UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
-------- --------
Commission File Number 0 - 9676
FIRST COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
ARKANSAS 71-0540166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 WEST CAPITOL AVENUE, LITTLE ROCK, ARKANSAS 72201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501)371-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practical date.
Class Outstanding at Sept. 30, 1995
--------------------------------------- -----------------------------
Common Stock, $3.00 par value per share 23,740,237
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TABLE OF CONTENTS
Item Page
---- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements (Unaudited)............................. 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
PART II - OTHER INFORMATION
1. Legal Proceedings............................................ 19
6. Exhibits and Reports on Form 8-K............................. 19
Signatures............................................................. 20
2
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED BALANCE SHEETS September 30, December 31,
(Dollars in thousands, except par value) -------------- --------------
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................... $ 298,083 $ 287,376
Federal funds sold........................................................ 76,460 71,979
-------------- --------------
Total cash and cash equivalents.......................................... 374,543 359,355
Investment securities held-to-maturity, estimated market
value $808,304 ($865,366 in 1994)........................................ 812,931 900,064
Investment securities available-for-sale.................................. 358,184 409,129
Trading account securities................................................ 320 13
Loans and leases, net of unearned income.................................. 2,785,935 2,534,793
Allowance for possible loan and lease losses.............................. (45,223) (45,325)
-------------- --------------
Net loans and leases..................................................... 2,740,712 2,489,468
Bank premises and equipment, net.......................................... 89,946 87,046
Other real estate owned, net of allow for poss losses of $63 ($67 in 1994) 2,304 3,093
Other assets.............................................................. 183,889 126,031
-------------- --------------
Total assets........................................................... $ 4,562,829 $ 4,374,199
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing transaction accounts................................. $ 826,860 $ 767,525
Interest bearing transaction and savings accounts......................... 1,392,392 1,538,601
Certificates of deposit $100,000 and over................................. 386,239 326,298
Other time deposits....................................................... 1,269,736 1,192,936
-------------- --------------
Total deposits........................................................... 3,875,227 3,825,360
Short-term borrowings..................................................... 255,163 167,417
Other liabilities and deferred income taxes............................... 46,201 29,988
Long-term debt............................................................ 11,471 8,243
-------------- --------------
Total liabilities........................................................ 4,188,062 4,031,008
Stockholders' equity
Preferred stock, $1 par value, 400,000 shares authorized, none issued
Common stock, $3 par value, 34,000,000 shares authorized,
23,819,237 and 23,775,118 shares issued, respectively................... 71,458 71,325
Capital surplus.......................................................... 109,493 109,167
Retained earnings........................................................ 195,851 170,132
Unrealized net losses on available-for-sale securities, net of income tax (20) (7,433)
Less treasury stock at cost, 79,000 and 0 shares, respectively........... (2,015) --
-------------- --------------
Total stockholders' equity.............................................. 374,767 343,191
-------------- --------------
Total liabilities and stockholders' equity............................. $ 4,562,829 $ 4,374,199
============== ==============
See accompanying notes.
</TABLE>
3
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<TABLE>
<CAPTION>
FIRST COMMERCIAL CORPORATION Unaudited Unaudited
CONSOLIDATED INCOME STATEMENTS Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data) September 30, September 30,
---------------------- ----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income
Loans and leases, including fees........................... $ 61,141 $ 46,983 $ 172,039 $ 133,852
Short-term investments..................................... 977 1,290 3,094 3,154
Investment securities-taxable.............................. 15,032 14,769 45,564 45,024
-nontaxable........................... 1,680 1,877 5,105 5,761
Trading account securities................................. 5 9 5 20
---------- ---------- ---------- ----------
Total interest income.................................... 78,835 64,928 225,807 187,811
Interest expense
Interest on deposits....................................... 30,658 23,545 87,002 67,770
Short-term borrowings...................................... 2,577 1,311 7,747 2,745
Long-term debt............................................. 208 137 619 558
---------- ---------- ---------- ----------
Total interest expense................................... 33,443 24,993 95,368 71,073
Net interest income........................................... 45,392 39,935 130,439 116,738
Provision for possible loan and lease losses.................. 421 8 1,565 1,049
---------- ---------- ---------- ----------
Net int inc after prov for possible loan and lease losses 44,971 39,927 128,874 115,689
Other income
Trust department income.................................... 2,738 2,636 8,165 8,526
Mortgage servicing fee income.............................. 5,092 4,430 12,590 12,555
Broker-dealer operations income............................ 824 500 2,202 1,881
Service charges on deposit accounts........................ 5,326 5,155 15,803 14,789
Other service charges and fees............................. 2,406 1,924 6,336 5,982
Investment securities gains (losses), net.................. (42) 8 (61) 127
Other real estate gains (losses), net...................... (59) 589 (164) 2,798
Other...................................................... 1,325 1,770 3,695 5,111
---------- ---------- ---------- ----------
Total other income....................................... 17,610 17,012 48,566 51,769
Other expenses
Salaries, wages and employee benefits...................... 19,336 19,047 57,737 55,973
Net occupancy.............................................. 2,847 2,467 8,166 6,993
Equipment.................................................. 2,640 2,443 7,686 7,007
FDIC insurance............................................. 2,146 2,387 6,511 6,405
Amortization of purchased mortgage servicing rights........ 1,037 1,206 3,111 4,435
Other...................................................... 12,655 10,336 33,628 30,948
---------- ---------- ---------- ----------
Total other expenses..................................... 40,661 37,886 116,839 111,761
Income before income taxes................................. 21,920 19,053 60,601 55,697
Income tax provision....................................... 7,585 6,332 20,580 18,306
---------- ---------- ---------- ----------
Net income............................................... $ 14,335 $ 12,721 $ 40,021 $ 37,391
========== ========== ========== ==========
Weighted average number of common shares outstanding
during the period............................................ 23,736,718 23,788,600 23,771,094 23,988,817
Earnings per common share..................................... $ 0.60 $ 0.53 $ 1.68 $ 1.55
See accompanying notes.
