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 March 31, 1998
[ ] 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 March 31, 1998
--------------------------------------- --------------------------------
Common Stock, $3.00 par value per share 37,603,692
<PAGE>
TABLE OF CONTENTS
Item Page
---- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements (Unaudited)............................. 1
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 10
3. Quantitative and Qualitative Disclosures about Market Risk... 20
PART II - OTHER INFORMATION
1. Legal Proceedings............................................ 20
6. Exhibits and Reports on Form 8-K............................. 20
Signatures............................................................. 21
<PAGE> 1
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED BALANCE SHEETS March 31, December 31,
(Dollars in thousands, except par value) -------------- --------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................... $ 447,245 $ 397,361
Federal funds sold........................................................ 237,220 173,794
-------------- --------------
Total cash and cash equivalents.......................................... 684,465 571,155
Investment securities held-to-maturity, estimated market
value $341,105 and $410,620 respectively................................. 338,877 408,683
Investment securities available-for-sale.................................. 1,413,171 1,309,955
Trading account securities................................................ 516 149
Loans and leases, net of unearned income.................................. 4,643,100 4,317,631
Allowance for possible loan and lease losses.............................. (86,879) (79,970)
-------------- --------------
Net loans and leases..................................................... 4,556,221 4,237,661
Bank premises and equipment, net.......................................... 136,015 124,872
Other real estate owned, net of allow for possible losses of $1 and $2,
respectively............................................................. 6,917 5,658
Other assets.............................................................. 245,907 229,119
-------------- --------------
Total assets........................................................... $ 7,382,089 $ 6,887,252
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing transaction accounts................................. $ 1,110,616 $ 1,222,660
Interest bearing transaction and savings accounts......................... 2,256,228 1,983,803
Certificates of deposit $100,000 and over................................. 665,239 727,000
Other time deposits....................................................... 2,297,488 2,014,227
-------------- --------------
Total deposits........................................................... 6,329,571 5,947,690
Short-term borrowings..................................................... 314,329 203,185
Other liabilities and deferred income taxes............................... 78,866 80,161
Long-term debt............................................................ 23,394 5,103
-------------- --------------
Total liabilities........................................................ 6,746,160 6,236,139
Stockholders' equity
Preferred stock, $1 par value, 400,000 shares authorized, none issued.... -- --
Common stock, $3 par value, 50,000,000 shares authorized,
37,612,842 and 37,578,681 shares issued, respectively................... 112,839 112,736
Capital surplus.......................................................... 330,135 359,629
Retained earnings........................................................ 191,359 174,423
Accumulated other comprehensive income, net of taxes
Unrealized net gains on available-for-sale securities................... 2,222 4,325
Less treasury stock at cost, 9,150 and -0- shares, respectively.......... (626) --
-------------- --------------
Total stockholders' equity.............................................. 635,929 651,113
-------------- --------------
Total liabilities and stockholders' equity............................. $ 7,382,089 $ 6,887,252
============== ==============
See accompanying notes.
</TABLE>
<PAGE> 2
FIRST COMMERCIAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in thousands, except per share data)
Unaudited
Three Months Ended
March 31,
----------------------
1998 1997
---------- ----------
Interest income
Loans and leases, including fees................... $ 95,962 $ 95,226
Short-term investments............................. 2,238 2,249
Investment securities-taxable...................... 21,890 22,406
-nontaxable................... 2,925 3,037
Trading account securities......................... (1) 12
---------- ----------
Total interest income............................ 123,014 122,930
Interest expense
Interest on deposits............................... 49,777 51,236
Short-term borrowings.............................. 2,741 2,502
Long-term debt..................................... 99 420
---------- ----------
Total interest expense........................... 52,617 54,158
Net interest income................................... 70,397 68,772
Provision for possible loan and lease losses.......... 2,051 2,842
---------- ----------
Net interest income after provision for
possible loan and lease losses................. 68,346 65,930
Other income
Trust department income............................ 4,161 3,238
Mortgage servicing fee income...................... 8,849 9,774
Broker-dealer operations income.................... 1,696 1,243
Service charges on deposit accounts................ 8,003 8,112
Other service charges and fees..................... 4,078 3,932
Investment securities gains (losses), net.......... 154 10
Other real estate gains (losses), net.............. (76) (354)
Other.............................................. 2,687 1,970
---------- ----------
Total other income............................... 29,552 27,925
Other expenses
Salaries, wages and employee benefits.............. 28,922 28,880
Net occupancy...................................... 3,735 3,931
Equipment.......................................... 3,907 3,925
FDIC insurance..................................... 267 (48)
Amortization of mortgage servicing rights.......... 2,193 4,243
Other.............................................. 17,910 18,215
---------- ----------
Total other expenses............................. 56,934 59,146
Income before income taxes......................... 40,964 34,709
Income tax provision............................... 13,656 12,148
---------- ----------
Net income....................................... $ 27,308 $ 22,561
========== ==========
<PAGE> 3
FIRST COMMERCIAL CORPORATION
CONSOLIDATED INCOME STATEMENTS (Continued)
(Dollars in thousands, except per share data)
Unaudited
Three Months Ended
March 31,
----------------------
1998 1997
---------- ----------
Weighted average number of
common shares outstanding - Basic................... 37,318,092 37,432,824
Dilutive potential common shares...................... 525,543 430,330
---------- ----------
Weighted average number of common shares -
assuming dilution................................... 37,843,635 37,863,154
========== ==========
Basic earnings per common share....................... $ 0.73 $ 0.60
========== ==========
Diluted earnings per common share..................... $ 0.72 $ 0.60
========== ==========
See accompanying notes.
