SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of
1934.
For the Quarter ended March 31, 1999 Commission File No. 0-14277
First Commerce Bancshares, Inc.
Nebraska 47-0683029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1248 O Street, Lincoln, Nebraska 68508-1424
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (402) 434-4110
-----------------------------
None
Former name, former address, and former fiscal year, if changes since last
report.
"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 and Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------- -------
Common stock, $.20 par value; outstanding at March 31, 1999
Class A Common 2,583,319 shares.
Class B Common 10,903,200 shares.
FIRST COMMERCE BANCSHARES, INC. & SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In Thousands)
(Unaudited)
March 31, 1999 December 31, 1998
-------------- -----------------
(Amounts in Thousands)
ASSETS
Cash and due from banks $ 136,587 $ 135,731
Federal funds sold 52,715 31,865
----------- -----------
Cash and cash equivalents 189,302 167,596
Mortgages loans held for sale 65,183 66,178
Securities available for sale (cost of
$533,723,000 and $430,747,000) 545,192 452,301
Securities held to maturity (fair value of
$280,298,000 and $300,502,000) 278,055 295,543
Loans 1,247,613 1,284,007
Less allowance for loan losses 24,503 24,292
----------- -----------
Net loans 1,223,110 1,259,715
Federal Home Loan Bank stock, at cost 9,649 9,347
Premises and equipment 64,237 62,392
Other assets 72,066 71,673
----------- -----------
$ 2,446,794 $ 2,384,745
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 343,354 $ 365,782
Interest bearing 1,394,986 1,362,718
----------- -----------
1,738,340 1,728,500
Short-term borrowings 255,406 213,470
Federal Home Loan Bank borrowings 158,500 143,625
Accrued expenses and other liabilities 32,348 37,004
Long-term debt 13,500 13,500
----------- -----------
Total liabilities 2,198,094 2,136,099
Stockholders' equity:
Common stock:
Class A voting, $.20 par value; authorized
10,000,000 shares; issued and outstanding
2,583,319 shares; 517 517
Class B non-voting, $.20 par value; authorized
40,000,000 shares; issued and outstanding
10,903,200 and 10,928,951 shares 2,181 2,186
Paid in capital 21,531 21,572
Retained earnings 217,016 210,361
Accumulated other comprehensive income 7,455 14,010
----------- -----------
Total stockholders' equity 248,700 248,646
----------- -----------
$ 2,446,794 $ 2,384,745
=========== ===========
See notes to consolidated condensed financial statements.
FIRST COMMERCE BANCSHARES, INC. & SUBSIDIARIES
Consolidated Condensed Statements of Income
(Unaudited)
(In Thousands Except Per Share Data)
Three Months Ended
March 31,
1999 1998
----------- -----------
Interest income:
Loans $26,888$ $27,618
Securities:
Taxable 11,191 9,998
Nontaxable 465 351
Dividends 529 450
Mortgage loans held for sale 1,054 713
Federal funds sold 609 374
-------- --------
Total interest income 40,736 39,504
Interest expense:
Deposits 14,866 15,281
Short-term borrowings 2,421 2,283
Federal Home Loan Bank borrowings 1,963 1,470
Long-term debt 290 345
-------- --------
Total interest expense 19,540 19,379
-------- --------
Net interest income 21,196 20,125
Provision for loan losses 1,595 1,496
-------- --------
Net interest income after provision for loan losses 19,601 18,629
Noninterest income:
Service charges and fees to customers 14,584 11,530
Trust services 1,571 1,736
Gains on securities sales 1,747 839
Other income 673 887
-------- --------
Total noninterest income 18,575 14,992
-------- --------
Noninterest expense:
Salaries and employee benefits 11,553 10,704
Occupancy and equipment 3,025 2,328
Fees and insurance 4,853 3,402
Other expenses 5,797 5,407
-------- --------
Total noninterest expense 25,228 21,841
-------- --------
Income before income taxes 12,948 11,780
Income tax provision 4,460 4,160
-------- --------
Net income $ 8,488 $ 7,620
======== ========
Weighted average shares outstanding 13,507 13,530
======== ========
Basic net income per share $ .63 $ .56
======== ========
See notes to consolidated condensed financial statements.
