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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NO. 0-6032
COMPASS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0593897
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
15 SOUTH 20TH STREET
BIRMINGHAM, ALABAMA 35233
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 933-3000
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $2 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of January 31, 1995, the aggregate market value of voting stock held by non-
affiliates was $942,893,559.
Indicate the number of shares outstanding of the registrant's class of common
stock, as of the latest practicable date.
CLASS OUTSTANDING AT JANUARY 31, 1995
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Common Stock, $2 Par Value 36,976,218
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
----------------------------------- ----------------------------------
Proxy Statement for 1995 annual Part III
meeting except for information
referred to in Item 402(a)(8) of
Regulation S-K
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PART I
ITEM 1 -- BUSINESS
Compass Bancshares, Inc. (the "Company") is a bank holding company with its
principal place of business in Birmingham, Alabama. The Company was organized
in 1970 and commenced business in late 1971 upon the acquisition of Central
Bank & Trust Co. and State National Bank. The Company subsequently acquired
substantially all of the outstanding stock of additional banks located in
Alabama, 11 of which were merged in late 1981 to create Central Bank of the
South, Alabama's first statewide bank. In February, 1987, the Company acquired
First National Bank of Crosby near Houston, Texas, and became the first out-
of-state holding company to acquire a bank in Texas. The Company first
expanded into Florida in July, 1991, when it acquired Citizens & Builders
Federal Savings, F.S.B., in Pensacola, Florida. In November, 1993, the Company
changed its name from Central Bancshares of the South, Inc. to Compass
Bancshares, Inc. and Central Bank of the South, the Company's lead bank
subsidiary, changed its name to Compass Bank ("Compass Bank").
In addition to Compass Bank, the Company also owns Compass Bank, a Florida
state member bank headquartered in Jacksonville, Florida ("Compass Bank-
Florida"), Central Bank of the South, an Alabama banking corporation
headquartered in Anniston, Alabama, and Compass Banks of Texas, Inc., a
Delaware bank holding company ("Compass of Texas"), which owns Compass Bank-
Houston in Houston, Texas, and Compass Bank-Dallas in Dallas, Texas. The bank
subsidiaries of the Company and Compass of Texas are referred to collectively
herein as the "Subsidiary Banks". Compass of Texas also owns River Oaks Trust
Company with offices in Houston and Dallas, Texas.
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide them with capital and services
of various kinds. The Company derives substantially all of its income from
dividends from its subsidiaries. Such dividends are determined on an
individual basis, generally in relation to each subsidiary's earnings and
capital position.
SUBSIDIARY BANKS
Compass Bank conducts a general commercial banking and trust business at 90
locations in 47 communities in Alabama. Compass Bank-Houston conducts a
general commercial banking business from 38 locations in Houston, Texas and
Compass Bank-Dallas conducts a general commercial banking business from 21
banking offices in Dallas and Collin Counties, Texas. River Oaks Trust Company
offers a full range of trust services to customers in Texas through its
offices in Houston and Dallas. Compass Bank-Florida conducts a general
commercial banking business from 5 locations in Pensacola, Florida, 18
locations in Jacksonville, Florida and 6 locations in Ft. Walton Beach,
Florida. Central Bank of the South primarily provides cash management services
to commercial customers of the Subsidiary Banks.
The Subsidiary Banks perform banking services customary for full service
banks of similar size and character for their customers in Alabama and Florida
and the two largest metropolitan markets in Texas. Such services include
receiving demand and time deposit accounts, making personal and commercial
loans and furnishing personal and commercial checking accounts. The Trust
Division of Compass Bank and River Oaks Trust Company offer customers in
Alabama, Texas, North Carolina, Georgia and Florida a variety of fiduciary
services, including the administration and investment of funds of estates,
trusts and employee benefit plans. Other trust services include custodial and
portfolio management services, and acting as fiscal and paying agent and
trustee under corporate and government trust indentures. Through Compass
Bancshares Insurance, Inc., a wholly-owned subsidiary of Compass Bank, the
Subsidiary Banks make available to their customers and others, as agent for a
variety of insurance companies, term life insurance, fixed-rate annuities and
other insurance products.
The Subsidiary Banks provide correspondent banking services including loan
participations, investment services, and audit services to approximately 1,000
financial institutions located throughout the Southeast and Southwest. Through
the Correspondent and Investment Services Division of Compass Bank, the
Subsidiary Banks distribute or make available a variety of investment services
and products to institutional
1
and individual investors including sales of municipal bonds, U.S. Government
securities and asset/liability services. Through Compass Brokerage, Inc., a
wholly-owned subsidiary of Compass Bank, the Subsidiary Banks also provide
discount brokerage services, mutual funds, and variable-rate annuities to
individuals and businesses. Through Compass Bank's wholly-owned subsidiary,
Compass Financial Corporation, the Subsidiary Banks provide lease financing
services to individuals and businesses. Compass Mortgage Corporation, a
subsidiary of Compass Bank, was organized in 1992 as a full-service mortgage
corporation and currently originates residential mortgage loans in Alabama and
engages in mortgage banking activities in several states, including Texas and
Florida.
NONBANKING SUBSIDIARIES
Through wholly-owned subsidiaries, the Company is engaged in providing
credit-related insurance products to customers of the Subsidiary Banks and
owning real estate for bank premises. Revenues from operation of these
subsidiaries do not presently constitute a significant portion of the Company's
total operating revenues. The Company may subsequently engage in other
activities permissible for registered bank holding companies when suitable
opportunities develop. Any proposal for such further activities is subject to
approval by appropriate regulatory authorities. (See "Supervision and
Regulation".)
ACQUISITIONS
The Company may seek to acquire other banks and banking offices when suitable
opportunities develop. Discussions are held from time to time with institutions
primarily in Texas, Florida and Alabama about their possible affiliation with
the Company. It is impossible to predict accurately whether any discussions
will lead to agreement. Any bid or proposal for the acquisition of additional
banks is subject to approval by appropriate regulatory authorities. (See
"Supervision and Regulation".)
Since the Company first expanded to Texas in 1987 and to Florida in 1991, the
Company has acquired 20 financial institutions and numerous branch offices in
Texas and Florida. Acquisitions have been made on a competitive bid basis from
the Federal Deposit Insurance Corporation ("FDIC") and the Resolution Trust
Corporation ("RTC") and as the result of negotiations with boards of directors
and shareholders of the institutions. A list of the acquisitions completed
during the past three years with their asset size and closing dates follows (in
Thousands):
Assets Method of
Acquisition Date Acquired Accounting
- ----------- -------- -------- ----------
Interstate Bancshares, Inc. 6-18-92 $ 66,000 Pooling
Houston, Texas
City National Bancshares, Inc. 10-28-92 $ 62,000 Pooling
Carrollton, Texas
FWNB Bancshares, Inc. 12-22-92 $161,000 Pooling
Plano, Texas
Cornerstone Bancshares, Inc. 1-19-93 $239,000 Pooling
Dallas, Texas
First Federal Savings Bank of Northwest Florida 10-14-93 $101,000 Purchase
Ft. Walton Beach, Florida
Peoples Holding Company, Inc. 10-21-93 $ 43,000 Purchase
Ft. Walton Beach, Florida
Spring National Bank 11-3-93 $ 75,000 Pooling
Houston, Texas
1st Performance National Bank 1-27-94 $278,000 Purchase
Jacksonville, Florida
Security Bank, N.A. 5-1-94 $ 76,000 Pooling
Houston, Texas
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On October 1, 1994, the Company completed the acquisition of 22 branches of
First Heights Bank, fsb, of Houston, Texas, with deposits of approximately $870
million and assets of $68 million. Additionally, on May 12, 1994, the Company
acquired three branches of Anchor Savings Bank, F.S.B. in the Jacksonville,
Florida area with deposits of $31 million. Both of these acquisitions were
accounted for as purchases.
PENDING ACQUISITIONS
The Company entered into an agreement on June 16, 1994, to acquire Southwest
Bankers, Inc. ("Southwest"), of San Antonio, Texas, and its bank subsidiary,
The Bank of San Antonio, for 950,000 shares of the Company's common stock. At
December 31, 1994, Southwest had assets of $143 million and equity of $11
million. It is anticipated that the transaction will close in the first quarter
of 1995 and will be accounted for under the pooling-of-interests method of
accounting.
On September 23, 1994, the Company entered into an agreement to acquire The
American Bancorporation of the South ("American"), of Brevard County, Florida,
and its bank subsidiary, American Bank of the South, for up to $15,350,000 in
cash. American had total assets of $183 million and equity of $9 million at
December 31, 1994. The transaction is expected to close during the second
quarter of 1995 and will be accounted for under the purchase method of
accounting.
COMPETITION
The Subsidiary Banks encounter intense competition in their businesses,
generally from other banks located in Alabama, Texas, Florida and adjoining
states and compete for interest bearing funds with other banks, mutual funds
and with many issuers of commercial paper and other securities which are not
banks. Competition also exists for the correspondent banking and securities
sales business, which is particularly important to Compass Bank, from
commercial and investment banks and brokerage firms. In the case of larger
customers, competition exists with financial institutions in Texas and other
major metropolitan areas in the United States, many of which are larger in
terms of capital, resources and personnel. Increasingly, in the conduct of
certain aspects of their businesses, the Subsidiary Banks compete with finance
companies, savings and loan associations, credit unions, mutual funds, factors,
insurance companies and similar financial institutions.
There is significant competition among bank holding companies in most of the
markets served by the Subsidiary Banks. At December 31, 1994, the five largest
bank holding companies in Alabama (including the Company) accounted for
approximately 69 percent of the state's total bank deposits. The Company
believes that intense competition for banking business among bank holding
companies in Alabama, Texas, and Florida will continue and that during 1995 the
competition may further intensify if additional regional bank holding companies
enter such states through the acquisition of local bank holding companies or
savings and loan institutions and with continued consolidation of savings and
loan institutions with and into bank holding companies. Competition among bank
holding companies is also significant in Texas where the Company's Texas
Subsidiary Banks are located in major metropolitan markets having populations
of 4.0 million and 3.7 million people. The Texas Subsidiary Banks are small in
terms of assets and deposits in comparison with the super-regional banks they
compete with in Houston and Dallas. Likewise, in Jacksonville, Pensacola and
Fort Walton Beach, Florida, Compass Bank-Florida encounters intense competition
from other financial institutions that are substantially larger in terms of
assets and deposits.
EMPLOYEES
At January 31, 1995, the Company and its subsidiaries had approximately 4,000
employees. The Company and its subsidiaries provide a variety of benefit
programs including group life, health, accident, and other insurance,
retirement and stock ownership plans. The Company also maintains training,
educational and affirmative action programs designed to equip employees for
positions of increasing responsibility in both management and operating
positions.
3
GOVERNMENT MONETARY POLICY
The Company and the Subsidiary Banks are affected by the credit policies of
monetary authorities, including the Board of Governors of the Federal Reserve
System. An important function of the Federal Reserve System is to regulate the
national supply of bank credit. Among the instruments of monetary policy used
by the Federal Reserve to implement these objectives are: open market
operations in U.S. Government securities, changes in the discount rate, reserve
requirements on member bank deposits and funds availability regulations. These
instruments are used in varying combinations to influence the overall growth of
bank loans, investments and deposits and may also affect interest rates charged
on loans or paid on deposits.
The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of financial institutions in the
past and will continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to the future
impact that changes in interest rates, deposit levels or loan demand may have
on the business and income of the Company and the Subsidiary Banks.
SUPERVISION AND REGULATION
THE COMPANY
The Company and Compass of Texas are multi-bank holding companies within the
meaning of the Bank Holding Company Act ("BHC Act") and are registered as such
with the Federal Reserve. As bank holding companies, the Company and Compass of
Texas are required to file with the Federal Reserve an annual report and such
additional information as the Federal Reserve may require pursuant to the BHC
Act. The Federal Reserve may also make examinations of the Company and each of
its subsidiaries. Under the BHC Act, bank holding companies are prohibited,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than five percent of the voting shares of any company engaging in
activities other than banking or managing or controlling banks or furnishing
services to or performing services for their banking subsidiaries. However, the
BHC Act authorizes the Federal Reserve to permit bank holding companies to
engage in, and to acquire or retain shares of companies that engage in,
activities which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHC Act requires a bank holding company to obtain the prior approval of
the Federal Reserve before it may acquire substantially all the assets of any
bank or ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than five
percent of the voting shares of any such bank. Congress enacted and the
President recently signed into law the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act"), which permits, commencing
one year after enactment, bank holding companies to acquire banks located in
any state without regard to whether the transaction is prohibited under any
state law, except that states may establish the minimum age of their local
banks subject to interstate acquisition of out-of-state bank holding companies.
The minimum age of local banks subject to interstate acquisition is limited to
a maximum of 5 years.
The States of Alabama, Florida, and Texas, where the Company currently
operates banking subsidiaries, each have laws relating specifically to
acquisitions of banks, bank holding companies, and other types of financial
institutions in those states by financial institutions that are based in, and
not based in, those states. In 1986, the State of Alabama enacted a regional
reciprocal banking act. In general, the Alabama statute permits Alabama banks
and bank holding companies to be acquired by regional bank holding companies
and effectively permits Alabama banks and bank holding companies to acquire
banks located in 14 other designated jurisdictions including Texas and Florida
if such jurisdictions have adopted reciprocal statutes. Texas law currently
permits out-of-state bank holding companies to acquire banks in Texas
regardless of where the acquiror is based, subject to the satisfaction of
various conditions such as agreements with respect to compliance with state law
and evidence as to certain financial matters.
4
Prior to July 1, 1994, Florida's regional reciprocal banking act permitted
acquisitions of banks and bank holding companies in Florida by financial
institutions based in 13 designated jurisdictions other than Florida, including
Alabama, but not including Texas. Because of deposits attributable to the
Company's Texas Subsidiary Banks, the Company did not meet the definition of a
regional bank holding company under Florida law existing prior to July 1, 1994.
Effective July 1, 1994, an amendment to Florida law added Texas among the
jurisdictions which defined the term "region" under Florida's regional
reciprocal banking act. The Company has since met the definition of a regional
bank holding company under Florida law. Prior to this amendment to Florida law,
the Company owned in Florida Compass Bank, N.A., a national bank with its
principal office in Pensacola ("Compass Bank, N.A."), and Compass Bank,
Jacksonville, Florida, a federal savings bank ("Compass FSB"). Effective
December 31, 1994, the Company converted Compass Bank, N.A. into Compass Bank-
Florida and merged Compass FSB with and into Compass Bank-Florida. In addition,
Florida has enacted legislation, to become effective on May 1, 1995, which will
permit out-of-state bank holding companies to acquire banks in Florida
regardless of where such companies are based, subject to various conditions.
Upon the effectiveness of the Interstate Act, the restrictions imposed by
these state laws with respect to acquisitions by out-of-state bank holding
companies will no longer be effective. Accordingly, following the effective
date of the Interstate Act's bank holding company acquisition provisions, the
Company and all other bank holding companies will be permitted to undertake
interstate acquisitions of banks consistent with those provisions,
notwithstanding the limitations currently imposed by the interstate banking
laws of any state.
The Federal Reserve Act generally imposes certain limitations on extensions
of credit and other transactions by and between banks which are members of the
Federal Reserve System and other affiliates (which includes any holding company
of which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Banks which are not members of the Federal Reserve System are
also subject to these limitations. Further, federal law prohibits a bank
holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or the furnishing of services.
In December, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. This act recapitalized the Bank Insurance Fund
("BIF"), of which the Subsidiary Banks are members, and the Savings Association
Insurance Fund ("SAIF"), which insures certain of the Subsidiary Banks'
deposits, substantially revised statutory provisions, including capital
standards, restricted certain powers of state banks, gave regulators the
authority to limit officer and director compensation and required holding
companies to guarantee the capital compliance of their banks in certain
instances. Among other things, FDICIA requires the federal banking agencies to
take "prompt corrective action" with respect to banks that do not meet minimum
capital requirements. FDICIA established five capital tiers: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized", as defined by regulations
adopted by the Federal Reserve, the FDIC and the other federal depository
institution regulatory agencies. A depository institution is well capitalized
if it significantly exceeds the minimum level required by regulation for each
relevant capital measure, adequately capitalized if it meets such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in
the regulations. The critical capital level must be a level of tangible equity
capital equal to the greater of 2 percent of total tangible assets or 65
percent of the minimum leverage ratio to be prescribed by regulation. An
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.
If a depository institution fails to meet regulatory capital requirements,
the regulatory agencies can require submission and funding of a capital
restoration plan by the institution, place limits on its activities, require
the raising of additional capital and, ultimately, require the appointment of a
conservator or receiver for the institution. The obligation of a controlling
bank holding company under FDICIA to fund a capital
5
restoration plan is limited to the lesser of 5 percent of an undercapitalized
subsidiary's assets or the amount required to meet regulatory capital
requirements. If the controlling bank holding company fails to fulfill its
obligations under FDICIA and files (or has filed against it) a petition under
the Federal Bankruptcy Code, the FDIC's claim may be entitled to a priority in
such bankruptcy proceeding over third party creditors of the bank holding
company.
An insured depository institution may not pay management fees to any person
having control of the institution nor may an institution, except under certain
circumstances and with prior regulatory approval, make any capital distribution
(including the payment of dividends) if, after making such payment or
distribution, the institution would be undercapitalized. FDICIA also restricts
the acceptance of brokered deposits by insured depository institutions and
contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts.
At December 31, 1994, the Subsidiary Banks were "well capitalized", and were
not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. The Subsidiary Banks do not
rely upon brokered deposits as a primary source of deposit funding, although
such deposits are sold through the Correspondent and Investment Services
Division of Compass Bank.
FDICIA contains numerous other provisions, including new reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy. In addition, FDICIA requires the FDIC to establish a system
of risk-based assessments for federal deposit insurance, by which banks that
pose a greater risk of loss to the FDIC (based on their capital levels and the
FDIC's level of supervisory concern) will pay a higher insurance assessment.
THE SUBSIDIARY BANKS
In general, federal and state banking laws and regulations govern all areas
of the operations of the Subsidiary Banks, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state banking regulatory agencies also
have the general authority to limit the dividends paid by insured banks and
bank holding companies if such payments may be deemed to constitute an unsafe
and unsound practice. Federal and state banking agencies also have authority to
impose penalties, initiate civil and administrative actions and take other
steps intended to prevent banks from engaging in unsafe or unsound practices.
Compass Bank, organized under the laws of the State of Alabama, is a member
of the Federal Reserve System. As such, it is supervised, regulated and
regularly examined by the Alabama State Banking Department and the Federal
Reserve. Compass Bank-Florida is a Florida-chartered bank which is also a
member of the Federal Reserve System. It is supervised, regulated and regularly
examined by the Florida Department of Banking and Finance and the Federal
Reserve. Compass Bank-Houston and Compass Bank-Dallas, both of which are
organized under the laws of the State of Texas, are state banks that are not
members of the Federal Reserve System. The Texas banks are supervised,
regulated and regularly examined by the Department of Banking of the State of
Texas and the FDIC. The Subsidiary Banks, as participants in the BIF and the
SAIF of the FDIC, are subject to the provisions of the Federal Deposit
Insurance Act and to examination by and regulations of the FDIC.
Compass Bank is governed by Alabama laws restricting the declaration and
payment of dividends to 90 percent of annual net income until its surplus funds
equal at least 20 percent of capital stock. Compass Bank has surplus in excess
of this amount. Compass Bank-Houston and Compass Bank-Dallas, governed by the
laws of the State of Texas, are, under certain circumstances, restricted in the
declaration and payment of dividends to the extent that before declaring any
dividends, each of these banks must transfer to its "certified surplus"
accounts an amount not less than 10 percent of the net profits of such bank
earned since the last dividend was declared, except that there is no
requirement for a transfer to certified surplus of a sum which
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would increase the certified surplus to more than the capital stock of the
respective bank. In addition, Compass Bank-Houston has entered into an
agreement with the Commissioner of the Department of Banking of the State of
Texas that it will not declare dividends in excess of 50 percent of its current
earnings. Compass Bank-Florida, governed by the laws of the State of Florida,
may declare and pay dividends not to exceed the current period's net profits
combined with the net retained profits of the previous two years -- after
charging off bad debts, depreciation, and other worthless assets and after
making provision for reasonably anticipated future losses on loans and other
assets -- and may, with the approval of the Department of Banking and Finance
of the State of Florida, declare quarterly, semiannual, or annual dividends, in
any amounts deemed expedient by the board of directors, from retained net
profits which accrued during the preceding two years; provided that, prior to
declaring any dividend, the bank shall carry 20 percent of its net profits for
such preceding period as is covered by the dividend to its surplus fund until
such surplus fund shall at least equal the amount of the bank's common stock
and any preferred stock then issued and outstanding. Compass Bank-Florida may
not declare any dividend at any time at which its net income from the current
year combined with retained net income for the preceding two years is a loss or
which would cause the capital accounts of the bank to fall below any written
agreement with the Florida Department of Banking and Finance or any federal
regulatory agency. Compass Bank-Florida has no such written agreements with the
Florida Department of Banking and Finance or any federal regulatory agency
concerning its dividends. As members of the Federal Reserve System, Compass
Bank and Compass Bank-Florida are subject to dividend limitations imposed by
the Federal Reserve that are similar to those applicable to national banks. The
approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of net profits for that
year, plus its retained net profits for the preceding two years, less any
required transfers to surplus.