<PAGE> 4
<TABLE>
<CAPTION>
FIRST COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
--------- --------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996............ $ 101,618 $ 263,090 $ 191,813 $ 1,079 $ -- $ 557,600
Comprehensive income
Net income............................ 22,561 22,561
Other comprehensive income, net of taxes
Unrealized gain (loss) on available-
for-sale (AFS) securities........... (5,256) (5,256)
---------
Total comprehensive income....... 17,305
---------
Cash dividends-$.23 per common share... (9,691) (9,691)
Stock options exercised................ 85 111 196
Purchase of treasury stock, 91 shares.. (2) (2)
Purchase of minority shares of
Springhill Bank & Trust Company,
253 shares........................... 1 10 2 13
Acquisition of W.B.T. Holding Company, Inc.,
1,430,050 shares..................... 4,087 14,524 214 18,825
Acquisition of City National Bank,
152,752 shares..................... 436 1,289 14 1,739
Acquisition of First Charter Bancshares, Inc.,
277,439 shares..................... 792 (487) 5,109 5,414
---------- ---------- --------- ------------- --------- ---------
Balance - March 31, 1997...............$ 107,019 $ 264,013 $ 224,330 $ (3,963) -- $ 591,399
========== ========== ========= ============= ========= =========
Balance - December 31, 1997............$ 112,736 $ 359,629 $ 174,423 $ 4,325 $ -- $ 651,113
Comprehensive income
Net income............................ 27,308 27,308
Other comprehensive income, net of taxes
Unrealized gain (loss) on AFS securities
($2,145), net of reclassification
adjustment for income(loss) included in
net income of ($42) (2,103) (2,103)
---------
Total comprehensive income....... 25,205
---------
Cash dividends-$.28 per common share... (10,372) (10,372)
Stock options exercised................ 103 412 515
Purchase of treasury stock for use in
Kemmons Wilson, Inc. acquisition,
1,125,000 shares...................... (74,270) (74,270)
Acquisition of Kemmons Wilson, Inc.