FIRST COMMERCE BANCSHARES, INC. & SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited) (In Thousands)
Three Months Ended
March 31,
1999 1998
-------- --------
Net cash flows from operating activities $ 12,392 $ (31,281)
Cash flows from investing activities:
Proceeds from maturities of held to maturity securities 24,579 28,620
Purchase of held to maturity securities (7,091) (25,979)
Proceeds from maturities of available for sale securities 20,223 7,081
Proceeds from sales of available for sale securities 19,466 6,019
Purchase of available for sale securities (140,924) (4,665)
Net decrease in loans 35,010 9,523
Capital expenditures (3,473) (3,233)
Purchases of mortgage servicing rights (2,332) (2,380)
Proceeds from derivative financial instrument - 697
Other (147) (188)
Net cash flows from investing activities (54,689) 15,495
Cash flows from financing activities:
Increase in deposits 9,840 68,836
Increase/(decrease) in short-term borrowings 41,936 (19,000)
Net increase/(decrease) in Federal Home Loan Bank
borrowings 14,875 (14,850)
Cash dividends paid (1,216) (1,151)
Repurchase of common stock (663) -
Other (769) (766)
Net cash flows from financing activities 64,003 33,069
Net increase in cash and cash equivalents 21,706 17,283
Cash and cash equivalents at January 1 167,596 193,159
Cash and cash equivalents at March 31 $189,302 $210,442
======== =========
See notes to consolidated condensed financial statements.
FIRST COMMERCE BANCSHARES, INC. & SUBSIDIARIES
Notes To Consolidated Condensed Financial Statements
A. GENERAL
The accompanying unaudited consolidated condensed financial statements and notes
thereto contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
and its subsidiaries as of March 31, 1999, and the results of their operations.
The consolidated condensed financial statements should be read in conjunction
with the annual consolidated financial statements and the notes thereto included
in the Company's 1998 annual report and Form 10-K. Certain 1998 amounts have
been reclassified to conform to 1999 classifications. The results of operations
for the unaudited three-month period ended March 31, 1999, are not necessarily
indicative of the results which may be expected for the entire calendar year
1999.
B. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for the loan losses are summarized as follows:
1999 1998
------ ------
(Amounts in Thousands)
Balance, January 1 $24,292 $22,458
Provision for loan losses 1,595 1,496
Charge-offs (2,087) (2,045)
Recoveries 703 595
------- --------
Balance, March 31 $24,503 $22,504
======= =======
C. COMPREHENSIVE INCOME
The Company's "other comprehensive income" is comprised of unrealized gains and
losses on debt and equity securities classified as available for sale. "Other
comprehensive income" for the first quarters of 1999 and 1998 was a negative
$6,555,000, net of tax; and a negative $1,375,000, net of tax, respectively.
Thereby, total "comprehensive income" for the first quarter of 1999 was
$1,933,000 as compared to book net income of $8,488,000. For the first quarter
of 1998 total "comprehensive income" was $6,245,000 as compared to book net
income of $7,620,000.
FINANCIAL REVIEW
Three Months Ended March 31, 1999 and 1998
Results of Operations
Net income for the three months ended March 31, 1999, was $8,488,000 or $.63 per
share as compared to $7,620,000 or $.56 per share for the same period one year
ago. Net income for the three months ended December 31, 1998, was $5,709,000 or
$.43 per share. Net income for the first three months of 1999 includes
$1,747,000 in gains primarily from the sale of investments in the Company's
Global fund, as compared to gains of $839,000 for the same period one year ago.
If the securities gains were excluded for both periods, net income would have
been $7,352,000 and $7,075,000, respectively. On a per share basis, earnings
would have been $.54 per share and $.52 per share respectively.
