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, 1996
[ ] 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, 1996
--------------------------------------- -----------------------------
Common Stock, $3.00 par value per share 27,356,227
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.................................... 10
PART II - OTHER INFORMATION
1. Legal Proceedings............................................ 20
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) -------------- --------------
1996 1995
-------------- --------------
ASSETS
Cash and due from banks................................................... $ 259,074 $ 432,117
Federal funds sold........................................................ 98,661 108,181
-------------- --------------
Total cash and cash equivalents.......................................... 357,735 540,298
Investment securities held-to-maturity, estimated market
value $342,675 ($352,492 in 1995)........................................ 346,305 351,415
Investment securities available-for-sale.................................. 1,011,396 973,129
Trading account securities................................................ 615 449
Loans and leases, net of unearned income.................................. 3,189,954 3,215,562
Allowance for possible loan and lease losses.............................. (51,716) (51,341)
-------------- --------------
Net loans and leases..................................................... 3,138,238 3,164,221
Bank premises and equipment, net.......................................... 104,385 106,665
Other real estate owned, net of allow for poss losses of $49 ($50 in 1995) 2,229 2,266
Other assets.............................................................. 218,925 222,497
-------------- --------------
Total assets........................................................... $ 5,179,828 $ 5,360,940
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing transaction accounts................................. $ 871,029 $ 1,018,181
Interest bearing transaction and savings accounts......................... 1,583,265 1,612,294
Certificates of deposit $100,000 and over................................. 509,956 505,303
Other time deposits....................................................... 1,532,396 1,494,763
-------------- --------------
Total deposits........................................................... 4,496,646 4,630,541
Short-term borrowings..................................................... 170,610 235,378
Other liabilities and deferred income taxes............................... 64,666 55,592
Long-term debt............................................................ 7,170 7,170
-------------- --------------
Total liabilities........................................................ 4,739,092 4,928,681
Stockholders' equity
Preferred stock, $1 par value, 400,000 shares authorized, none issued.... -- --
Common stock, $3 par value, 34,000,000 shares authorized,
27,356,227 and 27,343,279 shares issued, respectively................... 82,069 82,030
Capital surplus.......................................................... 195,176 195,019
Retained earnings........................................................ 164,506 154,356
Unrealized net gains (losses) on available-for-sale securities,
net of income tax....................................................... (1,015) 854
Less treasury stock at cost, 0 shares.................................... -- --
-------------- --------------
Total stockholders' equity.............................................. 440,736 432,259
-------------- --------------
Total liabilities and stockholders' equity............................. $ 5,179,828 $ 5,360,940
============== ==============
See accompanying notes.
3
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED INCOME STATEMENTS Three Months Ended
(Dollars in thousands, except per share data) March 31,
----------------------
1996 1995
---------- ----------
Interest income
Loans and leases, including fees.................................................. $ 71,212 $ 54,870
Short-term investments............................................................ 1,467 982
Investment securities-taxable..................................................... 16,888 15,659
-nontaxable.................................................. 2,012 1,995
Trading account securities........................................................ (8) 2
---------- ----------
Total interest income........................................................... 91,571 73,508
Interest expense
Interest on deposits.............................................................. 37,039 28,064
Short-term borrowings............................................................. 2,464 2,619
Long-term debt.................................................................... 121 192
---------- ----------
Total interest expense.......................................................... 39,624 30,875
Net interest income.................................................................. 51,947 42,633
Provision for possible loan and lease losses......................................... 1,572 825
---------- ----------
Net int inc after prov for possible loan and lease losses....................... 50,375 41,808
Other income
Trust department income........................................................... 3,068 2,811
Mortgage servicing fee income..................................................... 11,001 3,680
Broker-dealer operations income................................................... 905 651
Service charges on deposit accounts............................................... 5,922 5,325
Other service charges and fees.................................................... 2,919 2,080
Investment securities gains (losses), net......................................... 65 (27)
Other real estate gains (losses), net............................................. 13 (233)
Other............................................................................. 1,715 1,290
---------- ----------
Total other income.............................................................. 25,608 15,577
Other expenses
Salaries, wages and employee benefits............................................. 23,770 19,508
Net occupancy..................................................................... 2,972 2,732
Equipment......................................................................... 3,055 2,563
FDIC insurance.................................................................... 326 2,250
Amortization of mortgage servicing rights......................................... 5,064 988
Other............................................................................. 16,289 10,456
---------- ----------
Total other expenses............................................................ 51,476 38,497
Income before income taxes........................................................... 24,507 18,888
Income tax provision................................................................. 8,606 6,196
---------- ----------
Net income...................................................................... $ 15,901 $ 12,692
========== ==========
Weighted average number of common shares outstanding
during the period................................................................... 27,351,106 26,138,470
Earnings per common share............................................................ $ 0.58 $ 0.49
See accompanying notes.
