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 June 30, 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 June 30, 1995
--------------------------------------- -----------------------------
Common Stock, $3.00 par value per share 23,727,867
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............................................ 19
6. Exhibits and Reports on Form 8-K............................. 19
Signatures............................................................. 20
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED BALANCE SHEETS June 30, December 31,
(Dollars in thousands, except par value) -------------- --------------
1995 1994
-------------- --------------
ASSETS
Cash and due from banks................................................... $ 306,767 $ 287,376
Federal funds sold........................................................ 75,894 71,979
-------------- --------------
Total cash and cash equivalents.......................................... 382,661 359,355
Investment securities held-to-maturity, estimated market
value $833,685 ($865,366 in 1994)........................................ 840,214 900,064
Investment securities available-for-sale.................................. 363,969 409,129
Trading account securities................................................ 230 13
Loans and leases, net of unearned income.................................. 2,680,498 2,534,793
Allowance for possible loan and lease losses.............................. (45,641) (45,325)
-------------- --------------
Net loans and leases..................................................... 2,634,857 2,489,468
Bank premises and equipment, net.......................................... 89,239 87,046
Other real estate owned, net of allow for poss losses of $70 ($67 in 1994) 2,443 3,093
Other assets.............................................................. 127,831 126,031
-------------- --------------
Total assets........................................................... $ 4,441,444 $ 4,374,199
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing transaction accounts................................. $ 815,958 $ 767,525
Interest bearing transaction and savings accounts......................... 1,417,781 1,538,601
Certificates of deposit $100,000 and over................................. 369,786 326,298
Other time deposits....................................................... 1,239,026 1,192,936
-------------- --------------
Total deposits........................................................... 3,842,551 3,825,360
Short-term borrowings..................................................... 180,010 167,417
Other liabilities and deferred income taxes............................... 40,832 29,988
Long-term debt............................................................ 13,071 8,243
-------------- --------------
Total liabilities........................................................ 4,076,464 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,
23,806,867 and 23,775,118 shares issued, respectively................... 71,421 71,325
Capital surplus.......................................................... 109,368 109,167
Retained earnings........................................................ 186,280 170,132
Unrealized net losses on available-for-sale securities, net of income tax (74) (7,433)
Less treasury stock at cost, 79,000 and 0 shares, respectively........... (2,015) --
-------------- --------------
Total stockholders' equity.............................................. 364,980 343,191
-------------- --------------
Total liabilities and stockholders' equity............................. $ 4,441,444 $ 4,374,199
============== ==============
See accompanying notes.
3
FIRST COMMERCIAL CORPORATION Unaudited Unaudited
CONSOLIDATED INCOME STATEMENTS Three Months Ended Six Months Ended
(Dollars in thousands, except per share data) June 30, June 30,
---------------------- ----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Interest income
Loans and leases, including fees........................... $ 57,730 $ 44,268 $ 110,898 $ 86,869
Short-term investments..................................... 1,162 1,171 2,117 1,864
Investment securities-taxable.............................. 15,390 15,050 30,532 30,255
-nontaxable........................... 1,611 1,913 3,425 3,884
Trading account securities................................. (2) 2 -- 11
---------- ---------- ---------- ----------
Total interest income.................................... 75,891 62,404 146,972 122,883
Interest expense
Interest on deposits....................................... 29,593 22,336 56,344 44,225
Short-term borrowings...................................... 2,551 928 5,170 1,434
Long-term debt............................................. 221 115 411 421
---------- ---------- ---------- ----------
Total interest expense................................... 32,365 23,379 61,925 46,080
Net interest income........................................... 43,526 39,025 85,047 76,803
Provision for possible loan and lease losses.................. 364 523 1,144 1,041
---------- ---------- ---------- ----------
Net int inc after prov for possible loan and lease losses 43,162 38,502 83,903 75,762
Other income
Trust department income.................................... 2,621 2,962 5,427 5,890
Mortgage servicing fee income.............................. 3,818 4,081 7,498 8,125
Broker-dealer operations income............................ 728 683 1,378 1,381
Service charges on deposit accounts........................ 5,300 4,789 10,477 9,634
Other service charges and fees............................. 1,897 2,004 3,930 4,058
Investment securities gains (losses), net.................. 7 40 (19) 119
Other real estate gains (losses), net...................... 128 683 (105) 2,209
Other...................................................... 1,149 1,624 2,370 3,341
---------- ---------- ---------- ----------
Total other income....................................... 15,648 16,866 30,956 34,757
