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 September 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 September 30, 1999:
Class A Common 2,568,892 shares.
Class B Common 10,769,638 shares.
FIRST COMMERCE BANCSHARES, INC. & SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In Thousands)
(Unaudited)
September 30, 1999 December 31, 1998
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ASSETS
Cash and due from banks $ 137,354 $ 135,731
Federal funds sold 53,420 31,865
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Cash and cash equivalents 190,774 167,596
Mortgage loans held for sale 23,049 66,178
Securities available for sale (cost of
$593,638,000 and $430,747,000) 592,495 452,301
Securities held to maturity (fair value of
$232,955,000 and $300,502,000) 236,374 295,543
Loans 1,361,363 1,284,007
Less allowance for loan losses 24,909 24,292
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Net loans 1,336,454 1,259,715
Federal Home Loan Bank stock, at cost 13,614 9,347
Premises and equipment 72,642 62,392
Other assets 80,210 71,673
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$ 2,545,612 $ 2,384,745
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 291,709 $ 365,782
Interest bearing 1,469,104 1,362,718
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1,760,813 1,728,500
Short-term borrowings 226,900 213,470
Federal Home Loan Bank borrowings 261,020 143,625
Accrued expenses and other liabilities 33,771 37,004
Long-term debt 13,018 13,500
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Total liabilities 2,295,522 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, $.20 par value; authorized
40,000,000 shares; issued and outstanding
10,769,638 and 10,928,951 shares 2,154 2,186
Paid in capital 21,379 21,572
Retained earnings 226,786 210,361
Accumulated other comprehensive (loss)/income (743) 14,010
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Total stockholders' equity 250,090 248,646
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$ 2,545,612 $ 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Loans $29,125 $27,487 $83,492 $ 82,786
Securities:
Taxable 12,212 10,557 35,653 30,832
Nontaxable 526 380 1,491 1,096
Dividends 544 532 1,657 1,588
Mortgage loans held for sale 592 803 2,450 2,461
Federal funds sold 512 492 1,635 1,477
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Total interest income 43,511 40,251 126,378 120,240
Interest expense:
Deposits 15,200 16,142 45,179 47,319
Short-term borrowings 3,472 2,278 8,768 6,752
Federal Home Loan Bank borrowings 2,181 1,546 6,194 4,460
Long-term debt 207 341 736 1,003
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Total interest expense 21,060 20,307 60,877 59,534
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Net interest income 22,451 19,944 65,501 60,706
Provision for loan losses 1,663 1,531 4,865 4,511
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Net interest income after provision for loan losses 20,788 18,413 60,636 56,195
Noninterest income:
Service charges and fees to customers 15,102 12,844 44,413 36,260
Trust services 1,391 1,438 4,913 4,816
Gains on securities sales 761 1,915 3,448 4,211
Other income 612 1,024 1,957 2,937
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Total noninterest income 17,866 17,221 54,731 48,224
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Noninterest expense:
Salaries and employee benefits 12,295 10,962 36,170 32,397
Occupancy and equipment 3,144 2,695 8,735 7,543
Fees and insurance 4,782 3,859 14,737 10,905
Other expenses 6,427 6,322 18,653 17,408
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Total noninterest expense 26,648 23,838 78,295 68,253
------- ------- -------- --------
Income before income taxes 12,006 11,796 37,072 36,166
Income tax provision 4,218 4,195 12,971 12,840
-------- ------- -------- --------
Net income $ 7,788 $ 7,601 $ 24,101 $ 23,326
======= ======= ======== ========
Weighted average shares outstanding 13,354 13,530 13,434 13,530
======== ======= ======== ========
Basic net income per share $ .58 $ .56 $ 1.79 $ 1.72
======== ======= ======== ========
See notes to consolidated condensed financial statements.