1,115,850 shares...................... (29,906) 73,644 43,738
---------- ---------- --------- ------------- --------- ---------
Balance - March 31, 1998................$ 112,839 $ 330,135 $ 191,359 $ 2,222 $ (626)$ 635,929
========== ========== ========= ============= ========= =========
See accompanying notes.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOW Three Months Ended
(Dollars in thousands) March 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 27,308 $ 22,561
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization..................................................... 6,360 8,429
Provision for possible loan and lease losses...................................... 2,051 2,842
Gain on sale of available-for-sale investment securities.......................... (154) (10)
Gain on sale of equipment......................................................... (26) (6)
Loss (gain) on sale of other real estate.......................................... (531) 26
Write downs of other real estate.................................................. 111 11
Equity in undistributed earnings of unconsolidated subsidiary..................... (510) (146)
Decrease (increase) in trading securities......................................... (374) 171
Realized loss on trading securities............................................... 7 --
Decrease (increase) in mortgage loans held for resale............................. (22,929) 2,939
Increase in income taxes payable.................................................. 7,484 11,879
Decrease (increase) in interest and other receivables............................. 3,536 (240)
Decrease in interest payable...................................................... (335) (1,685)
Increase (decrease) in accrued expenses........................................... (19,869) 1,100
Increase in prepaid expenses...................................................... (182) (438)
---------- ----------
Net cash provided by operating activities........................................ 1,947 47,433
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale.................... 152,991 80
Proceeds from maturing investment securities available-for-sale.................... 605,879 211,179
Proceeds from maturing investment securities held-to-maturity...................... 133,683 91,535
Purchases of investment securities available-for-sale.............................. (853,037) (184,849)
Purchases of investment securities held-to-maturity................................ (59,968) (94,607)
Purchase of institutions, net of funds acquired.................................... 42,935 32,362
Net (increase) decrease in loans and leases........................................ 21,261 (48,769)
Capital expenditures............................................................... (4,432) (3,561)
Proceeds from sale of bank premises and equipment.................................. 742 263
Purchased mortgage servicing rights and changes in other assets, net............... 7,916 1,961
Proceeds from sales of other real estate........................................... 1,901 675
---------- ----------
Net cash provided by investing activities......................................... 49,871 6,269
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
FIRST COMMERCIAL CORPORATION Unaudited
CONSOLIDATED STATEMENTS OF CASH FLOW (continued) Three Months Ended
(Dollars in thousands) March 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts, and savings accounts..... 47,130 (179,777)
Net increase (decrease) in time deposits........................................... (647) 17,785
Net increase in short-term borrowings.............................................. 99,144 4,967
Proceeds from long-term borrowings................................................. 3 --
Repayment of long-term debt........................................................ (11) (6,062)
Purchase of treasury stock......................................................... (74,270) (2)
Sale of treasury stock............................................................. -- 2
Stock options exercised............................................................ 515 196
Cash dividends paid on common stock................................................ (10,372) (9,691)
---------- ----------
Net cash provided by (used in) financing activities............................... 61,492 (172,582)
Net increase (decrease) in cash and cash equivalents............................... 113,310 (118,880)
Cash and cash equivalents at the beginning of year................................. 571,155 654,830
---------- ----------
Cash and cash equivalents at end of period......................................... $ 684,465 $ 535,950
========== ==========
See accompanying notes.
</TABLE>
<PAGE> 7
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1. There have been no significant changes in the accounting policies of the
Company since December 31, 1997, the date of the most recent annual
report on Form 10-K, except as disclosed in Note 7, nor have there
occurred events, except as disclosed in Notes 4, 5 and 6, 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 March 31, 1998, and the results of
operations and changes in cash flows for the three months then ended.
Any adjustments consist only of normal recurring accruals.
3. Cash payments for interest were approximately $50.9 million and $55.8
million for the first quarter of 1998 and 1997, respectively. Cash
payments for income taxes during the first quarter of 1998 and 1997 were
approximately $700 thousand and $970 thousand, 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. After a setoff pertaining to monies owed by Aearth Development,
Inc., and related interests, to First Commercial Bank, N.A., and a
Remittitur reducing the punitive damages awarded in the judgment by $7.0
million, 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. On April 30, 1998, the Arkansas Supreme Court reversed the
judgment and dismissed the case.
First Commercial Bank, N.A. is uncertain if any additional appeals or
motions might be attempted, but believes 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.
<PAGE> 8
FIRST COMMERCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
5. On February 8, 1998, the Company and Regions Financial Corporation
("Regions") entered into a definitive agreement that provides for the
merger of the Company into Regions. Following the merger, Regions will
have assets of $32.8 billion and 667 banking locations in nine southern
states. Under the terms of the agreement, Regions will exchange 1.7
shares of its common stock for each share of the Company's common stock.
Based on Regions' closing stock price on February 6, 1998, the transaction
would be valued at approximately $2.7 billion. The merger, which is
expected to be a tax-free reorganization for federal income tax purposes
and accounted for as a pooling of interests, is expected to be consummated
during the third quarter of 1998, pending Regions and Company shareholder
approval, regulatory approval and other customary conditions of closing.
Approximately 65.9 million shares of Regions' common stock are expected to
be issued in the transaction. In connection with the execution of the
definitive agreement, the Company granted Regions an option to purchase,
under certain circumstances, up to 19.9% of the Company's outstanding
shares of common stock.
6. On March 25, 1998, the Company acquired all of the outstanding shares of
Kemmons Wilson, Inc., in exchange for 1,115,850 shares of the Company's
common stock. The Company used treasury shares it had acquired during the
first quarter of 1998 for the expressed intent of this acquisition.