4
FIRST COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Unrealized
Preferred Common Retained Gains and Treasury
Stock Stock Surplus Earnings (Losses) Stock Total
--------- --------- --------- --------- --------- --------- ---------
Balance - January 1, 1995.............. $ - $ 71,325 $ 109,167 $ 170,132 $ (7,433)$ -- $ 343,191
Change in unrealized gains (losses),
net of income taxes of $2,152........ 4,007 4,007
Net income............................ 12,692 12,692
Cash dividends - $.19 per common share (4,843) (4,843)
Stock options exercised............... 56 95 151
Common stock issued, 2,388 shares..... 7 46 53
Acquisition of equity interest of
West-Ark Bancshares, Inc.,
689,106 shares....................... 1,932 380 5,421 (260) 7,473
--------- --------- --------- --------- --------- --------- ---------
Balance - March 31, 1995.............. $ - $ 73,320 $ 109,688 $ 183,402 (3,686) -- $ 362,724
========= ========= ========= ========= ========= ========= =========
Balance - January 1, 1996.............. $ - $ 82,030 $ 195,019 $ 154,356 $ 854 $ -- $ 432,259
Change in unrealized gains (losses),
net of income taxes of $1,086........ (1,869) (1,869)
Net income............................ 15,901 15,901
Cash dividends - $.21 per common share (5,751) (5,751)
Stock options exercised............... 39 157 196
--------- --------- --------- --------- --------- --------- ---------
Balance - March 31, 1996............... $ - $ 82,069 $ 195,176 $ 164,506 $ (1,015)$ -- $ 440,736
========= ========= ========= ========= ========= ========= =========
See accompanying notes.
5
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended
(Dollars in thousands) March 31,
-----------------------
1996 1995
---------- ----------
OPERATING ACTIVITIES
Net income......................................................................... $ 15,901 $ 12,692
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 8,547 3,611
Provision for possible loan and lease losses...................................... 1,572 825
Loss (gain) on investment securities available-for-sale........................... (65) 27
Gain on sale of equipment......................................................... (5) (31)
Gain on sale of other real estate................................................. (267) (111)
Write downs of other real estate.................................................. 17 19
Equity in undistributed earnings of unconsolidated subsidiary..................... (351) (406)
Increase in trading securities.................................................... (164) (196)
Net unrealized gain on trading securities......................................... (2) (1)
Decrease in mortgage loans held for resale........................................ 44,827 14,883
Increase in income taxes payable.................................................. 7,771 8,349
Decrease (increase) in interest and other receivables............................. (974) 293
Reductions in other assets........................................................ -- 3,758
Increase (decrease) in interest payable........................................... (128) 866
Increase (decrease) in accrued expenses........................................... 2,540 (3,376)
Increase in prepaid expenses...................................................... (571) (3,075)
---------- ----------
Net cash provided by operating activities........................................ 78,648 38,127
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale.................... 15,016 3,804
Proceeds from maturing investment securities available-for-sale.................... 231,277 60,419
Proceeds from maturing investment securities held-to-maturity...................... 151,982 125,342
Purchases of investment securities available-for-sale.............................. (255,828) (34,263)
Purchases of investment securities held-to-maturity................................ (178,494) (82,289)
Purchase of institution, net of funds acquired..................................... -- 5,276
Net increase in loans and leases................................................... (21,287) (85,146)
Capital expenditures............................................................... (1,980) (4,982)
Proceeds from sale of bank premises and equipment.................................. 1,691 1,086
Additions to purchased mortgage servicing rights and other assets.................. (528) (215)
Proceeds from sales of other real estate........................................... 1,158 1,267
---------- ----------
Net cash used in investing activities............................................. (56,993) (9,701)
(Continued on next page)