Other expenses
Salaries, wages and employee benefits...................... 19,324 18,676 38,401 36,926
Net occupancy.............................................. 2,636 2,188 5,319 4,526
Equipment.................................................. 2,542 2,309 5,046 4,564
FDIC insurance............................................. 2,189 1,896 4,365 4,018
Amortization of purchased mortgage servicing rights........ 1,086 1,563 2,074 3,229
Other...................................................... 10,798 9,864 20,973 20,612
---------- ---------- ---------- ----------
Total other expenses..................................... 38,575 36,496 76,178 73,875
Income before income taxes................................. 20,235 18,872 38,681 36,644
Income tax provision....................................... 6,874 6,167 12,995 11,974
---------- ---------- ---------- ----------
Net income............................................... $ 13,361 $ 12,705 $ 25,686 $ 24,670
========== ========== ========== ==========
Weighted average number of common shares outstanding
during the period............................................ 23,791,363 24,088,556 23,788,567 24,090,584
Earnings per common share..................................... $ 0.56 $ 0.53 $ 1.08 $ 1.02
See accompanying notes.
4
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended
(Dollars in thousands) June 30,
-----------------------
1995 1994
---------- ----------
OPERATING ACTIVITIES
Net income......................................................................... $ 25,686 $ 24,670
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 7,222 7,964
Provision for possible loan and lease losses...................................... 1,144 1,041
Loss (gain) on investment securities available-for-sale........................... 19 (119)
Gain on sale of equipment......................................................... (27) (139)
Gain on sale of other real estate................................................. (749) (2,489)
Write downs of other real estate.................................................. 31 282
Equity in undistributed earnings of unconsolidated subsidiary..................... (867) (719)
Decrease (increase) in trading securities......................................... (217) 51
Net unrealized loss on trading securities......................................... -- 1
Decrease (increase) in mortgage loans held for resale............................. (8,575) 17,456
Increase (decrease) in income taxes payable....................................... 3,310 (2,182)
Decrease (increase) in interest and other receivables............................. 273 (1,628)
Increase in interest payable...................................................... 1,582 291
Increase (decrease) in accrued expenses........................................... 1,773 (843)
Increase in prepaid expenses...................................................... (2,077) (404)
---------- ----------
Net cash provided by operating activities........................................ 28,528 43,233
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale.................... 10,812 8,722
Proceeds from maturing investment securities available-for-sale.................... 112,727 19,878
Proceeds from maturing investment securities held-to-maturity...................... 239,207 458,014
Purchases of investment securities available-for-sale.............................. (67,090) (66,802)
Purchases of investment securities held-to-maturity................................ (179,357) (339,672)
Net increase in loans and leases................................................... (138,961) (94,787)
Capital expenditures............................................................... (7,696) (12,448)
Proceeds from sale of bank premises and equipment.................................. 1,493 6,207
Additions to purchased mortgage servicing rights and other assets.................. (2,084) (6,855)
Proceeds from sales of other real estate........................................... 2,371 12,724
---------- ----------
Net cash used in investing activities............................................. (28,578) (15,019)
(Continued on next page)
5
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Six Months Ended
(Dollars in thousands) June 30,
-----------------------
1995 1994
---------- ----------
FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts, and savings accounts................ (72,387) (56,791)
Net increase (decrease) in time deposits........................................... 89,578 (22,763)
Net increase in short-term borrowings.............................................. 12,593 47,091
Repayment of long-term debt........................................................ (1,172) (17,580)
Proceeds from long-term borrowings................................................. 6,000 5,030
Payment to redeem preferred stock.................................................. -- (11,330)
Proceeds from issuance of common stock............................................. 62 --
Purchase of treasury stock......................................................... (2,014) (2,825)
Sale of treasury stock............................................................. -- 445
Stock options exercised............................................................ 235 212
Preferred stock dividends.......................................................... -- (129)
Cash dividends paid on common stock................................................ (9,539) (8,270)
---------- ----------
Net cash provided by (used in) financing activities............................... 23,356 (66,910)
Net increase (decrease) in cash and cash equivalents............................... 23,306 (38,696)
Cash and cash equivalents at the beginning of year................................. 359,355 384,823
---------- ----------
Cash and cash equivalents at end of period........................................ $ 382,661 $ 346,127
========== ==========
See accompanying notes.
