UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1995
[ ] 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 0 - 9676
FIRST COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
ARKANSAS 71-0540166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 WEST CAPITOL AVENUE, LITTLE ROCK, ARKANSAS 72201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501)371-7000
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 [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practical date.
Class Outstanding at March 31, 1995
--------------------------------------- -----------------------------
Common Stock, $3.00 par value per share 23,795,909
TABLE OF CONTENTS
Item Page
---- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements (Unaudited)............................. 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
PART II - OTHER INFORMATION
1. Legal Proceedings............................................ 18
4. Submission of Matters to a Vote of Security Holders.......... 20
6. Exhibits and Reports on Form 8-K............................. 20
Signatures............................................................. 21
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED BALANCE SHEETS March 31, December 31,
(Dollars in thousands, except par value) -------------- --------------
1995 1994
-------------- --------------
ASSETS
Cash and due from banks................................................... $ 234,681 $ 287,376
Federal funds sold........................................................ 102,297 71,979
-------------- --------------
Total cash and cash equivalents.......................................... 336,978 359,355
Investment securities held-to-maturity, estimated market
value $836,563 ($865,366 in 1994)........................................ 856,354 900,064
Investment securities available-for-sale.................................. 385,097 409,129
Trading account securities................................................ 210 13
Loans and leases, net of unearned income.................................. 2,597,889 2,534,793
Allowance for possible loan and lease losses.............................. (45,673) (45,325)
-------------- --------------
Net loans and leases..................................................... 2,552,216 2,489,468
Bank premises and equipment, net.......................................... 88,827 87,046
Other real estate owned, net of allowance for possible losses of $67...... 2,521 3,093
Other assets.............................................................. 125,338 126,031
-------------- --------------
Total assets........................................................... $ 4,347,541 $ 4,374,199
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing transaction accounts................................. $ 737,799 $ 767,525
Interest bearing transaction and savings accounts......................... 1,483,440 1,538,601
Certificates of deposit $100,000 and over................................. 336,432 326,298
Other time deposits....................................................... 1,214,994 1,192,936
-------------- --------------
Total deposits........................................................... 3,772,665 3,825,360
Short-term borrowings..................................................... 166,493 167,417
Other liabilities and deferred income taxes............................... 39,268 29,988
Long-term debt............................................................ 14,243 8,243
-------------- --------------
Total liabilities........................................................ 3,992,669 4,031,008
Stockholders' equity
Preferred stock, $1 par value, 400,000 shares authorized, none issued
Common stock, $3 par value, 34,000,000 shares authorized,
23,795,909 and 23,775,118 shares issued, respectively................... 71,388 71,325
Capital surplus.......................................................... 109,308 109,167
Retained earnings........................................................ 177,691 170,132
Unrealized net losses on available-for-sale securities, net of income tax (3,515) (7,433)
Less treasury stock at cost, 0 shares.................................... -- --
-------------- --------------
Total stockholders' equity.............................................. 354,872 343,191
-------------- --------------
Total liabilities and stockholders' equity............................. $ 4,347,541 $ 4,374,199
============== ==============
See accompanying notes.
3
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED INCOME STATEMENTS Three Months Ended
(Dollars in thousands, except per share data) March 31,
----------------------
1995 1994
---------- ----------
Interest income
Loans and leases, including fees.................................................. $ 53,168 $ 42,601
Short-term investments............................................................ 955 693
Investment securities-taxable..................................................... 15,142 15,205
-nontaxable.................................................. 1,814 1,971
Trading account securities........................................................ 2 9
---------- ----------
Total interest income........................................................... 71,081 60,479
Interest expense
Interest on deposits.............................................................. 26,751 21,889
Short-term borrowings............................................................. 2,619 506
Long-term debt.................................................................... 190 306
---------- ----------
Total interest expense.......................................................... 29,560 22,701
Net interest income.................................................................. 41,521 37,778
Provision for possible loan and lease losses......................................... 780 518
---------- ----------
Net int inc after prov for possible loan and lease losses....................... 40,741 37,260
Other income
Trust department income........................................................... 2,806 2,928
Mortgage servicing fee income..................................................... 3,680 4,044
Broker-dealer operations income................................................... 650 698
Service charges on deposit accounts............................................... 5,177 4,845
Other service charges and fees.................................................... 2,033 2,054
Investment securities gains (losses), net......................................... (26) 79
Other real estate gains (losses), net............................................. (233) 1,526
Other............................................................................. 1,221 1,717
---------- ----------
Total other income.............................................................. 15,308 17,891
Other expenses
Salaries, wages and employee benefits............................................. 19,077 18,250
Net occupancy..................................................................... 2,683 2,338
Equipment......................................................................... 2,504 2,255
FDIC insurance.................................................................... 2,176 2,122
Amortization of purchased mortgage servicing rights............................... 988 1,666
Other............................................................................. 10,175 10,748
---------- ----------
Total other expenses............................................................ 37,603 37,379
Income before income taxes........................................................ 18,446 17,772
Income tax provision.............................................................. 6,121 5,807
---------- ----------
Net income...................................................................... $ 12,325 $ 11,965
========== ==========
Weighted average number of common shares outstanding
during the period................................................................... 23,785,740 24,092,635
Earnings per common share............................................................ $ 0.52 $ 0.49
See accompanying notes.