6
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Three Months Ended
(Dollars in thousands) March 31,
-----------------------
1996 1995
---------- ----------
FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts, and savings accounts................ (176,181) (83,307)
Net increase in time deposits...................................................... 42,286 37,471
Net increase (decrease) in short-term borrowings................................... (64,768) 5,076
Proceeds from issuance of common stock............................................. -- 53
Stock options exercised............................................................ 196 151
Cash dividends paid on common stock................................................ (5,751) (4,843)
---------- ----------
Net cash used in financing activities............................................. (204,218) (45,399)
Net decrease in cash and cash equivalents.......................................... (182,563) (16,973)
Cash and cash equivalents at the beginning of year................................. 540,298 359,355
---------- ----------
Cash and cash equivalents at end of period........................................ $ 357,735 $ 342,382
========== ==========
See accompanying notes.
7
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
1. There have been no significant changes in the accounting policies of the
Company since December 31, 1995, the date of the most recent annual report
to shareholders, nor have there occurred events, except as disclosed in
Notes 4, 5 and 6, which have had a material impact on the disclosures
contained therein.
2. 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, 1996, and the results of operations and
changes in cash flows for the three months then ended. Any adjustments
consist only of normal recurring accruals.
3. Cash payments for interest were approximately $37.2 million and $27.2
million for the first three months of 1996 and 1995, respectively. There
were no cash payments for income taxes during the first three months of
1996 and 1995.
4. Aearth Development, Inc. v. First Commercial Bank, N.A.
-------------------------------------------------------
First Commercial Bank, N.A., a wholly owned subsidiary of the Company, is
the defendant in litigation initiated in 1989 seeking approximately
$200,000,000 in compensatory damages plus punitive damages. Plaintiffs in
the litigation allege fraudulent conspiracy, fraudulent misrepresentation,
tortious interference with a business expectancy, breach of contract,
willful breach of fiduciary duty, interference with performance of contract,
securities law violations, conversion, prima facie tort and violations of
the Federal Racketeer Influenced and Corrupt Organizations Act as a basis
for treble damages. In June of 1991, the matter was tried before a chancery
judge in Chancery Court in Pulaski County, Arkansas, and on June 5, 1992,
the complaint was dismissed and no damages were assessed against First
Commercial Bank, N.A. Plaintiffs appealed this decision to the Supreme
Court of Arkansas in July of 1992, alleging error for failure to try the
case before a jury in Circuit Court. On July 18, 1994, the Supreme Court of
Arkansas remanded the case to Circuit Court in Pulaski County, Arkansas, for
jury trial. A jury trial was held, which concluded March 13, 1996, with the
jury awarding plaintiffs a total of $12.5 million compensatory damages and
$10.0 million punitive damages. On April 30, 1996, the trial court in the
case approved a $7.3 million set off to the March 13, 1996, $22.5 million
jury verdict. The set off pertains to monies owed by Aearth Development,
Inc., and related interests, to First Commercial Bank, N.A. The trial court
has not yet entered a judgment on the verdict, but management of the Company
and First Commercial Bank, N.A., intend to vigorously pursue an appeal of
any judgment not in favor of First Commercial Bank, N.A. The ultimate legal
and financial liability of the Company in connection with this matter cannot
be estimated with certainty, but management, based on the advice of legal
counsel that any judgment entered on the verdict will be reversed and
dismissed in whole or in part or a new trial ordered in whole or in part,
believes that the impact of this matter will not have a materially adverse
effect on the Company's financial position. However, if any substantial
loss were to occur as a result of this litigation it could have a material
adverse impact upon results of operations in the fiscal quarter or year in
which it were to be incurred, but the Company cannot estimate the range of
any reasonably possible loss.
