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 September 30, 1997
[ ] 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 September 30, 1997
--------------------------------------- --------------------------------
Common Stock, $3.00 par value per share 35,509,110
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
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 September 30, December 31,
(Dollars in thousands, except par value) -------------- --------------
1997 1996
-------------- --------------
ASSETS
Cash and due from banks................................................... $ 411,471 $ 368,249
Federal funds sold........................................................ 199,771 286,581
-------------- --------------
Total cash and cash equivalents.......................................... 611,242 654,830
Investment securities held-to-maturity, estimated market
value $444,018 ($511,302 in 1996)....................................... 442,599 512,495
Investment securities available-for-sale.................................. 1,109,361 1,109,708
Trading account securities................................................ 220 196
Loans and leases, net of unearned income.................................. 4,193,755 4,024,635
Allowance for possible loan and lease losses.............................. (82,002) (62,495)
-------------- --------------
Net loans and leases..................................................... 4,111,753 3,962,140
Bank premises and equipment, net.......................................... 123,612 126,647
Other real estate owned, net of allow for poss losses of $47 ($87 in 1996) 3,177 2,398
Other assets.............................................................. 227,510 242,804
-------------- --------------
Total assets........................................................... $ 6,629,474 $ 6,611,218
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing transaction accounts................................. $ 1,210,396 $ 1,090,401
Interest bearing transaction and savings accounts......................... 1,866,196 1,933,713
Certificates of deposit $100,000 and over................................. 561,395 676,044
Other time deposits....................................................... 2,078,636 2,060,120
-------------- --------------
Total deposits........................................................... 5,716,623 5,760,278
Short-term borrowings..................................................... 197,810 195,941
Other liabilities and deferred income taxes............................... 82,790 68,648
Long-term debt............................................................ 5,112 28,751
-------------- --------------
Total liabilities........................................................ 6,002,335 6,053,618
Stockholders' equity
Preferred stock, $1 par value, 400,000 shares authorized, none issued.... -- --
Common stock, $3 par value, 50,000,000 shares authorized,
35,509,110 and 33,872,583 shares issued, respectively................... 106,527 101,618
Capital surplus.......................................................... 264,978 263,090
Retained earnings........................................................ 252,060 191,813
Unrealized net gains (losses) on available-for-sale securities,
net of income tax....................................................... 3,574 1,079
-------------- --------------
Total stockholders' equity.............................................. 627,139 557,600
-------------- --------------
Total liabilities and stockholders' equity............................. $ 6,629,474 $ 6,611,218
============== ==============
See accompanying notes.
3
FIRST COMMERCIAL CORPORATION Unaudited Unaudited
CONSOLIDATED INCOME STATEMENTS Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Interest income
Loans and leases, including fees........................... $ 96,684 $ 90,085 $ 289,330 $ 265,061
Short-term investments..................................... 2,350 1,864 6,585 5,167
Investment securities-taxable.............................. 20,868 20,361 64,972 60,847
-nontaxable........................... 2,831 2,650 8,692 7,761
Trading account securities................................. 6 10 16 12
---------- ---------- ---------- ----------
Total interest income.................................... 122,739 114,970 369,595 338,848
Interest expense
Interest on deposits....................................... 49,280 48,106 150,751 143,324
Short-term borrowings...................................... 2,507 2,383 7,655 7,363
Long-term debt............................................. 123 408 843 1,193
---------- ---------- ---------- ----------
Total interest expense................................... 51,910 50,897 159,249 151,880
Net interest income........................................... 70,829 64,073 210,346 186,968