Federal law further provides that no insured depository institution may make
any capital distribution, including a cash dividend, if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements. Moreover, the federal bank regulatory agencies also have
the general authority to limit the dividends paid by insured banks if such
payments may be deemed to constitute an unsafe and unsound practice. Insured
banks are prohibited from paying dividends on their capital stock while in
default in the payment of any assessment due to the FDIC except in those cases
where the amount of the assessment is in dispute and the insured bank has
deposited satisfactory security for the payment thereof.
The Community Reinvestment Act of 1977 ("CRA") and the regulations of the
Federal Reserve and the FDIC implementing that act are intended to encourage
regulated financial institutions to help meet the credit needs of their local
community or communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of such financial institutions.
The CRA and such regulations provide that the appropriate regulatory authority
will assess the records of regulated financial institutions in satisfying their
continuing and affirmative obligations to help meet the credit needs of their
local communities as part of their regulatory examination of the institution.
The results of such examinations are made public and are taken into account
upon the filing of any application to establish a domestic branch or to merge
or to acquire the assets or assume the liabilities of a bank. In the case of a
bank holding company, the CRA performance record of the banks involved in the
transaction are reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with any
other bank holding company. An unsatisfactory record can substantially delay or
block the transaction. The bank regulatory agencies have announced a proposal
to revise the regulations implementing the CRA. The proposal contemplates
extensive changes to the existing procedures for determining compliance with
the CRA and the full effect of the proposed regulations cannot be determined at
this time.
OTHER
Other legislative and regulatory proposals regarding changes in banking, and
the regulation of banks, thrifts and other financial institutions, are being
considered by the executive branch of the Federal government, Congress and
various state governments, including Alabama, Texas and Florida. Certain of
these
7
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. It cannot be predicted accurately whether any
of these proposals will be adopted or, if adopted, how these proposals will
affect the Company or the Subsidiary Banks.
The Correspondent and Investment Services Division of Compass Bank is treated
as a municipal securities dealer and a government securities dealer for
purposes of the federal securities laws and, therefore, is subject to certain
reporting requirements and/or regulatory controls by the Securities and
Exchange Commission (the "Commission"), the United States Department of the
Treasury and the Federal Reserve. Compass Brokerage, Inc. is a discount
brokerage service registered with the Commission and the National Association
of Securities Dealers, Inc. and is subject to certain reporting requirements
and regulatory control by these agencies. Compass Bancshares Insurance, Inc. is
a licensed insurance agent or broker for various insurance companies and is
subject to reporting and licensing regulations of the Alabama Insurance
Commission.
References to applicable statutes under the heading "Supervision and
Regulation" are brief summaries of portions thereof, do not purport to be
complete and are qualified in their entirety by reference to such statutes.
8
ITEM 1 -- STATISTICAL DISCLOSURE
PAGE(S)
-------
Consolidated Average Balances, Interest Income/Expense and
Yields/Rates.......................................................... 30 & 31
Rate/Volume Variance Analysis.......................................... 32 & 33
Investment Securities and Investment Securities Available for Sale..... 15
Investment Securities and Investment Securities Available for Sale Ma-
turity Schedule....................................................... 16
Loan Portfolio......................................................... 13
Selected Loan Maturity and Interest Rate Sensitivity................... 14
Nonperforming Assets................................................... 37
Summary of Loan Loss Experience........................................ 35
Allocation of Allowance for Loan Losses................................ 36
Maturities of Time Deposits............................................ 18
Return on Equity and Assets............................................ 25
Short-Term Borrowings.................................................. 19
Interest Rate Sensitivity Analysis..................................... 21
Interest Rate Protection Contracts..................................... 22
Assets/Liabilities Associated With Interest Rate Protection Contracts.. 23
Interest Rate Contracts -- Trading Account............................. 23
Trading Account Composition............................................ 17
Leverage Ratio Calculations............................................ 26
Noninterest Income..................................................... 38
Noninterest Expense.................................................... 40
9
ITEM 2 -- PROPERTIES
The Company, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. The principal executive offices of the
Company are located at 15 South 20th Street, Birmingham, Alabama, in a 317,000
square-foot office building. The Subsidiary Banks own or lease various other
offices and facilities in Alabama, Florida and Texas, with remaining lease
terms of 1 to 20 years, exclusive of renewal options. In addition, the Company
owns a 300,000 square-foot administrative headquarters facility completed in
early 1988 and the River Oaks Bank Building in Houston, Texas, a 14-story,
168,000 square-foot office building. The River Oaks Bank Building is 35 percent
occupied by Compass Bank-Houston and River Oaks Trust Company. The remaining
space is leased to multiple tenants. See "Summary of Significant Accounting
Policies" and "Notes to Consolidated Financial Statements" for information with
respect to the amounts at which bank premises, equipment and other real estate
are carried and information relating to commitments under long-term leases.
ITEM 3 -- LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is presently involved in any
material legal proceedings other than ordinary routine litigation incidental to
its business.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1994.
10
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low closing prices of the common
stock of the Company as reported through the National Association of Securities
Dealers, Inc. Automated Quotation National Market System and the dividends paid
thereon during the periods indicated. The prices shown do not reflect retail
mark-ups, mark-downs, or commissions. All share prices have been rounded to the
nearest 1/8 of one dollar.
High Low Dividend
---- ---- --------
1994:
FIRST QUARTER......................................... $ 24 $ 21 $.23
SECOND QUARTER........................................ 26 3/4 23 .23
THIRD QUARTER......................................... 26 23 .23
FOURTH QUARTER........................................ 23 3/4 21 .23
1993:
First quarter......................................... $ 25 3/4 $22 1/2 $.19
Second quarter........................................ 26 1/2 22 1/2 .19
Third quarter......................................... 26 23 1/2 .19
Fourth quarter........................................ 25 20 3/4 .19
As of January 31, 1995, there were 6,221 shareholders of record of common
stock of which 5,295 were residents of either Alabama, Texas or Florida.
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five
years. All per share information for periods prior to July, 1992, has been
restated to reflect the 3-for-2 stock split with respect to the Company's
common stock, which was effected by a stock dividend paid on July 2, 1992. All
prior year information has been restated to reflect acquisitions consummated
during 1994 accounted for under the pooling-of-interests method of accounting.
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(in Thousands Except Per Share Data)
Net interest income..... $ 331,368 $ 329,013 $ 316,924 $ 257,593 $ 198,976
Provision for loan
losses................. 3,404 36,306 53,175 38,199 24,193
Net income.............. 99,671 89,718 76,003 63,374 52,605
Per common share data:
Net income............. $ 2.68 $ 2.37 $ 2.01 $ 1.74 $ 1.51
Cash dividends
declared.............. .92 .76 .667 .587 .533
Balance sheet:
Average total equity... $ 574,549 $ 538,787 $ 482,047 $ 409,482 $ 346,913
Average assets......... 8,019,343 7,125,744 6,811,121 6,129,106 5,293,948
Period-end FHLB and
other borrowings...... 484,942 325,437 203,913 13,181 11,750
Period-end total
equity................ 600,613 551,337 510,817 453,505 363,090
Period-end assets...... 9,123,253 7,333,594 7,084,441 6,781,121 5,541,716
11
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report. Prior year information has been restated to reflect
1994 and 1993 acquisitions accounted for using the pooling-of-interests
accounting method and prior period per share data has been restated to reflect
a 3-for-2 stock split effected through the issuance of a 50 percent stock
dividend paid in July, 1992. Financial institutions acquired by the Company
during the past three years and accounted for as purchases are reflected in the
financial position and results of operations of the Company since the date of
their acquisition.
SUMMARY
Net income for 1994 was $100 million, an 11 percent increase over the
Company's previous high of $90 million in 1993. Net income for 1993 was 18
percent higher than 1992 net income of $76 million. The increases in net income
per common share for 1994 and 1993 were 13 percent and 18 percent,
respectively. Net income per common share increased 16 percent during 1992.
Pretax income for 1994 was up $13 million or 10 percent over 1993 while income
tax expense increased only 7 percent over the same period due to a decrease in
the effective tax rate in 1994 from 35 percent to 34 percent partially offset
by an increase in the Company's income subject to taxation.
One significant factor in the growth of the Company has been the Company's
acquisitions in Texas, specifically the Houston and Dallas areas, since late
1987. The Texas expansion continued throughout 1994 and is expected to continue
in 1995. On October 1, 1994, the Company completed its largest acquisition to
date with the purchase of 22 branches of First Heights Bank, fsb ("First
Heights") of Houston, Texas with total deposits of $870 million. This
acquisition increased the assets of the Company's Texas operations to
approximately $3 billion and management expects the asset size to continue to
increase. In addition, the Company has been able to expand its operations in
Florida and will seek to continue to increase its presence in that market in
1995. For additional information, see "Acquisitions" and "Pending Acquisitions"
in Part I of this report and the accompanying "Notes to the Consolidated
Financial Statements," Note 10, Mergers and Acquisitions.
EARNING ASSETS
Average earning assets in 1994 increased 13 percent over 1993 due to
increases in both average loans and total investment securities. The average
earning asset mix continued to change during 1994 with loans at 72 percent,
investment securities and investment securities available for sale at 24
percent and other earning assets at 4 percent of the total. In 1993, loans were
74 percent, investment securities and investment securities available for sale
were 22 percent and other earning assets were 4 percent of average earning
assets, up from 68 percent, 29 percent, and 3 percent, respectively, in 1992.
The shift in the mix of earning assets during 1994 is to a large extent due to
the First Heights acquisition in which the assets acquired, principally cash,
were initially invested in investment securities and federal funds sold which
more than offset the positive impact of the growth in loans discussed below.
Management anticipates that it will take several quarters to return the portion
of earning assets represented by loans to desired levels while maintaining the
Company's standards of acceptable credit risk. The mix of earning assets is
monitored on a continuous basis in order to react to interest rate movements
and to maximize return on earning assets.
LOANS
Average loans increased 10 percent in 1994 with much of the increase
concentrated in residential mortgage loans and real estate construction loans.
Total loans outstanding at year end increased 11 percent over previous year-end
levels. The growth in the portfolio resulted from the Company's ongoing efforts
to increase the loan portfolio through the origination of loans, especially
variable rate one-to-four family real
12
estate mortgages. Real estate construction loans increased 46 percent,
residential mortgage loans increased 19 percent, consumer installment loans
increased 3 percent and commercial mortgage loans increased less than 1 percent
from year-end 1993 to year-end 1994. Commercial, financial and agricultural
loans, which were 20 percent of total loans in 1994, increased 4 percent
compared to the previous year. The 11 percent increase in the Company's loan
portfolio from 1992 to 1993 occurred primarily in residential mortgage loans
which increased 30 percent.
The Company's loan portfolio continues to reflect the diversity of the
markets served by the Subsidiary Banks. The condition of the economy in states
in which the Subsidiary Banks lend money is further reflected in the loan
portfolio mix. There has been a decline in the volume of commercial, financial
and agricultural loans, as a percentage of total loans outstanding, for the
past five years, reflective of the general state of the economy in the markets
served. With fewer attractive lending opportunities in the commercial lending
area, other lending opportunities were sought and brought about the increases
in the other categories within the portfolio. Specifically, the mortgage
refinancing boom of the past two years resulted in growth in residential real
estate mortgages from 31 percent of the loan portfolio at December 31, 1992, to
39 percent at year-end 1994. Additionally, the Company experienced a three
percent increase in its indirect auto loan portfolio from 1993 to 1994. At
December 31, 1994, the Company's indirect loan portfolio, consisting primarily
of indirect automobile loans, represented 14 percent of total loans
outstanding.
The Company has not invested in loans that would be considered highly
leveraged transactions ("HLT") as defined by the Federal Reserve Board and
other regulatory agencies. The Company had no foreign loans or loans to lesser
developed countries as of December 31, 1994.
The Loan Portfolio table shows the classifications of loans by major category
at December 31, 1994, and for each of the preceding four years. The second
table shows maturities of certain loan classifications at December 31, 1994,
and an analysis of the rate structure for such loans due in over one year.
LOAN PORTFOLIO
December 31
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(in Thousands)
Commercial,
financial and
agricultural $1,179,013 20.4% $1,136,427 21.8% $1,062,509 22.7% $ 977,170 24.5% $ 926,688 26.5%
Real estate --
construction...... 369,331 6.4 253,086 4.9 235,566 5.0 200,733 5.0 298,784 8.6
Real estate --
mortgage:
Residential....... 2,273,771 39.5 1,903,578 36.6 1,467,747 31.3 1,022,715 25.6 794,248 22.7
Commercial........ 732,590 12.7 731,839 14.1 719,957 15.4 713,082 17.9 540,296 15.5
Consumer install-
ment.............. 1,207,995 21.0 1,176,005 22.6 1,199,880 25.6 1,078,670 27.0 933,958 26.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
5,762,700 100.0% 5,200,935 100.0% 4,685,659 100.0% 3,992,370 100.0% 3,493,974 100.0%
===== ===== ===== ===== =====
Less: Unearned in-
come 1,189 3,471 6,600 8,556 9,422
Allowance for loan
losses........... 107,183 110,616 83,859 55,982 42,770
---------- ---------- ---------- ---------- ----------
Total loans........ $5,654,328 $5,086,848 $4,595,200 $3,927,832 $3,441,782
========== ========== ========== ========== ==========
13
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
Rate Structure For Loans
Maturity Maturing Over One Year
----------------------------------------- -------------------------
One Over One Year Over Predetermined Floating or
Year or Through Five Five Interest Adjustable
Less Years Years Total Rate Rate
-------- ------------- ------- ---------- ------------- -----------
(in Thousands)
Commercial, financial
and agricultural....... $807,946 $313,723 $57,344 $1,179,013 $261,434 $109,633
Real estate --
construction.......... 177,847 191,484 -- 369,331 162,421 29,063
-------- -------- ------- ---------- -------- --------
$985,793 $505,207 $57,344 $1,548,344 $423,855 $138,696
======== ======== ======= ========== ======== ========
INVESTMENT SECURITIES
On December 31, 1993, the Company adopted Financial Accounting Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities
("FAS115") which requires that a company's debt and equity securities be
classified based on management's intent to hold the securities into one of
three categories: (i) trading account securities, (ii) held-to-maturity
securities, or (iii) securities available for sale. Securities held in a
trading account are required to be reported at fair value, with unrealized
gains and losses included in earnings. Securities designated to be held to
maturity are reported at amortized cost. Securities classified as available for
sale are required to be reported at fair value with unrealized gains and
losses, net of taxes, excluded from earnings and shown separately as a
component of shareholders' equity. At December 31, 1994, unrealized losses, net
of unrealized gains, in the Company's available-for-sale portfolio totaled
$15.7 million as opposed to net unrealized gains of $10.5 million at December
31, 1993. Under the requirements of FAS115, shareholders' equity at December
31, 1994, has been reduced by $11.5 million to reflect the tax-effected
unrealized loss associated with the available-for-sale portfolio.
The composition of the Company's total investment securities portfolio
reflects the Company's investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the Company's investment strategy are to maintain an appropriate level of
liquidity and provide a tool to assist in controlling the Company's interest
rate position while at the same time producing adequate levels of interest
income. For securities classified as held-to-maturity, the Company has the
ability, and it is management's intention, to hold such securities to maturity.
Certain securities that may be sold prior to maturity are reflected as
investment securities available for sale on the Company's balance sheet. The
Company transferred approximately $566 million of investment securities from
its held-to-maturity portfolio to the available-for-sale classification in 1992
and, with the adoption of FAS115 on December 31, 1993, transferred an
additional $64 million of investment securities to its available-for-sale
portfolio. The transfer primarily involved fixed-rate collateralized mortgage
obligations ("CMOs") that could have been required, based on the wording of a
regulatory policy of the Federal Financial Institutions Examination Council
("FFIEC") in place at the time, to be transferred to the available-for-sale
portfolio in the future if sufficiently reduced prepayment speeds were
experienced on the underlying mortgages. During 1994, the FFIEC clarified its
policy language and intent, which enabled CMOs to be carried in the held-to-
maturity portfolio under FAS115. As a result, the Company transferred
approximately $225 million of CMOs from its available-for-sale portfolio to
investment securities held to maturity during 1994.
During 1994 and 1993, sales of held-to-maturity securities were $700,000 and
$48.8 million, respectively, while maturities totaled $297.9 million and $442.4
million, respectively. Sales and maturities of securities available for sale
totaled $239.8 million and $106.7 million, respectively, in 1994 while sales
and maturities in the category in 1993 were $57.3 million and $251.8 million.
Net gains associated with the sales accounted for four percent and one percent
of noninterest income in 1994 and 1993, respectively. Gross unrealized gains
14
in the Company's held-to-maturity portfolio amounted to $6.6 million at year-
end 1994 and gross unrealized losses amounted to $55.5 million.
In recent years, the trend of the Company has been to invest in taxable
securities due to the lack of preferential treatment afforded tax-exempt
securities under the tax laws. Because of their liquidity, credit quality and
yield characteristics, the majority of the purchases of taxable securities have
been in mortgage-backed pass-through securities ("MBS") and CMOs. Total average
investment securities, including those available for sale, increased 25 percent
during 1994 after decreasing 21 percent in 1993. Total investment securities,
including those available for sale, at December 31, 1994, increased 101 percent
from year-end 1993 primarily due to the investment of cash received in
connection with the acquisition of First Heights.
The following table contains the carrying amount of the investment securities
portfolio at the end of each of the last three years.
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
December 31
---------------------------------
1994 1993 1992
---------- ---------- ----------
(in Thousands)
Investment securities:
U.S. Treasury................................ $ 11,978 $ 2,014 $ 46,672
U.S. Government agencies and corporations.... 85,784 26,704 46,736
Mortgage-backed pass-through securities...... 431,259 280,982 490,203
Collateralized mortgage obligations:
Agency...................................... 618,849 114,399 289,281
Corporate................................... 422,011 23,782 22,697
States and political subdivisions............ 78,472 108,409 152,061
Corporate bonds.............................. 162,306 43,571 51,340
Other........................................ 2,678 4,603 23,836
---------- ---------- ----------
1,813,337 604,464 1,122,826
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 650,121 259,200 292,216
Mortgage-backed pass-through securities...... 756 978 --
Collateralized mortgage obligations:
Agency...................................... 19,196 278,103 177,096
Corporate................................... -- 49,416 71,708
Other........................................ 47,572 47,260 19,536
---------- ---------- ----------
717,645 634,957 560,556
Net unrealized gain (loss).................. (15,705) 10,497 --
---------- ---------- ----------
701,940 645,454 560,556
---------- ---------- ----------
Total....................................... $2,515,277 $1,249,918 $1,683,382
========== ========== ==========
The maturities and weighted average yields of the investment securities and
investment securities available for sale at the end of 1994 are presented in
the following table using primarily the average expected lives including the
effects of prepayments. The amounts and yields disclosed for investment
securities available for sale reflect the amortized cost rather than the net
carrying value, i.e., market value, of these securities. Taxable equivalent
adjustments, using a 35 percent tax rate, have been made in calculating yields
on tax-exempt obligations.
15
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE MATURITY
SCHEDULE
Maturing
----------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
-------------- ----------------- ---------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- --------- ----- -------- ----- -------- -----
(in Thousands)
Investment securities:
U.S. Treasury.......... $ 5,986 4.34% $ 5,992 4.43% -- -- -- --
U.S. Government
agencies and
corporations.......... 1,048 7.73 69,085 6.55 $ 15,651 9.30% -- --
Mortgage-backed pass-
through securities.... 162 6.38 288,987 8.18 90,081 7.18 $ 52,029 7.20%
Collateralized mortgage
obligations........... 49,738 7.27 634,050 7.44 184,017 7.68 173,055 7.57
States and political
subdivisions.......... 4,627 9.12 14,801 8.93 13,566 9.12 45,478 9.56
Other.................. 63,983 5.99 82,859 6.53 16,663 9.69 1,479 6.00
-------- ----------- ---------- --------
125,544 6.54 1,095,774 7.51 319,978 7.79 272,041 7.81
-------- ----------- ---------- --------
Investment securities
available for sale--
amortized cost:
U.S. Treasury.......... 292,794 5.04 356,881 5.14 -- -- 446 10.88
Mortgage-backed pass-
through securities.... -- -- -- -- 756 8.58 -- --
Collateralized mortgage
obligations........... -- -- -- -- 9,196 7.95 10,000 6.95
Other.................. 14,287 6.88 33,265 6.25 -- -- 20 7.00
-------- ----------- ---------- --------
307,081 5.13 390,146 5.23 9,952 8.00 10,466 7.12
-------- ----------- ---------- --------
Total.................. $432,625 5.54 $ 1,485,920 6.91 $ 329,930 7.79 $282,507 7.79
======== =========== ========== ========
While the weighted average stated maturities of total MBS and CMOs are 12.3
years and 21.2 years, respectively, the corresponding average expected lives
assumed in the above table are 6.2 years and 5.8 years. During a period of
rising rates, prepayment speeds generally slow on MBS and CMOs with a resulting
extension in average life. Due to the large number of new mortgages generated
during the lengthy refinancing period ending in 1994, and the subsequent
increase in mortgage rates, prepayment speeds at year end are not expected to
slow much further. For example, given a 100 basis point immediate and permanent
increase in mortgage rates, the expected average lives for MBS and CMOs would
be 6.4 and 6.1 years, respectively.
The weighted average market prices as a percentage of par value for MBS and
CMOs at December 31, 1994, were 98.63 percent and 94.22 percent, respectively.
