First Commerce Bancshares & Subsidiaries o 1
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 eight 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, two in Kansas, one in Arkansas,
Colorado, Florida, New Mexico and Texas.
The Company is geographically located throughout Nebraska with full service
banking offices in Alliance, Bridgeport, Grand Island, Hastings, Kearney,
Lincoln, McCook, North Platte, Valentine and West Point. Loan/deposit production
offices are located in Cairo, Holdrege, Hyannis, Mullen, Snyder, and Wood River,
Nebraska; Burlington, Colorado; and Goodland, Kansas.
Financial Highlights (In Thousands Except Per Share Data)
Percent
At December 31, 1998 1997 Change
------ ------ -------
Assets $2,384,745 $2,251,100 5.9%
Investments 747,844 691,144 8.2
Loans 1,284,007 1,236,443 3.8
Deposits 1,728,500 1,649,494 4.8
Stockholders' equity 248,646 232,580 6.9
Per share data:
Stockholders' equity before net unrealized gains
(losses) on securities available for sale 17.36 15.57 11.5
Total stockholders' equity 18.40 17.19 7.0
Closing bid price
Class A 26.25 29.00 (9.5)
Class B 28.00 32.50 (13.8)
Percent Percent
Year Ended December 31, 1998 Change 1997 Change 1996
-------- -------- -------- -------- --------
Net interest income $82,197 7.3% $76,586 9.2% $70,106
Provision for loan losses 7,658 (7.7) 8,297 21.3 6,839
Noninterest income 65,714 22.1 53,839 22.3 44,030
Noninterest expense 95,286 17.5 81,103 9.7 73,912
Net income 29,035 9.2 26,597 22.3 21,756
Return on average equity before
net unrealized gains (losses) on
securities available for sale 13.05% 13.28% 12.14%
Per share data:
Basic net income $2.15 $1.96 $1.60
Dividends .34 .30 .26
Marketable equities (cost) $52,057 $43,217 $33,309
Marketable equities (fair value) 72,258 73,913 44,169
Dear Stockholders:
Our Company had another good year of earnings growth and operational improvement
in 1998. Net income for the year was $29.0 million, up 9.2% over the previous
record year of $26.6 million. On a per share basis, 1998 earnings were $2.15
versus $1.96 in 1997, up 9.7%.
Our earnings improvement was due to another year of increased net interest
income, very low loan losses, a wonderful year of increased fee income, and
gains on securities in our Global Fund. Asset growth during the year was less
impressive, up only 5.9% over 1997, ending 1998 at $2.38 billion. Average asset
growth was somewhat better, up 9% for the year. [OBJECT OMITTED]A year ago we
introduced a new earnings term called "normalized earnings" which we hoped would
be helpful to you in being able to compare earnings for different periods
without being distorted by "non-core" earnings such as Global gains, bond gains,
gains from sale of venture capital positions, etc. In 1998 our normalized
earnings were $26 million, up 11% over normalized earnings in 1997.
Normalized Earnings Schedule
1995 1996 1997 1998
---- ---- ---- ----
Net income $17,420 $21,756 $26,597 $29,035
Less global gains net of tax 332 1,063 3,067 2,986
Less venture capital gains (losses) 76 (116) - (36)
Less securities gains net of tax 46 24 94 26
-------------------- --------------------
Normalized earnings $16,966 $20,785 $23,436 $26,059
====== ====== ====== ======
As I mentioned in the 1998 Third Quarter Report, the healthy earnings growth of
our Company in 1998 is a continuation of a pattern of earnings and asset growth
which began ten years ago. During these past ten years, our Company has grown
from $955 million of total assets in 1988 to $2.38 billion on December 31, 1998,
and earnings have increased from $9.7 million in 1988 to $29 million in 1998.
This ten-year report card is very, very good. Needless to say, all of us are
proud of this excellent business success.
During this past ten-year period, we have generally had a solid economic arena
in which to compete. Our agricultural commodity prices have been reasonably
good, our national economy has been growing at a surprising pace for a long
period, and our U. S. equity markets have enjoyed unprecedented gains. Also,
during this period we have had some unique opportunities to capitalize on
mistakes made by some of our competitors which in some markets has enabled us to
accelerate our growth rate and improve market share. I have said this before,
and I am repeating myself, as I believe that the big picture environment of
today and what I see during the next few years will be more difficult for us
than the past ten years. I am not predicting doom and gloom, just a tougher
environment.
In the next few pages I will discuss many important components of our business
to give you a big picture look at recent important Company activity. We provide
you with this information because review of our consolidated profit and loss
statement and balance sheet, although very real, does not paint a complete or
clear picture of our Company activity. At the conclusion of this review, I will
also share some of my thoughts on what I expect our Company will be able to
accomplish in the few years ahead.
GROWTH
Although asset and loan growth has been good during the past ten years, assets
this past year increased only 5.9% to $2.38 billion at year-end. Loans were up
only 3.8% to $1.28 billion at year-end. This reduced growth occurred in part due
to poor cattle and hog prices and poor grain prices in our farm sector. Other
loan sectors were impacted by low interest rates that enabled many of our loan
customers to find long-term fixed rate loans from long-term lenders to replace
our shorter term credits. Changing competitive patterns in our installment and
student loan activities also slowed our overall loan growth rate, and a very
tough competitive environment in general negatively impacted our overall loan
growth.
LOAN QUALITY
As I continue to mention in these reviews, excessive loan losses kill bank
earnings, and ultimately can kill banks, period. We continue our strong credit
quality standard and have not and will not alter our long-term commitment to
credit quality, even in this new arena of tougher competition. Our loss ratios
(excluding credit card) are well in line with industry averages as are our loss
reserves to loans. Our "watch list" grew considerably this past year, mostly as
a result of the poor farm economy. A larger watch list does not necessarily mean
higher actual loan losses, but another year of economic stress in our
agricultural sector will certainly translate into higher future losses. [OBJECT
OMITTED][OBJECT OMITTED] CREDIT CARD Our credit card business made major
progress this year in stabilizing loss rates, improving profitability, and
continuing rapid growth. This business began to change rapidly a few years ago
with a proliferation of card offerings at lower rates and fees to consumers,
many of which had sub-par credit standings. This rapid shift in the industry
norm caused many that were previously in this business to fold their tents, lick
their wounds, and look for other things to do. At First Commerce, we have found
ways to reduce losses, improve our collection process, increase fees, and
continue to grow.
As mentioned in past reports, a few years ago we entered into a joint venture
with Cabela's, "The World's Foremost Outfitter of Hunting, Fishing, and Outdoor
Gear." This co-branded card partnership continues to be very successful. We
admire and work well with our partners. With this partnership, our active credit
card accounts outstanding now number over 160,000, and our managed loan volume
from credit cards now exceeds $200 million. Our hats are off to those who have
provided excellent leadership to this rapidly changing and important business --
Mark Hansen, Executive Vice President and Senior Lending Officer at NBC; Tom
Boatman, Senior Vice President and Manager of our BankCard Division; Sue
Saathoff, Vice President and Chief Operating Officer of our BankCard Division.
[OBJECT OMITTED][OBJECT OMITTED]
FIRST COMMERCE MORTGAGE
Our mortgage company had another wonderful year in 1998 with net income of $1.2
million, and loan servicing growth of 36.8%, ending the 1998 year with servicing
volume of $1.6 billion. At the beginning of 1998, mortgage rates fell rapidly to
levels we have not seen for many years. This created a huge wave of refinancing
activity, increasing volume for FCM to levels three times that of normal. Our
management team did a skillful job of controlling interest rate exposure and
were very successful in profitably selling unhedged mortgages into the secondary
markets, enabling us to offset the losses incurred by writing down previously
booked mortgage servicing rights caused by the heavy refinancing activity. FCM
borrows heavily from NBC to support its warehouse activity. And, it is also one
of NBC's largest deposit customers with average balances in excess of $47
million.
During the year Jeff Holmberg was named Chief Executive Officer, effectively and
smoothly completing the management transition planned a year ago. We are
thankful for the many years of dedicated service which Doug Alford, FCM's former
president, provided us. This past year, between the earnings of FCM, origination
fees generated from our operating businesses, dollars earned by NBC from loans
made to FCM, and interest earned on the FCM deposit balances, this business
activity earned First Commerce over $3 million.
[OBJECT OMITTED][OBJECT OMITTED]
FEE INCOME
During 1998, fee income generated in various parts of our consolidated Company
increased $11.0 million to $58.2 million, up 23.3% over 1997. This is a very
substantial increase without which we would not have been able to achieve our
1998 earnings targets. This excellent fee income growth occurred in our BankCard
Division, Trust Division, our mortgage origination activity, brokerage, and
investment fees generated by First Commerce Investors. This has been wonderful
growth for us.
RETAIL
Our retail function continues to strengthen our relationships with our customers
through continued quality service and cross selling activities. Our customers
like to bank with us, and we are working hard to continue to earn their trust
and find more good people to do business with. Jo Kinsey and staff are doing a
great job of making banking fun again for our customers and our people.
Important pieces of new technology were put in place this past year - a data
base marketing system (managed by Judy Terwilliger) and an account profitability
measuring system, which will make us more effective marketers and will enable us
to do a better job managing customer relationships for future growth.
During 1998, we opened our new Call Center at NBC, and it has been enormously
successful. Under the leadership of Sandra Walsh, our Call Center now receives
customer calls at a rate of 4,000 a week. This translates into 208,000 calls per
year. Sandra and our excellent Call Center staff do a wonderful job of
maintaining our traditional quality service, do an excellent job of
cross-selling, and free up our Personal Bankers for effective and important
face-to-face work with our customers in our banks and branches.
We have web sites (www.fcbi.com) for every bank and now an interactive home
banking product that allows our customers to access our bank services with their
home PC over the Internet. This "electronic banking" function will grow
importantly over the next five years and keep our Company in the front of the
race in providing our customers new, convenient ways to access our many
financial services.
FIRST COMMERCE INVESTORS AND NBC TRUST DIVISION
Our Trust Division, which is part of the National Bank of Commerce, and First
Commerce Investors, which is a holding company subsidiary, have done an
excellent job of increasing revenue and profits during the past three years. In
the fall of 1997, the vast majority of the NBC co-mingled funds were converted
into mutual funds, which provide a better product for our customers. Our Trust
Division is capably led by Steve Caswell and a team of real pros who do a great
job for our customers and bring in significant new business each year. Vicki
Huff and the Trust Department staff continue to lead the new business charge for
us and deserve a big hand for their wonderful work.
At First Commerce Investors, Jim Stuart, III, Chairman, and Cam Hinds, President
and Chief Investment Officer, along with a crew of very capable people have
developed a very important investment business, which has the potential to
provide us with good future growth. The current challenge is growing our mutual
funds.
FIRST COMMERCE TECHNOLOGIES, INC.
First Commerce Technologies lost $888,000 in 1998. Principal causes of the loss
were 1) communication expenses running much higher than plan, 2) increased costs
relative to work done to be Year 2000 ready (mostly extra people), and 3) costs
incurred (hardware and software) to provide better customer service and enhance
our existing products. Needless to say, none of us are happy about the loss. We
anticipate being able to run FCT at breakeven levels in 1999, and are then
hopeful that our improved products and service quality will begin to produce
higher revenues and profits in 2000 and beyond.
Bank technology has been changing very rapidly during the past five years and we
have invested heavily during this period to provide ourselves and FCT customers
with the technology and service level to enable us to remain competitive in
today's and tomorrow's banking environment.