</TABLE>
4
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<TABLE>
<CAPTION>
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended
(Dollars in thousands) September 30,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 40,021 $ 37,391
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 10,939 11,643
Provision for possible loan and lease losses...................................... 1,565 1,049
Loss (gain) on investment securities available-for-sale........................... 61 (127)
Gain on sale of equipment......................................................... (61) (153)
Gain on sale of other real estate................................................. (857) (3,238)
Write downs of other real estate.................................................. 44 334
Equity in undistributed earnings of unconsolidated subsidiary..................... (1,336) (1,116)
Decrease (increase) in trading securities......................................... (305) 703
Net unrealized gain on trading securities......................................... (2) --
Decrease (increase) in mortgage loans held for resale............................. (46,743) 12,336
Increase (decrease) in income taxes payable....................................... 2,370 (2,090)
Increase in interest and other receivables........................................ (3,474) (499)
Increase in interest payable...................................................... 2,266 232
Increase (decrease) in accrued expenses........................................... 7,230 (4,818)
Increase in prepaid expenses...................................................... (1,723) (3,601)
---------- ----------
Net cash provided by operating activities........................................ 9,983 48,046
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale.................... 13,069 8,722
Proceeds from maturing investment securities available-for-sale.................... 252,392 73,263
Proceeds from maturing investment securities held-to-maturity...................... 365,051 602,832
Purchases of investment securities available-for-sale.............................. (203,186) (88,782)
Purchases of investment securities held-to-maturity................................ (277,918) (399,504)
Purchases of institutions, net of funds acquired................................... -- (5,872)
Net increase in loans and leases................................................... (207,440) (171,126)
Capital expenditures............................................................... (10,884) (17,870)
Proceeds from sale of bank premises and equipment.................................. 1,896 8,596
Additions to purchased mortgage servicing rights and other assets.................. (55,734) (223)
Proceeds from sales of other real estate........................................... 2,976 14,162
---------- ----------
Net cash provided by (used in) investing activities............................... (119,778) 24,198
(Continued on next page)
</TABLE>
5
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<TABLE>
<CAPTION>
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Nine Months Ended
(Dollars in thousands) September 30,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts, and savings accounts................ (86,874) (61,338)
Net increase (decrease) in time deposits........................................... 136,741 (42,404)
Net increase in short-term borrowings.............................................. 87,746 50,575
Repayment of long-term debt........................................................ (2,772) (17,166)
Proceeds from long-term borrowings................................................. 6,000 5,030
Payment to redeem preferred stock.................................................. -- (11,330)
Proceeds from issuance of common stock............................................. 63 --
Purchase of treasury stock......................................................... (2,015) (9,650)
Sale of treasury stock............................................................. -- 63
Stock options exercised............................................................ 397 904
Preferred stock dividends.......................................................... -- (129)
Cash dividends paid on common stock................................................ (14,303) (12,337)
---------- ----------
Net cash provided by (used in) financing activities............................... 124,983 (97,782)
Net increase (decrease) in cash and cash equivalents............................... 15,188 (25,538)
Cash and cash equivalents at the beginning of year................................. 359,355 384,823
---------- ----------
Cash and cash equivalents at end of period........................................ $ 374,543 $ 359,285
========== ==========
See accompanying notes.
</TABLE>
6
<PAGE>
FIRST COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position as of September 30, 1995, and the results of
operations and changes in cash flows for the nine months then ended. Any
adjustments consist only of normal recurring accruals.
2. Earnings per common share is calculated by dividing net income less the
preferred stock dividend by the weighted average number of common shares
outstanding. The preferred stock dividends for the nine months ended
September 30, 1995, and 1994, were $0 and $129,288, respectively.
3. Cash payments for interest were approximately $93.1 million and $70.8
million for the first nine months of 1995 and 1994, respectively. Cash
payments for income taxes during the first nine months of 1995 and 1994
were $16.5 million and $19.3 million, respectively.
4. In 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for Post-
Employment Benefits." As required under the Statement, the Company has
adopted the provisions of the new standard as of January 1, 1995. The
effect of adopting this new standard was not material to the Company's
financial position or results of operation.
5. In 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan." As required under the Statement, the Company has
adopted the provisions of the new standard as of January 1, 1995. The
effect of adopting this new standard was not material to the Company's
financial position or results of operation.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
First Commercial Corporation ("Registrant" or the "Company") is a multi-
bank holding company headquartered in Little Rock, Arkansas. The Company
operates twelve institutions in the state of Arkansas, eight institutions in
the state of Texas, and one institution in the state of Tennessee. In a joint
venture with Arvest Bank Group, Inc., of Bentonville, Arkansas, the Company
owns 50% of an institution in Norman, Oklahoma. The Company's consolidated
assets at September 30, 1995, totaled approximately $4.6 billion.