FIRST COMMERCE BANCSHARES, INC. & SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited) (In Thousands)
Nine Months Ended
September 30,
1999 1998
---- ---- -
Net cash flows from operating activities $ 75,895 $ 7,805
Cash flows from investing activities:
Proceeds from maturities of held to maturity securities 73,734 75,654
Purchase of held to maturity securities (14,565) (82,840)
Proceeds from maturities of available for sale securities 73,094 40,588
Proceeds from sales of available for sale securities 49,026 19,194
Purchase of available for sale securities (281,559) (126,666)
Net increase in loans (81,604) (6,915)
Capital expenditures (14,963) (8,829)
Purchase of mortgage servicing rights (5,927) (8,154)
Proceeds from derivative financial instrument - 697
Purchase of Federal Home Loan Bank stock (3,768) (474)
Other (50) (35)
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Net cash flows from investing activities (206,582) (97,780)
Cash flows from financing activities:
Increase in deposits 32,313 23,896
Increase/(decrease) in short-term borrowings 13,430 (6,106)
Net increase in Federal Home Loan Bank borrowings 117,395 26,813
Cash dividends paid (3,625) (3,450)
Repurchase of common stock (4,369) -
Repayment of long-term debt (13,982) (2,501)
Proceeds from issuance of long-term debt 13,500 -
Other (797) (800)
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Net cash flows from financing activities 153,865 37,852
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Net increase/(decrease) in cash and cash equivalents 23,178 (52,123)
------- --------
Cash and cash equivalents at January 1 167,596 193,159
------- --------
Cash and cash equivalents at September 30 $ 190,774 $ 141,036
========= =========
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 September 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 nine-month period ended September 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 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 4,865 4,511
Charge-offs (6,398) (5,890)
Recoveries 2,150 2,114
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Balance, September 30 $24,909 $23,193
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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 nine months of 1999 and 1998 was a negative
$14,753,000, net of tax; and a negative $11,119,000, net of tax, respectively.
Thereby, total "comprehensive income" for the first nine months of 1999 was
$9,348,000 as compared to book net income of $24,101,000. For the first nine
months of 1998 total "comprehensive income" was $12,207,000 as compared to book
net income of $23,326,000. "Other comprehensive income" for the third quarter of
1999 and 1998 was a negative $5,415,000, net of tax, and a negative $4,776,000,
net of tax, respectively. Thereby, total "comprehensive income" for the third
quarter of 1999 was $2,373,000 as compared to book net income of $7,788,000. For
the third quarter of 1998 total "comprehensive income" was $2,825,000 as
compared to book net income of $7,601,000.
D. LONG-TERM DEBT
Long-term debt at September 30, 1999, consists of a term 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
Nine Months Ended September 30, 1999 and 1998
Results of Operations
Net income for the nine months ended September 30, 1999, was $24,101,000 or
$1.79 per share as compared to $23,326,000 or $1.72 per share for the same
period one year ago. Net income for the three months ended September 30, 1999,
was $7,788,000 or $.58 per share compared to $7,601,000 or $.56 per share for
the three months ended September 30, 1998. Net income for the first nine months
of 1999 includes $3,448,000 in gains primarily from the sale of investments in
the Company's Global Fund, as compared to gains of $4,211,000 for the same
period one year ago. If the securities gains were excluded for both periods, net
income would have been $21,860,000 and $20,589,000, respectively. On a per share
basis, earnings would have been $1.63 per share and $1.52 per share,
respectively.
Net Interest Income
Net interest income (interest income less interest expense) was $65,501,000 for
the nine months ended September 30, 1999, compared to $60,706,000 for the nine
months ended September 30, 1998. Net interest income for the three months ended
September 30, 1999 and 1998 was $22,451,000 and $19,944,000, respectively. The
increase in net interest income reflects an increase in total earning assets.
Earning assets at September 30, 1999, and September 30, 1998 were $2.280 billion
and $2.074 billion, respectively, a 9.9% increase. The net yield on earning
assets (net interest income divided by earning assets) was approximately 3.9% as
of September 30, 1999, compared to approximately 4.1% as of September 30, 1998.
Loans were $1.361 billion at the end of September 1999, compared to $1.240
billion at the same time a year ago, a 9.8% increase. Investments were $829
million at September 30, 1999 compared to $752 million at September 30, 1998, a
10.2% increase.