FCT has excellent people, they have improved service levels, and they have made
excellent product improvement. This year, we have yet another year of heavy
investment in products and a heavy year of completion of converting all of our
customers to new Year 2000 ready and more user-friendly products. In the
following year, we should begin to see the results of our heavy investment in
this business. We have not done a good job of predicting results.
WESTERN NEBRASKA NATIONAL BANKS
At Western Nebraska National Banks (North Platte and Valentine), which I call
"Western," growth continues at a very rapid pace. Total loans (when Valentine is
included) increased to $162 million at the end of last year, up 17% from a year
ago, and total assets as of year-end 1998 (when Valentine is included) were $240
million, up 14% over the previous year, and up 176% from five years ago.
Expansion of our Alliance building is nearly complete, and we have recently
hired two new outstanding people, Daryl Krejci and Jerry Beagle, to complement
Frank Tolstedt, Marvin Larabee and Miles Colson. This great team has the town
"abuzz" and new customers are standing in line to get in.
In Valentine, Jan Lallman and Monty Nieffer have a new building under
construction that, when completed, will boost the already strong growth which
has occurred there. Total assets at year-end in Valentine were $17 million. This
is a conversion of an LPO which we began only three years ago. Jan, Monty and
their staff have plans to add a significant amount of new business this year in
this wonderful Nebraska Sandhills ranch country.
Mary Gerdes, President of Western, Joe Scherger, Executive Vice President, and
Leland Poppe, Executive Vice President, have created a wonderful team of highly
motivated people who are working hard, having fun, and winning. Upfront costs of
goodwill created from past acquisitions and strong depreciation charges created
by construction of the many new facilities dampen current earnings, but
continued growth and time will make Western one of our largest profit centers.
As I have said before, this is not "business as usual."
GLOBAL
We had another good year with our Global investments. At year end, Global's
market value was $70.1 million with a cost of $52.1 million, thus creating
potential future pre-tax gains (if December 31, 1998 prices hold) of $18
million. During 1998, $3.0 million was taken in net after tax gains and income,
which was included in Company net income.
Investment returns in 1998 for Global were 16.86%, which compares well to the
Lipper Global Equity Index of 14.63%. Over the past three and five years, our
Global returns have been 18.33% and 16.06%, respectively, which is quite good
and better than our expectation. Global continues to provide us with a
diversified earnings stream, a source of spare capital, and a source of
potential emergency liquidity. Jim Stuart, III, and Cam Hinds, our FCI leaders,
do a good job of managing this important pool of Company capital.
COMPANY ACTIVITIES
During this past year, Stuart Bartruff and I looked at a good number of
potential acquisitions and bid on a few. We were not successful on any of our
bids at the prices we felt would benefit our Company over the long run. Current
acquisition prices for banks with little growth potential have been in the 2.5x
book value area, and banks in growth markets are fetching handsome 3x book and
higher prices. Stuart and I have not been able to justify paying excessive
prices which would dilute our per share earnings caused mostly by the goodwill
amortization created when excessive prices are paid.
We continue to look for acquisition opportunities, which will accelerate our
growth rate. Buying more agriculturally based Midwest banks does not meet this
criteria unless the price is low enough that it does provide overall Company
value.
In April we will be opening a new bank on the northern borders of Colorado
Springs. We are very pleased that Tom Feilmeier has agreed to be our president
there. Tom is a very bright, high energy banker who has the financial and
leadership skills to build a successful new bank in Colorado. This investment
will require patience on our part, as this start-up will not breakeven for about
three to five years. This is, we think, an excellent way to enter new growth
markets at reasonable prices (book value plus losses versus 3x book for an
existing bank). We are excited about this new venture.
During 1998 we increased our cash dividend payment rate from 30 cents to 34
cents per share. Your Board also voted in December to increase the cash dividend
rate in 1999 to 36 cents per share.
During the 1998 year, we also purchased 18,017 of FCB shares at what we believe
to be good prices for our Company and our stockholders. We will continue this
practice when good opportunities present themselves. We compare these
purchases/investments at prices of approximately 1.4x book value versus making
an acquisition of another bank at 2.5x earnings that dilutes our earnings on a
per share basis. On balance, as much as we like Nebraska, we think we have
enough mid-western ag banks. Acquisition excitement for us comes from growth
markets at fair prices, or continued investments in the Global Fund, or in our
own Company when the price is right.
During the past 18 months, we have spent a great deal of time and money in both
our computer company, and our banks and other businesses to assure ourselves and
customers that we are prepared for the turn of the century which will occur at
the end of this year. Our principal focus has been to assure our customers and
ourselves that our computer based hardware and software will work when we enter
the Year 2000.
We estimate that we have spent approximately $5.5 million through 1998 and will
spend another $7.0 million in 1999 in both hard and soft dollars to make sure
our hardware and software systems will work January 1, 2000. In our computer
company, Terri Raffety, Mary Anne Classen, and Sandy Deets have done a great job
defining, testing, and fixing our systems. And in NBC, Steve Slope and Dave
Wellsfry have done an outstanding job of getting our systems prepared and
tested. These five individuals have earned "Hero" status in my book. We are very
proud of them. We will have nearly all systems tested by June 30 of this year.
At this writing, all of our efforts and tests have gone very well, leaving me
confident that we will be fully prepared for business as usual in January next
year.
CURRENT YEAR THOUGHTS
Our business plans for 1999 call for us to continue with reasonable bottom line
growth from both asset generated income, fee income, and normal profit
production from Global. As mentioned earlier, I am worried that continued stress
on our ag customers due to poor prices (below breakeven levels) could result in
increased levels of loan losses and the need to beef up loss reserves to cover
current and future losses. We clearly need price improvement or we are going to
begin to see some unwanted liquidations a year from now in our agricultural
sector. Our U.S. equity prices have been increasing in value at an unprecedented
and an unsustainable rate for four years now. A rapid stock market correction
could cause GDP growth in the U. S. economy to slow causing our general business
climate to soften, making it tougher for our brokers to sell investments, making
it tougher to produce good returns in Global, and producing a general and
potentially scary slowdown in the U.S. economy. We know about the troubles of
our trading partners in Asia and Latin America, which will continue to have a
negative impact on U.S. GDP growth and ag prices here at home. Even with these
concerns, our budgets call for continued growth and we work hard each day to
achieve our plans for another successful year.
Long term I continue to be optimistic about the growth of our country and the
world economy and I feel there are reasonable prospects for agriculture in
America.
I also believe that given the current potential troublesome environment, our
company is focused on the right things to maximize both our short and long-term
potential. We have made important investments in people, technology, and
buildings to enhance asset and bottom line growth. Our people are skilled,
seasoned, and motivated to win. This, of course, is extremely important both in
good times and even more so when our environment toughens up.
It is possible that none of the things that concern me today will ever happen. I
hope this turns out to be the case. We are not waiting for bad things to happen.
We are working hard every day to make good things happen and being opportunistic
along the way.
We are very appreciative of the many people who have and who are helping make
this an outstanding business organization. It has taken tremendous energy and
commitment to get us where we are today, and we have no intention of letting any
of our success slip away.
As in past letters, I have ended by inviting any of you who have a good
idea which will be helpful to us to call me, and I again invite you to do so.
Sincerely,
James Stuart, Jr.
James Stuart, Jr.
Chairman and CEO
The First Commerce Bancshares Organization
The multi-resource, statewide organization First Commerce Bancshares is today,
traces its roots to the founding of Lincoln's National Bank of Commerce in 1902.
The organization has since expanded not only in Nebraska, but into Kansas and
Colorado. The numerous banking locations that comprise First Commerce Bancshares
are indicated on the map below.
Index To Financial Information
Consolidated Balance Sheets....................................................10
Consolidated Statements of Income..............................................11
Consolidated Statements of Stockholders' Equity................................12
Consolidated Statements of Cash Flows..........................................13
Notes to Consolidated Financial Statements.....................................14
Independent Auditors' Report...................................................26
Selected Quarterly Financial Data..............................................27
Selected Financial Data........................................................28
Management's Discussion and Analysis...........................................32
Officers and Directors.........................................................48
Consolidated Balance Sheets
December 31,
--------------------------
1998 1997
--------- --------
(Amounts In Thousands)
ASSETS
Cash and due from banks $ 135,731 $ 156,664
Federal funds sold 31,865 36,495
--------- ---------
Cash and cash equivalents 167,596 193,159
Mortgage loans held for sale 66,178 31,360
Securities available for sale (cost of
$430,747,000 and $294,691,000) 452,301 328,376
Securities held to maturity (fair value of
$300,502,000 and $367,489,000) 295,543 362,768
Loans 1,284,007 1,236,443
Less allowance for loan losses 24,292 22,458
--------- ---------
Net loans 1,259,715 1,213,985
Federal Home Loan Bank stock, at cost 9,347 8,481
Accrued interest receivable 22,257 21,476
Premises and equipment, net 62,392 54,468
Other assets 49,416 37,027
--------- ---------
$2,384,745 $2,251,100
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 365,782 $ 353,109
Interest bearing 1,362,718 1,296,385
--------- ---------
1,728,500 1,649,494
Short-term borrowings 213,470 198,395
Federal Home Loan Bank borrowings 143,625 120,450
Accrued interest payable 7,442 7,734
Accrued expenses and other liabilities 29,562 26,277
Long-term debt 13,500 16,170
--------- ---------
Total liabilities 2,136,099 2,018,520
Commitments and contingencies
Stockholders' equity:
Common stock:
Class A voting, $.20 par value; authorized
10,000,000 shares; issued and outstanding 2,583,319
and 2,591,336 shares; 517 518
Class B nonvoting, $.20 par value; authorized
40,000,000 shares, issued and outstanding 10,928,951
and 10,938,951 shares 2,186 2,188
Paid-in capital 21,572 21,601
Retained earnings 210,361 186,377
Accumulated other comprehensive income 14,010 21,896
--------- ---------
Total stockholders' equity 248,646 232,580
--------- ---------
$2,384,745 $2,251,100
========= =========
See notes to consolidated financial statements.
Consolidated Statements of Income
Year ended December 31,
----------------------------
1998 1997 1996
------ ------ ------
(Amounts In Thousands Except Per Share Data)
Interest income:
Loans $111,395 $104,018 $ 97,228
Securities:
Taxable 41,635 39,463 32,485
Nontaxable 1,503 1,381 1,483
Dividends 2,110 1,653 1,313
Mortgage loans held for sale 3,419 1,674 1,953
Federal funds sold 1,898 1,980 2,037
------ ------ ------
Total interest income 161,960 150,169 136,499
Interest expense:
Deposits 62,902 60,201 55,315
Short-term borrowings 9,181 8,706 7,256
Federal Home Loan Bank borrowings 6,313 3,206 2,153
Long-term debt 1,367 1,470 1,669
------ ------ ------
Total interest expense 79,763 73,583 66,393
------ ------ ------
Net interest income 82,197 76,586 70,106
Provision for loan losses 7,658 8,297 6,839
------ ------ ------
Net interest income after provision for loan losses 74,539 68,289 63,267
Noninterest income:
Credit card 15,759 13,047 10,591
Computer services 11,427 8,904 8,491
Other service charges and fees 10,682 7,829 6,217
Mortgage banking 8,853 5,425 4,868
Trust services 6,085 6,469 5,840
Service charges on deposits 5,427 5,562 5,231
Gains on securities sales 4,635 4,861 1,672
Other income 2,846 1,742 1,120
------ ------ ------
Total noninterest income 65,714 53,839 44,030
------ ------ ------
Noninterest expense:
Salaries and employee benefits 44,123 39,475 35,808
Credit card fees 11,403 7,921 7,055
Equipment expense 6,289 5,538 5,523
Amortization of mortgage servicing rights 4,782 2,067 1,537
Communications 4,447 4,221 4,159
Net occupancy expense 4,353 4,496 3,980
Business development 4,343 3,695 3,990
Fees and insurance 4,266 3,802 3,770
Supplies 2,786 2,539 2,404
Other expenses 8,494 7,349 5,686
------ ------ ------
Total noninterest expense 95,286 81,103 73,912
------ ------ ------
Income before income taxes 44,967 41,025 33,385
Income tax provision 15,932 14,428 11,629
------ ------ ------
Net income $ 29,035 $ 26,597 $ 21,756
====== ====== ======
Weighted average shares outstanding 13,529 13,541 13,566
====== ====== ======
Basic net income per share $2.15 $1.96 $1.60
====== ====== ======
See notes to consolidated financial statements.