Provision for possible loan and lease losses.................. 18,993 2,633 24,943 6,620
---------- ---------- ---------- ----------
Net int inc after prov for possible loan and lease losses 51,836 61,440 185,403 180,348
Other income
Trust department income.................................... 3,752 3,033 10,182 9,293
Mortgage servicing fee income.............................. 8,978 10,039 27,653 32,252
Broker-dealer operations income............................ 1,556 1,037 3,870 2,945
Service charges on deposit accounts........................ 8,206 7,637 24,661 21,902
Other service charges and fees............................. 3,978 3,530 12,049 10,329
Investment securities gains (losses), net.................. (119) (76) (121) 14
Other real estate gains (losses), net...................... (824) (197) (1,698) (563)
Other...................................................... 2,159 2,087 5,845 5,871
---------- ---------- ---------- ----------
Total other income....................................... 27,686 27,090 82,441 82,043
Other expenses
Salaries, wages and employee benefits...................... 27,127 26,421 83,498 79,624
Net occupancy.............................................. 3,832 3,757 11,705 10,781
Equipment.................................................. 4,138 3,754 12,038 10,837
FDIC insurance............................................. 258 609 262 1,159
Amortization of mortgage servicing rights.................. 2,725 4,958 11,066 15,122
Other...................................................... 25,791 17,393 61,762 53,419
---------- ---------- ---------- ----------
Total other expenses..................................... 63,871 56,892 180,331 170,942
Income before income taxes................................. 15,651 31,638 87,513 91,449
Income tax provision....................................... 4,503 11,043 30,630 31,872
---------- ---------- ---------- ----------
Income before extraordinary gain........................... 11,148 20,595 56,883 59,577
Extraordinary gain, net of income taxes of $9,641.......... 15,443 -- 15,443 --
---------- ---------- ---------- ----------
Net income............................................... $ 26,591 $ 20,595 $ 72,326 $ 59,577
========== ========== ========== ==========
Weighted average number of common shares outstanding
during the period............................................ 35,440,707 33,894,986 35,414,528 33,981,052
Earnings per common share
Before extraordinary gain................................... $ 0.31 $ 0.61 $ 1.60 $ 1.75
Extraordinary gain.......................................... $ 0.44 $ -- $ 0.44 $ --
---------- ---------- ---------- ----------
Net Income.................................................. $ 0.75 $ 0.61 $ 2.04 $ 1.75
========== ========== ========== ==========
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 - December 31, 1995............ $ -- $ 97,217 $ 224,152 $ 184,732 $ 1,005 $ -- $507,106
Change in unrealized gains (losses),
net of income taxes of $1,649........ (3,062) (3,062)
Net income............................ 59,577 59,577
Cash dividends - $.54 per common share (18,393) (18,393)
Stock options exercised............... 138 306 6 450
Purchase of treasury stock,
219,425 shares..................... (6,369) (6,369)
Sale of treasury stock, 7,350 shares 214 214
Purchase of minority shares of
Springhill Bank & Trust Company,
1,422 shares......................... 13 30 43
Acquisition of equity interest of
Security National Bank,
253,154 shares....................... 759 1,541 1,267 (12) 3,555
-------- --------- --------- --------- ---------- --------- --------
Balance - September 30, 1996........... $ -- $ 98,114 $ 226,012 $ 227,183 $ (2,069) $(6,119) $543,121
======== ========= ========= ========= ========== ======== ========
Balance - December 31, 1996............ $ -- $ 101,618 $ 263,090 $ 191,813 $ 1,079 $ -- $557,600
Change in unrealized gains (losses),
net of income taxes of $1,228........ 2,280 2,280
Net income............................ 72,326 72,326
Cash dividends - $.75 per common share (26,721) (26,721)
Stock options exercised............... 384 563 947
Purchase of treasury stock,
175 shares........................... (3) (3)
Common stock issued,
1,400 shares......................... 2 28 1 31
Purchase of minority shares of
Springhill Bank & Trust Company,
241 shares........................... 1 10 2 13
Acquisition of equity interest of
W.B.T. Holding Company, Inc.,
1,361,952 shares..................... 4,086 14,628 215 18,929
Acquisition of equity interest of
City National Bank
145,478 shares....................... 436 1,287 14 1,737
-------- --------- --------- --------- --------- --------- ---------
Balance - September 30, 1997........... $ -- $ 106,527 $ 264,978 $ 252,060 $ 3,574 $ -- $627,139
======== ========= ========= ========= ========== ======== =========
See accompanying notes.
