UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 No. 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $3.00 PAR VALUE PER SHARE
(Title of Class)
PREFERRED SHARE PURCHASE RIGHTS
(Title of Class)
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 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant: $1,910,005,421 (based upon
the average closing bid and asked prices quoted on the Nasdaq National Market
on February 13, 1998.)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock:
Class Outstanding at February 13, 1998
-------------------------------------- --------------------------------
Common Stock $3.00 par value per share 37,593,323
TABLE OF CONTENTS
Item Page
---- ----
PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 ("PSLRA")........................................................ 1
1. Business.................................................. 1
General................................................. 1
Regulation and Supervision.............................. 3
Executive Officers...................................... 8
Financial Review........................................ 9
2. Properties................................................ 74
3. Legal Proceedings......................................... 74
4. Submission of Matters to a Vote of Security Holders....... 75
PART II
5. Market for Registrant's Common Stock and Related
Stockholder Matters....................................... 75
6. Selected Financial Data................................... 75
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 75
7A. Quantitative and Qualitative Disclosures about Market Rate 76
8. Financial Statements and Supplementary Data............... 76
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 76
PART III
10. Directors and Executive Officers of the Registrant........ 77
11. Executive Compensation.................................... 81
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 87
13. Certain Relationships and Related Transactions............ 88
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................... 88
Signatures ........................................................... 90
1
PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 ("PSLRA")
Certain forward-looking information contained in this report is being
provided in reliance upon the "safe harbor" provisions of the PSLRA as set
forth in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such information
includes, without limitation, discussions as to estimates, expectations,
beliefs, plans, strategies and objectives concerning the Company's future
financial and operating performance. Such forward-looking information is
subject to assumptions and beliefs based on current information known to the
Company and factors that could yield actual results differing materially from
those anticipated. Such factors include, without limitation, changes in
general economic conditions, capital deployment opportunities, ability to
control non-interest expense, and availability of liquidity sources to support
asset growth.
Item 1. BUSINESS
--------
GENERAL
First Commercial Corporation ("Registrant" or the "Company") was created
through a merger of Commercial Bankstock, Inc., and First National Bancshares,
Inc., on July 31, 1983. The Company is the largest multi-bank holding company
headquartered in Arkansas with its corporate offices located in the capital
city of Little Rock. The Company offers a broad range of bank and bank-
related services through its bank and nonbank subsidiaries and affiliates.
The Company provides service to its subsidiary banks in such areas as
audit, loan review, credit administration, compliance, data processing,
investment portfolio management, asset and liability management, human
resources and training.
Commercial Banking Subsidiaries
- -------------------------------
The Company's principal source of income is derived from twenty-eight
commercial banking institutions. The Company owns seventeen institutions in
the state of Arkansas, seven institutions in the state of Texas, one
institution in the state of Tennessee, one institution in the state of
Louisiana, and in a joint venture with Arvest Bank Group, Inc., of
Bentonville, Arkansas, the Company owns 50% of two institutions in Oklahoma.
All of the Company's bank subsidiaries offer a broad range of traditional
commercial and consumer banking services to the markets and communities which
they serve. Certain subsidiary banks additionally offer trust and fiduciary
services and brokerage services.
Nonbank Subsidiaries and Affiliates
- -----------------------------------
First Commercial Mortgage Company offers mortgage financing throughout
Arkansas and in Memphis, Tennessee, East Texas, Oklahoma and Mississippi, and
conducts mortgage servicing on a nationwide basis. First Commercial Capital
Management is an investment advisor and money manager for individuals,
employee benefit plans, endowments, foundations and other funds. First
Commercial Trust Company, N.A., provides a full range of personal trust,
employee benefit, and corporate and public securities administrative services.
First Commercial Investments, Inc., is a full service investment company which
2
buys and sells stocks, bonds, U.S. Government securities, fixed and variable
annuities, and municipal securities on behalf of its clients. Financial Fleet
Services, Inc., is an equipment leasing company located in Little Rock,
Arkansas, which serves customers throughout the United States. Commercial
Capital Funding, Inc., is a factoring company headquartered in Dallas, Texas,
which specializes in accounts receivable financing in all affiliate markets.
The income and other operating results of the nonbank subsidiaries and
affiliates as compared to the consolidated results of the Company are not
substantial enough to require financial and other information concerning
industry segments to be included in this Annual Report on Form 10-K.
Recent Developments
- -------------------
On February 8, 1998, the Company and Regions Financial Corporation
("Regions") entered into an Agreement and Plan of Merger (the "Agreement"),
pursuant to which the Company will be merged with and into Regions, with
Regions as the surviving entity (the "Merger"). The Boards of Directors of the
Company and Regions approved the Agreement and the transactions contemplated
thereby at separate meetings held on February 8, 1998. A joint press release
was issued by the Company and Regions on February 9, 1998 regarding the
proposed transactions.
Under the terms of the Agreement, Regions will exchange 1.7 shares of its
common stock for each share of the Company's common stock. The Merger is
expected to be a tax-free reorganization for federal income tax purposes and
accounted for as a pooling of interests. It is expected that the Merger will
be consummated during the third quarter of 1998, pending approval by the
shareholders of the Company and Regions, regulatory approval and other
customary conditions of closing.
The Agreement contains provisions granting the Company the right to
terminate the Agreement which are intended, in general, to protect the
Company's shareholders against an excessive decline in the value of Regions'
common stock. The termination right is dependent upon the average closing
price of Regions' common stock being less than 80% of a reference price and
less than 85% of a weighted index of the stock prices of a group of seventeen
bank holding companies, all as described more specifically in the Agreement.
In the event the Company gives notice of its intention to terminate the
Agreement based on such provisions, Regions has the right to elect to adjust
the exchange ratio in accordance with the terms of the Agreement and thereby
would extinguish the Company's right to terminate.
In connection with the Agreement, the Company entered into a Stock Option
Agreement pursuant to which it granted to Regions an option to purchase up to
7,480,450 shares of the Company's common stock, representing 19.9% of the
outstanding shares of the Company's common stock without giving effect to the
exercise of the option. The option is exercisable at a purchase price of
$59.00 per share, upon certain terms and in accordance with certain conditions.
Under the terms of the Agreement, the Total Profit and the Notional Total
Profit, as each term is defined in the Agreement, that Regions or any other
holder may realize as a result of exercising the option may not exceed
$130,000,000.
On March 25, 1998, the Company acquired all of the outstanding shares of
Kemmons Wilson, Inc., in exchange for 1,115,850 shares of the Company's common
stock. Kemmons Wilson, Inc., which name the Company has changed to KWB
Holdings, Inc., is the parent company of KW Bancshares, Inc., which owns
3
Federal Savings Bank headquartered in Rogers, Arkansas. Federal Savings Bank
has assets of $421 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 Fort Smith
market. This transaction will be accounted for as a purchase.
Foreign Operations
- ------------------
Neither the Company nor any of its subsidiary banks conducts foreign
operations. Balances maintained in foreign countries amounted to $204,034 at
December 31, 1997. There are no loans to foreign corporations, banks,
financial institutions, governments, consumers or businesses, or involving
real estate in a foreign country, nor does the Company hold any deposits from
banks in foreign countries, or from foreign governments, official
institutions, central banks or international institutions.
Competition
- -----------
The activities engaged in by the Company and its subsidiaries are
intensely competitive, and the Company competes for business with other
financial services organizations, including other commercial banks, savings
and loan associations, credit unions, brokerage firms, mortgage companies,
leasing companies, finance companies, and a variety of financial services and
advisory companies.
The Company's subsidiary banks actively compete with other banks and
financial institutions in their efforts to obtain deposits and make loans.
The principal areas of competition in the commercial banking industry are in
the scope and type of services offered and in interest rates paid on interest-
bearing and time deposits and charged on loans. Competition with other
financial institutions is expected to increase, especially with the passage of
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which
authorizes interstate banking and is discussed under the Regulation and
Supervision section of this report in greater detail.
According to information obtained from the Arkansas Bankers Association,
during 1997 there were approximately 27 multi-bank holding companies and
approximately 95 single-bank holding companies in Arkansas. As of December
31, 1997, the Company was the largest multi-bank holding company headquartered
in Arkansas with $6.9 billion in total assets and $5.9 billion in total
deposits.
Employees
- ---------
As of December 31, 1997, the Company and its subsidiaries and affiliates
had a total of 3,322 full-time equivalent employees.
REGULATION AND SUPERVISION
Regulation and Supervision of Bank Holding Companies:
- -----------------------------------------------------
The following summaries of statutes and regulations affecting bank holding
companies do not purport to be complete. The summaries are qualified in
their entirety by reference to the provisions of the statutes and regulations
summarized.
4
Bank Holding Company Act of 1956, as Amended:
- ---------------------------------------------
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Act"), and is registered as such
with the Board of Governors of the Federal Reserve System (the "Board of
Governors"). As a bank holding company, the Company is required to file with
the Board of Governors an annual report and such additional information as the
Board of Governors may require pursuant to the Act. The Board of Governors
may also make examinations of the Company and each of its subsidiaries. The
Act requires each bank holding company to obtain prior approval of the Board
of Governors before it may acquire substantially all of the assets of any
bank, or ownership or control of any voting shares of any bank, if, after such
acquisition, it would own or control directly or indirectly, more than 5% of
the voting shares of such bank.
With certain exceptions, the Act further restricts non-banking
acquisitions by registered bank holding companies to shares of companies whose
activities the Board of Governors deems to be so closely related to banking,
or managing or controlling banks, as to be proper incident thereto. In making
such determinations, the Board of Governors is required to consider whether
the performance of such activities by an affiliate can reasonably be expected
to produce benefits to the public, such as increased competition or gains in
efficiencies against the risk of possible adverse effects, such as undue
concentration of resources, decreases in or unfair competition, conflicts of
interest, or unsound banking practices.
The Board of Governors has determined by regulation that certain
activities are permissible activities for bank holding companies and their
affiliates, including making and servicing loans, operating an industrial loan
institution, performing certain fiduciary functions, leasing real estate and
personal property, making real estate and personal property appraisals,
providing certain management consulting, investment and financial advice,
acting as a futures commission merchant, performing certain data processing
operations, acting as an insurance agent for certain types of insurance and
underwriting credit life and disability insurance related to credit
transactions within the particular holding company system, assisting in tax
preparation and planning, providing check guaranty services, operating a
collection agency, operating a credit bureau, underwriting and dealing in
government obligations and money market instruments, providing foreign
exchange advisory services, arranging commercial real estate equity financing,
promoting community development, handling money orders, savings bonds and
travelers checks, providing securities brokerage, providing consumer financial
counseling, operating savings associations, and providing courier services.
Under Section 106 of the 1970 amendments to the Act and regulations of the
Board of Governors, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extensions
of credit, or lease or sale of any property or the furnishing of such
services.
Risk-Based Capital Guidelines:
- ------------------------------
In January 1989, the Board of Governors issued final guidelines to
implement what is commonly referred to as risk-based capital adequacy, whereby
banking organizations with less risky asset bases will be allowed to maintain
lower capital amounts to support these assets than those organizations having
high-risk assets. The regulations currently require a total risk-based
5
capital ratio of 8%. The Company's December 31, 1997 risk-based capital ratio
was 13.6%.
Federal Reserve Act:
- --------------------
Under the Federal Reserve Act the Board of Governors has cease and desist
powers over parent holding companies and nonbanking subsidiaries when actions
of such holding companies and nonbanking subsidiaries would constitute a
serious threat to the safety, soundness or stability of a subsidiary bank.
The Board of Governors also has the authority to regulate debt obligations,
other than commercial paper, issued by bank holding companies.
The Company is an "affiliate" of its subsidiary banking institutions and
will be an "affiliate" of any other acquired banks within the meaning of the
Federal Reserve Act. The Federal Reserve Act imposes certain restrictions on
(i) loans by a subsidiary bank to its bank holding company or to any other
affiliated companies, (ii) investments by a subsidiary bank in the stock or
other securities of its bank holding company, and (iii) the use of stock or
securities of the bank holding company as collateral for loans by a subsidiary
bank to any borrower.
The Company is also subject to certain restrictions with respect to
engaging in the business of issuing, floatation, underwriting, public sale,
and distribution of securities.
Arkansas Regulation:
- --------------------
In addition to regulation by the Board of Governors, bank holding
companies in Arkansas are subject to regulation by the State Bank
Commissioner. Accordingly, regular examinations are performed and the filing
of certain reports is required.
In 1983, the Arkansas Legislature passed legislation specifically
authorizing the ownership of more than one bank by a bank holding company,
subject to certain restrictions and conditions. Generally, such legislation
permits multi-bank holding companies if: (i) all banks controlled by the bank
holding company were chartered pursuant to an application filed before
December 31, 1982, or were in existence for ten years, and (ii) all banks
owned or controlled by the bank holding company have, in the aggregate, 10% or
less of the total deposits held by all state and national banks having their
principal offices within the state of Arkansas. The 10% restriction was
modified to 12% effective June 30, 1984, and to 15% effective December 31,
1984. In 1993, the Arkansas Legislature increased the deposit limit to 25% of
the total deposits held by all state and national banks having their principal
offices within the state of Arkansas.
In 1988, the Arkansas Legislature enacted legislation making significant
changes to Arkansas' interstate banking and branching laws. As of January 1,
1989, bank acquisitions between banks in Arkansas and banks in states within
the Southern Regional Compact, which had reciprocal banking laws, were
permitted. Arkansas banks acquired under the 1988 law must have been in
existence for at least ten years. Under such legislation, branches could be
located anywhere within the county of a bank's principal banking office.
After December 31, 1993, branches could be established in counties contiguous
to the county in which the principal office was located. After December 31,
1998, branches may be located anywhere in the state of Arkansas. A
subparagraph to Arkansas' Thrift Banking Legislation was enacted to apply the
same branching restrictions to Arkansas thrifts.
6
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") was enacted as part of the federal banking
laws. The interstate banking provisions of the Riegle-Neal Act repealed the
Douglas Amendment to the Bank Holding Company Act of 1956 and permits after
September 19, 1995, the acquisition of banks in any state by bank holding
companies located in other states. The interstate branching provisions of the
Riegle-Neal Act, which became effective on June 1, 1997, permit a bank to
acquire and operate branches in states other than the bank's home state,
subject to certain continued state regulation.
In response to the Riegle-Neal Act, Arkansas has adopted the Arkansas
Interstate Banking and Branching Act, which became effective on May 31, 1997.
The Arkansas Interstate Banking and Branching Act prohibits a bank holding
company from directly or indirectly owning or controlling more than one bank
subsidiary, if any such bank subsidiary having its main office in the state of
Arkansas has a de novo charter. A bank shall be considered to have a de novo
charter if the bank has been in existence for less than five years; provided,
however, a bank resulting from the conversion of a savings and loan
association to a bank, or from the conversion of a state bank to a national
bank, or from the conversion of a national bank to a state bank shall be
deemed to have been in existence, for the purpose of determining whether it
has a de novo charter, from the date the converting institution came into
existence. In addition, the Arkansas Interstate Banking and Branching Act
prohibits a bank holding company from acquiring the stock or the assets of any
bank that has its main office or any branch office in the state of Arkansas,
if after giving effect to the acquisition of such stock or assets, the
acquiring bank holding company would own or control, directly or indirectly,
banks having in the aggregate more than 25% of the total bank deposits within
the state of Arkansas.
The Arkansas Interstate Banking and Branching Act authorizes interstate
branching following an interstate bank merger and authorizes Arkansas banks
and out-of-state banks to establish customer-bank communication terminals
anywhere within the state of Arkansas. However, the Act prohibits an out-of-
state bank from coming into Arkansas by establishing a new branch or by
acquiring an existing branch in Arkansas from another financial institution as
its first branch in the state of Arkansas. The Act retains the provisions of
the 1988 Act discussed above, which allows banks to establish branch offices
in counties contiguous to the county in which the principal office of the bank
is located and which effectively defers state-wide branching until after
December 31, 1998.
Arkansas Usury Law:
- -------------------
The Arkansas Usury Law, which applies to all of the Company's Arkansas
affiliates, generally limits interest rates on all credit classifications to a
rate equal to the Federal Reserve Bank of St. Louis' discount rate plus 5%.
The interest rate on consumer loans is subject to the additional restriction
that, in any event, it may not exceed 17%. Loans secured by first liens on
residential real property are not subject to any interest rate limitation.
Texas Regulation:
- -----------------
The Texas Finance Code permits an "out-of-state" bank holding company to
acquire control of a bank located in the state of Texas, if such bank received
a charter and was continually operated for at least five years prior to the
acquisition, and subjects the "out-of-state" bank holding company to the
supervision and regulation by the Banking Department of Texas.
7
Under the Texas Finance Code, a bank holding company cannot control more
than 20% of the total deposits of all state and national banks domiciled in
the state of Texas.
Government Monetary Policy and Economic Controls:
- -------------------------------------------------
In addition to the effect of general economic conditions, the earnings of
the Company's subsidiary banks are affected by the fiscal and monetary
policies of the Federal Reserve System, which attempts to regulate the
national money supply so as to mitigate recessionary and inflationary
pressures. The techniques used by the Federal Reserve System include setting
the reserve requirements for banks and establishing the discount rate on
banks' borrowings. The Federal Reserve System also conducts open market
operations in United States government securities.
The policies of the Federal Reserve System have a direct effect on the
amount of bank loans and deposits and the interest rates charged and paid
thereon. The impact upon the future business and earnings of the subsidiary
banks of current economic problems and policies of the Federal Reserve System,
and other regulatory authorities designed to deal with these problems cannot
be accurately predicted; however, such economic problems and policies can
materially affect the revenues and net income of commercial banks.
Other Regulatory Developments:
- ------------------------------
In December, 1991, the FDIC Improvement Act of 1991 ("FDICIA") was
enacted. FDICIA contains numerous provisions increasing regulatory review of
depository institutions' operations. The increased regulations include annual
examinations by the depository institution's primary regulator and mandatory
independent audits for all depository institutions with assets of $500 million
or more. In addition, the institutions must establish independent audit
committees composed solely of outside directors.
Effective December 16, 1992, final rules regarding FDICIA's establishment of
five capital levels, ranging from "well capitalized" to "critically
undercapitalized" were adopted. If an institution's capital level falls below
"well capitalized," it becomes subject to increasing regulatory oversight and
restrictions on banking activities. These regulations and restrictions
increase at each lower capital level. In addition, FDIC insurance premiums
are now, in part, based upon an institution's capital level. A financial
institution is considered "well capitalized" if it is under no regulatory
order or action and its leverage ratio is at least 5% and its Tier I and total
risk-based capital ratios are at least 6% and 10%, respectively. The Company
is considered "well capitalized," as defined, with a leverage ratio of 9.01%,
a Tier I capital ratio of 12.74% and a total risk-based capital ratio of
13.60% at December 31, 1997.
Regulation and Supervision of Subsidiary Banks:
- -----------------------------------------------
The national bank subsidiaries of the Company are subject to regulation
and supervision by the Office of the Comptroller of the Currency. The state
bank subsidiaries of the Company that are located in the state of Arkansas are
subject to regulation and supervision, including regular bank examinations, by
the Arkansas State Bank Department. The state bank subsidiary of the Company
that is located in the state of Louisiana is subject to regulation and
supervision, including regular bank examinations, by the Louisiana Office of
Financial Institutions. The Company and its subsidiaries are also subject to
8
examinations and regulation by the Federal Reserve System under the provision
of the Bank Holding Company Act of 1956, as amended.
All of the Company's subsidiary banks are members of the FDIC, which
currently insures the deposits of each member bank up to a maximum of $100,000
per deposit relationship. For this protection, each bank pays a semi-annual
statutory assessment and is subject to the rules and regulations of the FDIC
and to examinations by the FDIC.
EXECUTIVE OFFICERS OF THE COMPANY
As of December 31, 1997, the principal executive officers of the Company
were as follows:
Jack Fleischauer, Jr., 49, serves as Chairman of the Board, President and
Chief Executive Officer of First Commercial Bank, N.A., Little Rock, Arkansas.
Mr. Fleischauer assumed the President and Chief Executive Officer positions in
May 1994 and the Chairman of the Board position in June 1996. Prior to
joining the Company in 1994, Mr. Fleischauer served as President and Chief
Operating Officer of Worthen National Bank, Little Rock, Arkansas, lead bank
for Worthen Banking Corporation, which position he assumed in 1991. Mr.
Fleischauer joined the Company with over twenty years of banking experience.
Barnett Grace, 53, serves as Chairman of the Board, President and Chief
Executive Officer of the Company. Mr. Grace has been employed by the Company
and/or its subsidiaries since 1972. Mr. Grace assumed the position of
President of the Company in 1988 and the positions of Chairman of the Board
and Chief Executive Officer of the Company in 1990.
Edwin P. Henry, 60, serves as Vice Chairman of the Company's Board of
Directors, and Chairman of the Affiliate Bank Management Group. Additionally,
he serves as a director on several boards of directors of affiliate banks.
Mr. Henry has been associated with the Company and/or its subsidiaries since
1962.
Wayne Hartsfield, 63, serves as Executive Officer of the Company, a
position he assumed in July 1997 when First National Bank of Searcy was
acquired by the Company. He has been the President and CEO of First National
Bank of Searcy since 1972. Mr. Hartsfield serves on the boards of several
affiliate banks of the Company. He has over 37 years of banking experience.
J. French Hill, 41, serves as Executive Officer of the Company. Mr.
Hill's areas of responsibility include Trust, Investment Banking and Bank
Brokerage. Prior to joining the Company in March 1993, Mr. Hill served as a
U.S. Treasury official and Special Assistant to President George Bush.
Clarence E. Hoover, 55, serves as Executive Officer of Operations and
Management Information Services. Prior to joining the Company in December
1991, Mr. Hoover was employed with banking institutions in Virginia and
Tennessee and possessed over thirty years of banking experience.
Douglas Jackson, 60, serves as Director of Regional Lending for the
Company, which position he assumed in 1996. Mr. Jackson previously served as
Senior Credit Officer of State First Financial Corporation, which was merged
into the Company in July 1996. Mr. Jackson has been associated with the
Company and/or its subsidiaries since 1987.
9
Neil S. West, 52, serves as Executive Officer of the Company, a position
he assumed in August 1995, with responsibility for the Company's Credit
Administration Division and oversight responsibility for ten of the Company's
banking institutions. Mr. West also serves as Chairman of the Board and Chief
Executive Officer of Tyler Bank and Trust Company, N.A., Tyler, Texas, a
position he has held since February 1993. Mr. West previously served as
President and Chief Executive Officer of State First Financial Corporation, a
position he assumed in May 1994. State First Financial Corporation was merged
into the Company in July 1996. Mr. West has been associated with the Company
and/or its subsidiaries since 1987, when he joined the Company with over
fifteen years of banking experience.