4
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended
(Dollars in thousands) March 31,
-----------------------
1995 1994
---------- ----------
OPERATING ACTIVITIES
Net income......................................................................... $ 12,325 $ 11,965
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 3,545 4,158
Provision for possible loan and lease losses...................................... 780 518
Loss (gain) on investment securities available-for-sale........................... 26 (79)
Gain on sale of equipment......................................................... (31) (282)
Gain on sale of other real estate................................................. (111) (1,502)
Write downs of other real estate.................................................. 19 80
Equity in undistributed earnings of unconsolidated subsidiary..................... (406) (321)
Decrease (increase) in trading securities......................................... (196) 19
Net unrealized loss (gain) on trading securities.................................. (1) 6
Decrease (increase) in mortgage loans held for resale............................. 14,883 (1,703)
Increase in income taxes payable.................................................. 8,249 5,284
Decrease (increase) in interest and other receivables............................. 490 (56)
Increase (decrease) in interest payable........................................... 652 (24)
Reduction in other assets......................................................... 3,823 --
Decrease in accrued expenses...................................................... (3,279) (531)
Increase in prepaid expenses...................................................... (2,975) (2,196)
---------- ----------
Net cash provided by operating activities........................................ 37,793 15,336
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale.................... 3,804 7,664
Proceeds from maturing investment securities available-for-sale.................... 60,420 451
Proceeds from maturing investment securities held-to-maturity...................... 125,365 267,072
Purchases of investment securities available-for-sale.............................. (34,204) (47,795)
Purchases of investment securities held-to-maturity................................ (81,655) (192,499)
Net increase in loans and leases................................................... (79,014) (21,457)
Capital expenditures............................................................... (4,843) (5,756)
Proceeds from sale of bank premises and equipment.................................. 1,086 3,700
Additions to purchased mortgage servicing rights and other assets.................. (215) (8,100)
Proceeds from sales of other real estate........................................... 1,267 9,157
---------- ----------
Net cash provided by (used in) investing activities............................... (7,989) 12,437
(Continued on next page)
5
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Three Months Ended
(Dollars in thousands) March 31,
-----------------------
1995 1994
---------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts, and savings accounts..... (84,887) 8,261
Net increase (decrease) in time deposits........................................... 32,192 (23,370)
Net increase (decrease) in short-term borrowings................................... (924) 37,526
Repayment of long-term debt........................................................ -- (16,093)
Proceeds from long-term borrowings................................................. 6,000 --
Payment to redeem preferred stock.................................................. -- (11,330)
Proceeds from issuance of common stock............................................. 53 --
Purchase of treasury stock......................................................... -- (385)
Stock options exercised............................................................ 150 108
Preferred stock dividends.......................................................... -- (129)
Cash dividends paid on common stock................................................ (4,765) (4,132)
---------- ----------
Net cash used in financing activities............................................. (52,181) (9,544)
Net increase (decrease) in cash and cash equivalents............................... (22,377) 18,229
Cash and cash equivalents at the beginning of year................................. 359,355 384,823
---------- ----------
Cash and cash equivalents at end of period........................................ $ 336,978 $ 403,052
========== ==========
See accompanying notes.
6
FIRST COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position as of March 31, 1995, and the results of operations
and changes in cash flows for the three months then ended. Any adjustments
consist only of normal recurring accruals.
2. Earnings per common share is calculated by dividing net income less the
preferred stock dividend by the weighted average number of common shares
outstanding. The preferred stock dividends for the three months ended
March 31, 1995, and 1994, were $0 and $129,288, respectively.
3. Cash payments for interest were approximately $28.9 million and $22.7
million for the first three months of 1995 and 1994, respectively. There
were no cash payments for income taxes during the first three months of
1995 and 1994.
4. In 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for Post-
Employment Benefits." As required under the Statement, the Company has
adopted the provisions of the new standard as of January 1, 1995. The
effect of adopting this new standard was not material to the Company's
financial position or results of operation.
5. In 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan." As required under the Statement, the Company has
adopted the provisions of the new standard as of January 1, 1995. The
effect of adopting this new standard was not material to the Company's
financial position or results of operation.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
First Commercial Corporation ("Registrant" or the "Company") is a multi-
bank holding company headquartered in Little Rock, Arkansas. The Company
operates twelve institutions in the state of Arkansas, eight institutions in
the state of Texas, and one institution in the state of Tennessee. In a joint
venture with Arvest Bank Group, Inc., of Bentonville, Arkansas, the Company
owns 50% of an institution in Norman, Oklahoma. The Company's consolidated
assets at March 31, 1995, totaled approximately $4.3 billion.
On April 12, 1995, a subsidiary of the Company, First Commercial Mortgage
Company, completed acquisition of Brumbaugh and Fulton Mortgage Company based
in Tulsa, Oklahoma. The acquisition represents the Company's first entry into
the Tulsa market. Brumbaugh and Fulton Mortgage Company has had a significant
presence in the city for many years and services approximately 6,000 loans
totaling over $200 million in principal balance. The purchase will provide
about $40 million a year in new production for First Commercial Mortgage
Company.
Financial Review
- - - - ----------------
The following financial review provides management's analysis of the
consolidated financial condition and results of operations of the Company. As
such, the presentation focuses on those factors that have had the most
significant impact on the Company's financial condition during the periods
discussed.