5
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOW Nine Months Ended
(Dollars in thousands) September 30,
-----------------------
1997 1996
---------- ----------
OPERATING ACTIVITIES
Net income......................................................................... $ 72,326 $ 59,577
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary gain on sale of institutions........................................ (25,084) ---
Depreciation and amortization..................................................... 23,686 27,122
Provision for possible loan and lease losses...................................... 24,943 6,620
Loss (gain) on investment securities available-for-sale........................... 121 (14)
Gain on sale of equipment......................................................... (257) (7)
Loss (gain) on sale of other real estate.......................................... 105 (269)
Write downs of other real estate.................................................. 510 123
Equity in undistributed earnings of unconsolidated subsidiary..................... (1,101) (1,126)
Decrease in trading securities.................................................... 117 142
Decrease (increase) in mortgage loans held for resale............................. (5,107) 93,161
Decrease in income taxes payable.................................................. (4,258) (3,269)
Decrease (increase) in interest and other receivables............................. 3,359 (2,429)
Decrease in interest payable...................................................... (3,659) (1,147)
Reduction (increase) in other assets.............................................. 8,294 (9,425)
Increase in accrued expenses...................................................... 18,063 9,425
Increase in prepaid expenses...................................................... (854) (2,733)
---------- ----------
Net cash provided by operating activities........................................ 111,204 175,751
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale.................... 210,238 45,170
Proceeds from maturing investment securities available-for-sale.................... 379,252 722,326
Proceeds from maturing investment securities held-to-maturity...................... 586,476 482,604
Purchases of investment securities available-for-sale.............................. (517,431) (785,223)
Purchases of investment securities held-to-maturity................................ (516,580) (499,889)
Proceeds from sale of institutions................................................. 53,000 ---
Purchase of institutions, net of funds acquired.................................... --- 7,247
Net decrease (increase) in loans and leases........................................ 31,688 (237,603)
Capital expenditures............................................................... (10,593) (10,598)
Proceeds from sale of bank premises and equipment.................................. 9,284 3,148
Additions to purchased mortgage servicing rights................................... (1,554) (8,833)
Proceeds from sales of other real estate........................................... 2,905 2,655
Other.............................................................................. 63 ---
---------- ----------
Net cash provided (used) in investing activities.................................. 226,748 (278,996)
(Continued on next page)
6
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOW (continued) Nine Months Ended
(Dollars in thousands) September 30,
-----------------------
1997 1996
---------- ----------
FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts, and savings accounts................ (125,193) (75,654)
Net (decrease) increase in time deposits........................................... (205,261) 115,988
Net decrease in short-term borrowings.............................................. (6,268) (53,948)
Proceeds from long-term borrowings................................................. 1,011 14,289
Repayment of long-term debt........................................................ (20,083) (1,073)
Proceeds from issuance of common stock............................................. 31 --
Purchase of treasury stock......................................................... (3) (6,344)
Stock options exercised............................................................ 947 639
Cash dividends paid on common stock............................................... (26,721) (18,393)
---------- ----------
Net cash provided (used) in financing activities.................................. (381,540) (24,496)
Net increase (decrease) in cash and cash equivalents............................... (43,588) (127,741)
Cash and cash equivalents at the beginning of year................................. 654,830 586,349
---------- ----------
Cash and cash equivalents at end of period......................................... $ 611,242 $ 458,608
========== ==========
See accompanying notes.
7
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
1. There have been no significant changes in the accounting policies of the
Company since December 31, 1996, the date of the most recent annual
report to shareholders, nor have there occurred events, except as
disclosed in Notes 4, 5, 6, 7, 10 and 11, 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 September 30, 1997, and the results of
operations and changes in cash flows for the nine months then ended. Any
adjustments consist only of normal recurring accruals.
3. Cash payments for interest were approximately $162.9 million and $153.0
million for the first nine months of 1997 and 1996, respectively. Cash
payments for income taxes during the first nine months of 1997 and 1996
were approximately $45.9 million and $36.8 million, respectively.
4. Aearth Development, Inc. v. First Commercial Bank, N.A.
-------------------------------------------------------
First Commercial Bank, N.A., a wholly owned subsidiary of Registrant, is
the defendant in litigation initiated in 1989 seeking approximately $200
million 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 trebled 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 approved a $7.3 million set
off to the March 13, 1996, $22.5 million jury verdict. The setoff
pertained to monies owed by Aearth Development, Inc., and related
interests, to First Commercial Bank, N.A. On May 20, 1996, the Court
entered a judgment against First Commercial Bank, N.A., in the amount of
$15.2 million. Thereafter, on June 21, 1996, the Court granted a Motion
for Remittitur and reduced the punitive damages awarded in the judgment
by $7.0 million. Therefore, the final award was $8.2 million. On June
27, 1996, First Commercial Bank, N.A., filed a Notice of Appeal to the
Supreme Court of Arkansas. Management of the Company and First
Commercial Bank, N.A., intend to vigorously pursue the appeal. 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 the judgment entered on the verdict will
be reversed and dismissed in whole or in part or a new trial ordered in
8
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
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 and/or year in which it were to be incurred, but the
Company cannot estimate the range of any reasonably possible loss.
