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 June 30, 1999 Commission File No. 0-14277
FIRST COMMERCE BANCSHARES, INC.
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NEBRASKA 47-0683029
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1248 O STREET, LINCOLN, NEBRASKA 68508-1424
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (402) 434-4110
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NONE
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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
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Common stock, $.20 par value; outstanding at June 30, 1999
Class A Common 2,568,892 shares.
Class B Common 10,801,492 shares.
FIRST COMMERCE BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, 1999 DECEMBER 31, 1998
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(AMOUNTS IN THOUSANDS)
ASSETS
Cash and due from banks $ 144,826 $ 135,731
Federal funds sold 40,435 31,865
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Cash and cash equivalents 185,261 167,596
Mortgage loans held for sale 45,964 66,178
Securities available for sale (cost of
$583,853,000 and $430,747,000) 591,041 452,301
Securities held to maturity (fair value of
$256,800,000 and $300,502,000) 258,460 295,543
Loans 1,305,464 1,284,007
Less allowance for loan losses 24,477 24,292
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Net loans 1,280,987 1,259,715
Federal Home Loan Bank stock, at cost 10,136 9,347
Premises and equipment 70,902 62,392
Other assets 73,824 71,673
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$ 2,516,575 $ 2,384,745
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 369,572 $ 365,782
Interest bearing 1,407,118 1,362,718
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1,776,690 1,728,500
Short-term borrowings 283,747 213,470
Federal Home Loan Bank borrowings 162,525 143,625
Accrued expenses and other liabilities 30,503 37,004
Long-term debt 13,500 13,500
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Total liabilities 2,266,965 2,136,099
Stockholders' equity:
Common stock:
Class A voting, $.20 par value; authorized
10,000,000 shares; issued and outstanding
2,568,892 and 2,583,319 shares; 514 517
Class B non-voting, $.20 par value; authorized
40,000,000 shares; issued and outstanding
10,801,492 and 10,928,951 shares 2,160 2,186
Paid in capital 21,346 21,572
Retained earnings 220,918 210,361
Accumulated other comprehensive income 4,672 14,010
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Total stockholders' equity 249,610 248,646
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$ 2,516,575 $ 2,384,745
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -------------------------
1999 1998 1999 1998
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Interest income:
Loans $27,479 $27,681 $54,367 $55,299
Securities:
Taxable 12,250 10,277 23,441 20,275
Nontaxable 500 365 965 716
Dividends 584 606 1,113 1,056
Mortgage loans held for sale 804 945 1,858 1,658
Federal funds sold 514 611 1,123 985
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Total interest income 42,131 40,485 82,867 79,989
Interest expense:
Deposits 15,113 15,896 29,979 31,177
Short-term borrowings 2,875 2,191 5,296 4,474
Federal Home Loan Bank borrowings 2,050 1,444 4,013 2,914
Long-term debt 239 317 529 662
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Total interest expense 20,277 19,848 39,817 39,227
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Net interest income 21,854 20,637 43,050 40,762
Provision for loan losses 1,607 1,484 3,202 2,980
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Net interest income after provision for loan losses 20,247 19,153 39,848 37,782
Noninterest income:
Service charges and fees to customers 14,971 11,886 29,311 23,416
Trust services 1,707 1,642 3,522 3,378
Gains on securities sales 940 1,457 2,687 2,296
Other income 672 1,026 1,345 1,913
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Total noninterest income 18,290 16,011 36,865 31,003
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Noninterest expense:
Salaries and employee benefits 12,322 10,731 23,875 21,435
Occupancy and equipment 2,566 2,520 5,591 4,848
Fees and insurance 5,102 3,644 9,955 7,046
Other expenses 6,429 5,679 12,226 11,086
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Total noninterest expense 26,419 22,574 51,647 44,415
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Income before income taxes 12,118 12,590 25,066 24,370
Income tax provision 4,293 4,485 8,753 8,645
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Net income $ 7,825 $ 8,105 $ 16,313 $ 15,725
======== ======= ======== ========
Weighted average shares outstanding 13,441 13,530 13,474 13,530
======== ======= ======== ========
Basic net income per share $ .58 $ .60 $ 1.21 $ 1.16
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See notes to consolidated condensed financial statements.