Consolidated Statements Of Stockholders' Equity
Accumulated
Class A Class B Compre- Other
Common Common Paid-In Retained hensive Comprehensive
Stock Stock Capital Earnings Income Income
-------- -------- -------- -------- ------- -------------
(Amounts in Thousands)
Balance, January 1, 1996 $521 $2,193 $21,665 $146,269 $ 9,373
Purchase and retirement of stock - (5) (37) (321) -
Comprehensive income:
Net income - - - 21,756 $21,756 -
Unrealized gains on securities,
net of reclassification
adjustment (see disclosure) - - - - (488) (488)
------
Comprehensive income - - - - $21,268 -
======
Cash dividends ($.26 per share) - - - (3,528) -
---- ----- ------ ------- ------
Balance, December 31, 1996 521 2,188 21,628 164,176 8,885
---- ----- ------ ------- ------
Purchase and retirement of stock (3) - (27) (330) -
Comprehensive income:
Net income - - - 26,597 $26,597 -
Unrealized gains on securities, - - - - -
net of reclassification
adjustment (see disclosure) - - - - 13,011 13,011
------
Comprehensive income - - - - $39,608 -
======
Cash dividends ($.30 per share) - - - (4,066) -
---- ----- ------ ------- ------
Balance, December 31, 1997 518 2,188 21,601 186,377 21,896
---- ----- ------ ------- ------
Purchase and retirement of stock (1) (2) (29) (451) -
Comprehensive income:
Net income - - - 29,035 $29,035 -
Unrealized gains on securities,
net of reclassification
adjustment (see disclosure) - - - - (7,886) (7,886)
------
Comprehensive income - - - - $21,149 -
======
Cash dividends ($.34 per share) - - - (4,600) -
---- ----- ------ ------- ------
Balance, December 31, 1998 $517 $2,186 $21,572 $210,361 $14,010
==== ===== ====== ======= ======
Disclosure of reclassification amount:
(Amounts in Thousands)
Year ended December 31, 1996 1997 1998
---- ---- ----
Unrealized holding gains arising during period, net of tax of
$322, $8,708, and $(2,868), respectively $ 598 $16,171 $(5,326)
Less: reclassification adjustment for gains included in net income,
net of tax of $(584), $(1,700), and $(1,378), respectively (1,086) (3,160) (2,560)
------ ------ ------
Net unrealized gains on securities, net of tax of
$(262), $7,008, and $(4,246), respectively $ (488) $13,011 $(7,886)
====== ====== ======
See notes to consolidated financial statements.
Consolidated Statements Of Cash Flows
Year ended December 31,
1998 1997 1996
------- ------- -------
(Amounts in Thousands)
Net income $ 29,035 $ 26,597 $ 21,756
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization 12,217 8,472 7,901
Provision for loan losses 7,658 8,297 6,839
Provision for deferred taxes 1,792 1,188 (489)
Gain on sales of mortgage loans and securities (5,498) (4,906) (1,445)
Changes in assets and liabilities:
Purchases of mortgage loans held for sale (847,580) (307,025) (350,675)
Proceeds from sales of mortgage loans held for sale 813,625 292,003 359,803
Accrued interest receivable (781) (1,283) (1,503)
Accrued interest payable (292) 84 120
Other assets (1,039) (3,329) (759)
Accrued expenses and other liabilities 122 1,277 34
Other 56 (271) (1,262)
------- ------- -------
Total adjustments (19,720) (5,493) 18,564
------- ------- -------
Net cash flows from operating activities 9,315 21,104 40,320
Cash flows from investing activities:
Proceeds from sales of securities held to maturity - 180 502
Proceeds from maturities of securities held to maturity 157,844 50,031 123,744
Purchases of securities held to maturity (90,619) (142,967) (193,574)
Proceeds from sales of securities available for sale 31,971 101,701 8,913
Proceeds from maturities of securities available for sale 55,183 67,403 71,553
Purchases of securities available for sale (219,269) (99,784) (93,591)
Net increase in loans (76,388) (140,200) (165,571)
Securitization and sale of credit card loans 23,000 19,000 56,000
Purchases of premises and equipment (13,966) (11,054) (6,229)
Purchases of mortgage servicing rights (11,663) (3,922) (4,204)
Other 347 (459) (280)
------- ------- -------
Net cash flows from investing activities (143,560) (160,071) (202,737)
Cash flows from financing activities:
Net increase in deposits 79,006 74,950 111,339
Net increase in short-term borrowings 15,075 57,003 40,683
Net increase in Federal Home Loan Bank borrowings 23,175 47,381 41,569
Repayment of long-term debt (2,670) (2,534) (2,546)
Repurchase of common stock (483) (360) (363)
Cash dividends paid (4,600) (4,066) (3,528)
Other (821) (85) (89)
------- ------- -------
Net cash flows from financing activities 108,682 172,289 187,065
------- ------- -------
Net change in cash and cash equivalents (25,563) 33,322 24,648
Cash and cash equivalents at beginning of year 193,159 159,837 135,189
------- ------- -------
Cash and cash equivalents at end of year $167,596 $193,159 $159,837
======= ======= =======
Supplemental disclosure:
Interest paid $79,911 $73,540 $66,210
Income taxes paid 13,290 13,465 12,540
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. The
majority of the Company's operations and assets are related to its
Nebraska-based banking operations and none of the Company's other operations are
significant enough to be reportable segments.
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.
Mortgage Loans Held For Sale - Mortgage loans 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 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 the sole component of accumulated other comprehensive income in stockholders'
equity. Realized gains and losses on investments are recognized using 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 had a derivative financial
instrument, a collar relating to a certain public equity security held by the
Company, which was settled in 1998. The Company utilizes the deferral method of
accounting for this instrument. Under the deferral method of accounting, a
$697,000 gain from the settlement of the derivative financial instrument, net of
tax of $244,000, was deferred and will be recognized in the same period as the
gains and losses of the security 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. A loan is considered
impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. 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 $98,000,000 and $75,000,000 of credit card loans at December 31,
1998 and 1997, 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
earnings stream and servicing have been retained in the securitization, both of
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 expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. The allowance is an estimate of the amount that
management believes will be adequate to absorb possible losses based on prior
loan loss experience, the nature and volume of the loan portfolio, review of
specific problem loans and an evaluation of 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.
Advertising Costs - The Company expenses costs of advertising, except for
direct-response advertising relating to its credit card 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, 1998 and 1997, $3,301,000 and $2,730,000 of advertising costs are
reported in other assets.
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.
The unamortized mortgage servicing rights included in other assets were
$14,402,000 and $7,521,000 at December 31, 1998 and 1997, respectively. The
amount of loans serviced for others approximated $1,606,829,000, $1,174,357,000
and $1,038,021,000 at December 31, 1998, 1997, and 1996, respectively.
As of December 31, 1998 and 1997, the fair value of the Company's capitalized
mortgage servicing rights (including mortgage servicing rights purchased) was
approximately $19.1 million and $15.4 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 1998, Statement of Financial Accounting
Standards No. 133 (SFAS133), "Accounting for Derivative Instruments and Hedging
Activities" was issued. This statement addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. The statement is effective for the Company's
2000 financial statements and establishes standards for reporting and display of
derivatives on the balance sheet as assets or liabilities, measured at fair
value. The Company has not determined the impact this statement will have on the
consolidated financial statements.
B. RESTRICTED CASH BALANCES
The average compensating balances held at correspondent banks during 1998 and
1997 were $11,957,000 and $11,322,000 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 $26,568,000 and $25,624,000 for
1998 and 1997, respectively, as a reserve requirement.
C. SECURITIES
Debt and equity securities have been classified in the accompanying 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, 1998
- ------------------
U.S. government and agency securities $133,332 $ 2,949 $ - $136,281
Mortgage-backed securities 245,358 834 (2,430) 243,762
Marketable equity securities 52,057 23,092 (2,891) 72,258
------- ------ ------ -------
Totals $430,747 $26,875 $(5,321) $452,301
======= ====== ====== =======
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 43,217 31,929 (1,233) 73,913
------- ------ ------ -------
Totals $294,691 $35,190 $(1,505) $328,376
======= ====== ====== =======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
Securities held to maturity:
December 31, 1998
- ------------------
U.S. government and agency securities $102,027 $2,458 $ - $104,485
States and political subdivision securities 36,802 589 (7) 37,384
Mortgage-backed securities 156,424 2,059 (139) 158,344
Other 290 - (1) 289
------- ------ ------ -------
Totals $295,543 $5,106 $ (147) $300,502
======= ====== ====== =======
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
======= ====== ====== =======
The amortized cost and estimated fair value of debt securities at December 31,
1998, 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 $ 4,255 $ 4,277 $ 35,653 $ 36,229
Due after one year through five years 29,101 29,570 46,646 48,015
Due after five years through ten years 89,410 91,745 51,033 52,037
Due after ten years 16,353 16,566 - -
------- ------- ------- -------
139,119 142,158 133,332 136,281
Mortgage-backed securities 156,424 158,344 245,358 243,762
------- ------- ------- -------
$295,543 $300,502 $378,690 $380,043
======= ======= ======= =======
The following table presents the securities portfolio sales activities for the
years ended December 31, 1998, 1997 and 1996. All sales of securities held to
maturity were within three months of the securities' maturities, or were early
calls of the securities.
1998 1997 1996
------------------ ----------------- --------------------
Held Available Held Available Held Available
to for to for to for
Maturity Sale Maturity Sale Maturity Sale
------- ----- -------- ------ ------- -------
Proceeds from sales of securities $ - $31,971 $180 $101,701 $502 $8,913
Gross gains on sales of securities - 6,187 - 5,270 2 1,821
Gross losses on sales of securities - (1,552) - (409) - (151)
Securities with a carrying value of $544,328,000 at December 31, 1998, and
$438,402,000 at December 31, 1997, 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 $81,592,000 and $57,240,000
were pledged to secure advances from the Federal Home Loan Bank as of December
31, 1998 and 1997, 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 marketable equity security.
At December 31, 1998 and 1997, state and political subdivision securities with
an amortized cost of $31,871,000 and $23,899,000, respectively, and an estimated
fair value of $32,344,000 and $24,231,000, respectively, were issued by State of
Nebraska political subdivisions.
D. LOANS
Loans at December 31 are summarized as follows:
1998 1997
------- -------
Real estate mortgage $ 408,380 $ 375,044
Consumer 276,837 281,697
Commercial and financial 258,898 259,045
Agricultural 180,029 180,310
Credit card 109,176 106,737
Real estate construction 50,687 33,610
--------- ---------
$1,284,007 $1,236,443
========= =========
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, 1998 and 1997, there were
$538,000 and $1,581,000, respectively, of nonaccruing loans. The amount of
impaired loans and the amount of restructured loans as of December 31, 1998 and
1997 was not material.
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.