6
FIRST COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 1995, and the results of operations
and changes in cash flows for the six 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 six months ended
June 30, 1995, and 1994, were $0 and $129,288, respectively.
3. Cash payments for interest were approximately $60.3 million and $45.8
million for the first six months of 1995 and 1994, respectively. Cash
payments for income taxes during the first six months of 1995 and 1994
were $12.3 million.
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 June 30, 1995, totaled approximately $4.4 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.
On May 16, 1995, the Company entered into a definitive agreement for the
purchase of West-Ark Bancshares, Inc., and its wholly owned subsidiary,
Arkansas State Bank of Clarksville, which has assets of $145 million, loans of
$88 million and deposits of $134 million. The Company will issue approximately
630,000 shares of the Company's common stock for all the outstanding shares of
West-Ark Bancshares, Inc. The Company anticipates completion of this
acquisition in the fourth quarter of 1995.
On May 30, 1995, the Company announced that it had executed a letter of
intent to acquire FDH Bancshares, Inc., and its wholly owned subsidiaries. A
definitive agreement for the purchase of FDH Bancshares, Inc., was entered into
on June 21, 1995. The Company will issue 1,370,000 shares of the Company's
common stock for all outstanding shares of FDH Bancshares, Inc. FDH
Bancshares, Inc., headquartered in Little Rock, owns four Arkansas banks in
Little Rock, El Dorado, Arkadelphia and Fordyce under the name Citizens First
Bank and one Louisiana bank, Springhill Bank and Trust in Springhill,
Louisiana. FDH Bancshares, Inc., has consolidated assets of $382 million,
loans of $215 million and deposits of $334 million. The Company anticipates
completion of this acquisition in the fourth quarter of 1995.
On June 30, 1995, a subsidiary of the Company, First Commercial Mortgage
Company, announced that it had executed a purchase and sale agreement to
acquire servicing rights and other assets of the former National Home Mortgage
Company (NHMC) located in San Diego, California. The sale of NHMC was
conducted by the Resolution Trust Corporation (RTC), which had assumed
ownership of NHMC two years ago. Under terms of the agreement, First
Commercial Mortgage Company will acquire approximately $5 billion in loan
servicing rights and certain other assets from the RTC, represented by over
60,000 mortgages held on properties throughout the United States. Once
completed, this transaction will bring First Commercial Mortgage Company's
total servicing portfolio to over $8.5 billion and 140,000 loans. The Company
anticipates the transaction to be complete in August 1995.
8
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
The Company reported earnings of $0.56 per share in 1995's second quarter,
an increase of 5.7% from $0.53 per share reported for the second quarter of
1994. Net income for the three months ended June 30, 1995, was $13.4 million,
up 5.2% from $12.7 million in 1994. The 1994 second quarter results include
non-recurring income of $444 thousand, or $0.01 per share, after-tax. The non-
recurring income is a result of other real estate gains. Excluding the non-
recurring income, earnings per share were up 7.7% over 1994's second quarter
results.
Earnings of $1.08 per share in 1995's first six months represented an
increase of 5.9% from $1.02 per share during the same period in 1994. Net
income for the six months ended June 30, 1995, was $25.7 million, up 4.1% from
$24.7 million in 1994. The 1994 results include net non-recurring income of
$806 thousand, or $0.03 per share, after-tax. The non-recurring items included
$2.2 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 9.1% 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 six months of 1994,
the Company's net income increased 7.6%. This increase was the result of a
rise of 10.7% in net interest income after provision for possible loan and
lease losses, mitigated by a 5.1% decrease in non-interest income and an
increase of 4.5% 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
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 1.0%. 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 six months of 1995 and 1994 was 1.19%.