The market prices for MBS and CMOs generally decline in a rising rate
environment due to the resulting increase in average life as well as the (i)
decreased market yield on fixed rate securities and (ii) impact of annual and
life rate caps on adjustable-rate securities. The opposite is generally true
during a period of falling rates. At December 31, 1994, fixed-rate MBS and CMOs
totaled $347.9 million and $823.2 million, respectively, with corresponding
weighted average expected lives of 4.1 and 3.4 years. Adjustable rate MBS and
CMOs totaled $84.1 million and $236.9 million, respectively, with corresponding
weighted average expected lives of 14.7 and 13.6 years. Substantially all
adjustable-rate MBS and CMOs are subject to life rate caps, and MBS are also
subject to a 2 percent annual cap. The weighted average life caps at year end
are 12.52 percent and 9.90 percent for MBS and CMOs, respectively, and the
corresponding weighted average coupon rates at year end were 6.86 percent and
7.00 percent. Given a 100 basis point immediate and permanent increase in
mortgage rates, the estimated market prices as a percentage of par value for
MBS and CMOs would be 95.90 and 91.82, respectively.
TRADING ACCOUNT SECURITIES AND OTHER EARNING ASSETS
Securities carried in the trading account, while interest bearing, are
primarily held for sale. The volume of activity is directly related to general
market conditions and reactions to the changing interest rate environment. The
average balance in the trading account portfolio for 1994 decreased by 24
percent following a 74 percent increase in 1993. The composition of the
Company's trading account at December 31, 1994 and 1993, is detailed below:
16
TRADING ACCOUNT COMPOSITION
DECEMBER 31, 1994 December 31, 1993
----------------- -----------------
(in Thousands)
U.S. Treasury and Government agency......... $26,599 $ 45,158
States and political subdivisions........... 9,046 10,984
Mortgage-backed pass-through securities..... 15,567 10,651
Other debt securities....................... 201 6,321
Derivative securities:
Collateralized mortgage obligations:
Fixed and floating...................... 5,344 129,652
Inverse floaters........................ -- 31,306
Interest rate floors and caps............. 1,178 5,131
Other options............................. 77 288
------- --------
$58,012 $239,491
======= ========
The overall level of the trading account decreased from December 31, 1993, as
a result of the Company's decisions during the second quarter of 1994 to sell
its position in inverse floaters and to substantially limit its proprietary
trading efforts (as distinguished from the retail trading necessary to
facilitate customer transactions) in response to the rising interest rate
environment.
Average federal funds sold and securities purchased under agreements to
resell increased 51 percent in 1994 compared to a 23 percent increase in 1993.
The average balance of interest bearing deposits in other banks decreased 44
percent during 1994 from 1993 levels after decreasing 18 percent from 1992 to
1993. There were no foreign time deposits as of December 31, 1994 or 1993.
DEPOSITS AND BORROWED FUNDS
Changes in the Company's markets and the economy in general, as well as the
First Heights acquisition, not only impacted the Company's asset mix in 1994,
but the Company's liability mix as well. Primarily as a result of the First
Heights acquisition, deposits increased by 26 percent from year-end 1993 to
year-end 1994. At the same time, the portion of average interest bearing
liabilities represented by interest bearing deposits, the primary source of
funding for the Company, increased from 79 percent in 1993 and 1992 to 81
percent in 1994 due to the fact that interest bearing deposits were the only
interest bearing liabilities assumed in connection with the acquisition of
First Heights. Falling interest rates during 1992 and 1993 allowed the Company
to restructure the mix of deposits toward more consumer-oriented, lower-cost
sources of funds. Conversely, the rise in the general level of interest rates
during 1994 resulted in a shift toward higher-cost time deposits. This factor,
coupled with the fact that time deposits represented 73 percent of total
deposits assumed in the First Heights acquisition, resulted in an increase in
the percentage of average total deposits represented by average time deposits
from 37 percent in 1993 to 40 percent in 1994.
During 1994, the average balance of demand deposits and savings accounts
increased by $229.1 million while the average balance of certificates of
deposit and other time deposits grew by $486.3 million. The largest dollar
increase in average interest bearing deposits was in certificates of deposits
and other time deposits less than $100,000, increasing $337.4 million or 22
percent from 1993. Average noninterest bearing demand deposits increased $75.7
million, or 7 percent, after increasing 11 percent during 1993 and 21 percent
in 1992. The increase in deposits in 1994 was due principally to the
acquisition of 22 branches of First Heights and the related deposits totaling
$870 million as well as the acquisition of 1st Performance National Bank ("1st
Performance") of Jacksonville, Florida in January, 1994. The increase during
1993 was due primarily to internally generated growth with a portion of the
increase due to the Company's Florida acquisitions, while the increase in 1992
was due solely to internally generated growth. Savings deposits, interest
bearing demand deposits, and noninterest bearing demand deposits accounted for
60 percent of total average deposits during
17
1994, down from 63 percent in 1993 and 61 percent in 1992. Total average time
deposits, including certificates of deposit over $100,000, were approximately
$2.5 billion in 1994 and $2.0 billion in 1993 with the large certificates of
deposit representing 25 percent of the total during 1994 and 24 percent during
1993. The maturities of certificates of deposit of $100,000 or more and other
time deposits of $100,000 or more outstanding at December 31, 1994, are
summarized in the following table:
MATURITIES OF TIME DEPOSITS
Certificates Other Time
of Deposit Deposits
Over Over
$100,000 $100,000 Total
------------ ---------- --------
(in Thousands)
Three months or less.......................... $281,277 $18,287 $299,564
Over three through six months................. 110,585 -- 110,585
Over six through twelve months................ 105,769 10,000 115,769
Over twelve months............................ 200,096 -- 200,096
-------- ------- --------
$697,727 $28,287 $726,014
======== ======= ========
Borrowed funds consist of FHLB and other borrowings as well as short-term
borrowings, primarily in the form of federal funds purchased, securities sold
under agreements to repurchase, and other short-term borrowings. Average
federal funds purchased declined seven percent during 1994 and average
securities sold under agreements to repurchase increased one percent. Average
other short-term borrowings, which include parent company commercial paper and
trading account short sales, increased eight percent. During 1994, the average
balance of FHLB and other borrowings increased $75 million, or 27 percent, as a
result of the issuance of $50 million in subordinated debentures in the third
quarter of the year and additional FHLB advances of $110 million incurred in
the fourth quarter. The average balance of FHLB and other borrowings increased
during 1993 due to additional borrowings of $75 million in subordinated
debentures and $48 million in FHLB advances. For a discussion of interest rates
and maturities of FHLB and other borrowings, refer to Note 5, FHLB and Other
Borrowings, in the "Notes to Consolidated Financial Statements."
The Short-Term Borrowings table on the following page shows the distribution
of the Company's short-term borrowed funds and the weighted average interest
rates thereon at the end of each of the last three years. Also provided are the
maximum outstanding amounts of borrowings, the average amounts of borrowings
and the average interest rates at year-end for the last three years.
18
SHORT-TERM BORROWINGS
Year Ended December 31
-------------------------------------------------
Maximum Average
Outstanding Average Interest
At Any Average Interest Ending Rate At
Month End Balance Rate Balance Year End
----------- ---------- -------- -------- --------
(in Thousands)
1994
FEDERAL FUNDS PURCHASED...... $ 484,189 $ 380,160 4.54% $484,189 5.69%
SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE.... 348,235 243,109 3.54 348,235 4.74
SHORT SALES.................. 43,352 21,470 5.54 16,756 6.33
COMMERCIAL PAPER............. 106,591 92,748 3.94 45,330 5.10
OTHER SHORT-TERM BORROWINGS.. 269,519 110,909 4.66 42,512 5.44
---------- ---------- --------
$1,251,886 $ 848,396 $937,022
========== ========== ========
1993
Federal funds purchased...... $ 499,390 $ 409,072 3.05% $414,704 2.99%
Securities sold under
agreements to repurchase.... 269,873 240,474 2.80 208,739 2.56
Short sales.................. 34,660 23,546 4.28 25,656 4.10
Commercial paper............. 118,073 80,126 3.15 62,858 3.05
Other short-term borrowings.. 203,569 104,403 3.24 82,500 3.26
---------- ---------- --------
$1,125,565 $ 857,621 $794,457
========== ========== ========
1992
Federal funds purchased...... $ 875,685 $ 617,697 3.53% $545,605 2.98%
Securities sold under
agreements to repurchase.... 345,645 269,980 3.36 234,670 2.92
Short sales.................. 63,115 29,309 5.75 23,970 5.22
Commercial paper............. 88,910 70,332 3.62 34,302 3.26
Other short-term borrowings.. 160,810 91,927 3.80 74,059 3.21
---------- ---------- --------
$1,534,165 $1,079,245 $912,606
========== ========== ========
LIQUIDITY MANAGEMENT
Liquidity is the ability of a bank to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the
Company's ability to meet the day-to-day cash flow requirements of the
Subsidiary Banks' customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Subsidiary Banks would not be able to perform the
primary function of a financial intermediary and would, therefore, not be able
to meet the needs of the communities they serve.
Additionally, the parent holding company requires cash for various operating
needs including dividends to shareholders, business combinations, capital
injections into the Subsidiary Banks, the servicing of debt and the payment of
general corporate expenses. The primary source of liquidity for the parent
holding company is dividends from the Subsidiary Banks. At December 31, 1994,
the Company's Subsidiary Banks could have paid additional dividends to the
parent holding company in the amount of $99.8 million while continuing to meet
the capital requirements for "well-capitalized" banks. Also, the parent
holding company has access to various capital markets as evidenced by the
issuance of subordinated debentures in 1993 and 1994 and the issuance of
common stock in a private placement in 1991. The parent holding company does
not anticipate any liquidity requirements that it cannot meet in the near
future.
Asset and liability management functions not only to assure adequate
liquidity in order for the Subsidiary Banks to meet the needs of their
customers, but also to maintain an appropriate balance between interest-
sensitive assets and interest-sensitive liabilities so that the Company can
also meet the investment requirements of its shareholders. Daily monitoring of
the sources and uses of funds is necessary to maintain
19
an acceptable cash position that meets both requirements. In a banking
environment, both assets and liabilities are considered sources of liquidity
funding and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a
lesser extent, sales of investment securities available for sale and trading
account securities. Real estate construction and commercial, financial and
agricultural loans that mature in one year or less amounted to $986 million or
17 percent of the total loan portfolio at December 31, 1994. Other short-term
investments such as federal funds sold, securities purchased under agreements
to resell and maturing interest bearing deposits with other banks are
additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and noninterest bearing deposit accounts.
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings are additional sources of liquidity and basically
represent the Company's incremental borrowing capacity. These sources of
liquidity are short-term in nature and are used as necessary to fund asset
growth and meet short-term liquidity needs.
As disclosed in the Company's "Consolidated Statements of Cash Flows," net
cash provided by operating activities increased to $322.0 million primarily
due to the decrease in trading account securities. Net cash used in investing
activities of $691.6 million consisted primarily of net loans originated of
$441.6 million and held-to-maturity securities and available-for-sale
securities purchased of $1.3 billion and $654.4 million, respectively, funded
by cash received in the First Heights branch purchase as well as maturities
and paydowns of investment securities held to maturity and investment
securities available for sale of $297.9 million and $106.7 million,
respectively, and sales of investment securities available for sale of $239.8
million. This overall increase in the Company's investment securities
portfolios was due to the initial investment of cash received in connection
with the First Heights branch purchase. Net cash provided by financing
activities provided the remainder of funding sources for 1994. The $569.0
million of net cash provided consisted primarily of a $306.5 million net
increase in deposits, a net increase of $159.4 million in FHLB and other
borrowings, and a $201.9 million increase in federal funds purchased and
securities sold under agreements to repurchase offset partially by a reduction
of $66.5 million in other short-term borrowings. The increase in FHLB and
other borrowings in 1994 consisted of $50 million of subordinated debentures
issued by the Company during the third quarter of the year and additional FHLB
advances of $110 million during the fourth quarter of 1994.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest bearing assets
and liabilities are subject to change in interest rates either at replacement,
repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on repricing relationships of assets and
liabilities during periods of changes in market interest rates. Effective
interest rate sensitivity management seeks to ensure that both assets and
liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net
interest income. Interest rate sensitivity is measured as the difference
between the volumes of assets and liabilities in the Company's current
portfolio that are subject to repricing at various time horizons: immediate, 1
to 3 months, 4 to 12 months, 1 to 5 years and over 5 years. The differences
are known as interest sensitivity gaps. The following table shows interest
sensitivity gaps for these different intervals as of December 31, 1994 and
1993, including the effect of interest rate swaps, interest rate floors,
futures and other hedging instruments.
20
INTEREST RATE SENSITIVITY ANALYSIS
December 31
-----------------------------------------------------------------------
One- Four- One- Over
Three Twelve Five Five
Immediate Months Months Years Years Total
---------- ----------- ---------- ---------- ---------- ----------
(in Thousands)
1994
EARNING ASSETS:
LOANS, NET OF UNEARNED
INCOME................ $1,371,127 $ 370,828 $1,580,713 $ 967,365 $1,471,478 $5,761,511
TAXABLE INVESTMENT
SECURITIES............ -- 342,668 297,948 817,618 265,789 1,724,023
TAX-EXEMPT INVESTMENT
SECURITIES............ -- 270 3,552 14,324 71,168 89,314
INVESTMENT SECURITIES
AVAILABLE FOR SALE.... -- 92,925 260,427 345,952 2,636 701,940
TRADING ACCOUNT
SECURITIES............ 58,012 -- -- -- -- 58,012
FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED
UNDER AGREEMENTS TO
RESELL................ 46,535 -- -- -- -- 46,535
INTEREST BEARING
DEPOSITS WITH OTHER
BANKS................. -- -- -- -- 99 99
---------- ----------- ---------- ---------- ---------- ----------
TOTAL EARNING ASSETS... 1,475,674 806,691 2,142,640 2,145,259 1,811,170 8,381,434
INTEREST BEARING
LIABILITIES:
DEMAND DEPOSITS........ -- 825,170 -- -- -- 825,170
SAVINGS DEPOSITS....... -- -- 1,389,781 -- 394,123 1,783,904
CERTIFICATES OF DEPOSIT
LESS THAN $100,000 AND
OTHER TIME DEPOSITS... -- 561,562 803,406 1,005,241 20,597 2,390,806
CERTIFICATES OF DEPOSIT
OF $100,000 OR MORE... -- 281,277 216,354 195,701 4,395 697,727
FEDERAL FUNDS PURCHASED
AND SECURITIES SOLD
UNDER AGREEMENTS TO
REPURCHASE............ 828,924 -- -- -- 3,500 832,424
OTHER SHORT-TERM
BORROWINGS............ 104,598 -- -- -- -- 104,598
FHLB AND OTHER
BORROWINGS............ -- 246,043 136 110,901 127,862 484,942
---------- ----------- ---------- ---------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES........... 933,522 1,914,052 2,409,677 1,311,843 550,477 7,119,571
EFFECT OF INTEREST RATE
SWAPS.................. (20,000) 26,000 -- 2,000 (8,000) --
---------- ----------- ---------- ---------- ---------- ----------
INTEREST SENSITIVITY
GAP.................... 522,152 (1,081,361) (267,037) 835,416 1,252,693 $1,261,863
---------- ----------- ---------- ---------- ---------- ==========
CUMULATIVE INTEREST
SENSITIVITY GAP........ $ 522,152 $ (559,209) $ (826,246) $ 9,170 $1,261,863
========== =========== ========== ========== ==========
1993
Earning assets:
Loans, net of unearned
income................. $1,280,348 $ 462,943 $1,180,864 $1,236,016 $1,037,293 $5,197,464
Taxable investment
securities............. -- 82,923 206,664 155,001 49,614 494,202
Tax-exempt investment
securities............. -- 719 1,808 93,855 13,880 110,262
Investment securities
available for sale..... -- 370,880 30,261 220,066 24,247 645,454
Trading account
securities............. 239,491 -- -- -- -- 239,491
Federal funds sold and
securities purchased
under agreements to
resell................. 144,764 -- -- -- -- 144,764
Interest bearing
deposits with other
banks.................. -- 376 9,999 -- 99 10,474
---------- ----------- ---------- ---------- ---------- ----------
Total earning assets... 1,664,603 917,841 1,429,596 1,704,938 1,125,133 6,842,111
Interest bearing
liabilities:
Demand deposits......... -- 730,587 -- -- -- 730,587
Savings deposits........ -- -- 1,367,356 -- 253,689 1,621,045
Certificates of deposit
less than $100,000 and
other time deposits.... -- 403,217 465,257 663,847 9,018 1,541,339
Certificates of deposit
of $100,000 or more.... -- 326,033 111,505 136,075 2,474 576,087
Federal funds purchased
and securities sold
under agreements to
repurchase............. 602,443 -- -- -- 21,000 623,443
Other short-term
borrowings............. 171,014 -- -- -- -- 171,014
FHLB and other
borrowings............. -- 246,039 123 813 78,462 325,437
---------- ----------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities........... 773,457 1,705,876 1,944,241 800,735 364,643 5,588,952
Effect of interest rate
swaps.................. (20,000) 151,000 (25,000) (98,000) (8,000) --
---------- ----------- ---------- ---------- ---------- ----------
Interest sensitivity
gap.................... 871,146 (637,035) (539,645) 806,203 752,490 $1,253,159
---------- ----------- ---------- ---------- ---------- ==========
Cumulative interest
sensitivity gap........ $ 871,146 $ 234,111 $ (305,534) $ 500,669 $1,253,159
========== =========== ========== ========== ==========
21
In the preceding tables, MBS and CMOs are presented based on market median
prepayment speeds for the weighted average coupon of the underlying collateral
pools as of December 31, 1994. For all other interest earning assets and
interest bearing liabilities, variable rate assets and liabilities are
reflected in the time interval of the asset's or liability's earliest repricing
date. Fixed rate assets and liabilities have been allocated to various time
intervals based on contractual repayment and/or maturity.
As seen in the preceding table as of December 31, 1994, for the first year,
74 percent of earning asset funding sources will reprice compared to 53 percent
of all interest earning assets. Changes in the mix of earning assets or
supporting liabilities can either increase or decrease the net interest margin
without affecting interest rate sensitivity. In addition, the interest rate
spread between an asset and its supporting liability can vary significantly
while the timing of repricing for both the asset and the liability remains the
same, thus impacting net interest income. Varying interest rate environments
can create unexpected changes in prepayment levels of assets and repricing of
liabilities which are not reflected in the interest sensitivity analysis
report. These prepayments may have significant effects on the Company's net
interest margin.
In addition to the ongoing monitoring of interest-sensitive assets and
liabilities, the Company enters into various interest rate contracts not held
in the trading account ("interest rate protection contracts") to help manage
the Company's interest sensitivity. Such contracts generally have a fixed
notional principal amount and include (i) interest rate swaps where the Company
typically receives or pays a fixed rate and a counterparty pays or receives a
floating rate based on a specified index, generally the prime rate or the
London Interbank Offered Rate ("LIBOR"), (ii) interest rate caps and floors
purchased or written where the Company receives or pays, respectively, interest
if the specified index falls below the floor rate or rises above the cap rate,
and (iii) interest rate futures where the Company agrees to deliver or receive
securities at a designated future date and at a specified price or yield. The
interest rate risk factor in these contracts is considered in the overall
interest management strategy and the Company's interest risk management
program. The income or expense associated with interest rate swaps, caps and
floors and gains or losses in futures contracts classified as hedges are
ultimately reflected as adjustments to interest income or expense. Changes in
the estimated fair value of interest rate protection contracts are not
reflected in the financial statements until realized. A discussion of interest
rate risks, credit risks and concentrations in off-balance sheet financial
instruments is included in Note 6, Derivative Financial Instruments, of "Notes
to Consolidated Financial Statements." The following table details various
information regarding interest rate protection contracts as of December 31,
1994.
INTEREST RATE PROTECTION CONTRACTS
Weighted
Weighted Average Weighted Average
Rate* Average Repricing
Notional Carrying Estimated -------------------- Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
---------- -------- ---------- ---------- -------- ---------- ---------
(in Thousands)
Non-trading interest rate contracts:
Swaps:
Pay fixed versus:
Prime..................................... $ 18,000 $ (1) $ 16 8.50% 8.61% 0.21 1
3 mon. LIBOR.............................. 108,000 61 7,702 6.02 5.46 3.21 90
Receive fixed versus 3 mon. LIBOR.......... 120,000 139 (3,595) 6.64 5.92 2.71 90
Basis swaps+............................... 200,000 (21) 60 5.72 5.88 1.13 90
Cap corridor**............................. 400,000 (156) (45) 0.80 0.99 1.56 1
Floors purchased........................... 650,000 191 92 -- * 2.46 76
---------- ----- -------
$1,496,000 $ 213 $ 4,230
========== ===== =======
- --------
+ The Company receives interest based on the federal funds rate and pays
interest based on 3-month LIBOR.
* Weighted average rates received/paid are shown only for swaps, caps and
floors for which net interest amounts were receivable or payable at December
31, 1994. For caps and floors, the rate shown represents the weighted average
net interest differential between the index rate and the cap or floor rate.
** The cap corridor represents a single transaction with a counterparty in
which the Company both purchased a $400 million notional cap (at 4.5 percent
based on federal funds rate) and sold a $400 million notional cap (at 7.25
percent based on prime), in order to keep funding costs at 275 basis points
below prime.