Net Interest Income
Net interest income (interest income less interest expense) was $21,196,000 for
the first quarter of 1999, compared to $20,125,000 for the first quarter of
1998, and $21,491,000 for the last quarter of 1998. The relatively stable net
interest income reflects a slight increase in total earning assets and in total
interest-bearing liabilities. In addition, loan volume decreased from December
31, 1998, and was replaced with lower interest-bearing investments. Earning
assets at March 31, 1999, March 31, 1998, and December 31, 1998 were $2,198
million, $2,036 million, and $2,139 million, respectively. The net yield on
earning assets (net interest income divided by earning assets) was approximately
4.0% as of March 31, 1999, 4.2% as of March 31, 1998 and 4.1% as of December 31,
1998. Loans were $1.248 billion at the end of March 1999, as compared to $1.225
billion at the same time a year ago, a 1.8% increase. Investments were $823
million at March 31, 1999 as compared to $678 million at March 31, 1998, a 21.4%
increase.
Provision for Loan Losses
The provision for loan losses was $1,595,000 for the first three months of 1999,
as compared to $1,496,000 for the first three months of 1998, a 6.6% increase
The first quarter provision is a 49.3% decrease from the $3,147,000 for the
fourth quarter of 1998 primarily because the first quarter of 1999 has been
profitable for cattle feeders and grain prices are at breakeven levels. For the
first three months of 1999 net charge-offs were $1,384,000 compared to
$1,450,000 for the same period a year ago and $2,048,000 for the last quarter of
1998. Credit card charge-offs have stabilized. Net credit card charge-offs
totaled $1,360,000 for the first quarter of 1999 compared to $1,332,000 million
for the first quarter of 1998 and $1,406,000 million for the fourth quarter of
1998. Other consumer loan net charge-offs decreased when compared to the same
period one year ago and the fourth quarter of 1998. As a percentage of loans
outstanding, the loan loss reserve was 2.0% and 1.8% as of March 31, 1999 and
1998, respectively. As a whole, management believes the credit quality of the
loan portfolio remains sound, with no major change in the overall quality of the
loan portfolio since December 31, 1998. Management will continue to monitor
agricultural loans, credit card quality, and other loan trends.
The following table presents the amount of non-performing loans:
March 31, 1999 December 31, 1998
-------------- -----------------
Loans accounted for on a non
accrual basis $ 579,000 $ 538,000
Accruing loans which are contractually
past due 90 days or more as to
principal or interest payment 1,774,000 1,584,000
Loans not included above which
are "troubled debt restructurings" 1,464,000 1,465,000
The accruing loans that are contractually past due 90 days or more are in the
process of resolution. There have been no significant changes in non accrual
loans and troubled debt restructurings since December 31, 1998. Virtually all of
the Company's loans are to Nebraska-based organizations, although the loan
portfolio is well diversified by industry. The Nebraska economy is dependent
upon the general state of the agricultural economy. The Company has $167 million
in agricultural loans, excluding agricultural real estate loans. The Company is
concerned about low agricultural commodity prices. Fat cattle feeders have
experienced losses over the past two years, and while the first quarter of 1999
has been profitable, the earnings picture for the balance of the year is
unclear. While overall yields were good for grain producers in 1998, grain
prices continue to be near breakeven levels when coupled with government program
payments. Current weather conditions and world economic conditions are such that
improvement in the general agricultural economy may not be likely over the near
term. Although the Company's borrowers are in relatively good financial
condition, the uncertain environment they are working under may have a negative
effect on agricultural producers in general, and may have an impact on the
banking sector resulting in higher levels of non performing loans than
historically experienced.
Noninterest Income
Noninterest income for the first three months of 1999 was $18,575,000 compared
to $14,992,000 for the first three months of 1998, a 23.9% increase. If
securities gains were excluded, noninterest income would have been $16,828,000
compared to $14,153,000, an 18.9% increase. Credit card fees increased
$1,398,000 primarily due to an increase in interchange and merchant income, and
increases in late, overlimit and cash advance fees. The 31.6% increase in other
service charges and fees is due to several factors: increased bond sales,
increased discount brokerage fees, and fees earned from the "Great Plains Family
of Funds." Increased bond sales are due to more dollars available in banks to
buy bonds, and increased business with the Nebraska Investment Council. An
increase in discount brokerage fees is due to steady growth and a strong stock
market. Increased fees earned from the "Great Plains Family of Funds" also
account for a portion of the 9.5% decrease in trust services income. Computer
fees increased $399,000 or 14.6% due to various fees generated from installation
services, conversions, and profit on resale of equipment, and the late 1998
opening of out-of-Nebraska item processing centers by First Commerce
Technologies. Mortgage banking income increased 32.8% over the same period one
year primarily due to volume. Loans serviced by First Commerce Mortgage were
$1.697 billion at March 31, 1999 compared to $1.228 billion at March 31, 1998.