FIRST COMMERCE BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
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1999 1998
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Net cash flows from operating activities $ 41,104 $ (570)
Cash flows from investing activities:
Proceeds from maturities of held to maturity securities 51,341 53,435
Purchase of held to maturity securities (14,258) (78,932)
Proceeds from maturities of available for sale securities 48,803 27,684
Proceeds from sales of available for sale securities 28,447 10,903
Purchase of available for sale securities (227,678) (36,537)
Net (increase)/decrease in loans (24,474) 10,780
Capital expenditures (11,487) (5,951)
Purchase of mortgage servicing rights (4,236) (5,605)
Proceeds from derivative financial instrument - 697
Other (467) (357)
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Net cash flows from investing activities (154,009) (23,883)
Cash flows from financing activities:
Increase in deposits 48,190 37,679
Increase/(decrease) in short-term borrowings 70,277 (28,888)
Net increase/(decrease) in Federal Home Loan Bank
borrowings 18,900 (2,700)
Cash dividends paid (2,425) (2,300)
Repurchase of common stock (3,586) -
Repayment of long-term debt (13,500) (2,501)
Proceeds from issuance of long-term debt 13,500 -
Other (786) (783)
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Net cash flows from financing activities 130,570 507
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Net increase/(decrease) in cash and cash equivalents 17,665 (23,946)
Cash and cash equivalents at January 1 167,596 193,159
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Cash and cash equivalents at June 30 $185,261 $169,213
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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 June 30, 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 six-month period ended June 30, 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
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(AMOUNTS IN THOUSANDS)
Balance, January 1 $24,292 $22,458
Provision for loan losses 3,202 2,980
Charge-offs (4,387) (4,071)
Recoveries 1,370 1,324
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Balance, June 30 $24,477 $22,691
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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 six months of 1999 and 1998 was a negative
$9,338,000, net of tax; and a negative $6,343,000, net of tax, respectively.
Thereby, total "comprehensive income" for the first six months of 1999 was
$6,975,000 as compared to book net income of $16,313,000. For the first six
months of 1998 total "comprehensive income" was $9,382,000 as compared to book
net income of $15,725,000. "Other comprehensive income" for the second quarter
of 1999 and 1998 was a negative $2,783,000, net of tax; and a negative
$4,968,000, net of tax, respectively. Thereby, total "comprehensive income" for
the second quarter of 1999 was $5,042,000 as compared to book net income of
$7,825,000. For the second quarter of 1998 total "comprehensive income" was
$3,137,000 as compared to book net income of $8,105,000.
D. LONG-TERM DEBT
Long-term debt at June 30, 1999, consists of a $13,500,000 loan from a
commercial bank, maturing May 2, 2006. The interest rate is fixed at 6.2%.
Scheduled annual principal payments are $1.929 million.
FIRST COMMERCE BANCSHARES, INC. & SUBSIDIARIES
FINANCIAL REVIEW
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1999, was $16,313,000 or $1.21 per
share as compared to $15,725,000 or $1.16 per share for the same period one year
ago. Net income for the three months ended June 30, 1999, was $7,825,000 or $.58
per share compared to $8,105,000 or $.60 per share for the three months ended
June 30, 1998. Net income for the three months ended March 31, 1999, was
$8,488,000 or $.63 per share. Net income for the first six months of 1999
includes $2,687,000 in gains primarily from the sale of investments in the
Company's Global Fund, as compared to gains of $2,296,000 for the same period
one year ago. If the securities gains were excluded for both periods, net income
would have been $14,566,000 and $14,233,000, respectively. On a per share basis,
earnings would have been $1.08 per share and $1.05 per share, respectively.
