<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 31, 1998
REGIONS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-6159 63-0589368
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
417 North 20th Street, Birmingham, Alabama 35203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (205) 326-7100
1
<PAGE> 2
Item 2. Acquisition or Disposition of Assets
On July 31, 1998, (the "Effective Date"), Regions Financial Corporation
("Regions") completed the combination with First Commercial Corporation ("FCC").
The combination was accomplished by means of the merger ("the Merger") of FCC
with and into Regions, pursuant to the Agreement and Plan of Merger between
Regions and FCC dated as of February 8, 1998 (the "Agreement"). In conjunction
with and as a part of the Merger, each of the 37,717,665 shares of FCC common
stock was converted into 1.7 shares of Regions common stock. Immediately prior
to the Effective Date, Regions had 149,980,900 shares of common stock issued,
none of which were held as treasury shares; 64,120,031 shares of Regions common
stock resulted from the conversion of FCC common stock; and 214,100,931 shares
of Regions common stock were issued and outstanding immediately following the
Merger.
The consideration given by Regions to FCC stockholders in the Merger was
determined in arms-length negotiations between Regions and FCC. There were no
material relationships between Regions and FCC, or between the affiliates,
directors and officers of Regions and their associates, on the one side, and the
affiliates, directors and officers of FCC and their associates, on the other
side. Regions attempted to agree upon an exchange ratio that would be
sufficiently attractive to FCC to induce FCC's agreement, and not be detrimental
to Regions' existing stockholders. Regions also took into account the trading
price of its common stock at the time it entered into the Agreement, and other
factors.
FCC was a bank holding company based in Little Rock, Arkansas with assets
of approximately $7.4 billion as of March 31, 1998, with 165 banking offices in
Arkansas, Texas, Tennessee, Louisiana, and Oklahoma.
The plant, equipment, and other physical property acquired by Regions in
the Merger is not material to Regions consolidated financial position.
2
<PAGE> 3
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of businesses acquired. Historical financial
statements of First Commercial Corporation are included as Exhibit 99.2.
(b) Pro forma financial information. Unaudited pro forma financial
information of Regions Financial Corporation is included as Exhibit 99.3
(c) Exhibits. The exhibits listed in the exhibit index are filed as a part of
or incorporated by reference in this current report on Form 8-K.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Regions Financial Corporation (Registrant)
By: /s/ Robert P. Houston
Executive Vice President and Comptroller
Date: August 12, 1998
4
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Page No.
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of February 8, 1998
by and between Regions Financial Corporation and First
Commercial Corporation incorporated by reference from
Regions's Registration Statement on Form S-4,
No. 333-57499, filed under the Securities Act of 1933.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Kemp & Company
99.1 Press Release dated July 31, 1998.
99.2 Historical Financial Statements of First Commercial
Corporation.
99.3 Pro forma financial information of Regions Financial
Corporation.
</TABLE>
5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference of our report dated January 20,
1998, except for Note 18 as to which the date is February 8, 1998, with respect
to the consolidated financial statements of First Commercial Corporation as of
December 31, 1997 and 1996 and for the three years in the period ended December
31, 1997 in the Current Report (Form 8-K) filed by Regions Financial
Corporation related to their acquisition of First Commercial Corporation in the
following Registration Statements and in the related Prospectuses:
Form S-8 No. 2-95291 pertaining to the 1983 Stock Option Plan;
Form S-8 No. 33-24370 pertaining to the 1988 Stock Option Plan;
Form S-8 No. 33-40728 pertaining to the 1991 Long-Term Incentive Plan;
Form S-8 No. 33-58469 pertaining to the Stock Options Assumed in the
acquisition of First Community Bancshares, Inc. and the Stock Options
Assumed in the acquisition of Union Bank and Trust Company;
Form S-8 No. 33-58979 pertaining to the 1991 Long-Term Incentive Plan;
Form S-3 No. 33-59735 pertaining to the registration of $200,000,000
Subordinated Debt Securities;
Form S-8 No. 333-05281 pertaining to the Stock Options Assumed in Acquisition
of Metro Financial Corporation;
Form S-8 No. 333-05335 pertaining to the Stock Options Assumed in Combination
with First National Bancorp;
Form S-8 No. 333-10701 pertaining to the Stock Options Assumed in Acquisition
of First Gwinnett Bancshares, Inc.;
Form S-8 No. 333-10683 pertaining to the Stock Options Assumed in Acquisition
of Rockdale Community Bank;
Form S-8 No. 333-21651 pertaining to the Stock Options Assumed in Acquisition
of Florida First Bancorp, Inc.;
Form S-8 No. 333-24265 pertaining to the Regions Financial Corporation Profit
Sharing Plan;
Form S-8 No. 333-28091 pertaining to the Stock Options Assumed in Acquisition
of First Mercantile National Bank;
Form S-8 No. 333-28089 pertaining to the Stock Options Assumed in Acquisition
of West Carroll Bancshares, Inc.;
Form S-8 No. 333-29685 pertaining to the Stock Options Assumed in Acquisition
of First Bankshares, Inc.;
Form S-8 No. 333-30643 pertaining to the Stock Options Assumed in Acquisition
of The New Iberia Bancorp, Inc.;
Form S-8 No. 333-43675 pertaining to the Regions Financial Corporation
Directors' Stock Investment Plan;
Form S-8 No. 333-43677 pertaining to the Regions Financial Corporation
Employee Stock Purchase Plan;
Form S-8 No. 333-43943 pertaining to the Stock Options Assumed in the
Acquisition of GF Bancshares, Inc.;
Form S-8 No. 333-49909 pertaining to the Stock Options Assumed in the
Combination with Greenville Financial Corporation;
Form S-8 No. 333-50665 pertaining to the Stock Options Assumed in the
Combination with PALFED, Inc.;
Form S-8 No. 333-53019 pertaining to the Stock Options Assumed in the
Combination with First State Corporation;
Form S-8 333-53021 pertaining to the Stock Options Assumed in the Combination
with First United Bancorporation;
Form S-4 No. 333-58429 pertaining to the pending business combination with
First Community Banking Services, Inc.;
Form S-4 No. 333-58787 pertaining to the pending business combination with
Village Bankshares, Inc.;
Form S-4 No. 333-58815 pertaining to the pending business combination with
Etowah Bank;
Form S-4 No. 333-58877 pertaining to the pending business combination with
Jacobs Bank; and
Form S-8 No. 333-60497 pertaining to the Stock Options Assumed in the
Combination with First Commercial Corporation.
/s/ ERNST & YOUNG LLP
Little Rock, AR
August 11, 1998
6
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-59735, Form S-4 Nos. 333-58429, 333-58787, 333-58815 and
333-58877 and Form S-8 Nos. 2-95291, 33-24370, 33-40728, 33-58469, 33-58979,
333-05281, 333-05335, 333-10701, 333-10683, 333-21651, 333-24265, 333-28091,
333-28089, 333-29685, 333-30643, 333-43675, 333-43677, 333-43943, 333-49909,
333-50665, 333-53019, 333-53021 and 333-60497) of Regions Financial Corporation
of our report dated January 31, 1997, with respect to the consolidated balance
sheet of Southwest Bancshares, Inc. and subsidiaries as of December 31, 1996,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1996, which
report is included in the Current Report on Form 8-K filed by Regions Financial
Corporation related to their acquisition of First Commercial Corporation.
/s/ Kemp & Company
Little Rock, Arkansas
August 11, 1998
7
<PAGE> 1
EXHIBIT 99.1
July 31, 1998
BIRMINGHAM, Ala.--Regions Financial Corporation (NASDAQ/NMS:RGBK) announced
today that the previously announced acquisition of First Commercial Corporation
of Little Rock, Ark. has been completed.
Under the terms of the transaction, Regions will issue approximately 64.1
million shares of its common stock in exchange for all of First Commercial's
outstanding common stock. The exchange ratio will be 1.7 shares of Regions
common stock for each share of First Commercial common stock. First Commercial
stockholders will receive a letter of instruction in the near future describing
the procedures for exchanging their certificates. First Commercial stockholders
should not send in their stock certificates until they receive the letter of
instruction.
Carl E. Jones, Jr., president and chief executive officer of Regions,
stated: "We are extremely pleased to welcome the First Commercial shareholders
into the Regions' family. The combination of Regions and First Commercial will
create a powerful southern banking franchise, placing Regions among the top 25
largest banks in the country with assets of $35 billion and a market
capitalization of almost $10 billion. The addition of First Commercial gives
Regions the number one market share in Arkansas and expands our franchise into
east Texas and Memphis, Tennessee. We are looking forward to serving our new
customers in these new markets."
Barnett Grace, chairman, president and chief executive officer of First
Commercial stated: "We are pleased to now be a part of the Regions' family and
enthusiastically look forward to becoming a major contributor to the company's
success. Regions' philosophy that local banking decisions need to be made at the
local community level provides the environment whereby our existing line
management and staff can continue to deliver competitive financial products and
services at a level that exceeds our customers' expectations."
Regions Financial Corporation is a bank holding company providing banking
services from 700 offices in Alabama, Arkansas, Florida, Georgia, Louisiana,
South Carolina, Tennessee and Texas. Regions also provides banking-related
services in the fields of mortgage banking, insurance, securities brokerage and
mutual funds. Regions' common stock is traded in the Nasdaq National Market
System under the symbol RGBK.
CONTACT: Regions Financial Corp
Ronald C. Jackson, 205/326-7374
8
<PAGE> 1
EXHIBIT 99.2
Historical Financial Statements of First Commercial Corporation
INDEX TO FINANCIAL STATEMENTS
First Commercial Corporation and Subsidiaries
Reports of Independent Auditors ........................................ 10
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996, and 1995 ................................ 12
Consolidated Balance Sheets as of December 31, 1997 and 1996 .............. 13
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995 ...................................... 14
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996, and 1995 ................................ 16
Notes to Consolidated Financial Statements ................................ 18
Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997 .................................................. 47
Consolidated Statements of Income for the
the Three Months Ended March 31, 1998 and 1997 (Unaudited) ............. 48
Consolidated Statements of Stockholders Equity for the Three Months
Ended March 31, 1998 and 1997 (Unaudited) .............................. 50
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (Unaudited) ................. 51
Notes to Unaudited Consolidated Interim Financial Statements .............. 53
9
<PAGE> 2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- ---------------------------------------------------
The Board of Directors and Stockholders
First Commercial Corporation
We have audited the accompanying consolidated balance sheets of First
Commercial Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit 1996 and 1995 financial statements of Southwest
Bancshares, Inc., a wholly-owned subsidiary, which statements reflect total
assets constituting 12.4% in 1996 and total revenues constituting 11.8% in 1996
and 11.0% in 1995 of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Southwest Bancshares, Inc.,
is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1996 and 1995 the report of
other auditors, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Commercial
Corporation at December 31, 1997, and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Little Rock, Arkansas
January 20, 1998, except for Note 18
as to which the date is February 8, 1998
10
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Southwest Bancshares, Inc.