Consolidated Earnings Summary
Earnings of $0.52 per share in 1995's first three months represented an
increase of 6.1% from $0.49 per share during the same period in 1994. Net
income for the three months ended March 31, 1995, was $12.3 million, up 3.0%
from $12.0 million in 1994. The 1994 first quarter results include net non-
recurring income of $557 thousand, or $.02 per share after-tax. The non-
recurring items included $1.5 million in other real estate gains offset by
expenses of $969 thousand relating to the first quarter pay-off of the
Company's subordinated capital notes. Excluding the non-recurring items,
earnings per share were up 8.8% over 1994 results. The higher percentage
increase in earnings per share than in net income reflects the February 1994
redemption of the Company's preferred stock and the effect of the stock
repurchase plan approved by the Board of Directors in February 1994.
Excluding the non-recurring items recorded in the first quarter of 1994,
the Company's net income increased 6.2%. This increase was the result of a
rise of 9.3% in net interest income after provision for possible loan and lease
losses, mitigated by a 6.5% decrease in non-interest income and an increase of
3.3% in non-interest expense. The primary reason for the increase in net
interest income is the 1994 third quarter acquisitions of The First National
Bank of Palestine, Texas, and Kilgore First National Bank, Kilgore, Texas,
which were accounted for as purchase transactions. The decrease in non-
interest income was due primarily to a decrease in mortgage production
8
volume and mortgage servicing fees. The increase in non-interest expense was
primarily due to the two bank purchases in Palestine and Kilgore, Texas, in
1994. Excluding the effect of these purchases, non-interest expense actually
decreased 2.0%. A detailed explanation of these increases is included in the
Non-Interest Income and Non-Interest Expense sections of the Financial Review.
When evaluating the earnings performance of a banking organization, two
profitability ratios are important standards of measurement: return on average
assets and return on average common stockholders' equity. Return on average
assets measures net income in relation to total average assets and portrays the
organization's ability to profitably employ its resources. Annualized return
on average assets for the first three months of 1995 was 1.15% as compared to
1.17% for the first three months of 1994. Excluding the non-recurring items
recorded in the first quarter of 1994, discussed previously, 1994 first quarter
return on average assets was 1.13%. Annual returns on average assets were
1.19% in 1994, 1.21% in 1993 and 1.21% in 1992.
The second profitability ratio, return on average common stockholders'
equity, indicates how effectively a company has been able to generate earnings
on the capital invested by its stockholders. In the first three months of
1995, the Company earned 14.06% on average common stockholders' equity compared
with 14.56% for the first three months of 1994. Excluding the non-recurring
items recorded in the first quarter of 1994, discussed previously, 1994 first
quarter return on average common stockholders' equity was 14.12%. Return on
average common stockholders' equity for the years 1994, 1993 and 1992 were
14.87%, 14.43% and 14.27%, respectively. The originally reported ratios in
1992 and 1993, before restatements for pooling acquisitions, for return on
average common stockholders' equity were above 15%. The ratios fell due to the
high capital level of State First Financial Corporation, a pooling-of-interests
acquisition that was consummated in March 1994. Management will work to
profitably deploy the excess capital thereby improving the return on average
common stockholders' equity.
Net Interest Income/Net Interest Margin
Net interest income, the greatest component of a bank's earnings, is the
difference between income generated by earning assets and the interest cost of
funding those assets. For the purpose of this analysis and discussion, net
interest income and net interest margin reflect income from tax-exempt loans
and tax-exempt investments on a fully tax-equivalent basis. This permits
comparability of income data through recognition of the tax savings realized on
tax-exempt earnings. On a tax-equivalent basis, net interest income was $42.4
million in the first three months of 1995 compared to $38.7 million in the
first three months of 1994. The primary reason for the 1995 increase in net
interest income was the previously mentioned acquisitions of the two Texas
banks in Palestine and Kilgore in the third quarter of 1994. For 1994, net
interest income on a fully tax-equivalent basis reached $163.1 million,
increasing from $148.3 million in 1993, and $137.5 million in 1992.
The primary reason for the increase in net interest income in 1994 was the
addition of the two Texas banks in Palestine and Kilgore and the 1993 fourth
quarter purchases of the two Texas Commerce banks in Longview and Nacogdoches,
Texas, which were accounted for as purchase transactions. The increase in net
interest income in 1993 was due primarily to the first quarter 1993 bank
purchases in Tyler and Lufkin, Texas, and State First Financial Corporation's
purchase of The First National Bank of Nashville, Arkansas, in January 1993.
9
Net interest margin is the ratio of net interest income to average earning
assets. This ratio indicates the Company's ability to manage its earning
assets and to control the spread between yields earned on assets and rates paid
on liabilities. Fully tax-equivalent net interest margin was 4.39% for the
first three months of 1995, compared to 4.19% for the same period in 1994. The
increase in net interest margin reflects the strong net interest margins of the
two banks in Palestine and Kilgore, Texas, purchased in 1994, increased loan
demand and reinvestment of maturing assets at higher rates due to the rise in
the general interest rate environment. Fully tax-equivalent net interest
margin was 4.26% for the full year of 1994, 4.28% in 1993 and 4.55% in 1992.
