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 June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission File 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 [ ]
<PAGE>
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 June 30, 1997
- --------------------------------------- -----------------------------
Common Stock, $3.00 par value per share 33,774,337
<PAGE>
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................................. 11
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K.......................... 22
Signatures........................................................... 22
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED BALANCE SHEETS June 30, December 31,
(Dollars in thousands, except par value) -------------- --------------
1997 1996
-------------- --------------
ASSETS
Cash and due from banks................. $ 382,653 $ 360,374
Federal funds sold...................... 174,668 281,831
------------ -------------
Total cash and cash equivalents......... 557,321 642,205
Investment securities held-to-maturity,
estimated market value $452,281 ($431,649
in 1996)............................ 455,901 453,108
Investment securities available-for-
sale.................................. 1,039,821 1,066,365
Trading account securities............. 147 196
Loans and leases, net of unearned
income................................ 4,203,089 3,884,475
Allowance for possible loan and lease
losses................................ (69,866) (61,626)
------------ -------------
Net loans and leases.................. 4,133,223 3,822,849
Bank premises and equipment, net....... 128,591 123,575
Other real estate owned, net of allow for
poss losses of $60 ($87 in 1996) 3,496 2,398
Other assets........................... 231,686 239,898
------------ -------------
Total assets........................ $ 6,550,186 $ 6,350,594
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing transaction
accounts.............................. $ 1,060,996 $ 1,006,461
Interest bearing transaction and savings
accounts.............................. 1,898,015 1,922,587
Certificates of deposit $100,000 and
over.................................. 647,345 676,045
Other time deposits.................... 2,053,357 1,926,236
------------ ------------
Total deposits......................... 5,659,713 5,531,329
<PAGE>
Short-term borrowings................... 237,272 200,342
Other liabilities and deferred income
taxes.................................. 65,350 66,080
Long-term debt.......................... 13,376 24,184
------------ ------------
Total liabilities...................... 5,975,711 5,821,935
Stockholders' equity
Preferred stock, $1 par value, 400,000
shares authorized, none issued........ -- --
Common stock, $3 par value, 50,000,000
shares authorized, 33,774,337 and
32,222,620 shares issued, respectively.. 101,323 96,668
Capital surplus.......................... 262,142 260,602
Retained earnings........................ 211,064 170,327
Unrealized net gains (losses) on available-
for-sale securities, net of income tax.... (54) 1,062
----------- ------------
Total stockholders' equity............. 574,475 528,659
----------- ------------
Total liabilities and stockholders'
equity............................... $ 6,550,186 $ 6,350,594
=========== ===========
See accompanying notes.
<PAGE>
FIRST COMMERCIAL CORPORATION
CONSOLIDATED INCOME STATEMENTS Unaudited Unaudited
(Dollars in thousands, except per Three Months Ended Six Months Ended
share data) June 30, June 30,
------------ ----------
1997 1996 1997 1996
------ ------ ------ ------
Interest income
Loans and leases, including fees. $ 94,762 $ 85,127 $ 186,067 $ 168,963
Short-term investments........... 2,048 1,666 4,235 3,303
Investment securities-taxable.... 20,763 19,402 41,504 38,146
-nontaxable. 2,576 2,214 5,197 4,421
Trading account securities....... (3) 10 9 1
-------- -------- -------- --------
Total interest income 120,146 108,419 237,012 214,834
Interest expense
Interest on deposits............. 48,459 45,367 96,642 90,742
Short-term borrowings............ 2,643 2,255 5,142 4,977
Long-term debt................... 301 380 720 785
-------- -------- -------- --------
Total interest expense........ 51,403 48,002 102,504 96,504
Net interest income................ 68,743 60,417 134,508 118,330
Provision for possible loan and
lease losses..................... 2,990 2,044 5,770 3,867
--------- --------- ------- --------
Net int inc after prov for
possible loan and lease losses 65,753 58,373 128,738 114,463
Other income
Trust department income.......... 3,189 3,060 6,394 6,196
Mortgage servicing fee income.... 9,222 10,956 18,653 22,136
Broker-dealer operations income. 1,069 989 2,310 1,905
Service charges on deposit
accounts...................... 8,133 7,087 15,981 13,789
Other service charges and fees.. 4,076 3,414 7,931 6,659
Investment securities gains
(losses), net................. (12) 20 (2) 90
Other real estate gains (losses),
net........................... (532) (351) (874) (366)
Other........................... 1,740 2,044 3,675 3,746
--------- -------- ------- ---------
Total other income............ 26,885 27,219 54,068 54,155
Other expenses
Salaries, wages and employee
benefits....................... 27,267 25,995 55,133 51,979
Net occupancy................... 3,830 3,461 7,562 6,749
Equipment....................... 3,903 3,500 7,676 6,870
FDIC insurance.................. 49 240 (9) 550
Amortization of mortgage
servicing rights.............. 4,168 5,100 8,341 10,164
Other........................... 17,673 18,100 35,459 35,515
-------- -------- ------- --------
Total other expenses.......... 56,890 56,396 114,162 111,827
<PAGE>
Income before income taxes...... 35,748 29,196 68,644 56,791
Income tax provision............ 13,536 10,306 25,149 19,943
-------- -------- -------- --------
Net income.................... $ 22,212 $ 18,890 $ 43,495 $ 36,848
========= ========= ========= =========
Weighted average number of common
shares outstanding during the
period........................... 33,764,829 32,366,382 33,751,259 32,374,595
Earnings per common share..........$ 0.66 $ 0.58 $ 1.29 $ 1.14
See accompanying notes.