We have audited the consolidated balance sheets of Southwest Bancshares,
Inc. and subsidiaries as of December 31, 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1996 (not presented separately herein).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Southwest Bancshares, Inc. and subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Kemp & Company
Little Rock, Arkansas
January 31, 1997
11
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars In Thousands Except for Share Data)
<S> <C> <C> <C>
Interest income
Loans and leases, including fees................................ $ 387,744 $ 355,784 $ 298,166
Short-term investments.......................................... 9,073 7,701 5,341
Investment securities - taxable................................. 88,634 81,933 73,043
- non-taxable............................. 11,693 10,549 9,711
Trading account securities...................................... 26 35 4
------------ ------------ ------------
Total interest income......................................... 497,170 456,002 386,265
Interest expense ------------ ------------ ------------
Interest on deposits............................................ 203,144 192,512 162,549
Short-term borrowings........................................... 10,124 9,962 11,204
Long-term debt.................................................. 934 1,622 2,238
------------ ------------ ------------
Total interest expense........................................ 214,202 204,096 175,991
------------ ------------ ------------
Net interest income................................................ 282,968 251,906 210,274
Provision for possible loan and lease losses (Note 7)............. 28,332 13,269 4,368
------------ ------------ ------------
Net interest income after provision for
possible loan and lease losses................................ 254,636 238,637 205,906
Other income
Trust department income......................................... 13,779 12,738 11,461
Mortgage servicing fee income................................... 37,905 42,140 22,312
Broker-dealer operations income................................. 5,288 4,162 2,982
Service charges on deposits..................................... 32,985 29,797 25,413
Other service charges and fees.................................. 15,831 13,935 9,308
Investment securities losses, net............................... (87) (43) (418)
Other income.................................................... 9,101 7,821 8,180
------------ ------------ ------------
Total other income............................................ 114,802 110,550 79,238
Other expenses
Salaries, wages and employee benefits (Note 14)................. 112,517 106,131 88,753
Net occupancy................................................... 15,598 14,344 13,274
Equipment....................................................... 15,831 14,596 10,829
FDIC insurance.................................................. 524 1,630 8,077
Amortization of mortgage servicing rights....................... 13,939 19,515 7,634
Other real estate expense, net.................................. 2,412 318 330
Other expenses.................................................. 80,481 72,619 59,121
------------ ------------ ------------
Total other expenses.......................................... 241,302 229,153 188,018
------------ ------------ ------------
Income before income taxes........................................ 128,136 120,034 97,126
Income tax provision (Note 11).................................... 43,502 41,480 31,892
------------ ------------ ------------
Net income before extraordinary items............................. 84,634 78,554 65,234
Extraordinary item, net of income taxes of $9,659 (Note 2)........ 15,425 - -
------------ ------------ ------------
Net income (Note 2)............................................... $ 100,059 $ 78,554 $ 65,234
============ ============ ============
Weighted average number of common shares
outstanding during the period - basic........................... 37,486,476 35,648,472 34,221,166
Dilutive potential common shares.................................. 435,476 384,813 317,939
------------ ------------ -----------
Weighted average number of shares - assuming dilution............. 37,921,952 36,033,285 34,539,105
============ ============ ===========
Basic earnings per common share (Note 12)
Net income before extraordinary items........................... $ 2.26 $ 2.20 $ 1.91
Extraordinary item.............................................. 0.41 - -
------------ ------------ ------------
Net income per common share..................................... $ 2.67 $ 2.20 $ 1.91
============ ============ ============
Diluted earnings per common share (Note 12)
Net income before extraordinary items........................... $ 2.23 $ 2.18 $ 1.89
Extraordinary item.............................................. 0.41 - -
------------ ------------ ------------
Net income per common share..................................... $ 2.64 $ 2.18 $ 1.89
============ ============ ============
</TABLE>
See accompanying notes.
12
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
Assets
Cash and due from banks (Note 4)................................................ $ 397,361 $ 368,249
Federal funds sold.............................................................. 173,794 286,581
------------ ------------
Total cash and cash equivalents................................................ 571,155 654,830
Investment securities held-to-maturity, estimated market value
$410,620 ($511,302 in 1996) (Notes 4 & 5)...................................... 408,683 512,495
Investment securities available-for-sale (Notes 4 & 5).......................... 1,309,955 1,109,708
Trading account securities...................................................... 149 196
Loans and leases, net of unearned income (Note 6)............................... 4,317,631 4,024,635
Allowance for possible loan and lease losses (Note 7)........................... (79,970) (62,495)
------------ ------------
Net loans and leases........................................................... 4,237,661 3,962,140
Bank premises and equipment, net (Note 8)....................................... 124,872 126,647
Other real estate owned, net of allow. for poss. losses of $2 ($87 in 1996)..... 5,658 2,398
Other assets (Notes 3, 11 & 14)................................................. 229,119 242,804
------------ ------------
Total assets..................................................................... $ 6,887,252 $ 6,611,218
============ ============
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing transaction accounts...................................... $ 1,222,660 $ 1,090,401
Interest bearing transaction and savings accounts.............................. 1,983,803 1,933,713
Certificates of deposit $100,000 and over (Note 9)............................. 727,000 776,935
Other time deposits.(Note 9).................................................. 2,014,227 1,959,229
------------ ------------
Total deposits................................................................ 5,947,690 5,760,278
Short-term borrowings (Note 9).................................................. 203,185 195,941
Other liabilities............................................................... 80,161 68,648
Long-term debt (Note 10)........................................................ 5,103 28,751
------------ ------------
Total liabilities............................................................. 6,236,139 6,053,618
Commitments and Contingencies (Note 14 & 16)
Stockholders' equity (Notes 4, 10, & 13)
Preferred stock, 400,000 shares
authorized Series 1991 Permanent, $1 par value, none issued.................... - -
Common stockholders' equity, 50,000,000 shares authorized
Common stock, $3 par value, 37,578,681 shares issued
and outstanding (35,564,721 in 1996).......................................... 112,736 101,618
Capital surplus................................................................ 359,629 263,090
Retained earnings.............................................................. 174,423 191,813
Net unrealized gains on available-for-sale securities, net of income tax....... 4,325 1,079
------------ ------------
Total common stockholders' equity............................................. 651,113 557,600
------------ ------------
Total liabilities and stockholders' equity....................................... $ 6,887,252 $ 6,611,218
============ ============
</TABLE>
See accompanying notes.
13
<PAGE> 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Common Retained Gains and Treasury
Stock Surplus Earnings (Losses) Stock Total
--------- --------- --------- --------- --------- ---------
(In Thousands Except for Share Data)
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1995, as previously
reported...................................... $ 71,325 $ 109,167 $ 170,132 $ (7,433)$ - $ 343,191
Adjustment for pooling-of-interests
business combinations......................... 13,638 23,186 24,066 (1,347) - 59,543
--------- --------- --------- --------- --------- ---------
Balance - January 1, 1995, as restated......... 84,963 132,353 194,198 (8,780) - 402,734
Change in unrealized gains (losses),
net of income taxes of $5,409................. 10,045 10,045
Net income..................................... 65,234 65,234
Cash dividends - $.70 per common share......... (22,370) (22,370)
Stock dividend, 7%............................. 5,362 52,345 (57,751) (44)
Stock options exercised, including tax
benefits (Note 13)............................ 177 958 1,135
Issuance of stock by Southwest Bancshares, Inc. 1,549 5,947 7,496
Purchase of treasury stock, 219,009 shares..... (5,245) (5,245)
Common stock issued, 3,012 shares.............. 8 53 61
Acquisition of FDH Bancshares, Inc.,
1,487,510 shares.............................. 3,226 32,116 5,245 40,587
Acquisition of West-Ark Bancshares, Inc.,
759,739 shares................................ 1,932 380 5,421 (260) - 7,473
--------- --------- --------- --------- --------- ---------
Balance - December 31, 1995.................... 97,217 224,152 184,732 1,005 - 507,106
Change in unrealized gains (losses),
net of income taxes of $46..................... 86 86
Net income..................................... 78,554 78,554
Cash dividends - $.80 per common share......... (26,386) (26,386)
Purchase of treasury stock, 230,487 shares..... ( 6,368) (6,368)
Stock dividend, 5%............................. 3,476 36,735 (46,354) 6,099 (44)
Stock options exercised, including tax
benefits (Note 13)............................ 158 548 6 712
Sale of treasury stock, 7,718 shares........... 223 223
Common stock issued, 3,022 shares.............. 8 99 107
Purchase of minority shares, Springhill
Bank & Trust, 1,883 shares.................... 15 40 55
Acquisition of Security National Bank,
265,812 shares................................ 759 1,541 1,267 (12) - 3,555
--------- --------- --------- --------- --------- ---------
Balance - December 31, 1996 ................... 101,618 263,090 191,813 1,079 - 557,600
</TABLE>
14
<PAGE> 7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Unrealized
Common Retained Gains and Treasury
Stock Surplus Earnings (Losses) Stock Total
--------- --------- --------- --------- --------- ---------
(In Thousands Except for Share Data)
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 .................... 101,618 263,090 191,813 1,079 - 557,600
Change in unrealized gains (losses),
net of income taxes of $1,632................. 3,032 3,032
Net income..................................... 100,059 100,059
Cash dividends - $.97 per common share......... (37,224) (37,224)
Stock dividend, 5%............................. 5,361 94,529 (99,976) (86)
Stock options exercised, including tax
benefits (Note 13)............................. 440 1,170 1,610
Purchase of treasury stock, 184 shares......... (3) (3)
Common stock issued, 1,470 shares.............. 2 28 1 31
Purchase of minority shares of
Springhill Bank & Trust, 253 shares........... 1 10 2 13
Acquisition of W.B.T. Holding Company, Inc.