J. Lynn Wright, 35, serves as Chief Financial Officer of the Company. Mr.
Wright joined the Company in 1984 and served in various capacities with the
Company's Finance Division before assuming his current position in July 1992.
FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Performance Summary
- -----------------------------
The Company reported record earnings for 1997 of $100.1 million, up 27%
from $78.6 million in 1996. Net income in 1995 was $65.2 million. Basic
earnings per share, which excludes the dilutive effect of stock options, was
$2.67 for 1997, compared to $2.20 and $1.91 for 1996 and 1995, respectively.
Diluted earnings per share for 1997 increased 21% to $2.64 from $2.18 for
1996.
The following discussion provides a comparison of profitability, balance
sheet and asset quality for the past three years. The consolidated financial
statements and accompanying notes should be reviewed carefully to provide a
complete analysis of the Company's financial condition and results of
operations. All share and per share data in this report have been
retroactively adjusted for the following stock dividends: seven percent
declared November 1995, five percent declared October 1996, and five percent
declared November 1997. During 1997 the Company completed several
acquisitions, each of which is discussed below. These transactions were
accounted for as poolings of interests and the results of all are included in
the consolidated financial statements for 1997. Additionally, all prior
period financial information has been restated to include the Southwest
Bancshares, Inc., and First Central Corporation acquisitions. These factors
should be considered when making comparisons to 1996 and 1995.
Profitability
- -------------
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. Return on
average assets for 1997 was 1.48% compared to 1.25% in 1996 and 1.19% in 1995.
10
The second profitability ratio is return on average common stockholders'
equity. This ratio reflects how effectively a company has been able to
generate earnings on the capital invested by its stockholders. The Company's
return on average common stockholders' equity was 16.15% in 1997, 14.71% in
1996, and 14.67% in 1995. The improvement is indicative of the Company's
successful deployment of its capital, combined with strong earnings growth.
The primary factors contributing to increased earnings during the past
three years have been a strong interest margin and consistent increases in
non-interest income accompanied by careful monitoring of non-interest
expenses, in order to control and minimize these costs.
Acquisitions
- ------------
The Company's continued growth in earnings, asset and market share during
1997 resulted from both internal growth and acquisition activity. The Company
has experienced numerous acquisitions during the past three years, which are
highlighted below.
On November 30, 1995, the Company acquired all of the outstanding common
stock of FDH Bancshares, Inc., in exchange for 1,487,510 Company common
shares. FDH Bancshares, Inc., had approximately $375 million in assets, $206
million in loans, and $330 million in deposits. This transaction was
accounted for as a purchase, and accordingly, the results of operations were
consolidated with those of the Company from the date of acquisition. The
assets and liabilities of FDH Bancshares, Inc., were adjusted to fair value at
the purchase date, resulting in an excess cost over fair value of $14.7
million.
On November 30, 1995, the Company acquired all of the outstanding common
stock of West-Ark Bancshares, Inc., Clarksville, Arkansas, in exchange for
759,739 Company common shares. This transaction was accounted for as a
pooling of interests. The results of West-Ark Bancshares, Inc., are included
in the consolidated financial statements for 1995; however, prior period
financial data has not been restated due to immateriality. West-Ark
Bancshares, Inc., had approximately $159 million in assets, $107 million in
loans, and $146 million in deposits.
On November 23, 1996, the Company acquired all of the outstanding common
stock of Security National Bank, Nacogdoches, Texas, in exchange for 265,812
Company common shares. This transaction was accounted for as a pooling of
interests. The results of Security National Bank are included in the
consolidated financial statements for 1996; however, prior period financial
data has not been restated due to immateriality. Security National Bank,
which was merged into an existing affiliate of the Company, Stone Fort
National Bank of Nacogdoches, Texas, had approximately $35 million in assets,
$16 million in loans, and $31 million in deposits.
On January 31, 1997 through a joint venture with Arvest Bank Group of
Bentonville, Arkansas, the Company purchased a 50% interest in Oklahoma
National Bank of Duncan, Oklahoma, which had assets of $60 million, loans of
$43 million, and deposits of $55 million.
11
On February 13, 1997, the Company acquired all of the outstanding common
stock of W.B.T. Holding Company, Memphis, Tennessee, in exchange for 1,430,050
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.
On April 17, 1997, the Company acquired all of the outstanding common
stock of City National Bank, Whitehouse, Texas, in exchange for 152,761 shares
of Company common stock. The transaction was accounted for as a pooling of
interests. The results of City National Bank are included in the 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.
On May 15, 1997, the Company acquired all of the outstanding common stock
of Southwest Bancshares, Inc., Jonesboro, Arkansas, in exchange for 3,582,865
shares of Company common stock. The transaction was accounted for as a
pooling of interests; therefore, 1997 and all prior period financial data 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.
On July 1, 1997, the Company acquired all of the outstanding common stock
of First Central Corporation, Searcy, Arkansas, in exchange for 1,732,461
Company common shares. This transaction was accounted for as a pooling of
interests; therefore, 1997 and all prior period financial data has 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.
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.
On October 31, 1997, the Company acquired all of the outstanding stock of
First Charter Bancshares, Inc. ("First Charter") in exchange for 277,439
Company common shares. This transaction was accounted for as a pooling of
interests. The results of First Charter are included in the consolidated
financial statements for 1997; however, prior period financial data has not
been restated due to immateriality. First Charter had assets of approximately
$71 million and a mortgage loan servicing portfolio of approximately $400
million. On November 21, 1997, Charter State Bank's Beebe branch merged with
First Commercial's Searcy affiliate, First National Bank of Searcy, and its
North Little Rock branch merged 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.
12
On March 25, 1998, the Company acquired all of the outstanding shares of
Kemmons Wilson, Inc., in exchange for 1,115,850 shares of the Company's common
stock. Kemmons Wilson, Inc., which name the Company has changed to KWB
Holdings, Inc., is the parent company of KW Bancshares, Inc., which owns
Federal Savings Bank headquartered in Rogers, Arkansas. Federal Savings Bank
has assets of $421 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 Fort Smith
market. This transaction will be accounted for as a purchase.
13
Six-Year Financial Summary
(Dollars In Thousands Except for Per Share Data) Five-Year
Compound
Annual
Growth
Years Ended December 31, Rate
---------------------------------------------------------------------- ----------
1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
Interest income............. $ 497,170 $ 456,002 $ 386,265 $ 301,908 $ 266,439 $ 256,466 14%
Interest expense............ 214,202 204,096 175,991 120,715 104,767 110,324 14
---------- ---------- ---------- ---------- ---------- ----------
Net interest income....... 282,968 251,906 210,274 181,193 161,672 146,142 14
Provision for possible loan
and lease losses........... 28,332 13,269 4,368 (2,021) 5,018 9,225 25
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for possible loan
and lease losses........... 254,636 238,637 205,906 183,214 156,654 136,917 13
Other income................ 114,802 110,550 79,238 67,523 61,430 52,938 17
Other expenses.............. 241,302 229,153 188,018 167,128 145,738 126,503 14
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes.. 128,136 120,034 97,126 83,609 72,346 63,352 15
Income tax provision........ 43,502 41,480 31,892 26,766 20,415 18,600 19
---------- ---------- ---------- ---------- ---------- ----------
Net income before extra-
ordinary items.............. 84,634 78,554 65,234 56,843 51,931 44,752
Extraordinary item,
net of income taxes......... 15,425 - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net income.................. $ 100,059 $ 78,554 $ 65,234 $ 56,843 $ 51,931 $ 44,752 17
========== ========== ========== ========== ========== ==========
Basic earnings per common
share...................... $ 2.67 $ 2.20 $ 1.91 $ 1.69 $ 1.51 $ 1.30 16
Diluted earnings per common
share........................ 2.64 2.18 1.89 1.68 1.49 1.29 16
Cash dividends per share.... 0.97 0.80 0.70 0.57 0.46 0.36 24
Year End Financial Position
Total loans and leases..... $4,317,631 $4,024,635 $3,855,388 $3,031,050 $2,529,219 $1,984,605 17%
Total assets............... 6,887,252 6,611,218 6,290,178 5,137,283 4,771,664 3,768,167 13
Total deposits............. 5,947,690 5,760,278 5,443,468 4,493,540 4,264,558 3,351,381 12
Long-term debt............. 5,103 28,751 25,737 22,438 28,758 26,287 (28)
Stockholders' equity....... 651,113 557,600 507,106 402,734 385,532 334,542 14
<FN>
NOTE: See previous discussion of acquisitions over last three years. Prior years have been restated for
certain pooling-of-interests business combinations.
</FN>
14
Net Interest Income
- -------------------
In this discussion, net interest income is presented on a fully tax-
equivalent basis. This permits comparability of data through recognition of
the tax savings realized on tax-exempt earnings. Net interest income on a
tax-equivalent basis was $288.4 million in 1997, versus $256.7 million in 1996
and $214.9 million in 1995. The $31.7 million increase in 1997 is due
principally to increased returns on earning assets combined with a decrease in
liability costs. There were general repricings of the securities and loan
portfolios: the average yield on the securities portfolio increased to 6.21%
in 1997 from 6.07% in 1996; and the average yield on the loan portfolio
increased to 9.05% from 9.04%. The $41.8 million increase in 1996 is due
principally to the 1995 fourth quarter acquisitions of FDH Bancshares, Inc.,
and West-Ark Bancshares, Inc. In addition, there were general repricings of
the securities and loan portfolios in excess of increases in liability costs:
the average yield on the securities portfolio increased to 6.07% in 1996 from
5.88% in 1995; and the average yield on the loan portfolio increased to 9.04%
in 1996 from 8.83% in 1995.
The Company's net interest spread increased to 3.82% in 1997 from 3.72% in
1996, while net interest margin increased to 4.69% in 1997 from 4.51% in 1996.
Net interest spread represents the difference between the rates earned on
assets and the rates paid on liabilities. Net interest margin measures the
net interest income earned as a percentage of earning assets.
Net interest spread and net interest margin increased in 1997 over 1996 as
a result of the securities and loan portfolio repricing combined with an 8.9%
growth in average loans and leases. The loan growth was due to internal
growth, 6.0%, and acquisitions, 2.9%. Net interest spread and net interest
margin increased in 1996 over 1995 for similar reasons.
The Arkansas usury law, which applies to all of the Company's Arkansas
affiliates, currently limits interest rates on all credit classifications,
except single-family mortgages, to the St. Louis Federal Reserve Bank's
discount rate plus 5%. There is a rate cap of the lesser of 17% or the
discount rate plus 5% on consumer credit under the current law.
Analysis of Net Interest Income (FTE = Fully Tax-Equivalent)
- ------------------------------------------------------------
(Dollars in Thousands) For the Years Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Interest income.......................... $ 497,170 $ 456,002 $ 386,265
Fully tax-equivalent adjustment.......... 5,397 4,760 4,627
---------- ---------- ----------
Interest income - FTE.................... 502,567 460,762 390,892
Interest expense......................... 214,202 204,096 175,991
---------- ---------- ----------
Net interest income - FTE................ $ 288,365 $ 256,666 $ 214,901
========== ========== ==========
Yield on earning assets - FTE............ 8.17% 8.10% 7.90%
Cost of interest bearing liabilities..... 4.35% 4.38% 4.29%
Net interest spread - FTE................ 3.82% 3.72% 3.61%
Net interest margin - FTE................ 4.69% 4.51% 4.34%
15
NOTE: Interest income on tax-exempt securities, loans and leases is
calculated on a tax-equivalent basis, using a federal marginal income tax rate
of 35%, and is reduced for non-deductible carrying interest. Loan balances
include non-accrual loans. See Note 1 of Notes to Consolidated Financial
Statements for a description of the income recognition policy.
Interest Rate Sensitivity Principal Amount Maturing in:
December 31, 1997 -------------------------------------------------------------------------------------------
(Dollars in thousands) Jan-Jun Jul-Dec There- Fair Value
1998 1998 1999 2000 2001 2002 after Total 12/31/97
---------- --------- --------- --------- -------- -------- --------- -------- ---------
Rate sensitive assets:
Fixed interest rate loans.... $ 993,040 $ 561,245 $ 595,111 $ 412,311 $ 210,492 $ 229,754 $ 362,473 $3,364,426 $3,325,105
Average interest rate....... 8.98% 9.22% 9.30% 9.43% 9.08% 8.89% 8.16% 9.04%
Variable interest rate loans. 325,760 262,342 122,217 75,058 45,268 46,134 76,426 953,205 953,205
Average interest rate....... 8.41% 8.45% 9.17% 9.24% 8.76% 8.33% 8.99% 8.64%
Fixed interest rate securities 631,008 190,556 310,535 156,855 111,933 44,218 143,138 1,588,243 1,591,386
Average interest rate....... 5.73% 5.90% 6.24% 6.33% 6.63% 7.13% 7.27% 6.56%
Variable interest rate
securities.................. 17,848 2,302 42,400 11,263 6,447 10,763 39,372 130,395 129,189
Average interest rate....... 5.71% 5.42% 6.85% 6.85% 6.58% 6.47% 6.19% 5.98%
Other interest-bearing assets 198,505 - - - - - - 198,505 198,505
Average interest rate....... 4.91% - - - - - - 4.91%
---------- --------- --------- --------- -------- -------- --------- --------- ---------
Total rate sensitive assets.. 2,166,161 1,016,445 1,070,263 655,487 374,140 330,869 621,409 6,234,774 6,197,390
Rate sensitive liabilities:
Non interest-bearing checking $ 316,139 $ - $ 240,343 $ 303,571 $ 122,266 $ 122,266 $ 118,075 $1,222,660 $1,222,660
Average interest rate....... - - - - - - - -
Savings & interest-bearing
deposits.................... - 83,466 622,963 567,319 281,847 142,736 285,472 1,983,803 1,983,803
Average interest rate....... - 2.73% 2.73% 2.73% 2.73% 2.73% 2.73% 2.73%
Time deposits................ 1,594,042 643,491 302,362 145,037 24,150 23,772 8,373 2,741,227 2,768,725
Average interest rate....... 5.22% 5.60% 5.65% 6.13% 5.53% 5.68% 5.86% 5.41%
Fixed interest rate borrowings 178,602 16 32 1,037 262 37 361 180,347 180,201
Average interest rate....... 4.99% 6.29% 6.29% 5.90% 4.94% 6.29% 6.29% 5.00%
Variable interest rate
borrowings.................. 22,941 - 5,000 - - - - 27,941 27,941
Average interest rate....... 4.34% - 5.82% - - - - 4.63%
---------- --------- --------- --------- -------- -------- --------- --------- ---------
Total rate sensitive
liabilities................. 2,111,724 726,973 1,170,700 1,016,964 428,525 288,811 412,281 6,155,978 6,183,330
Rate sensitive assets minus
liabilities................. 54,437 289,472 (100,437) (361,477) (54,385) 42,058 209,128 78,796 14,060
Cumulative interest rate
sensitivity gap............. 54,437 343,909 243,472 (118,005) (172,390) (130,332) 78,796
Cumulative rate sensitive assets
to rate sensitive liabilities 102.6% 112.1% 106.1% 97.7% 96.8% 97.7% 101.3%
Cumulative gap as a % of earning
assets...................... 0.9% 5.5% 3.9% (1.9%) (2.8%) (2.1%) 1.3%
16
Management has and will continue to monitor the interest rate sensitivity
position of the Company, so as to balance assets and liabilities to minimize
the effects associated with changes in the interest rate environment on the
net interest margin and the net interest spread.
One process for achieving this balance is to manage the adjusted interest
rate sensitivity gap of the Company. Due to the large amount of loans subject
to Arkansas usury statutes and the effect those statutes have on loan terms
and structures, the Company has traditionally focused on its six month
adjusted gap ratio with the target range being .90 to 1.10. The Company may
move within this range to optimize the trade-off between the competitive
market level of loan rates and the statutory caps which would be applicable to
both fixed and variable rate loans.
The Company has traditionally used net interest revenue simulation
modeling with a variety of interest rate scenarios for the entire Company as
well as for certain large affiliate banks. The Company also monitors economic
valuation risk by measuring the sensitivity of the economic value of the
Company's equity.
Unlike previous years, current financial reporting standards require that
the interest rate sensitivity analysis be based on contractual maturities
rather than repricing terms. Certain non-interest bearing accounts such as
checking accounts are included while others are not. The Company has chosen
to spread non-maturity deposits over the same maturity spectrum as it uses in
its economic value of equity modeling. The average rates are as of
December 31, 1997. Based on these reporting criteria, the table indicates the
Company is asset sensitive on a cumulative basis at both the six month and one
year time periods. However, changes in net interest income are determined by
the volumes of assets being repriced as well as the rates at which the assets
and liabilities are repriced. For example, the rates paid on savings, NOW,
and money market accounts tend to have a relatively low sensitivity to market
interest rates. Adjusting these and all other balance sheet categories for
their repricing terms and estimated sensitivity results in the Company having
a ratio of cumulative assets to cumulative liabilities of .98 at the six month
time period and 1.04 at the one year time period. The Company also reviews
the gap position for periods in excess of one year, comparing certain longer
term fixed rate assets to certain liabilities and equity.
Non-Interest Income
- -------------------
In addition to the net interest income increases, the Company has
continued to expand and 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 sales of investment
securities and annuities. During 1997, non-interest income increased 3.85% to
$114.8 million from $110.6 million for 1996. The primary contributors to the
increase were the bank acquisitions in 1997, increased service charges on
consumer deposits and increased activity from the Company's trust and broker-
dealer operations. 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 at December 31, 1996, to $7.3 billion. This
compares to a $6.8 billion total servicing portfolio at December 31, 1997,
resulting in a decrease in fee income from mortgage servicing activities.
Excluding the investment securities gains and losses, and the decrease in fee
income from mortgage servicing activities, non-interest income increased $8.5
million, or 12.5%.
17
During 1996, non-interest income increased 39.5% from 1995. The primary
contributors to this increase were the bank acquisitions in late 1995 and late
1996, an increased mortgage servicing portfolio due to loan servicing rights
acquisitions mentioned previously, and increased activity from the Company's
trust and broker-dealer operations. For a detailed analysis of the dollar and
percent changes in non-interest income, see the accompanying table.
Non-Interest Income For the Years
(Dollars in Thousands) Ended December 31, 1997 1996
------------------------------ Change from Change from
1997 1996 1995 1996 1995
-------- -------- -------- ------------------- -------------------
Trust department income......... $ 13,779 $ 12,738 $ 11,461 $ 1,041 8.17% $ 1,277 11.14%
Mortgage servicing fee income... 37,905 42,140 22,312 (4,235) (10.05) 19,828 88.87
Broker-dealer operations income. 5,288 4,162 2,982 1,126 27.05 1,180 39.57
Service charges on deposits..... 32,985 29,797 25,413 3,188 10.70 4,384 17.25
Other service charges and fees.. 15,831 13,935 9,308 1,896 13.61 4,627 49.71
Investment securities losses, net (87) (43) (418) (44) 102.33 375 (89.71)
Other income.................... 9,101 7,821 8,180 1,280 16.37 (359) (4.39)
-------- -------- -------- -------- --------
Total non-interest income....... $114,802 $110,550 $ 79,238 $ 4,252 3.85% $ 31,312 39.52%
======== ======== ======== ======== ========
First Commercial Mortgage Company's operations are affected by interest
rate fluctuations and market factors. Lower long-term interest rates normally
increase new mortgage loan production volume, which in turn increases fee
income and net interest income as a result of the higher average volume of
mortgages held for sale. Lower long-term rates also increase prepayment
speeds of mortgages on which mortgage servicing rights (MSRs) are currently
held, which lower yields realized on the Company's investment in MSRs.
Increased prepayment speeds also accelerate paid in full (PIF) interest
expense owed to certain investors. PIF interest is the partial monthly
interest in the month of payoff that is not payable by the mortgagor, but is
receivable by the mortgage security holder.
Higher long-term interest rates normally decrease the general volume of
new mortgage originations, decreasing the volume of mortgages held for sale.
These conditions result in reduced fee income and reduced net interest income.
However, the Company's average net yield as a percentage of the balance held
may increase if short-term rates do not change by a corresponding degree.
Higher long-term rates also decrease the prepayment speed of mortgages on
which MSRs are currently held, which in turn would increase the yield on the
Company's investment in MSRs. Decreased prepayment speeds will also decrease
PIF interest expense due to loans which pay off.
The value of the Company's loan servicing portfolio may be adversely
affected if mortgage interest rates decline and loan prepayments increase.
Periods of accelerated prepayments may result in future declines of income
generated from the Company's loan servicing portfolio. Conversely, if
mortgage interest rates increase, the value of the Company's loan servicing
portfolio may be positively affected.
18
Non-Interest Expense
- --------------------
Non-interest expenses consist of salaries and benefits, occupancy,
equipment and other expenses necessary for the operation of the Company.
Management is committed to controlling and even reducing the level of non-
interest expenses through improved efficiency and consolidation of certain
activities to achieve economies of scale without sacrificing quality of
service for our customers.
Non-interest expense increased $12.1 million in 1997, of which virtually
all were non-recurring costs including 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.
Non-interest expense increased $41.1 million in 1996, of which $7.8
million is a result of the bank acquisitions in late 1995 and 1996. The
primary contributors to the remaining increase were the amortization of
mortgage servicing rights from First Commercial Mortgage Company's expansion
of mortgage loan servicing activities, the expenses associated with the
Company's investment in new technology, and non-recurring expense accruals
relating to data processing conversions and legal expenses. These increases
were offset by a substantial reduction in FDIC premiums due to the insurance
fund reaching its target level.
The Company has completed an inventory and assessment and will have to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the years 2000 and thereafter. The
total Year 2000 project cost is estimated at approximately $10 million, which
includes $5 million for the purchase of new hardware and software that will be
capitalized and $5 million for the modification of existing software that will
be expensed as incurred. To date, the Company has incurred and expensed
approximately $2.5 million ($1.5 million capitalized), primarily for the
assessment of the Year 2000 issues and the development of a modification plan
and purchase of new hardware.
Our present schedule is to have programming changes largely completed and
testing underway on mission critical applications by December 31, 1998, which
is prior to any anticipated impact on our operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issues will not pose significant operational problems
for our computer systems. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 issues could have a
material impact on the operations of the Company. The Company has initiated
formal communications with all of its significant suppliers and large
customers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. There is no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.
19
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct relevant computer codes, and similar
uncertainties.
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 investment securities gains and
losses. The Company's ratio improved from 54.78% in 1996 to 52.59% in 1997,
exceeding its goal of 54%. The Company, in calculating its efficiency ratio
has excluded the effect of the non-recurring income and expenses noted
previously, as well as the effect of the Company's amortization of intangible
assets. The decrease in the efficiency ratio shows the Company's commitment
to controlling non-interest expense while increasing revenues. For a detailed
analysis of the dollar and percent changes in non-interest expenses, see the
accompanying table.