5. On February 13, 1997, the Company acquired all of the outstanding common
stock of W.B.T. Holding Company, Memphis, Tennessee, in exchange for
1,361,952 Company common shares. This transaction was accounted for as a
pooling of interests. The results of W.B.T. Holding Company are included
in the consolidated financial statements for 1997; however, prior period
financial data has not been restated due to immateriality. W.B.T.
Holding company had approximately $267 million in assets, $181 million in
loans, and $236 million in deposits.
6. On April 17, 1997, the Company acquired all of the outstanding common
stock of City National Bank, Whitehouse, Texas, in exchange for 145,478
shares of Company common stock. The transaction was accounted for as a
pooling of interests. The results of City National Bank are included in
consolidated financial statements for 1997; however, prior period
financial data has not been restated due to immateriality. City National
had approximately $39 million in assets, $30 million in loans, and $37
million in deposits.
7. On May 15, 1997, the Company acquired all of the outstanding common stock
of Southwest Bancshares, Inc., Jonesboro, Arkansas, in exchange for
3,412,252 shares of the Company's common stock. The transaction was
accounted for as a pooling of interests; therefore, 1997 and all prior
period financial information has been restated to include this
acquisition. Southwest Bancshares, Inc., had approximately $847 million
in assets, $610 million in loans, and $741 million in deposits.
8. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("Statement 128"),
"Earnings Per Share," which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary ("basic")
earnings per share, the dilutive effect of stock options will be
excluded. The impact of Statement 128 on the calculation of earnings per
share for the Company for the nine months ended September 30, 1997, and
September 30 1996, would not have been material.
9. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129 ("Statement 129"),
"Disclosure of Information about Capital Structure." Statement 129
consolidates existing guidance in Accounting Principles Board (APB)
Opinion No. 10, "Omnibus Opinion 1966," APB Opinion No. 15, "Earnings Per
Share," and Financial Accounting Standards No. 47, "Disclosure of Long-
Lived Obligations," relating to disclosure about a company's capital
structure. Statement 129 is required to be adopted on December 31, 1997.
The Company believes Statement 129 will have no material impact on the
Company's capital structure disclosures.
9
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
10. On July 1, 1997, the Company acquired all of the outstanding common stock
of First Central Corporation, Searcy, Arkansas, in exchange for 1,649,963
Company common shares. This transaction was accounted for as a pooling
of interests; therefore, 1997 and all prior period financial data have
been restated to include this acquisition. First Central Corporation was
the parent of First National Bank, Searcy, Arkansas, which had
approximately $269 million in assets, $142 million in loans and $237
million in deposits.
11. On August 1, 1997, pursuant to regulatory requirements based on market
share issues, the Company divested of First Bank of Arkansas,
Russellville and First Bank of Arkansas, Searcy, both of which were
subsidiaries of Southwest Bancshares, Inc. The two banks were purchased
by Simmons First National Corporation of Pine Bluff, Arkansas, for $53
million in cash. The resulting gain of $15.4 million after tax is
reported as an extraordinary item in the financial statements.
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 18 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 two institutions in the
state of Oklahoma. The Company's consolidated assets at September 30, 1997,
totaled approximately $6.6 billion.
On July 1, 1997, the Company acquired all of the outstanding common stock
of First Central Corporation, Searcy, Arkansas, ("First Central") in exchange
for 1,649,963 Company common shares. This transaction was accounted for as a
pooling of interests; therefore, 1997 and all prior period financial data have
been restated to include this acquisition. First Central was the parent of
First National Bank, Searcy, Arkansas, which had approximately $269 million in
assets, $142 million in loans and $237 million in deposits.
