FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number 03502
First National of Nebraska, Inc.
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(Exact name of registrant as specified in its charter)
Nebraska 47-0523079
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One First National Center Omaha, NE 68102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (402) 341-0500
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____.
----
As of May 7, 1999, the number of outstanding shares of the registrant's common
stock ($5.00 par value) was 334,500.
1
PART I. FINANCIAL INFORMATION
PART I. ITEM 1. FINANCIAL STATEMENTS
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Financial Condition
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March 31, December 31,
1999 1998
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(in thousands except share and per share data) (unaudited)
ASSETS
Cash and due from banks $ 310,608 $ 434,275
Federal funds sold and other short-term investments 264,216 382,234
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Total cash and cash equivalents 574,824 816,509
Securities available-for-sale (amortized cost $854,091 and $852,374) 851,641 854,183
Securities held-to-maturity (fair value $323,862 and $423,554) 321,976 420,918
Loans 5,642,989 5,746,054
Less: Allowance for loan losses 115,975 121,877
Unearned income 12,840 13,450
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Net loans 5,514,174 5,610,727
Premises and equipment, net 140,671 138,853
Other assets 339,239 346,625
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TOTAL ASSETS $ 7,742,525 $ 8,187,815
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 782,015 $ 896,485
Interest-bearing 5,950,310 5,971,396
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Total deposits 6,732,325 6,867,881
Federal funds purchased and securities sold under repurchase agreements 163,808 358,975
Other liabilities 98,843 250,753
Other borrowings 59,788 33,039
Capital notes 92,467 92,864
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Total liabilities 7,147,231 7,603,512
Stockholders' equity:
Common stock, $5 par value, 346,767 shares authorized,
334,501 and 335,000 shares issued and outstanding, respectively 1,673 1,675
Additional paid-in capital 2,511 2,515
Retained earnings 592,676 578,951
Accumulated other comprehensive income (loss) (1,566) 1,162
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Total stockholders' equity 595,294 584,303
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,742,525 $ 8,187,815
=============================================================================================================================
See notes to consolidated financial statements.
2
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Income
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Three Months Ended March 31,
1999 1998
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(in thousands except share and per share data) (unaudited)
Interest income:
Interest and fees on loans and lease financing $184,612 $174,341
Interest on securities:
Taxable interest income 15,579 17,864
Nontaxable interest income 222 215
Interest on federal funds sold
and other short-term investments 2,170 3,878
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Total interest income 202,583 196,298
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Interest expense:
Interest on deposits 71,052 74,391
Interest on federal funds purchased and
securities sold under repurchase agreements 1,606 1,870
Interest on other borrowings and capital notes 2,347 2,448
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Total interest expense 75,005 78,709
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Net interest income 127,578 117,589
Provision for loan losses 40,566 38,140
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Net interest income after provision for loan losses 87,012 79,449
Noninterest income:
Processing services 18,325 17,585
Credit card securitization income 16,244 14,745
Deposit services 6,194 5,768
Trust and investment services 5,998 5,837
Commissions 7,007 7,728
Miscellaneous 9,741 26,370
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Total noninterest income 63,509 78,033
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Noninterest expense:
Salaries and employee benefits 53,123 45,078
Communications and supplies 14,161 23,820
Loan servicing expense 7,097 5,431
Processing expense 7,406 5,830
Net occupancy expense of premises 7,718 7,168
Equipment rentals, depreciation and maintenance 9,467 8,232
Professional services 9,983 12,313
Miscellaneous 10,141 9,159
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Total noninterest expense 119,096 117,031
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Income before income taxes 31,425 40,451
Income tax expense(benefit):
Current 11,972 16,399
Deferred (16) 326
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Total income tax expense 11,956 16,725
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Net income $ 19,469 $ 23,726
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Average number of common shares outstanding 334,994 335,000
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Net income per common share $ 58.12 $ 70.82
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Cash dividends declared per common share $ 12.47 $ 8.75
==================================================================================================
See notes to consolidated financial statements.
3
FIRST NATIONAL OF NEBRASKA, INC.