Kmmons Wilson, Inc., which name the Company changed to KWB Holdings, Inc.,
was the parent company of KW Bancshares, Inc., which owned Federal Savings
Bank headquartered in Rogers, Arkansas. Federal Savings Bank had assets
of $393 million and serviced approximately $1 billion in residential
mortgage loans. This transaction was accounted for as a purchase. The
Company recorded costs in excess of fair value of the net assets acquired
of $41.9 million, which will be amortized over 25 years using the
straight-line method.
7. In June 1997, the Financial Accounting Standards Board issued Statement
130, "Reporting Comprehensive Income." This Statement establishes new
rules for the reporting and display of comprehensive income and its
components. As of January 1, 1998, the Company adopted Statement 130 and
the adoption of this Statement had no impact on the Company's net income
or stockholders' equity. Statement 130 requires unrealized gains or
losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included
in other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
8. Long-term debt
Long-term debt increased during the first quarter of 1998 primarily due to
the addition of an $18.3 million note through the acquisition of Kemmons
Wilson, Inc. This note is payable to Mercantile Bank with interest rates
floating at 30-day London InterBank Offered Rate plus 1.25%. The terms
include quarterly principal and interest payments with the remaining
balance due at maturity of December 31, 2000.
<PAGE> 9
9. Earnings per share
The following table sets forth the computation of basic and diluted
earnings per share ("EPS"):
Three Months Ended March 31,
(Dollars in Thousands, Except Per Share) 1998 1997
---------- ----------
Numerator:
Net income $ 27,308 $ 22,561
Preferred stock dividends................ - -
Effect of dilutive securities............ - -
---------- ----------
Numerator for basic and diluted EPS...... $ 27,308 $ 22,561
========== ==========
Denominator:
Denominator for basic EPS-weighted
shares outstanding...................... 37,318,092 37,432,824
Effect of dilutive securities:
Employee stock options.................. 525,543 430,330
---------- ----------
Denominator for diluted EPS-adjusted
weighted average shares and assumed
conversion.............................. 37,843,635 37,863,154
========== ==========
Basic earnings per common share........... $ 0.73 $ 0.60
========== ==========
Diluted earnings per common share......... $ 0.72 $ 0.60
========== ==========
<PAGE> 10
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 17 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 March 31, 1998,
totaled $7.4 billion.
On February 8, 1998, the Company and Regions Financial Corporation
("Regions") entered into an Agreement and Plan of Merger (the "Agreement"),
pursuant to which the Company will be merged with and into Regions, with
Regions as the surviving entity (the "Merger"). The Boards of Directors of the
Company and Regions approved the Agreement and the transactions contemplated
thereby at separate meetings held on February 8, 1998. A joint press release
was issued by the Company and Regions on February 9, 1998 regarding the
proposed transactions.
Under the terms of the Agreement, Regions will exchange 1.7 shares of its
common stock for each share of the Company's common stock. The Merger is
expected to be a tax-free reorganization for federal income tax purposes and
accounted for as a pooling of interests. It is expected that the Merger will
be consummated during the third quarter of 1998, pending approval by the
shareholders of the Company and Regions, regulatory approval and other
customary conditions of closing.
The Agreement contains provisions granting the Company the right to
terminate the Agreement which are intended, in general, to protect the
Company's shareholders against an excessive decline in the value of Regions'
common stock. The termination right is dependent upon the average closing
price of Regions' common stock being less than 80% of a reference price and
less than 85% of a weighted index of the stock prices of a group of seventeen
bank holding companies, all as described more specifically in the Agreement.
In the event the Company gives notice of its intention to terminate the
Agreement based on such provisions, Regions has the right to elect to adjust
the exchange ratio in accordance with the terms of the Agreement and thereby
would extinguish the Company's right to terminate.
In connection with the Agreement, the Company entered into a Stock Option
Agreement pursuant to which it granted to Regions an option to purchase up to
7,480,450 shares of the Company's common stock, representing 19.9% of the
outstanding shares of the Company's common stock without giving effect to the
exercise of the option. The option is exercisable at a purchase price of
$59.00 per share, upon certain terms and in accordance with certain conditions.
Under the terms of the Agreement, the Total Profit and the Notional Total
Profit, as each term is defined in the Agreement, that Regions or any other
holder may realize as a result of exercising the option may not exceed
$130,000,000.