Provision for Loan Losses
The provision for loan losses was $4,865,000 for the nine months ended September
30, 1999, compared to $4,511,000 for the nine months ended September 30, 1998, a
7.8% increase. The third quarter 1999 provision was $1,663,000, which compares
to $1,531,000 for the third quarter of 1998. For the nine months ended September
30, 1999 net charge-offs were $4,248,000 compared to $3,776,000 for the same
period a year ago. Credit card charge-offs have stabilized. Net credit card
charge-offs totaled $3,557,000 for the nine-month period ended September 30,
1999, compared to $3,436,000 for the same period of 1998. For the nine-month
period ended September 30, 1999, other consumer loan net charge-offs of $691,000
compared to $339,000 for the same period one year ago. As a percentage of loans
outstanding, the loan loss reserve was 1.8% as of September 30, 1999 and 1.9% as
of September 30, 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:
September 30, 1999 December 31, 1998
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Loans accounted for on a non
accrual basis $ 953,000 $ 538,000
Accruing loans which are contractually
past due 90 days or more as to
principal or interest payment 924,000 1,584,000
Loans not included above which
are "troubled debt restructurings" 1,277,000 1,465,000
The increase in nonaccrual loans can be attributed to one agricultural loan and
two commercial loans, all of which are in the process of resolution. One small
restructured loan paid off through a refinance, 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
$189 million in agricultural loans, excluding agricultural real estate loans.
The cattle feeding and ranching sectors of the agricultural economy should be
profitable in 1999 and into next year. However, the Company continues to be
concerned about low grain commodity prices. Although low grain prices are
beneficial to cattle feeders, when coupled with government program payments,
grain prices continue to be near or below breakeven levels for the producer. The
forecast for above average yields, coupled with existing large grain reserves
and only marginally improved world economic conditions, suggest improvement in
the grain sector may not be likely in the near term. Although the Company's
agricultural producers are in relatively good financial condition, the
instability in this economic sector may have a negative impact on producers in
general and related industries as well, including banking, where higher than
historically experienced levels of non performing loans may occur.
Noninterest Income
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Noninterest income for the nine months ended September 30, 1999 was $54,731,000
compared to $48,224,000 for the nine months ended September 30, 1998, a 13.5%
increase. If securities gains were excluded, noninterest income would have been
$51,283,000 compared to $44,013,000, a 16.5% increase. When compared to the same
period one year ago, credit card fees increased $4,180,000 or 36.6% primarily
due to the increase in balances as well as total activity, and increases in
late, overlimit and cash advance fees. In addition, there has been a significant
increase in the number of Cabela's joint-venture cards outstanding do to a new
marketing program implemented in the last quarter. Computer services fees
increased $1,566,000 or 19.7% 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 13.1% increase
in other service charges and fees is due to several factors: growth in bond
sales, increased discount brokerage sales, and increased real estate lending
fees. The increase in discount brokerage sales is due to steady growth and a
generally strong stock market. Mortgage banking revenue increased 21.5% over the
same period one year ago primarily due to volume. Loans serviced by First
Commerce Mortgage were $1.851 billion at September 30, 1999 compared to $1.503
billion at September 30, 1998. Gains on the sale of securities were $3,448,000
in the nine-month period ended September 30, 1999 compared to $4,211,000 in the
same period one year ago, a $763,000 decrease. These gains were primarily the
result of selling certain positions held in the Company's Global Fund. Other
income decreased $980,000 due primarily to venture capital losses in the first
quarter of 1999, and a $872,000 decrease in profit on the sale of mortgage loans
held for sale.