22
The net interest amount received or paid on an interest rate protection
contract represents an adjustment of the yield or rate on the respective asset
or liability with which such contract is associated. A gain or loss on a
terminated interest rate protection contract is deferred and amortized over the
remaining term of the original contract as an adjustment of yield or rate on
the asset or liability with which the original contract was associated. At
year-end 1994, there were $1,769,000 of deferred gains and $535,000 of deferred
losses on terminated interest rate protection contracts, which will be recorded
as net interest income/(expense) of $931,000 in 1995, $432,000 in 1996 and
$(129,000) thereafter. The following table indicates the asset or liability
category with which the interest protection contracts were associated at
December 31, 1994.
ASSETS/LIABILITIES ASSOCIATED WITH INTEREST RATE PROTECTION CONTRACTS
Notional Principal Associated With
---------------------------------------------------------
Total Fed Funds
Notional Adjustable-Rate Adjustable-Rate CDs Less Purchased
Principal Loans Investments Than $100,000 and Repos++
---------- --------------- --------------- ------------- -----------
(in Thousands)
Swaps:
Pay
fixed.. $ 126,000 $ 8,000 $ -- $ 18,000 $100,000
Receive
fixed.. 120,000 20,000 100,000 -- --
Basis
swaps.. 200,000 -- -- -- 200,000
Floors.... 650,000 650,000 -- -- --
Cap
corridor. 400,000 -- -- -- 400,000
---------- --------- --------- -------- --------
$1,496,000 $ 678,000 $ 100,000 $ 18,000 $700,000
========== ========= ========= ======== ========
- --------
++ Consists of federal funds purchased and securities sold under agreements to
repurchase.
In addition to interest rate protection contracts used to help manage overall
interest sensitivity, the Company also enters into interest rate contracts for
the trading account. The primary purposes for using interest rate contracts in
the trading account are to facilitate customer transactions and to help protect
cash market positions in the trading account against interest rate movement.
Changes in the estimated fair value of contracts in the trading account are
recorded in other noninterest income as trading profits (losses) and
commissions. Net interest amounts received or paid on interest rate contracts
in the trading account are recorded as an adjustment of interest on trading
account securities. The following table summarizes interest rate contracts held
in the trading account at December 31, 1994:
TRADING ACCOUNT INTEREST RATE CONTRACTS
Weighted
Weighted Average Weighted Average
Rate* Average Repricing
Notional Carrying Estimated -------------------- Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
-------- -------- ---------- ---------- -------- ---------- ---------
(in Thousands)
Trading interest rate
contracts:
Swaps:
Pay fixed versus:
1 mon. LIBOR......... $ 19,223 $ 1,664 $ 1,664 6.10% 5.46% 3.52 30
3 mon. LIBOR......... 20,000 880 880 5.64 4.38 1.34 90
Receive fixed versus:
3 mon. LIBOR......... 23,000 (767) (767) 6.10 5.74 2.07 90
6 mon. LIBOR......... 1,000 (1) (1) 7.16 5.75 0.76 180
Prime................ 8,673 (265) (265) 6.32 8.50 1.15 1
Caps:
Purchased............. 22,500 829 829 1.46 * 1.22 60
Written............... 96,400 (1,213) (1,213) * 0.30 1.69 74
Floors:
Purchased............. 240,000 349 349 0.12 * 3.20 90
Written............... 187,500 (314) (314) * 0.12 3.07 60
-------- ------- -------
Total................ $618,296 $ 1,162 $ 1,162
======== ======= =======
- --------
* Weighted average rates received/paid are shown only for swaps, caps and
floors for which net interest amounts were receivable or payable at December
31, 1994. For caps and floors, the rate shown represents the weighted average
net interest differential between the index rate and the cap or floor rate.
++Positive carrying values represent assets of the Company while negative
amounts represent liabilities.
23
In addition to the interest rate contracts shown above, the Company also uses
other options and futures in the trading account. At December 31, 1994, the
trading account contained other options purchased and written, having weighted
average expiration dates shorter than two months, with a notional principal
balance of $182 million for purchased options and a notional principal balance
of $2 million for written options and estimated fair values of $78,000 and
$(15,000), respectively. The notional principal amounts indicated are
substantially larger than the related credit or interest rate risks. The net
purchased position in other options was taken at December 31, 1994, in order to
help protect the market value of the trading account against rising short-term
interest rates while maintaining limited risk to declining rates. At December
31, 1994, futures contracts having a notional principal of $158 million were
also used to help reduce the price sensitivity of the trading account.
During 1994, the Company implemented Financial Accounting Statement No. 119,
Disclosure about Derivative Financial Instruments ("FAS119"), which requires
expanded 1994 disclosures for derivative financial instruments held for both
trading and other than trading purposes. Under FAS119, derivative financial
instruments include off-balance sheet instruments such as futures, forwards,
swap or option contracts, or other financial instruments with similar
characteristics. See "Summary of Significant Accounting Policies" and Note 6,
Derivative Financial Instruments, of "Notes to Consolidated Financial
Statements" for FAS119 disclosures.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December, 1991, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 107, Disclosures about Fair Value of Financial
Instruments ("FAS107"). FAS107 requires the Company to disclose the fair value
of substantially all financial instruments, both assets and liabilities,
including those recognized and those not recognized in the Company's balance
sheet. There has been no impact to the Company's financial statements as a
result of the recognition, measurement or classification of financial
instruments. See "Notes to Consolidated Financial Statements," Note 15, Fair
Value of Financial Instruments, for a discussion of the Company's accounting
policies and methodologies.
These disclosures should not be considered a surrogate of the liquidation
value of the Company or its Subsidiary Banks, but rather represent a good-faith
estimate of the increase or decrease in value of financial instruments held by
the Company since purchase, origination, or issuance. It should also be noted
that the Company has not valued any intangibles associated with the Company's
core deposits as is allowed by the provisions of FAS107.
CAPITAL RESOURCES
Shareholders' equity at December 31, 1994, increased nine percent after
increasing eight percent in 1993. Exclusive of the reduction in total
shareholders' equity due to the redemption of the Company's preferred stock in
1993 and the net change in unrealized holding gains/(losses) on securities
available-for-sale in both 1993 and 1994, net income after dividends accounted
for 98 percent of the increase in shareholders' equity in 1994 and for all of
the increase in 1993.
Dividends of $34 million were declared on the Company's common stock in 1994,
representing a 23 percent increase over 1993. The 1994 annual dividend rate per
common share was $.92, a 21 percent increase over 1993. The dividend payout
ratio for 1994 was 34 percent compared to 32 percent for 1993 and 33 percent
for 1992. The Company intends to continue a dividend payout ratio that is
competitive in the banking industry while maintaining an adequate level of
retained earnings to support continued growth.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The Company has
satisfied its capital requirements principally through the retention of
earnings. The Company's five-year compound growth rate in shareholders' equity
of 13 percent was achieved primarily through reinvested earnings.
24
Average shareholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average shareholders'
equity to average assets for 1994 was 7.16 percent compared to 7.56 percent in
1993 and 7.08 percent in 1992. In order to maintain this ratio at appropriate
levels with continued growth in total average assets, a corresponding level of
capital growth must be achieved. The table below summarizes these and other
key ratios for the Company for each of the last three years.
RETURN ON EQUITY AND ASSETS
December 31
-------------------
1994 1993 1992
----- ----- -----
Return on average assets................................... 1.24% 1.26% 1.12%
Return on average common equity............................ 17.35 16.90 16.11
Common stock dividend payout ratio......................... 34.33 32.07 33.18
Average equity to average assets ratio..................... 7.16 7.56 7.08
Two important indicators of capital adequacy in the banking industry are the
leverage ratio and the tangible leverage ratio. The leverage ratio is defined
as common shareholders' equity, minus goodwill, other intangibles disallowed
by the Subsidiary Bank's regulators and the unrealized gain (loss) on
available-for-sale securities, divided by total quarterly average assets minus
goodwill, other disallowed intangibles and the unrealized loss on available-
for-sale securities. In 1993, the unrealized gain on available-for-sale
securities was not excluded from the computation of total quarterly average
assets. In 1994, the federal regulators clarified the definition of total
quarterly average assets to exclude the impact of the unrealized gain (loss)
on available-for-sale securities effective for 1994 and subsequent years. The
tangible leverage ratio is defined as common shareholders' equity, minus all
intangibles and the unrealized gain (loss) on available-for-sale securities,
divided by total quarterly average assets minus all intangibles. Even though
core deposit intangibles and goodwill increased from acquisitions during 1994
and 1993, the leverage ratio remained well within regulatory guidelines: 6.60
percent at year-end 1994; 7.30 percent at year-end 1993; and 6.86 percent at
year-end 1992. For the same periods, the tangible leverage ratio was 6.35
percent at year-end 1994; 6.96 percent at year-end 1993; and 6.55 percent at
year-end 1992. The detail for the computation of these ratios is provided in
the following table. Other disallowed intangibles represent intangible assets,
other than goodwill, recorded after February 19, 1992, that are excluded from
regulatory capital. Other intangibles recorded before that date continue to be
included in regulatory capital under the "grandfather" provision of Federal
Reserve regulations. The $11.5 million decrease in shareholders' equity at
December 31, 1994, resulting from the decline in the fair value of the
Company's available-for-sale investment securities portfolio is not required
to be deducted from the Company's equity in the calculation of regulatory
capital by the Federal regulators.
25
LEVERAGE RATIO CALCULATIONS
December 31
----------------------------------
1994 1993 1992
---------- ---------- ----------
(in Thousands)
Total fourth quarter average assets....... $8,790,243 $7,321,192 $7,014,390
Add: Unrealized holding loss on
available-for-sale securities*.......... 8,478 -- --
Less: Goodwill........................... 20,606 9,241 7,350
Other disallowed intangibles........... 13,333 1,716 --
---------- ---------- ----------
Tangible average assets before deduction
of other intangibles..................... 8,764,782 7,310,235 7,007,040
Less: Other intangibles.................. 23,027 27,275 23,239
---------- ---------- ----------
Tangible average assets................. $8,741,755 $7,282,960 $6,983,801
========== ========== ==========
Total period-end common shareholders'
equity................................... $ 600,613 $ 551,337 $ 487,707
Less: Goodwill........................... 20,606 9,241 7,350
Other disallowed intangibles........... 13,333 1,716 --
Net unrealized holding gain (loss) on
available-for-sale securities......... (11,509) 6,545 --
---------- ---------- ----------
Total common shareholders' equity before
deduction of other intangibles........... 578,183 533,835 480,357
Less: Other intangibles.................. 23,027 27,275 23,239
---------- ---------- ----------
Tangible period-end common shareholders'
equity................................. $ 555,156 $ 506,560 $ 457,118
========== ========== ==========
Leverage ratio......................... 6.60% 7.30% 6.86%
Tangible leverage ratio................ 6.35 6.96 6.55
- --------
* Applicable only for the year ended December 31, 1994.
Risk-based capital guidelines take into consideration risk factors, as
defined by regulators, associated with various categories of assets, both on
and off of the balance sheet. Under the guidelines, capital strength is
measured in two tiers which are used in conjunction with risk-adjusted assets
to determine the risk-based capital ratios. The Company's Tier I capital, which
consists of common equity less goodwill and other disallowed intangibles,
amounted to $578.2 million at December 31, 1994. Tier II capital components
include supplemental capital components such as qualifying allowance for loan
losses and qualifying subordinated debt. Tier I capital plus the Tier II
capital components is referred to as Total Qualifying Capital and was $778.7
million at year-end 1994. The percentage ratios, as calculated under the
guidelines, were 9.52 percent and 12.82 percent for Tier I and Total Qualifying
Capital, respectively, at year-end 1994. The $75 million of subordinated debt
issued by the Company in the second quarter of 1993 and the $50 million of
subordinated debt issued by the Company in the third quarter of 1994
represented Tier II capital and favorably impacted the Company's Total
Qualifying Capital. The decrease in Tier I and Total Qualifying Capital ratios
in 1994 was due to the addition of higher-risk weighted assets, primarily loans
and investment securities, and additional goodwill and other intangibles
resulting from the 1st Performance and First Heights acquisitions.
December 31
-------------------
1994 1993 1992
----- ----- -----
Risk-based Capital Ratios:
Tier I Capital Ratio...................................... 9.52% 10.48% 9.85%
Total Qualifying Capital Ratio............................ 12.82 13.21 11.59
The regulatory capital ratios of the Company's Subsidiary Banks currently
exceed the minimum ratios of 5 percent leverage capital, 6 percent Tier I
capital, and 10 percent Total Qualifying Capital required in 1994 for "well-
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to assure that the Subsidiary Banks exceed the
guidelines.
26
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially
impact net interest income. The discussion of net interest income is presented
on a taxable equivalent basis, unless otherwise noted, to facilitate
performance comparisons among various taxable and tax-exempt assets.
Net interest income for 1994 increased less than one percent over 1993 while
increasing three percent in 1993 over 1992. Increased volumes of earning assets
and a historically high interest rate spread generated the 1993 increase while
in 1994 net interest income grew at a slower rate due to a 57 basis point
decline in net yield on earning assets. The schedule on pages 32 and 33
provides the detail of changes in interest income, interest expense and net
interest income due to changes in volumes and rates.
Interest income increased nine percent in 1994 after decreasing three percent
in 1993 and one percent in 1992. Interest income in 1994 grew as a result of a
13 percent increase in the volume of average earning assets partially offset by
a 27 basis point decline in the average interest rate earned. A 10 percent
increase in the volume of average loans accounted for the 7 percent increase in
fully taxable equivalent interest income on loans as rates declined 22 basis
points. The decrease in yield on loans resulted from reduced loans fees, the
reduced positive impact of interest rate contracts, and growth in fixed rate
loans. Additionally, a significant portion of the Company's real estate
mortgages are adjustable rate one-to-four family mortgages which generally have
caps which limit the amount by which interest rates can be increased in any one
year. For this reason, the increases in interest rates on many of these
mortgages have not paralleled the substantial increase in the general level of
interest rates that occurred during 1994. Interest income on investment
securities, including securities available for sale, increased 16 percent from
1993 to 1994. This increase resulted from a 26 percent increase in the average
balance of total investment securities reduced by a 55 basis point decrease in
yield which resulted as higher-yielding fixed rate securities matured with the
funds reinvested at lower rates. Interest income on trading securities
increased by 1 percent as a result of a 195 basis point increase in yield
offset by a 24 percent decrease in the average balance.
Total interest expense increased by 24 percent in 1994 due to a 30 basis
point increase in the rate paid on interest bearing liabilities combined with a
14 percent increase in volume. Interest expense on interest bearing deposits
increased 19 percent as the result of an 8 basis point increase in rate and a
17 percent increase in the average volume. The 6 percent increase in average
borrowed funds, which includes interest bearing liabilities that are not
classified as deposits, coupled with a 118 basis point increase in rate
resulted in a 44 percent increase in interest expense for this category. The
issuance of additional long-term borrowings at fixed rates during the third and
fourth quarter of 1994 contributed to the increase in interest expense on
average borrowed funds for the year.
From 1992 to 1993, interest income declined as a result of a 71 basis point
decline in the average interest rate in spite of a 5 percent increase in the
volume of average earning assets. Fully taxable equivalent interest income on
loans rose 4 percent as a 14 percent increase in volume more than offset an 84
basis point decline in yield. Interest income on investment securities,
including securities available for sale, decreased 27 percent from 1992 to 1993
as a result of an 83 basis point decrease in the yield on investment securities
available for sale offset by increases in the yield on taxable and tax-exempt
securities held-to-maturity of 18 and 12 basis points, respectively. A 74
percent increase in average balance offset by a 101 basis point decline in
yield increased interest income on trading securities by 49 percent in 1993.
27
A 66 basis point decline in the rate paid on interest bearing liabilities
more than offset a 3 percent increase in volume as total interest expense
declined by 13 percent in 1993. A substantial portion of the decrease in total
interest expense was due to a 14 percent decrease in interest expense on
interest bearing deposits, resulting from a 76 basis point decrease in rate and
a 3 percent increase in the average volume. The one percent increase in average
borrowed funds was more than offset by the lower rates paid, resulting in an
eight percent decrease in interest expense for this category.
The trend in net interest income is commonly evaluated in terms of average
rates using the net yield and the interest rate spread. The net yield on
earning assets is computed by dividing fully taxable equivalent net interest
income by average total earning assets. This ratio represents the difference
between the average yield returned on average earning assets and the average
rate paid for all funds used to support those earning assets, including both
interest bearing and noninterest bearing sources of funds. The net yield
declined 57 basis points to 4.54 percent in 1994 and decreased 8 basis points
to 5.11 percent in 1993. The steady decrease in net yield throughout 1994 was a
function of the decrease in yields on loans and investment securities discussed
earlier coupled with the repricing of interest bearing liabilities in the
increasing interest rate environment and the issuance of fixed rate
subordinated debentures and FHLB advances. This is evidenced by the fact that
the yield on interest earning assets declined 27 basis points while the rate
paid on interest bearing liabilities increased by 30 basis points. At the same
time, the portion of interest earning assets funded by interest bearing
liabilities increased from 82 percent in 1993 to 84 percent in 1994, partially
as a result of the acquisition of First Heights. The decline in yield was also
impacted by the initial investment of cash received in connection with the
First Heights acquisition in investment securities and federal funds sold,
assets which historically have lower yields than loans. It is anticipated that
the net yield will decline from the 4.30 percent earned during the fourth
quarter of 1994.
During 1994, the net yield on interest earning assets was positively impacted
by the Company's use of interest rate contracts, primarily interest rate swaps
and interest rate floors, increasing the taxable equivalent net yield on
interest earning assets by 12 basis points. The greatest impact from the use of
interest rate contracts was on the yield and interest income on commercial
loans where the net yield was increased by 78 basis points and interest income
was increased by $7.5 million. At the same time, the impact of interest rate
contracts on interest bearing liabilities was less significant, increasing
interest expense by $2.4 million and the net cost of funds by 4 basis points.
It is the Company's intention to continue to use interest rate contracts to
manage its exposure to the changing interest rate environment in the future,
although there can be no assurance that the impact of interest rate contracts
on the earnings of future periods will be positive. It is anticipated that the
positive impact of interest rate contracts experienced in 1994 will decline in
1995 due to the general level of interest rates.
The net cost of funds, defined as interest expense divided by average earning
assets, increased 30 basis points in 1994. The rate paid on interest bearing
liabilities increased 30 basis points from 1993 levels. In 1993, the net yield
on total earning assets fell 8 basis points while the rate paid on interest
bearing liabilities declined 66 basis points and the net cost of funds
decreased 62 basis points.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing liabilities. The
interest rate spread eliminates the impact of noninterest bearing funds and
gives a direct perspective on the effect of market interest rate movements.
During 1994, the net interest rate spread decreased 57 basis points to 3.89
percent from the 1993 spread of 4.46 percent as the cost of interest bearing
liabilities rose while the yields earned on earning assets continued to
decline. The decrease in interest rate spread in 1993 was 5 basis points from
4.51 percent in 1992. See the accompanying schedules entitled "Consolidated
Average Balances, Interest Income/Expense and Yields/Rates" and "Rate/Volume
Variance Analysis" for more information.
The following table presents certain interest rates without modification for
tax equivalency. The table on pages 30 and 31 contains these same percentages
on a taxable equivalent basis. Tax-exempt earning assets
28
continue to make up a smaller percentage of total earning assets. As a result,
the difference between these interest rates with and without modification for
tax equivalency continues to narrow.
December 31
-----------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- -----
Rate earned on interest earning assets........... 7.78% 8.02% 8.70% 9.77% 10.46%
Rate paid on interest bearing liabilities........ 3.97 3.67 4.33 6.08 7.42
Interest rate spread............................. 3.81 4.35 4.37 3.69 3.04
Net yield on earning assets...................... 4.46 5.00 5.06 4.56 4.07
Interest income, as reported in "Consolidated Statements of Income," on a
nominal yield basis increased in 1994 by $50 million while net interest income
increased by only $2 million. The 54 basis point decrease in the net yield in
1994 was a result of a decrease in the yields in the Company's interest earning
assets and an increase in the cost of interest bearing liabilities, as
discussed earlier. The Company will continue to focus its attention in 1995 on
increasing net interest income while at the same time maintaining the current
levels in interest rate spreads and net yields. However, it cannot be assured
that the negative trend in net yield experienced in 1994 will not continue due
to interest rate increases and other factors.