Although net interest margin was relatively stable between 1993 and 1994,
the trends within the years are different. During 1993, the trend was
declining primarily due to the impact of the 1993 affiliation with the four
Texas banks in Tyler, Lufkin, Longview and Nacogdoches, which had low loan to
deposit ratios and, therefore, lower net interest margins than those
experienced by the Company's other affiliates. During 1994, the trend began to
increase as those Texas banks, along with other affiliates of the Company,
experienced significant loan growth and an increase in net interest margin. In
addition, the acquisitions of the banks in Palestine and Kilgore, Texas, during
the third quarter of 1994, brought higher net interest margins to the Company.
Management of net interest margin is actively pursued through a continuing
emphasis on pricing both loans and deposits with focus on profitability, rather
than a narrow emphasis on local market conditions. Presented in the following
table is an analysis of the components of fully tax-equivalent net interest
income for the past three years and the first three months of 1995 and 1994.
Analysis of Net Interest Income (FTE = Fully Tax-Equivalent)
For the Three Months For the Years Ended
Ended March 31, December 31,
----------------------- --------------------------------------
1995 1994 1994 1993 1992
(Dollars in thousands) ---------- ---------- ---------- ---------- ----------
Interest income $ 71,081 $ 60,479 $ 257,751 $ 234,995 $ 232,098
Fully tax-equivalent adjustment 839 944 3,618 3,775 4,122
---------- ---------- ---------- ---------- ----------
Interest income - FTE 71,920 61,423 261,369 238,770 236,220
Interest expense 29,560 22,701 98,306 90,421 98,690
---------- ---------- ---------- ---------- ----------
Net interest income - FTE $ 42,360 $ 38,722 $ 163,063 $ 148,349 $ 137,530
========== ========== ========== ========== ==========
Yield on earning assets - FTE 7.46% 6.64% 6.82% 6.89% 7.82%
Cost of interest bearing liabilities 3.76% 3.02% 3.18% 3.23% 3.99%
Net interest spread - FTE 3.70% 3.62% 3.64% 3.66% 3.83%
Net interest margin - FTE 4.39% 4.19% 4.26% 4.28% 4.55%
The following schedule details rate sensitive assets and liabilities at
March 31, 1995. The repricing schedule, as depicted, represents the first
opportunity to reprice earning assets or interest bearing liabilities. The
interest rate sensitivity data is based on repricing terms, rather than actual
contractual maturities.
10
Interest Rate Sensitivity Period
(Dollars in thousands) ----------------------------------------------------------------------------
0 - 30 31 - 90 91 - 180 181 - 365 1 to 5 Over 5
Days Days Days Days Years Years Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earning assets:
Short-term investments $ 102,297 $ -- $ -- $ -- $ -- $ -- $ 102,297
Trading account assets 210 -- -- -- -- -- 210
Taxable investment securities 173,291 93,636 133,415 215,652 478,033 18,521 1,112,548
Tax-exempt investment securities 2,014 3,951 3,625 10,901 71,479 36,933 128,903
Loans and leases 570,863 199,454 243,123 412,445 898,637 273,367 2,597,889
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 848,675 297,041 380,163 638,998 1,448,149 328,821 3,941,847
Interest bearing liabilities:
Savings and NOW accounts 974,367 -- -- -- -- -- 974,367
Money market accounts 509,073 -- -- -- -- -- 509,073
Other time deposits 301,372 261,087 329,470 302,550 351,624 5,323 1,551,426
Short-term borrowings 166,493 -- -- -- -- -- 166,493
Long-term debt 1,071 -- 1 1 2,151 11,019 14,243
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities 1,952,376 261,087 329,471 302,551 353,775 16,342 3,215,602
Interest rate
sensitivity gap (1,103,701) 35,954 50,692 336,447 1,094,374 312,479
Cumulative interest rate
sensitivity gap (1,103,701)(1,067,747)(1,017,055) (680,608) 413,766 726,245
Cumulative rate sensitive assets
to rate sensitive liabilities 0.43 0.52 0.60 0.76 1.13 1.23
Cumulative gap as a percentage
of earning assets (28.0%) (27.1%) (25.8%) (17.3%) 10.5% 18.4%
The Company is currently in a negative static gap situation. However,
management recognizes the limitations of a static gap analysis. While a
comparison of rate sensitive assets and rate sensitive liabilities (static gap
analysis) does provide a general indication of how net interest income will be
affected by changes in interest rates, an important limitation is that static
gap analysis considers only the dollar volume of assets and liabilities to be
repriced. Changes in net interest income are determined not only by the
volumes being repriced, but also by the rates at which the assets and
liabilities are repriced, and the relationship between the rates earned on
assets and rates paid on liabilities are not necessarily constant over time.
Therefore, management uses a beta adjusted gap along with a net interest
revenue simulation model to actively manage the gap position. Management
believes that the dynamic gap position is in a near balanced situation, so that
the impact of changes in the general level of interest rates on net interest
margin is likely to be minimal. Management will continue to closely monitor
11
all aspects of the Company's gap position to maximize profitability as interest
rates fluctuate.
Non-Interest Income
In addition to net interest income increases, the Company has continued to
develop its sources of non-interest income. The primary sources of sustainable
non-interest income are trust services, service charges on deposit accounts,
mortgage services and broker-dealer operations. For the first three months of
1995, non-interest income totaled $15.3 million compared to $17.9 million for
the first three months of 1994. Excluding the $1.5 million in other real
estate gains recorded in the first quarter of 1994, non-interest income
decreased $1.1 million. A decrease in mortgage production volume and mortgage
servicing fees was the primary reason for this decrease in non-interest income.