The following table shows the breakdown of noninterest income and the percentage
change:
Nine Months Ended September 30, Percent
1999 1998 Increase/
(Amounts in Thousands) (Decrease)
Credit card fees $15,591 $11,411 36.6%
Computer services 9,535 7,969 19.7
Other service charges and fees 8,874 7,843 13.1
Mortgage banking 6,072 4,996 21.5
Service charges on deposits 4,341 4,041 7.4
Trust services 4,913 4,816 2.0
Gains on securities sales 3,448 4,211 (18.1)
Other income 1,957 2,937 (33.4)
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Total noninterest income $54,731 $48,224 13.5
======= =======
Noninterest Expense
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Noninterest expenses were $78,295,000 for the nine months ended September 30,
1999, as compared to $68,253,000 for the same period one year ago. This is an
increase of $10,042,000 or 14.7% from a year ago. Salary and employee benefits
increased $3,773,000 or 11.6% from the same period one year ago. The increase is
due to general 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 $3,427,000 or 43.8% 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 $1,144,000 or 26.3% 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 $657,000 or 20.7% due to an increase in the volume of mortgages
serviced by First Commerce Mortgage. Fees and insurance increased $405,000 or
13.1% due primarily to growth. Communications expenses decreased $373,000 or
11.2%. 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:
Nine Months Ended September 30, Percent
1999 1998 Increase/
(Amounts in Thousands) (Decrease)
Salaries and employee benefits $36,170 $32,397 11.6%
Equipment expense 5,492 4,348 26.3
Net occupancy expense 3,243 3,195 1.5
Credit card fees 11,248 7,821 43.8
Fees and insurance 3,489 3,084 13.1
Amortization of mortgage servicing rights 3,838 3,181 20.7
Business development 3,156 2,966 6.4
Communications 2,954 3,327 (11.2)
Supplies 1,905 2,001 (4.8)
Other expenses 4,968 4,775 4.0
Minority interest 1,449 775 87.0
Goodwill amortization 383 383 --
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Total noninterest expense $78,295 $68,253 14.7
======= =======
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 65.5% and 64.0% for the nine months ended September 30,
1999 and 1998, respectively.
Financial Condition at September 30, 1999
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Total assets at September 30, 1999, were $2,546 million, compared to $2,299
million at September 30, 1998, a 10.7% increase. Totalassets at December 31,
1998, were $2,385 million.
Since September 30, 1998, loans have increased from $1,240 million to $1,361
million, a 9.8% increase. Managed loans were $1,480 million at September 30,
1999 compared to $1,327 million at September 30, 1998. Managed loans include
securitized credit card loans of $119 million and $87 million at September 30,
1999 and 1998, respectively.
Loans are summarized as follows: September 30, 1999 September 30, 1998
------------------ ------------------
(Amounts in Thousands)
Real estate mortgage $ 458,086 $ 398,635
Consumer 308,184 268,891
Commercial and financial 262,114 257,877
Agricultural 189,090 170,449
Credit card 92,093 98,355
Real estate construction 51,796 45,375
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$1,361,363 $1,239,582
========== ==========
The increase in real estate and construction loans is due primarily to the
strong commercial real estate activity in the Omaha and Lincoln markets.
Increased indirect installment loans through vehicle dealerships have been the
primary source of the consumer loan portfolio growth. Agricultural loan growth
largely reflects higher cattle inventories due to improved cattle feeding
economics in 1999. The commercial and financial loan portfolios have seen
nominal growth.
Deposits have increased from $1,673 million at September 30, 1998 to $1,761
million at September 30, 1999, a 5.2% increase. The loan to deposit ratio was
77.3% as of September 30, 1999, compared to 74.1% at September 30, 1998.
Short-term borrowings totaled $227 million at September 30, 1999, compared to
$192 million at September 30, 1998, and $213 million at December 31, 1998.