Mortgage loans with a carrying value of $159,619,000 and $123,597,000 were
pledged against advances from the Federal Home Loan Bank as of December 31, 1998
and 1997, respectively.
E. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
1998 1997 1996
------- ------- -------
Balance, January 1 $22,458 $20,157 $19,017
Provision for loan losses 7,658 8,297 6,839
------- ------- -------
Total 30,116 28,454 25,856
Net charge-offs:
Loans charged off 8,501 8,630 7,794
Less recoveries 2,677 2,634 2,095
------- ------- -------
Net loans charged off 5,824 5,996 5,699
------- ------- -------
Balance, December 31 $24,292 $22,458 $20,157
======= ======= =======
F. PREMISES AND EQUIPMENT
Premises and equipment at December 31 consists of the following:
1998 1997
------- -------
Land $ 7,307 $ 7,176
Buildings and leasehold improvements 65,849 60,936
Equipment and furnishings 41,076 38,285
------- -------
114,232 106,397
Less accumulated depreciation 51,840 51,929
------- -------
$62,392 $54,468
======= =======
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, 1998, 1997 and
1996, was approximately $1,787,000, $1,646,000, and $1,587,000, respectively.
The approximate future minimum rental commitments under noncancelable leases are
as follows:
Premises Equipment Total
--------- --------- ---------
1999 $ 711 $112 $ 823
2000 484 79 563
2001 412 36 448
2002 338 24 362
2003 308 15 323
Thereafter 1,873 15 1,888
G. DEPOSIT MATURITIES
Maturities of time deposits at December 31, 1998 are as follows:
1999 $718,327
2000 99,049
2001 20,017
2002 9,779
2003 1,614
Thereafter 3
H. SHORT-TERM BORROWINGS
Amounts and interest rates related to securities sold under agreement to
repurchase are as follows:
1998 1997
------ ------
Amount outstanding at year-end $188,661 $142,941
Average interest rate outstanding at year-end 4.8% 4.9%
Highest amount outstanding as of any month-end during the year $188,661 $176,572
Average amount outstanding during the year 159,159 143,666
Approximate average interest rate 4.9% 4.9%
Other short-term borrowings consisted of federal funds purchased of $14,880,000
and $50,615,000 at December 31, 1998 and 1997, respectively, and commercial
paper totaling $9,929,000 and $4,839,000 at December 31, 1998 and 1997,
respectively.
I. FEDERAL HOME LOAN BANK BORROWINGS
Short-term Federal Home Loan Bank (FHLB) advances made to subsidiary banks
totaled $2,225,000 and $82,450,000 at December 31, 1998 and 1997, respectively.
Subsidiary banks had unused lines of credit with the FHLB of $41,610,000 as of
December 31, 1998.
FHLB long-term advances of $141,400,000 and $38,000,000 were made to subsidiary
banks at December 31, 1998 and 1997, respectively. These advances mature in 1999
to 2008. Interest is paid monthly of which $1,000,000 bears interest based upon
LIBOR rates, 5.35% at December 31, 1998. The balance bears fixed interest rates
of 4.20% to 5.85%. Virtually all of the advances held at December 31, 1998 are
callable at the option of the FHLB within the next five years. The advances are
collateralized by a blanket pledge of mortgage loans and certain investment
securities.
Scheduled principal payments based on the earlier of the maturity date or call
date of the FHLB advances for the five years following December 31, 1998 are:
1999 $75,225
2000 36,400
2001 3,000
2002 -
2003 29,000
J. LONG-TERM DEBT
Long-term debt at December 31 consists of capital notes which bear interest at
8.10% to 8.70%. 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 Company intends to redeem the remaining balance of
$13,500,000 on May 1, 1999. 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, 1998 and 1997.
Scheduled principal payments, not considering the anticipated redemption, for
the five years following December 31, 1998 are:
1999 $2,500
2000 2,000
2001 2,000
2002 7,000
2003 -
K. INCOME TAXES
Consolidated income tax expense for the years ended December 31 consists of the
following:
1998 1997 1996
------ ------ ------
Current provision:
Federal $13,359 $12,503 $11,418
State 781 737 700
------ ------ ------
14,140 13,240 12,118
Deferred income taxes 1,792 1,188 (489)
------ ------ ------
Total consolidated income tax provision $15,932 $14,428 $11,629
====== ====== ======
The effective rate of total tax expense differs from the statutory federal tax
rate as follows:
1998 1997 1996
------ ------ ------
Tax at federal statutory rate 35% 35% 35%
Tax-exempt interest on obligations
of state and political subdivisions (1) (2) (2)
Other 1 2 2
-- -- --
Effective tax rate 35% 35% 35%
== == ==
Significant items comprising the Company's net deferred tax liability as of
December 31, 1998 and 1997 are as follows:
Deferred tax assets: 1998 1997
------ ------
Allowance for loan losses $ 8,421 $ 7,779
Other 2,218 1,773
------ ------
Total deferred tax assets 10,639 9,552
Deferred tax liabilities:
Net unrealized gains and losses on
securities available for sale 7,544 11,789
Mortgage servicing rights 4,843 2,383
Premises and equipment 1,508 1,619
Other 1,598 1,069
------ ------
Total deferred tax liabilities 15,493 16,860
------ ------
Net deferred tax liability $(4,854) $(7,308)
====== ======
L. COMMITMENTS AND CONTINGENt liabilities
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities that 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
$617,940,000 and $449,325,000 (exclusive of $928,372,000 and $866,217,000 of
unused approved lines of credit related to credit card loan agreements) at
December 31, 1998 and 1997, 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 $108,696,000, and $46,878,000 at December 31, 1998 and
1997, 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 that 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 $146,510,000 and $64,043,000 as of December 31, 1998 and 1997,
respectively. The Company has an agreement to sell on a best efforts basis
$2,901,000 as of December 31, 1998.
Standby and commercial letters of credit are conditional commitments issued by
the Company guaranteeing the performance of a customer to a third party. These
guarantees primarily consist of performance assurances made on behalf of
customers who have a contractual commitment to produce or deliver goods or
services. Most guarantees are for one year or less. The risk to the Company
arises from its obligation to make payment in the event of the customers'
contractual default. The amount of collateral obtained, if deemed necessary by
the Company, is based upon management's credit evaluation of the customer. The
Company had $22,587,000 and $21,609,000 in letters of credit outstanding at
December 31, 1998 and 1997, 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, 1998, 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, 1998 is shown below:
Beginning Ending
Balance Additions Payments Balance
-------- -------- -------- --------
$25,676 $101,212 $90,259 $36,629
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
$1,193,000 in 1998, $1,156,000 in 1997 and $1,020,000 in 1996.
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 $1,497,000 in 1998, $1,308,000 in
1997 and $1,289,000 in 1996.
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 1999, the
subsidiary banks have retained defined net income from 1998 and 1997 of
approximately $21,000,000.
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, 1998, 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, 1998, that the Company and
its subsidiary banks meet all capital adequacy requirements to which they are
subject. The Company's and the National Bank of Commerce's (the Company's most
significant bank subsidiary) actual capital amounts and ratios are presented in
the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------------ ------------------
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $252,967 15.4% $131,854 8.0% N/A N/A
National Bank of Commerce 115,151 12.0 76,801 8.0 $96,001 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 230,226 14.0 65,927 4.0 N/A N/A
National Bank of Commerce 103,151 10.7 38,400 4.0 57,601 6.0
Tier I Capital (to Quarterly Average Assets):
Consolidated 230,226 10.0 91,868 4.0 N/A N/A
National Bank of Commerce 103,151 7.9 52,390 4.0 65,488 5.0
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
P. CONDENSED FINANCIAL INFORMATION
Condensed Balance Sheets (Parent Company Only) December 31,
--------------------
1998 1997
------ ------
ASSETS
Cash on deposit with subsidiaries $ 226 $ 142
Securities purchased under agreement to resell to subsidiary bank 5,055 5,380
------- -------
Cash and cash equivalents 5,281 5,522
Securities available for sale (cost of $55,882,000 and $47,063,000) 75,889 77,676
Investment in subsidiaries:
Equity in net assets of bank subsidiaries 172,587 161,180
Equity in net assets of nonbank subsidiaries 1,848 1,291
Premises and equipment, net 11,477 11,404
Other assets 13,903 9,140
------- -------
$280,985 $266,213
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 8,911 $ 12,624
Commercial paper outstanding 9,928 4,839
Long-term debt 13,500 16,170
------- -------
Total liabilities 32,339 33,633
Stockholders' equity 248,646 232,580
------- -------
$280,985 $266,213
======= =======
Condensed Statements of Income (Parent Company Only)
Year ended December 31,
-----------------------------
1998 1997 1996
------ ------ ------
Income:
Dividends from bank subsidiaries $18,278 $15,542 $14,186
Dividends from nonbank subsidiaries 400 225 150
Rent:
Subsidiaries 1,664 1,635 1,291
Other 1,514 1,449 1,678
Interest and dividend income 2,502 1,963 1,541
Other 4,613 4,733 1,219
------- ------- -------
28,971 25,547 20,065
Expenses:
Salaries and employee benefits 2,803 2,682 1,807
Interest 1,866 1,780 1,669
Interest paid to subsidiaries - - 204
Building expense 2,321 2,412 2,246
Other 1,515 1,597 1,945
------- ------- -------
8,505 8,471 7,871
------- ------- -------
Income before income tax benefit (expense)
and equity in undistributed earnings of subsidiaries 20,466 17,076 12,194
Income tax benefit (expense) (537) (327) 706
------- ------- -------
Income before equity in undistributed earnings of subsidiaries 19,929 16,749 12,900
Equity in undistributed earnings of subsidiaries 9,106 9,848 8,856
------- ------- -------
Net income $29,035 $26,597 $21,756
======= ======= =======
Condensed Statements of Cash Flows (Parent Company Only)
Year ended December 31,
-----------------------------
1998 1997 1996
------ ------ ------
Net income $29,035 $26,597 $21,756
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 1,016 884 864
Equity in undistributed earnings of subsidiaries (9,106) (9,848) (8,856)
Gains on sale of securities (4,595) (4,717) (1,635)
Other (98) (450) 1,105
------ ------ ------
Total adjustments (12,783) (14,131) (8,522)
------ ------ ------
Net cash flows from operating activities 16,252 12,466 13,234
Cash flows from investing activities:
Proceeds from sales and maturities of securities available for sale 30,687 17,824 8,915
Purchase of securities available for sale (35,603) (22,892) (14,277)
Purchase of premises and equipment (790) (365) (244)
Purchase of loans from subsidiary bank (4,731) (360) (4,980)
Cash and cash equivalents from nonbank subsidiaries merger - - 245
Investments in subsidiaries (4,089) (13) (93)
Other 697 (447) (494)
------ ------ ------
Net cash flows from investing activities (13,829) (6,253) (10,928)
Cash flows from financing activities:
Net increase in short-term borrowings 5,089 934 3,905
Repayment of long-term debt (2,670) (2,534) (2,546)
Repurchase of common stock (483) (360) (363)
Cash dividends paid (4,600) (4,066) (3,528)
------ ------ ------
Net cash flows from financing activities (2,664) (6,026) (2,532)
------ ------ ------
Net change in cash and cash equivalents (241) 187 (226)
Cash and cash equivalents at beginning of year 5,522 5,335 5,561
------ ------ ------
Cash and cash equivalents at end of year $ 5,281 $ 5,522 $ 5,335
====== ====== ======
Supplemental disclosures of cash flow information: Cash paid during year for:
Interest $ 1,798 $ 1,763 $ 1,716
Income taxes 13,062 12,708 12,140
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, 1998 and 1997. 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, 1998 December 31, 1997
------------------ -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- ------- -------
Assets:
Cash and cash equivalents $ 167,596 $ 167,596 $ 193,159 $ 193,159
Mortgage loans held for sale 66,178 66,388 31,360 31,427
Securities available for sale 452,301 452,301 328,376 328,376
Securities held to maturity 295,543 300,502 362,768 367,489
Net loans 1,259,715 1,261,759 1,213,985 1,215,790
Other financial instruments 48,371 48,371 48,303 48,303
Liabilities:
Demand deposits with no stated maturities 879,711 879,711 814,437 814,437
Time deposits 848,789 851,084 835,057 837,194
Short-term borrowings 213,470 213,470 198,395 198,395
Federal Home Loan Bank borrowings 143,625 143,711 120,450 120,565
Long-term debt 13,500 13,500 16,170 16,330
Other financial instruments 26,295 26,295 21,850 21,850
Cash and Cash Equivalents. For cash and cash equivalents, the carrying amount is
considered a reasonable estimate of fair value.