Non-interest income in 1994 totaled $68.7 million, an increase of 16% from
$59.0 million in 1993. Non-interest income for 1993 represented an increase of
15% over 1992. Of the $9.7 million increase in 1994, $4.4 million was a result
of net gains on sales of other real estate owned and $2.0 million was a result
of the 1993 fourth quarter purchase of the two Texas Commerce banks and the
1994 purchases of the banks in Palestine and Kilgore, Texas. The remaining
increase was attributable to the continued strong performance of the mortgage
banking subsidiary, with an increase in servicing fees of $3.4 million
resulting from a large acquisition of servicing rights late in 1993. The
primary contributors to the $7.8 million increase in 1993's non-interest income
were $3.1 million from the two bank acquisitions in Tyler and Lufkin, Texas,
and volume increases in service charges on deposit accounts, trust revenue and
mortgage servicing fees.
The following table summarizes non-interest income for 1994, 1993 and 1992.
For the Years
Ended December 31, 1994 1993
------------------------------ Change from Change from
1994 1993 1992 1993 1992
-------- -------- -------- ------------------- -------------------
Trust department income $ 10,904 $ 10,340 $ 8,112 $ 564 5.45% $ 2,228 27.47%
Mortgage servicing fee income 16,340 12,905 11,914 3,435 26.62 991 8.32
Broker-dealer operations income 1,727 2,069 1,935 (342) (16.53) 134 6.93
Service charges on deposits 20,131 17,965 15,415 2,166 12.06 2,550 16.54
Other service charges and fees 7,964 6,952 6,124 1,012 14.56 828 13.52
Investment securities gains
(losses), net 139 221 (330) (82) (37.10) 551 166.97
Other real estate gains
(losses), net 4,413 (89) 1 4,502 5058.43 (90) (9000.00)
Other 7,034 8,594 8,011 (1,560) (18.15) 583 7.28
-------- -------- -------- -------- --------
Total non-interest income $ 68,652 $ 58,957 $ 51,182 $ 9,695 16.44% $ 7,775 15.19%
======== ======== ======== ======== ========
12
Non-Interest Expense
Non-interest expenses consist of salaries and benefits, occupancy,
equipment and other expenses such as legal, postage, etc., necessary for the
operation of the Company. Management is committed to controlling the level of
non-interest expenses through improved efficiency and consolidation of certain
activities to achieve economies of scale. It is expected that those efforts
will further improve the Company's overhead ratios during the remainder of 1995
and future years.
Non-interest expenses were $37.6 million for the first three months of
1995, a 1% increase from $37.4 million for the same period in 1994. The 1994
amounts include non-recurring expenses of $969 thousand associated with the
pay-off of the Company's subordinated capital notes. Excluding the non-
recurring item and the non-interest expenses of the two Texas banks purchased
in the third quarter of 1994, non-interest expense actually decreased 2%.
Non-interest expense in 1994 totaled $156.9 million, an increase of 16%
from $135.2 million in 1993, which was 14% over 1992's non-interest expense of
$118.9 million. The increase in 1994 was $21.7 million, of which $9.1 million
was a result of the two bank purchases in 1994 and the two bank purchases in
the fourth quarter of 1993. Of the remaining $12.6 million, $6.3 million
represents the settlement of a class action lawsuit concerning investment of
customers' monies by First Commercial Trust Company, N.A., in certain mutual
funds containing derivative securities. In addition, the Company paid off its
subordinated capital notes resulting in an expense of $969 thousand and
experienced an increase in the amortization of mortgage servicing rights due to
a large acquisition of servicing rights at the end of 1993. Excluding the
effect of the four bank purchases, the non-recurring expenses, and the
amortization of mortgage rights, non-interest expense increased $5.3 million,
which represents an increase from 1993 of 4%.
The 1993 increase was due to the two bank purchases in the first quarter of
1993 in Tyler and Lufkin, Texas, and State First Financial Corporation's
purchase of the bank in Nashville, Arkansas, in January 1993, and the increased
amortization of mortgage servicing rights resulting primarily from the 1993
additions to the mortgage servicing portfolio. Excluding the effect of the
three bank purchases and the amortization of mortgage servicing rights, non-
interest expense increased only $2.3 million, which represents an increase from
1992 of 2%.
The following table presents the year-to-year comparison of dollar and
percentage changes in the various categories of non-interest expenses:
13
For the Years
Ended December 31, 1994 1993
------------------------------ Change from Change from
1994 1993 1992 1993 1992
-------- -------- -------- ------------------- -------------------
Salaries and employee benefits $ 74,981 $ 67,031 $ 57,361 $ 7,950 11.86% $ 9,670 16.86%
Net occupancy 9,947 10,486 9,508 (539) (5.14) 978 10.29
Equipment 9,149 8,013 7,175 1,136 14.18 838 11.68
FDIC insurance 8,639 7,396 6,804 1,243 16.81 592 8.70
Amortization of purchased
mortgage servicing rights 5,541 4,498 3,286 1,043 23.19 1,212 36.88
First Commercial Trust Company
lawsuit settlement 6,257 -- -- 6,257 -- -- --
Other 42,361 37,767 34,748 4,594 12.16 3,019 8.69
-------- -------- -------- -------- --------
Total non-interest expenses $156,875 $135,191 $118,882 $ 21,684 16.04% $ 16,309 13.72%
======== ======== ======== ======== ========
Income Taxes
The effective income tax rate differs from the statutory rate primarily
because of tax-exempt income from loans, leases and municipal securities. The
effective tax rate was 33.2% for the first three months of 1995 and 32.7% for
the first three months of 1994. The increase in 1995 was due to a decrease in
income on tax-exempt investments. The effective rates were 32.3% in 1994,
28.1% in 1993, and 29.6% in 1992. The increase in 1994 was due primarily to a
decrease in income on tax-exempt investments. The decrease in 1993 was due
primarily to the transition adjustment for implementing FASB Statement No. 109,
partially offset by a 1% increase in the corporate Federal tax rate.