The Southwest Bancshares, Inc. and First Central acquisitions resulted in
excess market share for the Company in the Russellville and Searcy, Arkansas,
markets, thereby prompting regulatory authorities to require divestiture in
order to bring the market share within prescribed guidelines. On August 1,
1997, the Company completed the sale of First Bank of Arkansas, Russellville,
and First Bank of Arkansas, Searcy, to Simmons First National Corporation,
Pine Bluff, Arkansas, for a total cash price of $53 million. This transaction
produced an after-tax gain of $15.4 million, or approximately $0.44 per share,
which is reported during the third quarter as an extraordinary item.
10
On August 17, 1997, the Company announced that it had entered into a
definitive agreement for the purchase of First Charter Bancshares, Inc.
("First Charter"), which has assets of approximately $71 million and mortgage
loan servicing portfolio of approximately $400 million. This transaction was
consummated on October 31, 1997 and was accounted for as a pooling of
interests, with results to be included in the consolidated financial data for
1997. Prior period financial data will not be restated due to immateriality.
On November 21, 1997, Charter State Bank's Beebe branch is scheduled to merge
with First Commercial's Searcy affiliate, First National Bank of Searcy, and
its North Little Rock branch will merge with First Commercial Bank of Little
Rock. First Charter's mortgage subsidiary, Charter Mortgage & Investments,
Inc., added an experienced team of mortgage bankers allowing First Commercial
Mortgage Company to expand its presence in Arkansas.
On October 1, 1997, the Company announced that Kemmons Wilson, Inc. will
merge with the Company. Kemmons Wilson, Inc. is the parent company of KW
Bancshares, Inc., which owns Federal Savings Bank headquartered in Rogers,
Arkansas. Federal Savings Bank has assets of $488 million and services
approximately $1 billion in residential mortgage loans. Federal Savings
Bank's 15 branches located in Rogers, Bentonville, Fort Smith, West Memphis,
and Little Rock, Arkansas, as well as Memphis, Tennessee, will allow the
Company to expand its presence in Northwest Arkansas, Little Rock and Memphis,
and to enter the important Fort Smith market. This transaction is expected to
close in the first quarter of 1998 and will be accounted for as a purchase.
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 $0.75 per share in third quarter 1997 represented an increase
of 23% from $0.61 per share during the same period in 1996. Net income for
the three months ended September 30, 1997, was $26.6 million, up 29% from
$20.6 million in 1996. Earnings of $2.04 per share in 1997's first nine
months represented an increase of 17% from $1.75 per share during the same
period in 1996. Net income for the nine months ended September 30, 1997, was
$72.3 million, up 21% from $59.6 million in 1996. The increase in net income
reflects strong growth in net interest margin combined with tight controls
over non-interest expense.
During the third quarter of 1997, the Company recorded non-recurring
expenses of approximately $0.43 per share. A detailed explanation of these
expenses is included below under the headings "Non-Interest Expense" and
"Provision and Allowance for Possible Loan and Lease Losses."
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 nine months of 1997 and 1996 were
1.45% and 1.27%, respectively.
11
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 nine months of
1997, the Company earned 15.96% on average common stockholders' equity
compared with 15.02% for the first nine months of 1996. The Company's
continued improvement in the return on average common stockholders' equity
ratio is indicative of the Company's successful deployment of its capital,
combined with strong earnings growth.
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
$214.4 million in the first nine months of 1997 compared to $190.5 million in
the first nine months of 1996. 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 4.71% for the first nine months of 1997, compared to 4.51%
for the same period in 1996. The increase in net interest income and net
interest margin resulted from increased returns on earning assets combined
with a decrease in liability costs.
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 third quarter and first
nine months of 1997 and 1996.