Mortgage Loans 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, 1998 and 1997. 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 matur-
ities 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, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Lincoln, Nebraska
February 5, 1999
Selected Quarterly Financial Data
(In Thousands Except Per Share Data)
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Total (2)
-------- -------- -------- -------- --------
(Unaudited)
1998
Total interest income $39,504 $40,485 $40,251 $41,720 $161,960
Net interest income 20,125 20,637 19,944 21,491 82,197
Provision for loan losses 1,496 1,484 1,531 3,147 7,658
Gains on securities sales 839 1,457 1,915 424 4,635
Noninterest income 14,153 14,554 15,306 17,066 61,079
Noninterest expense 21,841 22,574 23,838 27,033 95,286
Net income 7,620 8,105 7,601 5,709 29,035
Basic net income per share .56 .60 .56 .43 2.15
Common stock trading range (1)
Class A voting
high 32.00 31.50 29.75 28.50 32.00
low 29.00 27.00 25.00 24.75 24.75
Class B nonvoting
high 32.50 30.50 33.50 31.00 33.50
low 27.50 25.88 24.75 24.00 24.00
Dividends declared per share .085 .085 .085 .085 .34
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 .56 .51 .47 .43 1.96
Common stock trading range (1)
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
(1) 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, 1998, the Company had 474 Class A
shareholders of record and 1,044 Class B shareholders of record. (2) Quarterly
per share amounts may not add to annual total due to rounding.
Selected Financial Data
Three-Year Average Balance Sheets / Yields and Rates
Year Ended December 31,
-------------------------------
1998
-------------------------------
Average Average
Balance Interest Rate
------- ------- -------
(Amounts in thousands)
Assets
Interest-earning assets:
Loans, including non-accrual loans $1,231,931 $111,395 9.04%
Taxable investment securities 610,135 41,635 6.82
Nontaxable investment securities (non-taxable basis) 29,475 1,503 5.10
Federal funds sold 34,500 1,898 5.50
Mortgage loans held for sale 47,949 3,419 7.13
Equity securities 68,105 1,431 2.10
Federal Home Loan Bank stock 8,981 679 7.56
-------- -------
Total interest-earning assets 2,031,076 161,960 7.97
Less allowance for loan losses (22,735)
Cash and due from banks 116,870
Premises and equipment 57,917
Other assets 71,923
--------
Total assets $2,255,051
========
Liabilities AND EQUITY
Interest-bearing liabilities:
Interest-bearing demand $ 385,760 11,347 2.94%
Savings 97,227 2,776 2.86
Time 856,274 48,779 5.70
-------- ------
Total interest-bearing deposits 1,339,261 62,902 4.70
Short-term borrowings 182,922 9,181 5.02
Federal Home Loan Bank borrowings 116,166 6,313 5.43
Long-term debt 14,489 1,367 9.43
-------- ------
Total interest-bearing liabilities 1,652,838 79,763 4.83
------
Noninterest bearing demand deposits 320,619
Other liabilities 42,595
--------
Total liabilities 2,016,052
Total stockholders' equity 238,999
--------
Total liabilities and stockholders' equity $2,255,051
========
Net interest income $ 82,197
======
Net interest spread 3.14%
====
Net yield on interest-earning assets 4.05%
====
Selected Financial Data
Three-Year Average Balance Sheets / Yields and Rates
Year Ended December 31,
-------------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- ------- ------- ------- ------- -------
(Amounts in thousands)
$1,140,439 $104,018 9.12% $1,066,896 $ 97,228 9.11%
576,735 39,463 6.84 510,800 32,485 6.36
26,698 1,381 5.17 29,190 1,483 5.08
34,282 1,980 5.78 34,863 2,037 5.84
20,679 1,674 8.10 24,860 1,953 7.86
57,760 1,104 1.91 37,269 913 2.45
8,031 549 6.84 6,283 400 6.37
-------- -------- --------- -------
1,864,624 150,169 8.05 1,710,161 136,499 7.98
(21,401) (19,680)
116,196 102,269
51,400 48,146
59,245 46,467
--------- ---------
$2,070,064 $1,887,363
========= =========
$ 350,708 9,627 2.75% $ 325,590 8,332 2.56%
89,666 2,558 2.85 84,039 2,334 2.78
844,476 48,016 5.69 797,944 44,649 5.60
-------- ------- -------- -------
1,284,850 60,201 4.69 1,207,573 55,315 4.58
174,759 8,706 4.98 144,654 7,256 5.02
53,596 3,206 5.98 43,225 2,153 4.98
17,102 1,470 8.60 19,683 1,669 8.48
-------- ------- -------- -------
1,530,307 73,583 4.81 1,415,135 66,393 4.69
------- -------
293,474 265,013
33,237 20,786
--------- --------
1,857,018 1,700,934
213,046 186,429
--------- ---------
$2,070,064 $1,887,363
========= =========
$ 76,586 $ 70,106
======= =======
3.24% 3.29%
==== ====
4.11% 4.10%
==== ====
Selected Financial Data
(In Thousands Except Per Share Data)
1998 1997 1996 1995
------ ------ ------ ------
At December 31,
Assets $2,384,745 $2,251,100 $2,028,012 $1,815,575
Investments 747,844 691,144 642,700 561,183
Loans 1,284,007 1,236,443 1,121,239 1,017,367
Deposits 1,728,500 1,649,494 1,574,544 1,463,205
Federal Home Loan Bank borrowings 143,625 120,450 73,069 31,500
Long-term debt 13,500 16,170 18,704 21,250
Stockholders' equity 248,646 232,580 197,398 180,021
Year Ended December 31,
Net interest income $82,197 $76,586 $70,106 $60,889
Provision for loan losses 7,658 8,297 6,839 3,495
Total noninterest income 65,714 53,839 44,030 33,850
Total noninterest expenses 95,286 81,103 73,912 64,393
Net income 29,035 26,597 21,756 17,420
Per share data:
Net income $ 2.15 $ 1.96 $ 1.60 $ 1.29
Dividends .34 .30 .26 .227
Stockholders' equity before net unrealized gains
and losses on available for sale securities 17.36 15.57 13.92 12.58
Total stockholders' equity 18.40 17.19 14.57 13.27
Selected Ratios:
Rate of return on average:
Total assets 1.29% 1.28% 1.15% 1.02%
Stockholders' equity(1) 13.05 13.28 12.14 10.52
Average total stockholders' equity
to average total assets(1) 10.43 10.33 9.49 9.46
Common dividends payout ratio 15.84 15.29 16.21 17.58
Allowance for loan
losses to total loans 1.89 1.82 1.80 1.87
Nonaccrual and restructured
loans as a percentage of total loans .16 .25 .45 .29
Net charge-offs to
average total loans .47 .53 .53 .27
Capital Ratios:
Core capital (Tier I) (2) 13.97% 13.50% 13.31% 13.39%
Total risk based capital (3) 15.35 14.89 14.72 14.82
Leverage (4) 10.02 9.74 9.40 9.16
(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 1998 requirements). (3) Tier I
capital plus allowance for loan losses (limited to 1.25% of risk-weighted
assets) to risk-weighted assets (using 1998 requirements). (4) Tier I capital to
quarterly average assets less goodwill. .
1994 1993 1992 1991 1990 1989
------ ------ ------ ------ ------ ------
$1,624,138 $1,572,298 $1,452,058 $1,309,613 $1,106,354 $1,019,288
535,136 520,176 495,784 384,951 375,624 354,865
850,292 777,695 674,352 631,713 538,056 489,537
1,355,965 1,324,196 1,196,111 1,123,728 938,881 864,011
10,000 - - - - -
23,000 25,000 26,500 11,725 10,583 10,757
149,354 137,293 116,335 99,702 95,576 88,578
$57,793 $57,727 $55,303 $47,547 $37,933 $34,648
332 1,143 3,152 3,810 1,770 1,630
31,363 33,345 33,767 27,722 24,293 22,378
59,663 60,806 57,304 52,239 44,896 40,930
19,032 19,760 19,150 12,980 10,672 10,025
$ 1.46 $ 1.52 $1.47 $ .93 $ .75 $ .69
.216 .20 .188 .136 .112 .102
11.49 10.24 8.93 7.65 6.78 6.13
11.26 10.53 8.93 7.65 6.78 6.13
1.22% 1.33% 1.41% 1.06% 1.02% 1.04%
13.37 15.77 17.69 12.84 11.49 11.75
9.15 8.46 7.96 8.23 8.88 8.82
14.83 13.19 12.79 14.25 15.05 14.76
2.02 2.37 2.74 2.68 2.74 2.94
.30 .34 .50 .73 .43 .85
.24 .16 .25 .48 .37 .26
14.78% 13.43% 12.70% 10.05% 11.16%
16.26 14.90 13.95 11.30 12.41
9.23 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 1998 was $29,035,000 as compared to $26,597,000
in 1997 and $21,756,000 during 1996. On a per share basis this equates to $2.15,
$1.96, and $1.60, for 1998, 1997 and 1996, respectively. The Company experienced
moderate growth as year-end assets reached $2,384,745,000 as compared to
$2,251,100,000, in 1997. The Company continued its history of raising its annual
dividend rate. The 1998 cash dividend was $0.34 per share versus $0.30 per share
in 1997 and $0.26 per share in 1996. In December 1998, the Company raised its
annualized dividend to 36 cents.
The $2.4 million or 9% increase in net income in 1998 from 1997 can be primarily
attributed to an increase in net interest income, combined with a slight
decrease in the provision for loan losses. The net yield on interest earning
assets decreased slightly from 4.11% in 1997 to 4.05% in 1998. However, average
earning assets increased $166 million during 1998 compared to $154 million in
1997. This resulted in a $5.6 million or 7% increase in net interest income in
1998.
Although year-end loans increased $48 million in 1998 from 1997, this increase
is down from the $115 million increase in 1997 from 1996, and the $104 million
increase during 1996. Average deposit growth continues to lag earning asset
growth. Average deposits increased 5.2% or $82 million in 1998 and 7.2% or $106
million in 1997. Therefore, the Company has utilized other non-traditional
methods to fund some of its earning asset growth. In 1996 the Company started
securitizing part of its credit card portfolio. Total securitized assets were
$98 million at the end of 1998. Short-term borrowings that are made up primarily
of securities sold under repurchase agreements have increased on the average $38
million since 1996. Average Federal Home Loan Bank borrowings were $116 million
in 1998, as compared to $54 million in 1997 and $43 million in 1996.