Loan and Lease Portfolio
At March 31, 1995, the Company's loan and lease portfolio, net of unearned
income, totaled $2.6 billion, up from $2.5 billion at December 31, 1994. The
$63 million increase in the loan and lease portfolio reflects increased loan
demand. The Company has continued its policy of conservative lending so as to
avoid significant risk areas such as out of territory lending and highly
leveraged transactions. This has been and will remain the philosophy of
Company management.
In keeping with this philosophy, the Company has no foreign loans, no loans
outstanding to borrowers engaged in highly leveraged transactions, and no
concentrations of credit to borrowers in any one industry. A concentration
generally exists when more than 10% of total loans are outstanding to borrowers
in the same industry.
14
Provision and Allowance for Possible Loan and Lease Losses
The allowance for loan and lease losses is the amount deemed by management
to be reasonably necessary to provide for possible losses on loans and leases
that may become uncollectible. The allowance is adjusted by the provision for
possible loan and lease losses, increased by loan recoveries and decreased by
loan losses. As of March 31, 1995, the allowance for loan and lease losses
equaled $45.7 million or 1.76% of total loans and leases. Comparatively, the
allowance for loan and lease losses amounted to $48.3 million or 2.18% of total
loans and leases at March 31, 1994. The provision for possible loan and lease
losses amounted to $780 thousand in the first three months of 1995 as compared
to $518 thousand in the first three months of 1994.
A key indicator of the adequacy of the allowance for possible loan and
lease losses is the ratio of the allowance to non-performing loans. The
Company's ratio has been at or above 100% for the past five years. At March
31, 1995, the Company's ratio was 326.24%. This means that for every dollar of
non-performing loans (non-accrual loans, loans 90 days or more past due, and
renegotiated loans), $3.26 is set aside in the Company's reserve to cover
possible losses. The ratio at March 31, 1995, represents an increase over the
March 31, 1994, ratio of 320.34%. Another reserve adequacy indicator is the
ratio of allowance for possible loan and lease losses and other real estate
losses to non-performing assets. This ratio has increased from 259.93% at
March 31, 1994, to 344.40% at March 31, 1995. Both of the reserve adequacy
ratios indicate the conservative approach the Company has taken with regard to
building reserves for possible future losses. Presented in the following table
is a comparison of net loan and lease losses sustained to average loans and
leases, allowance for possible loan and lease losses to total loans and leases,
and non-performing loans to total loans and leases.
Annualized Three Months
Ended
March 31, For the Years Ended December 31,
----------------------- --------------------------------------------
1995 1994 1993 1992 1991 1990
----------------------- -------- -------- -------- -------- --------
Net loan and lease losses sustained
to average loans and leases 0.07% 0.04% 0.16% 0.52% 0.42% 0.43%
Allowance for possible loan and lease
losses to total loans and leases 1.76% 1.79% 2.19% 2.15% 2.25% 2.10%
Non-performing loans to total
loans and leases 0.54% 0.52% 0.72% 0.86% 1.61% 1.90%
Although asset quality has consistently improved during the periods
reflected in the preceding table, the principal area of risk for the Company
will continue to be in the real estate loan portion of the portfolio, and
accordingly, this area has the largest allocation of the reserve for loan and
lease losses. Management attempts to control the loan loss risks by
maintaining a diverse portfolio with no significant concentrations in any
industry or category of borrowers and through a very aggressive real estate
write down policy. Also, the Company maintains a corporate "in-house-lending
15
limit" that represents only 30% of the Company's combined legal lending limit.
Any exception to this limit must be approved by a corporate credit group prior
to commitment or funding. The Company currently has only 33 loan relationships
with aggregate outstanding balances of $5 million or greater, which further
mitigates the loan loss risks.
Liquidity
Two key measures of the Company's liquidity are the ratios of loans and
leases to total deposits and loans and leases to core deposits. Core deposits
are defined as total deposits less certificates of deposit of $100,000 and
over. Lower ratios in these two measures correlate to higher liquidity. As
can be seen from the following table, the Company's liquidity ratios have
increased over the last year indicating lower liquidity due to increased loan
demand.
For the Three Months
Ended March 31, For the Years Ended December 31,
-------------------- ------------------------------------
1995 1994 1993 1992
-------------------- ---------- ---------- ----------
Average loans and leases to average deposits 68.21% 61.76% 59.41% 59.34%
Average loans and leases to average core deposits 74.04% 67.83% 64.20% 64.60%
The Company's average short-term borrowings exceeded short-term investments
by $111.5 million at March 31, 1995. Average short-term investments exceeded
average short-term borrowings by $11.7 million in 1994, $88.7 million in 1993
and $82.5 million in 1992. The 1995 and 1994 decrease in liquidity occurred
due to an increase in loan demand and an increase in short-term borrowings by
the Company to fund the two Texas bank purchases in the third quarter of 1994.