Gains on the sale of securities were $1,747,000 in the first three months of
1999 compared to $839,000 in the first three months of 1998, a $908,000
increase. These gains were primarily the result of selling certain positions
held in the Company's Global Fund. Other income decreased $214,000 due primarily
to venture capital losses taken in the first quarter of 1999.
The following table shows the breakdown of noninterest income and the percentage
change:
(In Thousands) Percent
March 31, Increase/
1999 1998 (Decrease)
------- ------- ----------
Credit card fees $ 4,960 $3,562 39.2%
Other service charges and fees 3,222 2,449 31.6
Computer services 3,134 2,735 14.6
Mortgage banking 1,976 1,488 32.8
Service charges on deposits 1,292 1,296 (.3)
Trust services 1,571 1,736 (9.5)
Gains on securities sales 1,747 839 108.2
Other income 673 887 (24.1)
------ ------
Total noninterest income $18,575 $14,992 23.9
======= =======
Noninterest Expense
- -------------------
Noninterest expenses were $25,228,000 for the first three months of 1999 as
compared to $21,841,000 for the same period one year ago. This is an increase of
$3,400,000 or 15.5% from a year ago. Credit card fees increased $1,390,000 or
59.6% due to increased activity and an increase in Cabela's bucks expense,
points earned from using the Cabela's credit card, which can be redeemed for
merchandise at Cabela's. Equipment expenses increased $610,000 or 45.6% due to
maintenance and additional depreciation expense on the equipment purchases of
the last two years, primarily computer systems and software. Amortization of
mortgage servicing rights increased $252,000 or 24.3% due to an increase in the
volume of mortgages serviced by First Commerce Mortgage. Communications expenses
decreased $117,000 or 11.1%. Other expenses increased $161,000 or 11.5% due
primarily to network solutions engineers hired on a contract basis by First
Commerce Technologies to work on specific projects. The increase in minority
interest expense is directly related to the increase in profits in the Cabela's
credit card joint venture.
The following table shows the breakdown of noninterest expense and the
percentage change:
(In Thousands) Percent
March 31, Increase/
1999 1998 (Decrease)
-------- --------- ----------
Salaries and employee benefits $11,553 $10,704 7.9%
Credit card fees 3,724 2,334 59.6
Equipment expense 1,948 1,338 45.6
Amortization of mortgage servicing rights 1,289 1,037 24.3
Fees and insurance 1,129 1,068 5.7
Net occupancy expense 1,077 990 8.8
Business development 949 885 7.2
Communications 941 1,058 (11.1)
Supplies 619 673 (8.0)
Other expenses 1,557 1,396 11.5
Minority interest 315 231 36.4
Goodwill amortization 127 127 --
------- -------
Total noninterest expense $25,228 $21,841 15.5
======= =======
The Company's efficiency ratio -- noninterest expense (excluding net cost of
other real estate, minority interest and goodwill amortization) divided by the
sum of net interest income and noninterest income (excluding securities
gains/losses) -- was 65.2% and 62.7% at March 31, 1999 and 1998, respectively.
Financial Condition at March 31, 1999
- -------------------------------------
Total assets at March 31, 1999, were $2,447 million, compared to $2,293 mil-
lion at March 31, 1998, a 6.7% increase. Total assets at December 31, 1998,
were $2,385 million.
Since March 31, 1998, loans have increased from $1,225 million to $1,248 mil-
lion, a 1.8% increase. Managed loans at March 31, 1999 were $1,347 million.
