When will First Commerce Corp. have a "clean" quarter?
That's the question analysts and investors are asking about Louisiana's largest bank, which suffered proportionally more than most other southeastern banks from last year's rising interest rates.
New Orleans-based First Commerce reported three consecutive quarters of securities losses in 1994. The after-tax hit to earnings for the nine months ending Dec. 31 totaled $43.5 million.
Most analysts think First Commerce will be able to report a securities loss-free quarter by Sept. 30. But the company won't be pinned down.
"I can't tell you because we don't know," said executive vice president and chief administrative officer Michael A. Flick. "First Commerce, in a rising interest rate environment, will continue to review its portfolio and continue to consider these types of transactions because we believe they are very much in the long-term interests of shareholders."
Like many other banks around the country, First Commerce chose to sell low-yielding securities at a loss during 1994 in order to reinvest the proceeds in higher yielding instruments. But the impact of this action on the bank's bottom line was magnified by two factors.
The first was First Commerce's unusually large securities portfolio. During 1991 and 1992, the bank acquired about $1.5 billion in new deposits, half from a failed thrift and the rest from worried customers of struggling competitors.
Since Louisiana's economy was then in the doldrums and loan demand virtually nonexistent, First Commerce chose to invest those deposits in bonds. By 1993, the bank actually had a greater percentage of its assets in securities, 55%, than loans, 45%. Banks the size of First Commerce typically have a third of their assets in securities.
It wasn't until loan demand came back strong in 1994 that First Commerce was able to deploy more of its excess liquidity into loans, so that the mix today is 45% securities, or $2.6 billion, and 55% loans, or $3.2 billion.
The second factor has to do with First Commerce's decision to classify 85% of its portfolio in the "available for sale" category, as opposed to "held to maturity." Under FAS 115, the accounting rule that went into affect last year, banks had to do one or the other.
Most banks tended to classify at least half their portfolios as "held to maturity," which means they couldn't sell the bonds and reinvest the proceeds. But they also didn't have to mark them to market and recognize a loss.
"We anticipated a rising rate market," Mr. Flick said. "The logic that led us to put it in the available-for-sale category was, very simply, we wanted to be able to have management capability over that. If you put it in held-for-maturity, you can't really trade it.
"And if you don't trade it, what you do is end up with significantly below-market yields, which will negatively impact the overall profitability of the institution."