<PAGE> 11
On March 25, 1998, the Company acquired all of the outstanding shares of
Kemmons Wilson, Inc., in exchange for 1,115,850 shares of the Company's
common stock. Kemmons Wilson, Inc., which name the Company changed to KWB
Holdings, Inc., was the parent company of KW Bancshares, Inc., which owned
Federal Savings Bank headquartered in Rogers, Arkansas. Federal Savings Bank
had assets of $393 million and serviced approximately $1 billion in
residential mortgage loans. This transaction was accounted for as a purchase.
The Company recorded costs in excess of fair value of the net assets acquired
of $41.9 million, which will be amortized over 25 years using the straight-
line method.
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
Basic earnings of $0.73 per share in first quarter 1998 represented an
increase of 21% from $0.60 per share during the same period in 1997. Diluted
earnings per share also increased 21% to $0.72 from $0.60. Net income for the
first quarter of 1998 increased 21% to $27.3 million from $22.6 million in
1997. The increase in net income reflects strong growth in net interest
margin combined with tight controls over 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 quarter of 1998 and 1997 were 1.62%
and 1.34%, 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 quarter of 1998,
the Company earned 17.04% on average common stockholders' equity compared with
15.49% for the first quarter of 1997. 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
$71.7 million in the first quarter of 1998 compared to $70.2 million for the
same period in 1997. Net interest margin is the ratio of net interest income
<PAGE> 12
to average earning assets. This ratio indicates the Company's ability to
manage its earning assets and to control the spread between yields earned on
assets and rates paid on liabilities. Fully tax-equivalent net interest
margin was 4.67% for the first quarter of 1998, compared to 4.60% for the same
period in 1997. The increase in net interest income and net interest margin
resulted from stable yields on earning assets combined with a decrease in
liability costs.
Management of net interest income and net interest margin is actively
pursued through a continuing emphasis on pricing both loans and deposits with
focus on profitability, rather than a narrow emphasis on local market
conditions. Presented in the following table is an analysis of the components
of fully tax-equivalent net interest income for the first quarter of 1998 and
1997.
Analysis of Net Interest Income (FTE = Fully Tax-Equivalent)
For the Three Months
Ended March 31,
(Dollars in thousands) -----------------------
1998 1997
---------- ----------
Interest income...................................$ 123,014 $ 122,930
Fully tax-equivalent adjustment................... 1,263 1,404
---------- ----------
Interest income - FTE............................. 124,277 124,334
Interest expense.................................. 52,617 54,158
---------- ----------
Net interest income - FTE $ 71,660 $ 70,176
========== ==========
Yield on earning assets - FTE..................... 8.10% 8.14%
Cost of interest bearing liabilities ............ 4.16% 4.35%
Net interest spread - FTE......................... 3.94% 3.79%
Net interest margin - FTE......................... 4.67% 4.60%
Management has and will continue to monitor the interest rate sensitivity
position of the Company, so as to balance assets and liabilities to minimize
the effects associated with changes in the interest rate environment on the
net interest margin and the net interest spread.
One process for achieving this balance is to manage the adjusted interest
rate sensitivity gap of the Company. Due to the large amount of loans subject
to Arkansas usury statutes and the effect those statutes have on loan terms
and structures, the Company has traditionally focused on its six month
adjusted gap ratio with the target range being .90 to 1.10. The Company may
move within this range to optimize the trade-off between the competitive
market level of loan rates and the statutory caps which would be applicable to
both fixed and variable rate loans.
The Company has traditionally used net interest revenue simulation
modeling with a variety of interest rate scenarios for the entire Company as
well as for certain large affiliate banks. The Company also monitors economic
valuation risk by measuring the sensitivity of the economic value of the
Company's equity.
<PAGE> 13
Current financial reporting standards require that the interest rate
sensitivity analysis be based on contractual maturities rather than repricing
terms. Certain non-interest bearing accounts such as checking accounts are
included while others are not. The Company has chosen to spread non-maturity
deposits over the same maturity spectrum as it uses in its economic value of
equity modeling. The average rates are as of December 31, 1997. Based on
these reporting criteria, the table indicates the Company is asset sensitive
on a cumulative basis at both the six month and one year time periods.
However, changes in net interest income are determined by the volumes of
assets being repriced as well as the rates at which the assets and liabilities
are repriced. For example, the rates paid on savings, NOW, and money market
accounts tend to have a relatively low sensitivity to market interest rates.