Loans are summarized as follows: March 31, 1999 March 31, 1998
-------------- --------------
(In thousands)
Real estate mortgage $ 405,866 $ 377,225
Consumer 279,791 276,409
Commercial and financial 245,106 272,270
Agricultural 167,267 175,673
Credit card 98,314 86,751
Real estate construction 51,269 37,142
---------- ----------
$1,247,613 $1,225,470
========== ==========
The increase in real estate and construction loans is due primarily to the
strong commercial real estate activity in the Omaha and Lincoln markets. The
credit card portfolio growth has occurred primarily from the acquisition of a
credit union portfolio in the third quarter of 1998 and from increased Cabela's
Card accounts carried in portfolio. The decrease in commercial and financial
loans is attributed to paydowns and refinancings. The decline in agricultural
loans largely reflects lower cattle feeding inventories resulting from losses
incurred in this sector during 1998. Consumer loan growth has been relatively
flat reflecting competitive pressures and debt consolidations via home loan
refinancings.
Deposits have increased from $1,718 million at March 31, 1998 to $1,738 million
at March 31, 1999, a 1.2% increase. The loan to deposit ratio was 71.8% as of
March 31, 1999, compared to 71.3% at March 31, 1998. Short-term borrowings
totaled $255 million at March 31, 1999, compared to $179 million at March 31,
1998, and $213 million at December 31, 1998. Federal Home Loan Bank borrowings
totaled $159 million at March 31, 1999, compared to $106 million at March 31,
1998, and $144 million at December 31, 1998. Long-term debt consisting of
Company capital notes decreased $2.5 million since March 31, 1998 because of the
annual principal payment but did not change from December 31, 1998. Subsequent
to March 31, 1999, the Company has redeemed the remaining balance of
$13,500,000. The capital notes were refinanced with a seven-year amortizing loan
from a commercial bank. The rate is fixed at 6.2%. In addition to repurchase
agreements and Federal Home Loan Bank borrowings, the Company has utilized
commercial paper and the securitization of credit card receivables to provide
liquidity.
Stockholders' equity to assets was 9.9% as of March 31, 1999. The net unrealized
gains on available for sale securities decreased $6,555,000 since December 31,
1998.
The first quarter 1999 decrease in unrealized gains and losses on debt and
equity securities classified as available for sale, was due to the decline in
the stock values in the Global Fund in the first three months of 1999 combined
with an increase in bond yields. The first quarter 1998 decrease in unrealized
gains and losses was due principally to the decline in the market value of
Transcrypt International, Inc., a Lincoln, Nebraska based company that first
sold shares in the public stock market in 1997. At December 31, 1997, the
Company's original investment of $429,000 had a market value of $17 million; at
March 31, 1998, the stock had a market value of $7 million, and at March 31,
1999, the stock had a market value of $1.1 million.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of Tier I capital (as defined in the regulations) to total average
assets (as defined), and minimum ratios of Tier I and total capital (as defined)
to risk-weighted assets (as defined). The Company's and the National Bank of
Commerce's (the Company's most significant bank subsidiary) actual capital
amounts and ratios are presented in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------- ------------------ ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ ---------------------
As of March 31, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated $274,274 16.7% $131,742 8.0% N/A
National Bank of Commerce 116,519 12.4 75,210 8.0 $94,013 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 251,558 15.3 65,871 4.0 N/A
National Bank of Commerce 104,767 11.1 37,605 4.0 56,408 6.0
Tier I Capital (to Quarterly Average Assets):
Consolidated 251,558 10.6 94,535 4.0 N/A
National Bank of Commerce 104,767 7.9 53,265 4.0 66,581 5.0
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $252,967 15.4% $131,854 8.0% N/A
National Bank of Commerce 115,151 12.0 76,801 8.0 $96,001 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 230,226 14.0 65,927 4.0 N/A
National Bank of Commerce 103,151 10.7 38,400 4.0 57,601 6.0
Tier I Capital (to Quarterly Average Assets):
Consolidated 230,226 10.0 91,868 4.0 N/A
National Bank of Commerce 103,151 7.9 52,390 4.0 65,488 5.0
Nebraska Economy
Recent economic data shows that the economy remains strong in the Omaha/Lincoln
metro areas, but there are some signs of weaknesses for businesses engaged in
agricultural services/trade. A lack of qualified applicants hinders economic
growth across the state. Construction activity has been solid, while retail
sales growth has been favorable. The manufacturing base in the state continues
to operate at expanding levels. Motor vehicle sales have been strong. The
state's fiscal position is favorable from the standpoint of tax receipts and
budgeted expenditures. The U. S. economy should continue to realize moderate
growth as the Federal Reserve Board attempts to maintain balance between growth
and inflation. Agricultural exports have been reduced due to the Asian and other
markets' economic uncertainties, but some recovery is beginning to become
evident. Personal bankruptcy filings have stabilized but remain at high levels.