8
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
5. In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which addresses the accounting for the impairment of long-lived assets,
such as bank premises and equipment, identifiable intangibles and goodwill
related to those assets. As required under Statement 121, the Company has
adopted the provisions of the new standard as of January 1, 1996, and in
accordance with Statement 121, prior period financial statements have not
been restated to reflect the change in accounting principle. The effect of
adopting this new standard was not material to the Company's financial
position or results of operations.
6. In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 ("Statement 122"), "Accounting for
Mortgage Servicing Rights - an Amendment to FAS 65," to eliminate the
accounting inconsistencies that have existed between mortgage servicing
rights that are acquired through loan origination activities and those
acquired through purchase transactions. As required under Statement 122, the
Company has adopted the provisions of the new standard as of January 1,
1996, and in accordance with Statement 122, prior period financial
statements have not been restated to reflect the change in accounting
principle. The adoption increased the first three months of 1996's results
of operations $695 thousand.
9
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 fifteen institutions in the state of Arkansas, seven institutions in
the state of Texas, one institution in the state of Tennessee, and one
institution in the state of Louisiana. 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, 1996,
totaled approximately $5.2 billion.
On January 9, 1996, a subsidiary of the Company, First Commercial Mortgage
Company, completed the purchase of servicing rights and other assets from the
former Bailey Mortgage Company (BMC) located in Jackson, Mississippi. The sale
of servicing rights and other assets of BMC was conducted by the Resolution
Trust Corporation (RTC), which had assumed ownership of BMC three years ago.
Under terms of the agreement, First Commercial Mortgage Company acquired
approximately $850 million in loan servicing rights and certain other assets
from the RTC, represented by over 30,000 mortgages held on properties
throughout the United States. Following the closure of the sale, the Jackson,
Mississippi, production facility reopened under the name First Commercial
Mortgage Company. The transaction brought First Commercial Mortgage Company's
total servicing portfolio to over $8 billion and 160,000 loans.
On February 7, 1996, the Company entered into a definitive agreement for
the purchase of Cedar Creek Bancshares, Inc., and its wholly owned subsidiary,
Cedar Creek Bank. Cedar Creek Bancshares, Inc., is headquartered in Seven
Points, Texas, and Cedar Creek Bank serves the Cedar Creek Lake region of East
Texas. Cedar Creek Bank has assets of $100 million, loans of $39 million and
deposits of $93 million. The Company will issue approximately 464,380 shares
of the Company's common stock for all the outstanding shares of Cedar Creek
Bancshares, Inc. The Company anticipates completion of this acquisition in the
second quarter of 1996.
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 $0.58 per share in 1996's first three months represented an
increase of 18% from $0.49 per share during the same period in 1995. Net
income for the three months ended March 31, 1996, was $15.9 million, up 25%
from $12.7 million in 1995. The increase in net income was primarily due to a
rise in net interest income as a result of loan growth and increasing asset
yields. The Company also experienced an increase in non-interest income as a
result of mortgage servicing acquisitions during 1995 and early 1996, higher
mortgage production volumes, increased fee income, partially offset by related
10
expenses, from the 1995 purchase of consumer credit card loan participations,
and increased activity in the Company's broker-dealer operations. During the
first quarter of 1996, the Company recorded net non-recurring expenses of $1.8
million, or $0.04 per share after-tax, relating to legal expenses. A detailed
explanation of these increases is included in the Net Interest Income, 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 returns
on average assets for the first three months of 1996 and 1995 were 1.24% and
1.15%, respectively. Excluding the non-recurring items recorded in the first
three months of 1996, discussed previously, return on average assets was 1.32%.
Annual returns on average assets were 1.22% in 1995, 1.19% in 1994 and 1.21% in
1993.
