 31, 1996, and 13.4% and 14.8%,
respectively, at December 31, 1995. 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 9.7% at December 31, 1997 and 9.4% at December 31, 1996.
The Office of the Comptroller of the Currency 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, 1997.
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).
1997 1996 1995
----- ----- -----
Long-term debt to long-term debt plus equity 20.5% 21.9% 24.5%
Total long-term debt to equity 25.7 28.1 32.5
Long-term debt to equity (parent only) 7.7 9.9 12.4
FUNDING SOURCES
Average deposits were $1.58 billion in 1997 as compared to $1.47 billion during
1996 and $1.39 billion in 1995, a 7.2% and 5.6% increase, respectively.
Average interest-bearing deposits increased from $1,151 million in 1995 to
$1,208 million in 1996, to $1,285 million in 1997, a 4.9% and 6.4% increase,
respectively. Noninterest-bearing demand deposits increased $28.5 million or
10.7% in 1997 from 1996 and increased 9.2% or $22.4 million in 1996. The
increase in noninterest-bearing demand deposits can be primarily attributed to
growth in public and business account relationships.
Average time deposits increased 5.8% during 1997 as compared to 1996, while
interest-bearing demand and savings deposits increased 7.5%. 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, 1997
--------------------------------------------
Over 3 Over 6
3 Months through through Over
or Less 6 Months 12 Months 12 Months Total
-------- -------- ------- ------- --------
$133,806 $35,646 $41,963 $11,495 $222,910
During 1996, the Company used a funding source it had not previously used,
securitization. On July 18, 1996 the Company closed on 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, 1997 and 1996, the Company had
sold $75 million and $56 million, respectively, of credit card receivables to
the Trust.
EARNINGS PERFORMANCE
The Company's net income was $26,597,000, up 22% or $4,841,000 from 1996. The
Company's net income for 1996 was $21,756,000, up $4,336,000 from 1995's net
income of $17,420,000. The increase in net income in 1997 from 1996 can be
attributed to several factors. The net yield on interest earning assets
decreased from 4.10% in 1996 to 4.08% in 1997, but average earning assets
increased $167 million during 1997, resulting in a $6.5 million increase in net
interest income. Loan loss expense increased $1.5 million, which resulted a
net increase in net interest income after the provision for loan losses of $5.0
million. Gains on securities transactions increased $3.2 million over the
amounts taken in 1996. These gains were primarily taken in the Company's Global
fund, due to certain positions reaching levels where management felt the prices
of the investments had reached their maximum potential.
The increase in income in 1996 over 1995 was due primarily to an increase in net
interest income, due to a significant increase in the net yield on interest
earning assets, from 3.93% in 1995 to 4.10% in 1996. The increase in net
interest income was partially offset by an increase in the provision for loan
losses of $3.3 million.
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 1997 was
$76.6 million as compared $70.1 million and $60.9 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) increased from 3.93% in 1995 to 4.10% in 1996
and decreased slightly to 4.08% in 1997. A flat yield curve and stiff
competition for deposits contributed to the lower net yield on earning assets in
1995. As a result of the Company's growth in earning assets, the Company
employed a strategy 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. In addition, the Company
decided to fund some of its loan growth with more non-traditional funding
sources. The Company increased its borrowings from the Federal Home Loan Bank
in 1996, started making more use of brokered deposits and increased its use of
other short-term borrowing sources such as federal funds purchased and
securities sold under agreement to repurchase. In addition, the Company
securitized $56 million in credit card receivables during the 1996.
The Federal Reserve increased short-term rates in the first quarter of 1997,
which resulted in an increase in the Company's cost of funds. The Company was
unable to increase the yield on its earning assets at the same rate, so
therefore, there was a slight decline in the net yield on earning assets.
The impact of these strategies can be seen in the table shown on following page.
The 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.
1997/96 1996/95
----------------------- ----------------------
Amounts Amounts
Attributable Attributable
to Changes in to Changes in
------------------------ -----------------------
Total Total
Volume Rate Change Volume Rate Change
------- ------- ------ ------- ------ ------
Interest and fees on loans $ 6,608 $ 182 $ 6,790 $13,628 $(1,894) $11,734
Interest on taxable
investment securities 4,452 2,526 6,978 305 450 755
Interest on state
and municipal obligations (129) 27 (102) (132) 5 (127)
Equity securities 910 (570) 340 274 55 329
Interest on mortgages
held for sale (337) 58 (279) 1,005 (265) 740
Interest on short-term
investments (34) (23) (57) (729) (200) (929)
------- ----- ------ ------ ------ ------
Total interest income 11,470 2,200 13,670 14,351 (1,849) 12,502
------- ----- ------ ------ ------ ------
Interest on deposits:
Interest-bearing demand 1,448 (153) 1,295 329 (347) (18)
Savings deposits 163 61 224 111 (46) 65
Other time deposits 2,662 705 3,367 2,268 (2,156) 112
Interest on federal
funds purchased 2,006 90 2,096 782 (41) 741
Interest on short-term
borrowings 770 218 988 2,194 (429) 1,765
Interest on long-term debt (933) 153 (780) 891 (271) 620
------- ----- ----- ----- ------ -----
Total interest expense 6,116 1,074 7,190 6,575 (3,290) 3,285
------- ----- ----- ----- ------ -----
Net interest income $ 5,354 $1,126 $ 6,480 $ 7,776 $ 1,441 $ 9,217
======= ===== ===== ====== ====== ======
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 considered material to total interest income. Tax-exempt interest is not on
a tax-equivalent basis. The change due to rates in 1997/96 is positive despite
the small decline in the net yield on interest earning assets due to the
increase in net interest earning assets (i.e. interest yielding assets less
interest bearing liabilities).