The financial results of the 1998 Nebraska farm sector were not good. Crop
prices are below cost of production levels. Loan deficiency payments and market
transition payments helped to soften the impact of lower grain prices. Cattle
feeders lost money throughout all of 1998, however profitability has been
restored during the first months of 1999. Ranch operations reflected profits
throughout 1998, and profitability is expected in 1999 as beef cow numbers
continue to decline. Hog producers lost money for most of 1998 and for the early
part of 1999.
Year 2000
The Company's State of Readiness. A significant technological issue impacting
all companies worldwide is the need to modify their computer information systems
to properly process transactions relating to the Year 2000 and beyond. The
Company has implemented a formal program to evaluate, monitor, review and manage
the risks, solutions and costs and update its software programs and other time
sensitive systems for Year 2000 compliance. The Federal Financial Institutions
Examination Council has issued regulatory guidelines on the Year 2000 problem.
The Company has incorporated these guidelines into its Year 2000 plan. Certain
subsidiaries of the Company have been examined by both regulators and the
Company's own internal audit staff and will be subject to ongoing examinations
with regard to their Year 2000 readiness.
The Company's Year 2000 Project includes four phases __ awareness, assessment,
remediation and testing. Executive management of the Company reviews and
approves these various phases of the project as they are completed. A report is
given to the Company's Board of Directors on a quarterly basis on the status of
the Year 2000 project.
0 The Company considers the awareness phase of its Year 2000 Project to be
substantially complete from an internal standpoint. Major customers and
vendors of the Company have been contacted to establish the level of their
awareness concerning Year 2000, which will be ongoing as circumstances
dictate.
0 The Company considers the assessment phase of its Year 2000 Project to be
substantially complete for internal mission critical systems. Assessment of
external services and systems has been dependent, in part, on vendor
management surveys. The Company has completed this survey process and has
received a 100% response rate from mission critical vendors.
0 The remediation phase of the Company's project includes the analysis,
planning and actual remediation necessary to bring mission critical
internal systems, both software and other time sensitive systems, into Year
2000 ready status. Remediation may include upgrading, renovating or
replacing existing systems. The Company believes that this phase of its
Year 2000 Project was substantially completed as of December 31, 1998 with
respect to internal mission critical systems.
0 The testing phase of the project involves both Internal Testing conducted
by programming and quality assurance staff, and Customer Acceptance Testing
(CAT) conducted by customers of the Company. Internal testing is performed
on all internal and external mission critical systems and services with
Year 2000 date information in various Year 2000 date scenarios. CAT
testing, by the Company's financial institution data processing customers,
is conducted in a simulated banking environment. A detailed customer
acceptance testing program has been designed to test key aspects of all
core banking applications being provided to banking customers by the
Company. The Company has begun both types of tests related to its project
and to the extent feasible, plans to substantially complete testing and
implementation of mission critical systems and services by June 30, 1999.
The Costs to Address the Company's Year 2000 Issues. Through December 31, 1998,
cumulative costs relating directly to Year 2000 issues since the project's
inception have totaled approximately $5.5 million. A portion of the estimated
total includes both the cost of existing staff that have been redeployed to the
Year 2000 project from other projects and consultants or other independent
programmers who have been hired to help the Company complete its project. These
costs do not include system upgrades and replacements that were made in the
normal course of operations for other purposes in addition to addressing Year
2000 issues, unless the implementation was accelerated. The Company estimates
that remaining Year 2000 project costs will total approximately $7.0 million
and, therefore, the total estimated Year 2000 Project costs from inception
through completion should approximate $12.5 million.