<PAGE>
FIRST COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Unrealized
Preferred Common Retained Gains and Treasury
Stock Stock Surplus Earnings (Losses) Stock Total
------- ------- ------- ------- ------- ------- -----
Balance -
January 1, 1996 $ -- $ 92,267 $221,664 $165,279 $ 950 $ -- $480,160
Change in
unrealized gains
(losses), net of
income taxes of
$3,033........ (5,633) (5,633)
Net income..... 36,848 36,848
Cash dividends -
$.36 per common
share......... (11,494) (11,494)
Stock options
exercised..... 138 350 488
Purchase of
treasury stock,
45,382 shares. (1,414) (1,414)
Purchase of minority
shares of Springhill
Bank & Trust Company,
971 shares......... 12 17 29
Acquisition of equity
interest of Security
National Bank,
253,154 shares...... 759 1,541 1,267 (12) 3,555
----- ----- ------ ------- -------- ------- -----
Balance -
June 30, 1996...... $ -- $93,164 $223,567 $191,900 $(4,695) $(1,397) $502,539
==== ======= ======= ======== ======== ======== ========
Balance -
January 1, 1997.... $ -- $96,668 $260,602 $170,327 $ 1,062 $ -- $528,659
Change in unrealized
gains (losses), net
of income taxes of
$717............... (1,331) (1,331)
Net income......... 43,495 43,495
Cash dividends -
$.52 per common
share (17,400) (17,400)
Stock options
exercised......... 130 215 345
<PAGE>
Purchase of
treasury stock,
175 shares......... (3) (3)
Common stock
issued, 1,400
shares............. 2 28 1 31
Purchase of minority
shares of Springhill
Bank & Trust Company,
328 shares.......... 1 10 2 13
Acquisition of equity
interest of W.B.T.
Holding Company, Inc.,
1,361,952 shares..... 4,086 14,628 215 18,929
Acquisition of equity
interest of City
National Bank 145,478
shares................ 436 1,287 14 1,737
---- ----- ----- ------- ------- ----- ------
Balance -
June 30, 1997....... $ -- $101,323 $262,142 $211,064 $ (54) $ -- $574,475
==== ======== ======== ======== ======== ====== =========
See accompanying notes.
<PAGE>
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOW Six Months Ended
June 30,
------------------
(Dollars in thousands) 1997 1996
------- -------
OPERATING ACTIVITIES
Net income................................ $ 43,495 $ 36,848
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............ 16,763 18,086
Provision for possible loan and lease
losses.................................. 5,770 3,867
Loss (gain) on investment securities
available-for-sale...................... 2 (90)
Gain on sale of equipment................ (33) (24)
Loss (gain) on sale of other real estate. 75 (323)
Write downs of other real estate......... 162 91
Equity in undistributed earnings of
unconsolidated subsidiary............... (613) (701)
Decrease (increase) in trading
securities.............................. 190 (105)
Net unrealized gain on trading
securities.............................. -- (2)
Decrease in mortgage loans held for
resale.................................. 4,966 70,954
Decrease in income taxes
payable................................. (1,407) (3,951)
Increase in interest and other
receivables............................. (654) (2,033)
Decrease in interest payable............. (2,209) (1,098)
Reduction in other assets................ 7,691 --
Increase (decrease) in accrued expenses.. (1,022) 7,859
Decrease (increase) in prepaid expenses.. 312 (1,292)
-------- --------
Net cash provided by operating
activities............................. 73,488 128,086
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available- for-sale........... 5,533 40,114
Proceeds from maturing investment
securities available-for-sale............ 406,649 518,907
Proceeds from maturing investment
securities held-to-maturity.............. 362,863 314,709
Purchases of investment securities
available-for-sale....................... (319,481) (585,193)
Purchases of investment securities
held-to-maturity......................... (365,656) (336,139)
Purchase of institution, net of funds
acquired................................. 27,979 7,233
<PAGE>
Net increase in loans and leases.......... (118,293) (139,626)
Capital expenditures...................... (7,403) (7,474)
Proceeds from sale of bank premises and
equipment................................ 1,042 2,405
Additions to purchased mortgage servicing
rights and other assets.................. -- (8,746)
Proceeds from sales of other real estate.. 1,285 1,908
-------- --------
Net cash used in investing activities.... (5,482) (191,902)
<PAGE>
FINANCING ACTIVITIES
Net decrease in demand deposits, NOW
accounts, and savings accounts........... (147,709) (128,731)
Net increase (decrease) in time deposits.. (10,706) 91,496
Net increase (decrease) in short-term
borrowings............................... 33,360 (68,887)
Proceeds from long-term borrowings........ -- 10,109
Repayment of long-term debt............... (10,808) (1,072)
Proceeds from issuance of common stock.... 31 --
Purchase of treasury stock................ (3) (1,414)
Stock options exercised................... 345 488
Cash dividends paid on common stock....... (17,400) (11,494)
-------- --------
Net cash used in financing activities.... (152,890) (109,505)
Net decrease in cash and cash equivalents. (84,884) (173,321)
Cash and cash equivalents at the
beginning of year........................ 642,205 571,363
-------- --------
Cash and cash equivalents at end of
period.................................. $ 557,321 $ 398,042
========= =========
See accompanying notes.