Analysis of Net Interest Income (FTE = Fully Tax-Equivalent)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) ----------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
Interest income.......................................... $ 122,739 $ 114,970 $ 369,595 $ 338,848
Fully tax-equivalent adjustment.......................... 1,328 1,044 4,004 3,492
---------- ---------- ---------- ---------
Interest income - FTE.................................... 124,067 116,014 373,599 342,340
Interest expense......................................... 51,910 50,897 159,249 151,880
---------- ---------- ---------- ---------
Net interest income - FTE $ 72,157 $ 65,117 $ 214,350 $ 190,460
========== ========== ========== =========
Yield on earning assets - FTE............................ 8.21% 8.10% 8.21% 8.11%
Cost of interest bearing liabilities ................... 4.34% 4.34% 4.35% 4.39%
Net interest spread - FTE................................ 3.87% 3.76% 3.86% 3.72%
Net interest margin - FTE................................ 4.77% 4.55% 4.71% 4.51%
12
The following schedule details rate sensitive assets and liabilities at
September 30, 1997. 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.
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..........$ 199,771 $ -- $ -- $ -- $ -- $ -- $ 199,771
Trading account securities...... 220 -- -- -- -- -- 220
Taxable investment securities... 210,782 140,354 178,080 177,456 573,601 42,733 1,323,006
Tax-exempt investment securities 1,310 6,266 9,641 11,684 102,495 92,061 223,457
Loans and leases................ 928,031 287,278 442,858 719,047 1,460,826 355,716 4,193,755
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total earning assets............ 1,340,114 433,898 630,579 908,188 2,136,922 490,510 5,940,209
Interest bearing liabilities:
Savings and NOW accounts........ 1,068,129 -- -- -- -- -- 1,068,129
Money market accounts........... 798,067 -- -- -- -- -- 798,067
Other time deposits............. 373,412 392,617 694,909 680,379 488,862 9,853 2,640,031
Short-term borrowings........... 197,810 -- -- -- -- -- 197,810
Long-term debt.................. 1 7 5,104 5,112
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total interest bearing
liabilities.................... 2,437,418 392,617 694,909 680,380 488,869 14,957 4,709,149
Interest rate
sensitivity gap................(1,097,304) 41,281 (64,330) 227,807 1,648,053 475,553
Cumulative interest rate
sensitivity gap................(1,097,304)(1,056,023)(1,120,353) (892,546) 755,507 1,231,060
Cumulative rate sensitive assets
to rate sensitive liabilities.. 55.0% 62.7% 68.2% 78.8% 116.1% 126.1%
Cumulative gap as a percentage
of earning assets.............. (18.5%) (17.8%) (18.9%) (15.0%) 12.7% 20.7%
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. 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 at the
six-month and 1-year gap positions, 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 mortgage servicing, trust services,
service charges on deposit accounts, and other service charges and fees. For
the first nine months of 1997, non-interest income totaled $82.4 million
compared to $82.0 million for the first nine months of 1996. During late 1995
and early 1996, the Company's mortgage subsidiary made several large loan
servicing rights acquisitions which brought the company's total servicing
portfolio at September 30, 1996, to $7.4 billion. This compares to a $6.6
billion total servicing portfolio at September 30, 1997, resulting in a
decrease in fee income from mortgage servicing activities. Excluding the
other real estate and investment securities gains and losses, the effect of
lower fees from mortgage servicing activities, non-recurring gains on the sale
of assets, and the acquisitions of W.B.T. Holding Company ("WBT") and City
National Bank ("CNB"), which were not restated for 1996, non-interest income
increased $3.5 million, or 6.7%. The primary contributors to this increase
were service charges and fee income due to growth in the Company's deposit
base. The following table summarizes non-interest income for the third
quarter and first nine months of 1997 and 1996.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) ------------------------------------ -----------------------------------
1997 1996 % Change 1997 1996 % Change
---------- ---------- ----------- ---------- ---------- ----------
Trust department income.......... $ 3,752 $ 3,033 23.71% $ 10,182 $ 9,293 9.57%
Mortgage servicing fee income.... 8,978 10,039 (10.57) 27,653 32,252 (14.26)
Broker-dealer operations income.. 1,556 1,037 50.05 3,870 2,945 31.41
Service charges on deposits...... 8,206 7,637 7.45 24,661 21,902 12.60
Other service charges and fees... 3,978 3,530 12.69 12,049 10,329 16.65
Investment securities gains
(losses), net.................. (119) (76) 56.58 (121) 14 (964.29)
Other real estate gains
(losses), net.................. (824) (197) 318.27 (1,698) (563) 201.60
Other income..................... 2,159 2,087 3.45 5,845 5,871 (0.44)
---------- ---------- ---------- ----------
Total non-interest income........ 27,686 27,090 2.20% $ 82,441 $ 82,043 0.49%
========== ========== ========== ==========
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
1997 and future years.