EARNING ASSETS
Average earning assets in 1998 were $2.03 billion, an 8.9% increase over 1997
primarily caused by loan growth of $91 million and an increase in taxable
investment securities of $33 million. Average earning assets were $1.86 billion
in 1997, a 9.0% increase over 1996. Average loans were $1,232 million, $1,140
million and $1,067 million in 1998, 1997 and 1996, respectively, an 8.0%, 6.9%,
and 16.3% 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 growth in 1998 was primarily in the real estate market. Average loans
accounted for 61% of average earning assets during 1998 and 1997. Average
investment securities were $717 million during 1998, a $47 million increase over
1997. Investment securities accounted for 35% of average earning assets during
1998 and 36% during 1997.
SECURITY PORTFOLIO
The Company's investment securities portfolio consists of high quality
securities with primarily short to medium maturities. The Company utilized
buying opportunities during the 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, but the Company anticipates that these securities will be
called when they reach their call date. The Company expects that approximately
$100 million of U. S. Treasury and Agency securities will mature or be called in
1999 at an average yield of approximately 7.2%. The Company's average yield on
its taxable security portfolio was approximately 6.8% for the last two years.
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,
---------------------------
1998 1997 1996
------ ------ ------
U.S. Treasury $ 77,069 $103,366 $172,533
U.S. Agency 158,290 239,389 188,986
State and municipal 36,802 27,448 28,747
Mortgage-backed securities 401,782 243,614 205,244
Marketable equity securities 52,057 43,217 32,835
Other securities 290 425 687
------- ------- -------
$726,290 $657,459 $629,032
======= ======= =======
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, 1998
--------------------------------------------------
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 $1,500 $21,511 $79,016 $ - $102,027
State and municipal 2,755 7,490 10,315 16,242 36,802
Other securities - 100 79 111 290
------ ------- ----- ----- -------
$4,255 $29,101 $89,410 $16,353 $139,119
===== ====== ====== ====== =======
Weighted average yield to maturity:
U.S. Treasury and Agency 4.7% 7.2% 7.1% - % 7.1%
State and municipal (1) 3.1 4.3 4.8 4.8 4.6
Other securities - 8.6 8.6 7.1 8.0
Securities available for sale:
U.S. Treasury and Agency $35,653 $46,646 $51,033 $ - $133,332
====== ====== ====== ==== =======
Weighted average yield to maturity:
U.S. Treasury and Agency 7.2% 6.9% 7.0% -% 7.0%
(1) Not based on taxable equivalents.
The Company owned $402 million in mortgage-backed securities at December 31,
1998. 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.
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 years indicated.
December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Real estate mortgage $ 408,380 $ 375,044 $ 332,913 $ 295,268 $270,603
Consumer 276,837 281,697 271,906 263,320 228,332
Commercial and financial 258,898 259,045 245,873 201,910 166,682
Agricultural 180,029 180,310 130,071 126,414 87,758
Credit card 109,176 106,737 98,895 108,641 80,135
Real estate construction 50,687 33,610 41,581 21,814 16,782
--------- --------- --------- -------- -------
1,284,007 1,236,443 1,121,239 1,017,367 850,292
Less allowance for loan losses (24,292) (22,458) (20,157) (19,017) (17,190)
--------- --------- --------- -------- -------
$1,259,715 $1,213,985 $1,101,082 $ 998,350 $833,102
----------- --------- --------- -------- -------
December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
As a percentage of total loans:
Real estate mortgage 31.8% 30.3% 29.7% 29.0% 31.8%
Consumer 21.6 22.8 24.3 25.9 26.9
Commercial and financial 20.2 21.0 21.9 19.9 19.6
Agricultural 14.0 14.6 11.6 12.4 10.3
Credit card 8.5 8.6 8.8 10.7 9.4
Real estate construction 3.9 2.7 3.7 2.1 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 that have predetermined interest rates and
floating or adjustable rates.
As of December 31, 1998
--------------------------------------------------
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 $175,212 $71,371 $12,315 $55,859 $27,827
Agricultural 133,392 44,176 2,461 39,199 7,438
Real estate construction 33,604 16,764 319 7,737 9,346
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
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 $3.6 million at December 31, 1998, as
compared to $4.2 million at the end of 1997. As a percentage of total loans,
nonperforming loans represent only .3% of the loan portfolio at December 31,
1998 and 1997.
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 partially dependent upon the general state of the agricultural
economy. The agricultural economy is dependent upon commodity prices, weather
and input costs. Crop yields were generally fair throughout the region during
1998. The prices for crops were not as high as they were in 1997. Commodity
prices during 1998 were such that all agricultural related business groups
(i.e., ranchers, cattle feeders, hog producers and grain farmers) lost money for
a part or all of 1998. 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. Watch list loans (loans with a
potential or known repayment weakness) related to agriculture increased
significantly in the fourth quarter of 1998. Because of the volatility in this
sector, inherent losses in the loan portfolio may be greater than historical
experience, and a prudent evaluation requires the allowance for loan losses to
be greater than would otherwise be the case. Farm income represents 7% of
Nebraska's personal income. In 1999, grain prices are expected to be below
"breakeven" levels. This situation will result in additional financial stress
for many agricultural
borrowers.
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 had seen an increase in credit card charge-offs in
1997 and 1996 but credit card charge-offs stabilized in 1998. Credit card loans
had $4.8 million in net charge-offs during 1998, $5.0 million in 1997 and $4.2
million in 1996. Nationally, credit card charge-offs also increased during 1996
and 1997. The Company's credit card charge-offs are slightly below industry
averages. Consumer loan charge-offs showed an increase in 1998 from 1997, but
were lower than the levels seen in 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 1998, 1997 and
1996, the Company received approximately $491,000, $398,000 and $457,000 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 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 short notice and are
possible in the future.
The following table presents the amount of nonperforming loans for the periods
indicated:
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
1. Nonaccrual, Past Due and Restructured Loans
(a) Loans accounted for on a nonaccrual basis $ 538 $1,581 $3,429 $1,700 $1,150
(b) Accruing loans which are contractually past
due 90 days or more as to principal or
interest payments 1,584 1,106 846 690 384
(c) Loans not included above which are
"troubled debt restructurings" 1,465 1,530 1,597 1,256 1,377
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 202 529 628 350 285
ii.Amount of interest income on loans listed in
categories (a) and (c) that was included in net
income for the period. 150 244 395 155 153
2. Potential Problem Loans(1) 19,980 4,631 6,660 7,953 6,265
3. Foreign Outstandings - - - - -
4. Loan Concentrations - - - - -
(1) Balances shown are loans in which the primary source of repayment may not be
sufficient to meet the present terms of the loan. The Company believes it has
sufficient security collateral to support the current loan balance.
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 $7,658,000, $8,297,000 and
$6,839,000 for estimated loan losses in 1998, 1997 and 1996, respectively.
Average loans increased 8.0% in 1998, 6.9% during 1997 and 16.3% in 1996. Net
charge-offs were $5.8 million, $6.0 million and $5.7 million during 1998, 1997
and 1996, respectively. The increase in net charge-offs over the past three
years is primarily in credit card charge-offs, although the Company's charge-off
ratios 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 and 1998. Management believes the overall credit quality of
the Company's loan portfolio remains very good, although it is concerned by the
number of agricultural loans it has had to add to the Company's watch list in
the fourth quarter of 1998. Potential problem loans were approximately $20
million at the end of 1998 as compared to $4.6 million at the end of 1997. The
Company takes a proactive stance in identifying potential problem loans and
developing appropriate credit enhancement plans. The loan loss reserve as a
percentage of loans was 1.89%, 1.82% and 1.80% at December 31, 1998, 1997 and
1996, respectively.
The following table presents an analysis of loan loss experience.
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Average loans and leases for the year $1,231,931 $1,140,439 $1,066,896 $917,742 $797,369 ,
========= ========= ======== ======= =======
Reserve for loan losses:
Balance, beginning of year $22,458 $20,157 $19,017 $17,190 $18,461
Provision charged to expense 7,658 8,297 6,839 3,495 332
Bank acquisitions - - - 843 326
Loans charged off:
Real estate construction - - - - -
Real estate mortgage (50) (100) (43) (66) (27)
Agricultural (243) (158) (73) (98) (120)
Commercial and financial (782) (1,159) (734) (70) (64)
Consumer (1,541) (1,452) (2,117) (1,168) (631)
Credit card (5,885) (5,760) (4,827) (3,255) (2,881)
Loan recoveries:
Real estate construction - - - - -
Real estate mortgage 81 84 282 185 245
Agricultural 225 225 77 186 176
Commercial and financial 725 839 193 438 397
Consumer 604 736 897 636 431
Credit card 1,042 749 646 701 545
------- ------- ------- ------- -------
Net loans charged off (5,824) (5,996) (5,699) (2,511) (1,929)
------- ------- ------- ------- -------
Balance, end of year $24,292 $22,458 $20,157 $19,017 $17,190
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans .47% .53% .53% .27% .24%
=== === === === ===
This table presents an allocation of 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.
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Real estate construction $ 718 $ 330 $ 628 $ 419 $ 331
Real estate mortgage 3,514 3,009 2,493 2,902 2,927
Agricultural 3,700 3,286 3,169 3,941 2,658
Commercial and financial 5,020 4,690 4,896 3,781 3,887
Consumer 3,387 3,478 3,302 3,152 2,472
Credit card 7,607 7,175 5,398 4,623 3,511
Unallocated 346 490 271 199 1,404
------ ------ ------ ------ ------
$24,292 $22,458 $20,157 $19,017 $17,190
====== ====== ====== ====== ======
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 tries to limit this exposure by matching the maturities
of its assets and liabilities, along with the use of floating rate assets and
liabilities that 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 where 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 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, 1998
- ----------------------- Percent Change
-----------------
Change in Economic Value Actual Board
Interest Rates Of Equity Change Actual Limit
------------- --------- ------- -----
200 basis point increase $222,998 $(30,480) (12.0)% (25)%
150 basis point increase 230,033 (23,445) (9.2) (18)
100 basis point increase 238,150 (15,328) (6.0) (12)
50 basis point increase 246,200 (7,278) (2.9) (6)
Base scenario 253,478 - - -
50 basis point decrease 257,332 3,854 1.5 (6)
100 basis point decrease 259,256 5,778 2.3 (12)
150 basis point decrease 261,947 8,469 3.3 (18)
200 basis point decrease 264,680 11,202 4.4 (25)
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, 1998 and 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, 1998 and 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 presenting the
computation of EVE. Actual values may differ from those projections presented,
should market conditions vary from assumptions used in the calculation of EVE.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in 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 $ 80,049 $ 50,543 $120,184 $386,249 $ 89,962 $ 726,987
Loans 578,769 182,876 130,591 366,571 20,027 1,278,834
Mortgage loans held for sale 66,178 - - - - 66,178
Federal funds sold 31,865 - - - - 31,865
Federal Home Loan Bank stock - - - - 9,347 9,347
------- ------- ------- ------- ------- --------
756,861 233,419 250,775 752,820 119,336 2,113,211
Liabilities:
Interest-bearing
demand deposits 100,400 - 54,181 258,444 - 413,025
Savings deposits 18,731 - - 82,173 - 100,904
Time deposits 289,732 185,163 243,432 130,459 3 848,789
Short-term
borrowings 213,470 - - - - 213,470
Federal Home Loan Bank borrowings 51,225 1,000 23,000 68,400 143,625
Long-term debt - 13,500 - - - 13,500
------- ------- ------- ------- ------- --------
673,558 199,663 320,613 539,476 3 1,733,313
------- ------- ------- ------- ------- --------
Repricing gap $ 83,303 $ 33,756 $(69,838) $213,344 $119,333 $ 379,898
======= ======= ======= ======= ======= ========
Cumulative repricing gap $ 83,303 $117,059 $ 47,221 $260,565 $379,898 $ 379,898
======= ======= ======= ======= ======= ========
GAP as a % of earning assets 3.9% 5.5% 2.2% 12.3% 18.0% 18.0%
=== ==== ==== ==== ==== ====
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
positive by $47.2 million dollars. Generally, during a period of falling
interest rates, a positive gap would adversely effect net interest income.