<PAGE>
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
1. There have been no significant changes in the accounting policies of the
Company since December 31, 1996, the date of the most recent annual report
to shareholders, nor have there occurred events, except as disclosed in
Notes 4, 5, 6 and 7, which have had a material impact on the disclosures
contained therein.
2. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position as of June 30, 1997, and the results of operations
and changes in cash flows for the six months then ended. Any adjustments
consist only of normal recurring accruals.
3. Cash payments for interest were approximately $104.7 million and $97.6
million for the first six months of 1997 and 1996, respectively. Cash
payments for income taxes during the first six months of 1997 and 1996
were approximately $26.2 million and $24.2 million, respectively.
4. Aearth Development, Inc. v. First Commercial Bank, N.A.
-------------------------------------------------------
First Commercial Bank, N.A., a wholly owned subsidiary of Registrant, is
the defendant in litigation initiated in 1989 seeking approximately $200
million in compensatory damages plus punitive damages. Plaintiffs in the
litigation allege fraudulent conspiracy, fraudulent misrepresentation,
tortious interference with a business expectancy, breach of contract,
willful breach of fiduciary duty, interference with performance of contract,
securities law violations, conversion, prima facie tort and violations of
the Federal Racketeer Influenced and Corrupt Organizations Act as a basis
for trebled damages. In June of 1991, the matter was tried before a
chancery judge in Chancery Court in Pulaski County, Arkansas, and on
June 5, 1992, the complaint was dismissed and no damages were assessed
against First Commercial Bank, N.A. Plaintiffs appealed this decision to
the Supreme Court of Arkansas in July of 1992, alleging error for failure
to try the case before a jury in Circuit Court. On July 18, 1994, the
Supreme Court of Arkansas remanded the case to Circuit Court in
Pulaski County, Arkansas, for jury trial. A jury trial was held, which
concluded March 13, 1996, with the jury awarding plaintiffs a total of
$12.5 million compensatory damages and $10.0 million punitive damages.
On April 30, 1996, the trial court approved a $7.3 million set off to
the March 13, 1996, $22.5 million jury verdict. The set off pertained
to monies owed by Aearth Development, Inc., and related interests, to
First Commercial Bank, N.A. On May 20, 1996, the Court entered a judgment
against First Commercial Bank, N.A., in the amount of $15.2 million.
Thereafter, on June 21, 1996, the Court granted a Motion for Remittitur
and reduced the punitive damages awarded in the judgment by $7.0 million.
Therefore, the final award was $8.2 million. On June 27, 1996, First
Commercial Bank, N.A., filed a Notice of Appeal to the Supreme Court of
Arkansas. Management of the Company and First Commercial Bank, N.A.,
intend to vigorously pursue the appeal. The ultimate legal and financial
liability of the Company in connection with this matter cannot be estimated
with certainty, but management, based on the
<PAGE>
advice of legal counsel that the judgment entered on the verdict will be
reversed and dismissed in whole or in part or a new trial ordered in whole
or in part, believes that the impact of this matter will not have a
materially adverse effect on the Company's financial position.
However, if any substantial loss were to occur as a result of this
litigation it could have a material adverse impact upon results of
operations in the fiscal quarter and/or year in which it were to be
incurred, but the Company cannot estimate the range of any reasonably
possible loss.
5. On February 13, 1997, the Company acquired all of the outstanding common
stock of W.B.T. Holding Company, Memphis, Tennessee, in exchange for
1,361,952 Company common shares. This transaction was accounted for as a
pooling of interests. The results of W.B.T. Holding Company are included
in the consolidated financial statements for 1997; however, prior
period financial data has not been restated due to immateriality.