1,430,050 shares.............................. 4,086 14,628 214 18,928
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 - December 31, 1997.................... $ 112,736 $ 359,629 $ 174,423 $ 4,325 $ - $ 651,113
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
15
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Net income....................................................... $ 100,059 $ 78,554 $ 65,234
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary gain on sale of institutions (Note 2) (25,084) - -
Depreciation.................................................... 13,212 12,570 10,451
Amortization.................................................... 17,629 23,180 10,100
Provision for possible loan and lease losses.................... 28,332 13,269 4,368
Deferred income taxes........................................... (9,738) (6,438) (1,406)
Loss on sale of investment securities available-for-sale........ 87 43 418
Gain on sale of equipment....................................... (227) (9) (146)
Loss (gain) on sale of other real estate........................ 121 (940) (950)
Writedowns of other real estate................................. 626 106 75
Equity in undistributed earnings of unconsolidated subsidiary... (1,669) (1,440) (1,777)
Decrease (increase) in trading securities....................... 192 255 (435)
Net unrealized gain on trading securities....................... (4) (2) (1)
Decrease (increase) in mortgage loans held for resale........... (2,194) 104,891 (105,385)
Increase (decrease) in income taxes payable..................... 4,428 23 7,204
Decrease (increase) in interest and other receivables........... 236 (317) (8,104)
Increase (decrease) in interest payable......................... (1,361) 1,581 6,632
Increase in accrued expenses.................................... 15,395 1,994 9,447
Increase in prepaid expenses.................................... (646) (2,317) (2,484)
------------ ------------ ------------
Net cash provided by (used in) operating activities.............. 139,394 225,003 (6,759)
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale. 46,270 118,454 128,576
Proceeds from maturing investment securities available-for-sale. 857,071 908,377 321,591
Proceeds from maturing investment securities held-to-maturity... 817,695 452,783 554,308
Purchases of investment securities available-for-sale........... (1,047,478) (1,064,584) (603,529)
Purchases of investment securities held-to-maturity............. (739,121) (486,471) (244,431)
Proceeds from sale of institutions, net of funds sold (Note 2) 23,698 - -
Purchases of institutions, net of funds acquired (Note 2) 32,471 7,259 38,380
Net increase in loans and leases................................ (256,312) (266,728) (437,717)
Capital expenditures............................................ (16,351) (12,822) (18,013)
Proceeds from sale of bank premises and equipment............... 3,878 3,040 2,731
Purchased mortgage servicing rights and
changes in other assets, net.................................. 1,081 (18,842) (71,705)
Proceeds from sales of other real estate........................ 3,765 3,241 4,277
------------ ------------ ------------
Net cash used in investing activities............................ (273,333) (356,293) (325,532)
</TABLE>
16
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
and savings accounts........................................... 45,899 231,321 275,504
Net increase in time deposits................................... 45,775 50,030 223,662
Net increase (decrease) in short-term borrowings................ 5,089 (53,828) 49,171
Repayment of long-term debt..................................... (11,827) (2,337) (7,325)
Proceeds from long-term debt.................................... 1,000 6,340 10,550
Proceeds from issuance of common stock.......................... 31 107 7,557
Purchases of treasury stock..................................... (3) (6,368) (5,245)
Sales of treasury stock......................................... - 223 -
Purchase of partial shares resulting from stock splits/
stock dividends............................................... (86) (44) (44)
Stock options exercised......................................... 1,610 712 1,135
Cash dividends paid on common stock............................. (37,224) (26,386) (22,370)
------------ ------------ ------------
Net cash provided by financing activities........................ 50,264 199,770 532,595
Net increase (decrease) in cash and cash equivalents............. (83,675) 68,480 200,304
Cash and cash equivalents at beginning of year................... 654,830 586,350 386,046
------------ ------------ ------------
Cash and cash equivalents at end of year......................... $ 571,155 $ 654,830 $ 586,350
============ ============ ============
</TABLE>
See accompanying notes.
17
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- --------------
First Commercial Corporation ("Company") is a multi-bank holding company
headquartered in Little Rock, Arkansas, which owns 100% of twenty-six affiliate
banks and 50% of two affiliate banks. The Company's affiliate banks provide
traditional commercial, retail and correspondent banking services and offer a
broad range of specialized services. The Company's principal markets include the
state of Arkansas, East Texas, Northwest Louisiana and Memphis, Tennessee. The
Company's non-bank subsidiaries include a mortgage company, trust company,
investment banking company, factoring company and leasing company that serve
principally the same markets as the banking affiliates.
Use of Estimates
- ------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Investment and Trading Account Securities
- -------------------------------------------
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" securities
that the Company has both the positive intent and ability to hold to maturity
are carried at amortized cost. Securities that the Company does not have the
positive intent and ability to hold to maturity and all marketable equity
securities are classified as available-for-sale or trading and carried at fair
value. Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of stockholders' equity.
Accordingly, stockholders' equity at December 31, 1997, has been increased by
$3.0 million (net of $1.6 million in deferred income taxes) to reflect the net
unrealized holding gain on securities classified as available-for-sale. Also,
stockholders' equity at December 31, 1996, has been increased by $86,000 (net of
$46,000 in deferred income taxes) to reflect the net unrealized holding gain on
securities classified as available-for-sale. Unrealized holding gains and losses
on securities classified as trading are reported in earnings.
Gains and losses on the sale of investment securities are computed using the
specific identification method. The income tax benefit related to such net
security losses was $30,450, $15,050 and $146,300 for the years ended December
31, 1997, 1996, and 1995, respectively.
18
<PAGE> 11
Broker-Dealer Company
- -----------------------
One of the Company's banking subsidiaries operates First Commercial
Investments, Inc. ("FCII"), a broker-dealer company which has a customer base
principally located within the states of Arkansas and Texas. FCII is a party to
financial instruments with off-balance-sheet risk in its normal course of
business. FCII is required, in the event of the non-delivery of customers'
securities owed FCII by other broker-dealers, or by its customers, to purchase
identical securities in the open market. Such purchases might result in losses
not reflected in the accompanying consolidated financial statements. The market
values of securities owed FCII approximate the amounts payable.
Receivables and payables to customers arise from cash transactions executed
by FCII on their behalf. Receivables are collateralized by securities with
market values in excess of the amounts due. The Company's policy is to monitor
the market value of collateral and request additional collateral when required.
Such collateral is not reflected in the accompanying consolidated financial
statements. At December 31, 1997, and 1996, receivables from and payables to
other brokers and dealers amounted to $841,355 and $649,068, respectively.
In accordance with industry practice, FCII records securities transactions
executed on behalf of its customers on the settlement date, which is generally
three business days or the next business day after the trade date. The risk of
loss on unsettled transactions is the same as settled transactions and relates
to the customer's or broker's inability to meet the terms of their contracts.
Loans
- -------
Loans generally are stated at their outstanding unpaid principal balances,
net of any deferred fees or costs on originated loans, or unamortized premiums
or discounts on purchased loans. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to income using the
interest method. Loan origination fees, net of certain direct origination costs,
are deferred and recognized as an adjustment of the yield (interest income) of
the related loans.
NONACCRUAL LOANS. Generally, a loan (including a loan impaired under
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan") is classified as nonaccrual and the accrual of
interest on such loan is discontinued when the contractual payment of principal
or interest has become 90 days past due or management has serious doubts about
further collectibility of principal or interest, even though the loan currently
is performing. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is placed on
nonaccrual status, unpaid interest credited to income in the current year is
reversed and unpaid interest accrued in prior years is charged against the
allowance for credit losses. Interest received on nonaccrual loans generally is
either applied against principal or reported as interest income, according to
management's judgment as to the collectibility of principal. Generally, loans
are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of
time and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
19
<PAGE> 12
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES. The allowance for possible
loan and lease losses is established through provisions for credit losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for possible loan and lease losses, and subsequent recoveries, if any,
are credited to the allowance.
Statement 114, as amended by Statement of Financial Accounting Standards No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure," prescribes how the allowance for possible loan and lease losses
related to impaired loans should be determined. A loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect principal or interest due according to the contractual
terms of the loan. Under the new Statements, the amount of the allowance for
possible loan and lease losses related to individual loans that are identified
for evaluation in accordance with Statement 114 is determined based on estimates
of expected cash flows on each such loan which are then discounted using that
loan's effective interest rate. Alternatively, the fair value of the collateral
is used to determine the allowance for credit losses related to identified
collateral dependent loans. The determination of the allowance for possible loan
and lease losses for the remainder of the loan portfolio takes into
consideration the risk classification of loans and application of loss estimates
to these classifications. Statement 114 specifically excludes from the
definition of impaired loans large groups of smaller balance homogenous loans.
In accordance with these Statements, the Company considers all non-accrual loans
excluding credit card loans, residential mortgage loans, consumer installment
loans and loans held for resale by the Company's mortgage banking subsidiary, as
impaired loans.
The allowance for possible loan and lease losses is maintained at a level
believed adequate by management to absorb estimated probable credit losses.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions and
other relevant factors. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to significant
change.
Mortgage Loan Servicing
- -------------------------
Mortgage loans serviced by the Company's mortgage banking subsidiary are not
included in the accompanying consolidated balance sheets. The unpaid principal
balances of these mortgage loans were $6.8 billion and $7.3 billion at December
31, 1997 and 1996, respectively. Loan servicing fees are included in income as
related loan payments from mortgagees are collected.
Originated and purchased mortgage servicing rights are amortized using the
cash flow method, based on estimated future net servicing revenues. Management
estimates the value of the servicing rights originated by the Company's mortgage
banking subsidiary and the servicing rights acquired from third parties at
December 31, 1997, to be approximately $76.04 million based on an independent
impairment analysis. For purposes of measuring impairment, mortgage servicing
rights are stratified on the basis of interest rates and investor types.
20
<PAGE> 13
Derivative Financial Instruments
- ----------------------------------
The Company's investment policies do not allow the purchase of derivative
financial instruments for trading purposes. The only derivative financial
instruments owned by the Company have been issued for purposes other than
trading and include mortgages held for sale, unfunded loan commitments and
unsettled security purchase or sale agreements (see Broker-Dealer Company).
Real estate loans of approximately $42.2 million and $40.0 million at
December 31, 1997, and 1996, respectively, held for resale by the Company's
mortgage banking subsidiary, are valued at the lower of cost or market on an
aggregate basis. To manage the interest rate risk exposure related to these real
estate loans, the Company's mortgage banking subsidiary pre-sells these loans to
third parties. At December 31, 1997, all but $3.7 million of these real estate
loans had been pre-sold.
Interest rate risk related to unfunded loan commitments (see Note 16) is
managed by only issuing such instruments with short repricing terms. These
commitments are recorded as loans are funded.
Bank Premises and Equipment and Depreciation
- ----------------------------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is provided for financial statement purposes by the
straight-line method over an estimated useful life of 1 to 50 years for building
and improvements, 3 to 30 years for leasehold improvements, and 1 to 20 years
for equipment. Accelerated depreciation methods are used for income tax
purposes.
Foreclosed Assets
- -------------------
Foreclosed assets are comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified
as in-substance foreclosure. In accordance with Statement 114, a loan is
classified as in-substance foreclosure when the Company has taken possession of
the collateral regardless of whether formal foreclosure proceedings take place.
Foreclosed assets initially are recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of (1) cost or (2) fair value minus estimated costs to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
other real estate expense.
Income Taxes
- --------------
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
21
<PAGE> 14
Investments - Security National Bank and Trust Company, Oklahoma National Bank
and Real Estate
- --------------------------------------------------------------------------------
The Company's fifty percent investment in Security National Bank and Trust
Company of Norman, Oklahoma, and Oklahoma National Bank in Duncan, Oklahoma is
accounted for using the equity method. The Company, through one of its
subsidiaries, owns an interest in two real estate partnerships. These
investments are also accounted for using the equity method of accounting since
they represent significant influence but not control for the Company.
Earnings Per Common Share
- ---------------------------
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share considers the dilutive
effects of the Company's outstanding stock options. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.
Stock Option Plan
- -------------------
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its employee stock options because, as discussed in Note 13 to
the Consolidated Financial Statements, the alternative fair value accounting
provided for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized (see Note 13).
Stock Dividends
- -----------------
All share and per share amounts for 1997, 1996, and 1995, set forth in the
consolidated financial statements and notes thereto have been retroactively
adjusted for a five percent stock dividend declared November 1997, and payable
January 1998, a five percent stock dividend declared October 1996, and payable
November 1996, and a seven percent stock dividend declared November 1995, and
payable January 1996.
