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License to crow.



First Commercial Corp. executives are smiling all the way to the bank these days. While other banks and savings and loans are faltering, the men and women in dark pinstripe suits at Capitol and Broadway know they've got a solid financial institution.

They may even be a bit smug with an extra pleasant feeling and a spring in their step because their stock is doing well, and analysts are raving about it.

"First Commercial's earnings growth the last couple of years has been relatively phenomenal.... Very few companies in our universe produce that level of profitability," says Henry J. Coffey, a bank analyst at J.C. Bradford & Co., Nashville.

The holding company's earnings per share increased 47.4 percent in 1989's second quarter and 42.9 percent for the first six months of 1989 over results for the same periods in 1988.

"I think it's a great bank with real solid finances and good capital," says Matthew W. Finn, a bank analyst with Edward D. Jones & Co., St. Louis.

Finn is impressed that First Commercial has been able to write down its annual net charge-offs to average loans and leases to 0.58 percent in December 1988 from 1.20 percent the previous year.

He also notes that year-end core deposits have been growing: $1.2 million in 1988; $1.1 million, 1987; $1.0 million, 1986; $954,000, 1985, and $897,504, 1984.

Reserves against future bad loans are also piling up, he observes, with nearly $13.3 million in year-end reserves for 1988; $10.6 million, 1987, and $8.6 million, 1986.

Non-performing loans were up slightly for the second quarter at 2.38 percent of total loans, compared to 2.19 percent of a year earlier, but Finn says it was not a significant increase.

One of First Commercial's weaknesses is that its divided yield at 2.7 had been low, compared to other banks at 3.0 to 3.5 percent, Finn says. But First Commercial announced Aug. 15 an annual dividend increase of 64 cents per share, boosting yield to about 3.1 percent.

Additional numbers support the glowing comments of analysts.

Since the merger in July 1983 of First National Bank and Commercial National Bank to form the current bank-holding company, First Commercial stock has gone from $9.52 per share to $20.50 (Aug. 22). Over the period, there were stock splits of 2-1, 5-3 and an 8 percent stock dividend declared.

The latest stock split, which occurred in May, was a good move because it increased the holding company's exposure by making it easier for people to buy stock.

"First Commercial has done things that most other financial institutions have been unable to do," says Ellis Sloan, a portfolio analyst at Meridian Management, Little Rock. "They've been able to maintain the integrity of their loan portfolio and maintain an earnings growth rate -- both in the face of a sluggish Arkansas economy and a burdensome or limiting usury law."

"It has been able to avoid the pitfalls experienced by so many institutions, which made wildly speculative loans by going out of their home market and seeking opportunities in unfamiliar markets," Sloan says.

The bank-holding company has produced an 11 percent compound annual growth rate in earnings per share since 1983.

First Commercial has done well for a bank its size and better than some larger banks, says Richard Bove, senior bank analyst for Dean Witter Reynolds Inc., New York City. Its accomplishments are especially meaningful, he says, because they have occurred within the framework of the state's usury law, which limits the amount of interest customers pay, and as a result, the amount of return a bank can make on its loans.

With the Arkansas lending limit at 12 percent, the base rate charged by First Commercial Bank is 11.5 percent.

First Commercial has used an efficient and careful operation to get where it is. But Bove says it cannot build up the same type of momentum as out-of-state banks because usury limits prevent aggressive campaigns aimed at consumers and businesses seeking loans. Consequently, Arkansas banks must operate in an incredibly defensive fashion, and the state suffers because its capital is exported to other parts of the nation, he says.

Edward D. Jones & Co., which makes a market in First Commercial securities, and Dean Witter Reynolds recommend that their clients buy the stock. J.C. Bradford and Meridian Management do not make public recommendations.

In view of the state's usury limits, analysts praise First Commercial's success in non-interest income producing areas -- its trust department and mortgage servicing division. Annual trust income has grown to nearly $4.2 million in 1988, compared to $3.3 million in 1987 and $2.8 million in 1986. First Commercial Mortgage Co. expanded its servicing portfolio by 34 percent in 1988.

Other performance figures from the second quarter 1989 report add perspective. First Commercial Corp. with assets of $1.48 billion, has a price-to-earnings ratio (P/E) of 9.4; return on assets ratio (ROA as a percentage), 1.15 percent, and market-to-book value (M/B), 1.41.

Comparing Arkansas' other bank of similar size, Worthen Banking Corp. officials say their bank, whose stock is selling for $10 per share, has assets of $1.710 billion; P/E, 12.8; ROA, 0.49 percent, and M/B, nearly 1.16.

A look at out-of-state banks of similar asset size and those that are much larger give an overview of First Commercial's standing.

The holding companies are listed, followed by location; assets in billions; stock price as of Aug. 22; P/E based on 1989 estimated earnings; ROA, and market to book value. The figures are rounded and reflect the first half 1989 performance.

* Victoria Bancshares, Dallas: $1.28, $9.75, not applicable, (-0.31), 0.66.

* First Illinois, Chicago: $1.37, $10.25, 14.43, 1.37, 2.46.

* CB&T Bancshares, Columbus, Ga.: $1.99, $14.75, 16.9, 1.51, 2.70.

* Banc One, Columbus, Ohio: $26.67, $35.50, 11.8, 1.46, 2.16.

* Suntrust Banks, Atlanta: $29.06, $25.00, 9.4, 1.19, 1.61

* First Union, Charlotte, N.C.: $29.80, $24.12, 8.0, 0.99, 1.28

* Bank of New England, Boston: $31.98, $22.00, 6.41, 0.46, 0.92

* BankAmerica, San Francisco: $98.29, $30.75, 7.23, 1.39, 1.46

* Citicorp, New York City: $215.35, $31.62, 6.6, 0.74, 1.17

The banking industry average for selected figures is P/E, 10.1; ROA, 1.02 percent, and M/B, 1.42, according to Edward D. Jones & Co., which supplied information on the out-of-state banks.

First Commercial's success has made many believers.

In 1985, management set goals for returns of 1.0 percent on assets and 15.0 percent on equity. At the time, the marks were greeted with skepticism because of Arkansas usury constraints, says Bill Garner, SVP for marketing. But the ROA target was exceeded last year and also in both quarters of 1989. It now stands at 1.15 percent. The ROE threshold was surpassed in both quarters of this year and currently is 15.6 percent.

First Commercial Bank has been the state's largest bank, and early next year, First Commercial Corp. will solidify its position as the largest bankholding company in Arkansas when the acquisition of Arkansas Bank & Trust Co., Hot Springs, is completed.

The acquisition involves an exchange of nearly 1.2 million shares of First Commercial stock for all the outstanding shares of Arkansas Bank & Trust. The parent company will then have nearly 8.9 million shares outstanding, nearly 23.7 percent of which will be held by five directors.

Management team members deserve credit and should be given a license to crow about the performance of First Commercial's stock. Their plaudits come after traveling a difficult path. Given a better state economy and relaxed usury laws, they're probably dreaming about far surpassing current accomplishments.
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Title Annotation:First Commercial Corp.
Author:Kern, David F.
Publication:Arkansas Business
Article Type:company profile
Date:Aug 28, 1989
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