NET INTEREST INCOME
Net interest income (interest income less interest expense) was $43,050,000 for
the first half of 1999, compared to $40,762,000 for the first half of 1998. Net
interest income for the three months ended June 30, 1999 and 1998 was
$21,854,000 and $20,637,000, respectively. Net interest income for the quarter
ended March 31, 1999, was $21,196,000. The increase in net interest income
reflects an increase in total earning assets. Earning assets at June 30, 1999,
March 31, 1999, and June 30, 1998 were $2.252 billion, $2.198 billion, and
$2.017 billion, respectively. The net yield on earning assets (net interest
income divided by earning assets) was approximately 3.9% as of June 30, 1999,
4.0% as of March 31, 1999 and 4.1% as of December 31, 1998. Loans were $1.305
billion at the end of June 1999, compared to $1.223 billion at the same time a
year ago, a 6.7% increase. Investments were $850 million at June 30, 1999
compared to $706 million at June 30, 1998, a 20.3% increase.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $3,202,000 for the first half of 1999,
compared to $2,980,000 for the first half of 1998, a 7.4% increase. The second
quarter 1999 provision was $1,607,000, which compares to $1,595,000 for the
first quarter of 1999, and $1,484,000 for the second quarter of 1998. For the
first six months of 1999 net charge-offs were $3,017,000 compared to $2,747,000
for the same period a year ago. Credit card charge-offs have stabilized. Net
credit card charge-offs totaled $2,625,000 for the first half of 1999 compared
to $2,538,000 for the first half of 1998. For the first half of 1999, other
consumer loan net charge-offs of $392,000 compared to $209,000 for the same
period one year ago. As a percentage of loans outstanding, the loan loss reserve
was 1.9% as of June 30, 1999 and 1998. 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:
JUNE 30, 1999 DECEMBER 31, 1998
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Loans accounted for on a non
accrual basis $ 966,000 $ 538,000
Accruing loans which are contractually
past due 90 days or more as to
principal or interest payment 1,234,000 1,584,000
Loans not included above which
are "troubled debt restructurings" 1,447,000 1,465,000
The increase in nonaccrual loans can be attributed to one agricultural loan and
one commercial loan, both of which are in the process of resolution. There have
been no significant changes in troubled debt restructurings, and accruing loans
that are contractually past due 90 days or more have been well controlled.
Virtually all of the Company's loans are to Midwest-based organizations,
although the loan portfolio is well diversified by industry. The Midwestern
economy is partially dependent upon the general state of the agricultural
economy. The Company has $170 million in agricultural loans, excluding
agricultural real estate loans. The Company is concerned about low agricultural
commodity prices. Fat cattle feeders experienced losses over the past two years
and while the first half of 1999 has been profitable, the earnings picture for
the balance of the year is unclear. Grain prices, when coupled with government
program payments, continue to be near or below breakeven levels, as strong
yields are being forecasted for 1999. A bumper grain harvest, coupled with
existing large grain reserves and only marginally improved world economic
conditions, suggest improvement in the general agricultural economy may not be
likely in the near term. Although the Company's borrowers are in relatively good
financial condition, the uncertain environment they are experiencing 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 six months of 1999 was $36,865,000 compared to
$31,003,000 for the first six months of 1998, an 18.9% increase. If securities
gains were excluded, noninterest income would have been $34,178,000 compared to
$28,707,000, a 19.1% increase. When compared to the same period one year ago,
credit card fees increased $3,023,000 or 42.1% primarily due to the volume of
outstanding balances as well as total sales volume, and increases in late,
overlimit and cash advance fees. Computer fees increased $1,188,000 or 23.0% due
to various fees generated from installation services, conversions, profit on
resale of equipment, and out-of-Nebraska item processing centers operated by
First Commerce Technologies. The 15.9% increase in other service charges and
fees is due to several factors: growth in bond sales, increased discount
brokerage sales, and fees earned from the "Great Plains Family of Funds." The
increase in discount brokerage sales is due to steady growth and a strong stock
market. Mortgage banking income increased 22.5% over the same period one year
ago primarily due to volume. Loans serviced by First Commerce Mortgage were
$1.780 billion at June 30, 1999 compared to $1.400 billion at June 30, 1998.