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 41%, 39%, and 36% during 1997,
1996 and 1995, respectively. The following table shows the breakdown of
noninterest income and the percentage changes.
Percent Increase
(Decrease)
-----------------
1997 1996 1995 1997/96 1996/95
------- ------- -------- -------- --------
Credit card $13,047 $10,591 $ 4,965 23.2% 113.3%
Computer services 8,904 8,491 8,147 4.9 4.2
Other service charges
and fees 7,829 6,217 5,293 25.9 17.5
Trust services 6,469 5,840 5,272 10.8 10.8
Service charges on
deposits 5,562 5,231 4,893 6.3 6.9
Mortgage banking 5,425 4,868 3,571 11.4 36.3
Gains on securities sales 4,861 1,672 581 190.7 187.8
Other income 1,742 1,120 1,128 55.5 (.7)
------- ------- -------
Total noninterest income $53,839 $44,030 $33,850 22.3 30.1
======= ======= =======
Noninterest income increased $9,809,000 or 22.2% in 1997 from 1996. If
securities gains of $4,861,000 and $1,672,000 in 1997 and 1996, respectively,
were excluded, noninterest income would have been $49.0 million in 1997 compared
to $42.4 million in 1996, a 15.6% increase. These securities gains were
primarily the result of selling certain positions held in the Company's Global
Fund. Credit card income increased $2.5 million due to increased credit card
activity, particularly interchange and merchant income, due to an increased card
holder base. Discount brokerage fee income and bond investment fees on bonds
sold by the National Bank of Commerce are primarily responsible for a 25.9%
increase in other service charges and fees. Trust services fees increased 10.8%
due primarily to an increase in activity and an increase in the value of assets
being managed. Mortgage banking revenues increased due to an increase in
servicing income, origination fees and underwriting fee income, all due to an
increase in activity. Other income increased primarily due to gains on the sale
of mortgages held for sale and profit sharing payments received on some other
real estate owned (which had been previously sold) based on the earnings being
generated off of the real estate.
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 (Cabela's) to issue a co-branded credit card to its customer base.
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. Mortgage
banking revenues increased due to an increase in servicing income, origination
fees and underwriting fee income, all due to an increase in activity. Gains on
securities sales are attributable to sales of equity securities out of the
Company's Global fund.
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 1997, 1996 and
1995.
Percent Increase
(Decrease)
----------------
1997 1996 1995 1997/96 1996/95
-------- ------ ------ ------- -------
Salaries and
employee benefits $39,475 $35,808 $33,101 10.2% 8.2%
Credit card fees 7,921 7,055 3,751 12.3 88.1
Equipment expense 5,538 5,523 4,770 .3 15.8
Net occupancy expense 4,496 3,980 3,815 13.0 4.3
Communications 4,221 4,159 3,647 1.5 14.0
Fees and insurance 3,802 3,770 5,117 .8 (26.3)
Business development 3,695 3,990 2,649 (7.4) 50.6
Supplies 2,539 2,404 2,395 5.6 .4
Amortization of mortgage
servicing rights 2,067 1,537 747 34.5 105.8
Other expenses 7,349 5,686 4,401 29.2 29.2
------- ------- -------
Total noninterest
expense $81,103 $73,912 $64,393 9.7 14.8
======= ======= ========
Efficiency ratio (1) 63.1% 64.5% 67.8%
Average number of full-time
equivalent employees 1,108 1,035 1,015
Personnel expense per
employee (in dollars ) $35,627 $34,597 $32,612
(1) Computed as noninterest expense (excluding net cost of real estate owned,
minority interest and goodwill amortization) divided by the sum of net interest
income and noninterest income (excluding securities gains (losses)).
Noninterest expenses were $81,103,000 in 1997 compared to $73,912,000 in 1996.