W.B.T. Holding company had approximately $267 million in assets, $181
million in loans, and $236 million in deposits.
6. On April 17, 1997, the Company acquired all of the outstanding common stock
of City National Bank, Whitehouse, Texas, in exchange for 145,478 shares
of Company common stock. The transaction was accounted for as a pooling
of interests. The results of City National Bank are included in the
consolidated financial statements for 1997; however, prior period financial
data has not been restated due to immateriality. City National Bank had
approximately $39 million in assets, $30 million in loans, and $37 million
in deposits.
7. On May 15, 1997, the Company acquired all of the outstanding common stock
of Southwest Bancshares, Inc., Jonesboro, Arkansas, in exchange for
3,412,252 shares of the Company's common stock. The transaction was
accounted for as a pooling of interests and, accordingly, 1997 and all
prior period financial information has been restated to include this
acquisition. Southwest Bancshares, Inc., had approximately $847 million
in assets, $610 million in loans, and $741 million in deposits.
8. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("Statement 128"),
"Earnings Per Share," which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary ("basic") earnings
per share, the dilutive effect of stock options will be excluded. The
impact of Statement 128 on the calculation of earnings per share for the
Company for the six months ended June 30, 1997, and June 30, 1996, would
not have been material.
9. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129 ("Statement 129"),
"Disclosure of Information about Capital Structure." Statement 129
consolidates existing guidance in Accounting Principles Board (APB)
Opinion No. 10, "Omnibus Opinion 1966," APB Opinion No. 15, "Earnings
Per Share," and Financial Accounting Standards No. 47, "Disclosure of
<PAGE>
Long-Lived Obligations," relating to disclosure about a company's capital
structure. Statement 129 is required to be adopted on December 31, 1997.
The Company believes Statement 129 will have no material impact on the
Company's capital structure disclosures.
10. On July 1, 1997, the Company acquired all of the outstanding common
stock of First Central Corporation, Searcy, Arkansas, in exchange for
1,649,963 Company common shares. This transaction was accounted for
as a pooling of interests; therefore, effective with third quarter
reporting, all financial data will be restated to include this
acquisition. First Central Corporation was the parent of First National
Bank, Searcy, Arkansas, which had approximately $269 million in assets,
$142 million in loans and $237 million in deposits. The impact of this
acquisition on the Company's results of operations for the six months
ended June 30, 1997, is immaterial.
<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 seventeen institutions in the state
of Arkansas, seven institutions in the state of Texas, one
institution in the state of Tennessee, and one institution in the
state of Louisiana. In a joint venture with Arvest Bank Group,
Inc., of Bentonville, Arkansas, the Company owns 50% of two
institutions in the state of Oklahoma. The Company's consolidated
assets at June 30, 1997, totaled approximately $6.6 billion.
On April 17, 1997, the Company acquired all of the outstanding
common stock of City National Bank, Whitehouse, Texas, in
exchange for 145,478 shares of Company common stock. The
transaction was accounted for as a pooling of interests. The
results of City National Bank are included in the consolidated
financial statements for 1997; however, prior period financial
data has not been restated due to immateriality. City National
Bank had approximately $39 million in assets, $30 million in
loans, and $37 million in deposits.
On May 15, 1997, the Company acquired all of the outstanding
common stock of Southwest Bancshares, Inc., Jonesboro, Arkansas,
("SWB") in exchange for 3,412,252 Company common shares. This
transaction was accounted for as a pooling of interests;
therefore, all financial data has been restated to include this
acquisition. SWB was the parent of First Bank of Arkansas,
Jonesboro, Arkansas; First Bank of Arkansas, Russellville,
Arkansas; and First Bank of Arkansas, Searcy, Arkansas. SWB had
approximately $847 million in assets, $610 million in loans and
$741 million in deposits.
On July 1, 1997, the Company acquired all of the outstanding common
stock of First Central Corporation, Searcy, Arkansas, ("First Central")
in exchange for 1,649,963 Company common shares. This transaction was
accounted for as a pooling of interests; therefore, effective with
third quarter reporting, all financial data will be restated to include
this acquisition. First Central was the parent of First National Bank,
Searcy, Arkansas, which had approximately $269 million in assets, $142
million in loans and $237 million in deposits.
The SWB and First Central acquisitions resulted in excess market share
for the Company in the Russellville and Searcy, Arkansas, markets,
thereby prompting regulatory authorities to require divestiture in
order to bring the market share within prescribed guidelines. On
August 1, 1997, the Company completed the sale of
<PAGE>
First Bank of Arkansas, Russellville, and First Bank of Arkansas,
Searcy, to Simmons First National Corporation, Pine Bluff,
Arkansas, for a total cash price of $53 million. This
transaction produced an after-tax gain of $15.6 million, or
approximately $0.44 per share, which will be reported during the
third quarter as an extraordinary item.