Adjusting these and all other balance sheet categories for their repricing
terms and estimated sensitivity results in the Company having a ratio of
cumulative assets to cumulative liabilities of .96 at the six month time
period and 1.00 at the one year time period. The Company also reviews the gap
position for periods in excess of one year, comparing certain longer term
fixed rate assets to certain liabilities and equity.
<PAGE> 14
<TABLE>
<CAPTION>
Interest Rate Sensitivity Principal Amount Maturing in:
March 31, 1998 -------------------------------------------------------------------------------------
(Dollars in thousands) 0 - 6 7 - 12 1- 2 2 - 3 3 - 4 4 - 5 There-
Months Months Years Years Years Years after Total
---------- --------- --------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans.... $1,064,256 $ 647,341 $ 615,513 $ 409,060 $ 223,739 $ 262,524 $ 419,556 $3,641,989
Average interest rate....... 8.75% 9.02% 9.17% 9.15% 9.03% 8.82% 8.19% 8.87%
Variable interest rate loans. 354,671 237,040 133,227 75,348 45,126 46,308 81,255 972,975
Average interest rate....... 8.41% 8.47% 9.12% 9.21% 8.70% 8.29% 8.94% 8.63%
Fixed interest rate securities 518,980 168,605 258,966 180,629 83,196 86,654 343,064 1,640,094
Average interest rate....... 5.55% 5.86% 6.06% 6.00% 5.97% 5.88% 6.06% 5.86%
Variable interest rate
securities.................. 2,775 29,218 18,680 5,939 9,491 8,746 37,105 111,954
Average interest rate....... 5.31% 4.87% 5.51% 7.40% 6.05% 6.64% 6.18% 5.98%
Other interest-bearing assets 237,736 - - - - - - 237,736
Average interest rate....... 4.91% - - - - - - 4.91%
---------- --------- --------- --------- -------- -------- --------- ---------
Total rate sensitive assets.. 2,178,418 1,082,204 1,026,386 670,976 361,552 404,232 880,980 6,604,748
Rate sensitive liabilities:
Non interest-bearing checking $ 341,186 $ - $ 196,710 $ 264,948 $ 111,062 $ 111,062 $ 85,648 $1,110,616
Average interest rate....... - - - - - - - -
Savings & interest-bearing
deposits.................... - 96,641 709,079 644,652 322,272 161,195 322,389 2,256,228
Average interest rate....... - 2.47% 2.47% 2.47% 2.47% 2.47% 2.47% 2.47%
Time deposits................ 1,601,500 783,078 413,018 94,053 27,480 34,070 9,528 2,962,727
Average interest rate....... 5.19% 5.58% 5.79% 5.94% 5.64% 5.84% 5.48% 5.41%
Fixed interest rate borrowings 268,154 18 18,429 36 36 36 349 287,058
Average interest rate....... 4.87% 6.30% 7.34% 6.30% 6.30% 6.30% 6.30% 5.03%
Variable interest rate
borrowings.................. 45,665 - 5,000 - - - - 50,665
Average interest rate....... 5.74% - 5.82% - - - - 5.75%
---------- --------- --------- --------- -------- -------- --------- ---------
Total rate sensitive
liabilities................. 2,256,505 879,737 1,342,236 1,003,689 460,850 306,363 417,914 6,667,294
Rate sensitive assets minus
liabilities................. (78,087) 202,467 (315,850) (332,713) (99,298) 97,869 463,066 (62,546)
Cumulative interest rate
sensitivity gap............. (78,087) 124,380 (191,470) (524,183) (623,481) (525,612) (62,546)
Cumulative rate sensitive assets
to rate sensitive liabilities 96.5% 104.0% 95.7% 90.4% 89.5% 91.6% 99.1%
Cumulative gap as a % of earning
assets...................... (1.2%) 1.9% (2.9%) (7.9%) (9.4%) (8.0%) (0.9%)
</TABLE>
<PAGE> 15
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 quarter of 1998, non-interest income increased to $29.6 million, a
5.83% increase from the same period in 1997. The primary contributors to this
increase were trust income, bank dealer operations income and other fee
income. The following table summarizes non-interest income for the first
quarter of 1998 and 1997.