On April 12, 1995, a subsidiary of the Company, First Commercial Mortgage
Company, completed acquisition of Brumbaugh and Fulton Mortgage Company based
in Tulsa, Oklahoma. The acquisition represents the Company's first entry into
the Tulsa market. Brumbaugh and Fulton Mortgage Company has had a significant
presence in the city for many years and services approximately 6,000 loans
totaling over $200 million in principal balance. The purchase will provide
about $40 million a year in new production for First Commercial Mortgage
Company.
On May 16, 1995, the Company entered into a definitive agreement for the
purchase of West-Ark Bancshares, Inc., and its wholly owned subsidiary,
Arkansas State Bank of Clarksville, which has assets of $145 million, loans of
$88 million and deposits of $134 million. The Company will issue approximately
630,000 shares of the Company's common stock for all the outstanding shares of
West-Ark Bancshares, Inc. The Company anticipates completion of this
acquisition in the fourth quarter of 1995.
On May 30, 1995, the Company announced that it had executed a letter of
intent to acquire FDH Bancshares, Inc., and its wholly owned subsidiaries. A
definitive agreement for the purchase of FDH Bancshares, Inc., was entered into
on June 21, 1995. The Company will issue approximately 1,260,949 shares of the
Company's common stock for all outstanding shares of FDH Bancshares, Inc. FDH
Bancshares, Inc., headquartered in Little Rock, owns four Arkansas banks in
Little Rock, El Dorado, Arkadelphia and Fordyce under the name Citizens First
Bank and one Louisiana bank, Springhill Bank and Trust in Springhill,
Louisiana. FDH Bancshares, Inc., has consolidated assets of $382 million,
loans of $215 million and deposits of $334 million. The Company anticipates
completion of this acquisition in the fourth quarter of 1995.
On June 30, 1995, a subsidiary of the Company, First Commercial Mortgage
Company, announced that it had executed a purchase and sale agreement to
acquire servicing rights and other assets of the former National Home Mortgage
Company (NHMC) located in San Diego, California. The sale of NHMC was
conducted by the Resolution Trust Corporation (RTC), which had assumed
ownership of NHMC two years ago. Under terms of the agreement, First
Commercial Mortgage Company will acquire approximately $5 billion in loan
servicing rights and certain other assets from the RTC, represented by over
60,000 mortgages held on properties throughout the United States. First
Commercial Mortgage Company finalized this acquisition in August 1995. The
transaction brought First Commercial Mortgage Company's total servicing
portfolio to over $7.5 billion and 128,000 loans.
8
<PAGE>
Financial Review
- ----------------
The following financial review provides management's analysis of the
consolidated financial condition and results of operations of the Company. As
such, the presentation focuses on those factors that have had the most
significant impact on the Company's financial condition during the periods
discussed.
Consolidated Earnings Summary
The Company reported earnings of $0.60 per share in 1995's third quarter,
an increase of 13.2% from $0.53 per share reported for the third quarter of
1994. Net income for the three months ended September 30, 1995, was $14.3
million, up 12.7% from $12.7 million in 1994. During the third quarter of
1995, the Company had non-recurring income and expense which had a minimal
effect on net income. The non-recurring income related to unanticipated
revenue from recent mortgage servicing acquisitions. Information system
conversions from recent bank affiliations represented the non-recurring
expense. In addition, the Company's 1995 third quarter FDIC premium rebate was
offset entirely by an accrual in anticipation of a special charge to be levied
during the fourth quarter on the Company's Savings Association Insurance Fund
deposits. The 1994 third quarter results include non-recurring income of $383
thousand, or $0.02 per share, after-tax. The non-recurring income was a result
of other real estate gains. Excluding the non-recurring items, earnings per
share were up 17.6% over 1994's third quarter results.
Earnings of $1.68 per share in 1995's first nine months represented an
increase of 8.4% from $1.55 per share during the same period in 1994. Net
income for the nine months ended September 30, 1995, was $40.0 million, up 7.0%
from $37.4 million in 1994. The 1994 results include net non-recurring income
of $1.2 million, or $0.05 per share, after-tax. The non-recurring items
included $2.8 million in other real estate gains offset by expenses of $969
thousand relating to the first quarter pay-off of the Company's subordinated
capital notes. Excluding the non-recurring items, earnings per share were up
12.0% over 1994 results. The higher percentage increase in earnings per share
than in net income reflects the February 1994 redemption of the Company's
preferred stock and the effect of the stock repurchase plan approved by the
Board of Directors in February 1994.
Excluding the non-recurring items recorded in the first nine months of
1994, the Company's net income increased 10.8%. This increase was the result
of a rise of 11.4% in net interest income after provision for possible loan and
lease losses, mitigated by a 2.0% decrease in non-interest income and an
increase of 4.8% in non-interest expense. The primary reason for the increase
in net interest income is the 1994 third quarter acquisitions of The First
National Bank of Palestine, Texas, and Kilgore First National Bank, Kilgore,
Texas, which were accounted for as purchase transactions. The decrease in non-
interest income was due primarily to the sale of an insurance agency subsidiary
in January of this year. The insurance agency's net income was immaterial to
the Company's bottom line. The increase in non-interest expense was primarily
due to the two bank purchases in Palestine and Kilgore, Texas, in 1994.