Consolidated Statements of Cash Flows
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Three Months Ended March 31,
1999 1998
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(in thousands) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 19,469 $ 23,726
Adjustments to reconcile net income to net cash
flows from operating activities:
Provision for loan losses 40,566 38,140
Depreciation and amortization 11,392 10,241
Provision for deferred taxes (16) 326
Origination of mortgage loans for resale (43,818) (25,145)
Proceeds from the sale of mortgage loans for resale 41,549 19,525
Other asset and liability activity, net (147,783) 41,079
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Net cash flows from operating activities (78,641) 107,892
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and sales of securities available-for-sale 296,498 60,752
Purchases of securities available-for-sale (296,876) (6,347)
Maturities of securities held-to-maturity 101,819 183,430
Purchases of securities held-to-maturity (2,273) (129,468)
Net change in loans 74,746 8,387
Credit card securitization activities -- (295,000)
Purchases of loan portfolios (17,866) --
Purchases of premises and equipment (9,162) (9,629)
Other, net 190 486
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Net cash flows from investing activities 147,076 (187,389)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (135,556) 150,828
Net change in federal funds purchased and
securities sold under repurchase agreements (195,167) (56,755)
Issuance of other borrowings 40,180 15,397
Principal repayments of other borrowings
and capital notes (13,828) (5,680)
Repurchase of common stock (1,572) --
Cash dividends paid (4,177) (2,931)
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Net cash flows from financing activities (310,120) 100,859
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Net change in cash and cash equivalents (241,685) 21,362
Cash and cash equivalents at beginning of period 816,509 755,842
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Cash and cash equivalents at end of period $ 574,824 $ 777,204
===================================================================================================
Cash paid during the period for:
Interest $ 75,978 $ 77,824
Income taxes $ 2,218 $ 2,072
===================================================================================================
See notes to consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of First National
of Nebraska, Inc. and subsidiaries (the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements. For purposes of comparability, certain prior period
amounts have been reclassified.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial statements have
been included. Operating results for the three months ended March 31, 1999, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. The notes to the consolidated financial statements
contained in the Annual Report on Form 10-K for the year ended December 31, 1998
should be read in conjunction with these consolidated financial statements.
NOTE B: EARNINGS PER COMMON SHARE
Net income per share is calculated by dividing net income by the average number
of common shares outstanding during the period.
NOTE C: COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events or circumstances from
nonowner sources. Comprehensive income includes net income and other items of
comprehensive income meeting the above criteria. The Company's only component
of other comprehensive income is the change in unrealized appreciation or
depreciation of available-for-sale securities. For the three months ended March
31, 1999, total comprehensive income was $16.8 million, which includes net
income of $19.5 million less the change in net unrealized depreciation of
available-for-sale securities of $2.7 million. For the three months ended March
31, 1998, total comprehensive income was $23.5 million, which includes net
income of $23.7 million less the change in net unrealized depreciation of
available-for-sale securities of $200,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis contains forward looking statements which
reflect management's current views and estimates of future economic
circumstances, industry conditions, company performance and the financial
results. The statements are based on many assumptions and factors, including
general economic conditions, consumer behavior, competitive environment and
related market conditions, operating efficiencies and actions of governments.
Any changes in such assumptions or factors could produce different results.
RESULTS OF OPERATIONS:
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OVERVIEW:
Net income for the three months ended March 31, 1999 was $19.5 million, or
$58.12 per common share, decreasing 18% from $23.7 million, or $70.82 per common
share, for the same period in 1998. This decline in net income for the three
months ended March 31, 1999 when compared to the same period in 1998 is
primarily the result of proceeds received by the Company related to the
settlement of litigation in the first quarter of 1998. In 1999, the Company
experienced increases in net interest income and portions of noninterest income
when compared to the same period ended in 1998.
NET INTEREST INCOME:
The Company's primary source of income is net interest income which is defined
as the difference between interest income and fees derived from interest-earning
assets and interest expense on interest-bearing liabilities. Interest income
and expense are affected by changes in the volume and mix of interest-earning
assets and interest-bearing liabilities, in addition to changes in interest
rates. For the three months ended March 31, 1999, net interest income increased
$10 million, or 8.5%, to $127.6 million compared to $117.6 million for the same
period in 1998. This increase in 1999 is primarily due to an increase in net
average interest-earning assets of $87.5 million and net interest margin
compared to the same period in 1998.