Gains on the sale of securities were $2,687,000 in the first six months of 1999
compared to $2,296,000 in the first six months of 1998, a $391,000 increase.
These gains were primarily the result of selling certain positions held in the
Company's Global Fund. Other income decreased $568,000 due primarily to venture
capital losses in the first quarter of 1999, and a $265,000 decrease in profit
on the sale of mortgages held for sale.
The following table shows the breakdown of noninterest income and the percentage
change:
(IN THOUSANDS) PERCENT
SIX MONTHS ENDED JUNE 30, INCREASE/
1999 1998 (DECREASE)
------- ------- ----------
Credit card fees $ 10,196 $7,173 42.1%
Computer services 6,346 5,158 23.0
Other service charges and fees 6,046 5,217 15.9
Mortgage banking 3,950 3,224 22.5
Service charges on deposits 2,773 2,644 4.9
Trust services 3,522 3,378 4.3
Gains on securities sales 2,687 2,296 17.0
Other income 1,345 1,913 (29.7)
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Total noninterest income $36,865 $31,003 18.9
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NONINTEREST EXPENSE
Noninterest expenses were $51,647,000 for the first six months of 1999 as
compared to $44,415,000 for the same period one year ago. This is an increase of
$7,232,000 or 16.3% from a year ago. Salary and employee benefits increased
$2,440,000 or 11.4% from the same period one year ago. The increase is generally
due to increases in the levels of pay and number of employees, plus the addition
of banks in Valentine, Nebraska and Colorado Springs, Colorado. Credit card fees
increased $2,621,000 or 53.0% 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
$617,000 or 21.9% due to maintenance and additional depreciation expense on the
significant equipment purchases of the last two years, primarily computer
systems and software. Amortization of mortgage servicing rights increased
$525,000 or 25.5% due to an increase in the volume of mortgages serviced by
First Commerce Mortgage. Fees and insurance increased $288,000 or 13.7% due
primarily to expenses related to growth. Communications expenses decreased
$252,000 or 11.8%. Other expenses increased $600,000 or 11.5%. Network solutions
engineers hired on a contract basis by First Commerce Technologies to work on
specific projects, and amortization of a premium paid for a bankcard portfolio
are the primary other expense increases. 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
SIX MONTHS ENDED JUNE 30, INCREASE/
1999 1998 (DECREASE)
-------- --------- ----------
Salaries and employee benefits $23,875 $21,435 11.4%
Credit card fees 7,566 4,945 53.0
Equipment expense 3,428 2,811 21.9
Amortization of mortgage servicing rights 2,582 2,057 25.5
Fees and insurance 2,389 2,101 13.7
Net occupancy expense 2,163 2,037 6.2
Business development 2,008 1,992 .8
Communications 1,892 2,144 (11.8)
Supplies 1,299 1,319 (1.5)
Other expenses 3,426 2,826 21.2
Minority interest 764 493 55.0
Goodwill amortization 255 255 --
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Total noninterest expense $51,647 $44,415 16.3
======= =======
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 65.6% and 62.8% at June 30, 1999 and 1998, respectively.
FINANCIAL CONDITION AT JUNE 30, 1999
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Total assets at June 30, 1999, were $2,517 million, compared to $2,260 million
at June 30, 1998, an 11.4% increase. Total assets at December 31, 1998, were
$2,385 million.
Since June 30, 1998, loans have increased from $1,223 million to $1,305 million,
a 6.7% increase. Managed loans at June 30, 1999 were $1,404 million.
Loans are summarized as follows: (IN THOUSANDS)
JUNE 30, 1999 JUNE 30, 1998
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Real estate mortgage $ 431,884 $ 400,892
Consumer 292,431 269,475
Commercial and financial 260,035 257,290
Agricultural 169,841 168,634
Credit card 102,141 89,209
Real estate construction 49,132 37,416
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$1,305,464 $1,222,916
========== ==========
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. Increased indirect installment loans through
vehicle dealerships have been the primary source of the consumer loan portfolio
growth. The commercial, financial and agricultural loan portfolios have seen
nominal growth.