Excluding the effect of these purchases, non-interest expense actually
increased less than 1.0%. A detailed explanation of these increases is
included in the Non-Interest Income and Non-Interest Expense sections of the
Financial Review.
9
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When evaluating the earnings performance of a banking organization, two
profitability ratios are important standards of measurement: return on average
assets and return on average common stockholders' equity. Return on average
assets measures net income in relation to total average assets and portrays the
organization's ability to profitably employ its resources. Annualized return
on average assets for the first nine months of 1995 and 1994 was 1.22% and
1.19%, respectively. Excluding the non-recurring items recorded in the first
nine months of 1994, discussed previously, return on average assets was 1.15%.
Annual returns on average assets were 1.19% in 1994, 1.21% in 1993 and 1.21% in
1992.
The second profitability ratio, return on average common stockholders'
equity, indicates how effectively a company has been able to generate earnings
on the capital invested by its stockholders. In the first nine months of 1995,
the Company earned 14.72% on average common stockholders' equity compared with
14.85% for the first nine months of 1994. Excluding the non-recurring items
recorded in the first nine months of 1994, discussed previously, return on
average common stockholders' equity was 14.49%. Return on average common
stockholders' equity for the years 1994, 1993 and 1992 were 14.87%, 14.43% and
14.27%, respectively. The originally reported ratios in 1992 and 1993, before
restatements for pooling acquisitions, for return on average common
stockholders' equity were above 15%. The ratios fell due to the high capital
level of State First Financial Corporation, a pooling-of-interests acquisition
that was consummated in March 1994. Management will work to profitably deploy
the excess capital thereby improving the return on average common stockholders'
equity.
Net Interest Income/Net Interest Margin
Net interest income, the greatest component of a bank's earnings, is the
difference between income generated by earning assets and the interest cost of
funding those assets. For the purpose of this analysis and discussion, net
interest income and net interest margin reflect income from tax-exempt loans
and tax-exempt investments on a fully tax-equivalent basis. This permits
comparability of income data through recognition of the tax savings realized on
tax-exempt earnings. On a tax-equivalent basis, net interest income was $132.7
million in the first nine months of 1995 compared to $119.5 million in the
first nine months of 1994. The primary reason for the 1995 increase in net
interest income was the previously mentioned acquisitions of the two Texas
banks in Palestine and Kilgore in the third quarter of 1994. For 1994, net
interest income on a fully tax-equivalent basis reached $163.1 million,
increasing from $148.3 million in 1993, and $137.5 million in 1992.
The primary reason for the increase in net interest income in 1994 was the
addition of the two Texas banks in Palestine and Kilgore and the 1993 fourth
quarter purchases of the two Texas Commerce banks in Longview and Nacogdoches,
Texas, which were accounted for as purchase transactions. The increase in net
interest income in 1993 was due primarily to the first quarter 1993 bank
purchases in Tyler and Lufkin, Texas, and State First Financial Corporation's
purchase of The First National Bank of Nashville, Arkansas, in January 1993.
Net interest margin is the ratio of net interest income to average earning
assets. This ratio indicates the Company's ability to manage its earning
assets and to control the spread between yields earned on assets and rates paid
on liabilities. Fully tax-equivalent net interest margin was 4.49% for the
first nine months of 1995, compared to 4.21% for the same period in 1994. The
10
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increase in net interest margin reflects the strong net interest margins of the
two banks in Palestine and Kilgore, Texas, purchased in 1994, increased loan
demand and reinvestment of maturing assets at higher rates due to the rise in
the general interest rate environment. Fully tax-equivalent net interest
margin was 4.26% for the full year of 1994, 4.28% in 1993 and 4.55% in 1992.
Although net interest margin was relatively stable between 1993 and 1994,
the trends within the years are different. During 1993, the trend was
declining primarily due to the impact of the 1993 affiliation with the four
Texas banks in Tyler, Lufkin, Longview and Nacogdoches, which had low loan to
deposit ratios and, therefore, lower net interest margins than those
experienced by the Company's other affiliates. During 1994, the trend began to
increase as those Texas banks, along with other affiliates of the Company,
experienced significant loan growth and an increase in net interest margin. In
addition, the acquisitions of the banks in Palestine and Kilgore, Texas, during
the third quarter of 1994, brought higher net interest margins to the Company.
Management of net interest margin is actively pursued through a continuing
emphasis on pricing both loans and deposits with focus on profitability, rather
than a narrow emphasis on local market conditions. Presented in the following
table is an analysis of the components of fully tax-equivalent net interest
income for the past three years and the first nine months of 1995 and 1994.