Non-Interest Expenses For the Years
(Dollars in Thousands) Ended December 31, 1997 1996
------------------------------ Change from Change from
1997 1996 1995 1996 1995
-------- -------- -------- ------------------- -------------------
Salaries, wages and employee
benefits....................... $112,517 $106,131 $ 88,753 $ 6,386 6.02% $ 17,378 19.58%
Net occupancy................... 15,598 14,344 13,274 1,254 8.74 1,070 8.06
Equipment....................... 15,831 14,596 10,829 1,235 8.46 3,767 34.79
FDIC insurance.................. 524 1,630 8,077 (1,106) (67.85) (6,447) (79.82)
Amortization of mortgage
servicing rights............... 13,939 19,515 7,634 (5,576) (28.57) 11,881 155.63
Other real estate expense, net 2,412 318 330 2,094 658.49 (12) (3.64)
Other expenses.................. 80,481 72,619 59,121 7,862 10.83 13,498 22.83
-------- -------- -------- -------- --------
Total non-interest expenses..... $241,302 $229,153 $188,018 $ 12,149 5.30% $ 41,135 21.88%
======== ======== ======== ======== ========
Income Taxes
- ------------
The effective income tax rate differs from the statutory rate primarily
because of tax-exempt income from loans, leases and municipal securities. The
effective tax rate was 33.9% for 1997, 34.6% for 1996, and 32.8% for 1995.
The increase in 1997 and 1996 is due primarily to a decrease in tax-exempt
investment income as a percent of total net income. Generally, existing
levels of pretax earnings are considered sufficient to generate the minimum
amount of future taxable income needed to realize the Company's deferred tax
assets. For more information, see Note 11 of Notes to Consolidated Financial
Statements.
20
Loan and Lease Portfolio
- ------------------------
At December 31, 1997, the Company's loan and lease portfolio, net of
unearned income, reached $4.3 billion, an increase of 7.3% from year-end
1996's balance, primarily in the commercial and commercial real estate
sectors. The Company has continued its policy of conservative lending,
thereby avoiding significant risk areas, such as out-of-territory lending and
highly leveraged transactions
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.
The business loan portfolio, totaling $892.8 million and approximately 20%
of total loans at year end, consists of commercial, financial and agricultural
loans and is comprised primarily of loans to customers in the regional trade
area of the bank subsidiaries in Arkansas, East Texas, Northwest Louisiana and
Memphis, Tennessee. The bank subsidiaries generally do not participate in
credits of large, publicly traded companies unless operations are maintained
in the local communities. The portfolio is diversified from an industry
standpoint and includes businesses engaged in manufacturing, wholesale,
retail, agri-business, insurance, financial services and other service
businesses. Emphasis is upon middle-market and small businesses with known
local management and financial stability. Continued growth in business loans
will be based upon strong solicitation efforts in a highly competitive market
environment for quality loans. Asset quality is, in part, a function of
management's consistent application and conservative underwriting standards.
Risks associated with business loans such as financial performance,
stability/longevity, loan structure, collateral and economic vulnerability,
although not all inclusive, are considered in the underwriting process and
loan monitoring.
The portfolio of real estate-construction loans amounted to $241.2 million
and approximately 6% of total loans at December 31, 1997. Management
continues to maintain relatively low exposure in this category, being very
conscious of the potential deterioration in market values of collateral for
these types of loans. The portfolio consists of residential construction,
commercial construction and land development loans, predominantly in the local
markets of the Company's banking subsidiaries. Commercial construction loans
are for small and medium-sized office buildings, manufacturing and warehousing
facilities, strip shopping centers, apartment complexes and other commercial
properties. Exposure to larger speculative office and rental space is
minimal. Residential construction and land development loans are primarily
located in the state of Arkansas and East Texas. Management considers the
risk associated with real estate loans such as cash flows, interest rate
changes, project completion and lease up, collateral, loan structure,
regulatory and tax issues, financial structure of the borrower and financial
stability and longevity of the borrower in the underwriting process.
21
The mortgage loans in the real estate-mortgage category are extended
predominately for owner-occupied residential properties. At December 31,
1997, there were $2.3 billion in loans outstanding ($1.2 billion in 1-4 family
and $1.1 billion in commercial real estate loans, respectively), or 52% of
total loans. Historically, the underwriting terms for real estate-mortgage
loans have generally limited the borrowing availability such that an
outstanding loan to a borrower would not exceed a percentage of the appraised
value of the real estate. These percentages vary according to the type of
real estate securing the mortgage loan and range from a low of 65% on mortgage
loans secured by undeveloped land, to 80% for home equity loans, up to a high
of 85% on 1-4 family residential mortgage loans. The credit quality of real
estate-mortgage loans at December 31, 1997, is considered to be above average.
The consumer loan portfolio, totaling $883.1 million or 20% of total
loans, consists of both secured and unsecured loans to individuals for various
personal reasons such as automobile financing, home improvements, recreational
and educational purposes. Current delinquency ratios have increased over
unsustainably low levels experienced in previous years. However, management
does not anticipate current ratios to result in significant changes in loss
trends.
Loan and Lease Risk Management
- ------------------------------
The Company, in keeping with its focus on goals of strength, profitability
and growth, in that order of priority, manages and controls the risk in the
loan and lease portfolio through various strategies. The Asset Quality
Committee, an independent committee of the Company's Board of Directors,
actively reviews and approves overall corporate loan policies and procedures
and monitors asset quality trends and concentrations of credit by loan size
and industry. A corporate "in-house lending limit" has been set to reduce the
risk in the event that a borrower fails to perform, with any exception
requiring approval at the corporate level. The in-house lending limit
represents only 21% of the combined corporate legal lending limit. At December
31, 1997, the Company had only one funded credit, which accounted for 27% of
the combined corporate legal lending limit, exceeding the in-house limit.
Loans and leases are also monitored for loan quality through risk ratings as
defined in the Company's credit policy.
During 1997, Federal and State regulatory agencies completed asset quality
examinations at all of the Company's subsidiary banks. The Company's level
and classification of potential problem loans identified as part of
management's routine internal risk rating system was not altered significantly
as a result of this regulatory examination process.
The Asset Quality Committee has established various lending standards such
as in-house lending limits, concentrations of credit, collateral requirements,
loan to value guidelines, and exceptions to policies, and monitors each
affiliate bank as to its performance to these standards. An asset quality
index is also used. This index has seven key ratios of even weight that are
monitored for each affiliate bank to determine its composite grade. The
composite grade is also used by the Company's Loan Review Division to assist
in establishing the scope and frequency of reviews.
22
The Loan Review Division is an independent function of the Asset Quality
Committee. Loan Review's function complements and reinforces the risk
identification and assessment of our lenders, provides the Company with an
early warning identification system of deteriorating assets, reviews for
adherence to credit policies and procedures, and provides the Committee and
management with reports regarding the overall quality of the loan portfolio
and other bank assets with credit risk.
Asset Quality
- -------------
Management's on-going review of the loan portfolio results in the transfer
of loans to non-accrual status when doubt as to collectibility of principal or
interest exists under the original terms. In addition, the accrual of income
is discontinued if, in the opinion of management, the borrower will be unable
to meet future contractual obligations. Loans may be placed on non-accrual
status even though the presence of collateral may be sufficient to provide for
ultimate repayment. During the first quarter of 1995, the Company adopted
Statement of Financial Accounting Standard No. 114, "Accounting by Creditors
for Impairment of a Loan" as amended by Statement of Financial Accounting
Standard No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure." Due to the Company's loan classification
policies, adoption of Statement 114 and Statement 118 has had no material
impact on the Company's results of operations.
As can be seen in the accompanying table entitled Asset Quality, net
charge-offs were .33% of average loans and leases in 1997 compared to .18% in
1996 and .07% in 1995. The relatively low levels of net charge-offs reflect
the favorable asset quality that the Company has experienced from the
generally positive economic environment in the Company's markets, and the
conservative approach applied to its lending policies.
Asset Quality As of and For the Years Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Net charge-offs to average loans and leases........ .33% .18% .07% .04% .14%
Allowance for possible loan and lease
losses to total loans and leases.................. 1.85% 1.55% 1.46% 1.62% 2.01%
Non-performing loans to total loans
and leases........................................ 1.00% .68% .47% .47% .63%
Provision and Allowance for Possible Loan and Lease Losses
- ----------------------------------------------------------
The allowance for 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 principal areas of risk are in the commercial and industrial, and
commercial real estate loan portions of the portfolio. Accordingly, these
areas have been allocated the largest portion of the reserve. Management
attempts to control these risks by maintaining a diverse portfolio with no
23
significant concentrations and through an aggressive real estate writedown
policy. Also, the Company has only 44 loan relationships with aggregate
outstanding balances of $5 million or greater, which further mitigates the
loan loss risk.
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 eight years. At
December 31, 1997, the Company's ratio was 185.39%. This means that for every
dollar of non-performing loans (impaired loans, other non-accrual loans, loans
90 days or more past due, and restructured loans), $1.85 is set aside in the
Company's reserve to cover possible losses. The ratio at December 31, 1997,
represents a decrease from the December 31, 1996, ratio of 227.94%. The
respective increase in non-performing loans was primarily due to the first
quarter acquisition of W.B.T. Holding Company and the second quarter
acquisition of C.N.B. Whitehouse, as 1996 data was not restated to include
these mergers.
Another indication of reserve adequacy is the allowance for possible loan
and lease losses and other real estate losses to non-performing assets
(defined as impaired loans, other non-accrual loans, restructured debt,
repossessed assets, and other real estate owned). At December 31, 1997, this
ratio was 196.90%, down from 271.15% at December 31, 1996, indicating that the
Company has $1.97 set aside in reserves for every dollar of non-performing
assets. Although both of the reserve adequacy ratios have decreased from the
high levels experienced in previous years, they continue to reflect the
approach the Company has taken in regard to building reserves for possible
future losses.
As of December 31, 1997, the allowance for loan and lease losses equaled
$80.0 million or 1.85% of total loans and leases, as compared to $62.5 million
or 1.55% of total loans and leases at December 31, 1996. The provision for
possible loan and lease losses was $28.3 million in 1997, as compared to $13.3
million in 1996, and $4.4 million in 1995. The 1997 provision included a
special provision of $17 million, or $0.29 per share after taxes, 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.
Note that the amount charged to operations and the related balance in the
allowance for possible loan and lease losses is based upon periodic
evaluations of the loan portfolio by management. These evaluations consider
several factors including, but not limited to, general economic conditions,
loan portfolio composition, prior loan loss experience, and management's
estimation of future potential losses.
Investment Portfolio
- --------------------
The book value of investment securities for each of the last three years
and the maturity and yield distribution of investment securities at
December 31, 1997, are presented in the accompanying tables. Pursuant to
Statement of Financial Accounting Standards No. 115, the securities classified
as held-to-maturity are carried at amortized cost and those classified as
available-for-sale and trading are carried at fair value.
24
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 increased $378 million or 8% during 1997.
The increase in average core deposits was a result of the Company's attempt to
provide its customers a wide range of new and competitive deposit products.
Presented in the accompanying table are certificates of deposit and other time
deposits of $100,000 and over, by time remaining to maturity. 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
table below, the Company's ratios have increased from 1996 to 1997 and 1995 to
1996, 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.
Loan-to-Deposit Ratios for the Years: 1997 1996 1995
- -------------------------------------------- ------ ------ ------
Average loans and leases to average deposits 72.98% 71.95% 70.38%
Average loans and leases to average
core deposits 83.90% 83.20% 75.43%
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. Amounts and interest rates related to
federal funds purchased and securities sold under agreement to repurchase for
the last three years are presented in the accompanying table. Average short-
term borrowings exceeded average short-term investments by $11.8 million in
1997, $37.6 million in 1996 and $100.8 million in 1995.
This trend during 1996 and 1997 reflects an adjustment of the Company's
interest rate risk position between short term investments and the longer term
securities portfolio, as well as reduced parent company borrowings following
the divestiture of certain Southwest Bancshares bank subsidiaries in the third
quarter of 1997. 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
and recent acquisitions in pursuit of above average return opportunities. A
position of strength is important to the Company's customers, investors and
regulators.
25
At year-end 1997, the Company's equity to asset ratio was 9.45% compared
to 8.43% at year-end 1996 and 8.06% at year-end 1995. At December 31, 1997,
the Company's leverage, tier I and total risk-based capital ratios
substantially exceeded the regulatory minimum levels established by the Board
of Governors of the Federal Reserve System, as can be seen from the
accompanying table.
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, 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.
December 31,
Regulatory ---------------------------
Minimum 1997 1996 1995
-------- ------- ------- -------
Leverage ratio ...................... 3.00% 9.01% 7.99% 7.31%
Tier I risk-based capital ratio...... 4.00% 12.74% 11.60% 11.51%
Total risk-based capital ratio....... 8.00% 13.60% 12.46% 12.34%
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. Annual dividends per share have been increased in
each of the past three years from $.70 in 1995, to $.80 in 1996, and $.97 in
1997. In 1997, the Company increased its dividend rate for the eleventh
consecutive year, bringing the annual rate at the end of the year to $1.12 per
share. In 1997, the Company declared a five percent stock dividend to
stockholders of record on December 15, 1997; and in 1996, the Company declared
a five percent stock dividend to shareholders of record on October 31, 1996.
In addition, in 1995, the Company declared a seven percent stock dividend to
shareholders of record on December 14, 1995. Accordingly, all per share data
has been restated to reflect these increases in shares outstanding.
The cash dividend payout ratios for the past three years were 37.20% in
1997, 33.59% in 1996, and 34.29% in 1995. The Company's Board of Directors
reviews the cash dividend policy and payout levels annually in the fourth
quarter. See Note 4 to the audited consolidated financial statements for
description of regulatory restrictions on subsidiary banks' ability to pay
dividends to parent company.
The Company's common stock is traded in the over-the-counter market under
the NASDAQ symbol "FCLR" and is quoted on NASDAQ's National Market System.
The high and low bid prices of the common stock, as reported by NASDAQ, and
the dividends declared per share can be seen in the quarterly operating
results table on page 73. On December 31, 1997, there were 4,725 shareholders
of record. Additionally, 2,235 persons were holders of record of Company
common stock on December 31, 1997, through various stock ownership plans of
the Company.
26
REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS
REPORT OF MANAGEMENT
- --------------------
The financial statements and related financial information presented
herein were prepared by management in accordance with generally accepted
accounting principles and include amounts that are based on management's best
estimates and judgments. The Company maintains an accounting system and
related controls that are sufficient to provide reasonable assurance that
assets are safeguarded, and that transactions are properly authorized and
recorded. The concept of reasonable assurance is based on the recognition
that the cost of an accounting and control system must be related to the
benefits derived. The accounting system and related controls are monitored by
an extensive internal audit program and tested by the Company's independent
auditors in accordance with generally accepted auditing standards. The
Company's internal auditor and independent auditors meet regularly with the
Audit Committee of the Board of Directors to ensure that respective
responsibilities are being properly discharged and to discuss the results of
audits.
27
REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS (Continued)
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- -------------------------------------------------
The Board of Directors and Stockholders of First Commercial Corporation
We have audited the accompanying consolidated balance sheets of First
Commercial Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit 1996 and 1995 financial statements of Southwest
Bancshares, Inc., a wholly-owned subsidiary, which statements reflect total
assets constituting 12.4% in 1996 and total revenues constituting 11.8% in
1996 and 11.0% in 1995 of the related consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Southwest Bancshares,
Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and, for 1996 and 1995 the report of
other auditors, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Commercial
Corporation at December 31, 1997, and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Little Rock, Arkansas
January 20, 1998, except for Note 18
as to which the date is February 8, 1998
28
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31,
------------------------------------------
(Dollars In Thousands Except for Share Data) 1997 1996 1995
------------ ------------ ------------
Interest income
Loans and leases, including fees................................ $ 387,744 $ 355,784 $ 298,166
Short-term investments.......................................... 9,073 7,701 5,341
Investment securities - taxable................................. 88,634 81,933 73,043
- non-taxable............................. 11,693 10,549 9,711
Trading account securities...................................... 26 35 4
------------ ------------ ------------
Total interest income......................................... 497,170 456,002 386,265
Interest expense ------------ ------------ ------------
Interest on deposits............................................ 203,144 192,512 162,549
Short-term borrowings........................................... 10,124 9,962 11,204
Long-term debt.................................................. 934 1,622 2,238
------------ ------------ ------------
Total interest expense........................................ 214,202 204,096 175,991
------------ ------------ ------------
Net interest income................................................ 282,968 251,906 210,274
Provision for possible loan and lease losses (Note 7)............. 28,332 13,269 4,368
------------ ------------ ------------
Net interest income after provision for
possible loan and lease losses................................ 254,636 238,637 205,906
Other income
Trust department income......................................... 13,779 12,738 11,461
Mortgage servicing fee income................................... 37,905 42,140 22,312
Broker-dealer operations income................................. 5,288 4,162 2,982
Service charges on deposits..................................... 32,985 29,797 25,413
Other service charges and fees.................................. 15,831 13,935 9,308
Investment securities losses, net............................... (87) (43) (418)
Other income.................................................... 9,101 7,821 8,180
------------ ------------ ------------
Total other income............................................ 114,802 110,550 79,238
Other expenses
Salaries, wages and employee benefits (Note 14)................. 112,517 106,131 88,753
Net occupancy................................................... 15,598 14,344 13,274
Equipment....................................................... 15,831 14,596 10,829
FDIC insurance.................................................. 524 1,630 8,077
Amortization of mortgage servicing rights....................... 13,939 19,515 7,634
Other real estate expense, net.................................. 2,412 318 330
Other expenses.................................................. 80,481 72,619 59,121
------------ ------------ ------------
Total other expenses.......................................... 241,302 229,153 188,018
------------ ------------ ------------
Income before income taxes........................................ 128,136 120,034 97,126
Income tax provision (Note 11).................................... 43,502 41,480 31,892
------------ ------------ ------------
Net income before extraordinary items............................. 84,634 78,554 65,234
Extraordinary item, net of income taxes of $9,659 (Note 2)........ 15,425 - -
------------ ------------ ------------
Net income (Note 2)............................................... $ 100,059 $ 78,554 $ 65,234
============ ============ ============
29
CONSOLIDATED STATEMENTS OF INCOME (Continued) Years Ended December 31,
------------------------------------------
(Dollars In Thousands Except for Share Data) 1997 1996 1995
------------ ------------ ------------
Weighted average number of common shares
outstanding during the period - basic........................... 37,486,476 35,648,472 34,221,166
Dilutive potential common shares.................................. 435,476 384,813 317,939
------------ ------------ -----------
Weighted average number of shares - assuming dilution............. 37,921,952 36,033,285 34,539,105
============ ============ ===========
Basic earnings per common share (Note 12)
Net income before extraordinary items........................... $ 2.26 $ 2.20 $ 1.91
Extraordinary item.............................................. 0.41 - -
------------ ------------ ------------
Net income per common share..................................... $ 2.67 $ 2.20 $ 1.91
============ ============ ============
Diluted earnings per common share (Note 12)
Net income before extraordinary items........................... $ 2.23 $ 2.18 $ 1.89
Extraordinary item.............................................. 0.41 - -
------------ ------------ ------------
Net income per common share..................................... $ 2.64 $ 2.18 $ 1.89
============ ============ ============
See accompanying notes.
30
CONSOLIDATED BALANCE SHEETS December 31,
---------------------------
(Dollars in Thousands) 1997 1996
------------ ------------
Assets
Cash and due from banks (Note 4)................................................ $ 397,361 $ 368,249
Federal funds sold.............................................................. 173,794 286,581
------------ ------------
Total cash and cash equivalents................................................ 571,155 654,830
Investment securities held-to-maturity, estimated market value
$410,620 ($511,302 in 1996) (Notes 4 & 5)...................................... 408,683 512,495
Investment securities available-for-sale (Notes 4 & 5).......................... 1,309,955 1,109,708
Trading account securities...................................................... 149 196
Loans and leases, net of unearned income (Note 6)............................... 4,317,631 4,024,635
Allowance for possible loan and lease losses (Note 7)........................... (79,970) (62,495)
------------ ------------
Net loans and leases........................................................... 4,237,661 3,962,140
Bank premises and equipment, net (Note 8)....................................... 124,872 126,647
Other real estate owned, net of allow. for poss. losses of $2 ($87 in 1996)..... 5,658 2,398
Other assets (Notes 3, 11 & 14)................................................. 229,119 242,804
------------ ------------
Total assets..................................................................... $ 6,887,252 $ 6,611,218
============ ============
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing transaction accounts...................................... $ 1,222,660 $ 1,090,401
Interest bearing transaction and savings accounts.............................. 1,983,803 1,933,713
Certificates of deposit $100,000 and over (Note 9)............................. 727,000 776,935
Other time deposits.(Note 9).................................................. 2,014,227 1,959,229
------------ ------------
Total deposits................................................................ 5,947,690 5,760,278
Short-term borrowings (Note 9).................................................. 203,185 195,941
Other liabilities............................................................... 80,161 68,648
Long-term debt (Note 10)........................................................ 5,103 28,751
------------ ------------
Total liabilities............................................................. 6,236,139 6,053,618
Commitments and Contingencies (Note 14 & 16)
Stockholders' equity (Notes 4, 10, & 13)
Preferred stock, 400,000 shares authorized
Series 1991 Permanent, $1 par value, none issued........................... - -
Common stockholders' equity, 50,000,000 shares authorized
Common stock, $3 par value, 37,578,681 shares issued
and outstanding (35,564,721 in 1996)............................................ 112,736 101,618
Capital surplus................................................................ 359,629 263,090
Retained earnings.............................................................. 174,423 191,813
Net unrealized gains on available-for-sale securities, net of income tax....... 4,325 1,079
------------ ------------
Total common stockholders' equity............................................. 651,113 557,600
------------ ------------
Total liabilities and stockholders' equity....................................... $ 6,887,252 $ 6,611,218
============ ============
See accompanying notes.