<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
Earnings of $0.66 per share in second quarter 1997 represented
an increase of 14% from $0.58 per share during the same period
in 1996. Net income for the three months ended June 30, 1997,
was $22.2 million, up 18% from $19.0 million in 1996. Earnings
of $1.29 per share in 1997's first six months represented an
increase of 13% from $1.14 per share during the same period in
1996. Net income for the six months ended June 30, 1997, was
$43.5 million, up 18% from $36.8 million in 1996. The increase
in net income reflects strong growth in net interest margin
combined with tight controls over non-interest expense.
During the second quarter of 1997, the Company recorded a non-
recurring accrual for additional income tax expense of
approximately $0.03 per share. A detailed explanation of these
increases is included below under the headings "Net Interest Income,"
"Non-Interest Income" and "Non-Interest Expense."
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 returns on average assets for the first six months of
1997 and 1996 were 1.35% and 1.24%, respectively.
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 six months of 1997, the Company
earned 15.58% on average common stockholders' equity compared
with 15.04% for the first six months of 1996. The Company's
continued improvement in the return on average common
stockholders' equity ratio is indicative of the Company's
successful deployment of its capital, combined with strong
earnings growth.
Net Interest Income
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 $136.9 million in the first six months of 1997
compared to $120.3 million in the first six months of 1996.
<PAGE>
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 4.69%
for the first six months of 1997, compared to 4.50% for the same
period in 1996. The increase in net interest income and net
interest margin resulted from increased returns on earning assets
combined with a decrease in liability costs.
Management of net interest income and 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 second quarter and first
six months of 1997 and 1996.
Analysis of Net Interest Income (FTE = Fully Tax-Equivalent)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
(Dollars in thousands) ------------------- -----------------
1997 1996 1997 1996
-------- -------- -------- --------
Interest income......... $ 120,146 $ 108,419 $ 237,012 $ 214,834
Fully tax-equivalent
adjustment............. 1,148 980 2,344 1,950
-------- -------- -------- ---------
Interest income - FTE... 121,294 109,399 239,356 216,784
Interest expense........ 51,403 48,002 102,504 96,504
-------- -------- -------- ---------
Net interest income - FTE $ 69,891 $ 61,397 $ 136,852 $ 120,280
========= ========= ========= =========
Yield on earning
assets - FTE............ 8.27% 8.10% 8.21% 8.11%
Cost of interest bearing
liabilities ........... 4.31% 4.30% 4.29% 4.34%
Net interest spread - FTE. 3.96% 3.80% 3.92% 3.77%
Net interest margin - FTE. 4.77% 4.54% 4.69% 4.50%
The following schedule details rate sensitive assets and
liabilities at June 30, 1997. 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.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Interest Rate Sensitivity Period
-------------------------------------------------------------------------
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.. $ 174,668 $ -- $ -- $ -- $ -- $ -- $ 174,668
Trading account
securities............. 147 -- -- -- -- -- 147
Taxable investment
securities............. 173,623 111,634 140,789 146,836 668,803 46,373 1,288,057
Tax-exempt investment
securities............. 2,457 3,683 6,617 14,907 107,166 72,917 207,747
Loans and leases........ 942,527 359,845 421,994 697,269 1,429,794 351,660 4,203,089
--------- --------- --------- --------- ---------- -------- ---------
Total earning assets.... 1,293,422 475,162 569,400 859,011 2,205,763 470,950 5,873,708
Interest bearing
liabilities:
Savings and NOW accounts 1,147,924 -- -- -- -- -- 1,147,924
Money market accounts... 750,090 -- -- -- -- -- 750,090
Other time deposits..... 427,322 530,936 575,660 679,567 478,444 8,773 2,700,702
Short-term borrowings... 237,272 -- -- -- -- -- 237,272
Long-term debt.......... 80 157 233 455 4,572 8,950 14,447
--------- -------- -------- -------- ---------- ------- ---------
Total interest bearing
liabilities............ 2,562,688 531,093 575,893 680,022 483,016 17,723 4,850,435
Interest rate
sensitivity gap........ (1,269,265) (55,931) (6,493) 178,990 1,722,747 453,227
Cumulative interest
rate sensitivity gap... (1,269,265) (1,325,197) (1,331,690) (1,152,700) 570,046 1,023,274
Cumulative rate
sensitive assets to
rate sensitive
liabilities............ 50.5% 57.2% 63.7% 73.5% 111.8% 121.1%
Cumulative gap as a
percentage of earning
assets................. (21.6%) (22.6%) (22.7%) (19.6%) 9.7% 17.4%
</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 all
aspects of the Company's gap position to maximize profitability
as interest rates fluctuate.