Federal Home Loan Bank borrowings totaled $261 million at September 30, 1999,
compared to $147 million at September 30, 1998, and $144 million at December 31,
1998. In May 1999 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 6.3%. 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 September 30, 1999. The net
unrealized gains on available for sale securities decreased $14,753,000 since
December 31, 1998. In the first nine months of 1999 the decrease in unrealized
gains and losses on debt and equity securities classified as available for sale,
was due to an increase in medium to longer term interest rates which decreased
the market value of the Company's bond portfolio. The same period 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
September 30, 1998, the stock had a market value of $1.8 million, and at
September 30, 1999, the stock had a market value of $1.3 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
------- ----- ------ ------- ------ -----
(Amounts in Thousands)
As of September 30, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated $278,933 15.7% $142,000 8.0% N/A
National Bank of Commerce 121,945 12.1 80,635 8.0 $100,794 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 247,473 13.9 71,000 4.0 N/A
National Bank of Commerce 109,346 10.8 40,317 4.0 60,476 6.0
Tier I Capital (to Quarterly Average Assets):
Consolidated 247,473 10.0 98,874 4.0 N/A
National Bank of Commerce 109,346 7.8 56,211 4.0 70,263 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 favorable in the
Omaha/Lincoln metro areas, but there are some signs of weaknesses for rural
businesses. Employment growth remains solid despite stagnant population growth.
Construction activity is ahead of last year, while retail sales growth has been
positive (except in rural areas). The manufacturing base in the state continues
to operate at expanding levels. Motor vehicle sales are ahead of last year's
pace. 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 are beginning to recover. Personal bankruptcy filings may
be starting to decline.
The financial prospects for the grain farmers are not favorable as crop prices
are below cost of production levels. Crop yields are good, but lower than last
year. Congress is considering the appropriation of market loss adjustment
payments, which would provide a modest level of financial relief. Cattle feeders
have realized consistent profitability during 1999, while hog producers will be
facing losses for the most part in 1999. Ranchers are expected to continue to
realize good 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 and an increased supply of motel/hotel units on a regional
basis. 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 September
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 September 30, 1999. The Company will continue to conduct
various types of internal testing through the end of the year and beyond.
Testing will continue until all Year 2000 sensitive dates such as February
29, 2000, are past.
The Costs to Address the Company's Year 2000 Issues. Through September 30, 1999,
cumulative costs relating directly to Year 2000 issues since the project's
inception have totaled approximately $8.7 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 $500,000 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 $773 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 September 30, 1999
Economic Value Actual
Change in Interest Rates Of Equity Change Percent Change
---------- -------- ----------
(Amounts in Thousands)
200 basis point increase $168,494 $(67,933) (28.7)%
150 basis point increase 185,648 (50,779) (21.5)
100 basis point increase 202,656 (33,771) (14.3)
50 basis point increase 220,727 (15,700) (6.6)
Base scenario 236,427 - -
50 basis point decrease 255,109 18,682 7.9
100 basis point decrease 268,328 31,901 13.5
150 basis point decrease 276,572 40,145 17.0
200 basis point decrease 277,443 41,016 17.4
As of December 31, 1998
Economic Value Actual
Change in Interest Rates Of Equity Change Percent Change
---------- -------- ----------
(Amounts in Thousands)
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 September 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 $454 million of mortgage-backed securities at
cost, with a $438 million fair value. 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 $72 million of marketable equity securities at September 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.
September 30, 1999 December 31, 1998
------------------- ------------------
Fair Actual Fair Actual
Change in Prices Value Change Value Change
-------- ------ -------- -------
(Amounts in Thousands)
15% increase $83,155 $ 10,846 $83,097 $ 10,839
10% increase 79,540 7,231 79,484 7,226
5% increase 75,924 3,615 75,871 3,613
Current fair value 72,309 - 72,258
5% decrease 68,694 (3,615) 68,645 (3,613)
10% decrease 65,078 (7,231) 65,032 (7,226)
15% decrease 61,463 (10,846) 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 8% 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 33% 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 September 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 nine months ended September 30, 1999,
the Company acquired 14,427 shares of its Class A stock and 162,959 shares of
its Class B stock at an average price of $24.63. 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: November 11, 1999 By: James Stuart, Jr.
-------------------------- ------------------------------
James Stuart, Jr., Chairman and CEO
Date: November 11, 1999 By: Donald Kinley
-------------------------- -------------------------------
Donald Kinley, Senior Vice President and
Treasurer (Chief Accounting Officer)