<TABLE>
<CAPTION>
Analysis of Net Interest Income (FTE = Fully Tax-Equivalent)
For the Nine Months For the Years Ended
Ended September 30, December 31,
----------------------- --------------------------------------
1995 1994 1994 1993 1992
(Dollars in thousands) ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income $ 225,807 $ 187,811 $ 257,751 $ 234,995 $ 232,098
Fully tax-equivalent adjustment 2,290 2,745 3,618 3,775 4,122
---------- ---------- ---------- ---------- ----------
Interest income - FTE 228,097 190,556 261,369 238,770 236,220
Interest expense 95,368 71,073 98,306 90,421 98,690
---------- ---------- ---------- ---------- ----------
Net interest income - FTE $ 132,729 $ 119,483 $ 163,063 $ 148,349 $ 137,530
========== ========== ========== ========== ==========
Yield on earning assets - FTE 7.72% 6.71% 6.82% 6.89% 7.82%
Cost of interest bearing liabilities 3.98% 3.09% 3.18% 3.23% 3.99%
Net interest spread - FTE 3.74% 3.62% 3.64% 3.66% 3.83%
Net interest margin - FTE 4.49% 4.21% 4.26% 4.28% 4.55%
</TABLE>
The following schedule details rate sensitive assets and liabilities at
September 30, 1995. The repricing schedule, as depicted, represents the first
opportunity to reprice earning assets or interest bearing liabilities. The
interest rate sensitivity data is based on repricing terms, rather than actual
contractual maturities.
11
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<TABLE>
<CAPTION>
Interest Rate Sensitivity Period
(Dollars in thousands) ----------------------------------------------------------------------------
0 - 30 31 - 90 91 - 180 181 - 365 1 to 5 Over 5
Days Days Days Days Years Years Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Short-term investments $ 76,460 $ -- $ -- $ -- $ -- $ -- $ 76,460
Trading account securities 320 -- -- -- -- -- 320
Taxable investment securities 186,776 113,879 133,165 187,296 402,050 12,844 1,036,010
Tax-exempt investment securities 2,027 2,454 6,758 7,553 78,393 37,920 135,105
Loans and leases 722,677 206,123 292,271 484,692 956,563 123,609 2,785,935
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 988,260 322,456 432,194 679,541 1,437,006 174,373 4,033,830
Interest bearing liabilities:
Savings and NOW accounts 896,724 -- -- -- -- -- 896,724
Money market accounts 495,668 -- -- -- -- -- 495,668
Other time deposits 302,725 268,740 370,342 360,872 334,623 18,673 1,655,975
Short-term borrowings 255,163 -- -- -- -- -- 255,163
Long-term debt -- -- 1,071 2 1,079 9,319 11,471
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities 1,950,280 268,740 371,413 360,874 335,702 27,992 3,315,001
Interest rate
sensitivity gap (962,020) 53,716 60,781 318,667 1,101,304 146,381
Cumulative interest rate
sensitivity gap (962,020) (908,304) (847,523) (528,856) 572,448 718,829
Cumulative rate sensitive assets
to rate sensitive liabilities 0.51 0.59 0.67 0.82 1.17 1.22
Cumulative gap as a percentage
of earning assets (23.8%) (22.5%) (21.0%) (13.1%) 14.2% 17.8%
</TABLE>
The Company is currently in a negative static gap situation. However,
management recognizes the limitations of a static gap analysis. While a
comparison of rate sensitive assets and rate sensitive liabilities (static gap
analysis) does provide a general indication of how net interest income will be
affected by changes in interest rates, an important limitation is that static
gap analysis considers only the dollar volume of assets and liabilities to be
repriced. Changes in net interest income are determined not only by the
volumes being repriced, but also by the rates at which the assets and
liabilities are repriced, and the relationship between the rates earned on
assets and rates paid on liabilities are not necessarily constant over time.
Therefore, management uses a beta adjusted gap along with a net interest
revenue simulation model to actively manage the gap position. Management
believes that the dynamic gap position is in a near balanced situation, so that
the impact of changes in the general level of interest rates on net interest
margin is likely to be minimal. Management will continue to closely monitor
12
<PAGE>
all aspects of the Company's gap position to maximize profitability as interest
rates fluctuate.
Non-Interest Income
In addition to net interest income increases, the Company has continued to
develop its sources of non-interest income. The primary sources of sustainable
non-interest income are trust services, service charges on deposit accounts,
mortgage services and broker-dealer operations. For the first nine months of
1995, non-interest income totaled $48.6 million compared to $51.8 million for
the first nine months of 1994. Excluding approximately $700 thousand in
unanticipated revenue from recent mortgage servicing acquisitions recorded in
the third quarter of 1995 and the other real estate gains recorded in the first
nine months of 1995 and 1994, non-interest income decreased $987 thousand. The
sale of an insurance agency subsidiary in January of 1995 represents the
primary reason for the decrease in non-interest income.
Non-interest income in 1994 totaled $68.7 million, an increase of 16% from
$59.0 million in 1993. Non-interest income for 1993 represented an increase of
15% over 1992. Of the $9.7 million increase in 1994, $4.4 million was a result
of net gains on sales of other real estate owned and $2.0 million was a result
of the 1993 fourth quarter purchase of the two Texas Commerce banks and the
1994 purchases of the banks in Palestine and Kilgore, Texas. The remaining
increase was attributable to the continued strong performance of the mortgage
banking subsidiary, with an increase in servicing fees of $3.4 million
resulting from a large acquisition of servicing rights late in 1993. The
primary contributors to the $7.8 million increase in 1993's non-interest income
were $3.1 million from the two bank acquisitions in Tyler and Lufkin, Texas,
and volume increases in service charges on deposit accounts, trust revenue and
mortgage servicing fees.