31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Unrealized
Common Retained Gains and Treasury
(In Thousands Except for Share Data) Stock Surplus Earnings (Losses) Stock Total
--------- --------- --------- --------- --------- ---------
Balance - January 1, 1995, as previously reported $ 71,325 $ 109,167 $ 170,132 $ (7,433)$ - $ 343,191
Adjustment for pooling-of-interests
business combinations......................... 13,638 23,186 24,066 (1,347) - 59,543
--------- --------- --------- --------- --------- ---------
Balance - January 1, 1995, as restated......... 84,963 132,353 194,198 (8,780) - 402,734
Change in unrealized gains (losses),
net of income taxes of $5,409................. 10,045 10,045
Net income..................................... 65,234 65,234
Cash dividends - $.70 per common share......... (22,370) (22,370)
Stock dividend, 7%............................. 5,362 52,345 (57,751) (44)
Stock options exercised, including tax
benefits (Note 13)............................ 177 958 1,135
Issuance of stock by Southwest Bancshares, Inc. 1,549 5,947 7,496
Purchase of treasury stock, 219,009 shares..... (5,245) (5,245)
Common stock issued, 3,012 shares.............. 8 53 61
Acquisition of FDH Bancshares, Inc.,
1,487,510 shares.............................. 3,226 32,116 5,245 40,587
Acquisition of West-Ark Bancshares, Inc.,
759,739 shares................................ 1,932 380 5,421 (260) - 7,473
--------- --------- --------- --------- --------- ---------
Balance - December 31, 1995.................... 97,217 224,152 184,732 1,005 - 507,106
Change in unrealized gains (losses),
net of income taxes of $46..................... 86 86
Net income..................................... 78,554 78,554
Cash dividends - $.80 per common share......... (26,386) (26,386)
Purchase of treasury stock, 230,487 shares..... ( 6,368) (6,368)
Stock dividend, 5%............................. 3,476 36,735 (46,354) 6,099 (44)
Stock options exercised, including tax
benefits (Note 13)............................ 158 548 6 712
Sale of treasury stock, 7,718 shares........... 223 223
Common stock issued, 3,022 shares.............. 8 99 107
Purchase of minority shares, Springhill
Bank & Trust, 1,883 shares.................... 15 40 55
Acquisition of Security National Bank,
265,812 shares................................ 759 1,541 1,267 (12) - 3,555
--------- --------- --------- --------- --------- ---------
Balance - December 31, 1996 ................... 101,618 263,090 191,813 1,079 - 557,600
32
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Unrealized
Common Retained Gains and Treasury
(In Thousands Except for Share Data) Stock Surplus Earnings (Losses) Stock Total
--------- --------- --------- --------- --------- ---------
Balance - December 31, 1996 .................... 101,618 263,090 191,813 1,079 - 557,600
Change in unrealized gains (losses),
net of income taxes of $1,632................. 3,032 3,032
Net income..................................... 100,059 100,059
Cash dividends - $.97 per common share......... (37,224) (37,224)
Stock dividend, 5%............................. 5,361 94,529 (99,976) (86)
Stock options exercised, including tax
benefits (Note 13)............................. 440 1,170 1,610
Purchase of treasury stock, 184 shares......... (3) (3)
Common stock issued, 1,470 shares.............. 2 28 1 31
Purchase of minority shares of
Springhill Bank & Trust, 253 shares........... 1 10 2 13
Acquisition of W.B.T. Holding Company, Inc.
1,430,050 shares.............................. 4,086 14,628 214 18,928
Acquisition of City National Bank,
152,752 shares................................ 436 1,289 14 1,739
Acquisition of First Charter Bancshares, Inc.,
277,439 shares................................ 792 (487) 5,109 - - 5,414
--------- --------- --------- --------- --------- ---------
Balance - December 31, 1997.................... $ 112,736 $ 359,629 $ 174,423 $ 4,325 $ - $ 651,113
========= ========= ========= ========= ========= =========
See accompanying notes.
33
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,
------------------------------------------
(Dollars in Thousands) 1997 1996 1995
------------ ------------ ------------
Net income....................................................... $ 100,059 $ 78,554 $ 65,234
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Extraordinary gain on sale of institutions (Note 2) (25,084) - -
Depreciation.................................................... 13,212 12,570 10,451
Amortization.................................................... 17,629 23,180 10,100
Provision for possible loan and lease losses.................... 28,332 13,269 4,368
Deferred income taxes........................................... (9,738) (6,438) (1,406)
Loss on sale of investment securities available-for-sale........ 87 43 418
Gain on sale of equipment....................................... (227) (9) (146)
Loss (gain) on sale of other real estate........................ 121 (940) (950)
Writedowns of other real estate................................. 626 106 75
Equity in undistributed earnings of unconsolidated subsidiary... (1,669) (1,440) (1,777)
Decrease (increase) in trading securities....................... 192 255 (435)
Net unrealized gain on trading securities....................... (4) (2) (1)
Decrease (increase) in mortgage loans held for resale........... (2,194) 104,891 (105,385)
Increase (decrease) in income taxes payable..................... 4,428 23 7,204
Decrease (increase) in interest and other receivables........... 236 (317) (8,104)
Increase (decrease) in interest payable......................... (1,361) 1,581 6,632
Increase in accrued expenses.................................... 15,395 1,994 9,447
Increase in prepaid expenses.................................... (646) (2,317) (2,484)
------------ ------------ ------------
Net cash provided by (used in) operating activities.............. 139,394 225,003 (6,759)
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale. 46,270 118,454 128,576
Proceeds from maturing investment securities available-for-sale. 857,071 908,377 321,591
Proceeds from maturing investment securities held-to-maturity... 817,695 452,783 554,308
Purchases of investment securities available-for-sale........... (1,047,478) (1,064,584) (603,529)
Purchases of investment securities held-to-maturity............. (739,121) (486,471) (244,431)
Proceeds from sale of institutions, net of funds sold (Note 2) 23,698 - -
Purchases of institutions, net of funds acquired (Note 2) 32,471 7,259 38,380
Net increase in loans and leases................................ (256,312) (266,728) (437,717)
Capital expenditures............................................ (16,351) (12,822) (18,013)
Proceeds from sale of bank premises and equipment............... 3,878 3,040 2,731
Purchased mortgage servicing rights and
changes in other assets, net.................................. 1,081 (18,842) (71,705)
Proceeds from sales of other real estate........................ 3,765 3,241 4,277
------------ ------------ ------------
Net cash used in investing activities............................ (273,333) (356,293) (325,532)
34
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31,
------------------------------------------
(Dollars in Thousands) 1997 1996 1995
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
and savings accounts........................................... 45,899 231,321 275,504
Net increase in time deposits................................... 45,775 50,030 223,662
Net increase (decrease) in short-term borrowings................ 5,089 (53,828) 49,171
Repayment of long-term debt..................................... (11,827) (2,337) (7,325)
Proceeds from long-term debt.................................... 1,000 6,340 10,550
Proceeds from issuance of common stock.......................... 31 107 7,557
Purchases of treasury stock..................................... (3) (6,368) (5,245)
Sales of treasury stock......................................... - 223 -
Purchase of partial shares resulting from stock splits/
stock dividends............................................... (86) (44) (44)
Stock options exercised......................................... 1,610 712 1,135
Cash dividends paid on common stock............................. (37,224) (26,386) (22,370)
------------ ------------ ------------
Net cash provided by financing activities........................ 50,264 199,770 532,595
Net increase (decrease) in cash and cash equivalents............. (83,675) 68,480 200,304
Cash and cash equivalents at beginning of year................... 654,830 586,350 386,046
------------ ------------ ------------
Cash and cash equivalents at end of year......................... $ 571,155 $ 654,830 $ 586,350
============ ============ ============
See accompanying notes.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
First Commercial Corporation ("Company") is a multi-bank holding company
headquartered in Little Rock, Arkansas, which owns 100% of twenty-six
affiliate banks and 50% of two affiliate banks. The Company's affiliate banks
provide traditional commercial, retail and correspondent banking services and
offer a broad range of specialized services. The Company's principal markets
include the state of Arkansas, East Texas, Northwest Louisiana and Memphis,
Tennessee. The Company's non-bank subsidiaries include a mortgage company,
trust company, investment banking company, factoring company and leasing
company that serve principally the same markets as the banking affiliates.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Investment and Trading Account Securities
- -----------------------------------------
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" securities
that the Company has both the positive intent and ability to hold to maturity
are carried at amortized cost. Securities that the Company does not have the
positive intent and ability to hold to maturity and all marketable equity
securities are classified as available-for-sale or trading and carried at fair
value. Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of stockholders'
equity. Accordingly, stockholders' equity at December 31, 1997, has been
increased by $3.0 million (net of $1.6 million in deferred income taxes) to
reflect the net unrealized holding gain on securities classified as available-
for-sale. Also, stockholders' equity at December 31, 1996, has been increased
by $86,000 (net of $46,000 in deferred income taxes) to reflect the net
unrealized holding gain on securities classified as available-for-sale.
Unrealized holding gains and losses on securities classified as trading are
reported in earnings.
Gains and losses on the sale of investment securities are computed using
the specific identification method. The income tax benefit related to such
net security losses was $30,450, $15,050 and $146,300 for the years ended
December 31, 1997, 1996, and 1995, respectively.
36
Broker-Dealer Company
- ---------------------
One of the Company's banking subsidiaries operates First Commercial
Investments, Inc. ("FCII"), a broker-dealer company which has a customer base
principally located within the states of Arkansas and Texas. FCII is a party
to financial instruments with off-balance-sheet risk in its normal course of
business. FCII is required, in the event of the non-delivery of customers'
securities owed FCII by other broker-dealers, or by its customers, to purchase
identical securities in the open market. Such purchases might result in
losses not reflected in the accompanying consolidated financial statements.
The market values of securities owed FCII approximate the amounts payable.
Receivables and payables to customers arise from cash transactions
executed by FCII on their behalf. Receivables are collateralized by
securities with market values in excess of the amounts due. The Company's
policy is to monitor the market value of collateral and request additional
collateral when required. Such collateral is not reflected in the
accompanying consolidated financial statements. At December 31, 1997, and
1996, receivables from and payables to other brokers and dealers amounted to
$841,355 and $649,068, respectively.
In accordance with industry practice, FCII records securities transactions
executed on behalf of its customers on the settlement date, which is generally
three business days or the next business day after the trade date. The risk
of loss on unsettled transactions is the same as settled transactions and
relates to the customer's or broker's inability to meet the terms of their
contracts.
Loans
- -----
Loans generally are stated at their outstanding unpaid principal balances,
net of any deferred fees or costs on originated loans, or unamortized premiums
or discounts on purchased loans. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to income using the
interest method. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the yield (interest
income) of the related loans.
NONACCRUAL LOANS. Generally, a loan (including a loan impaired under
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan") is classified as nonaccrual and the accrual of
interest on such loan is discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan currently is performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a
loan is placed on nonaccrual status, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is charged
against the allowance for credit losses. Interest received on nonaccrual
loans generally is either applied against principal or reported as interest
income, according to management's judgment as to the collectibility of
principal. Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
37
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES. The allowance for possible
loan and lease losses is established through provisions for credit losses
charged against income. Loans deemed to be uncollectible are charged against
the allowance for possible loan and lease losses, and subsequent recoveries,
if any, are credited to the allowance.
Statement 114, as amended by Statement of Financial Accounting Standards
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure," prescribes how the allowance for possible loan
and lease losses related to impaired loans should be determined. A loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect principal or interest due
according to the contractual terms of the loan. Under the new Statements, the
amount of the allowance for possible loan and lease losses related to
individual loans that are identified for evaluation in accordance with
Statement 114 is determined based on estimates of expected cash flows on each
such loan which are then discounted using that loan's effective interest rate.
Alternatively, the fair value of the collateral is used to determine the
allowance for credit losses related to identified collateral dependent loans.
The determination of the allowance for possible loan and lease losses for the
remainder of the loan portfolio takes into consideration the risk
classification of loans and application of loss estimates to these
classifications. Statement 114 specifically excludes from the definition of
impaired loans large groups of smaller balance homogenous loans. In
accordance with these Statements, the Company considers all non-accrual loans
excluding credit card loans, residential mortgage loans, consumer installment
loans and loans held for resale by the Company's mortgage banking subsidiary,
as impaired loans.
The allowance for possible loan and lease losses is maintained at a level
believed adequate by management to absorb estimated probable credit losses.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is inherently
subjective as it requires material estimates including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
susceptible to significant change.
Mortgage Loan Servicing
- -----------------------
Mortgage loans serviced by the Company's mortgage banking subsidiary are
not included in the accompanying consolidated balance sheets. The unpaid
principal balances of these mortgage loans were $6.8 billion and $7.3 billion
at December 31, 1997 and 1996, respectively. Loan servicing fees are included
in income as related loan payments from mortgagees are collected.
Originated and purchased mortgage servicing rights are amortized using the
cash flow method, based on estimated future net servicing revenues.
Management estimates the value of the servicing rights originated by the
Company's mortgage banking subsidiary and the servicing rights acquired from
third parties at December 31, 1997, to be approximately $76.04 million based
on an independent impairment analysis. For purposes of measuring impairment,
mortgage servicing rights are stratified on the basis of interest rates and
investor types.
38
Derivative Financial Instruments
- --------------------------------
The Company's investment policies do not allow the purchase of derivative
financial instruments for trading purposes. The only derivative financial
instruments owned by the Company have been issued for purposes other than
trading and include mortgages held for sale, unfunded loan commitments and
unsettled security purchase or sale agreements (see Broker-Dealer Company).
Real estate loans of approximately $42.2 million and $40.0 million at
December 31, 1997, and 1996, respectively, held for resale by the Company's
mortgage banking subsidiary, are valued at the lower of cost or market on an
aggregate basis. To manage the interest rate risk exposure related to these
real estate loans, the Company's mortgage banking subsidiary pre-sells these
loans to third parties. At December 31, 1997, all but $3.7 million of these
real estate loans had been pre-sold.
Interest rate risk related to unfunded loan commitments (see Note 16) is
managed by only issuing such instruments with short repricing terms. These
commitments are recorded as loans are funded.
Bank Premises and Equipment and Depreciation
- --------------------------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is provided for financial statement purposes by
the straight-line method over an estimated useful life of 1 to 50 years for
building and improvements, 3 to 30 years for leasehold improvements, and 1 to
20 years for equipment. Accelerated depreciation methods are used for income
tax purposes.
Foreclosed Assets
- -----------------
Foreclosed assets are comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified
as in-substance foreclosure. In accordance with Statement 114, a loan is
classified as in-substance foreclosure when the Company has taken possession
of the collateral regardless of whether formal foreclosure proceedings take
place.
Foreclosed assets initially are recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of (1) cost or (2) fair value minus estimated costs to sell. Revenue
and expenses from operations and changes in the valuation allowance are
included in other real estate expense.
Income Taxes
- ------------
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
39
Investments - Security National Bank and Trust Company, Oklahoma National Bank
and Real Estate
- ------------------------------------------------------------------------------
The Company's fifty percent investment in Security National Bank and Trust
Company of Norman, Oklahoma, and Oklahoma National Bank in Duncan, Oklahoma is
accounted for using the equity method. The Company, through one of its
subsidiaries, owns an interest in two real estate partnerships. These
investments are also accounted for using the equity method of accounting since
they represent significant influence but not control for the Company.
Earnings Per Common Share
- -------------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Statement 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share considers the
dilutive effects of the Company's outstanding stock options. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirements.
Stock Option Plan
- -----------------
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its employee stock options because, as discussed in Note 13 to
the Consolidated Financial Statements, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized (see Note 13).
Stock Dividends
- ---------------
All share and per share amounts for 1997, 1996, and 1995, set forth in the
consolidated financial statements and notes thereto have been retroactively
adjusted for a five percent stock dividend declared November 1997, and payable
January 1998, a five percent stock dividend declared October 1996, and payable
November 1996, and a seven percent stock dividend declared November 1995, and
payable January 1996.
Financial Statement Presentation
- --------------------------------
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," provides accounting and disclosure rules for the sale,
securitization, and servicing of receivables and other financial assets.
Statement 125 provides guidance for establishing whether a transfer of
financial assets is a sale or a financing. Under Statement 125, the seller
is required to use the "financial components" approach to measure gain or loss
on the transaction. Under this approach, the seller would record at fair
value whatever new instruments it obtains and would derecognize financial
assets for which control has been surrendered based on the relative fair value
40
of the components transferred and those retained. Statement 125 is effective
for transactions occurring after December 31, 1996, regardless of the
Company's fiscal year end or when the securitization was originally
established. The Company adopted Statement 125 effective January 1, 1997,
which is applied prospectively from the date of adoption. The adoption did
not have a material effect on the Company's financial position or results of
operations.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure."
Statement 129 consolidates existing guidance relating to disclosure about a
company's capital structure. Statement 129 was adopted on December 31, 1997.
The adoption did not have a material impact on the Company's capital structure
disclosures.
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income." The Company will be required to adopt the provisions of Statement
130 effective January 1, 1998. Statement 130 requires the reporting and
display of the components of comprehensive income in interim and annual
financial statements. The Company expects to identify the components of
comprehensive income in its statement of changes in shareholders' equity
beginning in 1998.
In June 1997, the FASB also issued Statement 131, "Disclosures About
Segments of an Enterprise and Related Information." Statement 131 will be
required to be adopted by the Company effective January 1, 1998. Statement
131 requires segment information to be reported using a management approach
rather than the industry approach under the current standard. Management has
not completed its analysis of the requirements of Statement 131 to determine
the Company's reportable segments.
Supplemental Cash Flow Disclosures
- ----------------------------------
For purposes of the statement of cash flows, the Company includes cash and
due from banks, Federal funds sold and securities purchased under agreements
to resell as cash equivalents. Cash payments for interest were approximately
$215.6 million, $202.5 million and $169.4 million for 1997, 1996, and 1995,
respectively. Transfers from loans to other real estate owned were $7.0
million, $2.4 million and $2.3 million during 1997, 1996, and 1995,
respectively.
Institutions acquired in non-cash transactions for which prior period
financial data has not been restated consisted of the following for years
1997, 1996 and 1995:
Total Total Total
Assets Loans Deposits
------------- ------------- -------------
1997........................ $ 379 Million $ 243 Million $ 337 Million
1996........................ 39 Million 17 Million 36 Million
1995........................ 482 Million 281 Million 451 Million
Reclassifications
- -----------------
Certain reclassifications of 1996 and 1995 amounts have been made to
conform with the 1997 presentation.
41
NOTE 2: ACQUISITIONS
On January 31, 1997, through a joint venture with Arvest Bank Group of
Bentonville, Arkansas, the Company purchased a 50% interest in Oklahoma
National Bank of Duncan, Oklahoma, which had assets of $60 million, loans of
$43 million, and deposits of $55 million.
On February 13, 1997, the Company acquired all of the outstanding common
stock of W.B.T. Holding Company, Memphis, Tennessee, in exchange for 1,430,050
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.
On April 17, 1997, the Company acquired all of the outstanding common stock
of City National Bank, Whitehouse, Texas, in exchange for 152,752 shares of
Company common stock. The transaction was accounted for as a pooling of
interests. The results of City National Bank are included in the 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.
On May 15, 1997, the Company acquired all of the outstanding common stock
of Southwest Bancshares, Inc., Jonesboro, Arkansas, in exchange for 3,582,865
shares of the Company's common stock. The transaction was accounted for as a
pooling of interests, 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.
On July 1, 1997, the Company acquired all of the outstanding common stock
of First Central Corporation, Searcy, Arkansas, in exchange for 1,732,461
Company common shares. This transaction was accounted for as a pooling of
interests, and all prior period financial information has 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.
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
accompanying consolidated financial statements.
On October 31, 1997, the Company acquired all of the outstanding stock of
First Charter Bancshares, Inc. ("First Charter") in exchange for 277,439
Company common shares. This transaction was accounted for as a pooling of
interests. The results of First Charter are included in the consolidated
financial statements for 1997; however, prior period financial data has not
been restated due to immateriality. First Charter had assets of approximately
$71 million and a mortgage loan servicing portfolio of approximately $400
million. On November 21, 1997, Charter State Bank's Beebe branch merged with
42
First Commercial's Searcy affiliate, First National Bank of Searcy, and its
North Little Rock branch merged with First Commercial Bank of Little Rock.
First Charter's mortgage subsidiary, Charter Mortgage & Investments, Inc., was
merged with First Commercial Mortgage Company.
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
has 15 branches located in Rogers, Bentonville, Fort Smith, West Memphis, and
Little Rock, Arkansas, as well as Memphis, Tennessee. This transaction is
expected to close in the first quarter of 1998 and will be accounted for as a
purchase, with the Company reporting KW Bancshares' operations from the
closing date. The Company expects to record costs in excess of fair value of
the net assets acquired of $25 million in connection with this acquisition.
Combined and separate 1997 operating results of First Commercial
Corporation and all 1997 acquisitions up through the merger dates are as
follows:
Total Net
(Dollars in Thousands) Revenue Income
------------ ------------
First Commercial Corporation.................... $ 567,035 $ 93,477
W.B.T. Holding Co. (through 2/13/97)............ 3,806 484
City National Bank (through 3/31/97)............ 891 6
Southwest Bancshares, Inc. (through 4/30/97).... 23,765 3,128
First Central Corporation (through 6/30/97)..... 10,522 2,233
First Charter Bancshares (through 10/31/97)..... 5,953 731
------------ ------------
Combined........................................ $ 611,972 $ 100,059
============ ============
The following table shows the effect of the pooling-of-interests acquisitions
of Southwest Bancshares, inc. and First Central Corporation on previously
reported results of operations. The pro forma data is based on pre-
acquisition earnings and is not necessarily indicative of future performance.
1996 1995
------------ ------------
Total Revenue:
As previously reported......................... $ 479,885 $ 396,170
Southwest Bancshares, Inc...................... 66,604 51,301
First Central Corporation...................... 20,063 18,032
------------ ------------
As restated.................................... $ 566,552 $ 465,503
============ ============
Net Income:
As previously reported........................ $ 68,562 $ 56,910
Southwest Bancshares, Inc..................... 5,730 4,612
First Central Corporation..................... 4,262 3,712
------------ ------------
As restated................................... $ 78,554 $ 65,234
============ ============
43
NOTE 3: INTANGIBLE ASSETS
Intangible assets are included in other assets and consist of goodwill,
debt issuance costs, core deposit intangibles and mortgage servicing rights.
These assets are being amortized over periods ranging from one to twenty-five
years. Goodwill and identifiable intangibles at December 31, 1997, and 1996,
had an original cost of $54.8 million and $55.4 million, respectively, and are
amortized using the straight line method. The original cost of mortgage
servicing rights originated by the Company's mortgage banking subsidiary and
acquired from third parties, which are not included in the previous totals as
they have resale value, totaled $92.4 million and $88.4 million at December
31, 1997, and 1996, respectively. During 1997 and 1996, mortgage servicing
rights of $4.2 million and $9.5 million, respectively, were capitalized.
Accumulated amortization of intangible assets totaled $72.6 million and $55.9
million at December 31, 1997, and 1996, respectively. The Company's equity
capital, excluding all intangible assets except mortgage servicing rights, was
$612.6 million and $515.6 million at December 31, 1997 and 1996, respectively.
NOTE 4: PLEDGED ASSETS AND REGULATORY RESTRICTIONS
Investment securities having a carrying value of $872.5 million and $901.3
million at December 31, 1997, and 1996, respectively, were pledged to secure
public and trust deposits and certain borrowed funds.