<PAGE>
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 mortgage
servicing, trust services, service charges on deposit accounts,
and other service charges and fees. For the first six months of 1997,
non-interest income totaled $54.1 million compared to $54.2 million
for the first six months of 1996. During late 1995 and early 1996,
the Company's mortgage subsidiary made several large loan servicing
rights acquisitions which brought the company's total servicing
portfolio at June 30, 1996, to $7.8 billion. This compares to a $6.9
billion total servicing portfolio at June 30, 1997, resulting in a
decrease in fee income from mortgage servicing activities. Excluding
the other real estate and investment securities gains and losses, the
effect of lower fees from mortgage servicing activities, non-
recurring gains on the sale of assets, and the acquisitions of
W.B.T. Holding Company ("WBT") and City National Bank ("CNB"),
which were not restated for 1996, non-interest income increased
$2.2 million, or 6.4%. The primary contributors to this increase
were service charges and fee income due to growth in the
Company's deposit base. The following table summarizes non-
interest income for the second quarter and first six months of
1997 and 1996.
(Dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- --------------------
1997 1996 %Change 1997 1996 % Change
---- ---- ------- ---- ----- --------
Trust department income.. $ 3,189 $ 3,060 4.22% $ 6,394 $ 6,196 3.20%
Mortgage servicing fee
income.................. 9,222 10,956 (15.83) 18,653 22,136 (15.73)
Broker-dealer operations
income.................. 1,069 989 8.09 2,310 1,905 21.26
Service charges on
deposits............... 8,133 7,087 14.76 15,981 13,789 15.90
Other service charges
and fees................ 4,076 3,414 19.39 7,931 6,659 19.10
Investment securities
gains (losses), net..... (12) 20 (160.00) (2) 90 (102.22)
Other real estate gains
(losses), net........... (532) (351) (51.57) (874) (366) (138.80)
Other income............. 1,740 2,044 (14.87) 3,675 3,746 1.90
------- ------- ------- ------
Total non-interest
income............... 26,885 27,219 (1.23)% $54,068 $54,155 (0.16)%
====== ====== ======= =======
<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
these efforts will further improve the Company's efficiency ratio
during the remainder of 1997 and future years.
Non-interest expenses were $114.2 million for the first six
months of 1997 compared to $111.8 million for the first six months
of 1996. In the first six months of 1997, the Company recorded $1.4
million in non-recurring expenses relating to operating losses, merger
expenses, and medical benefit expenses. In the first six months of
1996, the Company recorded $3.0 million in non-recurring expenses
relating to legal matters. Excluding the effect of the non-
recurring expense items, the WBT and CNB acquisitions, and the
expenses associated with intangible amortization and FDIC
insurance, non-interest expense increased only 0.08%.
The Company is currently developing plans to ensure that its systems
will operate properly in the year 2000. Management is developing a cost
estimate, which is anticipated not to exceed $0.10 per share after tax.
The following table summarizes non-interest expenses for the second
quarter and first six months of 1997 and 1996.
(Dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------- --------------------
1997 1996 % Change 1997 1996 % Change
---- ---- ------- ---- ---- --------
Salaries, wages and
employee benefits.. $ 27,267 $ 25,995 4.89% $ 55,133 $ 51,979 6.07%
Net occupancy........ 3,830 3,461 10.66 7,562 6,749 12.05
Equipment............ 3,903 3,500 11.51 7,676 6,870 11.73
FDIC Insurance....... 49 240 (79.58) (9) 550 (101.64)
Amortization of
mortgage servicing
rights.............. 4,168 5,100 (18.27) 8,341 10,164 (17.94)
Other expenses....... 17,673 18,100 2.36 35,459 35,515 (0.16)
------- ------- ------ ------
Total non-interest
expenses............ $ 56,890 $ 56,396 0.88 $114,162 $111,827 2.09%
======== ======== ======== ========
An important tool in determining a bank's effectiveness in
managing non-interest expenses is the efficiency ratio, which is
calculated by dividing non-interest expense by the sum of net
interest margin on a tax-equivalent basis and non-interest
<PAGE>
income, excluding securities gains and losses. The Company's
ratio decreased from 55.41% for the first six months of 1996 to
53.71% in the first six months of 1997. The Company, in
calculating its efficiency ratio has excluded the effect of the
non-recurring expenses, mentioned previously, as well as the
amortization of intangible assets. The decrease in the
efficiency ratio shows the Company's commitment to controlling
non-interest expenses while increasing revenues. The 1996
efficiency ratio reached the Company's long-term goal of 57%.
Management set a new efficiency ratio goal of 54%, which was
achieved in the second quarter. This goal will be re-evaluated
continuously as the financial services industry changes.
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 36.6% for the
first six months of 1997 and 35.1% for the first six months of
1996. Excluding the non-recurring accrual discussed previously,
the effective tax rate was 35.1% for the first six months of 1997.