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
1996, the Company earned 14.59% on average common stockholders' equity compared
with 14.16% for the first three months of 1995. Excluding the non-recurring
items recorded in the first three months of 1996, discussed previously, return
on average common stockholders' equity was 15.59%. Returns on average common
stockholders' equity for the years 1995, 1994 and 1993 were 15.02%, 14.87% and
14.43%, respectively. The originally reported ratio in 1993, before
restatements for pooling acquisitions, was above 15%. The ratio fell due to
the high capital level of State First Financial Corporation, a pooling-of-
interests acquisition that was consummated in March 1994. The improvement seen
in the return on average common stockholders' equity ratio is indicative of the
Company's successful deployment of this capital, combined with strong earnings
growth. Management will continue to work to profitably deploy excess capital
thereby improving return on average common stockholders' equity.
Net Interest Income
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 $52.8
million in the first three months of 1996 compared to $43.6 million in the
first three months of 1995. 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 4.61% for the first three months of 1996, compared to 4.38% for the same
period in 1995. The increase in net interest income and net interest margin
resulted from a general repricing of the loan portfolio combined with a 21%
growth in average loans and leases between 1995 and 1996. The loan growth was
due to internal growth (10%), the acquisition of FDH Bancshares, Inc., in the
11
fourth quarter of 1995, which was accounted for as purchase transaction (8%),
and the increase in mortgage production volume experienced by the Company's
mortgage subsidiary (3%).
Management of net interest income and 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 first three months of 1996
and 1995.
Analysis of Net Interest Income (FTE = Fully Tax-Equivalent)
For the Three Months
Ended March 31,
-----------------------
1996 1995
(Dollars in thousands) ---------- ----------
Interest income...................................................................... $ 91,571 $ 73,508
Fully tax-equivalent adjustment...................................................... 858 936
---------- ----------
Interest income - FTE................................................................ 92,429 74,444
Interest expense..................................................................... 39,624 30,875
---------- ----------
Net interest income - FTE $ 52,805 $ 43,569
========== ==========
Yield on earning assets - FTE........................................................ 8.06% 7.48%
Cost of interest bearing liabilities................................................. 4.22% 3.79%
Net interest spread - FTE............................................................ 3.84% 3.69%
Net interest margin - FTE............................................................ 4.61% 4.38%
The following schedule details rate sensitive assets and liabilities at
March 31, 1996. 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.
12
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..........$ 98,661 $ -- $ -- $ -- $ -- $ -- $ 98,661
Trading account securities...... 615 -- -- -- -- -- 615
Taxable investment securities... 184,595 132,036 166,303 276,691 412,092 35,955 1,207,672
Tax-exempt investment securities 1,863 3,041 3,846 17,245 78,697 45,337 150,029
Loans and leases................ 823,192 275,946 337,912 512,856 995,002 245,046 3,189,954
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total earning assets............ 1,108,926 411,023 508,061 806,792 1,485,791 326,338 4,646,931
Interest bearing liabilities:
Savings and NOW accounts........ 828,753 -- -- -- -- -- 828,753
Money market accounts........... 754,512 -- -- -- -- -- 754,512
Other time deposits............. 305,555 387,886 470,375 480,149 377,879 20,508 2,042,352
Short-term borrowings........... 170,610 -- -- -- -- -- 170,610
Long-term debt.................. 1,071 -- -- 2 1,079 5,018 7,170
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities.................... 2,060,501 387,886 470,375 480,151 378,958 25,526 3,803,397
Interest rate
sensitivity gap................ (951,575) 23,137 37,686 326,641 1,106,833 300,812
Cumulative interest rate
sensitivity gap................ (951,575) (928,438) (890,752) (564,111) 542,722 843,534
Cumulative rate sensitive assets
to rate sensitive liabilities.. 53.8% 62.1% 69.5% 83.4% 114.4% 122.2%
Cumulative gap as a percentage
of earning assets.............. (20.5%) (20.0%) (19.2%) (12.1%) 11.7% 18.2%
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
all aspects of the Company's gap position to maximize profitability as interest
rates fluctuate.