29
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
Year Ended December 31
-------------------------------------------------------
1994 1993
--------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
---------- -------- ------ ---------- -------- ------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $5,355,755 $444,643 8.30% $4,889,217 $416,407 8.52%
Investment securities:
Taxable............... 939,696 72,574 7.72 739,647 59,030 7.98
Tax-exempt............ 96,582 9,095 9.42 135,548 13,030 9.61
---------- -------- ---------- --------
Total investment
securities........... 1,036,278 81,669 7.88 875,195 72,060 8.23
Investment securities
available for sale ... 762,632 40,832 5.35 555,591 33,219 5.98
Trading account
securities............ 125,805 9,996 7.95 164,757 9,885 6.00
Federal funds sold and
securities purchased
under agreements to
resell................ 137,022 5,599 4.09 90,747 2,712 2.99
Interest bearing
deposits with other
banks................. 5,997 508 8.47 10,720 889 8.29
---------- -------- ---------- --------
Total earning assets.. 7,423,489 583,247 7.86 6,586,227 535,172 8.13
Allowance for loan
losses................ (111,132) (99,644)
Unrealized gain (loss)
on investment
securities available
for sale.............. (3,372) 29
Cash and due from
banks................. 360,309 318,330
Other assets........... 350,049 320,802
---------- ----------
Total assets.......... $8,019,343 $7,125,744
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Demand................ $ 774,205 18,727 2.42 $ 643,744 15,873 2.47
Savings............... 1,757,172 55,075 3.13 1,658,539 47,870 2.89
Certificates of deposit
less than $100,000 and
other time deposits . 1,855,676 89,739 4.84 1,518,248 76,361 5.03
Certificates of deposit
of $100,000 or more.. 622,437 28,998 4.66 473,540 21,333 4.50
---------- -------- ---------- --------
Total interest bearing
deposits............. 5,009,490 192,539 3.84 4,294,071 161,437 3.76
Federal funds purchased. 380,160 17,246 4.54 409,072 12,464 3.05
Securities sold under
agreements to
repurchase............. 243,109 8,598 3.54 240,474 6,741 2.80
Other short-term
borrowings............. 225,127 10,014 4.45 208,075 6,908 3.32
FHLB and other
borrowings............. 350,045 17,959 5.13 275,288 11,350 4.12
---------- -------- ---------- --------
Total interest bearing
liabilities.......... 6,207,931 246,356 3.97 5,426,980 198,900 3.67
---- ----
Noninterest bearing
demand deposits........ 1,199,551 1,123,819
Accrued expenses and
other liabilities...... 37,312 36,158
Shareholders' equity.... 574,549 538,787
---------- ----------
Total liabilities and
shareholders' equity. $8,019,343 $7,125,744
========== ==========
Net interest income/net
interest spread........ 336,891 3.89% 336,272 4.46%
==== ====
Net yield on earning
assets................. 4.54% 5.11%
==== ====
Taxable equivalent
adjustment:
Loans.................. 1,894 2,188
Investment securities.. 3,386 4,686
Investment securities
available for sale.... 190 277
Trading account
securities............ 53 108
-------- --------
Total taxable
equivalent
adjustment........... 5,523 7,259
-------- --------
Net interest income..... $331,368 $329,013
======== ========
- --------
* Loans on nonaccrual status have been included in the computation of average
balances.
30
GROWTH RATE
Year Ended December 31 AVERAGE BALANCES
------------------------------------------------------------------------------------ -------------------
1992 1991 1990
--------------------------- --------------------------- --------------------------- ONE YEAR FIVE YEAR
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ 1994- COMPOUNDED
Balance Expense Rate Balance Expense Rate Balance Expense Rate 1993 1994-1989
---------- -------- ------ ---------- -------- ------ ---------- -------- ------ -------- ----------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $4,272,780 $400,004 9.36% $3,739,868 $396,904 10.61% $3,301,274 $377,412 11.43% 9.54% 12.41%
Investment securities:
Taxable............... 1,587,245 123,816 7.80 1,466,776 129,304 8.82 1,133,293 102,755 9.07 27.05 1.08
Tax-exempt............ 167,200 15,870 9.49 195,708 17,622 9.00 193,006 18,195 9.43 (28.75) (13.36)
---------- -------- ---------- -------- ---------- --------
Total investment
securities........... 1,754,445 139,686 7.96 1,662,484 146,926 8.84 1,326,299 120,950 9.12 18.41 (0.97)
Investment securities
available for sale... 55,618 3,789 6.81 -- -- -- -- -- -- 37.27 --
Trading account
securities............ 94,590 6,631 7.01 100,042 7,945 7.94 85,307 7,268 8.52 (23.64) 3.87
Federal funds sold and
securities purchased
under agreements to
resell................ 73,708 2,441 3.31 117,973 6,578 5.58 142,244 11,298 7.94 50.99 (1.85)
Interest bearing
deposits with other
banks................. 13,058 1,031 7.90 22,875 1,854 8.10 30,877 2,613 8.46 (44.06) (39.39)
---------- -------- ---------- -------- ---------- --------
Total earning assets.. 6,264,199 553,582 8.84 5,643,242 560,207 9.93 4,886,001 519,541 10.63 12.71 11.03
Allowance for loan
losses................ (67,112) (54,581) (42,911) 11.53 25.87
Unrealized gain (loss)
on investment
securities available
for sale.............. -- -- -- -- --
Cash and due from
banks................. 289,019 266,582 244,796 13.19 8.90
Other assets........... 325,015 273,863 206,062 9.12 13.91
---------- ---------- ----------
Total assets.......... $6,811,121 $6,129,106 $5,293,948 12.54 10.89
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Demand................ $ 536,899 15,366 2.86 $ 441,480 19,659 4.45 $ 335,931 17,167 5.11 20.27 22.93
Savings............... 1,581,816 54,557 3.45 1,362,651 72,649 5.33 936,621 61,298 6.54 5.95 17.89
Certificates of deposit
less than $100,000 an
other time deposits.. 1,552,718 93,295 6.01 1,572,705 114,512 7.28 1,398,080 113,377 8.11 22.22 8.88
Certificates of deposit
of $100,000 or more.. 481,402 24,376 5.06 449,413 30,354 6.75 458,504 36,793 8.02 31.44 2.64
---------- -------- ---------- -------- ---------- --------
Total interest bearing
deposits............. 4,152,835 187,594 4.52 3,826,249 237,174 6.20 3,129,136 228,635 7.31 16.66 12.29
Federal funds purchased. 617,697 21,822 3.53 461,546 25,542 5.53 399,946 32,224 8.06 (7.07) (1.19)
Securities sold under
agreements to
repurchase............. 269,980 9,064 3.36 406,322 22,124 5.44 522,962 39,296 7.51 1.10 (11.02)
Other short-term
borrowings............. 191,568 7,722 4.03 126,728 7,788 6.15 146,707 10,811 7.37 8.20 11.89
FHLB and other
borrowings............. 41,327 2,009 4.86 13,929 1,305 9.37 12,210 1,356 11.11 27.16 97.65
---------- -------- ---------- -------- ---------- --------
Total interest bearing
liabilities.......... 5,273,407 228,211 4.33 4,834,774 293,933 6.08 4,210,961 312,322 7.42 14.39 10.40
---- ----- -----
Noninterest bearing
demand deposits........ 1,009,136 832,815 688,435 6.74 13.94
Accrued expenses and
other liabilities...... 46,531 52,035 47,639 3.19 (5.90)
Shareholders' equity.... 482,047 409,482 346,913 6.64 12.34
---------- ---------- ----------
Total liabilities and
shareholders' equity. $6,811,121 $6,129,106 $5,293,948 12.54 10.89
========== ========== ==========
Net interest income/net
interest spread........ 325,371 4.51% 266,274 3.85% 207,219 3.21%
==== ===== =====
Net yield on earning
assets................. 5.19% 4.72% 4.24%
==== ===== =====
Taxable equivalent
adjustment:
Loans.................. 2,454 2,528 2,516
Investment securities.. 5,840 6,082 5,669
Investment securities
available for sale.... 70 -- --
Trading account
securities............ 83 71 58
-------- -------- --------
Total taxable
equivalent
adjustment........... 8,447 8,681 8,243
-------- -------- --------
Net interest income..... $316,924 $257,593 $198,976
======== ======== ========
31
RATE/VOLUME VARIANCE ANALYSIS
Taxable Equivalent Basis
Average Volume Change in Volume Average Rate
-------------------------------- -------------------- ----------------
1994 1993 1992 1994-1993 1993-1992 1994 1993 1992
---------- ---------- ---------- --------- --------- ---- ---- ----
(in Thousands)
EARNING ASSETS:
Loans, net of unearned
income................. $5,355,755 $4,889,217 $4,272,780 $466,538 $ 616,437 8.30% 8.52% 9.36%
Investment securities:
Taxable................ 939,696 739,647 1,587,245 200,049 (847,598) 7.72 7.98 7.80
Tax-exempt............. 96,582 135,548 167,200 (38,966) (31,652) 9.42 9.61 9.49
---------- ---------- ---------- -------- ---------
Total investment
securities.......... 1,036,278 875,195 1,754,445 161,083 (879,250) 7.88 8.23 7.96
Investment securities
available for sale..... 762,632 555,591 55,618 207,041 499,973 5.35 5.98 6.81
Trading account
securities............. 125,805 164,757 94,590 (38,952) 70,167 7.95 6.00 7.01
Federal funds sold and
securities purchased
under agreements to
resell................. 137,022 90,747 73,708 46,275 17,039 4.09 2.99 3.31
Interest bearing
deposits with other
banks.................. 5,997 10,720 13,058 (4,723) (2,338) 8.47 8.29 7.90
---------- ---------- ---------- -------- ---------
Total earning assets. $7,423,489 $6,586,227 $6,264,199 $837,262 $ 322,028 7.86 8.13 8.84
========== ========== ========== ======== =========
INTEREST BEARING
LIABILITIES:
Deposits:
Demand................. $ 774,205 $ 643,744 $ 536,899 $130,461 $ 106,845 2.42 2.47 2.86
Savings................ 1,757,172 1,658,539 1,581,816 98,633 76,723 3.13 2.89 3.45
Certificates of deposit
less than $100,000 and
other time deposits... 1,855,676 1,518,248 1,552,718 337,428 (34,470) 4.84 5.03 6.01
Certificates of deposit
of $100,000 or more... 622,437 473,540 481,402 148,897 (7,862) 4.66 4.50 5.06
---------- ---------- ---------- -------- ---------
Total interest
bearing deposits.... 5,009,490 4,294,071 4,152,835 715,419 141,236 3.84 3.76 4.52
Federal funds purchased. 380,160 409,072 617,697 (28,912) (208,625) 4.54 3.05 3.53
Securities sold under
agreements to
repurchase............. 243,109 240,474 269,980 2,635 (29,506) 3.54 2.80 3.36
Other short-term
borrowings............. 225,127 208,075 191,568 17,052 16,507 4.45 3.32 4.03
FHLB and other
borrowings............. 350,045 275,288 41,327 74,757 233,961 5.13 4.12 4.86
---------- ---------- ---------- -------- ---------
Total interest
bearing liabilities. $6,207,931 $5,426,980 $5,273,407 $780,951 $ 153,573 3.97 3.67 4.33
========== ========== ========== ======== ========= ---- ---- ----
Net interest income/net
interest spread........ 3.89% 4.46% 4.51%
==== ==== ====
Net yield on earning
assets................. 4.54% 5.11% 5.19%
==== ==== ====
Net cost of funds....... 3.32% 3.02% 3.64%
==== ==== ====
32
Variance Attributed to
--------------------------------------------------------
Interest Income/Expense Variance 1994 1993
--------------------------- ------------------- -------------------------- ----------------------------
1994 1993 1992 1994-1993 1993-1992 VOLUME RATE MIX Volume Rate Mix
-------- -------- -------- --------- --------- ------- -------- ------- -------- -------- --------
(in Thousands)
EARNING ASSETS:
Loans, net of unearned
income................. $444,643 $416,407 $400,004 $28,236 $ 16,403 $39,733 $(10,493) $(1,004) $ 57,710 $(36,100) $ (5,207)
Investment securities:
Taxable................ 72,574 59,030 123,816 13,544 (64,786) 15,966 (1,906) (516) (66,119) 2,859 (1,526)
Tax-exempt............. 9,095 13,030 15,870 (3,935) (2,840) (3,746) (266) 77 (3,004) 203 (39)
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------- --------
Total investment
securities.......... 81,669 72,060 139,686 9,609 (67,626) 12,220 (2,172) (439) (69,123) 3,062 (1,565)
Investment securities
available for sale..... 40,832 33,219 3,789 7,613 29,430 12,379 (3,472) (1,294) 34,061 (464) (4,167)
Trading account
securities............. 9,996 9,885 6,631 111 3,254 (2,337) 3,206 (758) 4,919 (956) (709)
Federal funds sold and
securities purchased
under agreements to
resell................. 5,599 2,712 2,441 2,887 271 1,383 996 508 564 (238) (55)
Interest bearing
deposits with other
banks.................. 508 889 1,031 (381) (142) (392) 19 (8) (185) 52 (9)
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------- --------
Total earning assets. 583,247 535,172 553,582 48,075 (18,410) 62,986 (11,916) (2,995) 27,946 (34,644) (11,712)
INTEREST BEARING
LIABILITIES:
Deposits:
Demand................. 18,727 15,873 15,366 2,854 507 3,217 (301) (62) 3,058 (2,128) (423)
Savings................ 55,075 47,870 54,557 7,205 (6,687) 2,847 4,113 245 2,646 (8,901) (432)
Certificates of deposit
less than $100,000 and
other time deposits... 89,739 76,361 93,295 13,378 (16,934) 16,971 (2,939) (654) (2,071) (15,201) 338
Certificates of deposit
of $100,000 or more... 28,998 21,333 24,376 7,665 (3,043) 6,708 729 228 (398) (2,689) 44
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------- --------
Total interest
bearing deposits.... 192,539 161,437 187,594 31,102 (26,157) 29,743 1,602 (243) 3,235 (28,919) (473)
Federal funds purchased. 17,246 12,464 21,822 4,782 (9,358) (881) 6,094 (431) (7,370) (3,001) 1,013
Securities sold under
agreements to
repurchase............. 8,598 6,741 9,064 1,857 (2,323) 74 1,764 19 (991) (1,496) 164
Other short-term
borrowings............. 10,014 6,908 7,722 3,106 (814) 566 2,348 192 665 (1,362) (117)
FHLB and other
borrowings............. 17,959 11,350 2,009 6,609 9,341 3,082 2,774 753 11,373 (305) (1,727)
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------- --------
Total interest
bearing liabilities. 246,356 198,900 228,211 47,456 (29,311) 32,584 14,582 290 6,912 (35,083) (1,140)
-------- -------- -------- ------- -------- ------- -------- ------- -------- -------- --------
Net interest income/net
interest spread........ $336,891 $336,272 $325,371 $ 619 $ 10,901 $30,402 $(26,498) $(3,285) $ 21,034 $ 439 $(10,572)
======== ======== ======== ======= ======== ======= ======== ======= ======== ======== ========
33
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the annual cost of providing an allowance or
reserve for anticipated future losses on loans. The amount for each year is
dependent upon many factors including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment
of loan portfolio quality, the value of collateral and general economic
factors.
The economic outlook for the states in which the Company does business is
guardedly optimistic in the midst of a gradual improvement of the economy
overall. Real estate values, affected by the recessionary pressures of prior
years, have shown a general stabilization in the Subsidiary Banks' markets. On
a regional basis, however, any additional economic slowdown in these markets
could have an effect on most regional bank holding companies and could be
reflected by little or no overall asset growth. Such an economic slowdown would
probably also have a negative impact on real estate lending as well as the
level of net charge-offs and delinquencies.
Since another economic slowdown could have an adverse effect on property
values and, for commercial development projects, cause an increase in vacancy
rates, the possibility exists for further writedowns, charge-offs and the
transfer of currently performing loans to a nonaccrual status in the real
estate and commercial loan categories. The mix of loans in the construction and
development portfolios are diversified in areas such as office buildings,
retail stores and malls, apartment buildings, health care facilities and
industrial warehouses. In addition, the Subsidiary Banks' specialized real
estate lending areas review, approve and monitor large real estate credits on a
continuing basis.
Loan review procedures, including such techniques as loan grading and on-site
reviews, are constantly utilized by the Company's loan review department in
order to ensure that potential problem loans are identified early in order to
lessen any potentially negative impact such problem loans may have on the
Company's earnings. Automated loan reports are prepared and used in conjunction
with the identification and monitoring of such loans on a monthly basis.
Management's involvement continues throughout the process and includes
participation in the work-out process and recovery activity. These formalized
procedures are monitored internally by the loan review area whose work is
supplemented by regulatory agencies that provide an additional level of review
on an annual basis. Such review procedures are quantified in monthly and
quarterly reports to senior management and are used in determining whether such
loans represent potential loss to the Company. Special reports are prepared for
consumer installment loans to identify trends unique to that portfolio. A
determination of a potential loss will result in a charge to the provision for
loan losses, thereby increasing the allowance for loan losses available for
potential risk. Management monitors the entire loan portfolio, including loans
acquired in business combinations, in an attempt to identify problem loans so
that risks in the portfolio can be timely identified and an appropriate
allowance maintained.
The provision for loan losses declined 91 percent in 1994 and 32 percent in
1993 compared to an increase of 39 percent in 1992. The decreased provisions in
1994 and 1993 primarily reflect the substantial decrease in nonperforming
assets from year-end 1992 as well as the significant decline in net charge-offs
for those years.
Net loan charge-offs decreased 26 percent in 1994 after decreasing 57 percent
in 1993 and 21 percent in 1992. A $2.5 million decrease in net charge-offs in
commercial, financial and agricultural loans and consumer installment loans
constituted the majority of the total $2.8 million decrease in net loan charge-
offs in 1994. The decrease in 1993 was due to decreased net charge-offs in all
loan categories other than real estate --construction. The decrease in net
charge-offs in 1992 resulted from decreased net charge-offs in commercial,
financial and agricultural loans and real estate construction loans offset
somewhat by increased net charge-offs in the Company's credit card portfolio.
During 1994, net charge-offs of commercial, financial and agricultural loans
decreased by 57 percent and net charge-offs of consumer installment loans
decreased 22 percent while net charge-offs of commercial real estate mortgages
increased 135 percent. With regard to the Company's consumer installment loan
portfolio, net charge-offs for credit card receivables decreased as a
percentage of loans from 3.03 percent in 1993 to 2.42 percent in 1994.
Similarly, net charge-offs as a percentage of loans in
34
the Company's indirect consumer installment portfolio, consisting primarily of
new and used automobile loans, decreased from 0.14 percent in 1993 to 0.09
percent in 1994. Net charge-offs on residential mortgage loans declined by 31
percent from 1993 levels and represented 4 percent of total net charge-offs
down from 5 percent in 1993.
The following table sets forth information with respect to the Company's
loans and the allowance for loan losses for the five years ended December 31,
1994.
SUMMARY OF LOAN LOSS EXPERIENCE
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(in Thousands)
Loans, net of unearned
income:
Average outstanding
during the year...... $5,355,755 $4,889,217 $4,272,780 $3,739,868 $3,301,274
========== ========== ========== ========== ==========
Allowance for loan
losses:
Balance at beginning
of year.............. $ 110,616 $ 83,859 $ 55,982 $ 42,770 $ 37,681
Charge-offs:
Commercial, financial
and agricultural..... 3,876 5,338 6,278 11,278 7,850
Real estate --
construction........ 65 645 315 3,986 2,470
Real estate --
mortgage:...........
Residential......... 447 811 1,309 954 1,406
Commercial.......... 1,009 753 4,649 2,953 981
Consumer installment.. 10,178 12,037 19,174 16,643 9,788
---------- ---------- ---------- ---------- ----------
Total............... 15,575 19,584 31,725 35,814 22,495
Recoveries:
Commercial, financial
and agricultural..... 3,375 4,176 2,213 1,084 875
Real estate --
construction........ 50 50 304 56 155
Real estate --
mortgage:...........
Residential......... 101 308 302 262 106
Commercial.......... 202 410 381 192 83
Consumer installment.. 3,762 3,768 3,227 2,355 1,868
---------- ---------- ---------- ---------- ----------
Total............... 7,490 8,712 6,427 3,949 3,087
---------- ---------- ---------- ---------- ----------
Net charge-offs..... 8,085 10,872 25,298 31,865 19,408
Provision charged to
income................. 3,404 36,306 53,175 38,199 24,193
Additions due to
acquisitions........... 1,248 1,323 -- 6,878 304
---------- ---------- ---------- ---------- ----------
Balance at end of year.. $ 107,183 $ 110,616 $ 83,859 $ 55,982 $ 42,770
========== ========== ========== ========== ==========
Net charge-offs to
average loans
outstanding during the
year................... .15% .22% .59% .85% .59%
When determining the adequacy of the allowance for loan losses, management
considers changes in the size and character of the loan portfolio, changes in
nonperforming and past due loans, historical loan loss experience, the existing
risk of individual loans, concentrations of loans to specific borrowers or
industries and existing and prospective economic conditions. The allowance
decreased 3 percent in 1994 and at year-end was 1.86 percent of outstanding
loans compared to 2.13 percent at December 31, 1993 and 1.79 percent at
December 31, 1992. The decrease is due in part to historically low net charge-
offs. As shown in the table below, management determined that at December 31,
1994, approximately 13 percent of the allowance for
35
loan losses was related to commercial, financial and agricultural loans, 21
percent was associated with real estate loans and 19 percent was related to
consumer installment loans. Approximately 47 percent of the allowance remained
unallocated to any specific category due to uncertainties related to loan
portfolios acquired in connection with business combinations with regard to
underwriting standards and other factors and the potential for increased
defaults on variable rate loans in an increasing rate environment. In addition,
a portion of the unallocated allowance is due to the returning of previously
nonperforming loans to performing status. While additional provision is
provided with respect to these loans when identified as nonperforming, the
corresponding portion of the allowance remains a component of the total
allowance upon a loan's return to performing status.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31
--------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
----------------- ----------------- ---------------- ---------------- ----------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- ------- -------- ------- -------- ------- --------
(in Thousands)
Commercial, financial
and agricultural....... $ 13,917 13.0% $ 14,933 13.5% $13,501 16.1% $13,995 25.0% $11,334 26.5%
Real estate --
construction.......... 4,412 4.1 4,867 4.4 5,283 6.3 5,374 9.6 7,741 18.1
Real estate -- mortgage:
Residential............ 5,341 5.0 3,319 3.0 2,935 3.5 3,527 6.3 1,283 3.0
Commercial............. 13,143 12.2 16,371 14.8 8,973 10.7 6,438 11.5 4,448 10.4
Consumer installment.... 20,232 18.9 17,920 16.2 19,791 23.6 19,202 34.3 12,147 28.4
Unallocated............. 50,138 46.8 53,206 48.1 33,376 39.8 7,446 13.3 5,817 13.6
-------- ----- -------- ----- ------- ----- ------- ----- ------- -----
$107,183 100.0% $110,616 100.0% $83,859 100.0% $55,982 100.0% $42,770 100.0%
======== ===== ======== ===== ======= ===== ======= ===== ======= =====
NONPERFORMING ASSETS
Nonperforming assets include loans classified as nonaccrual or renegotiated
and foreclosed real estate. It is the general policy of the Subsidiary Banks to
stop accruing interest income and place the recognition of interest on a cash
basis when any commercial, industrial or real estate loan is 90 days or more
past due as to principal or interest and the ultimate collection of either is
in doubt, unless the loan is well-collateralized and in the process of
collection. Accrual of interest income on consumer loans is suspended when any
payment of principal or interest, or both, is more than 120 days delinquent.