The Company and its subsidiary banks are subject to various regulatory
capital requirements administered by the Federal Reserve Bank, the Office of
the Comptroller of the Currency, the Federal Deposit Insurance Corporation and
the Arkansas State Bank Department. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by the regulators that, if undertaken, could have a
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and its subsidiary banks must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The
Company's and its subsidiary banks' capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum ratios as set forth in the
accompanying table. Management believes, as of December 31, 1997 and 1996,
that the Company and its subsidiary banks meet all capital adequacy
requirements to which they are subject.
The Company's actual capital ratios along with those of its significant
subsidiary, First Commercial Bank, N.A., of Little Rock, Arkansas, are shown
below.
44
First Commercial First Commercial
Corporation Bank, N.A.
As of December 31, As of December 31,
Regulatory ------------------ ------------------
Minimum 1997 1996 1997 1996
------------ -------- -------- -------- --------
Leverage ratio ....................................... 3.00% 9.01% 7.99% 7.10% 7.32%
Tier I risk-based capital ratio ...................... 4.00% 12.74% 11.60% 9.89% 9.63%
Total risk-based capital ratio ....................... 8.00% 13.60% 12.46% 11.06% 10.70%
As of December 31, 1997 and 1996, the most recent notification from the
regulators categorized the Company and its subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the Company's or its subsidiary banks' category.
Subsidiary banks are restricted by banking regulatory agencies from making
dividend payments above prescribed limits and are limited in making loans and
advances to the Company. At December 31, 1997, approximately $57 million was
available for payment of dividends by the Company's subsidiary banks without
the approval of regulatory authorities.
Under Federal Reserve regulation, the subsidiary banks are also limited as
to the amount they may loan to their affiliates, including the Company, unless
such loans are collateralized by specific obligations. At December 31, 1997,
the maximum amount available for transfer from the subsidiary banks to the
Company in the form of loans approximated $57 million.
Subsidiary banks are required by bank regulatory agencies to maintain
certain minimum balances of non-interest bearing deposits primarily with the
Federal Reserve. At December 31, 1997, these required balances aggregated
approximately $61 million.
NOTE 5: INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities at
December 31, 1997, are as follows:
45
Held-to-maturity
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
---------- ----------- ----------- ----------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 273,783 $ 651 $ (332) $ 274,102
Obligations of states and
political subdivisions............... 76,872 1,934 (69) 78,737
Corporate securities...................... 1,941 13 (4) 1,950
Mortgage-backed securities................ 55,584 178 (426) 55,336
Other debt securities..................... 503 - (8) 495
---------- ----------- ----------- ----------
Totals......................... $ 408,683 $ 2,776 $ (839) $ 410,620
========== =========== =========== ==========
Available-for-sale
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
---------- ----------- ----------- ----------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 946,417 $ 2,456 $ (668) $ 948,205
Obligations of states and
political subdivisions............... 169,158 4,112 (160) 173,110
Corporate securities...................... 5,442 42 (5) 5,479
Mortgage-backed securities................ 152,029 1,776 (846) 152,959
Other debt securities..................... 30,255 150 (203) 30,202
---------- ----------- ----------- ----------
Totals......................... $1,303,301 $ 8,536 $ (1,882) $1,309,955
========== =========== =========== ==========
46
The amortized cost and estimated market values of investment securities at
December 31, 1996, are as follows:
Held-to-maturity
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 359,499 $ 739 $ (1,498) $ 358,740
Obligations of states and
political subdivisions............... 76,518 1,197 (792) 76,923
Corporate securities...................... 2,010 17 (3) 2,024
Mortgage-backed securities................ 71,962 312 (1,147) 71,127
Other debt securities..................... 2,506 5 (23) 2,488
--------- ---------- ---------- ---------
Totals......................... $ 512,495 $ 2,270 $ (3,463) $ 511,302
========= ========== ========== =========
Available-for-sale
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
--------- ---------- ---------- -----------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............$ 737,531 $ 2,620 $ (1,698) $ 738,453
Obligations of states and
political subdivisions............... 152,741 2,043 (544) 154,240
Corporate securities...................... 12,671 67 (20) 12,718
Mortgage-backed securities................ 183,029 1,782 (2,467) 182,344
Other debt securities..................... 22,082 109 (238) 21,953
--------- ---------- ---------- ----------
Totals.........................$1,108,054 $ 6,621 $ (4,967) $1,109,708
========= ========== ========== =========
47
On November 15, 1995, the FASB staff issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with provisions in that Special Report,
the Company chose to reclassify securities from held-to-maturity to available-
for-sale. At the date of transfer the amortized cost of those securities was
$370.0 million and the unrealized loss on those securities was $3.5 million,
which is included in stockholders' equity.
During the years ended December 31, 1997, 1996 and 1995, investment
securities available-for-sale with a fair value at the date of sale of $34.9
million, $56.9 million and $84.2 million, respectively were sold. The gross
realized gains on such sales totaled $2,761, $209,458 and $200,398,
respectively. The gross realized losses totaled $89,305, $252,458 and
$558,686, respectively. Additionally, recognized losses of $59,469 were
recorded on other debt securities in the Company's portfolio in 1995.
The amortized cost and estimated market value of securities at December
31, 1997, by contractual maturity, are shown in the accompanying table.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Held-to-maturity
---------------------------
Amortized Estimated
(Dollars in Thousands) Cost Market Value
------------ ------------
Due in one year or less..................... $ 159,049 $ 158,691
Due after one year through five years....... 154,781 155,845
Due after five years through ten years...... 27,201 28,032
Due after ten years......................... 12,068 12,716
------------ ------------
353,099 355,284
Mortgage-backed securities.................. 55,584 55,336
------------ ------------
$ 408,683 $ 410,620
============ ============
Available-for-sale
---------------------------
Amortized Estimated
(Dollars in Thousands) Cost Market Value
------------ ------------
Due in one year or less..................... $ 627,136 $ 627,381
Due after one year through five years....... 403,624 406,285
Due after five years through ten years...... 73,611 75,540
Due after ten years......................... 46,901 47,790
------------ ------------
1,151,272 1,156,996
Mortgage-backed securities.................. 152,029 152,959
------------ ------------
$ 1,303,301 $ 1,309,955
============ ============
48
NOTE 6: LOANS AND LEASES
Loans and leases consist of the following:
(Dollars in Thousands) 1997 1996
------------ ------------
Commercial and financial................... $ 784,998 $ 733,678
Agricultural............................... 107,848 91,980
Real estate - construction................. 241,185 248,534
- mortgage..................... 2,259,751 2,065,299
Loans for purchasing or carrying securities 9,742 9,497
Consumer................................... 883,059 864,782
Direct lease financing..................... 39,264 38,914
Other...................................... 27,199 15,183
------------ ------------
4,353,046 4,067,867
Unearned income............................ (35,415) (43,232)
------------ ------------
Loans and leases, net of unearned income... $ 4,317,631 $ 4,024,635
============ ============
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired under Statement 114 was $18.9 million and $8.1
million, respectively, all of which were on a nonaccrual basis. These loans
had a related allowance for credit losses of $4.7 million and $1.8 million,
respectively. At December 31, 1997 and 1996, there were no impaired loans
that, as a result of writedowns, did not have an allowance for credit losses.
The average recorded investment in impaired loans during the years ended
December 31, 1997 and 1996, was approximately $13.5 million and $4.8 million,
respectively. For the years ended December 31, 1997 and 1996, the interest
income recognized using the cash basis method of income recognition on
impaired loans was immaterial.
Most of the Company's business activity is with customers located in the
state of Arkansas, East Texas, Northwest Louisiana and Memphis, Tennessee.
The Company's subsidiary banks grant commercial and financial, agri-business,
real estate construction and mortgage, and consumer loans. The loan portfolio
is diversified with no industry comprising greater than 10 percent of the
total outstandings.
Certain of the directors and officers of the Company, its subsidiaries,
and companies in which they have a 10% or more interest, are customers of, and
have transactions with, the Company's subsidiary banks in the ordinary course
of business. In the opinion of management, all loans and commitments to loan
included in such transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons. These loans do not include more
than a normal risk of collectibility and do not involve any unfavorable
features. The aggregate balance of such loans at December 31, 1997 and 1996,
was $162.5 million and $132.2 million, respectively. Transactions during 1997
included new loans amounting to $103.1 million and repayments amounting to
$74.6 million.
49
NOTE 7: ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
Transactions in the allowance for possible loan and lease losses are as
follows:
(Dollars in Thousands) 1997 1996 1995
-------- -------- --------
Balance - January 1....................... $ 62,495 $ 56,129 $ 49,150
Recoveries credited to allowance.......... 4,764 3,520 3,979
Provision charged to operating expense.... 28,332 13,269 4,368
Loans and leases charged off.............. (18,716) (10,560) (6,434)
Allowance resulting from acquisitions/sales 3,095 137 5,066
-------- -------- --------
Balance - December 31..................... $ 79,970 $ 62,495 $ 56,129
======== ======== ========
NOTE 8: BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
(Dollars in Thousands) 1997 1996
-------- --------
Land............................................ $ 20,439 $ 19,635
Building and improvements....................... 122,063 124,305
Leasehold improvements.......................... 12,322 9,480
Equipment....................................... 101,657 92,140
-------- --------
256,481 245,560
Less accumulated depreciation
and amortization.............................. 131,609 118,913
-------- --------
$124,872 $126,647
======== ========
NOTE 9: DEPOSITS AND SHORT-TERM BORROWINGS
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
(Dollars in Thousands)
1998..............................................$ 2,237,533
1999.............................................. 302,362
2000.............................................. 145,037
2001.............................................. 24,150
2002 and thereafter............................... 32,145
-----------
$ 2,741,227
===========
Short-term borrowings consist of the following:
(Dollars in Thousands) 1997 1996
-------- --------
Federal funds purchased........................... $ 23,254 $ 7,874
Securities sold under agreements to repurchase.... 156,990 128,915
Committed lines of credit......................... - 31,750
Other............................................. 22,941 27,402
-------- --------
$203,185 $195,941
======== ========
50
The maximum amount of outstanding repurchase agreements at any month-end
during the year ended December 31, 1997, was $157.0 million. The average
daily amount of outstanding repurchase agreements for the year ended December
31, 1997, was $125.2 million. The investment securities underlying the
repurchase agreements were held under the Company's control.
The Company has a $30.0 million and a $50.0 million committed line of
credit from two unaffiliated banks. Amounts borrowed under the $30.0 million
agreement are subject to a variable interest rate that is based on the London
InterBank Offered Rate plus 3/4 of 1% (6.47% at December 31, 1997). Amounts
borrowed under the $50.0 million agreement are subject to an interest rate
which is set monthly by the lender on a floating basis (6.31% at December 31,
1997). As of December 31, 1997, the Company had no borrowings under these
agreements.
NOTE 10: LONG-TERM DEBT
Long-term debt consists of the following:
(Dollars in Thousands) 1997 1996
-------- --------
Note payable to Federal Home Loan Bank, interest at
London InterBank Offered Rate plus .10%, due 2001
(5.79% at December 31, 1997)......................... $ 5,000 $ 5,000
Notes payable to Federal Home Loan Bank, weighted
average interest rate of 6.68%, payable monthly
including interest for 15 years...................... - 13,404
Revolving credit loan with a financial institution,
interest at New York Prime, due 2003 (8.25% at
December 31, 1996)................................... - 9,250
8.85% note -- payable $1,071,428 annually to 1997..... - 1,071
Other................................................. 103 26
-------- --------
$ 5,103 $ 28,751
======== ========
Maturities of long-term debt for years subsequent to December 31, 1997,
are as follows (dollars in thousands): 1998 - $34,; 1999 - $36; 2000 - $17;
2001 - $5,003; 2002 - $4; and $9 thereafter.
NOTE 11: INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1997,
and 1996, are as follows:
51
(Dollars in Thousands) 1997 1996
-------- --------
Deferred tax assets:
Loan loss reserve...................................$ 27,193 $ 20,344
Cost of mortgage servicing.......................... 3,232 5,113
Other - net......................................... 10,670 6,519
-------- --------
Total deferred tax assets................... 41,095 31,976
-------- --------
Valuation allowance.................................. (664) (804)
-------- --------
Net deferred tax assets.............................. 40,431 31,172
-------- --------
Deferred tax liabilities:
Operating leases.................................... 4,636 4,660
Net pension benefit................................. 6,160 5,543
Basis adjustment - purchase accounting.............. 2,533 2,514
Property, plant and equipment....................... 2,764 2,880
Other - net......................................... 5,825 3,336
-------- --------
Total deferred tax liabilities.............. 21,918 18,933
-------- --------
Net deferred tax assets................$ 18,513 $ 12,239
======== ========
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance equal to approximately the amount of
acquired tax operating loss carryforwards in excess of the subsidiaries'
future taxable items in the carryforward periods. The valuation allowance
relates solely to the State First National Bank, Texarkana, Texas; Kilgore
First National Bank, Kilgore, Texas; and First Bank of Arkansas, Jonesboro,
Arkansas, net operating loss carryforwards.
At December 31, 1997, State First National Bank, Kilgore First National
Bank and First Bank of Arkansas had net operating loss carryforwards of
approximately $916,000, $994,000 and $257,000, respectively, for Federal
income tax purposes. The carryforwards can only be used against taxable
income of the respective financial institutions and expire in 2004 and 2008.
Additionally, provisions of the Internal Revenue Code limit the annual
utilization of the net operating loss carryforwards. As the valuation
allowance is reduced, the amounts will be applied to reduce goodwill recorded
in connection with the purchase of both State First National Bank and Kilgore
First National Bank.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
52
(Dollars in Thousands) 1997 1996 1995
-------- -------- --------
Current:
Federal............................. $ 51,007 $ 43,709 $ 31,032
State............................... 2,233 4,209 2,266
-------- -------- --------
Total current....................... 53,240 47,918 33,298
-------- -------- --------
Deferred benefit:
Federal............................. (8,488) (5,620) (1,251)
State............................... (1,250) (818) (155)
-------- -------- --------
Total deferred benefit.............. (9,738) (6,438) (1,406)
-------- -------- --------
Provision for income taxes............ $ 43,502 $ 41,480 $ 31,892
======== ======== ========
The Company also recorded taxes of $9.7 million associated with the gain
on sale of two banking affiliates as required by the regulators. The gain on
sale was reported as an extraordinary item.
The components of the provision for deferred income taxes for the years
ended December 31, 1997, 1996, and 1995, are as follows:
(Dollars in Thousands) 1997 1996 1995
-------- -------- --------
Provision for possible loan and lease
losses.............................. $ (6,606) $ (3,608) $ (907)
Net pension benefit................... 608 528 763
Operating lease....................... 81 545 916
Cost of mortgage servicing............ (1,725) (4,406) -
Deferred expenses..................... (2,413) - -
Other................................. 317 503 (2,178)
-------- -------- --------
Provision for deferred income taxes... $ (9,738) $ (6,438) $ (1,406)
======== ======== ========
The reconciliation of income tax attributable to continuing operations
computed at the U.S. Federal statutory tax rates to income tax expense is:
(Dollars in Thousands) 1997 1996 1995
--------- --------- ---------
Tax at U.S. statutory rate............ 35.0% 35.0% 35.0%
Non-taxable interest income........... (2.9) (2.9) (3.3)
State income tax expense,
net of Federal income tax benefit... 0.5 1.8 1.4
Equity in earnings of unconsolidated
subsidiary.......................... (0.3) (0.3) (0.5)
Other, net............................ 1.6 1.0 0.2
--------- --------- ---------
Effective income tax rate............. 33.9% 34.6% 32.8%
========= ========= =========
Cash income taxes paid during 1997, 1996 and 1995, were $59.4 million,
$47.3 million and $28.9 million, respectively.
53
NOTE 12: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share ("EPS"):
(Dollars in Thousands, Except Per Share) 1997 1996 1995
-------- -------- --------
Numerator:
Net income before extraordinary items.... $ 84,634 $ 78,554 $ 65,234
Extraordinary item, net of income taxes
of $9,659.............................. 15,425 - -
-------- -------- --------
Net income ............................ 100,059 78,554 65,234
Preferred stock dividends................ - - -
Effect of dilutive securities............ - - -
--------- --------- --------
Numerator for basic and diluted EPS...... $100,059 $ 78,554 $ 65,234
========= ========= ========
Denominator:
Denominator for basic EPS-weighted
shares outstanding...................... 37,486,476 35,648,472 34,221,166
Effect of dilutive securities:
Employee stock options................... 435,476 384,813 317,939
---------- ---------- ----------
Denominator for diluted EPS-adjusted
weighted average shares and assumed
conversion............................. 37,921,952 36,033,285 34,539,105
========== ========== ==========
Basic earnings per share................. $ 2.67 $ 2.20 $ 1.91
========== ========== ==========
Diluted earnings per share............... $ 2.64 $ 2.18 $ 1.89
========== ========== ==========
Options to purchase 166,543 shares of common stock at $55 per share were
outstanding during 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares, and therefore, the effect would be
antidilutive.
NOTE 13: STOCK OPTIONS
Executives and other key officers have been granted options to purchase
the Company's common shares. The Company's 1987 Incentive and Nonqualified
Stock Option Plan, which expired in February 1997, was renewed as the 1997
Incentive Stock Plan (the "Plan"), for an additional ten-year term. The
Company has authorized 2,963,892 shares under the Plan. All options granted
have ten-year terms and vest ratably over a five-year period.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options issued from 1995 through 1997 under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model.
54
For the two grants during 1995 the weighted-average assumptions were: risk-
free interest rates of 7.1% and 5.6%; dividends yields of 3.4% and 3.1%;
volatility factors of the expected market price of the Company's common stock
of .20 and .19; and a weighted-average expected life of the option of 7 years.
For the grant during 1996, the weighted-average assumptions were: risk-free
interest rate of 6.3%; dividend yield of 2.7%; volatility factor of the
expected market price of the Company's common stock of .18; and a weighted-
average expected life of the option of 7 years. For the grants during 1997,
the weighted-average assumptions were: risk-free interest rate of 5.9%;
dividend yield of 2.3% volatility factor of the expected market price of the
Company's common stock of .18 and a weighted-average expected life of 7 years.
The weighted-average fair value of options granted during 1995, 1996 and 1997
is estimated at $5.97, $9.13 and $13.84 per share, respectively.
The Black-Scholes option valuation model was developed for use in estima-
ting the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different form those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair vale of the
options is amortized to expense over the options' vesting period. The pro
forma effect on net income for 1997, 1996 and 1995 is not indicative of the
pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995. The Company's pro forma information follows:
(In Thousands Except for Per Share Data) 1997 1996 1995
-------- -------- --------
Pro forma net income.......................$ 99,712 $ 78,367 $ 65,161
Pro forma basic earnings per share.........$ 2.66 $ 2.20 $ 1.90
Pro forma diluted earnings per share.......$ 2.65 $ 2.20 $ 1.90
Presented below is the activity in the Plan for the three years in the
period ended December 31, 1997, and certain other information concerning the
Plan.
55
Number of Shares
Under Option Option Price
------------------------------- --------------------------------------
Non- Weighted Avg
Incentive Qualified Total Exercise Price Total Per Share
--------- --------- --------- -------------- ----------- ------------
Outstanding at
January 1, 1995.... 70,152 642,876 713,028 $ 11.96 $ 8,527,917 $ 5.63-17.76
Granted.............. - 273,787 273,787 24.81 6,793,263 20.77-29.14
Exercised............ (22,863) (46,457) (69,320) 9.58 (663,854) 5.63-17.76
Forfeited............ - (15,756) (15,756) 17.79 (280,326) 15.34-20.77
--------- --------- --------- -----------
Outstanding at
December 31, 1995.. 47,289 854,450 901,739 15.94 $14,377,000 5.63-29.14
Granted.............. - 138,193 138,193 35.48 4,903,088 35.48
Exercised............ (5,113) (52,891) (58,004) 10.03 (581,779) 5.63-20.77
Forfeited............ - (24,528) (24,528) 18.80 (461,206) 15.34-29.14
--------- --------- --------- -----------
Outstanding at
December 31, 1996.. 42,176 915,224 957,400 19.05 $18,237,103 5.63-35.48
Granted.............. - 167,068 167,068 54.95 9,180,335 38.99-55.00
Exercised............ (22,107) (128,143) (150,250) 8.28 (1,244,346) 5.63-35.48
Forfeited............ - (25,388) (25,388) 27.40 (695,728) 15.34-35.48
--------- --------- --------- -----------
Outstanding at
December 31, 1997.. 20,069 928,761 948,830 $ 26.85 $25,477,364 $ 6.32-55.00
========= ========= ========= ===========
The information concerning current outstanding and exercisable options at
December 31, 1997, is as follows:
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Options Contractual Average Options Average
Exercise Prices Outstanding Life (in years) Exercise Price Exercisable Exercise Price
--------------- ------------- --------------- --------------- ------------- ---------------
< $10 125,262 0.8 $ 6.53 125,262 $ 6.53
$10 - $20 284,103 5.7 16.96 237,941 16.84
$20 - $30 243,185 7.6 24.99 100,850 24.99
$30 - $40 129,737 9.0 35.49 30,037 35.48
$40 - $50 - - - - -
$50 - $60 166,543 9.9 55.00 - -
------- -------
948,830 494,090
======= =======
56
NOTE 14: EMPLOYEE BENEFIT PLANS
The Company has a salary deferral retirement savings plan qualified under
Section 401(k) of the Internal Revenue Code for the benefit of all qualifying
employees who have completed one year of service. Participants in the Plan
may make deferral contributions to the Plan which are 100% vested at all
times. The Company matches a minimum of 30% of the employee's contributions
up to 6% of salary. After five years of service, the Company matches 40% of
the employee's contributions up to 6% of salary. Company-matching
contributions are fully vested after five years of service. In 1997, 1996,
and 1995, the Company made contributions of $1.6 million, $1.5 million and
$1.1 million respectively, to the 401(k) Plan.
On December 16, 1997, the Company granted a total of 100,295 stock unit
awards to certain employees. Each unit award is based on the valuation of one
share of the Company's common stock, and vests over five years. Cash payments
of one-third of the vested amount will be made at the end of years three, four
and five, based on the market value of the Company's common stock on the
anniversary dates. Upon change of control of the Company, all nonvested units
will vest 100% and be payable as of the closing date of the control change.
Compensation expense will be accrued over the five-year vesting period,
adjusted for changes in the value of the Company's common stock, unless change
of control occurs at which time total expense would be accrued.