The Company continually monitors the level of short-term investments and short-
term borrowings given interest margin considerations and liquidity needs.
Capitalization
Capital adequacy continues to hold a position of great importance when
evaluating financial services providers. The Company maintains the goal of
preserving a strong capital position while earning an above average return for
its shareholders. Management will use the additional financial leverage
provided by internal generation of capital and recent acquisitions in pursuit
of above average return opportunities.
The Board of Governors of the Federal Reserve System approved regulations
in 1988 to implement what is commonly referred to as risk-based capital
adequacy. This system is designed to reward banking organizations with less
risky asset bases by allowing them to maintain lower capital amounts to support
these assets. The opposite would be true for organizations with risky asset
bases as they would have to maintain higher capital levels. These regulations
require a tier I capital to assets ratio of 4% for bank holding companies. The
Company is in excess of this requirement with a tier I capital to assets ratio
16
of 7.73% at March 31, 1995. These regulations also require a risk-based capital
ratio (total capital to risk-adjusted assets) of 8%. At present, the Company's
risk-based capital ratio is 13.37%. The Company desires to maintain stronger
capital ratios than those set forth as minimums, and as shown in the following
table, the Company's capital ratios have remained in excess of the Federal
Reserve guidelines.
March 31, December 31, September 30, June 30, March 31,
1995 1994 1994 1994 1994
------------- ------------- ------------- ------------- -------------
Total stockholders' equity to assets 8.16% 7.85% 7.77% 8.10% 7.90%
Tier I capital to assets 7.73% 7.48% 7.37% 7.79% 7.54%
Tier I capital to risk-adjusted assets 12.60% 12.22% 12.38% 13.32% 12.96%
Total capital to risk-adjusted assets 13.37% 13.00% 13.17% 14.09% 13.77%
Dividend Policy
The Company's Board of Directors reviews the cash dividend policy and
payout levels annually in the fourth quarter. The annual dividend rate per
share has been increased in each of the past seven years. The annual dividend
rate for the Company was $.45 in 1992, $.57 in 1993, and $.71 in 1994, and is
currently $.80.
The Company's long-term dividend policy is to pay between 30% and 35% of
earnings in cash dividends to its shareholders while maintaining adequate
capital to support growth. The dividend payout ratio for the past three years
was 33.97% in 1994, 29.98% in 1993, and 26.63% in 1992. The level of dividends
was below the long-term goal in 1993 and 1992 due to the Board of Directors
electing to retain earnings to invest in above average return opportunities
providing enhanced shareholder value.
17
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
LOUISE N. BURROW AND JAMES N. BURROW, ON BEHALF OF THEMSELVES AND ALL OTHERS
- - - - ----------------------------------------------------------------------------
SIMILARLY SITUATED v. FIRST COMMERCIAL TRUST COMPANY, N.A.
- - - - ----------------------------------------------------------
This class action was filed on November 9, 1994, in Circuit Court in
Pulaski County, Arkansas, on behalf of all trust accounts that had investments
in the Managers Funds, Short Government Fund, Short and Intermediate Bond Fund
or Intermediate Mortgage Fund (collectively, the "Managers Funds"). Plaintiff
class alleges misrepresentation, fraud, deceit, breach of fiduciary duty and
negligence and seeks rescission or compensatory damages for all class members
plus pre-judgment interest, attorneys' fees and punitive damages from First
Commercial Trust Company, N.A., a wholly-owned subsidiary of the Company. This
matter has been settled in principle with the class by a payment to the class
in the approximate amount of $7,500,000. The Plaintiff's attorneys' fees and
other related costs amounted to approximately $1,750,000 and are to be paid in
addition to the class payment. Notice of the proposed settlement has been
given to the affected customers, and a hearing for final approval by the court
is set for June 12, 1995. The settlement is subject to court approval.
Additional related cases are WILLIS ROBERT TAYLOR, SR. AND JEAN TAYLOR v. FIRST
--------------------------------------------------
COMMERCIAL TRUST COMPANY, N.A. AND M. M. CROOM, JR.; ANITA TAYLOR v. FIRST
- - - - --------------------------------------------------------------------------
COMMERCIAL TRUST COMPANY, N.A. AND M. M. CROOM, JR.; AND JENA TAYLOR v. FIRST
- - - - -----------------------------------------------------------------------------
COMMERCIAL TRUST COMPANY, N.A. AND M.M. CROOM, JR.; AND W. R. TAYLOR, JR. v.
- - - - ----------------------------------------------------------------------------
FIRST COMMERCIAL TRUST COMPANY, N.A., all of which were filed in Pope County
- - - - -------------------------------------
Circuit Court, and RON ROBERTS v. FIRST COMMERCIAL TRUST COMPANY, N.A., which
----------------------------------------------------
was filed in Boone County Circuit Court. These cases also allege wrongdoing on
behalf of First Commercial Trust Company, N.A., in connection with trust
accounts having investments in the Managers Funds. These cases have been
settled and dismissed, with the trust customers accepting their part of the
class action amount described above.