Financial Statement Presentation
- ----------------------------------
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
provides accounting and disclosure rules for the sale, securitization, and
servicing of receivables and other financial assets. Statement 125 provides
guidance for establishing whether a transfer of financial assets is a sale or a
financing. Under Statement 125, the seller is required to use the "financial
components" approach to measure gain or loss on the transaction. Under this
approach, the seller would record at fair value whatever new instruments it
obtains and would derecognize financial assets for which control has been
surrendered based on the relative fair value
22
<PAGE> 15
of the components transferred and those retained. Statement 125 is effective for
transactions occurring after December 31, 1996, regardless of the Company's
fiscal year end or when the securitization was originally established. The
Company adopted Statement 125 effective January 1, 1997, which is applied
prospectively from the date of adoption. The adoption did not have a material
effect on the Company's financial position or results of operations.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure."
Statement 129 consolidates existing guidance relating to disclosure about a
company's capital structure. Statement 129 was adopted on December 31, 1997. The
adoption did not have a material impact on the Company's capital structure
disclosures.
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income." The Company will be required to adopt the provisions of Statement 130
effective January 1, 1998. Statement 130 requires the reporting and display of
the components of comprehensive income in interim and annual financial
statements. The Company expects to identify the components of comprehensive
income in its statement of changes in shareholders' equity beginning in 1998.
In June 1997, the FASB also issued Statement 131, "Disclosures About
Segments of an Enterprise and Related Information." Statement 131 will be
required to be adopted by the Company effective January 1, 1998. Statement 131
requires segment information to be reported using a management approach rather
than the industry approach under the current standard. Management has not
completed its analysis of the requirements of Statement 131 to determine the
Company's reportable segments.
Supplemental Cash Flow Disclosures
- ------------------------------------
For purposes of the statement of cash flows, the Company includes cash and
due from banks, Federal funds sold and securities purchased under agreements to
resell as cash equivalents. Cash payments for interest were approximately $215.6
million, $202.5 million and $169.4 million for 1997, 1996, and 1995,
respectively. Transfers from loans to other real estate owned were $7.0 million,
$2.4 million and $2.3 million during 1997, 1996, and 1995, respectively.
Institutions acquired in non-cash transactions for which prior period
financial data has not been restated consisted of the following for years 1997,
1996 and 1995:
<TABLE>
<CAPTION>
Total Total Total
Assets Loans Deposits
------------- ------------- -------------
<S> <C> <C> <C>
1997........................ $ 379 Million $ 243 Million $ 337 Million
1996........................ 39 Million 17 Million 36 Million
1995........................ 482 Million 281 Million 451 Million
</TABLE>
Reclassifications
- -------------------
Certain reclassifications of 1996 and 1995 amounts have been made to conform
with the 1997 presentation.
23
<PAGE> 16
NOTE 2: ACQUISITIONS
On January 31, 1997, through a joint venture with Arvest Bank Group of
Bentonville, Arkansas, the Company purchased a 50% interest in Oklahoma National
Bank of Duncan, Oklahoma, which had assets of $60 million, loans of $43 million,
and deposits of $55 million.
On February 13, 1997, the Company acquired all of the outstanding common
stock of W.B.T. Holding Company, Memphis, Tennessee, in exchange for 1,430,050
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.
On April 17, 1997, the Company acquired all of the outstanding common stock
of City National Bank, Whitehouse, Texas, in exchange for 152,752 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 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, in exchange for 3,582,865
shares of the Company's common stock. The transaction was accounted for as a
pooling of interests, 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.
On July 1, 1997, the Company acquired all of the outstanding common stock of
First Central Corporation, Searcy, Arkansas, in exchange for 1,732,461 Company
common shares. This transaction was accounted for as a pooling of interests, and
all prior period financial information has been 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.
On August 1, 1997, pursuant to regulatory requirements based on market share
issues, the Company divested of First Bank of Arkansas, Russellville and First
Bank of Arkansas, Searcy, both of which were subsidiaries of Southwest
Bancshares, Inc. The two banks were purchased by Simmons First National
Corporation of Pine Bluff, Arkansas, for $53 million in cash. The resulting gain
of $15.4 million after tax is reported as an extraordinary item in the
accompanying consolidated financial statements.
On October 31, 1997, the Company acquired all of the outstanding stock of
First Charter Bancshares, Inc. ("First Charter") in exchange for 277,439 Company
common shares. This transaction was accounted for as a pooling of interests. The
results of First Charter are included in the consolidated financial statements
for 1997; however, prior period financial data has not been restated due to
immateriality. First Charter had assets of approximately $71 million and a
mortgage loan servicing portfolio of approximately $400 million. On November 21,
1997, Charter State Bank's Beebe branch merged with
24
<PAGE> 17
First Commercial's Searcy affiliate, First National Bank of Searcy, and its
North Little Rock branch merged with First Commercial Bank of Little Rock. First
Charter's mortgage subsidiary, Charter Mortgage & Investments, Inc., was merged
with First Commercial Mortgage Company.
On October 1, 1997, the Company announced that Kemmons Wilson, Inc. will
merge with the Company. Kemmons Wilson, Inc. is the parent company of KW
Bancshares, Inc., which owns Federal Savings Bank headquartered in Rogers,
Arkansas. Federal Savings Bank has assets of $488 million and services
approximately $1 billion in residential mortgage loans. Federal Savings Bank has
15 branches located in Rogers, Bentonville, Fort Smith, West Memphis, and Little
Rock, Arkansas, as well as Memphis, Tennessee. This transaction is expected to
close in the first quarter of 1998 and will be accounted for as a purchase, with
the Company reporting KW Bancshares' operations from the closing date. The
Company expects to record costs in excess of fair value of the net assets
acquired of $25 million in connection with this acquisition.
Combined and separate 1997 operating results of First Commercial Corporation
and all 1997 acquisitions up through the merger dates are as follows:
<TABLE>
<CAPTION>
Total Net
Revenue Income
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
First Commercial Corporation.................... $ 567,035 $ 93,477
W.B.T. Holding Co. (through 2/13/97)............ 3,806 484
City National Bank (through 3/31/97)............ 891 6
Southwest Bancshares, Inc. (through 4/30/97).... 23,765 3,128
First Central Corporation (through 6/30/97)..... 10,522 2,233
First Charter Bancshares (through 10/31/97)..... 5,953 731
------------ ------------
Combined........................................ $ 611,972 $ 100,059
============ ============
</TABLE>
The following table shows the effect of the pooling-of-interests acquisitions of
Southwest Bancshares, inc. and First Central Corporation on previously reported
results of operations. The pro forma data is based on pre-acquisition earnings
and is not necessarily indicative of future performance.
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Total Revenue:
As previously reported......................... $ 479,885 $ 396,170
Southwest Bancshares, Inc...................... 66,604 51,301
First Central Corporation...................... 20,063 18,032
------------ ------------
As restated.................................... $ 566,552 $ 465,503
============ ============
Net Income:
As previously reported........................ $ 68,562 $ 56,910
Southwest Bancshares, Inc..................... 5,730 4,612
First Central Corporation..................... 4,262 3,712
------------ ------------
As restated................................... $ 78,554 $ 65,234
============ ============
</TABLE>
25
<PAGE> 18
NOTE 3: INTANGIBLE ASSETS
Intangible assets are included in other assets and consist of goodwill, debt
issuance costs, core deposit intangibles and mortgage servicing rights. These
assets are being amortized over periods ranging from one to twenty-five years.
Goodwill and identifiable intangibles at December 31, 1997, and 1996, had an
original cost of $54.8 million and $55.4 million, respectively, and are
amortized using the straight line method. The original cost of mortgage
servicing rights originated by the Company's mortgage banking subsidiary and
acquired from third parties, which are not included in the previous totals as
they have resale value, totaled $92.4 million and $88.4 million at December 31,
1997, and 1996, respectively. During 1997 and 1996, mortgage servicing rights of
$4.2 million and $9.5 million, respectively, were capitalized. Accumulated
amortization of intangible assets totaled $72.6 million and $55.9 million at
December 31, 1997, and 1996, respectively. The Company's equity capital,
excluding all intangible assets except mortgage servicing rights, was $612.6
million and $515.6 million at December 31, 1997 and 1996, respectively.
NOTE 4: PLEDGED ASSETS AND REGULATORY RESTRICTIONS
Investment securities having a carrying value of $872.5 million and $901.3
million at December 31, 1997, and 1996, respectively, were pledged to secure
public and trust deposits and certain borrowed funds.
The Company and its subsidiary banks are subject to various regulatory
capital requirements administered by the Federal Reserve Bank, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation and the
Arkansas State Bank Department. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
the regulators that, if undertaken, could have a material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and its
subsidiary banks must meet specific capital guidelines that involve quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and its
subsidiary banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum ratios as set forth in the accompanying
table. Management believes, as of December 31, 1997 and 1996, that the Company
and its subsidiary banks meet all capital adequacy requirements to which they
are subject.
The Company's actual capital ratios along with those of its significant
subsidiary, First Commercial Bank, N.A., of Little Rock, Arkansas, are shown
below.
26
<PAGE> 19
<TABLE>
<CAPTION>
First Commercial First Commercial
Corporation Bank, N.A.
As of December 31, As of December 31,
Regulatory ------------------ ------------------
Minimum 1997 1996 1997 1996
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Leverage ratio ....................................... 3.00% 9.01% 7.99% 7.10% 7.32%
Tier I risk-based capital ratio ...................... 4.00% 12.74% 11.60% 9.89% 9.63%
Total risk-based capital ratio ....................... 8.00% 13.60% 12.46% 11.06% 10.70%
</TABLE>
As of December 31, 1997 and 1996, the most recent notification from the
regulators categorized the Company and its subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the Company's or its subsidiary banks' category.
Subsidiary banks are restricted by banking regulatory agencies from making
dividend payments above prescribed limits and are limited in making loans and
advances to the Company. At December 31, 1997, approximately $57 million was
available for payment of dividends by the Company's subsidiary banks without the
approval of regulatory authorities.
Under Federal Reserve regulation, the subsidiary banks are also limited as
to the amount they may loan to their affiliates, including the Company, unless
such loans are collateralized by specific obligations. At December 31, 1997, the
maximum amount available for transfer from the subsidiary banks to the Company
in the form of loans approximated $57 million.
Subsidiary banks are required by bank regulatory agencies to maintain
certain minimum balances of non-interest bearing deposits primarily with the
Federal Reserve. At December 31, 1997, these required balances aggregated
approximately $61 million.
