NEW ORLEANS - Life in the Big Easy has been everything but for First Commerce Corp. lately.
The company, which operates Louisiana's largest bank, took $28 million in securities losses last year, which helped reduce earnings by a third. Because massive investments in technology and acquisition-related expenses have been holding down 1995 results, investors won't see a "clean" quarter until next year.
So much for the bad news.
The good news is that First Commerce's securities restructuring is expected to boost earnings in this and future years, as will the technological investment. On top of that, economic conditions are improving in Louisiana, so the $7.4 billion-asset bank is now riding a wave of 28% annualized loan growth.
First Commerce has "momentum going into later this year, and certainly into 1996," says Dean Witter analyst Anthony A. Lombardi.
"And, to boot, it's a takeover target," says Lehman Brothers analyst Michael L. Mayo.
Wall Street was less pleased with First Commerce last year when, from the second quarter on, the company reported continually escalating securities losses. Like many banks, New Orleans-based First Commerce found much of its bond portfolio underwater because of sharply rising interest rates.
The difference between First Commerce and most of its peers is that First Commerce had already decided, in response to accounting rule changes, to classify all of its portfolio as "available for sale" instead of "held to maturity," which would have shielded it from recognizing the losses.
First Commerce decided to sell off pieces of the portfolio gradually, turning the year into a kind of water torture for investors: every quarter another securities loss, another round of explanations to analysts.
First Commerce's feisty president and CEO Ian Arnof offers no apologies. "I think it's a problem if you've got bonds that are underwater and you can't resell them," he says. "If interest rates go up, we'll do it again. There'll be some people who won't understand it, but one man's sale is another guy's buying opportunity."
The restructuring does seem to have paid off. The yield on First Commerce's $2.6 billion securities portfolio was 6.76% in the second quarter, 146 basis points higher than the same period of 1994.
First Commerce estimates the restructuring will add 24 cents a share over two years. The bank earned $63.7 million, or $2.19 a share, in 1994.
"The way they handled it was, in retrospect, probably the best way to do it," Mr. Lombardi says.
The condition of First Commerce's securities portfolio is rooted in Louisiana's past economic troubles. Beginning about 1982, the state slid into a decade-long recession that severely wounded some of First Commerce's major rivals.
First Commerce, with its strict underwriting standards and heavy retail orientation, managed to scrape through in fairly decent shape. Executives boast that their bank was the only one with more than $1 billion in assets in any of the Oil Patch states to avoid an annual loss or dividend cut.
By 1992, First Commerce was benefiting from a flight to quality, picking up $1.5 billion in new deposits, half from a failed New Orleans thrift and half from panicked customers of competing banks.
"I had customers calling me asking if they needed to close their safe deposit boxes at other banks," Mr. Arnof recalls.
But anemic loan demand in Louisiana left First Commerce with no choice but to invest the extra deposits in securities, driving its ratio of loans to earning assets down to 45%. "We knew we were at the low point in the interest rate cycle, so we kept maturities short," Mr. Arnof said.
First Commerce had also learned in the late 1970s and early 1980s that banks can make good money in a rising-rate environment by "tax-swapping" securities. The strategy is to sell some bonds, buy similar bonds at a higher yield, and then reinvest the tax savings.
"It played havoc with your reported earnings, but at the end of the day, it was a good deal for the shareholders," Mr. Arnof says.
Analysts now feel comfortable that First Commerce has put its roller- coaster tax-swapping exercise behind it. "Going forward, I don't expect them to do anything material in terms of realizing losses," Mr. Lombardi says.
Unfortunately, First Commerce's earnings will remain distorted for a few more quarters by investment expenses and acquisition-related charges. Two years ago, the company embarked on a massive reengineering and technology investment program, spending $12 million in 1994 alone, to make up for a decade of neglect.
First Commerce also announced its biggest-ever acquisition this past May, when it agreed to buy Central Bank of Monroe for $191 million, or 2.7 times book. This transaction, combined with a smaller acquisition closing about the same time, will result in approximately $10 million in pretax merger charges in the fourth quarter, coming on top of a $2.6 million charge in the third quarter related to another deal.
"I find it somewhat difficult, in that every quarter you've got to sort of dig and find out what the real numbers are and make sure the fundamentals are there," grouses Mr. Lombardi, the Dean Witter analyst. "It's been getting easier the past two or three quarters, but you want to see a payoff."
Mr. Arnof appears confident that payoff will come in 1996 as First Commerce builds on its competitive strength in retail banking, credit cards, correspondent banking, and services to the gaming industry. Improved earnings should help lower First Commerce's expense-to-revenues ratio, currently 60%, to about 59% next year.
The reengineering effort, designed by the Bain & Co. consulting firm, is expected to contribute to the bottom-line improvement. Much of the program involves identifying appropriate customer groups and building profitable relationships with those segments.
A good example is the bank's proprietary credit card operation at service clubs on 88 Air Force bases around the country. The program has the potential to increase First Commerce's credit card outstandings of $450 million by another $230 million.
"It's just a unique piece of business that others aren't pursuing, and that's fine. It works," says executive vice president R. Jeffrey Brooks, director of card services.
Under the leadership of Ashton J. Ryan Jr., president and CEO of the lead New Orleans bank, First Commerce has also spent a lot of time developing specialized services for Louisiana's growing gaming industry, such as cash management, leasing, and ATMs on riverboats.
First Commerce did have to recognize $18 million in nonperforming loans in the second quarter that were related to a failed gambling boat venture. But Mr. Ryan says he's confident the two riverboats in question can be sold by the end of the year and make the bank whole again.
Since First Commerce now has $39 million in nonperforming assets, or 0.95% of loans, a payback on the gaming credits will cut that number nearly in half.
In consumer banking, First Commerce may face some additional pressure next year when Banc One Corp. completes its acquisition of Premier Bancorp, Baton Rouge. Banc One is known as a tough retail competitor, but Mr. Arnof expresses no concern.
He points out that Premier and First Commerce overlap in only a few major markets such as Baton Rouge, Lafayette, and now Monroe. Premier does not have a significant presence in First Commerce's strongholds of New Orleans, Alexandria, and Lake Charles.
Also, even though the Columbus, Ohio-based giant can be expected to introduce some marketing expertise and new products to the Premier franchise, "retail market share is a lot more difficult to move than commercial," Mr. Arnof says. "We're not sitting here quivering in our boosts waiting for Banc One to come in.
"I think we can show double-digit growth in earnings per share just by expanding our share of wallet with our existing customer base," Mr. Arnof adds. "And if I can do that, I'm not going to worry about Banc One."