5
PROVISION FOR LOAN LOSSES:
On a monthly basis, the Company evaluates its allowance for loan losses based
upon a review of collateral values, delinquencies, nonaccruals, payment
histories and various other analytical and subjective measures relating to the
various loan portfolios within the Company. For the three months ended March
31, 1999, the provision for loan losses increased $2.4 million, or 6.4%, to
$40.6 million compared to $38.1 million for the same period in 1998. The level
of net charge-offs remains high primarily due to the high volume of
delinquencies on consumer credit card loans and consumer bankruptcies which
continue to adversely affect the credit card industry.
NONINTEREST INCOME:
For the three months ended March 31, 1999, noninterest income decreased $14.5
million, or 18.6%, to $63.5 million compared to the same period in 1998. The
decrease is primarily attributable to miscellaneous income which in 1998
included proceeds from the settlement of litigation. The decrease is partially
offset by an increase in credit card securitization income of $1.5 million, or
10.2%, to $16.2 million compared to the same period in 1998. This increase in
credit card securitization income for the three months ended March 31, 1999 when
compared to the same period in 1998 resulted from the net impact of a $2.5
million, or 23.1%, increase in servicing income to $13.3 million from $10.8
million and a $1 million, or 25.6%, decrease in securitization gains to $2.9
million from $3.9 million.
NONINTEREST EXPENSE:
For the three months ended March 31, 1999, noninterest expense increased $2.1
million, or 1.8%, to $119.1 million compared to the same period in 1998. A
portion of the increase in noninterest expense is due to salaries and employee
benefits which increased 17.8% for the quarter as a result of overall Company
growth. Loan servicing expense increased $1.7 million, or 30.7%, due to the
Company's increased collection efforts and the resulting increases in collection
costs. Processing expenses increased $1.6 million, or 27%, due to credit card
processing expenses temporarily paid to external processors until conversion of
newly acquired credit card portfolios to the Company's computer system. These
increases in noninterest expenses were partially offset by a reduction in
professional services expense of $2.3 million, or 18.9%, due to decreased fees
paid to sales representatives and organizations for merchant business as well as
a decrease of $9.7 million, or 40.5%, in communication and supplies expense
principally due to a reduction in marketing expenses for the three months ended
March 31, 1999 as compared to the same period in 1998. Increases in remaining
expense categories related to continued Company growth and addressing Year 2000
issues. This growth was primarily due to increased processing volumes, the
acquisition of new customer relationships and loan portfolios and continued
investments in technology.
CREDIT CARD LOAN ACTIVITIES:
The Company securitizes credit card loans on a revolving basis as a funding
vehicle to supplement its use of core deposits as its primary source of funding.
These securitizations are accounted for as sales in accordance with SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which was adopted by the Company in 1997.
Since the Company continues to service these securitized loans, it takes the
role of a loan servicer rather than a lender. As loans are securitized, gains
which represent the present value of retained cash flows are recorded, and the
loans along with the related allowance for credit losses are removed from the
balance sheet. The securitizations result in differences in the amount of
reported loans versus managed loans. Reported loans reflect the removal of
these securitized loans from the balance sheet in accordance with generally
accepted accounting principles while managed loans include both securitized
loans and reported loans. The following table reflects the reconciliation of
the loan portfolio between reported and managed loans at March 31, 1999 and
December 31, 1998.