The Company has defined benefit pension plans which provide benefits to
substantially all employees. Benefits under these plans generally are based on
the employee's years of service and compensation during the years immediately
preceding retirement. The Company's general funding policy is to contribute
amounts deductible for Federal income tax purposes. Pension (cost) benefit is
summarized as follows:
1997 1996 1995
(Dollars in Thousands) -------- -------- --------
Service cost........................... $ (2,532) $ (2,198) $ (1,723)
Interest cost.......................... (3,227) (2,656) (2,240)
Actual return on plan assets........... 12,480 6,395 10,201
Net amortization and deferral.......... (6,718) (958) (5,057)
-------- -------- --------
Total pension benefit.................. $ 3 $ 583 $ 1,181
======== ======== ========
The status of the defined benefit plans at December 31 is as follows:
1997 1996 1995
(Dollars in Thousands) -------- -------- --------
Actuarial present value of benefit obligations:
Vested benefits...................... $ 35,969 $ 32,518 $ 26,975
Nonvested benefits................... 2,499 2,151 2,494
-------- -------- --------
$ 38,468 $ 34,669 $ 29,469
======== ======== ========
Fair value of plan assets.............. $ 70,315 $ 58,192 $ 52,514
Projected benefit obligation........... (45,002) (40,371) (33,701)
Plan assets in excess of -------- -------- --------
projected benefit obligation......... 25,313 17,821 18,813
Unrecognized net (gain) loss........... (6,277) 946 (511)
Unrecognized net transition asset...... (2,753) (3,566) (4,294)
-------- -------- --------
Prepaid pension costs.................. $ 16,283 $ 15,201 $ 14,008
======== ======== ========
57
The expected long-term rate of return on the plans' assets was 9.0% for
1997, 1996, and 1995. The discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8.0% and 4.5%, respectively, at December 31,
1997, 1996 and 1995. The plans' assets are invested in diversified portfolios
that primarily consist of equity and debt securities of which 143,896 shares,
218,629 shares and 249,856 shares at December 31, 1997, 1996, and 1995,
respectively, were in the Company's common stock. The fair value of these
shares at December 31, 1997, was $8.4 million and the cash dividends paid on
these shares during 1997 were $193 thousand. Also included in these
securities were investments in various common trust funds administered by
First Commercial Trust Company, a subsidiary of the Company, of 936,798
shares, 799,484 shares, and 568,308 shares at December 31, 1997, 1996, and
1995, respectively.
NOTE 15: FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. Whenever
possible, quoted market prices were used to develop fair values. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. Statement 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments as of December
31, 1997, and 1996.
CASH AND CASH EQUIVALENTS - The carrying amounts reported in the balance sheet
for cash and short-term investments approximate those assets' fair values.
INVESTMENT SECURITIES AND TRADING ACCOUNT SECURITIES - Fair values for
investment securities are based on quoted market prices. Investment
securities available for sale and trading account securities are carried at
fair value.
LOANS, NET OF UNEARNED INCOME - Fair values for loans with variable rates are
considered to be carrying value, adjusted for changes in credit risk since
origination of the loans. Fair values for loans with fixed rates are based
upon the discounting of the estimated future cash flows of the instrument.
The future cash flows were estimated using the actual yield for each specific
loan category after adjustment to allocate the expenses of origination and
servicing of the loans. The discount rate to bring the future cash flows to
present value was estimated based upon a risk-free rate derived from the
Treasury yield curve, adjusted for the credit risk of the loan portfolio,
allocation of expenses and a prepayment fee premium.
58
NON-INTEREST BEARING DEPOSITS AND INTEREST BEARING TRANSACTION ACCOUNTS AND
SAVINGS ACCOUNTS WITH VARIABLE RATES - The carrying amounts of these
liabilities approximate market. Accordingly, carrying value is the disclosed
fair value for these deposit liabilities. Statement 107 defines the fair
value of demand deposits as the amount payable on demand, and prohibits
adjusting fair value for any value derived from retaining those deposits for
an expected future period of time. That component, commonly referred to as a
deposit base intangible, is estimated to be approximately $164.6 million at
December 31, 1997, and $158.4 million at December 31, 1996. This component is
estimated using the method described for interest bearing deposits with the
addition of certain retention and profitability projections.
INTEREST BEARING DEPOSITS - The fair value of these liabilities has been
estimated based upon the projected future cash flows for these accounts. The
future cash flows were estimated using the actual interest expense for these
deposit accounts plus adjustments for the estimated expenses incurred in the
carrying of these accounts less estimated service charges. The future cash
flows are discounted at a risk-free rate derived from the Treasury yield curve
plus allocated expenses less estimated service charge income. The fair value
of these accounts is included in the total fair value of deposit liabilities
disclosed above.
SHORT-TERM BORROWINGS - The carrying amounts reported in the balance sheet for
short-term borrowings approximate those liabilities' fair values.
LONG-TERM DEBT - The fair value of these liabilities has been estimated based
upon the discounted future cash flows. The discount rate used included a
risk-free rate derived from the Treasury yield curve plus a risk weighting
commensurate with the Company's borrowing position.
OFF-BALANCE-SHEET ITEMS - The estimated fair value of loan commitments and
letters of credit is determined based upon the Company's current fee structure
and is considered immaterial at December 31, 1997, and December 31, 1996.
(Dollars in Thousands) December 31, 1997 December 31, 1996
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents......... $ 571,155 $ 571,155 $ 654,830 $ 654,830
Investment securities
held-to-maturity................ 408,683 410,620 512,495 511,302
Investment securities
available-for-sale.............. 1,309,955 1,309,955 1,109,708 1,109,708
Trading account securities ....... 149 149 196 196
Loans, net of allowance
for loan losses................. 4,198,340 4,277,688 3,923,172 3,925,980
Financial liabilities:
Non-interest bearing deposits..... $1,222,660 $1,222,660 $1,090,401 $1,090,401
Interest bearing transaction
and savings accounts............ 1,983,803 1,983,803 1,933,713 1,933,713
Time Deposits..................... 2,741,227 2,768,725 2,736,164 2,747,857
Short-term borrowings............. 203,185 203,185 195,941 195,941
Long-term debt.................... 5,103 4,957 28,751 25,158
59
These fair value estimates may not be relevant in predicting the Company's
future earnings or cash flows. This is due primarily to the Company's inten-
tion and ability to hold its investment securities and loans to maturity.
Additionally, it is the Company's policy to balance rate sensitive assets and
rate sensitive liabilities so as to minimize the effect of rate changes on net
interest margin. Because the Company follows this policy, the unrealized
gains and losses on the asset side of the balance sheet are substantially off-
set by unrealized gains and losses on the liability side of the balance sheet.
NOTE 16: COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various commitments outstanding
and contingent liabilities, such as guarantees and commitments to extend
credit, including letters of credit to facilitate commercial trade and standby
letters of credit to assure performance or to support debt obligations, which
are not reflected in the accompanying consolidated financial statements.
These arrangements have credit risk essentially the same as that involved in
extending loans to customers. At December 31, 1997 and 1996, the subsidiaries
of the Company had outstanding standby letters of credit of $53.6 million and
$40.1 million, respectively. The majority of the standby letters of credit
outstanding at December 31, 1997, are related to debts of others, primarily
corporations, including industrial revenue bonds of approximately $5 million.
The terms of these standby letters of credit are generally less than five
years. Potential losses on standby letters of credit are considered in the
allowance for possible loan and lease losses. Fee income on standby letters
of credit is recognized in accordance with Statement of Financial Accounting
Standards No. 91.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. Financial instruments whose contract amounts represent credit
risk at December 31, 1997, are as follows:
Contractual Amount
------------------
Commitments to extend credit....................... $ 820,303,000
Standby letters of credit.......................... $ 53,607,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Company upon extension of credit is based
on management's credit evaluation of the counterparty. Collateral held varies
but may include accounts receivable, inventory, property, plant and equipment,
and income-producing commercial properties.
Two real estate partnerships owned by the Company through one of its
subsidiaries have $1.4 million and $1.5 million, respectively, at December 31,
1997, of long-term indebtedness in which the creditors' recourse to the
Company is limited to the Company's interest in the specific partnership's
collateral pledged under the related obligation.
60
Land, buildings, and equipment are leased under contracts through various
dates to 2070, with renewal options generally available. Total rent expense
of the leased premises and equipment was $5.3 million in 1997, $4.5 million in
1996, and $4.1 million in 1995. Rental income received under sub-leases
amounted to $390,000 in 1997, $338,000 in 1996, and $466,000 in 1995.
Minimum annual rentals under non-cancelable operating leases totaling
$13.9 million, are as follows: 1998 - $2.7 million, 1999 - $2.3 million, 2000
- - $1.9 million, 2001 - $1.4 million, 2002 - $918,000, and remaining years $4.7
million. Minimum annual rental income under non-cancelable operating sub-
leases amounts to $70,000 each year from 1998 through 2001, and $35,000 in
2002. The annual rent for certain of the leases varies according to changes
in the Consumer Price Index.
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 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 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 approved a $7.3 million set off
to the March 13, 1996, $22.5 million jury verdict. The set off 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 intends
to vigorously pursue the appeal. The ultimate legal and financial responsi-
bility 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.
The Company is involved in various lawsuits and litigation matters on an
ongoing basis as a result of its day-to-day operations. However, the Company
does not believe that any of these or any threatened lawsuits and litigation
matters will have a materially adverse effect on the Company's financial
position or results of operations.
61
NOTE 17: PARENT COMPANY FINANCIAL INFORMATION
Presented below are the condensed balance sheets, and statements of income
and cash flows for the parent company, First Commercial Corporation:
Balance Sheets (Dollars in Thousands) December 31,
-------------------
1997 1996
Assets -------- --------
Cash and cash equivalents.............. $ 5,044 $ 8,282
Loans and leases....................... 13,857 17,955
Investment in and advances
to subsidiaries...................... 597,698 570,449
Investment securities, estimated market
value $34,463 ($772 in 1996)......... 34,481 772
Bank premises and equipment............ 8,448 8,379
Other assets........................... 9,733 10,166
-------- --------
$669,261 $616,003
======== ========
Liabilities and Stockholders' Equity
Long-term debt......................... $ - $ 10,321
Short-term borrowings.................. - 31,750
Other liabilities...................... 18,148 16,332
Common stockholders' equity............ 651,113 557,600
-------- --------
$669,261 $616,003
======== ========
Statements of Income (Dollars in Thousands) Years Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Income
Dividends from subsidiaries............ $ 63,252 $ 65,696 $ 48,716
Interest............................... 2,022 476 213
Other income........................... 5 412 395
-------- -------- --------
Total income........................... 65,279 66,584 49,324
-------- -------- --------
Expenses
Interest............................... 1,204 2,729 3,034
Other expenses......................... 15,194 14,348 11,740
-------- -------- --------
Total expenses......................... 16,398 17,077 14,774
-------- -------- --------
Income from operations................... 48,881 49,507 34,550
Income tax benefit....................... 4,416 6,125 5,229
Equity in undistributed
earnings of subsidiaries............... 31,337 22,922 25,455
-------- -------- --------
Net income before extraordinary items.... 84,634 78,554 65,234
Extraordinary item, net of income taxes
of $9,659.............................. 15,425 - -
-------- -------- --------
Net income............................... $100,059 $ 78,554 $ 65,234
======== ======== ========
62
Statements of Cash Flows (Dollars in Thousands) Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
OPERATING ACTIVITIES
Net income......................................................... $100,059 $ 78,554 $ 65,234
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................................... 3,057 2,904 2,351
Undistributed earnings of subsidiaries.......................... (31,337) (22,922) (25,455)
Gain on sale of equipment....................................... - - (3)
Increase (decrease) in taxes payable............................ 427 (2,033) 3,426
Increase in interest receivable ...................... (109) (61) -
Increase (decrease) in interest payable......................... (408) 33 (647)
Increase in dividends payable................................... 2,533 1,312 993
Decrease (increase) in other receivables........................ 540 (1,674) 1,834
Decrease (increase) in prepaid assets........................... (343) 23 47
Increase (decrease) in accrued expenses......................... (736) 2,811 (1,667)
-------- -------- --------
Net cash provided by operating activities.......................... 73,683 58,947 46,113
INVESTING ACTIVITIES
Proceeds from maturing investment securities available-for-sale.... 28,837 - -
Purchases of investment securities available-for-sale.............. (62,546) (100) (200)
Net decrease (increase) in loans................................... 4,098 (16,722) 63
Sale (purchase) of subsidiaries.................................... 26,127 3,610 (6,122)
Decrease (increase) in investments in subsidiaries................. 5,547 (13,508) (5,770)
Decrease (increase) in advances to subsidiaries.................... 1,540 2,400 (1,891)
Fixed asset purchases.............................................. (2,954) (94) (3,207)
Proceeds from sale of fixed assets................................. 173 185 107
-------- -------- --------
Net cash provided by (used in) investing activities................ 822 (24,229) (17,020)
FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings................... (31,750) (6,846) (3,104)
Repayment of long-term debt........................................ (10,321) (1,072) (6,321)
Proceeds from long-term debt .................................. - 2,250 4,500
Dividends paid on common stock..................................... (37,224) (26,386) (22,370)
Proceeds from issuance of common stock............................. 31 107 7,557
Purchases of treasury stock........................................ (3) (6,368) (5,245)
Sales of treasury stock............................................ - 223 -
Purchase of partial shares resulting
from stock dividends............................................. (86) (44) (44)
Stock options exercised............................................ 1,610 712 1,135
-------- -------- --------
Net cash used in financing activities.............................. (77,743) (37,424) (23,892)
Net increase (decrease) in cash and cash equivalents............... (3,238) (2,706) 5,201
Cash and cash equivalents at beginning of year..................... 8,282 10,988 5,787
-------- -------- --------
Cash and cash equivalents at end of year........................... $ 5,044 $ 8,282 $ 10,988
======== ======== ========
63
NOTE 18: SUBSEQUENT EVENT
On February 8, 1998, the Company and Regions Financial Corporation
("Regions") entered into a definitive agreement that provides for the merger
of the Company into Regions. Following the merger, Regions will have assets
of $32.8 billion and 667 banking locations in nine southern states.
Under the terms of the agreement, Regions will exchange 1.7 shares of its
common stock for each share of the Company's common stock. Based on Regions'
closing stock price on February 6, 1998, the transaction would be valued at
approximately $2.7 billion. The merger, which is expected to be a tax-free
reorganization for federal income tax purposes and accounted for as a pooling
of interests, is expected to be consummated during the third quarter of 1998,
pending Regions and Company shareholder approval, regulatory approval and
other customary conditions of closing. Approximately 65.9 million shares of
Regions' common stock are expected to be issued in the transaction.
In connection with the execution of the definitive agreement, the Company
granted Regions an option to purchase, under certain circumstances, up to
19.9% of the Company's outstanding shares of common stock.
64
STATISTICAL DISCLOSURE
Set forth below is the information required by Guide 3, "Statistical
Disclosure by Bank Holding Companies."
ANALYSIS OF SELECTED FINANCIAL STATISTICS
For the Years Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
Profitability
Net interest margin......................................................... 4.69% 4.51% 4.34%
Efficiency ratio <F1>....................................................... 52.59% 54.78% 59.65%
Return on average common stockholders' equity............................... 16.15% 14.71% 14.67%
Return on average assets.................................................... 1.48% 1.25% 1.19%
Basic earnings per common share............................................. $ 2.67 $ 2.20 $ 1.91
Diluted earnings per common share........................................... $ 2.64 $ 2.18 $ 1.89
Cash dividends paid......................................................... $ .97 $ .80 $ .70
Dividend payout ratio....................................................... 37.10% 33.59% 34.29%
Capital Adequacy
Total stockholders' equity to assets........................................ 9.45% 8.43% 8.06%
Leverage ratio.............................................................. 9.01% 7.99% 7.31%
Tier I risk-based capital ratio............................................. 12.74% 11.60% 11.51%
Total risk-based capital ratio.............................................. 13.60% 12.46% 12.34%
Asset Quality
Net charge-offs to average loans and leases................................. .33% .18% .07%
Allowance for possible loan and lease losses to total loans and leases...... 1.85% 1.55% 1.46%
Non-performing loans to total loans and leases.............................. 1.00% .68% .47%
Non-performing assets to total loans and leases and other real estate....... .94% .57% .36%
Allowance for possible loan and lease losses to non-performing loans........ 185.39% 227.94% 312.24%
Allowance for possible loan and lease losses and other real estate losses
to non-performing assets................................................... 196.90% 271.15% 400.35%
<FN>
<F1> Excludes effect of non-recurring income and expenses and intangible amortization.
</FN>
65
ANALYSIS OF CHANGES IN NET REVENUE FROM EARNING ASSETS (FTE)
(Dollars in Thousands)
Change from 1996 to 1997 Change from 1995 to 1996
-------------------------- --------------------------
Increase (Decrease) Increase (Decrease)
-------------------------- --------------------------
Due to Due to
Due to Yield/ Due to Yield/
Volume Cost Total Volume Cost Total
-------- -------- -------- -------- -------- --------
Revenue from earning assets
Short-term investments.............................. $ 904 $ 468 $ 1,372 $ 3,869 $ (1,510)$ 2,359
Trading account securities.......................... (11) 2 (9) 5 26 31
Investment securities............................... 5,986 2,378 8,364 6,875 3,035 9,910
Loans and leases, net of unearned income............ 31,600 478 32,078 49,561 8,009 57,570
-------- -------- -------- -------- -------- --------
Change in revenue from earning assets................ 38,479 3,326 41,805 60,310 9,560 69,870
-------- -------- -------- -------- -------- --------
Expense for interest bearing liabilities
Interest bearing transaction and savings accounts... 4,387 1,410 5,797 2,946 (1,776) 1,170
Certificates of deposit $100,000 and over........... 1,344 (769) 575 8,361 6,864 15,225
Other time deposits................................. 5,105 (845) 4,260 14,711 (1,143) 13,568
Short-term borrowings............................... (436) 598 162 (19) (1,223) (1,242)
Long-term debt...................................... (650) (38) (688) (276) (340) (616)
-------- -------- -------- -------- -------- --------
Change in interest expense........................... 9,750 356 10,106 25,723 2,382 28,105
-------- -------- -------- -------- -------- --------
Change in net revenue from earning assets............ $ 28,729 $ 2,970 $ 31,699 $ 34,587 $ 7,178 $ 41,765
======== ======== ======== ======== ======== ========
<FN>
NOTE: Interest income on tax-exempt securities, loans and leases is calculated on a tax-equivalent basis,
using a federal marginal income tax rate of 35%, and is reduced for non-deductible carrying interest. Loan
balances include non-performing loans. See Note 1 of Notes to Consolidated Financial Statements for a
description of the income recognition policy for such loans. Changes not solely due to volume or rate changes
are allocated to rate.
</FN>
66
AVERAGE BALANCES AND INTEREST RATES (FTE)
(Dollars in Thousands) 1997 1996 1995
--------------------------- --------------------------- ---------------------------
Tax Equiv. Int. Tax Equiv. Int. Tax Equiv. Int.
---------------- ---------------- ----------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
ASSETS ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
EARNING ASSETS
Short-term investments.... $ 167,343 $ 9,073 5.42% $ 149,769 $ 7,701 5.14% $ 86,861 $ 5,342 6.15%
Trading account securities 373 26 6.97 540 35 6.48 245 4 1.63
Investment securities
- taxable................. 1,465,139 88,634 6.05 1,392,680 81,933 5.88 1,301,811 73,043 5.61
- non-taxable............. 233,991 16,915 7.23 207,860 15,252 7.34 181,861 14,232 7.83
Loans and leases, net of
unearned income.......... 4,287,940 387,919 9.05 3,938,211 355,841 9.04 3,377,075 298,271 8.83
---------- -------- ---------- -------- ---------- --------
Total earning assets..... 6,154,786 502,567 8.17 5,689,060 460,762 8.10 4,947,853 390,892 7.90
---------- -------- ---------- -------- ---------- --------
Allowance for possible
loan and lease losses.... (72,883) (57,825) (51,694)
NON-EARNING ASSETS
Cash and due from banks.. 310,924 288,880 332,611
Bank premises and equip.. 128,903 127,831 113,553
Other real estate owned.. 3,595 2,425 2,674
Other assets............. 233,603 233,650 154,407
---------- ---------- ----------
Total assets.............. $6,758,928 $6,284,021 $5,499,404
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Interest bearing transaction
and savings accounts..... $1,910,495 $ 51,809 2.71 $1,744,201 $ 46,012 2.64 $1,636,660 $ 44,842 2.74
Certificates of deposit
$100,000 and over........ 764,226 41,724 5.46 740,063 41,149 5.56 559,578 25,924 4.63
Other time deposits....... 2,059,541 109,611 5.32 1,964,357 105,351 5.36 1,693,009 91,783 5.42
Short-term borrowings..... 179,160 10,124 5.65 187,358 9,962 5.32 187,676 11,204 5.97
Long-term debt............ 13,936 934 6.70 23,250 1,622 6.98 26,519 2,238 8.44
---------- -------- ---------- -------- ---------- --------
Total int bearing liab ... 4,927,358 214,202 4.35 4,659,229 204,096 4.38 4,103,442 175,991 4.29
---------- -------- ---------- -------- ---------- --------
NON-INTEREST BEARING LIABILITIES
Non-interest bearing
transaction accounts..... 1,141,038 1,024,800 908,876
Other liabilities......... 70,927 65,977 42,389
---------- ---------- ----------
Total liabilities........ 6,139,323 5,750,006 5,054,707
Common stockholders' equity 619,605 534,015 444,697
---------- ---------- ----------
Total liabilities and
stockholders' equity...... $6,758,928 $6,284,021 $5,499,404
Net revenue from ========== ========== ==========
earning assets........... $288,365 $256,666 $214,901
Net yield on earning assets ======== 4.69% ======== 4.51% ======== 4.34%
67
NOTE: Interest income on tax-exempt securities, loans and leases is
calculated on a tax-equivalent basis, using a federal marginal income tax rate
of 35%, and is reduced for non-deductible carrying interest. Loan balances
include non-accrual loans. See Note 1 of Notes to Consolidated Financial
Statements for a description of the income recognition policy.
LOANS AND LEASES BY TYPE AND NON-PERFORMING STATUS
(Dollars in Thousands) December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Types of loans and leases
Commercial, financial and agricultural........ $ 892,846 $ 825,775 $ 741,749 $ 604,098 $ 525,162
Real estate - construction.................... 241,185 248,534 197,858 140,504 99,902
- 1-4 family...................... 1,194,699 1,119,856 1,148,158 851,313 738,453
- other........................... 1,065,052 945,437 861,063 664,052 560,204
Loans for purchasing or carrying securities... 9,742 9,497 11,568 9,304 11,277
Consumer...................................... 883,059 864,788 862,509 734,242 572,613
Direct lease financing........................ 39,264 38,914 32,196 30,689 21,981
Other......................................... 27,199 15,066 52,403 42,876 36,575
---------- ---------- ---------- ---------- ----------
Total loans and leases...................... $4,353,046 $4,067,867 $3,907,504 $3,077,078 $2,566,167
========== ========== ========== ========== ==========
Non-performing loans
Impaired loans................................ $ 18,900 $ 8,093 $ 4,053 $ - $ -
Other non-accrual loans....................... 13,481 10,216 6,572 10,192 11,654
Loans past due 90 days or more and
still accruing............................... 9,841 8,263 7,182 3,611 3,667
Restructured loans............................ 914 845 170 386 520
---------- ---------- ---------- ---------- ----------
Total non-performing loans.................. $ 43,136 $ 27,417 $ 17,977 $ 14,189 $ 15,841
========== ========== ========== ========== ==========
<FN>
<F1> The total interest income that would have been recorded on non-accrual loans if the loans had been current
in accordance with their terms is $2,697, $1,531 and $909 for 1997, 1996 and 1995, respectively.