Loan and Lease Portfolio
At June 30, 1997, the Company's loan and lease portfolio, net
of unearned income, totaled $4.2 billion, as compared to a $3.9
billion loan portfolio at December 31, 1996. Excluding the
Company's acquisitions of WBT and CNB, the loan and lease
portfolio increased approximately 3% during the first six months
of 1997.
The Company has continued its policy of conservative lending
thereby avoiding 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.
Provision and Allowance for Possible Loan and Lease Losses
The allowance for possible loan and lease losses is the
amount deemed by management to be adequate to provide for
possible losses on loans and leases that may become
uncollectible. Reviews of general loss experience and the
performance of specific credits are conducted in determining
reserve adequacy and required provision expense. The allowance
is adjusted by the provision for possible loan and lease losses,
increased by loan recoveries and decreased by loan losses. As of
June 30, 1997, the allowance for possible loan and lease losses
equaled $69.9 million or 1.66% of total loans and leases.
Comparatively, the allowance for possible loan and lease losses
amounted to $61.6 million or 1.59% of total loans and leases at
December 31, 1996. The provision for possible loan and lease
losses amounted to $5.8 million in the first six months of 1997
as compared to $3.9 million in the first six months of 1996.
<PAGE>
While management believes the allowance is adequate at June 30,
1997, detailed analysis and research is being done to determine
how the five affiliations completed in the last twelve months
will impact the Company's overall asset quality. Because of this
rapid growth it is likely that management will strengthen the
allowance level in the third quarter to re-establish the fortress
balance sheet the Company has historically enjoyed. It is anticipated
that this addition to the allowance will be between $0.25 and $0.35
per share after tax.
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 seven years. At June 30, 1997, the Company's ratio
was 176.30%. This means that for every dollar of non-performing
loans (impaired loans, other non-accrual loans, loans 90 days or
more past due, and renegotiated loans), $1.76 has been set aside
in the Company's reserves to cover possible losses. The ratio at
December 31, 1996, was 226.77%. Another reserve adequacy
indicator is the ratio of allowance for possible loan and lease
losses and other real estate losses to non-performing assets
(defined as impaired loans, other non-accrual loans, renegotiated
debt, repossessed assets and other real estate owned). The ratio
was 195.37% at June 30, 1997, compared to 267.84% at December 31,
1996. The increase in non-performing loans was primarily
attributable to the first quarter acquisition of WBT and the second
quarter acquisition of CNB, as 1996 data was not restated to include
these mergers. 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.
Annualized Six Months
Ended June 30, For the Years Ended December 31,
--------------------- -----------------------------
1997 1996 1995 1994 1993 1992
--------------------- ---- ---- ---- ---- ----
Net loan and lease
losses sustained to
average loans and leases 0.22% 0.17% 0.07% 0.04% 0.14% 0.50%
Allowance for possible loan
and lease losses to total
loans and leases 1.66% 1.59% 1.49% 1.66% 2.06% 2.11%
Non-performing loans to
total loans and leases 0.94% 0.70% 0.48% 0.48% 0.65% 0.83%
Although asset quality has remained relatively stable 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.
<PAGE>
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 limit" that represents only 23% 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 40 loan
relationships with aggregate outstanding balances of $5 million
or greater, which further mitigates the loan loss risks.
Liquidity
Long-term liquidity is a function of a large core deposit
base and a strong capital position. Core deposits, which consist
of total deposits less certificates of deposit of $100,000 and
over, represent the Company's largest and most important funding
source. The capital position of the Company is a result of
internal generation of capital and earnings retention. The
Company manages dividends to retain sufficient capital for long-
term liquidity and growth. Two key measures of the Company's
long-term liquidity are the ratios of loans and leases to total
deposits and loans and leases to core deposits. Lower ratios in
these two measures correlate to higher liquidity. As can be seen
from the accompanying table, the Company's liquidity ratios have
increased, indicating lower liquidity. The Company's liquidity
has decreased because the funding of loans has outpaced the
growth in the Company's core deposit base. However, the
Company's relatively sound deposit base, along with its low debt
level and common and preferred stock availability, provide
several alternatives for future financing and long-term liquidity
needs.
<PAGE>
For the Six Months
Ended June 30, For the Years Ended December 31,
----------------- --------------------------------
1997 1996 1995 1994
------ ------ ------ ------
Average loans and leases
to average deposits....... 73.35% 72.44% 70.77% 62.87%
Average loans and leases to
average core deposits..... 83.29% 82.56% 80.12% 70.41%
Short-term liquidity is the ability of the Company to meet
the borrowing needs and deposit withdrawal requirements of its
customers due to growth in the customer base and, to a lesser
extent, seasonal and cyclical customer demands. Short-term
liquidity needs can be met by short-term borrowings in state and
national money markets. Short-term borrowings include federal
funds purchased, securities sold under agreement to repurchase,
treasury tax and loan accounts, and other borrowings. Average
short-term borrowings exceeded average short-term investments by
$46.1 million in the first six months of 1997. During the fourth
quarter of 1996 average short-term borrowings exceeded average
short-term investments by $2.8 million. The Company has
continued to use short-term borrowings to fund overall loan
growth throughout the Company. Future short-term liquidity needs
for daily operations are not expected to vary significantly and
management believes that the Company's level of liquidity is
sufficient to meet current funding requirements.