March 31, 1999 December 31, 1998
Reported Securitized Managed Reported Securitized Managed
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(in thousands)
Managed Loan Data
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As of Period End:
Total loans outstanding $ 5,642,989 $ 653,022 $ 6,296,011 $ 5,746,054 $ 653,022 $ 6,399,076
Total credit cards and related
plans outstanding $ 2,610,244 $ 653,022 $ 3,263,266 $ 2,781,626 $ 653,022 $ 3,434,648
Year-to-Date Average:
Total loans outstanding $ 5,660,599 $ 653,022 $ 6,313,621 $ 5,454,209 $ 695,367 $ 6,149,576
Total credit cards and related
plans outstanding $ 2,731,661 $ 653,022 $ 3,384,683 $ 2,728,328 $ 695,367 $ 3,423,695
6
In addition to credit card securitization activities, the Company acquired
credit card loan portfolios totaling $17.4 million during the three months ended
March 31, 1999.
ASSET QUALITY
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The Company's loan delinquency rates and net charge-off activity reflect, among
other factors, general economic conditions, the quality of the loans, the
average seasoning of the loans and the success of the Company's collection
efforts. The Company's objective in managing its loan portfolio is to balance
and optimize the profitability of the loans within the context of acceptable
risk characteristics. The Company continually monitors the risks embedded in
the loan portfolio with the use of statistically-based computer simulation
models.
The consumer credit industry continues to experience high levels of
delinquencies and charge-offs. As a major credit card issuer, the Company also
continues to experience high net charge-off and delinquency rates. The
increased delinquencies and charge-off trends appear to have leveled off, but it
is likely selected segments of consumers may continue to experience declines in
credit quality. Therefore, management continues to closely evaluate and monitor
consumer behavior, credit standards and marketing strategies.
The following table reflects the delinquency rates for the Company's overall
loan portfolio and for credit cards and related plans. An account is
contractually delinquent if the minimum payment is not received by the specified
billing date. The overall delinquency rate as a percentage of total loans was
3.07% at March 31, 1999 compared with 3.37% at December 31, 1998. The
delinquency rate as a percentage of total credit card loans and related plans
was 5.39% at March 31, 1999 compared to 5.94% at December 31, 1998.
DELINQUENT LOANS:
March 31, 1999 December 31, 1998
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(in thousands)
TOTAL LOANS % of Loans % of Loans
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Loans outstanding $5,642,989 $5,746,054
Loans delinquent:
30 - 89 days $ 107,246 1.90% $ 121,237 2.11%
90 days or more & still accruing 65,941 1.17% 72,482 1.26%
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Total delinquent loans $ 173,187 3.07% $ 193,719 3.37%
=============================================================
Nonaccrual loans $ 7,808 .14% $ 7,027 .12%
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CREDIT CARDS AND RELATED PLANS
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Loans outstanding $2,610,244 $2,781,626
Loans delinquent:
30 - 89 days $ 79,450 3.04% $ 96,625 3.47%
90 days or more & still accruing 61,319 2.35% 68,578 2.47%
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Total delinquent loans $ 140,769 5.39% $ 165,203 5.94%
=============================================================
Nonaccrual loans -- -- -- --
=============================================================
The Company's policy is to charge off credit card and related loans when they
become 180 days contractually past due. Net loan charge-offs include the
principal amount of losses resulting from borrowers' unwillingness or inability
to pay, in addition to bankrupt and deceased borrowers, less current period
recoveries of previously charged-off loans. The allowance for loan losses is
intended to cover losses inherent in the Company's loan portfolio as of the
reporting date. The provision for loan losses is charged against earnings to
cover both current period net charge-offs and to maintain the allowance at an
acceptable level to cover losses inherent in the portfolio as of the reporting
date. Net charge-offs for the Company's overall portfolio were $46.9 million
for the three months ended March 31, 1999 compared to $38.9 million for the same
period in 1998. Net charge-offs as a percentage of average loans were .83% for
the three months ended March 31, 1999 compared to .76% for the same period last
year.
7
The following table presents the activity in the Company's allowance for loan
losses with a breakdown of charge-off and recovery activity related to credit
cards and related plans.