Deposits have increased from $1,687 million at June 30, 1998 to $1,777 million
at June 30, 1999, a 5.3% increase. The loan to deposit ratio was 73.5% as of
June 30, 1999, compared to 72.5% at June 30, 1998. Short-term borrowings totaled
$284 million at June 30, 1999, compared to $170 million at June 30, 1998, and
$213 million at December 31, 1998. Federal Home Loan Bank borrowings totaled
$163 million at June 30, 1999, compared to $118 million at June 30, 1998, and
$144 million at December 31, 1998. The Company redeemed the outstanding
long-term capital notes totaling $13,500,000. The capital notes were refinanced
with a seven-year amortizing loan in the amount of $13,500,000 from a commercial
bank. The interest 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. On July
6, 1999, the Company increased the size of its pooling and service agreement
from $100 million to $150 million. Since then it has increased its securitized
credit card portfolio from $99 million to $119 million.
Stockholders' equity to assets was 9.8% as of June 30, 1999. The net unrealized
gains on available for sale securities decreased $9,338,000 since December 31,
1998. The first half 1999 decrease in unrealized gains and losses on debt and
equity securities classified as available for sale, was due to an increase in
bond yields which decreased the market value of the Company's bond portfolio.
The first half 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 June 30, 1998, the stock had a market value of
$2.5 million, and at June 30, 1999, the stock had a market value of $.9 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 JUNE 30, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated $273,304 15.9% $137,603 8.0% N/A
National Bank of Commerce 119,220 12.1 78,986 8.0 $98,733 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 240,920 14.0 68,802 4.0 N/A
National Bank of Commerce 106,849 10.8 39,493 4.0 59,240 6.0
Tier I Capital (to Quarterly Average Assets):
Consolidated 240,920 9.9 97,328 4.0 N/A
National Bank of Commerce 106,849 7.7 55,543 4.0 69,429 5.0
AS OF DECEMBER 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $261,743 15.9% $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
ECONOMY
Recent economic data show 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. Employment growth remains strong despite stagnant
population growth. 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 may realize moderate growth as the Federal
Reserve Board raises interest rates in an attempt 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 may be starting
to decline.
The financial results of the 1998 Nebraska farm sector were not good. Crop
prices are below cost of production levels. Cattle feeders have realized some
level of profitability during the first half of 1999, while hog producers will
be facing losses for the most part in 1999. Ranchers are expected to continue to
realize modest profits given the reduced herd size. Some layoffs have occurred
in the agricultural equipment manufacturing sector in the state, and farm
implement dealerships are experiencing slow sales.
The commercial and residential real estate markets remain in reasonable
supply/demand balance. There has been a modest overbuilding of multi-family
units in Lincoln. Higher interest rates could, however, dampen market
conditions. The real estate market in Colorado Springs remains strong given the
influx of new jobs into the region.
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 issues.
The Company has incorporated these guidelines into its Year 2000 plan. The
Company is examined by both regulators and the Company's own internal audit
staff and will be subject to ongoing examinations with regard to being Year 2000
ready.
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. Routine
reporting is given to the Company's Board of Directors on the status of the Year
2000 project.
0 The Company considers the awareness phase of its Year 2000 project to be
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
complete for internal mission critical systems. The Company has completed a
vendor management 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. All mission critical systems have been
remediated and implemented in the production environment as of June 30,
1999.
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 completed both types of tests related to its
project as of June 30, 1999.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Through June 30, 1999,
cumulative costs relating directly to Year 2000 issues since the project's
inception have totaled approximately $8.2 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 $1.0 million
and, therefore, the total estimated Year 2000 project costs from inception
through completion should approximate $9.2 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 affected. Some of the commercial financial services
that could be affected are credit card merchant processing, commercial cash
management services and financial institution data processing services. Year
2000 issues 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 issues, 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 issues could also have a material adverse effect on the Company 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 has in place contingency plans to
address potential Year 2000 interruptions of its internal and external mission
critical systems and services. For example, the Company developed plans to
provide the liquidity that would be needed to meet possible unusually high cash
demands. These plans will be subject to ongoing review, testing and adjustment
throughout 1999.