14
Non-interest expenses were $180.3 million for the first nine months of
1997 compared to $170.9 million for the first nine months of 1996. In the
first nine months of 1997, the Company recorded $9.5 million in non-recurring
expenses of which about $7.5 million, or $0.13 per share after taxes, was
recorded during the third quarter. These non-recurring expenses consisted of
merger costs, an accrual for a dispute which arose with one of the mortgage
subsidiary's investors, and a reserve for a lawsuit settlement at one of the
Company's banking subsidiaries. In the first nine months of 1996, the Company
recorded $3.6 million in non-recurring expenses related to legal matters.
Excluding the effect of the non-recurring expense items, the WBT and CNB
acquisitions, and the expenses associated with intangible amortization, non-
interest expense decreased by 0.5%. Additionally, a change in the estimated
life of mortgage servicing rights resulted in lower amortization expense.
First Commercial Corporation, like most owners of computer software, will
be required to modify significant portions of its software so that it will
function properly in the years 2000 and beyond. Preliminary estimates of the
total costs to be incurred prior to the year 2000 range from $7 million to $10
million. Maintenance or modification costs will be expensed as incurred,
while the costs of new software will be capitalized and amortized over the
software's useful life. The financial impact to the Company has not been and
is not anticipated to be material to its financial position or results of
operations in any given year.
The following table summarizes non-interest expenses for the third quarter
and first nine months of 1997 and 1996.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) ------------------------------------ -----------------------------------
1997 1996 % Change 1997 1996 % Change
---------- ---------- ----------- ---------- ---------- ----------
Salaries, wages and
employee benefits.............. $ 27,127 $ 26,421 2.67% $ 83,498 $ 79,624 4.87%
Net occupancy.................... 3,832 3,757 2.00 11,705 10,781 8.57
Equipment........................ 4,138 3,754 10.23 12,038 10,837 11.08
FDIC Insurance................... 258 609 (57.64) 262 1,159 (77.39)
Amortization of mortgage servicing
rights......................... 2,725 4,958 (45.04) 11,066 15,122 (26.82)
Other expenses................... 25,791 17,393 48.28 61,762 53,419 15.62
---------- ---------- ---------- ----------
Total non-interest expenses...... $ 63,871 $ 56,892 12.27% $ 180,331 $ 170,942 5.49%
========== ========== ========== ==========
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 income on a tax-equivalent
basis and non-interest income, excluding securities gains and losses. The
Company's ratio decreased from 54.69% for the first nine months of 1996 to
52.68% in the first nine months of 1997. The Company, in calculating its
15
efficiency ratio has excluded the effect of the non-recurring expenses,
mentioned previously, as well as the amortization of intangible assets. The
decrease in the efficiency ratio shows the Company's commitment to controlling
non-interest expenses while increasing revenues. The 1996 efficiency ratio
reached the Company's long-term goal of 57%. Management set a new efficiency
ratio goal of 54%, which was achieved in the first quarter of 1997. This goal
will be re-evaluated continuously as the financial services industry changes.
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 35.8% for the first nine months of 1997 and 34.9% for
the first nine months of 1996.
Loan and Lease Portfolio
At September 30, 1997, the Company's loan and lease portfolio, net of
unearned income, totaled $4.2 billion, as compared to a $4.0 billion loan
portfolio at December 31, 1996. The Company has continued its policy of
conservative lending thereby avoiding 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.
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 September 30, 1997, the allowance for possible loan and
lease losses equaled $82.0 million or 1.96% of total loans and leases.
Comparatively, the allowance for possible loan and lease losses amounted to
$62.5 million or 1.55% of total loans and leases at December 31, 1996. The
provision for possible loan and lease losses amounted to $24.9 million in the
first nine months of 1997 as compared to $6.6 million in the first nine months
of 1996.
Of the $24.9 million provision recorded during the first nine months of
1997, a special provision of $17 million, or $0.30 per share after taxes, was
recorded in the third quarter. This increase to the allowance for possible
loan and lease losses was prompted by regulators' cautions to the financial
services industry regarding reserve levels, and the Company's decreasing non-
performing loan coverage ratios caused by the substantial acquisition activity
during 1997.