The following table summarizes non-interest income for 1994, 1993 and 1992.
<TABLE>
<CAPTION>
For the Years
Ended December 31, 1994 1993
------------------------------ Change from Change from
1994 1993 1992 1993 1992
-------- -------- -------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust department income $ 10,904 $ 10,340 $ 8,112 $ 564 5.45% $ 2,228 27.47%
Mortgage servicing fee income 16,340 12,905 11,914 3,435 26.62 991 8.32
Broker-dealer operations income 1,727 2,069 1,935 (342) (16.53) 134 6.93
Service charges on deposits 20,131 17,965 15,415 2,166 12.06 2,550 16.54
Other service charges and fees 7,964 6,952 6,124 1,012 14.56 828 13.52
Investment securities gains
(losses), net 139 221 (330) (82) (37.10) 551 166.97
Other real estate gains
(losses), net 4,413 (89) 1 4,502 5058.43 (90) (9000.00)
Other 7,034 8,594 8,011 (1,560) (18.15) 583 7.28
-------- -------- -------- -------- --------
Total non-interest income $ 68,652 $ 58,957 $ 51,182 $ 9,695 16.44% $ 7,775 15.19%
======== ======== ======== ======== ========
</TABLE>
13
<PAGE>
Non-Interest Expense
Non-interest expenses consist of salaries and benefits, occupancy,
equipment and other expenses such as legal, postage, etc., necessary for the
operation of the Company. Management is committed to controlling the level of
non-interest expenses through improved efficiency and consolidation of certain
activities to achieve economies of scale. It is expected that those efforts
will further improve the Company's overhead ratios during the remainder of 1995
and future years.
Non-interest expenses were $116.8 million for the first nine months of
1995, a 4.5% increase from $111.8 million for the same period in 1994. In the
third quarter of 1995, the Company recorded non-recurring expenses associated
with information system conversions from recent bank affiliations. The 1994
amounts include non-recurring expenses of $969 thousand associated with the
pay-off of the Company's subordinated capital notes. Excluding the non-
recurring items in 1995 and 1994 and the non-interest expenses of the two Texas
banks purchased in the third quarter of 1994, non-interest expense actually
increased less than 1.0%.
Non-interest expense in 1994 totaled $156.9 million, an increase of 16%
from $135.2 million in 1993, which was 14% over 1992's non-interest expense of
$118.9 million. The increase in 1994 was $21.7 million, of which $9.1 million
was a result of the two bank purchases in 1994 and the two bank purchases in
the fourth quarter of 1993. Of the remaining $12.6 million, $6.3 million
represents the settlement of a class action lawsuit concerning investment of
customers' monies by First Commercial Trust Company, N.A., in certain mutual
funds containing derivative securities. In addition, the Company paid off its
subordinated capital notes resulting in an expense of $969 thousand and
experienced an increase in the amortization of mortgage servicing rights due to
a large acquisition of servicing rights at the end of 1993. Excluding the
effect of the four bank purchases, the non-recurring expenses, and the
amortization of mortgage rights, non-interest expense increased $5.3 million,
which represents an increase from 1993 of 4%.
The 1993 increase was due to the two bank purchases in the first quarter of
1993 in Tyler and Lufkin, Texas, and State First Financial Corporation's
purchase of the bank in Nashville, Arkansas, in January 1993, and the increased
amortization of mortgage servicing rights resulting primarily from the 1993
additions to the mortgage servicing portfolio. Excluding the effect of the
three bank purchases and the amortization of mortgage servicing rights, non-
interest expense increased only $2.3 million, which represents an increase from
1992 of 2%.
The following table presents the year-to-year comparison of dollar and
percentage changes in the various categories of non-interest expenses:
14
<PAGE>
<TABLE>
<CAPTION>
For the Years
Ended December 31, 1994 1993
------------------------------ Change from Change from
1994 1993 1992 1993 1992
-------- -------- -------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 74,981 $ 67,031 $ 57,361 $ 7,950 11.86% $ 9,670 16.86%
Net occupancy 9,947 10,486 9,508 (539) (5.14) 978 10.29
Equipment 9,149 8,013 7,175 1,136 14.18 838 11.68
FDIC insurance 8,639 7,396 6,804 1,243 16.81 592 8.70
Amortization of purchased
mortgage servicing rights 5,541 4,498 3,286 1,043 23.19 1,212 36.88
First Commercial Trust Company
lawsuit settlement 6,257 -- -- 6,257 -- -- --
Other 42,361 37,767 34,748 4,594 12.16 3,019 8.69
-------- -------- -------- -------- --------
Total non-interest expenses $156,875 $135,191 $118,882 $ 21,684 16.04% $ 16,309 13.72%
======== ======== ======== ======== ========
</TABLE>
Income Taxes
The effective income tax rate differs from the statutory rate primarily
because of tax-exempt income from loans, leases and municipal securities. The
effective tax rate was 34.0% for the first nine months of 1995 and 32.9% for
the first nine months of 1994. The increase in 1995 was due to a decrease in
income on tax-exempt investments. The effective rates were 32.3% in 1994,
28.1% in 1993, and 29.6% in 1992. The increase in 1994 was due primarily to a
decrease in income on tax-exempt investments. The decrease in 1993 was due
primarily to the transition adjustment for implementing FASB Statement No. 109,
partially offset by a 1% increase in the corporate Federal tax rate.