ALLOWANCE FOR LOAN LOSSES:
For the Three Months Ended March 31,
1999 1998
--------------------------------------
(in thousands)
BALANCE AT JANUARY 1 $121,877 $128,990
Addition due to loan purchases 481 --
Reduction due to sales of loans -- (8,990)
Provision for loan losses 40,566 38,140
Loans charged off:
Credit cards and related plans (53,346) (44,131)
All other loans (1,324) (1,351)
Loans recovered:
Credit cards and related plans 7,212 5,975
All other loans 509 593
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Total net charge-offs (46,949) (38,914)
----------- ------------
BALANCE AT MARCH 31 $115,975 $119,226
=========== ============
Allowance as a percentage of loans 2.06% 2.27%
Total net charge-offs as a percentage
of average loans 0.83% 0.76%
CAPITAL RESOURCES
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The Company and its banking subsidiaries are required to maintain minimum
capital in accordance with regulatory guidelines. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and its banking subsidiaries must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. These
quantitative measures require the Company and its banking subsidiaries to
maintain minimum amounts and ratios of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). The Company and its banking
subsidiaries' capital amounts and classifications are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors.
As of March 31, 1999, the most recent notification from the OCC categorized the
Company's banking subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the institution's
category. To be categorized as well capitalized, the Company's banking
subsidiaries must maintain minimum total risk-based capital of 10%, Tier I risk-
based capital of 6% and Tier I leverage capital of 5%.
The Company repurchased 499 shares and one share of the Company's common stock
on March 31, 1999 and April 14, 1999, respectively. The 500 shares repurchased
were retired decreasing the total number of shares issued and outstanding to
334,500. The purchase prices of these transactions were negotiated at arm's
length and reflected fair value of the Company's common stock.
In 1995, First National Bank of Omaha issued $75 million in 15 year subordinated
capital notes. These subordinated capital notes, along with $17.5 million in
capital notes outstanding as of March 31, 1999 issued in connection with the
Company's previous acquisitions, count towards meeting the required capital
standards, subject to certain limitations. The Company has historically
retained approximately 85% of annual net income in capital to fund the growth of
future operations and to maintain minimum capital standards.
LIQUIDITY MANAGEMENT
- --------------------
Adequate liquidity levels are necessary to ensure that sufficient funds are
available for loan growth and deposit withdrawals. These funding needs are
offset by funds generated from loan repayments, investment maturities, and core
deposit growth. The Company's Asset/Liability Committee is responsible for
monitoring the current and forecasted balance sheet structure to ensure
anticipated funding needs can be met at a reasonable cost. Contingency plans
are in place to meet unanticipated funding needs or loss of funding sources.
8
Domestic retail deposits are used as the primary source of funding for all
banking subsidiaries. In order to maintain flexibility and diversity in
liquidity management the Company also has access to a variety of other funding
sources. These other sources include securities sold under repurchase
agreements, federal funds purchased, securitization, Federal Home Loan Bank
advances, other short-term and long-term debt and subordinated capital notes.
The parent company's cash flows are dependent upon the receipt of dividends from
its banking subsidiaries which are subject to regulatory restrictions.
The Company utilizes credit card-backed securitization vehicles to assist in its
management of liquidity, interest rate risk and capital. At March 31, 1999 and
1998, $653 million and $655 million, respectively, of the Company's managed
credit card portfolio was securitized with an additional $275 million and $295
million, respectively, in unused securitization lines available. At March 31,
1999, the parent company had no balance outstanding under a $100 million
syndicated revolving credit facility reflected in other borrowings. As part of
this syndicated credit facility arranged for the parent company, a $150 million
revolving credit facility for the Bank was also available at March 31, 1999 for
general liquidity purposes.
YEAR 2000 READINESS
- -------------------
The Company's State of Readiness. As is the case for most financial service
- --------------------------------
companies that are heavily dependent on computer systems, the Year 2000 computer
problem presents significant issues for the Company. The Company began working
on Year 2000 challenges in 1994 and has established a Year 2000 Project
Management Office (PMO) to monitor, evaluate and manage the risks, solutions and
costs associated with Year 2000 issues. The PMO has developed a project plan
for the Company and serves as a resource to assist the Company's various
business units in assessment, remediation and testing for Year 2000 readiness.