The Risks of the Company's Year 2000 Issues. As is the case with most financial
services companies, the Company is heavily dependent on internal and external
computer systems and services. If those systems or services are interrupted, the
Company's ability to serve its retail, commercial banking and its credit card
customers could be directly effected. Some of the commercial financial services
that could be effected are credit card merchant processing, commercial cash
management services and financial institution data processing services. Year
2000 failures associated with internal and external systems and services could
generate claims or create other material adverse effects for the Company. Even
though the Company's Year 2000 Project will include contingency plans for third
party Year 2000 failures, there can be no assurances that mission critical third
party vendors or other significant third parties (such as telecommunications or
utilities industries, the Federal Reserve System or national credit card
processing associations) will adequately address their Year 2000 issues.
Increased credit losses associated with possible Year 2000 failures of major
borrowers or increased consumer cash demands resulting from publicity concerning
Year 2000 problems could also have a material adverse effect on the Company. The
Company is unable to quantify, in any reasonable manner, the financial impact of
these possible adverse effects, due to the uncertainty involved. The Company
generally advises commercial entities with which it does business that it cannot
guarantee that they or the Company will be completely unaffected by the Year
2000. The Company nonetheless continues to monitor these issues on an ongoing
basis and will strive to minimize their impact.
The Company's Contingency Plans. The Company is in the process of developing
contingency plans to address potential Year 2000 interruptions of its internal
and external mission critical systems and services. For example, the Company is
developing plans to provide the liquidity that would be needed to meet possible
unusually high cash demands generated by the publicity concerning potential Year
2000 issues for financial institutions. The initial contingency planning process
is well under way as of March 31, 1999. These plans will be subject to ongoing
review, testing and adjustment. Contingency plans may be limited or problematic
for some systems or services because there may be no reasonable economic
alternatives for these systems or services. There can be no assurance that
contingency plans will fully mitigate Year 2000 problems.
The foregoing Year 2000 discussion contains forward-looking statements,
including without limitation, anticipated costs and the dates by which the
Company expects to substantially complete the remediation and testing of systems
and are based on management's best current estimates, which were derived
utilizing numerous assumptions about future events, including the continued
availability of certain resources, representations received from third party
service providers and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
form those anticipated. Specific matters 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 identify and convert all relevant
computer systems, results of Year 2000 testing, adequate resolution of Year 2000
issues by governmental agencies, business or other third parties who are service
providers, suppliers, borrowers or customers of the Company, unanticipated
systems costs, the need to replace hardware and the adequacy of and ability to
implement contingency plans and similar uncertainties.
Forward Looking Information
When used or incorporated by reference in disclosure documents, the words
"anticipate," "estimate," "expect," "project," "target," "goal," and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Such forward-looking
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, expected or projected. These forward-looking statements
speak only as of the date of the document. The Company expressly disclaims any
obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectation with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
Quantitative and Qualitative Disclosures about Market Risk
The Company's principal objective for interest rate risk management is to manage
exposure of net interest income to risks associated with interest rate
movements. The Company tries to limit this exposure by matching the maturities
of its assets and liabilities, along with the use of floating rate assets and
liabilities that will move with interest rate movements.
Interest rate risk is measured and reported to the Company's Asset and Liability
Management Committee (ALCO), which includes senior management representatives.
Measurement and reporting methods include traditional gap analysis which
measures the difference between assets and liabilities that reprice in a given
time period, simulation modeling which produces projections of net interest
income under various interest rate scenarios and balance sheet strategies, and
economic valuation modeling which measures the sensitivity of equity value to
changes in interest rates. Significant assumptions include rate sensitivities,
prepayment risks, and the timing of changes in prime and deposit rates compared
with changes in money market rates.
The Company's exposure to interest rate risk is reviewed on at least a quarterly
basis by the Board of Directors and the ALCO. In addition, each subsidiary bank
has its own ALCO committee, which reviews the interest rate risk of each
subsidiary bank. If interest rate risk measurements are not within established
guidelines, the Board may direct management to adjust its asset and liability
mix to bring interest rate risk within Board-approved limits. In order to manage
the exposure to interest rate fluctuations, the Company has developed strategies
to manage its liquidity, shorten its effective maturities of interest-earning
assets, and increase the interest rate sensitivity of its asset base. The
Company has approximately $400 million of assets where interest rates are
adjustable, primarily in a 30-day time frame.