Interest income actually received on these loans is immaterial.
<F2> Loans are placed on non-accrual status when doubt as to collectibility of interest or principal exists.
See Note 1 of Notes to Consolidated Financial Statements for a description of the income recognition
policy for such loans.
<F3> Presently there are no significant amounts of loans where serious doubts exist as to the ability of the
borrowers to comply with the current loan payment terms which are not included in the non-performing
categories as reflected above. Additionally, no concentrations of loans exceeding 10% of total loans
currently exist which are required to be disclosed as a separate category of loans above.
<F4> Impaired loan data for 1993 & 1994 is not available.
</FN>
68
MATURITY AND INTEREST RATE SENSITIVITY OF LOANS
(Dollars in Thousands) Loans at December 31, 1997, maturing in:
-------------------------------------------------
Over One
One Year Through Over
or Less Five Years Five Years Total
---------- ---------- ---------- ----------
Commercial, financial and agricultural...................... $ 524,922 $ 293,741 $ 74,183 $ 892,846
Real estate - construction.................................. 162,061 46,778 32,346 241,185
---------- ---------- ---------- ----------
Total................................................... $ 686,983 $ 340,519 $ 106,529 $1,134,031
========== ========== ========== ==========
Predetermined rates......................................... $ 477,796 $ 244,917 $ 49,610 $ 772,323
Variable rates.............................................. 209,187 95,602 56,919 361,708
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Commercial, financial and agricultural............. $ 20,999 $ 12,624 $ 11,675 $ 11,304 $ 12,817
Real estate........................................ 21,538 20,686 20,206 17,203 18,615
Consumer........................................... 12,497 11,249 8,475 6,193 6,561
Other.............................................. 2,421 750 617 885 763
General risk....................................... 22,515 17,186 15,156 13,565 12,105
---------- ---------- ---------- ---------- ----------
Total allowance for possible loan and lease losses.. $ 79,970 $ 62,495 $ 56,129 $ 49,150 $ 50,861
========== ========== ========== ========== ==========
PERCENTAGE DISTRIBUTION OF ALLOWANCE ALLOCATION AND CATEGORIES OF LOANS AS A
PERCENT OF LOANS
DECEMBER 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
Allowance Lns Allowance Lns Allowance Lns Allowance Lns Allowance Lns
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Commercial, financial
and agricultural.......... 26.3% 20.4% 20.2% 20.3% 20.8% 19.0% 23.0% 19.6% 25.2% 20.5%
Real estate................ 26.9 57.5 33.1 56.9 36.0 56.5 35.0 53.8 36.6 54.5
Consumer................... 15.6 20.3 18.0 21.3 15.1 22.0 12.6 23.9 12.9 22.3
Other...................... 3.0 1.8 1.2 1.5 1.1 2.5 1.8 2.7 1.5 2.7
General risk............... 28.2 --- 27.5 --- 27.0 --- 27.6 --- 23.8 ---
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
69
SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE
(Dollars in Thousands) December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Beginning balance of allowance for possible
loan and lease losses......................... $ 62,495 $ 56,129 $ 49,150 $ 50,861 $ 40,878
Loans and leases charged off:
Commercial, financial and agricultural...... 5,096 1,763 1,091 842 2,090
Real estate - construction.................. 95 58 1,108 31 39
Real estate - mortgage...................... 3,021 1,399 702 820 2,287
Consumer.................................... 10,221 7,337 3,470 2,663 2,463
Other....................................... 283 3 63 11 129
---------- ---------- ---------- ---------- ----------
Total charged off.............................. 18,716 10,560 6,434 4,367 7,008
---------- ---------- ---------- ---------- ----------
Recoveries of loans and leases
previously charged off:
Commercial, financial and agricultural...... 1,466 1,156 2,092 1,522 2,149
Real estate - construction.................. 50 34 403 73 67
Real estate - mortgage...................... 1,342 635 390 673 892
Consumer.................................... 1,865 1,590 1,063 891 706
Other....................................... 41 105 31 80 31
---------- ---------- ---------- ---------- ----------
Total recoveries............................... 4,764 3,520 3,979 3,239 3,845
---------- ---------- ---------- ---------- ----------
Net loans and leases charged off............... 13,952 7,040 2,455 1,128 3,163
Provision for possible loan and lease losses... 28,332 13,269 4,368 (2,021) 5,018
Balance of allowance of acquired/merged banks.. 3,095 137 5,066 1,438 8,128
---------- ---------- ---------- ---------- ----------
Ending balance of allowance for possible
loan and lease losses.......................... $ 79,970 $ 62,495 $ 56,129 $ 49,150 $ 50,861
========== ========== ========== ========== ==========
Average loans and leases outstanding........... $4,287,940 $3,938,211 $3,377,075 $2,730,261 $2,274,912
70
INVESTMENT SECURITIES
(Dollars in Thousands)
December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Held-to-maturity
U.S. Treasuries and government agencies.............................. $ 273,783 $ 360,719 $ 299,104
States and political subdivisions.................................... 76,872 76,518 96,325
Other................................................................ 58,028 75,258 97,081
---------- ---------- ----------
Total............................................................ 408,683 512,495 492,510
---------- ---------- ----------
Available-for-sale
U.S. Treasuries and government agencies.............................. 948,205 738,453 696,486
States and political subdivisions.................................... 173,110 154,241 113,816
Other................................................................ 188,640 217,014 234,331
---------- ---------- ----------
Total............................................................ 1,309,955 1,109,708 1,044,633
---------- ---------- ----------
Total investment securities...................................... $1,718,638 $1,622,203 $1,537,143
========== ========== ==========
<FN>
The investment portfolio of the Company is used to generate stable earnings, provide liquidity and serve as one
of the primary means of interest rate risk management. Active, aggressive management of the portfolio is
required to accomplish these goals. The purchase of held-to-maturity investment securities is made with the
positive intent and ability to hold these assets to maturity. Held-to-maturity investment securities are
therefore carried at amortized cost in the financial statements. Available-for-sale investment securities are
carried at fair value. Changes in the economy, the yield curve, interest rate risk and liquidity are all part
of the business cycle. Changes in these areas may necessitate altering the investment portfolio. Sales of
securities, when necessary to react to the aforementioned changes, are not materially influenced by unrealized
losses or gains existing in the portfolio.
</FN>
71
INVESTMENT SECURITIES PORTFOLIO ANALYSIS
(Dollars in Thousands) Investments at December 31, 1997, maturing in:
----------------------------------------------------------------------------------------
Less Than One to Five Five to Ten More Than Ten
One Year Years Years Years Total
----------------- ----------------- ----------------- ----------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Held-to-maturity
U.S. Treasuries
and government
agencies.......... $ 149,348 5.47% $ 122,288 6.15% $ 2,147 6.69% - -% $ 273,783 5.79%
States and political
subdivisions...... 8,892 7.69 30,857 7.79 25,054 7.91 12,069 8.30 76,872 7.89
Other.............. 22,435 5.54 33,360 6.00 910 6.90 1,323 7.02 58,028 5.86
---------- ---------- ---------- ---------- ----------
Total.............. 180,675 5.59 186,505 6.39 28,111 7.78 13,392 8.18 408,683 6.19
---------- ---------- ---------- ---------- ----------
Available-for-sale
U.S. Treasuries
and government
agencies.......... 604,025 5.54 321,588 6.21 19,398 6.23 3,194 6.48 948,205 5.78
States and political
subdivisions...... 21,135 6.83 81,054 7.36 55,992 7.83 14,929 8.04 173,110 7.50
Other.............. 39,784 5.72 96,336 6.22 12,128 6.63 40,392 6.05 188,640 6.10
---------- ---------- ---------- ---------- ----------
Total.............. 664,944 5.59 498,978 6.39 87,518 7.29 58,515 6.59 1,309,955 6.05
---------- ---------- ---------- ---------- ----------
Total investment
securities........ $ 845,619 5.59% $ 685,483 6.39% $ 115,629 7.42% $ 71,907 6.89% $1,718,638 6.08%
========== ========== ========== ========== ==========
<FN>
NOTE: Interest income on tax-exempt securities is calculated on a tax-equivalent basis, using a federal
marginal income tax rate of 35%.
</FN>
MATURITY DISTRIBUTION OF TIME DEPOSITS $100,000 AND OVER
(Dollars in Thousands) December 31, 1997
--------------------------
Certificates
of Deposit Other Time
------------ ------------
Three months or less........................$ 303,401 $ 22,318
Over three months to six months............. 174,158 14,296
Over six months to twelve months............ 160,619 7,185
Over twelve months.......................... 88,822 1,610
------------ ------------
Total............................$ 727,000 $ 45,409
============ ============
72
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD
UNDER AGREEMENTS TO REPURCHASE
(Dollars in Thousands) December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Balance at December 31............ $ 180,244 $ 141,357 $ 191,965
Average daily amount outstanding.. 138,903 137,724 138,890
Maximum month-end balance......... 182,202 180,347 216,209
Average daily interest rate....... 5.6% 4.8% 5.9%
Weighted average interest rate
on balance at December 31........ 4.8% 4.6% 5.0%
SELECTED QUARTERLY OPERATING RESULTS (IN THOUSANDS EXCEPT FOR PER SHARE DATA)
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
Interest Income:
First Quarter.................................................... $ 122,930 $ 110,877 $ 87,190
Second Quarter................................................... 126,487 113,001 94,187
Third Quarter.................................................... 124,162 114,970 98,740
Fourth Quarter................................................... 123,591 117,154 106,148
- --------------------------------------------------------------------------------------------------------------
$ 497,170 $ 456,002 $ 386,265
Net Interest Income:
First Quarter.................................................... $ 68,773 $ 60,133 $ 48,273
Second Quarter................................................... 71,892 62,763 50,829
Third Quarter.................................................... 71,492 64,073 53,364
Fourth Quarter................................................... 70,811 64,937 57,808
- --------------------------------------------------------------------------------------------------------------
$ 282,968 $ 251,906 $ 210,274
Provision for Possible Loan and Lease Losses:
First Quarter.................................................... $ 2,842 $ 1,868 $ 1,107
Second Quarter................................................... 3,114 2,119 737
Third Quarter.................................................... 18,996 2,633 776
Fourth Quarter................................................... 3,380 6,649 1,748
- --------------------------------------------------------------------------------------------------------------
$ 28,332 $ 13,269 $ 4,368
Net Income:
First Quarter.................................................... $ 22,561 $ 19,010 $ 14,344
Second Quarter................................................... 23,629 19,972 15,356
Third Quarter.................................................... 26,874 20,595 17,221
Fourth Quarter................................................... 26,995 18,977 18,313
- --------------------------------------------------------------------------------------------------------------
$ 100,059 $ 78,554 $ 65,234
73
SELECTED QUARTERLY OPERATING RESULTS (CONTINUED)
(In Thousands Except for Per Share Data) Years Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
Basic Earnings Per Common Share:
First Quarter.................................................... $ .60 $ .53 $ .42
Second Quarter................................................... .63 .56 .45
Third Quarter.................................................... .72 .58 .51
Fourth Quarter................................................... .72 .53 .53
- --------------------------------------------------------------------------------------------------------------
$ 2.67 $ 2.20 $ 1.91
Diluted Earnings Per Common Share:
First Quarter.................................................... $ .60 $ .53 $ .42
Second Quarter................................................... .62 .55 .45
Third Quarter.................................................... .71 .57 .50
Fourth Quarter................................................... .71 .53 .52
- --------------------------------------------------------------------------------------------------------------
$ 2.64 $ 2.18 $ 1.89
Dividends Per Common Share:
First Quarter.................................................... $ .23 $ .19 $ .17
Second Quarter................................................... .23 .19 .17
Third Quarter.................................................... .23 .19 .17
Fourth Quarter................................................... .28 .23 .19
- --------------------------------------------------------------------------------------------------------------
$ .97 $ .80 $ .70
Bid Price Per Common Share:
High for the period:
First Quarter.................................................... $ 39.89 $ 29.70 $ 20.67
Second Quarter................................................... 40.00 28.46 21.72
Third Quarter.................................................... 46.08 31.30 23.94
Fourth Quarter................................................... 59.69 37.75 29.48
Low for the period:
First Quarter.................................................... $ 35.00 $ 28.34 $ 18.45
Second Quarter................................................... 35.48 26.98 20.55
Third Quarter.................................................... 38.81 26.53 21.41
Fourth Quarter................................................... 44.52 31.55 23.52
Note: Third quarter 1997 results include an extraordinary gain, net of taxes
of $15,425 ($0.41 per basic and diluted share). Quarterly results have been
restated to reflect pooling-of-interests business combinations and will differ
from amounts previously reported in Forms 10-Q.
74
Item 2. PROPERTIES
----------
The principal offices of the Company and the following affiliates, First
Commercial Bank, N.A., First Commercial Mortgage Company, First Commercial
Trust Company, N.A., First Commercial Investments, Inc., and Financial Fleet
Services, Inc., are located in the First Commercial Building at 400 West
Capitol Avenue in downtown Little Rock, Arkansas. The Company and its
affiliates lease approximately 235,000 combined square feet of space. The
office space is held under long-term leases from First Commercial, Inc., a
wholly owned subsidiary of First Commercial Bank, N.A.
The Company and its banking subsidiaries and affiliates maintain 165
banking locations throughout the states of Arkansas, Texas, Tennessee,
Louisiana and Oklahoma. The majority of these offices are owned by the
respective subsidiary and affiliate banks.
The information regarding lease commitments is contained in this Form 10-K
on page 59, in Note 16, "Commitments and Contingencies," of the Notes to the
Consolidated Financial Statements, and is incorporated herein by reference.
Item 3. LEGAL PROCEEDINGS
-----------------
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 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 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 approved a $7.3 million set off
to the March 13, 1996, $22.5 million jury verdict. The set off 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.
75
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 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No information is required in response to this Item as no matters were
submitted to a vote of Registrant's security holders during the fourth quarter
of the fiscal year covered by this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------
The information required by this Item is contained in this Form 10-K in
the "Dividend Policy" section on page 25, and in the table on page 73, and is
incorporated herein by reference.
The information on dividend restrictions is contained in this Form 10-K in
Note 4, "Pledged Assets and Regulatory Restrictions," on page 43 and Note 10,
"Long-term Debt," on page 50 of the Notes to the Consolidated Financial
Statements, and is incorporated herein by reference.
On March 25, 1998, the Company, in an offering exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, issued 1,115,850
Company common shares to the shareholders of Kemmons Wilson, Inc., in exchange
for all of the outstanding shares of common stock of Kemmons Wilson, Inc.
Item 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this Item is contained in this Form 10-K in
the "Six-Year Financial Summary" table on page 13, and is incorporated herein
by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by this Item is contained in this Form 10-K in
the "Management's Discussion and Analysis" section on pages 9 through 25, and
is incorporated herein by reference.
76
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-----------------------------------------------------------
The information required by this Item is contained in this Form 10-K in
the "Interest Rate Sensitivity" table on page 15, and is incorporated herein
by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this Item is contained in this Form 10-K in
Consolidated Financial Statements and the Notes thereto on pages 28 through
63, the "Report of Management and Independent Auditors" on pages 26 through
27, the "Selected Quarterly Operating Results" table on pages 72 through 73,
and the "Statistical Disclosure" section on pages 64 through 73, and is
incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
No information is required in response to this Item.
77
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following table presents for each director of the Company, his or her
principal occupation, the number of shares of common stock of the Company
beneficially owned at February 13, 1998, and certain other information.
Percentage
Common Stock of Common
Name and Principal Occupation Director Beneficially Stock
or Employment<F1> Age Since Owned<F2> Outstanding
------------------------------------- ----- -------- ----------------- -----------
(B) John W. Allison
President and Chief Executive
Officer, Spirit Homes, Inc. 51 1985 793,597<F4> 2.11%
(A) Truman Arnold
Chairman and Chief Executive
Officer, Truman Arnold Companies, Inc. 60 1994 955,946<F5> 2.54%
(A) William H. Bowen
Retired Chairman of the Company 74 1971 693,961<F3><F6> 1.85%
(C) Peggy Clark
Manager/Partial Owner,
Clark Timberlands 48 1994 1,724 .01%
(C) Robert G. Cress
Chairman and Chief Executive Officer,
J.A. Riggs Tractor Company 65 1985 29,784 .08%
(A) Cecil W. Cupp, Jr.
Retired Chairman,
Arkansas Bank & Trust Company 73 1990 780,572<F7> 2.08%
(A) Wallace W. Fowler.
Chairman
Fowler Foods, Inc. 62 1997 1,125,465<F8> 2.99%
(B) Barnett Grace
Chairman, President and Chief Executive
Officer of the Company 53 1981 472,700<F3><F9> 1.26%
78
Percentage
Common Stock of Common
Name and Principal Occupation Director Beneficially Stock
or Employment<F1> Age Since Owned<F2> Outstanding
------------------------------------- ----- -------- ----------------- -----------
(A) Edwin P. Henry
Vice Chairman of the Company;
Executive Vice President of 60 1997 139,803<F3><F10> .37%
First Commercial Bank, N. A.,
Little Rock, Arkansas
(A) Frank D. Hickingbotham
Chairman,
TCBY Enterprises, Inc. 61 1995 1,499,620<F11> 3.99%
(C) Walter E. Hussman, Jr.
Publisher,
Arkansas Democrat-Gazette 51 1994 2,193<F12> .01%
(A) Frederick E. Joyce, M.D.
Physician 63 1994 240,225<F13> .64%
(B) Jack G. Justus
Executive Vice President,
Arkansas Farm Bureau Federation 66 1984 8,071<F14> .02%
(B) Michael W. Murphy
President,
Marmik Oil Company 50 1985 9,201<F15> .02%
(A) David Pryor
Former U. S. Senator 63 1997 440 --
(A) Wayne W. Pyeatt.
Retired Banker 73 1997 389,778<F16> 1.04%
(C) Sam C. Sowell
Consultant 64 1976 28,810<F17> .08%
(A) Paul D. Tilley
President and Chief Executive Officer,
Highland Resources, Inc. 56 1989 136,782<F18> .36%
79
<FN>
(A) Term expires at Annual Meeting in 1998.
(B) Term expires at Annual Meeting in 1999.
(C) Term expires at Annual Meeting in 2000.
<F1> All persons have been engaged in the occupation identified in the foregoing table for at least five
years with the exception of Cecil W. Cupp, Jr. Mr. Cupp's retirement was effective December 31, 1994.
<F2> All shares listed are owned of record, except as described in <F3> through <F18>.
<F3> Includes interests in the Company's common stock under the Company's payroll based stock ownership plan
and employee stock ownership plan as of December 31, 1996, which interests include sole voting power
with respect to the shares, as follows: Mr. Bowen 29,660, Mr. Grace 34,055 and Mr. Henry 32,876.
<F4> John W. Allison owned of record 656,771 shares; 19,381 shares were owned by his wife; 17,115 shares,
for which Mr. Allison and his wife have custodial power, were owned by Mr. Allison's children and
grandchildren; 100,330 shares were owned by Capital Buyers, Inc., of which Mr. Allison is president.
<F5> Truman Arnold owned of record 580,510 shares; 89,991 shares, of which Mr. Arnold has the right to
direct the voting, were owned by a trust; 242,550 shares were owned by Truman Arnold Companies, Inc.,
of which Mr. Arnold is chairman and chief executive officer; 42,895 shares, of which Mr. Arnold has the
right to direct the voting, were owned by Truman Arnold Companies, Inc., Retirement Trust.
<F6> William H. Bowen owned of record 573,253 shares; 91,048 shares were owned by his wife.
<F7> 778,588 shares were owned by a trust for which Cecil W. Cupp, Jr. is trustee with the right to vote
such shares; 1,984 shares were owned by a trust for which his wife is trustee with the right to vote
such shares.
<F8> Wallace Fowler owned of record 437,078 shares; 1,050 shares were owned jointly with his wife; 413,042
shares were owned by his wife; 180,734 shares were owned by Fowler Family Investments Partnership of
which Mr. Fowler is the managing partner; 65,737 shares were owned by Fowler Foods, Inc. of which Mr.
Fowler is the chairman; 27,824 shares were owned by Town and Country Insurance Agency of which Mr.
Fowler is a director and vice president.
<F9> Barnett Grace owned of record 289,138 shares; 1,944 shares were owned by his wife; 3,014 shares, for
which Mr. Grace has custodial power, were owned by Mr. Grace's children; 96,307 shares were owned by
various trusts for which Mr. Grace is trustee with the right to vote such shares. Includes exercisable
options granted under the 1987 Incentive and Nonqualified Stock Option Plan of 48,242.
<F10>Edwin P. Henry owned of record 11,674 shares; 14,853 shares were jointly owned with his wife. Includes
80,400 shares of exercisable options granted under the 1987 Incentive and Nonqualified Stock Option
Plan.
<F11>Frank D. Hickingbotham owned of record, 1,447,620 shares; 10,000 shares were jointly owned with his
wife; 42,000 shares, of which Mr. Hickingbotham has the right to direct the voting, were owned by a
charitable trust.
<F12>Walter E. Hussman, Jr., owned of record 1,585 shares; 608 shares were owned by various trusts for which
Mr. Hussman is trustee with the right to vote such shares.
<F13>Frederick E. Joyce, M.D. owned of record 232,602 shares; 7,623 shares, of which Dr. Joyce has the right
to direct the voting, were owned by a retirement trust.
80
<F14>Jack G. Justus owned 8,071 shares jointly with his wife.
<F15>Michael W. Murphy owned of record 371 shares; 2,729 shares were owned by his wife; 6,101 shares were
owned by trusts for which Mr. Murphy is trustee with the right to vote such shares.
<F16>Wayne Pyeatt owned of record 213,220 shares; 176,558 were owned by trusts for which Mr. Pyeatt is
trustee and has the right to vote.
<F17>Sam C. Sowell owned of record 11,750 shares; 17,060 shares were owned jointly with his wife.
<F18>Paul D. Tilley owned of record 3,540 shares; 133,242 shares were owned by Highland Resources, Inc., of
which Mr. Tilley is the president and chief executive officer.
</FN>
The following directors occupy directorships in other registered
companies as indicated:
William H. Bowen TCBY Enterprises, Inc.
Frank D. Hickingbotham TCBY Enterprises, Inc.