Loan and Lease Portfolio
At September 30, 1995, the Company's loan and lease portfolio, net of
unearned income, totaled $2.8 billion, up from $2.5 billion at December 31,
1994. In July of 1995, the Company bought approximately $25 million in loan
participations of consumer credit card loans from Security National Bank &
Trust Company in Norman, Oklahoma. The remaining $226 million increase in the
loan and lease portfolio reflects increased loan demand. Although the 10%
growth in loans was spread through all categories, the strongest growth
occurred in the retail consumer and residential sectors. Commercial loans also
experienced solid growth.
The Company has continued its policy of conservative lending so as to avoid
significant risk areas such as out of territory lending and highly leveraged
transactions. This has been and will remain the philosophy of Company
management. In keeping with this philosophy, the Company has no foreign loans,
no loans outstanding to borrowers engaged in highly leveraged transactions, and
no concentrations of credit to borrowers in any one industry. A concentration
generally exists when more than 10% of total loans are outstanding to borrowers
in the same industry.
15
<PAGE>
Provision and Allowance for Possible Loan and Lease Losses
The allowance for loan and lease losses is the amount deemed by management
to be reasonably necessary to provide for possible losses on loans and leases
that may become uncollectible. The allowance is adjusted by the provision for
possible loan and lease losses, increased by loan recoveries and decreased by
loan losses. As of September 30, 1995, the allowance for loan and lease losses
equaled $45.2 million or 1.62% of total loans and leases. Comparatively, the
allowance for loan and lease losses amounted to $45.3 million or 1.79% of total
loans and leases at December 31, 1994. The provision for possible loan and
lease losses amounted to $1.6 million in the first nine months of 1995 as
compared to $1.0 million in the first nine months of 1994.
A key indicator of the adequacy of the allowance for possible loan and
lease losses is the ratio of the allowance to non-performing loans. The
Company's ratio has been at or above 100% for the past five years. At
September 30, 1995, the Company's ratio was 352.81%. This means that for every
dollar of non-performing loans (non-accrual loans, loans 90 days or more past
due, and renegotiated loans), $3.53 is set aside in the Company's reserve to
cover possible losses. The ratio at December 31, 1994, was 340.82%. Another
reserve adequacy indicator is the ratio of allowance for possible loan and
lease losses and other real estate losses to non-performing assets. The ratio
was 373.55% at September 30, 1995, compared to 347.35% at December 31, 1994.
Both of the reserve adequacy ratios indicate the conservative approach the
Company has taken with regard to building reserves for possible future losses.
Presented in the following table is a comparison of net loan and lease losses
sustained to average loans and leases, allowance for possible loan and lease
losses to total loans and leases, and non-performing loans to total loans and
leases.
<TABLE>
<CAPTION>
Annualized Nine Months
Ended
September 30, For the Years Ended December 31,
----------------------- --------------------------------------------
1995 1994 1993 1992 1991 1990
----------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net loan and lease losses sustained
to average loans and leases 0.08% 0.04% 0.16% 0.52% 0.42% 0.43%
Allowance for possible loan and lease
losses to total loans and leases 1.62% 1.79% 2.19% 2.15% 2.25% 2.10%
Non-performing loans to total
loans and leases 0.46% 0.52% 0.72% 0.86% 1.61% 1.90%
</TABLE>
Although asset quality has consistently improved during the periods
reflected in the preceding table, the principal area of risk for the Company
will continue to be in the real estate loan portion of the portfolio, and
accordingly, this area has the largest allocation of the reserve for loan and
lease losses. Management attempts to control the loan loss risks by
maintaining a diverse portfolio with no significant concentrations in any
industry or category of borrowers and through a very aggressive real estate
write down policy. Also, the Company maintains a corporate "in-house-lending
16
<PAGE>
limit" that represents only 28% of the Company's combined legal lending limit.
Any exception to this limit must be approved by a corporate credit group prior
to commitment or funding. The Company currently has only 30 loan relationships
with aggregate outstanding balances of $5 million or greater, which further
mitigates the loan loss risks.
Liquidity
Two key measures of the Company's liquidity are the ratios of loans and
leases to total deposits and loans and leases to core deposits. Core deposits
are defined as total deposits less certificates of deposit of $100,000 and
over. Lower ratios in these two measures correlate to higher liquidity. As
can be seen from the following table, the Company's liquidity ratios have
increased over the last year indicating lower liquidity due to increased loan
demand.
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, For the Years Ended December 31,
-------------------- ------------------------------------
1995 1994 1993 1992
-------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average loans and leases to average deposits 69.85% 61.76% 59.41% 59.34%
Average loans and leases to average core deposits 76.35% 67.83% 64.20% 64.60%
</TABLE>
The Company's average short-term borrowings exceeded short-term investments
by $106.4 million at September 30, 1995. Average short-term investments
exceeded average short-term borrowings by $11.7 million in 1994, $88.7 million
in 1993 and $82.5 million in 1992. The 1995 and 1994 decrease in liquidity
occurred due to an increase in loan demand and an increase in short-term
borrowings by the Company to fund the two Texas bank purchases in the third
quarter of 1994. The Company continually monitors the level of short-term
investments and short-term borrowings given interest margin considerations and
liquidity needs.