When a loan is placed on nonaccrual status, any interest previously accrued but
not collected is reversed against current income unless the collateral for the
loan is sufficient to cover the accrued interest or a guarantor assures payment
of interest.
Nonperforming assets at December 31, 1994, were $19.3 million, a decrease of
$20.8 million from year-end 1993. Nonperforming loans decreased $7.0 million
from year-end 1993 to $12.3 million. The decrease in nonperforming loans was
the result of management's efforts in resolving a limited number of large,
unrelated, geographically-dispersed commercial real estate credits previously
on nonaccrual status. Some of the amounts removed from nonperforming status
were transferred to the other real estate owned category. During 1994, $3.4
million of loans were transferred to other real estate owned offset by total
sales of other real estate owned of $18.2 million. Of these sales, $6.8 million
were cash sales while $11.4 million represented loans originated by the
Subsidiary Banks to facilitate the sale of other real estate. During 1993,
loans transferred to other real estate owned totaled $8.1 million, cash sales
were $16.1 million, loans to facilitate the sale of other real estate owned
were $8.7 million, and writedowns totaled $1.6 million.
Even though the stabilization in the commercial real estate market in the
Southeastern part of the country continued during 1994, management closely
monitored and will continue to monitor the Company's real estate and commercial
loan portfolio during 1995. Particular attention will be focused on those
credits
36
targeted by the loan monitoring and review process. Management continues to
emphasize the need to maintain a low level of nonperforming assets and to
return current nonperforming assets to an earning status.
Renegotiated loans decreased $5.7 million from year-end 1993 while foreclosed
real estate decreased $13.9 million for the year. Loans past due 90 days or
more decreased $400,000 compared to the 1993 year-end level. Other foreclosed
or repossessed assets at year-end 1994 totaled less than $300,000. There were
no accruing loans greater than $500,000 past due 90 days or more at year-end
1994.
At December 31, 1994, nonperforming assets were 0.33 percent of loans
outstanding and foreclosed real estate held for sale compared to 0.77 percent
at year-end 1993. Nonaccrual loans were 0.19 percent of loans outstanding at
year-end 1994 compared to the previous year-end level of 0.23 percent, while
renegotiated loans decreased to 0.02 percent of loans outstanding at December
31, 1994, from 0.14 percent a year earlier.
The following table summarizes the Company's nonperforming assets for each of
the last five years. Also provided are tables which detail nonaccrual loans and
loans with terms modified in troubled debt restructurings at December 31, 1994
and 1993.
NONPERFORMING ASSETS
December 31
-------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
(in Thousands)
Loans on nonaccrual............... $10,853 $12,165 $20,950 $28,664 $43,502
Renegotiated loans................ 1,428 7,143 7,572 8,151 3,395
------- ------- ------- ------- -------
Total nonperforming loans....... 12,281 19,308 28,522 36,815 46,897
Other real estate................. 6,980 20,831 37,403 40,769 29,863
------- ------- ------- ------- -------
Total nonperforming assets...... $19,261 $40,139 $65,925 $77,584 $76,760
======= ======= ======= ======= =======
Loans 90 days past due............ $ 3,736 $ 4,143 $ 3,595 $ 7,915 $ 4,036
Total nonperforming loans as a
percentage of loans.............. .21% .37% .61% .92% 1.35%
Total nonperforming assets as a
percentage of loans and ORE...... .33 .77 1.40 1.93 2.18
Loans 90 days past due as a
percentage of loans.............. .06 .08 .08 .20 .12
Other loans within the Company's portfolio may become classified as
nonperforming as conditions dictate; however, management was not aware of any
such loan that was material in amount at December 31, 1994.
Details of nonaccrual loans at December 31, 1994 and 1993 appear below:
1994 1993
------- -------
(in Thousands)
Principal balance............................................... $10,853 $12,165
Interest that would have been recorded under original terms..... 1,324 1,606
Interest actually recorded...................................... 466 643
Details of loans with terms modified in troubled debt restructurings at
December 31, 1994 and 1993 appear below:
1994 1993
------- -------
(in Thousands)
Principal balance............................................... $ 1,428 $ 7,143
Interest that would have been recorded under original terms..... 111 578
Interest actually recorded...................................... 88 570
37
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities, including fee-based services, profits and
commissions earned through securities and insurance sales, and trading
activities. In addition, gains or losses realized from the sale of investment
portfolio securities are included in noninterest income. Total noninterest
income for 1994 decreased 17 percent while noninterest income for 1993 showed
an increase of 7 percent.
NONINTEREST INCOME
Year Ended December 31 Percent Change
------------------------- -------------------
1994 1993 1992 1994/1993 1993/1992
------- -------- ------- --------- ---------
(in Thousands)
Service charges on deposit ac-
counts.......................... $44,318 $ 39,020 $36,291 13.6% 7.5%
Trust fees....................... 16,111 16,648 14,190 (3.2) 17.3
Trading account profits (losses)
and commissions................. (2,533) 11,351 13,808 (122.3) (17.8)
Investment securities gains, net. 3,224 1,036 1,266 211.2 (18.2)
Loss on purchase of securities
from common trust fund.......... (8,222) -- -- -- --
Credit card service charges and
fees............................ 7,167 6,741 6,310 6.3 6.8
Other............................ 25,566 28,390 25,022 (9.9) 13.5
------- -------- -------
Total noninterest income....... $85,631 $103,186 $96,887 (17.0) 6.5
======= ======== =======
Fee income from service charges on deposit accounts increased 14 percent in
1994 following an 8 percent increase in 1993. Continued emphasis on low cost
checking account services, appropriate pricing for transaction deposit accounts
and fee collection practices for other deposit services contributed to the
increased levels of income for both years. Increases during 1994 and 1993 were
further influenced by the increase in both the number of accounts and balances
outstanding in transaction deposit accounts.
Trust fees or income from fee-based fiduciary activities decreased 3 percent
in 1994 compared to the 17 percent increase in 1993. The decrease in 1994 is
due primarily to a slight decrease in assets administered at the Trust Division
of Compass Bank and the Company's River Oaks Trust Company subsidiary from $5.9
billion at the end of 1993 to $5.8 billion at December 31, 1994. The decrease
in trust fees was also impacted by reduced mutual fund participation and the
fact that fees were reduced as the value of fixed income assets under
administration declined as the general level of interest rates rose.
Trading account profits and commissions on bond sales and trading activities
decreased from income of $11.4 million in 1993 to a loss of $2.5 million in
1994. This $13.9 million decrease was due in large part to an $8.4 million
decline during the first two quarters of the year in the market value of
speculative securities held in the Company's trading account, primarily
collateralized mortgage obligation inverse floaters ("inverse floaters"). Such
inverse floaters represented securities in which the coupon, and consequently
the return, floated inversely to changes in interest rates. The coupons on
inverse floaters are generally a function of a base rate minus the product of a
multiplier and a floating index. In the case of the inverse floaters held by
the Company in its trading account, the coupon rate was typically based on a
base rate less two times 1-month LIBOR. Therefore, for each 100 basis point
increase in 1-month LIBOR, the coupon earned on such securities declined by 200
basis points. As the level of interest rates rose in the first six months of
1994, the repayment speed on the mortgages collateralizing the inverse floaters
slowed, which caused the average life of such securities to extend at the same
time coupon rates were falling. The resulting decreased yield and the extended
weighted average life generated a substantial decline in market value. All
inverse floaters held in the trading account were sold prior to the end of the
second quarter.
38
The remaining decrease in trading account profits and commissions resulted
from the increase in the general level of interest rates during 1994. It should
be noted that changes in the trading account profits and commissions in future
quarters cannot be predicted accurately because of the uncertainty of changes
in market conditions. There can be no assurance that such amounts will or will
not continue at their current levels. For a discussion of the composition of
the trading account and interest rate contracts held in the trading account at
December 31, 1994, see pages 17 and 23.
The $8.2 million loss on purchase of securities from common trust fund
resulted from the purchase of inverse floaters by the Company during the second
quarter from a common trust fund managed by the Trust Division of Compass Bank.
Due to the increase in the general level of interest rates, the common trust
fund customers faced significant losses on inverse floaters held in the
portfolio. After evaluating the suitability of these investments for the common
trust fund subsequent to the decline in market value, the Company determined
that it would be in the best interests of the Company, Compass Bank, and its
trust customers to purchase these securities at book value from the common
trust fund. As a result of this decision, the Company purchased inverse
floaters with a fair value of $27.0 million from the common trust fund at the
fund's cost of $35.2 million with the difference between purchase price and
fair value reflected in the Company's "Consolidated Statements of Income" as a
separate component of noninterest income. At December 31, 1994, these
securities were classified as held-to-maturity in the Company's investment
securities portfolio at $26.2 million, which represents its cost of $27.0
million less subsequent principal payments received.
Following the purchase of the inverse floaters, the Company conducted a
review of all securities held by the common trust funds managed by the Company
or its subsidiaries. No inverse floaters or other high risk derivatives are
held by the common trust funds, however, certain individual trust accounts hold
derivative securities which may include high risk derivative securities. In
those cases where derivative securities continue to be held in individual trust
accounts, either (a) Compass Bank continues to monitor the securities and the
securities remain subject to sale, but the Company believes after reasonable
investigation that it is not desirable, in light of the current illiquid and
depressed market for the securities and other factors relevant to the account,
to dispose of the securities at this time, or (b) at the direction of the
customer or following consultation with the customer, the securities have been
placed in a held-to-maturity account.
No other "high risk" derivatives are held by the Company in its held-to-
maturity and available-for-sale portfolios at December 31, 1993 or 1994, other
than those inverse floaters held by the parent company as of December 31, 1994,
as discussed above.
Credit card service charge and fee income increased six percent in 1994 after
increasing seven percent in 1993. Increases in merchants' discounts and in the
annual credit card fees accounted for the increase.
Recurring items of other noninterest income decreased $10.1 million in 1994
following an increase of $7.4 million in 1993. The decrease in 1994 resulted
primarily from trading account losses experienced as a result of declining
interest rates offset to an extent by increases in service charge income.
Nonrecurring items of other noninterest income, excluding the loss on
purchase of securities from common trust fund, equaled $4.1 million in 1994 and
$3.3 million for 1993. Nonrecurring items of noninterest income include net
gains on sales of investment portfolio securities, net gains on the sale of
fixed assets and other real estate owned, and gains on loan settlements.
Nonrecurring items represented five percent of overall noninterest income in
1994, three percent in 1993, and four percent in 1992. The net gains on sales
of investment securities in 1994 were $3.2 million compared to $1.0 million in
1993. Also included in nonrecurring noninterest income are the gains recognized
on the sales of assets such as fixed assets and other real estate owned. These
gains decreased from $900,000 in 1993 to $150,000 in 1994 due primarily to
decreased sales of other real estate owned. Gains on loan settlements at
amounts in excess of the discounted carrying values relating to the Company's
1990 and 1991 acquisitions of certain failed banks in Texas accounted for 18
percent of the total nonrecurring income for 1994 compared to 41 percent in
1993 and 69 percent in 1992.
39
NONINTEREST EXPENSE
Noninterest expense for 1994 increased two percent following an increase of
five percent in 1993. Total salaries and other personnel expenses increased two
percent from 1993 with regular incentive bonuses decreasing from 1993 levels.
Salaries alone increased four percent during 1994 and five percent in 1993 due
to normal increases relating to additions to staff and merit increases, while
the increase in 1994 also reflected the impact of staff additions resulting
from the Company's 1994 acquisitions. During 1994, employee benefits decreased
6 percent after increasing 14 percent in 1993. The decrease in employee
benefits during 1994 was due to decreased accruals related to the Company's
projected contributions to the employee stock ownership plan partially offset
by increased pension plan expense.
NONINTEREST EXPENSE
Year Ended December 31 Percent Change
-------------------------- -------------------
1994 1993 1992 1994/1993 1993/1992
-------- -------- -------- --------- ---------
(in Thousands)
Salaries......................... $110,796 $105,378 $ 99,114 5.1% 6.3%
Commissions...................... 2,501 3,812 4,431 (34.4) (14.0)
Other personnel expense.......... 20,549 21,895 19,243 (6.1) 13.8
Net occupancy expense............ 21,406 19,367 17,960 10.5 7.8
Equipment expense................ 20,146 18,219 16,312 10.6 11.7
Bank travel and entertainment.... 6,608 6,417 6,326 3.0 1.4
Other real estate expenses....... 779 3,351 8,007 (76.8) (58.1)
Marketing........................ 6,820 5,859 5,240 16.4 11.8
Professional services............ 16,234 17,236 16,087 (5.8) 7.1
Supplies......................... 7,546 6,998 6,570 7.8 6.5
FDIC insurance................... 13,840 12,151 11,568 13.9 5.0
Other............................ 34,741 37,020 35,087 (6.2) 5.5
-------- -------- --------
Total noninterest expense...... $261,966 $257,703 $245,945 1.7 4.8
======== ======== ========
Net occupancy expense increased by 11 percent in 1994 following an 8 percent
increase in 1993. These increases in occupancy expense were due principally to
bank acquisitions, opening of new branches, and normal renovation of existing
properties. Equipment expense increased 11 percent in 1994 and 12 percent in
1993 due to equipment replacements and upgrades necessary to support increased
business growth.
Other noninterest expense, as reflected in the "Consolidated Statements of
Income," decreased by five percent compared to an increase of less than one
percent in 1993. Professional service expenses decreased six percent in 1994 as
a result of decreased legal expenses after increasing seven percent in 1993
while bank travel and entertainment expenses increased three percent in 1994
and one percent in 1993, primarily due to acquisition activity. The amount the
Subsidiary Banks paid for Federal deposit insurance increased $1.7 million in
1994 after increasing less than $600,000 in 1993. The amount of FDIC insurance
premiums paid by the Subsidiary Banks is a function of both the Subsidiary
Banks' deposit base and the rate at which insurance premiums are assessed by
the FDIC, which is based in part on the capital adequacy of each bank. Because
each of the Subsidiary Banks meets the regulatory definition of "well-
capitalized," this expense reflects the lowest possible assessment rate charged
by the FDIC.
With regard to FDIC insurance, under applicable law, Federal regulators are
authorized to set assessments for the Bank Insurance Fund ("BIF") at the level
necessary to maintain a designated reserve ratio. Due to the fact that BIF
should achieve the designated reserve ratio in 1995, the Federal regulators
have proposed substantially reducing the BIF premiums paid by healthy banking
institutions. Under this proposal, the insurance rate for the Company's BIF
deposits should decrease substantially. At this time, however, the Federal
regulators have not proposed any reduction in the Savings Association Insurance
Fund
40
("SAIF") premiums paid by savings and loan associations. Given that a
substantial portion of the Company's deposit base is BIF-insured, it is
anticipated that the total amount of FDIC insurance premiums paid by the
Subsidiary Banks should decrease in 1995. However, this proposed reduction in
BIF premiums has met strong opposition from the savings and loan industry, and
it is impossible to predict whether in fact there will be a reduction in BIF
premiums or another regulatory or statutory response. As of December 31, 1994,
the Subsidiary Banks had BIF deposits totaling approximately $5.9 billion and
SAIF deposits of approximately $1.1 billion.
INCOME TAXES
Income tax expense increased $3.5 million, or 7 percent, to $52.0 million for
the year ended December 31, 1994. The effective tax rate as a percentage of
pretax income was 34 percent in 1994, 35 percent in 1993, and 34 percent in
1992. The statutory federal rate was 35 percent for 1994 and 1993 and 34
percent for 1992. The lower effective tax rate in 1994 was due to the favorable
settlement of a three-year IRS audit. For further information concerning the
provision for income taxes, refer to Note 13, Income Tax Expense, of the "Notes
to Consolidated Financial Statements."
OTHER ACCOUNTING ISSUES
During the second quarter of 1993, the Financial Accounting Standards Board
("FASB") issued Financial Accounting Statement No. 114, Accounting by Creditors
for Impairment of a Loan, as amended by Financial Accounting Statement No. 118,
Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures, ("FAS114"). FAS114 requires that impaired loans be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, which is the contractual interest rate adjusted for
any deferred loan fees or costs, premium, or discount existing at the inception
or acquisition of the loan. FAS114 is effective for fiscal years beginning
after December 15, 1994, with earlier adoption permitted. The Company chose not
to adopt FAS114 prior to its effective date and will adopt FAS114 in the first
quarter of 1995. Presently, the Company is unable to quantify the impact that
adoption of FAS114 will have on the consolidated financial statements of the
Company, but management anticipates that the impact will not be material.
PENDING ACQUISITIONS
For information on pending acquisitions, see the accompanying "Notes to
Consolidated Financial Statements," Note 10, Mergers and Acquisitions.
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from that
of an industrial company in that virtually all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on
financial results depends upon the Company's ability to react to changes in
interest rates and, by such reaction, reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or
at the same magnitude, as the prices of other goods and services. As discussed
previously, management seeks to manage the relationship between interest-
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
Various information shown elsewhere in this Annual Report will assist in the
understanding of how well the Company is positioned to react to changing
interest rates and inflationary trends. In particular, the summary of net
interest income, the maturity distributions, the compositions of the loan and
securities portfolios, the data on the interest sensitivity of loans and
deposits, and the information related to off-balance sheet hedging activities
discussed in Note 6, Derivative Financial Instruments, of "Notes to
Consolidated Financial Statements" should be considered.
41
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X
and by Item 302 of Regulation S-K are set forth in the pages listed below.
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................. 43
Consolidated Balance Sheets as of December 31, 1994 and 1993.............. 44
Consolidated Statements of Income for the years ended December 31, 1994,
1993 and 1992............................................................ 45
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1993 and 1992......................................... 46
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992...................................................... 47
Summary of Significant Accounting Policies -- December 31, 1994, 1993 and
1992..................................................................... 48
Notes to Consolidated Financial Statements -- December 31, 1994, 1993 and
1992..................................................................... 51
Quarterly Results (Unaudited)............................................. 71
42
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Compass Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Compass
Bancshares, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 financial position of Compass Bancshares,
Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes to adopt the provisions of
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in 1993. Also, as discussed in
Note 1, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities at December
31, 1993.