Salaries and employee benefits increased $3.7 million or 10.2% generally due to
increases in the levels of pay and the number of employees. Credit card
processing fees increased $866,000 due to increased activity and an increase in
Cabela's bucks expense (points earned from using the Cabela's credit card that
can be redeemed for merchandise at Cabela's). Net occupancy expense increased
13.0% generally due to building new and remodeling existing facilities. The
increase in amortization of mortgage servicing rights is due to the adoption of
Statement of Financial Accounting Standards No. 122 in 1995, and the related
costs being capitalized and amortized over the the life of the related servicing
income. The largest components in the increase in other expenses are increases
in minority interest expense because of the Cabela's joint venture of $696,000,
additional consulting expenses of $603,000 and increased travel expenses of
$600,000 primarily relating to the Company's computer service company.
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. The decrease in fees and
insurance is due to a decrease in FDIC fees of $1.5 million. Communications
expense increased 14% due to First Commerce Technologies now doing 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. Credit card 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 travel costs of $200,000 and an increase in minority interest
expense because of the Cabela's joint-venture of $764,000.
INCOME TAXES
The provision for income taxes was $14,428,000 in 1997, $11,629,000 in 1996 and
$9,431,000 in 1995. The changes from year to year can be primarily attributed
to the increase in income before income taxes.
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.
TRENDS AND UNCERTAINTIES
ECONOMY. The projected outlook for the Nebraska economy over the next couple of
years is for growth in employment (2.0% growth), personal income (6.2% annual
growth), and retail sales (5.5% 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 is 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, but the
financial weakness in Asian countries may have a depressing influence on the U.
S. economy. Agricultural exports may be reduced due to the Asian economic
uncertainties.
The financial results of the 1997 Nebraska farm sector have been mixed. Crop
prices are much lower relative to last year, and crop yields were average.
Cattle feeders realized improved profitability in the early part of the year,
while losses were incurred in the last half of the year. Ranch operations have
been reflecting profits (reduced herd inventories). Agricultural real estate
values have risen. Personal bankruptcy filings have stabilized but remain at
historically high levels.
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, moratoriums on
new irrigation wells and preserving wildlife habitat. These discussions may
ultimately have an impact on the 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
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's loan production office in
Valentine will be converting to a full service bank (new bank charter pending
regulatory approval) in order to provide complete banking services to the
growing client base. 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
72,000 active accounts from Cabela's clients. In 1998, they 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
1997, subsidiary banks opened loan/deposit production offices in Kansas,
Colorado and two in Nebraska. These offices are attracting new customers and
allowing the company to expand geographically. The Company has minority
ownership interests in six early stage venture capital companies. One of these
companies successfully completed an initial public stock offering in 1997. The
Company will continue to explore venture capital investment opportunities.
YEAR 2000. A significant technological issue impacting all companies worldwide
is the need to modify their computer information systems to properly process
transactions relating to the year 2000 and beyond. The Company has implemented
a formal program to review its software programs and other time sensitive
systems for year 2000 compliance. The Company expects to incur internal staff
costs as well as consulting and other expenses related to the execution of the
implementation plan. A portion of these expenses may be incorporated in the
cost of normal software upgrades and involve the redeployment of existing
information technology resources. Presently, management has not yet completely
determined the year 2000 implementation costs, but they are not expected to have
a material financial impact on the Company. It is the Company's intent to have
all critical programs updated and tested for year 2000 compliance by December
31, 1998. Progress is reported to the Board of Directors at least quarterly.
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, 1997, 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 1997, the Company
acquired 15,000 shares of its Class A stock and 1,700 shares of its Class B
stock at an average price of $21.50. All outstanding treasury stock was retired
as of December 31, 1997.
FORWARD LOOKING INFORMATION
When used or incorporated by reference in disclosure documents, the words
"anticipate," "estimate," "expect," "project," "target," "goal," and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Such forward-looking
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, expected or projected. These forward-looking statements
speak only as of the date of the document. The Company expressly disclaims any
obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectation with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
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
Donald D. Kinley
Vice President and Treasurer
Karen Kuhn
Vice President, Marketing
James R. Richardson
Vice President and Loan Services Manager
* Executive Officer
DIRECTORS
David Calhoun
Chairman and Chief Executive Officer
Jacob North Printing
Connie Lapaseotes
Lapaseotes, Ltd.
Cattle Feeding, Ranching and Farming
John G. Lowe, III
Owner, Lowe Investment Co.
Investment Firm
John C. Osborne
President, Industrial Irrigation Services
Richard C. Schmoker
Attorney and Partner, Faegre & Benson
William C. Schmoker
Assistant Vice President
Norwest Investment Management, Inc
Kenneth W. Staab
Staab Restaurant Management
James Stuart
Chairman, Stuart Management Co.
Managing of Outdoor Advertising Companies
James Stuart, Jr.
Chairman and Chief Executive Officer
First Commerce Bancshares, Inc.
James Stuart, III
Chairman and Chief Executive Officer
First Commerce Investors, Inc.
Scott Stuart
Managing Partner
KJS, LLC, Outdoor Advertising
Advisory Director
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
Mary C. Gerdes, 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
Website: www.chasemellon.com
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,
1997, 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 21, 1998
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