Capitalization
Capital adequacy continues to hold a position of great importance when
evaluating financial services providers. The Company maintains the goal of
preserving a strong capital position while earning an above average return for
its shareholders. Management will use the additional financial leverage
provided by internal generation of capital and recent acquisitions in pursuit
of above average return opportunities.
The Board of Governors of the Federal Reserve System approved regulations
in 1988 to implement what is commonly referred to as risk-based capital
adequacy. This system is designed to reward banking organizations with less
risky asset bases by allowing them to maintain lower capital amounts to support
these assets. The opposite would be true for organizations with risky asset
bases as they would have to maintain higher capital levels. These regulations
require a tier I capital to assets ratio of 4% for bank holding companies. The
17
<PAGE>
Company is in excess of this requirement with a tier I capital to assets ratio
of 7.75% at September 30, 1995. These regulations also require a risk-based
capital ratio (total capital to risk-adjusted assets) of 8%. At present, the
Company's risk-based capital ratio is 12.79%. The Company desires to maintain
stronger capital ratios than those set forth as minimums, and as shown in the
following table, the Company's capital ratios have remained in excess of the
Federal Reserve guidelines.
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
1995 1995 1995 1994 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total stockholders' equity to assets 8.21% 8.22% 8.16% 7.85% 7.77%
Tier I capital to assets 7.75% 7.73% 7.73% 7.48% 7.37%
Tier I capital to risk-adjusted assets 12.03% 12.01% 12.29% 12.22% 12.38%
Total capital to risk-adjusted assets 12.79% 12.78% 13.03% 13.00% 13.17%
</TABLE>
Dividend Policy
The Company's Board of Directors reviews the cash dividend policy and
payout levels annually in the fourth quarter. The annual dividend rate per
share has been increased in each of the past seven years. The annual dividend
rate for the Company was $.45 in 1992, $.57 in 1993, and $.71 in 1994, and is
currently $.80.
The Company's long-term dividend policy is to pay between 30% and 35% of
earnings in cash dividends to its shareholders while maintaining adequate
capital to support growth. The dividend payout ratio for the past three years
was 33.97% in 1994, 29.98% in 1993, and 26.63% in 1992. The level of dividends
was below the long-term goal in 1993 and 1992 due to the Board of Directors
electing to retain earnings to invest in above average return opportunities
providing enhanced shareholder value.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
AEARTH DEVELOPMENT, INC., v. FIRST COMMERCIAL BANK, N.A.
- --------------------------------------------------------
The above litigation, which was disclosed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, is to be tried before the
Circuit Court in Pulaski County, Arkansas. The trial date has been changed
from January 26, 1996, to February 5, 1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None
19
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMERCIAL CORPORATION
/s/ J. Lynn Wright
By: -------------------------------
J. Lynn Wright
Chief Financial Officer
Date: November 13, 1995
20
<PAGE>
Index to Exhibits
Exhibit Number Exhibit
---------------- --------------------------------------------
11 Computation of Earnings per Common Share
27 Financial Data Schedule
21
EXHIBIT 11
FIRST COMMERCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(Dollars in thousands, 1995 1994 1995 1994
except per share data) ---------- ---------- ---------- ----------
Net income $ 14,335 $ 12,721 $ 40,021 $ 37,391
Less: Preferred stock dividend -- -- -- 129
---------- ---------- ---------- ----------
Income applicable to
common shares $ 14,335 $ 12,721 $ 40,021 $ 37,262
========== ========== ========== ==========
Weighted average common shares
outstanding 23,736,718 23,788,600 23,771,094 23,988,817
Earnings per common share $ 0.60 $ 0.53 $ 1.68 $ 1.55
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 298,083
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 76,460
<TRADING-ASSETS> 320
<INVESTMENTS-HELD-FOR-SALE> 358,184
<INVESTMENTS-CARRYING> 812,931
<INVESTMENTS-MARKET> 808,304
<LOANS> 2,785,935
<ALLOWANCE> 45,223
<TOTAL-ASSETS> 4,562,829
<DEPOSITS> 3,875,227
<SHORT-TERM> 255,163
<LIABILITIES-OTHER> 46,201
<LONG-TERM> 11,471
<COMMON> 71,458
0
0
<OTHER-SE> 303,309
<TOTAL-LIABILITIES-AND-EQUITY> 4,562,829
<INTEREST-LOAN> 172,039
<INTEREST-INVEST> 53,768
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 225,807
<INTEREST-DEPOSIT> 87,002
<INTEREST-EXPENSE> 95,368
<INTEREST-INCOME-NET> 130,439
<LOAN-LOSSES> 1,565
<SECURITIES-GAINS> (61)
<EXPENSE-OTHER> 116,839
<INCOME-PRETAX> 60,601
<INCOME-PRE-EXTRAORDINARY> 60,601
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,021
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.66
<YIELD-ACTUAL> 4.49
<LOANS-NON> 8,965
<LOANS-PAST> 3,659
<LOANS-TROUBLED> 194
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 45,325
<CHARGE-OFFS> 4,160
<RECOVERIES> 2,493
<ALLOWANCE-CLOSE> 45,223
<ALLOWANCE-DOMESTIC> 32,741
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 12,482
</TABLE>