Capitalization
The Company maintains its goal of providing a strong capital
position while earning an acceptable return for its shareholders.
Management will use the additional financial leverage provided by
internal generation of capital and recent acquisitions in pursuit
of above average return opportunities. A position of strength is
important to the Company's customers, investors and regulators.
At June 30, 1997, the Company's equity to asset ratio was
8.77% compared to 8.32% at December 31, 1996. At June 30, 1997,
the Company's leverage and tier 1 and total risk-based capital
ratios substantially exceeded the required 3%, 4% and 8% levels
established by the Board of Governors of the Federal Reserve
System, as can be seen from the accompanying table.
<PAGE>
<TABLE>
<CAPTION>
Regulatory June 30, March 31, December 31, September 30, June 30,
Minimum 1997 1997 1996 1996 1996
---------- -------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio....... 3.00% 8.27% 8.00% 7.89% 7.82% 7.71%
Tier 1 risk-based
capital ratio....... 4.00% 11.79% 11.51% 11.34% 11.14% 11.17%
Total risk-based
capital ratio....... 8.00% 12.65% 12.37% 12.19% 12.00% 12.02%
</TABLE>
While management plans to maintain the Company's strong capital
base, it recognizes the need to effectively manage capital levels
as they relate to asset growth. In order to avoid declining
return on equity ratios caused by a more rapid rate of growth in
capital than in assets, management will continue to evaluate
options to utilize excess capital thereby improving return on
equity.
The Company is not aware of any current recommendations by
any regulatory authorities which, if they were implemented, are
reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations.
Dividend Policy
The Company's long-term dividend policy is to pay between 35%
and 40% of earnings in cash dividends to its stockholders while
maintaining adequate capital to support growth. In October 1996,
the Company increased its dividend rate for the tenth consecutive
year, bringing the annual dividend rate to $.96 per share.
The dividend payout ratios for the past three years were
35.34% in 1996, 35.77% in 1995, and 33.97% in 1994. The
Company's Board of Directors reviews the cash dividend policy and
payout levels annually in the fourth quarter.
Forward-Looking Statements
This report contains forward-looking statements and reflects
management's current views and estimates of future economic
circumstances, industry conditions, company performance and
financial results. These forward-looking statements are subject
to a number of factors and uncertainties which could cause the
Company's actual results and experience to differ from the
anticipated results and expectations expressed in such forward-
looking statements. Specific reference is made to forward-
looking statements contained in the sections of this report
entitled "Non-Interest Expense" and "Provision and Allowance for
Possible Loan and Lease Losses."
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
Registrant did not file anyreports on Form 8-K during the second
quarter of 1997.
<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: August 14, 1997
<PAGE>
Index to Exhibits
Exhibit Number Exhibit
-------------- ----------------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE SECOND QUARTER CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 382,653
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 174,668
<TRADING-ASSETS> 147
<INVESTMENTS-HELD-FOR-SALE> 1,039,821
<INVESTMENTS-CARRYING> 455,901
<INVESTMENTS-MARKET> 455,227
<LOANS> 4,203,089
<ALLOWANCE> 69,866
<TOTAL-ASSETS> 6,550,186
<DEPOSITS> 5,659,713
<SHORT-TERM> 237,272
<LIABILITIES-OTHER> 65,350
<LONG-TERM> 13,376
0
0
<COMMON> 101,323
<OTHER-SE> 473,152
<TOTAL-LIABILITIES-AND-EQUITY> 6,550,186
<INTEREST-LOAN> 186,067
<INTEREST-INVEST> 50,945
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 237,012
<INTEREST-DEPOSIT> 96,642
<INTEREST-EXPENSE> 102,504
<INTEREST-INCOME-NET> 134,508
<LOAN-LOSSES> 5,770
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 114,162
<INCOME-PRETAX> 68,644
<PAGE>
<INCOME-PRE-EXTRAORDINARY> 68,644
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,495
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.27
<YIELD-ACTUAL> 4.69
<LOANS-NON> 27,498
<LOANS-PAST> 9,300
<LOANS-TROUBLED> 2,830
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 61,626
<CHARGE-OFFS> 7,172
<RECOVERIES> 2,752
<ALLOWANCE-CLOSE> 69,866
<ALLOWANCE-DOMESTIC> 49,776
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 20,090
</TABLE>