One measure of interest rate sensitivity is an evaluation of the sensitivity of
the Economic Value of Equity (EVE). The interest rate risk is measured from the
dispersion of equity values above and below the value produced using current or
base rates. EVE is the difference between the total present values of cash
flowing into the Company and the total present values of cash flowing out of the
Company in the future. The analysis performed by the Company assesses the risk
of loss in interest rate sensitive instruments in the event of a sudden and
sustained 50 to 200 basis points increase or decrease in the market interest
rates. The Company's Board of Directors has adopted an interest rate risk policy
which establishes maximum decreases in EVE of 6%, 12%, 18% and 25% in the event
of a sudden and sustained 50 to 200 basis points increase or decrease in market
interest rates.
The following table presents the Company's projected change in EVE, for all
assets and liabilities except for the Company's marketable equity securities,
for the various rate shock levels:
As of December 31, 1998
Percent Change
-----------------
Change in Economic Value Actual Board
Interest Rates Of Equity Change Actual Limit
------------------------ ------------- --------- ------ ------
200 basis point increase $222,998 $(30,480) (12.0)% (25)%
150 basis point increase 230,033 (23,445) (9.2) (18)
100 basis point increase 238,150 (15,328) (6.0) (12)
50 basis point increase 246,200 (7,278) (2.9) (6)
Base scenario 253,478 - - -
50 basis point decrease 257,332 3,854 1.5 (6)
100 basis point decrease 259,256 5,778 2.3 (12)
150 basis point decrease 261,947 8,469 3.3 (18)
200 basis point decrease 264,680 11,202 4.4 (25)
The preceding table indicates that at December 31, 1998, in the event of a
sudden and sustained increase in prevailing market rates, the Company's EVE
would be expected to decrease, and that in the event of a sudden and sustained
decrease in prevailing market interest rates, the Company's EVE would be
expected to increase. At December 31, 1998, the Company's estimated changes in
EVE were within the targets established by the Board of Directors. There have
been no material changes in the Company's EVE or in interest rate sensitivity
from December 31, 1998 to March 31, 1999.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presenting the
computation of EVE. Actual values may differ from those projections presented,
should market conditions vary from assumptions used in the calculation of EVE.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in EVE.
Finally, the ability of many borrowers, with adjustable rate loans, to repay
their loans may decrease in the event of interest rate increases.
The Company owns $72 million of marketable equity securities at December 31,
1998. The fair value of this portfolio has exposure to price risk. The following
table shows the effect of stock price fluctuations of plus or minus 5%, plus or
minus 10% and plus or minus 15%. These were selected based upon the probability
of their occurrence.
December 31, 1998
Fair Actual
Change in Prices Value Change
---------------- -------- ------
15% increase $83,097 $ 10,839
10% increase 79,484 7,226
5% increase 75,871 3,613
Current fair value 72,258 -
5% decrease 68,645 (3,613)
10% decrease 65,032 (7,226)
15% decrease 61,419 (10,839)
Within the Company's public equity investment portfolio, a 5% or less increase
in the value of the portfolio has occurred in 33% of the quarters over the past
three years; a 5% to 10% increase in the value of the portfolio has occurred in
17% of the quarters over the past three years; a 10% to 15% increase in the
value of the portfolio has occurred in 25% of the quarters in the past three
years; a 5% or less decrease has occurred in 17% of the quarters in the last
three years; and a 5% to 10% decrease has occurred in one quarter over the past
three years. There have been no material changes in the Company's marketable
equity securities portfolio from December 31, 1998 to March 31, 1999.
In conclusion, the analysis of the above data indicates that the Company's
earnings could be adversely effected by a decrease in interest rates. All of the
estimated changes fall within the guidelines of the Company's Board of Directors
and the risks they are willing to take in order to generate profits for the
Company.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMERCE BANCSHARES, INC.
Date: May 12, 1999 By: James Stuart Jr.
--------------------- ------------------------------
James Stuart, Jr., Chairman and CEO
Date: May 12, 1999 By: Donald Kinley
--------------------- -----------------------------
Donald Kinley, Senior Vice President and
Treasurer (Chief Accounting Officer)