For the Three Months
Ended March 31,
(Dollars in thousands) -----------------------------------
1998 1997 % Change
---------- ---------- ----------
Trust department income.......... $ 4,161 $ 3,238 28.51%
Mortgage servicing fee income.... 8,849 9,774 (9.46)
Broker-dealer operations income.. 1,696 1,243 36.44
Service charges on deposits...... 8,003 8,112 (1.34)
Other service charges and fees... 4,078 3,932 3.71
Investment securities gains
(losses), net.................. 154 10 1,440.00
Other real estate gains
(losses), net.................. (76) (354) (78.53)
Other income..................... 2,687 1,970 36.40
---------- ----------
Total non-interest income........ $ 29,552 $ 27,925 5.83%
========== ==========
Non-Interest Expense
Non-interest expenses consist of salaries and benefits, occupancy,
equipment and other expenses 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.
Non-interest expenses were $56.9 million for the first quarter of 1998
compared to $59.1 million for the same period in 1997. The primary
contributor to this decrease was lower amortization expense due to a change in
the estimated life of mortgage servicing rights in the second quarter of 1997.
The following table summarizes non-interest expenses for the first quarter
of 1997 and 1996.
<PAGE> 16
For the Three Months
Ended March 31,
(Dollars in thousands) -----------------------------------
1998 1997 % Change
---------- ---------- ----------
Salaries, wages and
employee benefits.............. $ 28,922 $ 28,880 0.15%
Net occupancy.................... 3,735 3,931 (4.99)
Equipment........................ 3,907 3,925 (0.46)
FDIC Insurance................... 267 (48) 656.25
Amortization of mortgage servicing
rights......................... 2,193 4,243 (48.31)
Other expenses................... 17,910 18,215 (1.67)
---------- ----------
Total non-interest expenses...... $ 56,934 $ 59,146 (3.74%)
========== ==========
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 income on a tax-equivalent
basis and non-interest income, excluding securities gains and losses. The
Company's ratio decreased from 53.83% in the first quarter of 1997 to 53.18%
in the first quarter of 1998. The Company, in calculating its efficiency
ratio has excluded the effect of non-recurring expenses, 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.
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 33.3% for the first quarter of 1998 and 35.0% for the
same period of 1997.
Loan and Lease Portfolio
At March 31, 1998, the Company's loan and lease portfolio, net of
unearned income, increased to $4.6 billion, as compared to $4.3 billion at
December 31, 1997. The growth was primarily due to the acquisition of Federal
Savings Bank.
The Company has continued its policy of conservative lending thereby
avoiding significant risk areas, such as out-of-territory lending and highly
leveraged transactions. 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
<PAGE> 17
for possible loan and lease losses, increased by loan recoveries and decreased
by loan losses.
As of March 31, 1998, the allowance for possible loan and lease losses
equaled $86.9 million or 1.87% of total loans and leases. Comparatively, the
allowance for possible loan and lease losses amounted to $80.0 million or
1.85% of total loans and leases at December 31, 1997. The provision for
possible loan and lease losses amounted to $2.1 million in the first quarter
of 1998 as compared to $2.8 million in the same period of 1997.
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 eight years. At March
31, 1998, the Company's ratio was 186%. 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), $1.86 has been set aside in the
Company's reserves to cover possible losses. The ratio at December 31, 1997,
was 185%. 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 191% at
March 31, 1998, compared to 197% at December 31, 1997.
Annualized
Three Months
Ended March 31, For the Years Ended December 31,
-------------- ---------------------------------
1998 1997 1996 1995 1994 1993
-------------- ------ ------ ------ ------ -----
Net loan and lease losses
to average loans and leases 0.23% 0.33% 0.18% 0.07% 0.04% 0.14%
Allowance for possible loan
and lease losses to
total loans and leases 1.87% 1.85% 1.55% 1.46% 1.62% 2.01%
Non-performing loans to
total loans and leases 1.01% 1.00% 0.68% 0.47% 0.47% 0.63%
The principal areas of risk for the Company are in the commercial and
industrial, and commercial real estate loan portions of the portfolio.
Accordingly, these areas have been allocated the largest portion of the
reserve. Management attempts to control the loan loss risks by maintaining a
diverse portfolio with no significant concentrations and through an aggressive
real estate write down policy. The Company has only 58 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.
<PAGE> 18
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 in the accompanying table, liquidity ratios have generally increased,
indicating lower liquidity. The Company's liquidity has decreased because the
funding of loans has outpaced the growth in the Company's deposits. The
Company's relatively sound deposit base, along with its low debt level and
common and preferred stock availability, provide the company with several
alternatives for future financing and long-term liquidity needs.
Three Months
Ended March 31, For the Years Ended December 31,
------------------ --------------------------------
1998 1997 1996 1995
------------------ ---------- ---------- --------
Average loans and leases
to average deposits 73.52% 72.98% 71.95% 70.38%
Average loans and leases
to average core deposits 82.29% 83.90% 83.20% 75.43%
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 $14.5 million in the first quarter of 1998.