KPMG Peat Marwick LLP
Birmingham, Alabama
January 17, 1995
43
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
----------------------
1994 1993
---------- ----------
(in Thousands)
ASSETS
Cash and due from banks............................... $ 483,253 $ 283,783
Interest bearing deposits with other banks............ 99 10,474
Investment securities (market value of $1,764,407 and
$631,794 for 1994 and 1993, respectively):
Taxable............................................. 1,724,023 494,202
Tax-exempt.......................................... 89,314 110,262
---------- ----------
Total investment securities....................... 1,813,337 604,464
Investment securities available for sale (unrealized
holding loss of $15,705 for 1994; unrealized holding
gain of $10,497 for 1993)............................ 701,940 645,454
Trading account securities............................ 58,012 239,491
Federal funds sold and securities purchased under
agreements to resell................................. 46,535 144,764
Loans................................................. 5,762,700 5,200,935
Less: Unearned income................................. (1,189) (3,471)
Allowance for loan losses........................... (107,183) (110,616)
---------- ----------
Net loans....................................... 5,654,328 5,086,848
Premises and equipment, net........................... 201,419 176,790
Other assets.......................................... 164,330 141,526
---------- ----------
TOTAL ASSETS.................................... $9,123,253 $7,333,594
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing................................. $1,364,797 $1,156,039
Interest bearing.................................... 5,697,607 4,469,058
---------- ----------
Total deposits.................................... 7,062,404 5,625,097
Federal funds purchased............................... 484,189 414,704
Securities sold under agreements to repurchase........ 348,235 208,739
Other short-term borrowings........................... 104,598 171,014
Accrued expenses and other liabilities................ 38,272 37,266
FHLB and other borrowings............................. 484,942 325,437
---------- ----------
Total liabilities................................. 8,522,640 6,782,257
Shareholders' equity:
Common stock of $2 par value:
Authorized -- 100,000,000 shares;
Issued -- 36,972,448 shares in 1994 and 36,927,277
shares in 1993................................... 73,945 73,854
Loans to finance stock purchases.................... (5,914) (6,576)
Surplus............................................. 37,862 37,050
Net unrealized holding gain (loss) on available-for-
sale securities.................................... (11,509) 6,545
Retained earnings................................... 506,229 440,464
---------- ----------
Total shareholders' equity........................ 600,613 551,337
---------- ----------
Commitments (Notes 6 and 7)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $9,123,253 $7,333,594
========== ==========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
44
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
---------------------------------------
1994 1993 1992
------------ ------------ ------------
(in Thousands Except Per Share Data)
INTEREST INCOME:
Interest and fees on loans.......... $ 442,749 $ 414,219 $ 397,550
Interest on investment securities:
Taxable........................... 72,574 59,030 123,816
Tax-exempt........................ 5,709 8,344 10,030
------------ ------------ ------------
Total interest on investment
securities..................... 78,283 67,374 133,846
Interest on investment securities
available for sale................. 40,642 32,942 3,719
Interest on trading account
securities......................... 9,943 9,777 6,548
Interest on federal funds sold and
securities purchased under
agreements to resell............... 5,599 2,712 2,441
Interest on interest bearing
deposits with other banks.......... 508 889 1,031
------------ ------------ ------------
TOTAL INTEREST INCOME........... 577,724 527,913 545,135
INTEREST EXPENSE:
Interest on deposits................ 192,539 161,437 187,594
Interest on federal funds purchased
and securities sold under
agreements to repurchase........... 25,844 19,205 30,886
Interest on other short-term
borrowings......................... 10,014 6,908 7,722
Interest on FHLB and other
borrowings......................... 17,959 11,350 2,009
------------ ------------ ------------
TOTAL INTEREST EXPENSE.......... 246,356 198,900 228,211
------------ ------------ ------------
Net interest income............. 331,368 329,013 316,924
Provision for loan losses............. 3,404 36,306 53,175
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES...... 327,964 292,707 263,749
NONINTEREST INCOME:
Service charges on deposit accounts. 44,318 39,020 36,291
Trust fees.......................... 16,111 16,648 14,190
Trading account profits (losses) and
commissions........................ (2,533) 11,351 13,808
Investment securities gains, net.... 3,224 1,036 1,621
Writedown of securities available
for sale........................... -- -- (355)
Loss on purchase of securities from
common trust fund.................. (8,222) -- --
Credit card service charges and
fees............................... 7,167 6,741 6,310
Other............................... 25,566 28,390 25,022
------------ ------------ ------------
TOTAL NONINTEREST INCOME........ 85,631 103,186 96,887
------------ ------------ ------------
NONINTEREST EXPENSE:
Salaries, benefits and commissions.. 133,846 131,085 122,788
Net occupancy expense............... 21,406 19,367 17,960
Equipment expense................... 20,146 18,219 16,312
FDIC insurance...................... 13,840 12,151 11,568
Other............................... 72,728 76,881 77,317
------------ ------------ ------------
TOTAL NONINTEREST EXPENSE....... 261,966 257,703 245,945
------------ ------------ ------------
Net income before income tax
expense........................ 151,629 138,190 114,691
Income tax expense.................... 51,958 48,472 38,688
------------ ------------ ------------
NET INCOME...................... $ 99,671 $ 89,718 $ 76,003
============ ============ ============
Net income per common share........... $ 2.68 $ 2.37 $ 2.01
Weighted average common shares
outstanding.......................... 37,197 37,187 36,861
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
45
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Net
Unrealized
Holding
Gain/
Loans to (Loss) on
Finance Available- Total
Preferred Common Stock Retained Treasury For-Sale Shareholders'
Stock Stock Purchases Surplus Earnings Stock Securities Equity
--------- ------- --------- ------- -------- -------- ---------- -------------
(in Thousands)
Balance December 31,
1991................... $ 23,110 $48,571 $ -- $50,386 $331,438 $ -- $ -- $453,505
Net income -- 1992..... -- -- -- -- 76,003 -- -- 76,003
Effect of 3-for-2 stock
split................. -- 23,880 -- (23,897) -- -- -- (17)
Cash common dividends
declared ($.67 per
share)................ -- -- -- -- (22,120) -- -- (22,120)
Cash preferred
dividends declared
($8.00 per share)..... -- -- -- -- (2,089) -- -- (2,089)
Cash dividends declared
by pooled banks prior
to acquisition........ -- -- -- -- (219) -- -- (219)
Exercise of stock
options............... -- 1,268 (3,119) 5,216 (5) 9 -- 3,369
Tax benefit of stock
options exercised..... -- -- -- 1,908 -- -- -- 1,908
Purchase of treasury
stock................. -- -- -- -- -- (9) -- (9)
Issuance of common
stock................. -- -- -- 486 -- -- -- 486
-------- ------- ------- ------- -------- ----- -------- --------
Balance December 31,
1992................... 23,110 73,719 (3,119) 34,099 383,008 -- -- 510,817
Net income -- 1993..... -- -- -- -- 89,718 -- -- 89,718
Cash common dividends
declared ($.76 per
share)................ -- -- -- -- (27,502) -- -- (27,502)
Cash preferred
dividends declared
($5.98 per share)..... -- -- -- -- (1,531) -- -- (1,531)
Cash dividends declared
by pooled banks prior
to acquisition........ -- -- -- -- (139) -- -- (139)
Exercise of stock
options............... -- 135 -- 583 -- -- -- 718
Purchase of treasury
stock................. -- -- -- -- -- (410) -- (410)
Treasury shares issued
for options........... -- -- -- -- (235) 410 -- 175
Loans to finance stock
purchases............. -- -- (3,457) -- -- -- -- (3,457)
Issuance of common
stock................. -- -- -- 2,368 -- -- -- 2,368
Retirement of preferred
stock................. (23,110) -- -- -- (2,855) -- -- (25,965)
Effect of adoption of
FASB Statement No.
115 -- Accounting for
Certain Investments in
Debt and Equity
Securities............ -- -- -- -- -- -- 6,545 6,545
-------- ------- ------- ------- -------- ----- -------- --------
Balance December 31,
1993................... -- 73,854 (6,576) 37,050 440,464 -- 6,545 551,337
NET INCOME -- 1994..... -- -- -- -- 99,671 -- -- 99,671
CASH COMMON DIVIDENDS
DECLARED ($.92 PER
SHARE)................ -- -- -- -- (33,898) -- -- (33,898)
EXERCISE OF STOCK
OPTIONS............... -- 91 -- 489 -- -- -- 580
TAX BENEFIT OF STOCK
OPTIONS EXERCISED..... -- -- -- 27 -- -- -- 27
PURCHASE OF TREASURY
STOCK................. -- -- -- -- -- (14) -- (14)
TREASURY SHARES ISSUED
FOR OPTIONS........... -- -- -- -- (8) 14 -- 6
LOANS TO FINANCE STOCK
PURCHASES, NET OF
REPAYMENTS............ -- -- 662 -- -- -- -- 662
ISSUANCE OF COMMON
STOCK................. -- -- -- 296 -- -- -- 296
CHANGE IN UNREALIZED
GAIN/(LOSS) ON
SECURITIES AVAILABLE
FOR SALE.............. -- -- -- -- -- -- (18,054) (18,054)
-------- ------- ------- ------- -------- ----- -------- --------
BALANCE DECEMBER 31,
1994.................. $ -- $73,945 $(5,914) $37,862 $506,229 $ -- $(11,509) $600,613
======== ======= ======= ======= ======== ===== ======== ========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
46
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
---------------------------------
1994 1993 1992
----------- --------- ---------
(in Thousands)
OPERATING ACTIVITIES:
Net income................................. $ 99,671 $ 89,718 $ 76,003
Adjustments to reconcile net income to cash
provided (used) by operations:
Depreciation and amortization.............. 28,391 26,582 23,184
Accretion of discount and loan fees........ (12,514) (9,045) (10,136)
Provision for loan losses.................. 3,404 36,306 53,175
Net change in trading account securities... 203,466 (133,445) (25,931)
Net change in mortgage loans available for
sale...................................... (152) (15,795) --
Deferred tax expense (benefit)............. 1,702 (6,757) (10,958)
Net gain on sale of investment securities.. (3,224) (1,036) (1,621)
Loss on purchase of securities from common
trust fund................................ 8,222 -- --
Net gain on sale of premises and equipment. (175) (37) (65)
Net gain on sale of other real estate
owned..................................... (75) (926) (15)
Provision for losses on other real estate
owned, net of recoveries.................. (203) 1,602 5,100
Writedown of investment securities
available for sale........................ -- -- 355
(Increase)/decrease in interest receivable. (19,313) 8,133 4,284
(Increase)/decrease in other assets........ 4,656 (1,472) 33,526
Increase/(decrease) in interest payable.... 8,508 (3,771) (8,260)
Increase/(decrease) in taxes payable....... 2,101 103 (5,308)
Increase/(decrease) in other payables...... (2,426) 4,338 3,243
----------- --------- ---------
Net cash provided (used) by operating
activities............................... 322,039 (5,502) 136,576
INVESTING ACTIVITIES:
Proceeds from sales of investment
securities................................ 698 48,846 64,657
Proceeds from maturities/calls of
investment securities..................... 297,893 442,415 696,705
Purchases of investment securities......... (1,287,738) (51,875) (464,498)
Proceeds from sales of investment
securities available for sale............. 239,767 57,347 5,296
Proceeds from maturities/calls of
investment securities available for sale.. 106,737 251,826 --
Purchases of investment securities
available for sale........................ (654,370) (284,748) --
Net (increase)/decrease in federal funds
sold and securities purchased under
agreements to resell...................... 244,779 (79,811) 56,011
Net increase in loan portfolio............. (441,565) (386,927) (739,187)
Proceeds from sales of loans............... -- -- 5,336
Net cash received (paid) in acquisitions of
banks..................................... 811,649 (16,016) --
Purchases of premises and equipment........ (27,617) (38,088) (34,795)
Proceeds from sales of premises and
equipment................................. 955 2,143 622
Net decrease in interest bearing deposits
with other banks.......................... 10,376 1,001 4,838
Proceeds from sales of other real estate
owned..................................... 6,843 16,133 9,797
----------- --------- ---------
Net cash used by investing activities..... (691,593) (37,754) (395,218)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW
accounts and savings accounts............. 87,441 63,601 215,232
Net increase/(decrease) in time deposits... 219,029 (900) 87,015
Net increase/(decrease) in federal funds
purchased................................. 62,385 (130,901) (126,370)
Net increase/(decrease) in securities sold
under agreements to repurchase............ 139,496 (25,931) (121,846)
Net increase/(decrease) in short-term
borrowings................................ (66,484) 38,681 14,980
Proceeds from FHLB advances and other
borrowings................................ 159,619 122,505 198,000
Repayment of other borrowings.............. (179) (3,481) (7,273)
Purchase of treasury shares................ (14) (410) (9)
Common dividends paid...................... (33,898) (27,641) (22,234)
Preferred dividends paid................... -- (1,531) (2,089)
Redemption of preferred stock.............. -- (25,965) --
Repayment of loans to finance stock
purchases................................. 747 -- --
Proceeds from issuance of common stock..... -- 9 486
Proceeds from exercise of stock options.... 882 2,911 6,484
----------- --------- ---------
Net cash provided by financing activities. 569,024 10,947 242,376
----------- --------- ---------
Net increase (decrease) in cash and due from
banks...................................... 199,470 (32,309) (16,266)
Cash and due from banks at beginning of the
year....................................... 283,783 316,092 332,358
----------- --------- ---------
Cash and due from banks at end of the year.. $ 483,253 $ 283,783 $ 316,092
=========== ========= =========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
47
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1994, 1993 AND 1992
The accounting principles followed by Compass Bancshares, Inc. (the
"Company") and its subsidiaries and the methods of applying these principles
conform with generally accepted accounting principles and with general
practices within the banking industry. Certain principles which significantly
affect the determination of financial position, results of operations and cash
flows are summarized below.
Prior years' financial statements have been restated to reflect acquisitions
consummated during 1994 accounted for using the pooling-of-interests method of
accounting. Financial institutions acquired by the Company during the past
three years and accounted for as purchases are reflected in the financial
position and results of operations of the Company since the date of their
acquisition. Certain items in prior years' financial statements have been
reclassified to conform with the current financial statement presentations.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, Compass Bank (and its wholly-owned subsidiaries),
Central Bank of the South, Compass Bank-Florida, Compass Banks of Texas, Inc.
(and its wholly-owned subsidiaries) (collectively, the "Subsidiary Banks"),
Compass Land Holding Corporation and Compass Underwriters, Inc. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
SECURITIES
Securities are held in three portfolios: (i) trading account securities,
(ii) held-to-maturity securities, and (iii) securities available for sale.
Trading account securities are stated at market value. Investment securities
held to maturity are stated at cost adjusted for amortization of premiums and
accretion of discounts. With regard to investment securities held to maturity,
management has the intent and ability to hold such securities until maturity.
On December 31, 1993, the Company adopted Financial Accounting Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities
("FAS115") which requires that investment securities available for sale be
reported at fair value with any unrealized gains or losses excluded from
earnings and reflected as a separate component of stockholders' equity. The
adoption of FAS115 did not affect the Company's methodology for determining
the carrying value of its trading account securities or its investment
securities held to maturity. During all periods prior to the date of adoption,
the Company reported securities available for sale at the lower-of-cost-or-
market with any valuation adjustment reflected in earnings as required by
generally accepted accounting principles at that time. Additionally, FAS115
specifies accounting principles in regard to transfers among the three
portfolios and the conditions that would permit such transfers. Investment
securities available for sale are classified as such due to the fact that
management may decide to sell certain securities prior to maturity for
liquidity, tax planning or other valid business purposes. The adoption of
FAS115 resulted in the addition of $6.5 million to stockholders' equity at
December 31, 1993, representing the tax-effected net unrealized gain on the
Company's available-for-sale portfolio at that date. The tax-effected
unrealized loss of $11.5 million at December 31, 1994, is reflected as a
reduction of shareholders' equity. Subsequent increases and decreases in the
net unrealized gain/loss on the portfolio of securities available for sale
will be reflected as adjustments to the carrying value of the portfolio and as
adjustments to the component of shareholders' equity.
Interest earned on investment securities held to maturity, investment
securities available for sale, and trading account securities is included in
interest income. Net gains and losses on the sale of investment securities
held to maturity and investment securities available for sale, computed
principally on the specific identification method, are shown separately in
noninterest income in the "Consolidated Statements of Income."
As part of the Company's overall interest rate risk management, the Company
uses interest rate futures, swaps, caps and floors. Gains and losses on
futures contracts are deferred and amortized over the lives of the hedged
assets or liabilities as an adjustment to interest income or expense. Interest
income or expense related
48
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
to interest rate swaps, caps and floors is recorded over the life of the
agreement as an adjustment to net interest income. Gains or losses on
terminated swaps, caps and floors are deferred and amortized as an adjustment
of net interest income over the remaining life of the original contract.
Gains or losses on futures contracts used in the securities trading
portfolio, as well as gains or losses on short-sale transactions, are
recognized currently by the mark-to-market method of accounting and are
recorded in the noninterest income section of the "Consolidated Statements of
Income." Income received as an intermediary for customers under interest rate
contracts is amortized over the life of the respective contract and recorded in
trading account profits (losses) and commissions.
LOANS
All loans are stated at principal outstanding. Interest income on installment
loans is recognized primarily on the level yield method. Interest income on
other loans is credited to income based primarily on the principal outstanding
at appropriate rates of interest.
It is the general policy of the Subsidiary Banks to stop accruing interest
income and place the recognition of interest on a cash basis when any
commercial, industrial or real estate loan is 90 days or more past due as to
principal or interest and the ultimate collection of either is in doubt, unless
the loan is well collateralized and in the process of collection. Accrual of
interest income on consumer installment loans is suspended when any payment of
principal or interest, or both, is more than 120 days delinquent. Credit cards
and the related accrued interest is charged off when the receivable is more
than 150 days past due. When a loan is placed on a nonaccrual basis, any
interest previously accrued but not collected is reversed against current
income unless the collateral for the loan is sufficient to cover the accrued
interest or a guarantor assures payment of interest.
ALLOWANCE FOR LOAN LOSSES
The amount of the provision for loan losses charged to income is determined
on the basis of several factors including actual loss experience, current and
expected economic conditions and periodic examinations and appraisals of the
loan portfolio. Such provisions, less net loan charge-offs, comprise the
allowance for loan losses which is deducted from loans and is available for
future loan charge-offs.
The Subsidiary Banks generally follow the policy of charging off loans
determined to be uncollectible by management, the Company's loan examination
division or Federal and state supervisory authorities. Subsequent recoveries
are credited to the allowance.
OTHER REAL ESTATE
For real estate acquired through foreclosure and in-substance foreclosed
assets, a new cost basis is established at fair value at the time of
foreclosure. Subsequent to foreclosure, foreclosed assets are carried at the
lower of fair value less estimated costs to sell or cost, with the difference
recorded as a valuation allowance, on an individual asset basis. Subsequent
decreases in fair value and increases in fair value, up to the value
established at foreclosure, are recognized as charges or credits to expense.
Other real estate, net of allowance for losses, is reported in other assets in
the "Consolidated Balance Sheets."
LOAN FEES
The Company accounts for loan fees and origination costs in accordance with
Financial Accounting Statement No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Direct Costs of Leases
("FAS91"). The basic requirement of FAS91 calls for the Company to treat loan
fees, net of direct costs, as an adjustment to the yield of the related loan
over the term of the loan.
49
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using primarily the straight-line method over the
estimated useful lives of assets.
AMORTIZATION OF INTANGIBLES
Intangibles are included in other assets. The amortization periods for these
assets are dependent upon the type of intangible. Goodwill is amortized over a
period not greater than 20 years; core deposit and other identifiable
intangibles are amortized over a period based on the life of the intangible
which generally varies from 10 to 25 years. Goodwill is amortized using the
straight-line method and other identifiable intangibles are amortized using
accelerated methods as appropriate.
TREASURY STOCK
Stock repurchases are accounted for using the cost method.
INCOME TAX EXPENSE
For 1994 and 1993, the Company and its subsidiaries provide for income taxes
using the asset and liability method of accounting for income taxes in
accordance with Financial Accounting Statement No. 109, Accounting for Income
Taxes ("FAS109"). For 1992, the Company and its subsidiaries provide for income
taxes using the deferred method of accounting for income taxes under APB
Opinion 11.
Under the asset and liability method prescribed by FAS109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under FAS109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Pursuant to the deferred method under APB Opinion 11, deferred income taxes
are recognized for income and expense items that are reported in different
years for financial reporting purposes and income tax purposes using the tax
rate applicable for the year of the calculation. Under the deferred method,
deferred taxes are not adjusted for subsequent changes in tax rates.
EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have various employee benefit plans which
cover substantially all employees. Pension expense is determined based on an
actuarial valuation. The Company contributes amounts to the pension fund
sufficient to satisfy funding requirements of the Employee Retirement Income
Security Act. Contributions to the various other plans are determined by the
Board of Directors.
NET INCOME PER COMMON SHARE
Primary net income per common share is calculated based on the weighted
average shares of common stock and common stock equivalents outstanding during
the year. Common stock equivalents included in the computations represent the
dilutive effect of shares issuable under stock options granted by the Company.
For purposes of this calculation, net income has been adjusted for preferred
stock dividends paid by the Company during the years in which preferred stock
was issued and outstanding.
50
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993 AND 1992
(1) CASH AND DUE FROM BANKS
The Subsidiary Banks are required to maintain cash balances with the Federal
Reserve. The average amounts of those balances for the years ended December 31,
1994 and 1993 were approximately $86.2 million and $78.0 million, respectively.
(2) CASH FLOWS
The Company paid approximately $237.9 million, $202.7 million and $236.5
million in interest on deposits and other liabilities during 1994, 1993 and
1992, respectively.
December 31
------------------------------
1994 1993 1992
---------- --------- --------
(in Thousands)
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Transfers of loans to other real estate owned. $ 3,427 $ 8,096 $ 20,692
Loans to facilitate the sale of other real
estate owned................................. 11,375 8,692 7,771
Transfer of securities to investment
securities available for sale................ -- 92,282 566,137
Transfer of securities available for sale to
held-to-maturity securities.................. 224,971 -- --
Tax benefit realized upon exercise of stock
options...................................... 27 -- 1,908
Acquisition of banks:
Liabilities assumed......................... $1,139,538 $ 146,723
Fair value of assets acquired............... 327,889 165,313
---------- ---------
Net cash received (paid).................. $ 811,649 $ (18,590)
========== =========
(3) INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
The adjusted cost and approximate market value of investment securities and
investment securities available for sale at December 31, 1994 and 1993 were as
follows:
1994 1993
--------------------- -----------------
CARRYING MARKET Carrying Market
AMOUNT VALUE Amount Value
---------- ---------- -------- --------
(in Thousands)
Investment securities:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations...................... $ 97,762 $ 96,972 $ 28,718 $ 32,636
Mortgage-backed pass-through
securities........................ 431,259 426,503 280,982 294,251
Collateralized mortgage
obligations....................... 1,040,860 999,465 138,181 139,935
States and political subdivisions.. 78,472 77,881 108,409 113,747
Corporate.......................... 162,306 160,662 43,571 46,384
Foreign............................ 770 770 770 717
Other.............................. 424 445 1,986 2,048
Equity securities.................... 1,484 1,709 1,847 2,076
---------- ---------- -------- --------
Total............................ $1,813,337 $1,764,407 $604,464 $631,794
========== ========== ======== ========
51
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
1994 1993
------------------ ------------------
MARKET AMORTIZED Market Amortized
VALUE COST Value Cost
-------- --------- -------- ---------
(in Thousands)
Investment securities available for sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations........................ $634,415 $650,121 $266,703 $259,200
Mortgage-backed pass-through
securities.......................... 753 756 1,058 978
Collateralized mortgage obligations.. 19,200 19,196 327,944 327,519
Corporate............................ 8,600 8,600 12,934 12,683
Other................................ 5,687 5,687 1,407 1,407
Equity securities...................... 33,285 33,285 35,408 33,170
-------- -------- -------- --------
Total.............................. $701,940 $717,645 $645,454 $634,957
======== ======== ======== ========
Securities with principal amounts of approximately $887.2 million and $797.7
million at December 31, 1994 and 1993, respectively, were pledged to secure
public deposits and for other purposes as required by law. Unrealized gains and
unrealized losses on investment securities held to maturity for 1994 were $6.6
million and $55.6 million, respectively. For investment securities available
for sale, unrealized gains and unrealized losses at year-end 1994 were $200,000
and $15.9 million, respectively. The unrealized gains and unrealized losses on
investment securities and investment securities available for sale related to
the various categories as of December 31, 1994 and 1993, are detailed in the
following table.