Excluding the non-recurring items recorded in the first six months of 1994,
discussed previously, return on average assets was 1.15%. Annual returns on
average assets were 1.19% in 1994, 1.21% in 1993 and 1.21% in 1992.
9
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 six months of 1995,
the Company earned 14.41% on average common stockholders' equity compared with
14.86% for the first six months of 1994. Excluding the non-recurring items
recorded in the first six months of 1994, discussed previously, return on
average common stockholders' equity was 14.38%. 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 $86.6
million in the first six months of 1995 compared to $78.7 million in the first
six 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.
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 4.43% for the
first six months of 1995, compared to 4.20% 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
10
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 six months of 1995 and 1994.
Analysis of Net Interest Income (FTE = Fully Tax-Equivalent)
For the Three Months For the Years Ended
Ended June 30, December 31,
----------------------- --------------------------------------
1995 1994 1994 1993 1992
(Dollars in thousands) ---------- ---------- ---------- ---------- ----------
Interest income $ 146,972 $ 122,883 $ 257,751 $ 234,995 $ 232,098
Fully tax-equivalent adjustment 1,532 1,856 3,618 3,775 4,122
---------- ---------- ---------- ---------- ----------
Interest income - FTE 148,504 124,739 261,369 238,770 236,220
Interest expense 61,925 46,080 98,306 90,421 98,690
---------- ---------- ---------- ---------- ----------
Net interest income - FTE $ 86,579 $ 78,659 $ 163,063 $ 148,349 $ 137,530
========== ========== ========== ========== ==========
Yield on earning assets - FTE 7.61% 6.66% 6.82% 6.89% 7.82%
Cost of interest bearing liabilities 3.90% 3.04% 3.18% 3.23% 3.99%
Net interest spread - FTE 3.71% 3.62% 3.64% 3.66% 3.83%
Net interest margin - FTE 4.43% 4.20% 4.26% 4.28% 4.55%
The following schedule details rate sensitive assets and liabilities at
June 30, 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.
11
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 $ 75,894 $ -- $ -- $ -- $ -- $ -- $ 75,894
Trading account securities 230 -- -- -- -- -- 230
Taxable investment securities 155,025 96,475 151,195 227,981 421,391 21,606 1,073,673
Tax-exempt investment securities 2,227 1,926 3,768 11,507 71,190 39,892 130,510
Loans and leases 616,972 201,713 248,137 482,741 960,791 170,144 2,680,498
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 850,348 300,114 403,100 722,229 1,453,372 231,642 3,960,805
Interest bearing liabilities:
Savings and NOW accounts 927,763 -- -- -- -- -- 927,763
Money market accounts 490,018 -- -- -- -- -- 490,018
Other time deposits 282,080 268,739 315,300 358,756 377,363 6,574 1,608,812
Short-term borrowings 180,010 -- -- -- -- -- 180,010
Long-term debt 5,902 2 3 8 2,196 4,960 13,071
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities 1,885,773 268,741 315,303 358,764 379,559 11,534 3,219,674
Interest rate
sensitivity gap (1,035,425) 31,373 87,797 363,465 1,073,813 220,108
Cumulative interest rate
sensitivity gap (1,035,425)(1,004,052) (916,255) (552,790) 521,023 741,131
Cumulative rate sensitive assets
to rate sensitive liabilities 0.45 0.53 0.63 0.81 1.16 1.23
Cumulative gap as a percentage
of earning assets (26.1%) (25.3%) (23.1%) (14.0%) 13.2% 18.7%
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
12
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 six months of
1995, non-interest income totaled $31.0 million compared to $34.8 million for
the first six months of 1994. Excluding the $2.2 million in other real estate
gains recorded in the first six months of 1994, non-interest income decreased
$1.6 million. A decrease in mortgage production volume and mortgage servicing
fees were the primary reasons for the 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%
======== ======== ======== ======== ========
13
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 $76.2 million for the first six months of 1995,
a 3.1% increase from $73.9 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 1.0%.