NOTE 5: INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities at
December 31, 1997, are as follows:
27
<PAGE> 20
<TABLE>
<CAPTION>
Held-to-maturity
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 273,783 $ 651 $ (332) $ 274,102
Obligations of states and
political subdivisions............... 76,872 1,934 (69) 78,737
Corporate securities...................... 1,941 13 (4) 1,950
Mortgage-backed securities................ 55,584 178 (426) 55,336
Other debt securities..................... 503 - (8) 495
---------- ----------- ----------- ----------
Totals......................... $ 408,683 $ 2,776 $ (839) $ 410,620
========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 946,417 $ 2,456 $ (668) $ 948,205
Obligations of states and
political subdivisions............... 169,158 4,112 (160) 173,110
Corporate securities...................... 5,442 42 (5) 5,479
Mortgage-backed securities................ 152,029 1,776 (846) 152,959
Other debt securities..................... 30,255 150 (203) 30,202
---------- ----------- ----------- ----------
Totals......................... $1,303,301 $ 8,536 $ (1,882) $1,309,955
========== =========== =========== ==========
</TABLE>
28
<PAGE> 21
The amortized cost and estimated market values of investment securities at
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Held-to-maturity
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 359,499 $ 739 $ (1,498) $ 358,740
Obligations of states and
political subdivisions............... 76,518 1,197 (792) 76,923
Corporate securities...................... 2,010 17 (3) 2,024
Mortgage-backed securities................ 71,962 312 (1,147) 71,127
Other debt securities..................... 2,506 5 (23) 2,488
--------- ---------- ---------- ---------
Totals......................... $ 512,495 $ 2,270 $ (3,463) $ 511,302
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............$ 737,531 $ 2,620 $ (1,698) $ 738,453
Obligations of states and
political subdivisions............... 152,741 2,043 (544) 154,240
Corporate securities...................... 12,671 67 (20) 12,718
Mortgage-backed securities................ 183,029 1,782 (2,467) 182,344
Other debt securities..................... 22,082 109 (238) 21,953
--------- ---------- ---------- ----------
Totals.........................$1,108,054 $ 6,621 $ (4,967) $1,109,708
========== ========== ========== ==========
</TABLE>
29
<PAGE> 22
On November 15, 1995, the FASB staff issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with provisions in that Special Report,
the Company chose to reclassify securities from held-to-maturity to available-
for-sale. At the date of transfer the amortized cost of those securities was
$370.0 million and the unrealized loss on those securities was $3.5 million,
which is included in stockholders' equity.
During the years ended December 31, 1997, 1996 and 1995, investment
securities available-for-sale with a fair value at the date of sale of $34.9
million, $56.9 million and $84.2 million, respectively were sold. The gross
realized gains on such sales totaled $2,761, $209,458 and $200,398,
respectively. The gross realized losses totaled $89,305, $252,458 and $558,686,
respectively. Additionally, recognized losses of $59,469 were recorded on other
debt securities in the Company's portfolio in 1995.
The amortized cost and estimated market value of securities at December 31,
1997, by contractual maturity, are shown in the accompanying table. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Held-to-maturity
---------------------------
Amortized Estimated
Cost Market Value
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
Due in one year or less..................... $ 159,049 $ 158,691
Due after one year through five years....... 154,781 155,845
Due after five years through ten years...... 27,201 28,032
Due after ten years......................... 12,068 12,716
------------ ------------
353,099 355,284
Mortgage-backed securities.................. 55,584 55,336
------------ ------------
$ 408,683 $ 410,620
============ ============
Available-for-sale
---------------------------
Amortized Estimated
(Dollars in Thousands) Cost Market Value
------------ ------------
Due in one year or less..................... $ 627,136 $ 627,381
Due after one year through five years....... 403,624 406,285
Due after five years through ten years...... 73,611 75,540
Due after ten years......................... 46,901 47,790
------------ ------------
1,151,272 1,156,996
Mortgage-backed securities.................. 152,029 152,959
------------ ------------
$ 1,303,301 $ 1,309,955
============ ============
</TABLE>
30
<PAGE> 23
NOTE 6: LOANS AND LEASES
Loans and leases consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
Commercial and financial................... $ 784,998 $ 733,678
Agricultural............................... 107,848 91,980
Real estate - construction................. 241,185 248,534
- mortgage..................... 2,259,751 2,065,299
Loans for purchasing or carrying securities 9,742 9,497
Consumer................................... 883,059 864,782
Direct lease financing..................... 39,264 38,914
Other...................................... 27,199 15,183
------------ ------------
4,353,046 4,067,867
Unearned income............................ (35,415) (43,232)
------------ ------------
Loans and leases, net of unearned income... $ 4,317,631 $ 4,024,635
============ ============
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired under Statement 114 was $18.9 million and $8.1
million, respectively, all of which were on a nonaccrual basis. These loans had
a related allowance for credit losses of $4.7 million and $1.8 million,
respectively. At December 31, 1997 and 1996, there were no impaired loans that,
as a result of writedowns, did not have an allowance for credit losses. The
average recorded investment in impaired loans during the years ended December
31, 1997 and 1996, was approximately $13.5 million and $4.8 million,
respectively. For the years ended December 31, 1997 and 1996, the interest
income recognized using the cash basis method of income recognition on impaired
loans was immaterial.
Most of the Company's business activity is with customers located in the
state of Arkansas, East Texas, Northwest Louisiana and Memphis, Tennessee. The
Company's subsidiary banks grant commercial and financial, agri-business, real
estate construction and mortgage, and consumer loans. The loan portfolio is
diversified with no industry comprising greater than 10 percent of the total
outstandings.
Certain of the directors and officers of the Company, its subsidiaries, and
companies in which they have a 10% or more interest, are customers of, and have
transactions with, the Company's subsidiary banks in the ordinary course of
business. In the opinion of management, all loans and commitments to loan
included in such transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons. These loans do not include more than
a normal risk of collectibility and do not involve any unfavorable features. The
aggregate balance of such loans at December 31, 1997 and 1996, was $162.5
million and $132.2 million, respectively. Transactions during 1997 included new
loans amounting to $103.1 million and repayments amounting to $74.6 million.
31
<PAGE> 24
NOTE 7: ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
Transactions in the allowance for possible loan and lease losses are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance - January 1....................... $ 62,495 $ 56,129 $ 49,150
Recoveries credited to allowance.......... 4,764 3,520 3,979
Provision charged to operating expense.... 28,332 13,269 4,368
Loans and leases charged off.............. (18,716) (10,560) (6,434)
Allowance resulting from acquisitions/sales 3,095 137 5,066
-------- -------- --------
Balance - December 31..................... $ 79,970 $ 62,495 $ 56,129
======== ======== ========
</TABLE>
NOTE 8: BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Land............................................ $ 20,439 $ 19,635
Building and improvements....................... 122,063 124,305
Leasehold improvements.......................... 12,322 9,480
Equipment....................................... 101,657 92,140
-------- --------
256,481 245,560
Less accumulated depreciation
and amortization.............................. 131,609 118,913
-------- --------
$124,872 $126,647
======== ========
</TABLE>
NOTE 9: DEPOSITS AND SHORT-TERM BORROWINGS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
1998..............................................$ 2,237,533
1999.............................................. 302,362
2000.............................................. 145,037
2001.............................................. 24,150
2002 and thereafter............................... 32,145
-----------
$ 2,741,227
===========
</TABLE>
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Federal funds purchased........................... $ 23,254 $ 7,874
Securities sold under agreements to repurchase.... 156,990 128,915
Committed lines of credit......................... - 31,750
Other............................................. 22,941 27,402
-------- --------
$203,185 $195,941
======== ========
</TABLE>
32
<PAGE> 25
The maximum amount of outstanding repurchase agreements at any month-end
during the year ended December 31, 1997, was $157.0 million. The average daily
amount of outstanding repurchase agreements for the year ended December 31,
1997, was $125.2 million. The investment securities underlying the repurchase
agreements were held under the Company's control.
The Company has a $30.0 million and a $50.0 million committed line of credit
from two unaffiliated banks. Amounts borrowed under the $30.0 million agreement
are subject to a variable interest rate that is based on the London InterBank
Offered Rate plus 3/4 of 1% (6.47% at December 31, 1997). Amounts borrowed under
the $50.0 million agreement are subject to an interest rate which is set monthly
by the lender on a floating basis (6.31% at December 31, 1997). As of December
31, 1997, the Company had no borrowings under these agreements.
NOTE 10: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
(Dollars in Thousands)
<S> <C> <C>
Note payable to Federal Home Loan Bank, interest at
London InterBank Offered Rate plus .10%, due 2001
(5.79% at December 31, 1997)......................... $ 5,000 $ 5,000
Notes payable to Federal Home Loan Bank, weighted
average interest rate of 6.68%, payable monthly
including interest for 15 years...................... - 13,404
Revolving credit loan with a financial institution,
interest at New York Prime, due 2003 (8.25% at
December 31, 1996)................................... - 9,250
8.85% note -- payable $1,071,428 annually to 1997..... - 1,071
Other................................................. 103 26
-------- --------
$ 5,103 $ 28,751
======== ========
</TABLE>
Maturities of long-term debt for years subsequent to December 31, 1997, are
as follows (dollars in thousands): 1998 - $34,; 1999 - $36; 2000 - $17; 2001 -
$5,003; 2002 - $4; and $9 thereafter.
NOTE 11: INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1997, and
1996, are as follows:
33
<PAGE> 26
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Deferred tax assets:
Loan loss reserve...................................$ 27,193 $ 20,344
Cost of mortgage servicing.......................... 3,232 5,113
Other - net......................................... 10,670 6,519
-------- --------
Total deferred tax assets................... 41,095 31,976
-------- --------
Valuation allowance.................................. (664) (804)
-------- --------
Net deferred tax assets.............................. 40,431 31,172
-------- --------
Deferred tax liabilities:
Operating leases.................................... 4,636 4,660
Net pension benefit................................. 6,160 5,543
Basis adjustment - purchase accounting.............. 2,533 2,514
Property, plant and equipment....................... 2,764 2,880
Other - net......................................... 5,825 3,336
-------- --------
Total deferred tax liabilities.............. 21,918 18,933
-------- --------
Net deferred tax assets................$ 18,513 $ 12,239
======== ========
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance equal to approximately the amount of acquired
tax operating loss carryforwards in excess of the subsidiaries' future taxable
items in the carryforward periods. The valuation allowance relates solely to the
State First National Bank, Texarkana, Texas; Kilgore First National Bank,
Kilgore, Texas; and First Bank of Arkansas, Jonesboro, Arkansas, net operating
loss carryforwards.
At December 31, 1997, State First National Bank, Kilgore First National Bank
and First Bank of Arkansas had net operating loss carryforwards of approximately
$916,000, $994,000 and $257,000, respectively, for Federal income tax purposes.
The carryforwards can only be used against taxable income of the respective
financial institutions and expire in 2004 and 2008. Additionally, provisions of
the Internal Revenue Code limit the annual utilization of the net operating loss
carryforwards. As the valuation allowance is reduced, the amounts will be
applied to reduce goodwill recorded in connection with the purchase of both
State First National Bank and Kilgore First National Bank.
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
34
<PAGE> 27
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Current:
Federal............................. $ 51,007 $ 43,709 $ 31,032
State............................... 2,233 4,209 2,266
-------- -------- --------
Total current....................... 53,240 47,918 33,298
-------- -------- --------
Deferred benefit:
Federal............................. (8,488) (5,620) (1,251)
State............................... (1,250) (818) (155)
-------- -------- --------
Total deferred benefit.............. (9,738) (6,438) (1,406)
-------- -------- --------
Provision for income taxes............ $ 43,502 $ 41,480 $ 31,892
======== ======== ========
</TABLE>
The Company also recorded taxes of $9.7 million associated with the gain on
sale of two banking affiliates as required by the regulators. The gain on sale
was reported as an extraordinary item.