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
from 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.
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, 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 $670 million of assets where interest rates are repriceable within
90 days.
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 reviews and monitors interest rate risk
analysis on a quarterly basis.
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 JUNE 30, 1999
CHANGE IN ECONOMIC VALUE ACTUAL
INTEREST RATES OF EQUITY CHANGE PERCENT CHANGE
200 basis point increase $183,377 $(60,799) (24.9)%
150 basis point increase 195,020 (49,156) (20.1)
100 basis point increase 210,693 (33,483) (13.7)
50 basis point increase 228,631 (15,545) (6.4)
Base scenario 244,176 - -
50 basis point decrease 259,054 14,878 6.1
100 basis point decrease 267,378 23,202 9.5
150 basis point decrease 271,534 27,358 11.2
200 basis point decrease 274,412 30,236 12.4
AS OF DECEMBER 31, 1998
CHANGE IN ECONOMIC VALUE ACTUAL
INTEREST RATES OF EQUITY CHANGE PERCENT CHANGE
200 basis point increase $222,998 $(30,480) (12.0)%
150 basis point increase 230,033 (23,445) (9.2)
100 basis point increase 238,150 (15,328) (6.0)
50 basis point increase 246,200 (7,278) (2.9)
Base scenario 253,478 - -
50 basis point decrease 257,332 3,854 1.5
100 basis point decrease 259,256 5,778 2.3
150 basis point decrease 261,947 8,469 3.3
200 basis point decrease 264,680 11,202 4.4
The preceding table indicates that at June 30, 1999, 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. Since December 31, 1998, the Company's estimated changes in EVE have
increased significantly.
The Company owns approximately $400 million of mortgaged-backed securities.
Mortgage interest rates have increased approximately 1.5% from their lows in the
fall of 1998. This has caused the cash flows from approximately $100 million of
these securities to decrease significantly from the estimated cash flows when
the securities were purchased. The average life of the Company's investment
portfolio has increased from December 31, 1998. This is the primary reason for
the significant change in the results of the Company's rate shock analysis.
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 $75 million of marketable equity securities at June 30, 1999.
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.
JUNE 30, 1999 DECEMBER 31, 1998
-------------- ------------------
FAIR ACTUAL FAIR ACTUAL
CHANGE IN PRICES VALUE CHANGE VALUE CHANGE
---------------- ----- ------ -------- ------
15% increase $86,789 $ 11,320 $83,097 $ 10,839
10% increase 83,016 7,547 79,484 7,226
5% increase 79,242 3,773 75,871 3,613
Current fair value 75,469 - 72,258 -
5% decrease 71,696 (3,773) 68,645 (3,613)
10% decrease 67,922 (7,547) 65,032 (7,226)
15% decrease 64,149 (11,320) 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 17% of the quarters over the past
three years; a 5% to 10% increase in the value of the portfolio has occurred in
25% 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 25% of the quarters in the last
three years; and a 5% to 10% decrease has occurred in one quarter over the past
three years.
In conclusion, rate shock analysis as of June 30, 1999, indicates the Company's
earnings could be adversely affected by an increase in interest rates, due to
the effect it would have on the Company's investment portfolio. A major decrease
in interest rates could also adversely affect the Company's earnings due to the
Company's inability to lower interest rates on interest-bearing demand deposits
to the same degree that interest-earning assets would change.
STOCK PURCHASE PROGRAM
During 1994, the Board of Directors announced its intentions to purchase shares
of its common stock when appropriate and at a price management believes
advantageous to the Company. During the six months ended June 30, 1999, the
Company acquired 14,427 shares of its Class A stock and 127,459 shares of its
Class B stock at an average price of $25.28. All treasury stock is immediately
retired.
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.
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: AUGUST 13, 1999 By: JAMES STUART, JR.
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James Stuart, Jr., Chairman and CEO
Date: AUGUST 13, 1999 By: DONALD KINLEY
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Donald Kinley, Senior Vice President and
Treasurer (Chief Accounting Officer)