13
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
1996, non-interest income totaled $25.6 million compared to $15.6 million for
the first three months of 1995. Excluding the other real estate and investment
securities gains and losses during the first three months of 1996 and 1995,
non-interest income increased $9.7 million or 61%. The primary contributor to
this increase was $7.3 million in increased mortgage servicing income due to
mortgage servicing acquisitions in 1995 and early 1996. The Company also
experienced increased fee income from the 1995 purchase of consumer credit card
loan participations from its 50% owned affiliate bank in Norman, Oklahoma.
Increased activity in the Company's broker-dealer operations also contributed
to the increase in non-interest income. The following table summarizes non-
interest income for the first three months of 1996 and 1995.
For the Three Months
Ended March 31,
------------------------------------
1996 1995 % Change
---------- ---------- -----------
Trust department income................................................. $ 3,068 $ 2,811 9.14%
Mortgage servicing fee income........................................... 11,001 3,680 198.94
Broker-dealer operations income......................................... 905 651 39.02
Service charges on deposits............................................. 5,922 5,325 11.21
Other service charges and fees.......................................... 2,919 2,080 40.34
Investment securities gains
(losses), net......................................................... 65 (27) 340.74
Other real estate gains
(losses), net......................................................... 13 (233) 105.58
Other income............................................................ 1,715 1,290 32.95
---------- ----------
Total non-interest income............................................... $ 25,608 $ 15,577 64.40%
========== ==========
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 these efforts
will further improve the Company's efficiency ratio during the remainder of
1996 and future years.
14
Non-interest expenses were $51.5 million for the first three months of 1996
compared to $38.5 million for the first three months of 1995. In the first
quarter of 1996, the Company recorded $1.8 million in non-recurring expenses
relating to legal matters. Of the remaining $11.2 million increase,
amortization of mortgage servicing rights contributed $4.1 million. This
increase was due to mortgage servicing acquisitions in 1995 and early 1996,
mentioned previously. Non-interest expense of $2.1 million was attributed to
FDH Bancshares, Inc., which was acquired in the fourth quarter of 1995. The
Company also experienced increased expenses from the 1995 purchase of consumer
credit card loan participations mentioned previously. Excluding the effect of
the 1995 bank and mortgage servicing acquisitions and the non-recurring expense
accruals, non-interest expense increased $1.2 million, which represents an
increase from 1995's first quarter of 3%. The following table summarizes non-
interest expenses for the first three months of 1996 and 1995.
For the Three Months
Ended March 31,
------------------------------------
1996 1995 % Change
---------- ---------- -----------
Salaries, wages and
employee benefits..................................................... $ 23,770 $ 19,508 21.85%
Net occupancy........................................................... 2,972 2,732 8.78
Equipment............................................................... 3,055 2,563 19.20
FDIC Insurance.......................................................... 326 2,250 (85.51)
Amortization of mortgage servicing
rights................................................................ 5,064 988 412.55
Other expenses.......................................................... 16,289 10,456 55.79
---------- ----------
Total non-interest expenses............................................. $ 51,476 $ 38,497 33.71%
========== ==========
An important tool in determining a bank's effectiveness in managing non-
interest expenses is the efficiency ratio, which is calculated by dividing non-
interest expense by the sum of net interest margin on a tax-equivalent basis
and non-interest income, excluding securities gains and losses. The Company's
ratio decreased from 63.14% for the first quarter of 1995 to 56.95% in the
first quarter of 1996. The Company, in calculating its efficiency ratio has
excluded the effect of the non-recurring expenses, mentioned previously, as
well as the amortization of mortgage servicing rights. The decrease in the
efficiency ratio shows the Company's commitment to controlling non-interest
expenses while increasing revenues. The first quarter efficiency ratio reached
the Company's long-term goal of 57%. Management is reviewing trends in the
financial services industry and will set a new efficiency ratio goal.
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 35.1% for the first three months of 1996 and 32.8% for
the first three months of 1995. The increase in the effective income tax rate
for 1996 was due to a decrease in income on tax-exempt investments as a
percentage of total income before income taxes.