The components of the provision for deferred income taxes for the years
ended December 31, 1997, 1996, and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Provision for possible loan and lease
losses.............................. $ (6,606) $ (3,608) $ (907)
Net pension benefit................... 608 528 763
Operating lease....................... 81 545 916
Cost of mortgage servicing............ (1,725) (4,406) -
Deferred expenses..................... (2,413) - -
Other................................. 317 503 (2,178)
-------- -------- --------
Provision for deferred income taxes... $ (9,738) $ (6,438) $ (1,406)
======== ======== ========
</TABLE>
The reconciliation of income tax attributable to continuing operations computed
at the U.S. Federal statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Tax at U.S. statutory rate............ 35.0% 35.0% 35.0%
Non-taxable interest income........... (2.9) (2.9) (3.3)
State income tax expense,
net of Federal income tax benefit... 0.5 1.8 1.4
Equity in earnings of unconsolidated
subsidiary.......................... (0.3) (0.3) (0.5)
Other, net............................ 1.6 1.0 0.2
-------- -------- --------
Effective income tax rate............. 33.9% 34.6% 32.8%
======== ======== ========
</TABLE>
Cash income taxes paid during 1997, 1996 and 1995, were $59.4 million, $47.3
million and $28.9 million, respectively.
35
<PAGE> 28
NOTE 12: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share ("EPS"):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(Dollars in Thousands, Except Per Share)
<S> <C> <C> <C>
Numerator:
Net income before extraordinary items.... $ 84,634 $ 78,554 $ 65,234
Extraordinary item, net of income taxes
of $9,659.............................. 15,425 - -
----------- ----------- -----------
Net income............................... 100,059 78,554 65,234
Preferred stock dividends................ - - -
Effect of dilutive securities............ - - -
----------- ----------- -----------
Numerator for basic and diluted EPS...... $ 100,059 $ 78,554 $ 65,234
=========== =========== ===========
Denominator:
Denominator for basic EPS-weighted
shares outstanding...................... 37,486,476 35,648,472 34,221,166
Effect of dilutive securities:
Employee stock options................... 435,476 384,813 317,939
----------- ----------- -----------
Denominator for diluted EPS-adjusted
weighted average shares and assumed
conversion............................. $37,921,952 $36,033,285 $34,539,105
=========== =========== ===========
Basic earnings per share................. $ 2.67 $ 2.20 $ 1.91
=========== =========== ===========
Diluted earnings per share............... $ 2.64 $ 2.18 $ 1.89
=========== =========== ===========
</TABLE>
Options to purchase 166,543 shares of common stock at $55 per share were
outstanding during 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares, and therefore, the effect would be
antidilutive.
NOTE 13: STOCK OPTIONS
Executives and other key officers have been granted options to purchase the
Company's common shares. The Company's 1987 Incentive and Nonqualified Stock
Option Plan, which expired in February 1997, was renewed as the 1997 Incentive
Stock Plan (the "Plan"), for an additional ten-year term. The Company has
authorized 2,963,892 shares under the Plan. All options granted have ten-year
terms and vest ratably over a five-year period.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options issued from 1995 through 1997 under the
fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model.
36
<PAGE> 29
For the two grants during 1995 the weighted-average assumptions were: risk- free
interest rates of 7.1% and 5.6%; dividends yields of 3.4% and 3.1%; volatility
factors of the expected market price of the Company's common stock of .20 and
.19; and a weighted-average expected life of the option of 7 years. For the
grant during 1996, the weighted-average assumptions were: risk-free interest
rate of 6.3%; dividend yield of 2.7%; volatility factor of the expected market
price of the Company's common stock of .18; and a weighted-average expected life
of the option of 7 years. For the grants during 1997, the weighted-average
assumptions were: risk-free interest rate of 5.9%; dividend yield of 2.3%
volatility factor of the expected market price of the Company's common stock of
.18 and a weighted-average expected life of 7 years. The weighted-average fair
value of options granted during 1995, 1996 and 1997 is estimated at $5.97, $9.13
and $13.84 per share, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different form those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
The pro forma effect on net income for 1997, 1996 and 1995 is not
indicative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation
expense related to grants made prior to 1995. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In Thousands Except for Per Share Data)
<S> <C> <C> <C>
Pro forma net income.......................$ 99,712 $ 78,367 $ 65,161
Pro forma basic earnings per share.........$ 2.66 $ 2.20 $ 1.90
Pro forma diluted earnings per share.......$ 2.65 $ 2.20 $ 1.90
</TABLE>
Presented below is the activity in the Plan for the three years in the
period ended December 31, 1997, and certain other information concerning the
Plan.
37
<PAGE> 30
<TABLE>
<CAPTION>
Number of Shares
Under Option Option Price
------------------------------- -------------------------------------------
Non- Weighted Avg
Incentive Qualified Total Exercise Price Total Per Share
--------- --------- --------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 1995.... 70,152 642,876 713,028 $ 11.96 $ 8,527,917 $ 5.63-17.76
Granted.............. - 273,787 273,787 24.81 6,793,263 20.77-29.14
Exercised............ (22,863) (46,457) (69,320) 9.58 (663,854) 5.63-17.76
Forfeited............ - (15,756) (15,756) 17.79 (280,326) 15.34-20.77
--------- --------- --------- -----------
Outstanding at
December 31, 1995.. 47,289 854,450 901,739 15.94 $14,377,000 5.63-29.14
Granted.............. - 138,193 138,193 35.48 4,903,088 35.48
Exercised............ (5,113) (52,891) (58,004) 10.03 (581,779) 5.63-20.77
Forfeited............ - (24,528) (24,528) 18.80 (461,206) 15.34-29.14
--------- --------- --------- -----------
Outstanding at
December 31, 1996.. 42,176 915,224 957,400 19.05 $18,237,103 5.63-35.48
Granted.............. - 167,068 167,068 54.95 9,180,335 38.99-55.00
Exercised............ (22,107) (128,143) (150,250) 8.28 (1,244,346) 5.63-35.48
Forfeited............ - (25,388) (25,388) 27.40 (695,728) 15.34-35.48
--------- --------- --------- -----------
Outstanding at
December 31, 1997.. 20,069 928,761 948,830 $ 26.85 $25,477,364 $ 6.32-55.00
========= ========= ========= ===========
</TABLE>
The information concerning current outstanding and exercisable options at
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Options Contractual Average Options Average
Exercise Prices Outstanding Life (in years) Exercise Price Exercisable Exercise Price
--------------- ------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
< $10 125,262 0.8 $ 6.53 125,262 $ 6.53
$10 - $20 284,103 5.7 16.96 237,941 16.84
$20 - $30 243,185 7.6 24.99 100,850 24.99
$30 - $40 129,737 9.0 35.49 30,037 35.48
$40 - $50 - - - - -
$50 - $60 166,543 9.9 55.00 - -
------- -------
948,830 494,090
======= =======
</TABLE>
38
<PAGE> 31
NOTE 14: EMPLOYEE BENEFIT PLANS
The Company has a salary deferral retirement savings plan qualified under
Section 401(k) of the Internal Revenue Code for the benefit of all qualifying
employees who have completed one year of service. Participants in the Plan may
make deferral contributions to the Plan which are 100% vested at all times. The
Company matches a minimum of 30% of the employee's contributions up to 6% of
salary. After five years of service, the Company matches 40% of the employee's
contributions up to 6% of salary. Company-matching contributions are fully
vested after five years of service. In 1997, 1996, and 1995, the Company made
contributions of $1.6 million, $1.5 million and $1.1 million respectively, to
the 401(k) Plan.
On December 16, 1997, the Company granted a total of 100,295 stock unit
awards to certain employees. Each unit award is based on the valuation of one
share of the Company's common stock, and vests over five years. Cash payments of
one-third of the vested amount will be made at the end of years three, four and
five, based on the market value of the Company's common stock on the anniversary
dates. Upon change of control of the Company, all nonvested units will vest 100%
and be payable as of the closing date of the control change. Compensation
expense will be accrued over the five-year vesting period, adjusted for changes
in the value of the Company's common stock, unless change of control occurs at
which time total expense would be accrued.
The Company has defined benefit pension plans which provide benefits to
substantially all employees. Benefits under these plans generally are based on
the employee's years of service and compensation during the years immediately
preceding retirement. The Company's general funding policy is to contribute
amounts deductible for Federal income tax purposes. Pension (cost) benefit is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Service cost........................... $ (2,532) $ (2,198) $ (1,723)
Interest cost.......................... (3,227) (2,656) (2,240)
Actual return on plan assets........... 12,480 6,395 10,201
Net amortization and deferral.......... (6,718) (958) (5,057)
-------- -------- --------
Total pension benefit.................. $ 3 $ 583 $ 1,181
======== ======== ========
</TABLE>
The status of the defined benefit plans at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits...................... $ 35,969 $ 32,518 $ 26,975
Nonvested benefits................... 2,499 2,151 2,494
-------- -------- --------
$ 38,468 $ 34,669 $ 29,469
======== ======== ========
Fair value of plan assets.............. $ 70,315 $ 58,192 $ 52,514
Projected benefit obligation........... (45,002) (40,371) (33,701)
Plan assets in excess of -------- -------- --------
projected benefit obligation......... 25,313 17,821 18,813
Unrecognized net (gain) loss........... (6,277) 946 (511)
Unrecognized net transition asset...... (2,753) (3,566) (4,294)
-------- -------- --------
Prepaid pension costs.................. $ 16,283 $ 15,201 $ 14,008
======== ======== ========
</TABLE>
39
<PAGE> 32
The expected long-term rate of return on the plans' assets was 9.0% for
1997, 1996, and 1995. The discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8.0% and 4.5%, respectively, at December 31,
1997, 1996 and 1995. The plans' assets are invested in diversified portfolios
that primarily consist of equity and debt securities of which 143,896 shares,
218,629 shares and 249,856 shares at December 31, 1997, 1996, and 1995,
respectively, were in the Company's common stock. The fair value of these shares
at December 31, 1997, was $8.4 million and the cash dividends paid on these
shares during 1997 were $193 thousand. Also included in these securities were
investments in various common trust funds administered by First Commercial Trust
Company, a subsidiary of the Company, of 936,798 shares, 799,484 shares, and
568,308 shares at December 31, 1997, 1996, and 1995, respectively.
NOTE 15: FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. Whenever possible, quoted market
prices were used to develop fair values. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments as of December 31, 1997,
and 1996.
CASH AND CASH EQUIVALENTS - The carrying amounts reported in the balance sheet
for cash and short-term investments approximate those assets' fair values.
INVESTMENT SECURITIES AND TRADING ACCOUNT SECURITIES - Fair values for
investment securities are based on quoted market prices. Investment securities
available for sale and trading account securities are carried at fair value.
LOANS, NET OF UNEARNED INCOME - Fair values for loans with variable rates are
considered to be carrying value, adjusted for changes in credit risk since
origination of the loans. Fair values for loans with fixed rates are based upon
the discounting of the estimated future cash flows of the instrument. The future
cash flows were estimated using the actual yield for each specific loan category
after adjustment to allocate the expenses of origination and servicing of the
loans. The discount rate to bring the future cash flows to present value was
estimated based upon a risk-free rate derived from the Treasury yield curve,
adjusted for the credit risk of the loan portfolio, allocation of expenses and a
prepayment fee premium.