Further cases have been filed relating to this matter in the Chancery Court
of Pulaski County, Arkansas, and are GERARD M. BENNETT v. FIRST COMMERCIAL
-------------------------------------
TRUST COMPANY, N.A.; CARL W. NOLL v. FIRST COMMERCIAL TRUST COMPANY, N.A.; JANE
- - - - -------------------------------------------------------------------------------
E. SHERROD v. FIRST COMMERCIAL TRUST COMPANY, N.A.; MARGARET SCOTT CRAIG v.
- - - - ---------------------------------------------------------------------------
FIRST COMMERCIAL TRUST COMPANY, N.A. and CURTIS CLARK v. FIRST COMMERCIAL TRUST
- - - - ------------------------------------ --------------------------------------
COMPANY, N.A.. These cases also allege wrongdoing on behalf of First
- - - - -------------
Commercial Trust Company, N.A., in connection with trust accounts having
investments in the Managers Fund. These cases have however, not been settled,
and the individual plaintiffs have opted out of the class action.
18
Two customers of First Commercial Trust Company, N.A., have filed an
objection to the settlement and seek to intervene in the pending Burrow
litigation. The intervenors' basic contention is that the benchmark
investments (Federated mutual funds) were not the fair way to compute the
settlement. Instead, the intervenors seek to use short-term certificates of
deposit, U.S. Treasury bills or money market mutual funds as the benchmarks
which the intervenors argue will result in a greater settlement for the Class.
First Commercial Trust Company, N.A., believes the settlement is fair
because the reimbursed loss was related to investments in derivatives and the
settlement reimburses the derivative loss.
VIRGINIA BOOKER WILHELM, ON BEHALF OF HERSELF AND ALL OTHER SHAREHOLDERS OF
- - - - ---------------------------------------------------------------------------
FIRST COMMERCIAL CORPORATION v. BEN ALLEN, JOHN W. ALLISON, TRUMAN ARNOLD,
- - - - --------------------------------------------------------------------------
WILLIAM H. BOWEN, PEGGY CLARK, JAMES R. COBB, ROBERT G. CRESS, CECIL W. CUPP,
- - - - -----------------------------------------------------------------------------
JR., BARNETT GRACE, WALTER E. HUSSMAN, JR., FREDERICK E. JOYCE, M.D., JACK G.
- - - - -----------------------------------------------------------------------------
JUSTUS, WILLIAM M. LEMLEY, CHARLES H. MURPHY, JR., MICHAEL W. MURPHY, ROBERT D.
- - - - -------------------------------------------------------------------------------
NABHOLZ, WILLIAM C. NOLAN, JR., SAM C. SOWELL, AND PAUL D. TILLEY, AND FIRST
- - - - ----------------------------------------------------------------------------
COMMERCIAL CORPORATION.
- - - - -----------------------
This derivative action on behalf of First Commercial Corporation was filed
on January 5, 1995, in Chancery Court in Pulaski County, Arkansas, and seeks
damages from the named directors of the Company in the amount of the proposed
settlement described in the preceding paragraph plus the Company's overhead and
attorneys' fees relating to such settlement. Plaintiffs on behalf of the
Company allege liability based on the directors' negligence and breach of
fiduciary duty for failing to properly monitor management of First Commercial
Trust Company, N.A., concerning the investment of trust customer funds in the
Managers Funds and a failure to require management to follow trust customers'
investment objectives. A settlement was negotiated with the plaintiffs which
received preliminary court approval on April 27, 1995. Notice of the terms of
the settlement has been delivered to all shareholders of record of First
Commercial Corporation on the date of April 18, 1995. The court has set a
final hearing for approval of the settlement for July 7, 1995. The settlement
releases claims of First Commercial Corporation against the directors without
reimbursement from the directors, and under the settlement First Commercial
Corporation will initiate two new procedures:
(1) The engagement by First Commercial Trust Company, N.A., of a
compliance and procedures administrator, and
(2) A reorganization of reporting responsibilities within First Commercial
Trust Company, N.A., and its investment affiliate First Commercial
Capital Management.
19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 18, 1995, in the annual meeting of the Company's shareholders,
the shareholders elected six (6) directors. The individuals elected and the
votes received were as follows:
Nominee For Against
--------------------------- ------------- -------------
Truman Arnold 19,626,710 142,777
William H. Bowen 19,758,302 10,241
James R. Cobb 19,758,784 9,801
Cecil W. Cupp, Jr. 19,757,268 11,235
Frederick E. Joyce, M.D. 19,748,519 19,984
Paul D. Tilley 19,758,047 10,455
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
During the period covered by this report, Registrant filed two reports on
Form 8-K. The first report, dated January 13, 1995, disclosed under Item 5
that Registrant's insurance carrier had notified Registrant that it would be
unable to resolve the coverage relating to settlement of a class action lawsuit
against First Commercial Trust Company, N.A., a subsidiary of Registrant, by
January 17, 1995, the date Registrant's Board of Directors was to review and
approve the release of unaudited 1994 earnings. A subsequent Form 8-K, dated
February 16, 1995, disclosed under Item 5 that Registrant had reached agreement
with its insurance carrier as to the disposition of claims made relating to the
class action lawsuit discussed above. As a result of the agreement, the
insurance coverage was included in 1994 earnings.
20
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 COMMERCIAL CORPORATION
/s/ J. Lynn Wright
By: -------------------------------
J. Lynn Wright
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: May 12, 1995
21
Index to Exhibits
Exhibit Number Exhibit
---------------- --------------------------------------------
11 Computation of Earnings per Common Share
27 Financial Data Schedule
22