Conversely, during a period of rising interest rates, a positive 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 $72 million and $74 million of marketable equity securities at
December 31, 1998 and 1997, respectively. 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.
December 31, 1998 December 31, 1997
-------------------- -----------------
Fair Actual Fair Actual
Change in Prices Value Change Value Change
---------------- ----- ------ -------- ------
15% increase $83,097 $ 10,839 $85,000 $ 11,087
10% increase 79,484 7,226 81,304 7,391
5% increase 75,871 3,613 77,609 3,696
Current fair value 72,258 - 73,913 -
5% decrease 68,645 (3,613) 70,217 (3,696)
10% decrease 65,032 (7,226) 66,522 (7,391)
15% decrease 61,419 (10,839) 62,826 (11,087)
Within the Company's public equity investment portfolio, a 5% or less increase
in the value of the portfolio has occurred in 33% of the quarters over the past
three years; a 5% to 10% increase in the value of the portfolio has occurred in
17% of the quarters over the past three years; a 10% to 15% increase in the
value of the portfolio has occurred in 25% of the quarters in the past three
years; a 5% or less decrease has occurred in 17% of the quarters in the last
three years; and a 5% to 10% decrease has occurred in one quarter over the past
three years. In conclusion, the analysis of the above data indicates that the
Company's earnings could be adversely effected by a decrease 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 (FHLB). 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 1999, the Banks have retained
defined net income from the previous two years of approximately $21.0 million.
The parent company holds approximately $81.0 million in cash, short-term
investments and marketable securities as of December 31, 1998. The Company has
the ability to issue commercial paper, which could be used to provide liquidity
to subsidiary banks. The Company has issued $10.0 million in commercial paper as
of December 31, 1998. Long-term debt at December 31, 1998 includes $13.5 million
of capital notes which have a payment of $2.5 million due in 1999 and $141.0
million of FHLB borrowings (at subsidiary banks) which have a payment of or are
callable in the amount of $73 million due in 1999. The Company's capital notes
are callable at the Company's option on or after May 1, 1999. It is the
Company's intention to exercise this call option and refinance with a
combination of term debt and a line of credit. Although most of the FHLB
borrowings have call dates much shorter than the maturity date, if interest
rates stay stable, these call options by the FHLB will probably not be
exercised.
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 14.0% and
15.4%, respectively, at December 31, 1998. These ratios are up slightly from
13.5% and 14.9%, respectively, at December 31, 1997, and 13.3% and 14.7%,
respectively, at December 31, 1996. 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 10.0% at December 31, 1998 and 9.7% at December 31, 1997.
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, 1998.
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).
1998 1997 1996
------- ------- -------
Long-term debt to long-term debt plus equity 39.8% 20.5% 21.9%
Total long-term debt to equity 66.0 25.7 28.1
Long-term debt to equity (parent only) 5.8 7.7 9.9
FUNDING SOURCES
Average deposits were $1.66 billion in 1998 as compared to $1.58 billion during
1997 and $1.47 billion in 1996, a 5.2% and 7.2% increase, respectively. Average
interest-bearing deposits increased from $1,208 million in 1996 to $1,285
million in 1997, to $1,339 million in 1998, a 6.4% and 4.2% increase,
respectively. Noninterest-bearing demand deposits increased $27.1 million or
9.2% in 1998 from 1997 and increased 10.7% or $28.5 million in 1997 from 1996.
The increase in noninterest-bearing demand deposits can be primarily attributed
to growth in public and business account relationships combined with a decline
in short-term interest rates in 1998, which causes customers who pay for
services by maintaining balances, to increase the balances they keep on deposit
with subsidiary banks.
Average time deposits increased 1.4% during 1998 and 5.8% during 1997.
Interest-bearing demand and savings deposits increased 9.7% during 1998 compared
to 7.5% during 1997. 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, 1998
---------------------------------------------------
Over 3 Over 6
3 Months through through Over
or Less 6 Months 12 Months 12 Months Total
--------- --------- --------- --------- -------
$129,372 $54,021 $53,324 $10,322 $247,039
On July 18, 1996, the Company closed on the National Bank of Commerce Master
Credit Card Trust (Trust). The initial pooling and servicing agreement allowed
the National Bank of Commerce 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, 1998 and 1997, the Company had sold $98 million
and $75 million, respectively, of credit card receivables to the Trust. The
National Bank of Commerce is in the process of increasing the maximum
securitization level to $120 million.
EARNINGS PERFORMANCE
The Company's net income was $29,035,000, up 9.2% or $2,438,000 from 1997. The
Company's net income for 1997 was $26,597,000, up $4,841,000 from 1996's net
income of $21,756,000. The increase in net income in 1998 from 1997 can be
attributed to several factors. The net yield on interest earning assets
decreased from 4.11% in 1997 to 4.05% in 1998, but average earning assets
increased $166 million during 1998, resulting in a $5.6 million increase in net
interest income. Loan loss expense decreased $.6 million, which resulted a net
increase in net interest income after the provision for loan losses of $6.3
million.
The increase in income in 1997 over 1996 was due primarily to an increase in net
interest income, due to a significant increase in interest earning assets
combined with an increase in gains on securities transactions of $3.2 million.
The increase in net interest income and gains on securities transactions was
partially offset by an increase in the provision for loan losses of $1.5
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 1998 was
$82.2 million as compared $76.6 million and $70.1 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) was 4.10% in 1996, increased to 4.11% in 1997
and decreased slightly to 4.05% in 1998. The Federal Reserve decreased
short-term rates in the fourth quarter of 1998, which could help decrease the
Company's cost of funds if they remain at current levels. Competition for
quality loan growth could hurt the 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.
1998/97 1997/96
------------------------------- ------------------------------
Amounts Amounts
Attributable Attributable
to Changes in to Changes in
----------------- -----------------
Total Total
Volume Rate Change Volume Rate Change
------ ------ ------ ------ ------ ------
Interest on loans $ 8,280 $ (903) $ 7,377 $ 6,708 $ 82 $ 6,790
Interest on taxable securities 2,279 (107) 2,172 4,394 2,584 6,978
Interest on nontaxable securities 142 (20) 122 (129) 27 (102)
Interest on fed funds sold 13 (95) (82) (33) (24) (57)
Interest on mortgage loans
held for sale 1,918 (173) 1,745 (341) 62 (279)
Equity securities 210 117 327 318 (127) 191
FHLB stock 131 (1) 130 122 27 149
------ ------ ------ ------ ----- -----
Total interest income 12,973 (1,182) 11,791 11,039 2,631 13,670
------ ------ ------ ------ ----- -----
Interest on deposits:
Interest-bearing demand 1,205 515 1,720 1,448 (153) 1,295
Savings deposits 216 2 218 163 61 224
Other time deposits 672 91 763 2,662 705 3,367
Interest on short-term borrowings 410 65 475 1,500 (50) 1,450
Interest on FHLB borrowings 3,425 (318) 3,107 1,155 (102) 1,053
Interest on long-term debt (238) 135 (103) (222) 23 (199)
------ ------ ------ ------ ----- -----
Total interest expense 5,690 490 6,180 6,706 484 7,190
------ ------ ------ ------ ----- -----
Net interest income $ 7,283 $(1,672) $ 5,611 $ 4,333 $2,147 $ 6,480
------ ------ ------ ------ ----- -------
------ ------ ------ ------ ----- ------
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.
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 44%, 41%, and 39% during 1998,
1997 and 1996, respectively. The following table shows the breakdown of
noninterest income and the percentage changes.
Percent Increase
(Decrease)
------------------
1998 1997 1996 1998/97 1997/96
------ ------ ------ ------- -------
Credit card $15,759 $13,047 $10,591 20.8% 23.2%
Computer services 11,427 8,904 8,491 28.3 4.9
Other service charges and fees 10,682 7,829 6,217 36.4 25.9
Mortgage banking 8,853 5,425 4,868 63.2 11.4
Trust services 6,085 6,469 5,840 (5.9) 10.8
Service charges on deposits 5,427 5,562 5,231 (2.4) 6.3
Gains on securities sales 4,635 4,861 1,672 (4.6) 190.7
Other income 2,846 1,742 1,120 63.4 55.5
------ ------ ------
Total noninterest income $65,714 $53,839 $44,030 22.1 22.3
====== ====== ======
Noninterest income in 1998 was $65,714,000 compared to $53,839,000 in 1997, a
22.1% increase. If securities gains of $4,635,000 and $4,861,000 in 1998 and
1997, respectively, were excluded, noninterest income would have been $61.1
million in 1998 compared to $49.0 million in 1997, a 24.7% increase. In both
1998 and 1997, the securities gains were primarily the result of selling certain
positions held in the Company's Global Fund. Credit card fees increased
$2,712,000 or 20.8% due to increased credit card activity including interchange
and merchant income, and fees generated by an increased card holder base.
Computer fees increased $2,523,000 or 28.3% due to an increase in conversion and
annual processing fees. In September 1997, the Company converted its common
trust funds to mutual funds, the "Great Plains Family of Funds." Fees earned
from these mutual funds are included in other service charges and fees, and
explain the $2,853,000 or 36.4% increase in this noninterest income category.
This also accounts for the 5.9% decrease in trust services income. Mortgage
banking income increased 63.2% over 1997 because of the large volume of mortgage
refinancings in 1998. Other income increased 63.4% in 1998 primarily due to an
increase in the gain on sale of mortgages held for sale. As a normal course of
business, First Commerce Mortgage Company holds mortgages from the time funded
until the time delivered.
Noninterest income increased $9,809,000 or 22.3% 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. Credit card income increased $2.5
million due to increased credit card activity. 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 from the real estate.
NONINTEREST EXPENSE
The emphasis on growth in fee-based service income requires significant
investments in staff, training and technology. The following table shows the
breakdown of noninterest expense and the percentage change for 1998, 1997 and
1996.
Percent Increase
(Decrease)
-------------------
1998 1997 1996 1998/97 1997/96
------ ------ ------ ------- -------
Salaries and employee benefits $44,123 $39,475 $35,808 11.8% 10.2%
Credit card fees 11,403 7,921 7,055 44.0 12.3
Equipment expense 6,289 5,538 5,523 13.6 .3
Amortization of mortgage servicing rights 4,782 2,067 1,537 131.3 34.5
Communications 4,447 4,221 4,159 5.4 1.5
Net occupancy expense 4,353 4,496 3,980 (3.2) 13.0
Business development 4,343 3,695 3,990 17.5 (7.4)
Fees and insurance 4,266 3,802 3,770 12.2 .8
Supplies 2,786 2,539 2,404 9.7 5.6
Other expenses 6,919 5,297 4,330 30.6 22.3
Minority interest 1,064 1,541 845 (31.0) 82.4
Goodwill amortization 511 511 511 - -
------ ------ ------
Total noninterest expense $95,286 $81,103 $73,912 17.5 9.7
====== ====== ======
Efficiency ratio (1) 65.4% 63.1% 64.5%
Average number of full-time equivalent employees 1,211 1,108 1,035
Personnel expense per employee (in dollars) $36,435 $35,627 $34,597
(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).
Noninterest expenses were $95,286,000 in 1998 compared to $81,103,000 in 1997.