The PMO also monitors and incorporates into the Company's plans the numerous
regulatory guidelines issued by the Federal Financial Institutions Examination
Council. The Company's various business units have been examined and will be
subject to ongoing examinations with regard to their Year 2000 readiness by
appropriate regulatory authorities and internal auditors. The Company's Year
2000 project includes internal information technology (IT) systems, internal
non-IT systems (such as microcontrollers in telephone, security and alarm
equipment) and external services and systems that are necessary to carry on the
Company's business.
The Company's Year 2000 Project includes four phases - awareness, assessment,
remediation and testing. Executive management of the Company reviews and
approves these various phases of the project plan as they are completed.
. The Company considers the awareness phase of its Year 2000 Project to be
substantially complete from an internal standpoint. Awareness efforts with
regard to the Company's customers and vendors will be ongoing as
circumstances dictate.
. The Company considers the assessment phase of its Year 2000 Project to be
substantially complete for internal mission critical systems (IT and non-IT).
Assessment of external services and systems has been dependent, in part, on
vendor management surveys. The Company has substantially completed this
survey process and has received a 100% response rate from mission critical
vendors. The Company's assessment phase has also included a review of its
business processes, with the goal being an identification of the Company's
key operational tasks, risks and priorities for mission critical systems.
. The remediation phase of the Company's project includes the analysis,
planning and actual remediation necessary to bring mission critical internal
systems (both IT and non-IT) into a Year 2000 ready status. Remediation may
include upgrading, renovating or replacing existing systems. The Company has
substantially completed this phase of its Year 2000 Project with respect to
internal mission critical systems. In limited situations, completion of
remediation is dependent on the performance of third party vendors, which is
not completely within the control of the Company.
. The testing phase of the Company's project involves various types of testing
of internal and external mission critical systems and services with Year 2000
date information in various Year 2000 date scenarios. The Company is in the
process of the testing phase of its project and to the extent feasible plans
to substantially complete testing and implementation of mission critical
systems by June 30, 1999 .
As remediated and tested internal mission critical systems are brought into
production, the Company has implemented additional quality control management
practices to avoid the re-introduction of Year 2000-related problems. This is
important because normal operations and regulatory considerations may require
that modifications continue to be made to the Company's systems in 1999. To
some extent, therefore, all four phases of the Company's project will continue
on an ongoing basis throughout 1999 and beyond.
The Costs to Address the Company's Year 2000 Issues. Through March 31, 1999,
- ---------------------------------------------------
cumulative costs relating directly to Year 2000 issues since the project's
inception have totaled approximately $8 million. A significant portion of this
estimated total includes the cost of existing staff that have been redeployed to
the Year 2000 project from other
9
technology development plans. 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. The Company estimates that
remaining Year 2000 costs will total approximately $5 million and therefore, the
total estimated Year 2000 Project costs from inception through completion should
approximate $13 million.
The Risks of the Company's Year 2000 Issues. As is the case with many financial
- -------------------------------------------
services companies, the Company is heavily dependent on internal and external
computer systems and services. If those systems or services are interrupted,
the Company's ability to serve its retail banking customers and its nationwide
base of credit card customers could be directly affected. System failures could
also directly affect the Company's ability to fulfill its service commitments to
commercial customers. Many of the Company's commercial financial services are
either dependent upon computerized data processing, or are financial data
processing services in and of themselves. Some of these services include the
Company's national credit card merchant processing business, commercial cash
management services, financial institution data processing services and
marketing and support of financial software products. Year 2000 failures
associated with internal and external systems and services could generate claims
or create other material adverse effects for the Company. Even though the
Company's Year 2000 Project 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 the telecommunications or
utilities industries, the Federal Reserve System or national credit card
associations) will adequately address their Year 2000 issues. Increased credit
losses associated with possible Year 2000 failures of major borrowers or
increased consumer cash demands resulting from publicity concerning Year 2000
problems could also have a material adverse effect on the Company. Uncertainty
prevents the Company from identifying any of these events as a reasonably likely
worst case scenario or quantifying their financial impact in any reasonable
manner. The Company generally advises commercial entities with which it does
business that it cannot guarantee that they or the Company will be completely
unaffected by the Year 2000. The Company nonetheless continues to monitor these
issues on an ongoing basis and, through its Year 2000 Project, will strive to
minimize their impact.