40
<PAGE> 33
NON-INTEREST BEARING DEPOSITS AND INTEREST BEARING TRANSACTION ACCOUNTS AND
SAVINGS ACCOUNTS WITH VARIABLE RATES - The carrying amounts of these liabilities
approximate market. Accordingly, carrying value is the disclosed fair value for
these deposit liabilities. Statement 107 defines the fair value of demand
deposits as the amount payable on demand, and prohibits adjusting fair value for
any value derived from retaining those deposits for an expected future period of
time. That component, commonly referred to as a deposit base intangible, is
estimated to be approximately $164.6 million at December 31, 1997, and $158.4
million at December 31, 1996. This component is estimated using the method
described for interest bearing deposits with the addition of certain retention
and profitability projections.
INTEREST BEARING DEPOSITS - The fair value of these liabilities has been
estimated based upon the projected future cash flows for these accounts. The
future cash flows were estimated using the actual interest expense for these
deposit accounts plus adjustments for the estimated expenses incurred in the
carrying of these accounts less estimated service charges. The future cash flows
are discounted at a risk-free rate derived from the Treasury yield curve plus
allocated expenses less estimated service charge income. The fair value of these
accounts is included in the total fair value of deposit liabilities disclosed
above.
SHORT-TERM BORROWINGS - The carrying amounts reported in the balance sheet for
short-term borrowings approximate those liabilities' fair values.
LONG-TERM DEBT - The fair value of these liabilities has been estimated based
upon the discounted future cash flows. The discount rate used included a
risk-free rate derived from the Treasury yield curve plus a risk weighting
commensurate with the Company's borrowing position.
OFF-BALANCE-SHEET ITEMS - The estimated fair value of loan commitments and
letters of credit is determined based upon the Company's current fee structure
and is considered immaterial at December 31, 1997, and December 31, 1996.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents......... $ 571,155 $ 571,155 $ 654,830 $ 654,830
Investment securities
held-to-maturity................ 408,683 410,620 512,495 511,302
Investment securities
available-for-sale.............. 1,309,955 1,309,955 1,109,708 1,109,708
Trading account securities ....... 149 149 196 196
Loans, net of allowance
for loan losses................. 4,198,340 4,277,688 3,923,172 3,925,980
Financial liabilities:
Non-interest bearing deposits..... $1,222,660 $1,222,660 $1,090,401 $1,090,401
Interest bearing transaction
and savings accounts............ 1,983,803 1,983,803 1,933,713 1,933,713
Time Deposits..................... 2,741,227 2,768,725 2,736,164 2,747,857
Short-term borrowings............. 203,185 203,185 195,941 195,941
Long-term debt.................... 5,103 4,957 28,751 25,158
</TABLE>
41
<PAGE> 34
These fair value estimates may not be relevant in predicting the Company's
future earnings or cash flows. This is due primarily to the Company's intention
and ability to hold its investment securities and loans to maturity.
Additionally, it is the Company's policy to balance rate sensitive assets and
rate sensitive liabilities so as to minimize the effect of rate changes on net
interest margin. Because the Company follows this policy, the unrealized gains
and losses on the asset side of the balance sheet are substantially offset by
unrealized gains and losses on the liability side of the balance sheet.
NOTE 16: COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various commitments outstanding
and contingent liabilities, such as guarantees and commitments to extend credit,
including letters of credit to facilitate commercial trade and standby letters
of credit to assure performance or to support debt obligations, which are not
reflected in the accompanying consolidated financial statements. These
arrangements have credit risk essentially the same as that involved in extending
loans to customers. At December 31, 1997 and 1996, the subsidiaries of the
Company had outstanding standby letters of credit of $53.6 million and $40.1
million, respectively. The majority of the standby letters of credit outstanding
at December 31, 1997, are related to debts of others, primarily corporations,
including industrial revenue bonds of approximately $5 million.
The terms of these standby letters of credit are generally less than five
years. Potential losses on standby letters of credit are considered in the
allowance for possible loan and lease losses. Fee income on standby letters of
credit is recognized in accordance with Statement of Financial Accounting
Standards No. 91.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. Financial
instruments whose contract amounts represent credit risk at December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
Contractual Amount
------------------
<S> <C>
Commitments to extend credit....................... $ 820,303,000
Standby letters of credit.......................... $ 53,607,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Two real estate partnerships owned by the Company through one of its
subsidiaries have $1.4 million and $1.5 million, respectively, at December 31,
1997, of long-term indebtedness in which the creditors' recourse to the Company
is limited to the Company's interest in the specific partnership's collateral
pledged under the related obligation.
42
<PAGE> 35
Land, buildings, and equipment are leased under contracts through various
dates to 2070, with renewal options generally available. Total rent expense of
the leased premises and equipment was $5.3 million in 1997, $4.5 million in
1996, and $4.1 million in 1995. Rental income received under sub-leases amounted
to $390,000 in 1997, $338,000 in 1996, and $466,000 in 1995.
Minimum annual rentals under non-cancelable operating leases totaling $13.9
million, are as follows: 1998 - $2.7 million, 1999 - $2.3 million, 2000 - $1.9
million, 2001 - $1.4 million, 2002 - $918,000, and remaining years $4.7 million.
Minimum annual rental income under non-cancelable operating sub-leases amounts
to $70,000 each year from 1998 through 2001, and $35,000 in 2002. The annual
rent for certain of the leases varies according to changes in the Consumer Price
Index.
Aearth Development, Inc. v. First Commercial Bank, N.A.: First Commercial
Bank, N.A., a wholly owned subsidiary of the Company, 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 treble 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 intends to
vigorously pursue the appeal. The ultimate legal and financial responsibility of
the Company in connection with this matter cannot be estimated with certainty,
but management, based on the advice of legal counsel that any 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
or year in which it were to be incurred, but the Company cannot estimate the
range of any reasonably possible loss.
The Company is involved in various lawsuits and litigation matters on an
ongoing basis as a result of its day-to-day operations. However, the Company
does not believe that any of these or any threatened lawsuits and litigation
matters will have a materially adverse effect on the Company's financial
position or results of operations.
43
<PAGE> 36
NOTE 17: PARENT COMPANY FINANCIAL INFORMATION
Presented below are the condensed balance sheets, and statements of income
and cash flows for the parent company, First Commercial Corporation:
<TABLE>
<CAPTION>
Balance Sheets (Dollars in Thousands) December 31,
-------------------
1997 1996
Assets -------- --------
<S> <C> <C>
Cash and cash equivalents.............. $ 5,044 $ 8,282
Loans and leases....................... 13,857 17,955
Investment in and advances
to subsidiaries...................... 597,698 570,449
Investment securities, estimated market
value $34,463 ($772 in 1996)......... 34,481 772
Bank premises and equipment............ 8,448 8,379
Other assets........................... 9,733 10,166
-------- --------
$669,261 $616,003
======== ========
Liabilities and Stockholders' Equity
Long-term debt......................... $ - $ 10,321
Short-term borrowings.................. - 31,750
Other liabilities...................... 18,148 16,332
Common stockholders' equity............ 651,113 557,600
-------- --------
$669,261 $616,003
======== ========
</TABLE>
<TABLE>
<CAPTION>
Statements of Income (Dollars in Thousands) Years Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income
Dividends from subsidiaries............ $ 63,252 $ 65,696 $ 48,716
Interest............................... 2,022 476 213
Other income........................... 5 412 395
-------- -------- --------
Total income........................... 65,279 66,584 49,324
-------- -------- --------
Expenses
Interest............................... 1,204 2,729 3,034
Other expenses......................... 15,194 14,348 11,740
-------- -------- --------
Total expenses......................... 16,398 17,077 14,774
-------- -------- --------
Income from operations................... 48,881 49,507 34,550
Income tax benefit....................... 4,416 6,125 5,229
Equity in undistributed
earnings of subsidiaries............... 31,337 22,922 25,455
-------- -------- --------
Net income before extraordinary items.... 84,634 78,554 65,234
Extraordinary item, net of income taxes
of $9,659.............................. 15,425 - -
-------- -------- --------
Net income............................... $100,059 $ 78,554 $ 65,234
======== ======== ========
</TABLE>
44
<PAGE> 37
<TABLE>
<CAPTION>
Statements of Cash Flows (Dollars in Thousands) Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $100,059 $ 78,554 $ 65,234
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 3,057 2,904 2,351
Undistributed earnings of subsidiaries.......................... (31,337) (22,922) (25,455)
Gain on sale of equipment....................................... - - (3)
Increase (decrease) in taxes payable............................ 427 (2,033) 3,426
Increase in interest receivable ...................... (109) (61) -
Increase (decrease) in interest payable......................... (408) 33 (647)
Increase in dividends payable................................... 2,533 1,312 993
Decrease (increase) in other receivables........................ 540 (1,674) 1,834
Decrease (increase) in prepaid assets........................... (343) 23 47
Increase (decrease) in accrued expenses......................... (736) 2,811 (1,667)
-------- -------- --------
Net cash provided by operating activities.......................... 73,683 58,947 46,113
INVESTING ACTIVITIES
Proceeds from maturing investment securities available-for-sale.... 28,837 - -
Purchases of investment securities available-for-sale.............. (62,546) (100) (200)
Net decrease (increase) in loans................................... 4,098 (16,722) 63
Sale (purchase) of subsidiaries.................................... 26,127 3,610 (6,122)
Decrease (increase) in investments in subsidiaries................. 5,547 (13,508) (5,770)
Decrease (increase) in advances to subsidiaries.................... 1,540 2,400 (1,891)
Fixed asset purchases.............................................. (2,954) (94) (3,207)
Proceeds from sale of fixed assets................................. 173 185 107
-------- -------- --------
Net cash provided by (used in) investing activities................ 822 (24,229) (17,020)
FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings................... (31,750) (6,846) (3,104)
Repayment of long-term debt........................................ (10,321) (1,072) (6,321)
Proceeds from long-term debt .................................. - 2,250 4,500
Dividends paid on common stock..................................... (37,224) (26,386) (22,370)
Proceeds from issuance of common stock............................. 31 107 7,557
Purchases of treasury stock........................................ (3) (6,368) (5,245)
Sales of treasury stock............................................ - 223 -
Purchase of partial shares resulting
from stock dividends............................................. (86) (44) (44)
Stock options exercised............................................ 1,610 712 1,135
-------- -------- --------
Net cash used in financing activities.............................. (77,743) (37,424) (23,892)
Net increase (decrease) in cash and cash equivalents............... (3,238) (2,706) 5,201
Cash and cash equivalents at beginning of year..................... 8,282 10,988 5,787
-------- -------- --------
Cash and cash equivalents at end of year........................... $ 5,044 $ 8,282 $ 10,988
======== ======== ========
</TABLE>
45
<PAGE> 38
NOTE 18: SUBSEQUENT EVENT
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.
46
<PAGE> 39
FIRST COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
March 31, December 31,
-------------- --------------
1998 1997
-------------- --------------
(Dollars in thousands, except par value)
<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
============== ==============
</TABLE>
See accompanying notes.
47
<PAGE> 40
FIRST COMMERCIAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31,
----------------------
1998 1997
---------- ----------
(Dollars in thousands,
except per share data)
<S> <C> <C>
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
========== ==========
</TABLE>
48
<PAGE> 41
FIRST COMMERCIAL CORPORATION
CONSOLIDATED INCOME STATEMENTS (Continued)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
See accompanying notes.