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:
14
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 33.6% for the first six months of 1995 and 32.7% for the
first six 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 June 30, 1995, the Company's loan and lease portfolio, net of unearned
income, totaled $2.7 billion, up from $2.5 billion at December 31, 1994. The
$146 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.
15
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 June 30, 1995, the allowance for loan and lease losses
equaled $45.6 million or 1.70% of total loans and leases. Comparatively, the
allowance for loan and lease losses amounted to $45.3 million or 1.79% of total
loans and leases at December 31, 1994. The provision for possible loan and
lease losses amounted to $1.1 million in the first six months of 1995 as
compared to $1.0 million in the first six 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 June 30,
1995, the Company's ratio was 321.12%. This means that for every dollar of
non-performing loans (non-accrual loans, loans 90 days or more past due, and
renegotiated loans), $3.21 is set aside in the Company's reserve to cover
possible losses. The ratio at December 31, 1994, was 340.82%. Another reserve
adequacy indicator is the ratio of allowance for possible loan and lease losses
and other real estate losses to non-performing assets. The ratio was 331.91%
at June 30, 1995, compared to 347.35% at December 31, 1994. 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 Six Months
Ended
June 30, For the Years Ended December 31,
----------------------- --------------------------------------------
1995 1994 1993 1992 1991 1990
----------------------- -------- -------- -------- -------- --------
Net loan and lease losses sustained
to average loans and leases 0.06% 0.04% 0.16% 0.52% 0.42% 0.43%
Allowance for possible loan and lease
losses to total loans and leases 1.70% 1.79% 2.19% 2.15% 2.25% 2.10%
Non-performing loans to total
loans and leases 0.53% 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
16
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 27 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 Six Months
Ended June 30, For the Years Ended December 31,
-------------------- ------------------------------------
1995 1994 1993 1992
-------------------- ---------- ---------- ----------
Average loans and leases to average deposits 69.14% 61.76% 59.41% 59.34%
Average loans and leases to average core deposits 75.41% 67.83% 64.20% 64.60%
The Company's average short-term borrowings exceeded short-term investments
by $104.6 million at June 30, 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
17
of 7.73% at June 30, 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 13.02%. 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.
June 30, March 31, December 31, September 30, June 30,
1995 1995 1994 1994 1994
------------- ------------- ------------- ------------- -------------
Total stockholders' equity to assets 8.22% 8.16% 7.85% 7.77% 8.10%
Tier I capital to assets 7.73% 7.73% 7.48% 7.37% 7.79%
Tier I capital to risk-adjusted assets 12.26% 12.29% 12.22% 12.38% 13.32%
Total capital to risk-adjusted assets 13.02% 13.03% 13.00% 13.17% 14.09%
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.
18
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.
----------------------------------------------------------
The above litigation, which was disclosed in the March 31, 1995, Form 10-Q,
was settled by agreement of the parties pursuant to the terms disclosed in the
March 31, 1995, Form 10-Q. The settlement was approved by the United States
District Court for the Eastern District of Arkansas on June 12, 1995. Payment
to members of the Plaintiff class has been made.
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.
-----------------------
The above litigation, which was disclosed in the March 31, 1995, Form 10-Q,
was settled by agreement of the parties pursuant to the terms disclosed in the
March 31, 1995, Form 10-Q. The settlement was approved by the Chancery Court
in Pulaski County, Arkansas, on July 7, 1995.
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 May 30, 1995, disclosed under Item 5 that
Registrant executed a letter of intent to acquire FDH Bancshares, Inc., and its
subsidiaries. The second report, dated June 30, 1995, disclosed under Item 5
that First Commercial Mortgage Company, a subsidiary of the Registrant,
executed a purchase and sale agreement to acquire servicing rights and other
assets of the former National Home Mortgage Company from the Resolution Trust
Corporation.
19
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: August 14, 1995
20
Index to Exhibits
Exhibit Number Exhibit
---------------- --------------------------------------------
11 Computation of Earnings per Common Share
27 Financial Data Schedule
21