Frederick E. Joyce, M.D. Southwestern Electric Power Company
Michael W. Murphy Murphy Oil Corporation
OTHER INFORMATION
The Board of Directors of the Company held thirteen meetings during
1997. The Board of Directors has Audit and Compensation committees. The
Board of Directors does not have a standing nominating committee.
The Audit Committee, which met six times during 1997, presently consists
of Directors Clark, Cress, and Joyce. The functions of the Audit Committee
are (a) to review and approve the adequacy of the Company's internal audit
plan, internal audit staff and audit budget; (b) to evaluate the Company's
internal control structure and risk management program; (c) to recommend
annually to the Board of Directors the appointment of independent auditors
at determined fees; (d) to approve the scope of the prospective annual
audit; (e) to review the Company's financial reporting process and
significant accounting policies; and (f) to review the results of various
examinations of the Company and its affiliates and management's response
thereto.
The Compensation Committee, which met six times during 1997, presently
consists of Directors Allison, Arnold, Cress, Sowell and Tilley. The
function of the Compensation Committee is to establish and review the
compensation and benefits of certain officers of the Company.
All of the incumbent members of the Board of Directors attended at least
75% of the aggregate number of meetings of the Board and of the Committees
on which they served during the last fiscal year, with the exceptions of
Directors Hickingbotham, Hussman, Murphy and Pyeatt.
81
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more than ten
percent of the Company's common stock to file with the Securities and
Exchange Commission (the "Commission") initial reports of ownership and
reports of changes in ownership of Company stock.
Based upon a review of copies of such reports filed with the Commission
and written representations that no other reports were required to be filed,
it is the Company's belief that all Section 16(a) filing requirements
applicable to its directors, executive officers and greater than ten percent
beneficial owners were complied with during the year ended December 31,
1997, with the exception of an initial ownership report which was filed late
for Howard M. Qualls.
The information concerning the executive officers of the Registrant is
contained in Part I, Item 1, of this Form 10-K under the caption "Executive
Officers of the Company", and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
----------------------
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the annual and long-term compensation for the
Company's Chief Executive Officer and the four highest-paid executive
officers during the Company's previous three fiscal years:
82
SUMMARY COMPENSATION TABLE
Long-term Compensation
------------------------
Annual Compensation Awards
--------------------------------- ------------------------
Other Annual Restricted Securities All Other
Compensation Stock Underlying Compensation
Name and Principal Position Year Salary($) Bonus($) ($)<F1> Award($)<F2> Options(#) $)<F3>
- ------------------------------ ---- --------- -------- ------------ ------------ ---------- ------------
Barnett Grace 1997 400,120 319,140 -- 606,375 35,000 13,167
Chairman, President and 1996 382,736 229,028 -- -- 10,500<F4> 15,666
Chief Executive Officer of 1995 363,216 210,549 -- -- 26,543<F4> 11,341
the Company
Jack Fleischauer, Jr. 1997 242,120 127,440 -- 255,544 14,576 5,834
Chairman, President and 1996 230,736 117,900 -- -- 7,350<F4> 5,966
Chief Executive Officer, 1995 220,801 107,768 -- -- 15,207<F4> 1,980
First Commercial Bank, N.A.,
Little Rock, Arkansas
Edwin P. Henry 1997 222,927 115,630 -- 567,394 13,391 10,412
Vice Chairman of the Company 1996 215,211 111,720 -- -- 3,150<F4> 10,323
Executive Vice President, 1995 203,316 90,291 -- -- 14,136<F4> 7,501
First Commercial Bank, N.A.
Neil S. West 1997 219,635 114,587 -- 241,049 13,188 8,994
Executive Officer of the 1996 211,925 97,674 -- -- 5,250<F4> 9,154
Company; Chairman and Chief 1995 199,500 69,564 -- -- 20,034<F4> 6,504
Executive Officer, Tyler
Bank and Trust Company, N.A.,
Tyler, Texas
Wayne Hartsfield 1997 169,460 86,000 -- -- 3,465 20,000
Executive Officer of the 1996 N/A N/A N/A N/A N/A N/A
Company; President and Chief 1995 N/A N/A N/A N/A N/A N/A
Executive Officer, First
National Bank of Searcy
83
<FN>
<F1> Amounts representing personal benefits are not included in this table. The Company has a policy of
providing country club memberships to some of its officers. The recipients of these items are selected
by the Company's executive management. The Company also provides a medical expense allowance to
certain executive officers. In the Company's estimation, the dollar amount of such items for the
personal benefit of each named officer does not exceed the lesser of $50,000 or ten percent (10%) of
the aggregate remuneration for any individual.
<F2> On December 16, 1997, the Company granted a total of 100,295 stock unit awards to certain employees.
Each unit is based on the valuation of one share of the Company's common stock and vests over five
years. Cash payments of one-third of the vested amount will be made at the end of years three, four
and five, based on the market value of the Company's common stock on the anniversary dates. Upon
change of control of the Company, all nonvested units will vest 100% and be payable as of the closing
date of the control change. Compensation expense will be accrued over the five-year vesting period,
adjusted for changes in the value of the Company's common stock, unless change of control occurs at
which time total expense would be accrued. The values shown in the table were as of the grant date of
December 16, 1997. The unit award values at December 31, 1997 for Messrs. Grace, Fleischauer, Henry,
and West were $615,563, $259,416, $575,991, and $244,701, respectively.
<F3> "All Other Compensation" for the year ended December 31, 1997 includes the following for Messrs.
Grace, Fleischauer, Henry, West: (i) Company contributions to the 401(k) Retirement Savings Plan of
$4,649, $3,749, $4,649, and $5,377 on behalf of each of the named executives, respectively, (ii)
Company contributions to the Non-Qualified Deferred Compensation Plan of $7,078, $1,215, $2,253,and
$2,177 on behalf of each of the named executives, respectively, and (iii) Company contributions to the
Company's group life insurance policy of $1,440, $870, $3,510, and $1,440, respectively.
All other compensation for the year 1997 for Mr. Hartsfield includes the following: (i) Company
contributions to the Profit Sharing Plan of $16,000, and (ii) Company contributions to the Company's
group life insurance policy of $4,000. There is no arrangement or understanding, formal or informal,
whereby the named executive officers have or will receive or be allocated an interest in any cash
surrender value under the Company's insurance policy.
<F4> Reflects a a five percent stock dividend paid January 2, 1998, a five percent stock dividend paid
November 15, 1996, and a seven percent stock dividend paid January 2, 1996.
</FN>
OPTIONS GRANTED AND OPTIONS EXERCISED IN THE LAST FISCAL YEAR
The following table sets forth certain information concerning options
granted during 1997 to the named executive officers:
84
OPTION GRANTS IN 1997
Individual Grants
- ---------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options Grant Date Present Value
Underlying Granted to Exercise or as Calculated per the
Options Employees in Base Price Black-Scholes Option
Name Granted(#)<F1> Fiscal Year ($/Share) Expiration Date Pricing Model($)<F2>
- --------------------- -------------- -------------- ----------- ----------------- ------------------------
Barnett Grace ....... 35,000 20.95 55.00 December 10, 2007 484,400
Jack Fleischauer, Jr. 14,576 8.73 55.00 December 10, 2007 201,732
Edwin P. Henry ...... 13,391 8.02 55.00 December 10, 2007 185,331
Neil S. West ........ 13,188 7.89 55.00 December 10, 2007 182,522
Wayne Hartsfield .... 3,465 2.07 55.00 December 10, 2007 47,956
- ------------------------------------------------------------------------------------------------------------
<FN>
<F1> Options become exercisable with respect to 20% of the shares covered thereby on the anniversary of the
grant date in 1998, 1999, 2000, 2001 and 2002. If the Company is acquired by another company, any
unexercisable portion of the options will become immediately exercisable.
<F2> Based on the Black-Scholes option pricing model as adjusted for the payment of dividends. Valuations
under the model depend on such factors as the volatility of a security's return, the level of interest
rates, the relationship of the underlying stock's price to the strike price of the option, current
dividends and the time remaining until the option expires. Valuations under the same model could
change if different assumptions as to factors such as volatility and interest rates were made. Option
values are dependent on the future performance of the common stock and overall stock market conditions.
There can be no assurance that the values reflected in this table will be realized. The specific
variables used for the Black-Scholes valuation in the above table are as follows: annual volatility of
the Company's rate of return on stock of .18; risk-free interest rate of 5.9%; annual dividend yield as
of date of option grant of 2.3%; and a weighted-average expected life of seven years. The option's
exercise price equals 100% of the fair market value of the Company's stock on the date of the grant.
</FN>
The following table summarizes options exercised during 1997 and
presents the value of unexercised options held by the named executive
officers at December 31, 1997:
85
OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
Value Realized Number of Securities Value of Unexercised
(Market price Underlying Unexercised in-the-Money
Shares at exercise Options at 12/31/97(#) Options at 12/31/97($)<F1>
Acquired on less exercise --------------------------- ---------------------------
Name Exercise(#) price)($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- -------------- ------------- ------------- ------------- -------------
Barnett Grace ...... 73,780 2,660,507 48,242 66,091 1,873,384 1,126,563
Jack Fleischauer, Jr. -- -- 21,673 38,995 824,443 884,208
Edwin P. Henry ..... 12,471 392,514 80,400 25,943 3,932,973 451,813
Neil S. West ....... -- -- 22,896 32,868 852,592 673,753
Wayne Hartsfield ... -- -- -- 3,465 -- 12,561
- ---------------------------------------------------------------------------------------------------------
<FN>
<F1> Amounts represent the excess of the market value over the exercise price for all exercisable shares and
all unexercisable shares at December 31, 1997.
</FN>
PENSION PLAN
The following table sets forth the annual life annuity payable under the
Company's qualified pension plans to participating employees in the
specified remuneration and years of service classification:
ESTIMATED ANNUAL BENEFITS
Final 5 Year Years of Service at Retirement
Average Annual --------------------------------------------------------------
Compensation 15 20 25 30 35
----------------- ---------- ---------- ---------- ---------- ----------
$100,000 $25,507 $34,010 $42,512 $42,512 $42,512
150,000 40,507 54,010 67,512 67,512 67,512
200,000<F1> 40,507 54,010 67,512 67,512 67,512
300,000<F1> 40,507 54,010 67,512 67,512 67,512
400,000<F1> 40,507 54,010 67,512 67,512 67,512
500,000<F1> 40,507 54,010 67,512 67,512 67,512
600,000<F1> 40,507 54,010 67,512 67,512 67,512
- ----------
<FN>
<F1> As required by Section 415 of the Internal Revenue Code, the qualified pension plans' payments may not
provide annual benefits exceeding a maximum amount, currently $125,000. Pursuant to Section 401(a)(17)
of the Internal Revenue Code, annual compensation in excess of $160,000, for fiscal year 1997, cannot
be taken into account in determining qualified pension plan benefits.
</FN>
86
Covered compensation comprises basic compensation and bonuses or
incentive compensation up to 20% of basic compensation, paid to all plans'
participants. The final average compensation is based on the highest five
consecutive years out of the final ten years of employment. Benefits
commence at age 70 1/2 or at retirement, if earlier, and continue for the
lifetime of the participant. The pension benefits are on the basis of a
life only annuity and are reduced for Social Security, but are not reduced
by other benefits received by the participants.
The maximum benefit under the qualified pension plans is limited by
Sections 415 and 401(a)(17) of the Internal Revenue Code; however, the
Company has adopted a Supplemental Executive Retirement Plan for Barnett
Grace and Jack Fleischauer. Under this plan, Mr. Grace would receive an
amount equal to the benefit payable under the Pension Plan, without regard
to such limitations, less the amount actually payable under the qualified
pension plan. This amount is further multiplied by a fraction, the
numerator of which is the number of years of service from January 1, 1995,
and the denominator of which is 15, unless Mr. Grace terminates employment
within a period 45 days prior to or 24 months after a change in control of
the Company, in which case the multiplier will not apply. The estimated
annual benefit payable for Mr. Grace at age 65, which has accrued as of
December 31, 1997, is $13,986. However, if the fractional reduction does
not apply, the annual benefit payable for life at age 65 is $69,932. The
estimated annual benefit payable for Mr. Fleischauer at age 65, which has
accrued as of December 31, 1997, is $2,706. No benefit is payable in the
event of termination prior to Mr. Fleischauer's normal retirement date.
The estimated years of credited service at December 31, 1997, for each
of the named executive officers is as follows: Barnett Grace, 26; Jack
Fleischauer, Jr., 4; Edwin P. Henry, 36; Neil S. West, 5; and Wayne
Hartsfield, 38.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into change-in-control agreements with Messrs.
Grace, Fleischauer, Henry, West, and Hartsfield. Pursuant to the terms of
such agreements, if any of these officers following a "change in control" of
the Company is terminated by the Company (prior to his normal retirement
date) within two years of the change in control without "cause," or if the
officer resigns for "good reason" within twelve months, then such officer is
entitled to receive certain cash payments from the Company. Payments shall
be made under the agreements which range up to three times the participant's
current base salary plus the average bonus for the past two years. Certain
agreements are "grossed up" to provide for any excise tax imposed by Section
4999 of the Internal Revenue Code and the continuation of benefits for up to
three years.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of the following directors:
Allison, Arnold, Cress, Sowell, and Tilley. There were no committee
interlocks or insider participation.
87
REMUNERATION OF DIRECTORS
The members of the Board of Directors are paid a fee of $350 per month
for advice and assistance called for on a day-to-day basis as well as $500
per meeting for all regular and special meetings of the Board which they
attend. In addition, those members of the Board who serve on Board
committees are paid a fee of $400 for each meeting they attend and $175 for
each meeting via telephone conference in which they participate. Those
members of the Board who are also executive officers of the Company do not
receive any fees.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
PRINCIPAL HOLDERS OF SHARES
As of February 13, 1998, there were no individuals who owned
beneficially more than 5% of the Company's common stock. The following
table sets forth the number of shares owned by the named executive officers
in the Summary Compensation Table and by all Directors and Executive
Officers as a group:
Percentage of
Name and Address of Amount of Common Stock
Beneficial Owner Beneficial Ownership Outstanding
---------------------------- -------------------- ------------
Barnett Grace .............. 472,700 <F1> 1.26%
Jack Fleischauer, Jr. ...... 23,461 <F2> .06%
Edwin P. Henry.............. 139,803 <F1> .37%
Neil S. West ............... 26,060 <F3> .07%
Wayne Hartsfield ........... 27,456 <F4> .07%
All Directors and Executive
Officers as a Group ....... 7,446,191 <F5> 19.69%
[FN]
<F1> For information with regard to form of ownership, see the footnotes to
the table that appears in "Directors and Executive Officers of the
Registrant."
<F2> Includes an interest in 1,655 shares under the Company's payroll based
stock ownership plan and employee stock ownership plan and includes
exercisable options for 21,673 shares granted under the 1987 Incentive
and Nonqualified Stock Option Plan.
<F3> Includes an interest in 2,720 shares under the Company's payroll based
stock ownership plan and employee stock ownership plan and includes
exercisable options for 22,896 shares granted under the 1987 Incentive
and Nonqualified Stock Option Plan.
<F4> Includes an interest in 452 shares under the Company's payroll based
stock ownership plan and employee stock ownership plan.
<F5> Includes interests in 104,963 shares under the Company's payroll based
stock ownership plan and employee stock ownership plan and includes
exercisable options for 215,597 shares granted under the 1987 Incentive
and Nonqualified Stock Option Plan.
</FN>
88
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
TRANSACTIONS WITH MANAGEMENT AND OTHERS
The Company and its subsidiaries have had, and expect to have in the
future, banking transactions in the ordinary course of business with
executive officers of the Company, directors of the Company and principal
shareholders. Loans made to members of this group, including companies in
which they are principal owners (10% or more ownership interest) amounted to
approximately $60 million at the highest point in 1997, which represents
9.7% of the Company's average equity capital. Such transactions have been
made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons. The loans do not include more than a normal risk of
collectibility and do not involve any unfavorable features.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Reports of Management and Independent Auditors
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996, and 1995
Consolidated Balance Sheets as of December 31, 1997
and 1996
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All schedules normally required by Form 10-K are omitted since they
either are not applicable, or the required information is shown in
the consolidated financial statements or the notes thereto.
(3) Executive Compensation Plans and Arrangements:
1987 Incentive and Non-Qualified Stock Option Plan, (Exhibit 10(a)
hereto).
Non-Qualified Deferred Compensation Plan, (Exhibit 10(b) hereto).
Supplemental Executive Retirement Plan for C. Barnett Grace (Exhibit
10(c) hereto).
89
Supplemental Executive Retirement Plan for John I. Fleischauer, Jr.
(Exhibit 10(d) hereto).
Change-in-Control Agreement between the Company and Barnett Grace
(Exhibit 10(e) hereto).
Change-in-Control Agreement between the Company and Jack
Fleischauer, Jr. (Exhibit 10(f) hereto).
Change-in-Control Agreement between the Company and Edwin P. Henry
(Exhibit 10(g) hereto).
Change-in-Control Agreement between the Company and Neil Stewart
West (Exhibit 10(h) hereto).
Change-in-Control Agreement between the Company and Wayne Hartsfield
(Exhibit 10(i) hereto).
1997 Incentive Stock Plan (Exhibit 10(j) hereto).
(b) Reports on Form 8-K:
Registrant did not file any reports on Form 8-K report during the fourth
quarter of 1997. With respect to the proposed merger of Regions Financial
Corporation and the Registrant, a report on Form 8-K was filed by the
Registrant on February 13, 1998.
(c) Exhibits:
The exhibits are submitted as a separate section of this Form 10-K under
the caption "Index to Exhibits."
(d) Financial Statement Schedules:
Not applicable.
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Barnett Grace
-------------------------
Barnett Grace
Chairman of the Board
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Barnett Grace Chairman of the Board, President, March 27, 1998
- ---------------------------- Chief Executive Officer and
Barnett Grace Director (Principal Executive
Officer)
/s/ J. Lynn Wright Chief Financial Officer March 27, 1998
- ---------------------------- (Principal Financial and
J. Lynn Wright Accounting Officer)
/s/ John W. Allison Director March 27, 1998
- ----------------------------
John W. Allison
/s/ Truman Arnold Director March 27, 1998
- ----------------------------
Truman Arnold
/s/ William H. Bowen Director March 27, 1998
- ----------------------------
William H. Bowen
/s/ Peggy Clark Director March 27, 1998
- ----------------------------
Peggy Clark
/s/ Robert G. Cress Director March 27, 1998
- ----------------------------
Robert G. Cress
/s/ Cecil W. Cupp, Jr. Director March 27, 1998
- ----------------------------
Cecil W. Cupp. Jr.
91
/s/ Wallace W. Fowler Director March 27, 1998
- ----------------------------
Wallace W. Fowler
/s/ Edwin P. Henry Vice Chairman and Director March 27, 1998
- ----------------------------
Edwin P. Henry
/s/ Frank D. Hickingbotham Director March 27, 1998
- ----------------------------
Frank D. Hickingbotham
Director
- ----------------------------
Walter E. Hussman, Jr.
/s/ Frederick E. Joyce, M.D. Director March 27, 1998
- ----------------------------
Frederick E. Joyce, M.D.
/s/ Jack G. Justus Director March 27, 1998
- ----------------------------
Jack G. Justus
/s/ Michael W. Murphy Director March 27, 1998
- ----------------------------
Michael W. Murphy
/s/ David Pryor Director March 27, 1998
- ----------------------------
David Pryor
/s/ Wayne W. Pyeatt Director March 27, 1998
- ----------------------------
Wayne W. Pyeatt
/s/ Sam C. Sowell Director March 27, 1998
- ----------------------------
Sam C. Sowell
/s/ Paul D. Tilley Director March 27, 1998
- ----------------------------
Paul D. Tilley
92
Index to Exhibits
Exhibit Number Exhibit
-------------- -------------------------------------------------------------------------------------
3(i) <F*> Company's Second Amended and Restated Articles of Incorporation, as amended (3(i) in
Form 10-Q for the quarter ended June 30, 1996 in 0-9676).
3(ii)<F*> Company's Bylaws as currently in effect (3(d) in Form 10-K for the fiscal year ended
December 31, 1991 in 0-9676).
10(a) <F*> 1987 Incentive and Non-Qualified Stock Option Plan (10(a) in Form 10-K for the fiscal
year ended December 31, 1994 in 0-9676).
10(b) <F*> Non-Qualified Deferred Compensation Plan, as amended (10(b) in Form 10-K for the
fiscal year ended December 31, 1994 in 0-9676).
10(c) <F*> Supplemental Executive Retirement Plan for C. Barnett Grace (10(c) in Form 10-K for
the fiscal year ended December 31, 1995 in 0-9676).
10(d) <F*> Supplemental Executive Retirement Plan for John I. Fleischauer, Jr. (10(d) in Form 10-K
for the fiscal year ended December 31, 1996 in 0-9676).
10(e) <F*> Change-in-Control Agreement between the Company and C. Barnett Grace. (10(e) in Form 10-K
for the fiscal year ended December 31, 1996 in 0-9676).
10(f) <F*> Change-in-Control Agreement between the Company and John I. Fleischauer, Jr. (10(f) in
Form 10-K for the fiscal year ended December 31, 1996 in 0-9676).
10(g) <F*> Change-in-Control Agreement between the Company and Edwin P. Henry. (10(g) in Form 10-K
for the fiscal year ended December 31, 1996 in 0-9676).
10(h) <F*> Change-in-Control Agreement between the Company and Neil S. West. (10(h) in Form 10-K
for the fiscal year ended December 31, 1996 in 0-9676).
10(i) Change-in-Control Agreement between the Company and Wayne Hartsfield.
10(j) <F*> 1997 Incentive Stock Plan (10 in Form 10-Q for the quarter ended March 31, 1997
in 0-9676).
11 Computation of Earnings per Common Share.
21 Subsidiaries of Registrant.
23(a) Consent of Ernst & Young LLP.
23(b) Consent of Kemp and Company, CPA's.
27(a) Financial Data Schedule - December 31, 1997
27(b) Financial Data Schedule - September 30, 1997 (Restated)
27(c) Financial Data Schedule - June 30, 1997 (Restated)
27(d) Financial Data Schedule - March 31, 1997 (Restated)
27(e) Financial Data Schedule - December 31, 1996 (Restated)
27(f) Financial Data Schedule - September 30, 1996 (Restated)
27(g) Financial Data Schedule - June 30, 1996 (Restated)
27(h) Financial Data Schedule - March 31, 1996 (Restated)
27(i) Financial Data Schedule - December 31, 1995 (Restated)
99(a) Report of Kemp and Company, CPA's.
99(b) Annual Report on Form 11-K for Stock Purchase Plan for employees of First Commercial
Corporation (to be filed by amendment).
<FN>
<F*> Document has been previously filed with the Securities and Exchange Commission and is incorporated herein
by reference. (Exhibit numbers and file numbers appear in parentheses.)
</FN>