49
<PAGE> 42
FIRST COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income (Loss) Stock Total
--------- --------- --------- ------------- --------- ---------
(Dollars in thousands, except per share data)
<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
========== ========== ========= ============= ========= =========
</TABLE>
See accompanying notes.
50
<PAGE> 43
FIRST COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
(Dollars in thousands)
<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>
51
<PAGE> 44
FIRST COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31,
-----------------------
1998 1997
---------- ----------
(Dollars in thousands)
<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
========== ==========
</TABLE>
See accompanying notes.
52
<PAGE> 45
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.
53
<PAGE> 46
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. The merger was consummated on July 31, 1998.
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.
54
<PAGE> 47
9. Earnings per share
The following table sets forth the computation of basic and diluted earnings
per share ("EPS"):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---------- ----------
(Dollars in Thousands,
Except Per Share)
<S> <C> <C>
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
========== ==========
</TABLE>
55
<PAGE> 1
EXHIBIT 99.3
Pro Forma Financial Information of Regions Financial Corporation
PRO FORMA FINANCIAL INFORMATION
PRO FORMA COMBINED CONDENSED STATEMENT OF CONDITION
(UNAUDITED)
The following unaudited pro forma combined condensed statement of condition
as of March 31, 1998, gives effect to the combination of First Commercial
Corporation with Regions Financial Corporation, assuming such transaction is
accounted for as a pooling of interest, as if such transaction had been
consummated on March 31, 1998.
The following unaudited pro forma combined condensed statements of income
for the three months ended March 31, 1998 and the years ended December 31, 1997,
1996, and 1995, give effect to the combination of First Commercial with Regions
assuming such transaction is accounted for as a pooling of interest, as if such
transaction had been consummated on January 1, 1995.
The effect of an anticipated restructuring charge estimated for purposes of
the pro forma financial statements at $63 million net of taxes to be taken by
Regions in connection with this transaction has been reflected in the pro forma
combined condensed statement of condition; however, since the anticipated
restructuring charge is nonrecurring, it has not been reflected in the pro forma
combined condensed statements of income.
The unaudited pro forma combined condensed financial statements are
presented for information purposes only and are not necessarily indicative of
the combined financial position or results of operations which would actually
have occurred if the transaction had been consummated at the date and for the
periods indicated or which may be obtained in the future.
<TABLE>
<CAPTION>
ADJUSTMENTS REGIONS AND
FIRST INCREASE FIRST COMMERCIAL
REGIONS COMMERCIAL (DECREASE) PRO FORMA COMBINED
----------- ---------- ----------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks.......................... $ 879,877 $ 447,245 $ 1,327,122
Interest-bearing deposits in other banks......... 75,347 75,347
Investment securities............................ 2,652,718 338,877 2,991,595
Securities available for sale.................... 2,379,360 1,413,171 3,792,531
Trading account assets........................... 24,213 516 24,729
Mortgage loans held for sale..................... 427,088 427,088
Federal funds sold and securities purchased under
agreements to resell........................... 180,796 237,220 418,016
Loans, net of unearned income.................... 18,045,378 4,643,100 22,688,478
Allowance for loan losses........................ (221,998) (86,879) (308,877)
Premises and equipment, net...................... 351,229 136,015 487,244
Other real estate................................ 15,034 6,917 21,951
Excess purchase price............................ 209,154 79,988 289,142
Due from customers on acceptances................ 141,948 141,948
Other assets..................................... 468,921 165,919 $22,000 (a) 656,840
----------- ---------- ------- -----------
TOTAL ASSETS............................ $25,629,065 $7,382,089 $22,000 $33,033,154
=========== ========== ======= ===========
LIABILITIES
Non-interest bearing deposits.................... $ 2,657,245 $1,110,616 $ 3,767,861
Interest-bearing deposits........................ 17,632,030 5,218,955 22,850,985
Federal funds purchased and securities sold under
agreements to repurchase....................... 1,454,417 1,454,417
Other borrowed funds............................. 1,352,595 335,601 1,688,196
Bank acceptances outstanding..................... 141,948 141,948
Other liabilities................................ 259,103 80,988 $85,000 (a) 425,091
----------- ---------- ------- -----------
Total Liabilities....................... 23,497,338 6,746,160 85,000 30,238,498
STOCKHOLDERS' EQUITY
Common stock..................................... 93,624 112,839 (72,885)(b) 133,578
Surplus.......................................... 681,703 330,135 72,259 (b) 1,084,097
Undivided profits................................ 1,356,314 191,359 (63,000)(a) 1,484,673
Less: Treasury and unearned restricted stock..... (8,548) (626) 626 (b) (8,548)
Accumulated other comprehensive income........... 8,634 2,222 10,856
----------- ---------- ------- -----------
Total Stockholders' Equity.............. 2,131,727 635,929 (63,000) 2,704,656
----------- ---------- ------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................ $25,629,065 $7,382,089 $22,000 $33,033,154
=========== ========== ======= ===========
</TABLE>
56
<PAGE> 2
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF CONDITION
(a) To reflect the estimated restructuring and merger-related charge to be
taken in connection with the First Commercial transaction. Components of the
merger charge are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Employee-related............................................ $ 24,000
Occupancy and equipment..................................... 10,000
Loss on divestiture of certain mortgage servicing assets.... 8,000
Conversion.................................................. 7,000
Investment banker, legal, accounting, and other merger
related fees.............................................. 28,500
--------
77,500
Charitable trust............................................ 7,500
--------
Gross charges............................................... 85,000
Taxes....................................................... (22,000)
--------
$ 63,000
========
</TABLE>
(b) To reflect the issuance of 63,926,276 shares of Regions Common Stock to
effect the First Commercial transaction. The First Commercial transaction will
be accounted for as a pooling of interests, therefore the effect upon
stockholders' equity will be to increase Regions stockholders' equity by the
total equity of First Commercial. The unaudited pro forma financial statements
have been prepared assuming Regions will issue 63,926,276 shares of Regions
Common Stock in exchange for all the outstanding shares of First Commercial. A
reclassification from common stock to surplus results from the issuance of the
shares.
57
<PAGE> 3
REGIONS FINANCIAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
REGIONS AND
ADJUSTMENTS FIRST COMMERCIAL
FIRST INCREASE PRO FORMA
REGIONS COMMERCIAL (DECREASE) COMBINED
-------- ---------- ----------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income................................ $485,716 $123,014 $608,730
Interest expense............................... 240,310 52,617 292,927
-------- -------- --------
Net interest income............................ 245,406 70,397 315,803
Provision for loan losses...................... 12,119 2,051 14,170
Non-interest income............................ 77,311 29,552 106,863
Non-interest expense........................... 178,637 56,934 235,571
-------- -------- --------
Income before income taxes..................... 131,961 40,964 172,925
Applicable income taxes........................ 45,758 13,656 59,414
-------- -------- --------
Net income..................................... $ 86,203 $ 27,308 $113,511
======== ======== ========
Earnings per common share...................... $ .58 $ .73 $ .53
======== ======== ========
Earnings per common share assuming dilution.... $ .57 $ .72 $ .52
======== ======== ========
Average common shares outstanding(a)........... 149,556 37,318 212,997
Average common shares outstanding assuming
dilution(a).................................. 152,571 37,844 216,905
</TABLE>
58
<PAGE> 4
REGIONS FINANCIAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
REGIONS AND
ADJUSTMENTS FIRST COMMERCIAL
FIRST INCREASE PRO FORMA
REGIONS COMMERCIAL (DECREASE) COMBINED
---------- ---------- ----------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income............................... $1,653,084 $497,170 $2,150,254
Interest expense.............................. 824,203 214,202 1,038,405
---------- -------- ----------
Net interest income........................... 828,881 282,968 1,111,849
Provision for loan losses..................... 41,773 28,332 70,105
Non-interest income........................... 258,553 114,802 373,355
Non-interest expense.......................... 600,341 241,302 841,643
---------- -------- ----------
Income before income taxes.................... 445,320 128,136 573,456
Applicable income taxes....................... 145,628 43,502 189,130
---------- -------- ----------
Income before extraordinary item.............. $ 299,692 $ 84,634 $ 384,326
========== ======== ==========
Income before extraordinary item per common
share....................................... $ 2.20 $ 2.26 $ 1.92
========== ======== ==========
Income before extraordinary item per common
share assuming dilution..................... $ 2.15 $ 2.23 $ 1.88
========== ======== ==========
Average common shares outstanding(a).......... 136,512 37,486 200,239
Average common shares outstanding assuming
dilution(a)................................. 139,421 37,922 203,888
</TABLE>
59
<PAGE> 5
REGIONS FINANCIAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
REGIONS AND
ADJUSTMENTS FIRST COMMERCIAL
FIRST INCREASE PRO FORMA
REGIONS COMMERCIAL (DECREASE) COMBINED
---------- ---------- ----------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income............................... $1,386,122 $456,002 $1,842,124
Interest expense.............................. 685,656 204,096 889,752
---------- -------- ----------
Net interest income......................... 700,466 251,906 952,372
Provision for loan losses..................... 29,041 13,269 42,310
Non-interest income........................... 220,739 110,550 331,289
Non-interest expense.......................... 553,801 229,153 782,954
---------- -------- ----------
Income before income taxes.................. 338,363 120,034 458,397
Applicable income taxes....................... 108,677 41,480 150,157
---------- -------- ----------
Net Income.................................. $ 229,686 $ 78,554 $ 308,240
========== ======== ==========
Earnings per common share..................... $ 1.85 $ 2.20 $ 1.67
========== ======== ==========
Earnings per common share assuming dilution... $ 1.81 $ 2.18 $ 1.64
========== ======== ==========
Average common shares outstanding(a).......... 124,272 35,648 184,874
Average common shares outstanding assuming
dilution(a)................................. 126,777 36,033 188,034
</TABLE>
60
<PAGE> 6
REGIONS FINANCIAL CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
REGIONS AND
ADJUSTMENTS FIRST COMMERCIAL
FIRST INCREASE PRO FORMA
REGIONS COMMERCIAL (DECREASE) COMBINED
---------- ---------- ----------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income............................... $1,259,600 $386,265 $1,645,865
Interest expense.............................. 635,336 175,991 811,327
---------- -------- ----------
Net interest income................. 624,264 210,274 834,538
Provision for loan losses..................... 30,271 4,368 34,639
Non-interest income........................... 187,406 79,238 266,644
Non-interest expense.......................... 487,461 188,018 675,479
---------- -------- ----------
Income before income taxes.................... 293,938 97,126 391,064
Applicable income taxes....................... 96,109 31,892 128,001
---------- -------- ----------
Net Income.......................... $ 197,829 $ 65,234 $ 263,063
========== ======== ==========
Earnings per common share..................... $ 1.60 $ 1.91 $ 1.45
========== ======== ==========
Earnings per common share assuming dilution... $ 1.58 $ 1.89 $ 1.43
========== ======== ==========
Average common shares outstanding(a).......... 123,340 34,221 181,516
Average common shares outstanding assuming
dilution(a)................................. 125,289 34,539 184,005
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(a) Pro forma earnings per share are based on the historical weighted
average number of shares outstanding for Regions, and the historical weighted
average number of shares outstanding for First Commercial, adjusted for
equivalent shares of Regions Common Stock.
61