This is an increase of $14.2 million or 17.5%. Salaries and employee benefits
increased $4,648,000 or 11.8% generally due to increases in the levels of pay
and number of employees. Credit card fees increased $3,482,000 or 44.0% due to
increased activity and an increase in Cabela's bucks expense, points earned from
using the Cabela's credit card in the joint venture with Cabela's, which can be
redeemed for merchandise at Cabela's. Equipment expenses increased $751,000 or
13.6% due to additional equipment purchases, primarily computer related.
Amortization of mortgage servicing rights increased $2,715,000 or 131.3% due to
an increase in the volume of mortgages serviced by First Commerce Mortgage. In
addition to the increase in volume, a significant increase in refinancings
during 1998 resulted in the early write-off of $2 million of capitalized
mortgage servicing rights on refinanced loans. Business development expenses
increased 17.5% due primarily to increased marketing for new solicitations at
Cabela's. Fees and insurance increased $464,000 or 12.2% due to increased credit
report and filing fees. Other expenses increased 30.6%. Additional consulting
fees relating primarily to the Company's computer service company increased
$747,000. Additional software expense increased $596,000 due primarily to
upgrading software to be Year 2000 ready. A decrease in minority interest
expense is related to the decrease in profits in the Cabela's credit card joint
venture.
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. 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, additional consulting expenses
and increased travel expenses primarily relating to the Company's computer
service company.
INCOME TAXES
The provision for income taxes was $15,932,000 in 1998, $14,428,000 in 1997 and
$11,629,000 in 1996. 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. Recent economic data shows that the economy remains strong in the
Omaha/Lincoln metro areas, but there are some signs of weaknesses, mostly in
businesses engaged in agricultural services and wholesale trade, in some of the
rural counties. A lack of qualified applicants hinders economic growth across
the state. 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 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 continue to
realize moderate growth as the Federal Reserve Board attempts to maintain
balance between growth and inflation. Agricultural exports have been reduced due
to the Asian and other markets' economic uncertainties.
The financial results of the 1998 Nebraska farm sector were not good. Crop
prices are approximately 25% lower relative to last year, while crop yields were
average to above average. Preliminary results would indicate that grain farmers,
at best, broke even in 1998. Loan deficiency payments and market transition
payments helped to soften the impact of lower grain prices. Cattle feeders lost
money throughout all of 1998. Ranch operations reflected profits throughout
1998, but at a much lower level in the last half of the year. Beef cow numbers
continue to decline. Hog producers lost money for most of 1998. Personal
bankruptcy filings have stabilized but remain at high levels.
Commodity prices remain at historically low levels. Current cash grain prices
will not allow grain farmers to turn a profit in 1999. Current cash hog prices
will keep hog producers selling at a loss. On the positive side, cattle feeders
recorded a profit in January 1999, for the first time in twenty months.
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 continues to discuss 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
was converted to a full service bank in order to provide complete banking
services to the growing client base. The Company has obtained preliminary
regulatory approval to charter a new bank in Colorado Springs, Colorado. 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 90,000 active accounts from
Cabela's clients. In 1999, the joint company 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. The Company could
make further use of loan production offices to expand geographically. The
Company has minority ownership interests in seven 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. THE COMPANY'S STATE OF READINESS. 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 evaluate, monitor,
review and manage the risks, solutions and costs and update its software
programs and other time sensitive systems for Year 2000 compliance. The Federal
Financial Institutions Examination Council has issued regulatory guidelines on
the Year 2000 problem. The Company has incorporated these guidelines into its
Year 2000 plan. Certain subsidiaries of the Company have been examined by both
regulators and the Company's own internal audit staff and will be subject to
ongoing examinations with regard to their Year 2000 readiness.
The Company's Year 2000 Project includes four phases __ awareness, assessment,
remediation and testing. Executive management of the Company reviews and
approves these various phases of the project as they are completed. A report is
given to the Company's Board of Directors on a quarterly basis on the status of
the Year 2000 project.
0 The Company considers the awareness phase of its Year 2000 Project to be
substantially complete from an internal standpoint. Major customers and
vendors of the Company have been contacted to establish the level of their
awareness concerning Year 2000, which will be ongoing as circumstances
dictate.
0 The Company considers the assessment phase of its Year 2000 Project to be
substantially complete for internal mission critical systems. Assessment of
external services and systems has been dependent, in part, on vendor
management surveys. The Company has completed this survey process and has
received a 100% response rate from mission critical vendors.
0 The remediation phase of the Company's project includes the analysis,
planning and actual remediation necessary to bring mission critical
internal systems, both software and other time sensitive systems, into Year
2000 ready status. Remediation may include upgrading, renovating or
replacing existing systems. The Company believes that this phase of its
Year 2000 Project was substantially completed as of December 31, 1998 with
respect to internal mission critical systems.
0 The testing phase of the project involves both Internal Testing conducted
by programming and quality assurance staff, and Customer Acceptance Testing
(CAT) conducted by customers of the Company. Internal testing is performed
on all internal and external mission critical systems and services with
Year 2000 date information in various Year 2000 date scenarios. CAT
testing, by the Company's financial institution data processing customers,
is conducted in a simulated banking environment. A detailed customer
acceptance testing program has been designed to test key aspects of all
core banking applications being provided to banking customers by the
Company. The Company has begun both types of tests related to its project
and to the extent feasible, plans to substantially complete testing of
mission critical systems and services by March 31, 1999.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Through December 31, 1998,
cumulative costs relating directly to Year 2000 issues since the project's
inception have totaled approximately $5.5 million. A portion of the estimated
total includes both the cost of existing staff that have been redeployed to the
Year 2000 project from other projects and consultants or other independent
programmers who have been hired to help the Company complete its project. These
costs do not include system upgrades and replacements that were made in the
normal course of operations for other purposes in addition to addressing Year
2000 issues, unless the implementation was accelerated. The Company estimates
that remaining Year 2000 project costs will total approximately $7.0 million
and, therefore, the total estimated Year 2000 Project costs from inception
through completion should approximate $12.5 million.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. As is the case with most financial
services companies, the Company is heavily dependent on internal and external
computer systems and services. If those systems or services are interrupted, the
Company's ability to serve its retail, commercial banking and its credit card
customers could be directly effected. Some of the commercial financial services
that could be effected are credit card merchant processing, commercial cash
management services and financial institution data processing services. Year
2000 failures associated with internal and external systems and services could
generate claims or create other material adverse effects for the Company. Even
though the Company's Year 2000 Project will include contingency plans for third
party Year 2000 failures, there can be no assurances that mission critical third
party vendors or other significant third parties (such as telecommunications or
utilities industries, the Federal Reserve System or national credit card
processing associations) will adequately address their Year 2000 issues.
Increased credit losses associated with possible Year 2000 failures of major
borrowers or increased consumer cash demands resulting from publicity concerning
Year 2000 problems could also have a material adverse effect on the Company. The
Company is unable to quantify, in any reasonable manner, the financial impact of
these possible adverse effects, due to the uncertainty involved. The Company
generally advises commercial entities with which it does business that it cannot
guarantee that they or the Company will be completely unaffected by the Year
2000. The Company nonetheless continues to monitor these issues on an ongoing
basis and will strive to minimize their impact.
THE COMPANY'S CONTINGENCY PLANS. The Company is in the process of developing
contingency plans to address potential Year 2000 interruptions of its internal
and external mission critical systems and services. For example, the Company is
developing plans to provide the liquidity that would be needed to meet possible
unusually high cash demands generated by the publicity concerning potential Year
2000 issues for financial institutions. The initial contingency planning process
is well under way as of December 31, 1998. These plans will be subject to
ongoing review, testing and adjustment. Contingency plans may be limited or
problematic for some systems or services because there may be no reasonable
economic alternatives for these systems or services. There can be no assurance
that contingency plans will fully mitigate Year 2000 problems.
The foregoing Year 2000 discussion contains forward-looking statements,
including without limitation, anticipated costs and the dates by which the
Company expects to substantially complete the remediation and testing of systems
and are based on management's best current estimates, which were derived
utilizing numerous assumptions about future events, including the continued
availability of certain resources, representations received from third party
service providers and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
form those anticipated. Specific matters that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to identify and convert all relevant
computer systems, results of Year 2000 testing, adequate resolution of Year 2000
issues by governmental agencies, business or other third parties who are service
providers, suppliers, borrowers or customers of the Company, unanticipated
systems costs, the need to replace hardware and the adequacy of and ability to
implement contingency plans and similar uncertainties.
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% 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 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, 1998, 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 1998, the Company
acquired 8,017 shares of its Class A stock and 10,000 shares of its Class B
stock at an average price of $26.81. All outstanding treasury stock was retired
as of December 31, 1998.
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
Leland Poppe
Senior Vice President and Senior Agricultural Banking Officer
James R. Richardson
Senior Vice President and Loan Services Manager
* Executive Officer
DIRECTORS
David Calhoun Kenneth W. Staab
Chairman and Chief Executive Officer Staab Restaurant Management
Jacob North Printing
Connie Lapaseotes James Stuart, Jr.
Lapaseotes, Ltd. Chairman and Chief Executive Officer
Cattle Feeding, Ranching and Farming First Commerce Bancshares, Inc.
John G. Lowe, III James Stuart, III
Owner, Lowe Investment Co. Chairman and Chief Executive Officer
Investment Firm First Commerce Investors, Inc.
John C. Osborne Scott Stuart
President, Industrial Irrigation Services Director, First Commerce Bancshares, Inc.
Richard C. Schmoker Councelor to the Board
Attorney and Partner, Faegre & Benson James Stuart, Sr.
Chairman, Stuart Management Co.
William C. Schmoker Advisory Director
Assistant Vice President Harold Wimmer
Norwest Investment Management, Inc. Chairman, Wimmers Meat Products, Inc.
SUBSIDIARY SENIOR OFFICERS
James Stuart, Jr., Chairman Mary C. Gerdes, President and
and Chief Executive Officer Chief Executive Officer
Brad Korell, President Western Nebraska National Bank
National Bank of Commerce North Platte - Alliance - Bridgeport, Nebraska
Lincoln, Nebraska
Brad Korell, Chairman Mary C. Gerdes, Chairman
Patric J. Jerge, President Jan Lallman, President
and Chief Executive Officer and Chief Executive Officer
First Commerce Technologies, Inc. Western Nebraska National Bank
Lincoln, Nebraska Valentine, Nebraska
Jeffrey Holmberg, President Allen McClure, Chairman
and Chief Executive Oficer Paul Bachman, President
First Commerce Mortgage Company and Chief Executive Officer
Lincoln, Nebraska First National Bank
West Point, Nebraska
Robert Morris, President Rick Harbaugh, President
and Chief Executive Officer and Chief Executive Officer
City National Bank The Overland National Bank
Hastings, Nebraska Grand Island, Nebraska
Larry L. Jepson, Chairman James Stuart, III, Chairman
and Chief Executive Officer and Chief Executive Officer
John Cannon, President H. Cameron Hinds, President
First National Bank First Commerce Investors, Inc.
Kearney, Nebraska Lincoln, Nebraska
Kenneth W. Foster, Chairman Jerry Pesek, Manager
Mark Jepson, President Community Mortgage Company
and Chief Executive Officer Lincoln, Nebraska
First National Bank
McCook, Nebraska
CORPORATE FACTS
Corporate Office:
NBC Center
1248 O Street
Lincoln, NE 68508
Telephone: (402) 434-4110
Fax: (402) 434-4181
E-mail Address: dbrown@fcbcorp.com
Website: www.fcbi.com
Transfer Agent:
Chase-Mellon Shareholder Services
Mellon Bank, N.A.
4 Station Square, 3rd Floor
Pittsburgh, PA 15219
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, 1998, 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 20, 1999
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