15
Loan and Lease Portfolio
At March 31, 1996, the Company's loan and lease portfolio, net of unearned
income, totaled $3.2 billion, as compared to a $3.2 billion loan portfolio at
December 31, 1995. Excluding the Company's mortgage loans held for resale,
which decreased $44.8 million, the Company's loan and lease portfolio
experienced an increase of $21.2 million, or 1%, during the first quarter of
1996. Although the growth in loans was spread through all categories, the
strongest growth occurred in the commercial and real estate portfolios.
The Company has continued its policy of conservative lending thereby
avoiding significant risk areas, such as out of territory lending and highly
leveraged transactions ("leveraged buy-outs"). 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.
Provision and Allowance for Possible Loan and Lease Losses
The allowance for possible loan and lease losses is the amount deemed by
management to be adequate to provide for possible losses on loans and leases
that may become uncollectible. Reviews of general loss experience and the
performance of specific credits are conducted in determining reserve adequacy
and required provision expense. 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, 1996, the allowance for possible loan and lease
losses equaled $51.7 million or 1.62% of total loans and leases.
Comparatively, the allowance possible for loan and lease losses amounted to
$51.3 million or 1.60% of total loans and leases at December 31, 1995. The
provision for possible loan and lease losses amounted to $1.6 million in the
first three months of 1996 as compared to $825 thousand in the first three
months of 1995.
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 six years. At March 31,
1996, the Company's ratio was 282.14%. This means that for every dollar of
non-performing loans (impaired loans, other non-accrual loans, loans 90 days or
more past due, and renegotiated loans), $2.82 has been set aside in the
Company's reserves to cover possible losses. The ratio at December 31, 1995,
was 294.42%. Another reserve adequacy indicator is the ratio of allowance for
possible loan and lease losses and other real estate losses to non-performing
assets (defined as impaired loans, other non-accrual loans, renegotiated debt,
repossessed assets and other real estate owned). The ratio was 352.14% at
March 31, 1996, compared to 376.30% at December 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.
16
Annualized Three Months
Ended March 31, For the Years Ended December 31,
----------------------- --------------------------------------------
1996 1995 1994 1993 1992 1991
----------------------- -------- -------- -------- -------- --------
Net loan and lease losses sustained
to average loans and leases 0.15% 0.08% 0.04% 0.16% 0.52% 0.42%
Allowance for possible loan and lease
losses to total loans and leases 1.62% 1.60% 1.79% 2.19% 2.15% 2.25%
Non-performing loans to total
loans and leases 0.57% 0.54% 0.52% 0.72% 0.86% 1.61%
Although asset quality has 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 limit" that represents only
24% 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 29 loan relationships with aggregate outstanding
balances of $5 million or greater, which further mitigates the loan loss risks.
Liquidity
Long-term liquidity is a function of a large core deposit base and a strong
capital position. Core deposits, which consist of total deposits less
certificates of deposit of $100,000 and over, represent the Company's largest
and most important funding source. The capital position of the Company is a
result of internal generation of capital and earnings retention. The Company
manages dividends to retain sufficient capital for long-term liquidity and
growth. Average total core deposits, excluding the FDH Bancshares, Inc.,
acquisition in November 1995, increased approximately $30 million, or 1%, from
1995's fourth quarter average total core deposits. The increase in average
core deposits is a result of the Company's attempt to provide its customers a
wide range of new and competitive deposit products. Two key measures of the
Company's long-term liquidity are the ratios of loans and leases to total
deposits and loans and leases to core deposits. Lower ratios in these two
measures correlate to higher liquidity. As can be seen from the accompanying
table, the Company's liquidity ratios have increased, indicating lower
liquidity. The Company's liquidity has decreased because the funding of loans
has outpaced the growth in the Company's core deposit base. However, the
Company's relatively sound deposit base, along with its low debt level and
common and preferred stock availability, provide several alternatives for
future financing and long-term liquidity needs.
17
For the Three Months
Ended March 31, For the Years Ended December 31,
-------------------- ------------------------------------
1996 1995 1994 1993
-------------------- ---------- ---------- ----------
Average loans and leases to average deposits....... 70.84% 69.29% 61.76% 59.41%
Average loans and leases to average core deposits.. 79.53% 76.88% 67.83% 64.20%
Short-term liquidity is the ability of the Company to meet the borrowing
needs and deposit withdrawal requirements of its customers due to growth in the
customer base and, to a lesser extent, seasonal and cyclical customer demands.