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 seven years. At
September 30, 1997, the Company's ratio was 196.27%. This means that for
16
every dollar of non-performing loans (impaired loans, other non-accrual loans,
loans 90 days or more past due, and renegotiated loans), $1.96 has been set
aside in the Company's reserves to cover possible losses. The ratio at
December 31, 1996, was 227.94%. 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 226.27% at September 30, 1997, compared to 271.39% at December
31, 1996.
The increase in non-performing loans was primarily due to the first
quarter acquisition of WBT and the second quarter acquisition of CNB, as 1996
data was not restated to include these mergers. 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 Nine Months
Ended September 30, For the Years Ended December 31,
----------------------- --------------------------------------------
1997 1996 1995 1994 1993 1992
----------------------- -------- -------- -------- -------- --------
Net loan and lease losses sustained
to average loans and leases 0.26% 0.18% 0.07% 0.04% 0.14% 0.48%
Allowance for possible loan and lease
losses to total loans and leases 1.96% 1.55% 1.46% 1.62% 2.01% 2.05%
Non-performing loans to total
loans and leases 1.00% 0.68% 0.47% 0.47% 0.63% 0.81%
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
23% 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 47 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. 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.
17
Lower ratios in these two measures correlate to higher liquidity. As can
be seen from the accompanying table, 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, a relatively sound deposit base, along with low debt level and common
and preferred stock availability, provide the company with several
alternatives for future financing and long-term liquidity needs.
For the Nine Months
Ended September 30, For the Years Ended December 31,
-------------------- ----------------------------------
1997 1996 1995 1994
-------------------- ---------- ---------- --------
Average loans and leases to average deposits....... 73.26% 71.95% 70.61% 62.77%
Average loans and leases to average core deposits.. 82.41% 81.55% 79.97% 70.33%
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 $25.3 million in the first nine months of
1997. During the fourth quarter of 1996, average short-term investments
exceeded average short-term borrowings by $3.1 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
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
in pursuit of above average return opportunities. A position of strength is
important to the Company's customers, investors and regulators.
At September 30, 1997, the Company's equity to asset ratio was 9.46%
compared to 8.43% at December 31, 1996. At September 30, 1997, the Company's
leverage and tier 1 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.
18
Regulatory Sep. 30, June 30, March 31, Dec. 31, Sep. 30,
Minimum 1997 1997 1997 1996 1996
----------- ------------ ------------ ------------ ------------ ----------
Leverage ratio................... 3.00% 8.91% 8.39% 8.13% 7.99% 7.97%
Tier 1 risk-based capital ratio.. 4.00% 12.81% 11.96% 11.75% 11.60% 11.42%
Total risk-based capital ratio... 8.00% 13.67% 12.83% 12.63% 12.46% 12.24%
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 35% and 40% of
earnings in cash dividends to its stockholders while maintaining adequate
capital to support growth. In October 1996, the Company increased its
dividend rate for the tenth consecutive year, bringing the annual dividend
rate to $.96 per share.
The dividend payout ratios for the past three years were 35.34% in 1996,
35.77% in 1995, and 33.97% in 1994. The Company's Board of Directors reviews
the cash dividend policy and payout levels annually in the fourth quarter.
Forward-Looking Statements
This report contains forward-looking statements and reflects management's
current views and estimates of future economic circumstances, industry
conditions, company performance and financial results. These forward-looking
statements are subject to a number of factors and uncertainties which could
cause the Company's actual results and experience to differ from the
anticipated results and expectations expressed in such forward-looking
statements. Numerous factors could alter these forward-looking statements
including, but not limited to, (1) general worsening of economic conditions,
(2) lack of capital deployment opportunities, (3) inability to control non-
interest expense, and (4) lack of liquidity sources to support asset growth.
Specific reference is made to forward-looking statements contained in the
sections of this report entitled "Non-Interest Expense," "Provision and
Allowance for Possible Loan and Lease Losses," "Liquidity," and
"Capitalization."
19
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the third
quarter of 1997.
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: November 13, 1997
21
Index to Exhibits
Exhibit Number Exhibit
---------------- --------------------------------------------
27 Financial Data Schedule