Average short-term investments exceeded average borrowings by $21.2 million in
the fourth quarter of 1997. During the first quarter of 1998, the Company
used $74.3 million of liquidity to repurchase its own common shares, which
were used to acquire Kemmons Wilson, Inc.
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
in pursuit of above average return opportunities. A position of strength is
important to the Company's customers, investors and regulators.
At March 31, 1998, the Company's equity to asset ratio was 8.61% compared
to 9.45% at December 31, 1997. The decrease was caused by the repurchase of
Company's common shares, which were used to acquire Kemmons Wilson, Inc. At
March 31, 1998, 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> 19
<TABLE>
<CAPTION>
Regulatory March 31, Dec. 31, Sep. 30, June 30, March 31,
Minimum 1998 1997 1997 1997 1997
----------- ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio................... 3.00% 8.13% 9.01% 8.90% 8.39% 8.13%
Tier 1 risk-based capital ratio.. 4.00% 11.58% 12.74% 12.97% 12.17% 11.91%
Total risk-based capital ratio... 8.00% 12.58% 13.60% 13.83% 13.04% 12.79%
</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. The dividend payout ratios for the past three
years were 37.20% in 1997, 33.59% in 1996, and 34.29% in 1995. In October
1997, the Company increased its dividend rate for the eleventh consecutive
year, bringing the annual dividend rate to $1.12 per share.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 ("PSLRA")
Certain forward-looking information contained in this report is being
provided in reliance upon the "safe harbor" provisions of the PSLRA as set
forth in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such information
includes, without limitation, discussions as to estimates, expectations,
beliefs, plans, strategies and objectives concerning the Company's future
financial and operating performance. Such forward-looking information is
subject to assumptions and beliefs based on current information known to the
Company and factors that could yield actual results differing materially from
those anticipated. Such factors include, without limitation, changes in
general economic conditions, capital deployment opportunities, ability to
control non-interest expense, and availability of liquidity sources to support
asset growth.
<PAGE> 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The information required by this Item is contained in this Form 10-Q in
the "Interest Rate Sensitivity" table, and is incorporated herein by
reference.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
Discussions of legal proceedings is included in this Form 10-Q in Note 4
to unaudited consolidated financial statements, and is incorporated herein by
reference.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
On February 13, 1998, the Company filed a report on Form 8-K relating
to the proposed merger of Regions Financial Corporation and the
Company.
<PAGE> 21
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: May 14, 1998
<PAGE> 22
Index to Exhibits
Exhibit Number Exhibit
---------------- --------------------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9 EXHIBIT 27
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FIRST QUARTER CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 447,245
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 237,220
<TRADING-ASSETS> 516
<INVESTMENTS-HELD-FOR-SALE> 1,413,171
<INVESTMENTS-CARRYING> 338,877
<INVESTMENTS-MARKET> 341,105
<LOANS> 4,643,100
<ALLOWANCE> 86,879
<TOTAL-ASSETS> 7,382,089
<DEPOSITS> 6,329,571
<SHORT-TERM> 314,329
<LIABILITIES-OTHER> 78,866
<LONG-TERM> 23,394
0
0
<COMMON> 112,839
<OTHER-SE> 523,090
<TOTAL-LIABILITIES-AND-EQUITY> 7,382,089
<INTEREST-LOAN> 95,962
<INTEREST-INVEST> 27,053
<INTEREST-OTHER> (1)
<INTEREST-TOTAL> 123,014
<INTEREST-DEPOSIT> 49,777
<INTEREST-EXPENSE> 52,617
<INTEREST-INCOME-NET> 70,397
<LOAN-LOSSES> 2,051
<SECURITIES-GAINS> 154
<EXPENSE-OTHER> 56,934
<INCOME-PRETAX> 40,964
<INCOME-PRE-EXTRAORDINARY> 27,308
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,308
<EPS-PRIMARY> .73
<EPS-DILUTED> .72
<YIELD-ACTUAL> 4.67
<LOANS-NON> 36,182
<LOANS-PAST> 9,650
<LOANS-TROUBLED> 835
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 79,970
<CHARGE-OFFS> 4,178
<RECOVERIES> 1,726
<ALLOWANCE-CLOSE> 86,879
<ALLOWANCE-DOMESTIC> 66,996
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 19,883
</TABLE>