Short-term liquidity needs can be met by short-term borrowings in state and
national money markets. Short-term borrowings include federal funds purchased,
securities sold under agreement to repurchase, treasury tax and loan accounts,
and other borrowings. Average short-term borrowings exceeded average short-
term investments by $75.1 million in the first quarter of 1996. During the
fourth quarter of 1995 average short-term borrowings exceeded average short-
term investments by $86.1 million. The Company has continued to use short-term
borrowings to fund overall loan growth throughout the Company. Future short-
term liquidity needs for daily operations are not expected to vary
significantly and management believes that the Company's level of liquidity is
sufficient to meet current funding requirements.
Capitalization
Capital adequacy continues to hold a position of great importance when
evaluating financial services providers. The Company maintains its goal of
providing a strong capital position while earning an acceptable 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. A position of strength is important to the
Company's customers, investors and regulators.
At March 31, 1996, the Company's equity to asset ratio was 8.51% compared
to 8.06% at December 31, 1995. At March 31, 1996, the Company's tier 1
leverage, tier 1 risk-based capital and total risk-based capital ratios
substantially exceeded the required 3%, 4% and 8% levels established by the
Board of Governors of the Federal Reserve System, as can be seen from the
accompanying table.
Regulatory March 31, December 31, September 30, June 30, March 31,
Minimum 1996 1995 1995 1995 1995
----------- ------------ ------------ ------------ ------------ ------------
Tier 1 leverage ratio............ 3.00% 7.64% 7.96% 7.80% 7.76% 7.66%
Tier 1 risk-based capital ratio.. 4.00% 11.24% 10.55% 11.56% 11.73% 12.09%
Total risk-based capital ratio... 8.00% 12.04% 11.38% 12.33% 12.50% 12.87%
18
While management plans to maintain the Company's strong capital base, it
recognizes the need to effectively manage capital levels as they relate to
asset growth. In order to avoid declining return on equity ratios caused by a
more rapid rate of growth in capital than in assets, management will continue
to evaluate options to utilize excess capital thereby improving return on
equity.
The Company is not aware of any current recommendations by any regulatory
authorities which, if they were implemented, are reasonably likely to have a
material effect on the Company's liquidity, capital resources or operations.
Dividend Policy
The Company's long-term dividend policy is to pay between 30% and 35% of
earnings in cash dividends to its stockholders while maintaining adequate
capital to support growth. In 1995, the Company increased its dividend rate
for the ninth consecutive year, bringing the annual dividend rate to $.84 per
share.
The dividend payout ratios for the past three years were 35.77% in 1995,
33.97% in 1994, and 29.98% in 1993. The Company's Board of Directors reviews
the cash dividend policy and payout levels annually in the fourth quarter.
19
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
AEARTH DEVELOPMENT, INC., v. FIRST COMMERCIAL BANK, N.A.
- --------------------------------------------------------
On April 30, 1996, the trial court in the above litigation, which is
described in detail in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, and in Note 4 of Notes to Unaudited Consolidated
Financial Statements included herein, approved a $7.3 million set off to the
March 13, 1996, $22.5 million jury verdict against First Commercial Bank, N.A.
The set off pertains to monies owed by Aearth Development, Inc., and related
interests, to First Commercial Bank, N.A. The trial court has not yet entered
a judgment on the verdict.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 16, 1996, 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 Withheld
--------------------------- ------------- ------------- -------------
John W. Allison 22,879,032 2,458 10,029
William H. Bowen 22,878,242 531 12,746
Cecil W. Cupp, Jr. 22,880,970 531 10,018
Barnett Grace 22,880,992 531 9,996
Jack G. Justus 22,880,970 531 10,018
Michael W. Murphy, Jr. 22,880,992 531 9,996
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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
Date: May 15, 1996
21
Index to Exhibits
Exhibit Number Exhibit
---------------- --------------------------------------------
27 Financial Data Schedule