The Company's Contingency Plans. The Company is in the process of developing
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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 designed to meet possible unusually high cash demands generated
by the publicity concerning potential Year 2000 issues for financial
institutions. The initial contingency planning process is well under way.
These plans 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
from those anticipated. Specific matters that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, 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
system costs, the need to replace hardware and the adequacy of and ability to
implement contingency plans and similar uncertainties.
ITEM 3. MARKET RISK:
The Company's primary component of market risk is interest rate volatility. It
is the goal of the Company to maximize profits while effectively managing rather
than eliminating interest rate risk. Two primary measures are used to measure
and manage interest rate risk: Net Interest Income Simulation Modeling and
Interest Rate Sensitivity Gap Analysis.
Net Interest Income Simulation:
The Company uses a simulation model to analyze net interest income sensitivity
to movements in interest rates. The simulation model projects net interest
income based on both upward and downward interest rate shifts over a twelve
month period. Alternative scenarios are simulated by applying immediate shifts
in interest rates (rate shocks) and gradual shifts in interest rates (rate
ramps). These interest rate shifts are applied to a projected balance sheet for
the Company for the twelve month simulation period. Based on the information
and assumptions in effect at March 31, 1999, management believes that a 200
basis point rate shock or rate ramp over a twelve month period, up or down,
would not significantly affect the Company's annualized net interest income.
The Company has established guidelines that limit the acceptable potential
change in net interest margin and net income under these interest rate and
balance sheet scenarios. Given the minimal potential for significant risk
exposure relating to
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potential losses in future earnings, fair values or cash flows of interest-rate-
sensitive instruments illustrated by the simulations, the Company does not
engage in derivative transactions such as hedges, swaps, or futures.
Interest Rate Sensitivity Gap Analysis:
The Company uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that time period. A gap is considered positive when the amount of
interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive
liabilities, and is considered negative when the amount of interest-rate-
sensitive liabilities exceeds the amount of interest-rate-sensitive assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income, while a positive gap would result in an
increase in net interest income. Conversely, during a period of falling
interest rates, a negative gap would result in an increase in net interest
income, while a positive gap would negatively affect net interest income.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings.
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PART II. OTHER INFORMATION
ITEMS 1,2,3,4, AND 5: Not applicable or negative response.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits 3(i)(ii) Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws of the Parent Company
(previously filed as Exhibits to form 10-Q filed with
the Securities and Exchange Commission by the Company
on June 30, 1997) are incorporated herein by reference.
4 Fiscal and Paying Agency Agreement entered into in
connection with the issuance of $75 million of
Subordinated Notes by First National Bank of Omaha (the
"Bank") dated December 7, 1995 between the Bank as
"Issuer" and the Bank as "Fiscal and Paying Agent"
incorporated by reference to the Company's Report on
Form 8-K, filed December 12, 1995.
10(a) Deferred Compensation and Consultative Services
Agreement between the Bank and John R. Lauritzen and
Amendment to Deferred Compensation and Consultative
Services Agreement between the Bank and John R.
Lauritzen, incorporated by reference to Exhibit 10(a)
of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
10(b) Deferred Compensation and Consultative Services
Agreement between the Bank and F. Phillips Giltner and
Amendment to Deferred Compensation and Consultative
Services Agreement between the Bank and F. Phillips
Giltner, incorporated by reference to Exhibit 10(b) of
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10(c) First National of Nebraska Senior Management Long Term
Incentive Plan, incorporated by reference to Exhibit
10(c) of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
10(d) Management Incentive Plan, incorporated by reference to
Exhibit 10(d) of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992.
10(e) Employment Contract between the Parent Company and
Bruce R. Lauritzen, incorporated by reference to
Exhibit 10(i) of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992.
27 Financial Data Schedule (EDGAR filing only).
(b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter
for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST NATIONAL OF NEBRASKA, INC.
By: /s/ Dennis A. O'Neal Date: May 10, 1999
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Dennis A. O'Neal
Executive Vice President and Treasurer,
Principal Financial Officer
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