1994 1993
--------------------- ---------------------
UNREALIZED UNREALIZED Unrealized Unrealized
GAINS LOSSES Gains Losses
---------- ---------- ---------- ----------
(in Thousands)
Investment securities:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.................. $1,271 $ 2,061 $ 3,932 $ 14
Mortgage-backed pass-through
securities.................... 3,133 7,889 13,313 44
Collateralized mortgage
obligations................... 433 41,828 2,660 906
States and political
subdivisions.................. 899 1,490 5,366 28
Corporate...................... 637 2,281 2,813 --
Foreign........................ -- -- -- 53
Other.......................... 21 -- 62 --
Equity securities................ 225 -- 229 --
------ ------- ------- ------
Total........................ $6,619 $55,549 $28,375 $1,045
====== ======= ======= ======
Investment securities available for
sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.................. $ 180 $15,886 $ 7,613 $ 110
Mortgage-backed pass-through
securities.................... -- 3 80 --
Collateralized mortgage
obligations................... 4 -- 425 --
Corporate...................... -- -- 251 --
Other.......................... -- -- -- --
Equity securities................ -- -- 2,238 --
------ ------- ------- ------
Total........................ $ 184 $15,889 $10,607 $ 110
====== ======= ======= ======
52
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
The maturity of the securities portfolio is presented in the tables below. No
maturity breakdown is presented for mortgage-backed pass-through securities and
collateralized mortgage obligations ("CMOs") because of the unpredictability as
to the timing and amount of principal repayments on these securities.
1994
---------------------
CARRYING MARKET
AMOUNT VALUE
---------- ----------
(IN THOUSANDS)
Investment securities:
Maturing within one year............................... $ 75,644 $ 74,799
Maturing after one but within five years............... 172,737 169,817
Maturing after five but within ten years............... 45,880 47,418
Maturing after ten years............................... 46,957 46,405
---------- ----------
341,218 338,439
Mortgage-backed pass-through securities................ 431,259 426,503
Collateralized mortgage obligations.................... 1,040,860 999,465
---------- ----------
Total................................................ $1,813,337 $1,764,407
========== ==========
MARKET AMORTIZED
VALUE COST
---------- ----------
(IN THOUSANDS)
Investment securities available for sale:
Maturing within one year............................... $ 302,493 $ 307,081
Maturing after one but within five years............... 378,925 390,146
Maturing after ten years............................... 569 466
---------- ----------
681,987 697,693
Mortgage-backed pass-through securities................ 753 756
Collateralized mortgage obligations.................... 19,200 19,196
---------- ----------
Total................................................ $ 701,940 $ 717,645
========== ==========
Proceeds from sales of investment securities classified as held-to-maturity
were $700,000 in 1994, $48.8 million in 1993, and $64.7 million in 1992. Gross
gains realized on those sales were $300,000 in 1993, and $1.6 million in 1992.
Proceeds from sales of available-for-sale investment securities were $239.8
million in 1994, $57.3 million in 1993, and $5.3 million in 1992. Gross gains
realized on those sales were $3.3 million in 1994 and $700,000 in 1993. There
were no gains realized on sales in 1992. There were $40,000 of losses realized
on sales of available-for-sale securities in 1994 and no losses on sales of
available-for-sale securities in 1993 and 1992. No losses were realized on
held-to-maturity securities during the last three years.
While there were no transfers of securities from the available-for-sale
portfolio to the trading securities portfolio, $225.0 million of available-for-
sale securities were transferred to the held-to-maturity portfolio during 1994.
With the adoption of FAS115 on December 31, 1993, the Company transferred an
additional $63.6 million of investment securities to its available-for-sale
portfolio. The transfer primarily involved fixed-rate CMOs that could have been
required, based on the wording of a regulatory policy in place at the time, to
be transferred to the available-for-sale portfolio in the future if
sufficiently reduced prepayment speeds were experienced on the underlying
mortgages. During 1994, the regulators clarified the policy language and
intent, which enabled CMOs to be carried in the held-to-maturity portfolio
under FAS115.
53
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
(4) LOANS AND ALLOWANCES FOR LOAN LOSSES AND LOSSES ON OTHER REAL ESTATE
At December 31, 1994 and 1993, the composition of the loan portfolio was as
follows:
1994 1993
---------- ----------
(in Thousands)
Commercial, financial and agricultural................... $1,179,013 $1,136,427
Real estate -- construction.............................. 369,331 253,086
Real estate -- mortgage.................................. 3,006,361 2,635,417
Consumer installment..................................... 1,207,995 1,176,005
---------- ----------
$5,762,700 $5,200,935
========== ==========
During 1994 and 1993, certain executive officers and directors of the Company
and its principal subsidiary, Compass Bank, including their immediate families
and companies with which they are associated, were loan customers of the
Subsidiary Banks. Total loans outstanding to these persons at December 31, 1994
and 1993, amounted to $65.6 million and $56.7 million, respectively. The change
from December 31, 1993, to December 31, 1994, reflects payments amounting to
$24.7 million, advances of $35.7 million and other reductions of $2.1 million.
Such loans are made in the ordinary course of business at normal credit terms,
including interest rate and collateral requirements, and do not represent more
than normal credit risk.
The Company does not have a concentration of loans to any one industry.
A summary of the transactions in the allowance for loan losses for the years
ended December 31, 1994, 1993 and 1992 follows:
1994 1993 1992
-------- -------- -------
(in Thousands)
Balance at beginning of year....................... $110,616 $ 83,859 $55,982
Add: Provision charged to income................ 3,404 36,306 53,175
Additions due to acquisitions.............. 1,248 1,323 --
Deduct: Loans charged off.......................... 15,575 19,584 31,725
Loan recoveries............................ (7,490) (8,712) (6,427)
-------- -------- -------
Net charge-offs........................ 8,085 10,872 25,298
-------- -------- -------
Balance at end of year............................. $107,183 $110,616 $83,859
======== ======== =======
Details of nonaccrual loans at December 31, 1994 and 1993, appear below:
1994 1993
------- -------
(in Thousands)
Principal balance............................................... $10,853 $12,165
Interest that would have been recorded under original terms..... 1,324 1,606
Interest actually recorded...................................... 466 643
Details of loans with terms modified in troubled debt restructurings at
December 31, 1994 and 1993, appear below:
1994 1993
------- -------
(in Thousands)
Principal balance............................................... $ 1,428 $ 7,143
Interest that would have been recorded under original terms..... 111 578
Interest actually recorded...................................... 88 570
54
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
A summary of the transactions in the allowance for losses on other real
estate for the years ended December 31, 1994, 1993 and 1992, follows:
1994 1993 1992
------- ------- -------
(in Thousands)
Balance at beginning of year......................... $ 3,129 $ 5,093 $ 1,534
Provision charged to income.......................... 381 1,602 5,100
Charge-offs.......................................... (1,162) (3,566) (1,541)
Recoveries........................................... (585) -- --
------- ------- -------
Balance at end of year............................... $ 1,763 $ 3,129 $ 5,093
======= ======= =======
Other real estate, net of the allowance for losses, totaled $7.0 million at
December 31, 1994, and $20.8 million at December 31, 1993, and is reported in
other assets in the "Consolidated Balance Sheets."
(5) FHLB AND OTHER BORROWINGS
At December 31, 1994, the Company had 7 percent subordinated debentures of
$75 million maturing in 2003 and 8.375 percent subordinated debentures of $50
million maturing in 2004, with interest paid semi-annually on both debentures.
At December 31, 1994, the net carrying amount of these debentures was $124.2
million.
The Company had a mortgage amounting to $4.8 million as of December 31,
1994, secured by the River Oaks Bank Building in Houston, Texas. The 8.875
percent mortgage has monthly principal and interest payments of approximately
$50,000 and matures December 31, 2008.
At December 31, 1994, the Company also had $356 million in outstanding
advances from the Federal Home Loan Bank of which $100 million matures in
1995, $48 million matures in 1996, and $208 million matures in 1997. Of the
amount maturing in 1997, $50 million carries an interest rate of 7.87 percent
and $60 million carries an interest rate of 7.755 percent. The interest rate
on the remaining advances resets quarterly based on the 3-month LIBOR rate and
interest payments are due quarterly. The advances are secured by first
mortgages of $587 million carried on the books of Compass Bank.
(6) DERIVATIVE FINANCIAL INSTRUMENTS
The Company is a party to derivative financial instruments in the normal
course of business for trading purposes and for other than trading purposes to
meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. The following table summarizes the contract or
notional amount of all derivative financial instruments as of December 31:
1994 1993
------------------- ---------------------
OTHER Other
THAN Than
TRADING TRADING Trading Trading
-------- ---------- ---------- ----------
(in Thousands)
Commitments to extend credit......... $ -- $2,076,073 $ -- $1,437,865
Standby and commercial letters of
credit.............................. -- 44,599 -- 52,746
Forward and futures contracts........ 161,405 -- 179,790 --
Interest rate swap agreements........ 71,896 446,000 132,287 436,000
Floors and caps written.............. 283,900 400,000 248,100 200,000
Floors and caps purchased............ 262,500 1,050,000 200,000 1,050,000
Other options written................ 2,000 -- 700,000 --
Other options purchased.............. 182,000 -- 1,254,000 --
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
55
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
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.
Standby letters of credit are commitments issued by the Company to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions and expire in
decreasing amounts. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Company holds various assets as collateral supporting those
commitments for which collateral is deemed necessary.
Forward and futures contracts are contracts for delayed delivery of
securities or money market instruments in which the seller agrees to make
delivery of a specified instrument at a designated future date at a specific
price or yield. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities' values and
interest rates.
The Company enters into a variety of interest rate contracts, including
interest rate caps and floors, interest rate options and interest rate swap
agreements, in its trading activities and in managing its interest rate
exposure. Interest rate caps and floors written by the Company enable
customers to transfer, modify or reduce their interest rate risk. Interest
rate options are contracts that allow the holder of the option to purchase or
sell a financial instrument at a specified price and within a specified period
of time from or to the seller, or writer, of the option. As a writer of
options, the Company receives a premium at the outset and then bears the risk
of the unfavorable change in the price of the financial instrument underlying
the option.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into interest rate swap agreements
involves not only the risk of dealing with counterparties and their ability to
meet the terms of the contracts but also the interest rate risk associated
with unmatched positions. Notional principal amounts often are used to express
the volume of these transactions, however, the amounts potentially subject to
credit risk are much smaller.
The following table details various information regarding swaps, caps and
floors used for other than trading purposes as of December 31, 1994.
Weighted Weighted
Average Weighted Average
Rate* Average Repricing
Notional Carrying Estimated ------------- Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
---------- -------- ---------- -------- ---- ---------- ---------
(in Thousands)
Non-trading interest
rate contracts:
Swaps:
Pay fixed versus:
Prime................ $ 18,000 $ (1) $ 16 8.50% 8.61% 0.21 1
3 mon. LIBOR......... 108,000 61 7,702 6.02 5.46 3.21 90
Receive fixed versus 3
mon. LIBOR........... 120,000 139 (3,595) 6.64 5.92 2.71 90
Basis swaps+........... 200,000 (21) 60 5.72 5.88 1.13 90
Cap corridor**......... 400,000 (156) (45) 0.80 0.99 1.56 1
Floors purchased....... 650,000 191 92 -- * 2.46 76
---------- ----- -------
$1,496,000 $ 213 $ 4,230
========== ===== =======
- --------
+ The Company receives interest based on the federal funds rate and pays
interest based on 3-month LIBOR.
* Weighted average rates received/paid are shown only for swaps, caps and
floors for which net interest amounts were receivable or payable at December
31, 1994. For caps and floors, the rate shown represents the weighted
average net interest differential between the index rate and the cap or
floor rate.
** The cap corridor represents a single transaction with a counterparty in
which the Company both purchased a $400 million notional cap (at 4.5
percent based on federal funds rate) and sold a $400 million notional cap
(at 7.25 percent based on prime), in order to keep funding cost at 275
basis points below prime.
56
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
Swaps, caps and floors acquired for other than trading purposes are used to
help reduce the risk of interest rate movements for specific categories of
assets and liabilities. At December 31, 1994, such swaps, caps and floors were
associated with the following asset or liability categories:
Notional Principal Associated With
-------------------------------------------------
Total Adjustable- Adjustable- Fed Funds
Notional Rate Rate CDs Less Purchased
Principal Loans Investments Than $100,000 and Repos++
---------- ----------- ----------- ------------- -----------
Swaps:
Pay fixed........ $ 126,000 $ 8,000 $ -- $18,000 $100,000
Receive fixed.... 120,000 20,000 100,000 -- --
Basis swaps...... 200,000 -- -- -- 200,000
Floors............ 650,000 650,000 -- -- --
Cap corridor...... 400,000 -- -- -- 400,000
---------- -------- -------- ------- --------
$1,496,000 $678,000 $100,000 $18,000 $700,000
========== ======== ======== ======= ========
- --------
++ Consists of federal funds purchased and securities sold under agreements to
repurchase.
In addition to interest rate protection contracts used to help manage overall
interest sensitivity, the Company also enters into interest rate contracts for
the trading account. The primary purposes for using interest rate contracts in
the trading account are to facilitate customer transactions and to help protect
cash market positions in the trading account against interest rate movement.
Changes in the estimated fair value of contracts in the trading account are
recorded in other noninterest income as trading profits and commissions. Net
interest amounts received or paid on interest rate contracts in the trading
account are recorded as an adjustment of interest on trading account
securities. The following table summarizes interest rate contracts held in the
trading account at December 31, 1994:
Weighted
Weighted Weighted Average
Average Rate* Average Repricing
Notional Carrying Estimated ------------- Years to Frequency
Amount Value++ Fair Value Received Paid Expiration (Days)
-------- -------- ---------- -------- ---- ---------- ---------
(in Thousands)
Trading interest rate contracts:
Swaps:
Pay fixed versus:
1 mon. LIBOR......... $ 19,223 $ 1,664 $ 1,664 6.10% 5.46% 3.52 30
3 mon. LIBOR......... 20,000 880 880 5.64 4.38 1.34 90
Receive fixed versus:
3 mon. LIBOR......... 23,000 (767) (767) 6.10 5.74 2.07 90
6 mon. LIBOR......... 1,000 (1) (1) 7.16 5.75 0.76 180
Prime................ 8,673 (265) (265) 6.32 8.50 1.15 1
Caps:
Purchased............. 22,500 829 829 1.46 * 1.22 60
Written............... 96,400 (1,213) (1,213) * 0.30 1.69 74
Floors:
Purchased............. 240,000 349 349 0.12 * 3.20 90
Written............... 187,500 (314) (314) * 0.12 3.07 60
-------- ------- -------
Total................ $618,296 $ 1,162 $ 1,162
======== ======= =======
- --------
* Weighted average rates received/paid are shown only for swaps, caps and
floors for which net interest amounts were receivable or payable at December
31, 1994. For caps and floors, the rate shown represents the weighted average
net interest differential between the index rate and the cap or floor rate.
++Positive carrying values represent assets of the Company while negative
amounts represent liabilities.
57
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
In addition to the interest rate contracts shown in the preceding table, the
Company also uses other options and futures in the trading account. At December
31, 1994, the trading account contained other options purchased and written,
having weighted average expiration dates shorter than two months, with a
notional principal balance of $182 million for purchased options and a notional
principal balance of $2 million for written options and estimated fair values
of $78,000 and $(15,000), respectively. The notional principal amounts
indicated are substantially larger than the related credit or interest rate
risks. The net purchased position in other options was taken at December 31,
1994, in order to help protect the market value of the trading account against
rising short-term interest rates while maintaining limited risk to declining
rates. At December 31, 1994, futures contracts having a notional principal of
$158 million were also used to help reduce the interest sensitivity of the
trading account.
For derivative financial instruments held or issued for trading purposes, the
fair values as of December 31, 1994, and the average fair value during the
year, are as follows:
Period-End Average
Fair Value Fair Value
---------- ----------
(in Thousands)
Swaps:
Assets.............. $ 2,544 $ 2,893
Liabilities......... (1,033) (509)
Floors and caps:
Assets.............. 1,178 2,227
Liabilities......... (1,527) (1,548)
Other options:
Assets.............. 78 129
Liabilities......... (15) (35)
The net trading profits or (losses) for derivative financial instruments
during 1994 were $400,000 for forwards and futures; $6.4 million for swaps;
$(2.4) million for floors and caps; and $(100,000) for other options. Such
amounts represent only a portion of total trading account profits and
commissions. The total trading account loss for 1994 was $2.5 million, a
decrease of $13.9 million from 1993 trading profits and commissions totaling
$11.4 million. Such decrease was due in large part to an $8.4 million decline
during the first two quarters of the year in the market value of speculative
securities held in the Company's trading account, primarily CMO inverse
floaters ("inverse floaters"). Such inverse floaters represented securities in
which the coupon, and consequently the return, floated inversely to changes in
interest rates. The coupons on inverse floaters are generally a function of a
base rate minus the product of a multiplier and a floating index. In the case
of the inverse floaters held by the Company in its trading account, the coupon
rate was typically based on a base rate less two times 1-month LIBOR.
Therefore, for each 100 basis point increase in 1-month LIBOR, the coupon
earned on such securities declined by 200 basis points. As the level of
interest rates rose in the first six months of 1994, the repayment speed on the
mortgages collateralizing the inverse floaters slowed, which caused the average
life of such securities to extend at the same time coupon rates were falling.
The resulting decreased yield and the extended weighted average life generated
a substantial decline in market value. All inverse floaters held in the trading
account were sold prior to the end of the second quarter.
Derivative financial instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated financial statements. The Company's exposure to credit
58
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
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. For interest rate contracts,
including caps, floors and swap transactions, forward and futures contracts and
other options, the contract or notional amounts significantly exceed the
ultimate exposure to credit loss. The Company has credit risk on
uncollateralized interest rate swaps and purchased floors for the amount
required to replace such contracts in the event of counterparty default. At
December 31, 1994, the Company estimates its credit risk in the event of total
counterparty default to be $7.1 million for interest rate swaps and $1.2
million for purchased floors and caps. The Company controls the credit risk of
its interest rate contracts through credit approvals, limits and monitoring
procedures.
The Company also has recorded as liabilities certain short-sale transactions
amounting to $16.8 million at December 31, 1994, which could result in losses
to the extent the ultimate obligation exceeds the amount of the recorded
liability. The amount of the ultimate obligation under such transactions will
be affected by movements in the financial markets, which are not determinable,
and the point at which securities are purchased to cover the short sales. The
short-sale transactions relate principally to U.S. Government securities for
which there is an active, liquid market. The Company does not expect the amount
of losses, if any, on such transactions to be material.
(7) COMMITMENTS
The Company and its subsidiaries lease certain facilities and equipment for
use in their businesses. The leases for facilities generally run for periods of
10 to 20 years with various renewal options, while leases for equipment
generally have terms not in excess of 5 years. The majority of the leases for
facilities contain rental escalation clauses with fixed rental increases or
increases tied to changes in consumer indexes. Certain real property leases
contain purchase options.
Management expects that most leases will be renewed or replaced with new
leases in the normal course of business.
The following is a schedule by years of future minimum rentals required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1994, for leased facilities (in
Thousands):
1995........................... $ 4,959
1996........................... 3,937
1997........................... 2,465
1998........................... 1,901
1999........................... 1,708
2000-2004........................ 4,317
2005-2009........................ 299
2010-2014........................ 98
2015-2069........................ 1,064
-------
$20,748
=======
Minimum rentals for all operating leases charged to earnings totaled $9.5
million, $7.3 million and $8.3 million for years ended December 31, 1994, 1993
and 1992, respectively.
59
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
(8) STOCK OPTION AND STOCK APPRECIATION RIGHT PLANS
The Company has two long-term incentive stock option plans for key senior
officers of the Company and its subsidiaries. The stock option plans provide
for these key employees to purchase shares of the Company's $2.00 par value
common stock at the fair market value at the date of the grant. Pursuant to the
1982 Long Term Incentive Plan and the 1989 Long Term Incentive Plan, 2,475,000
and 1,500,000 shares, respectively, of the Company's common stock have been
reserved for issuance. The options granted under the plans may be exercised
within 10 years from the date of grant. The incentive stock option agreements
state that incentive options may be exercised in whole or in part until
expiration date, but for options issued before 1987 no incentive stock option
may be exercised if an incentive stock option is outstanding that was granted
before the granting of such option. The plans also provide for the granting of
stock appreciation rights to holders of nonqualified stock options. A stock
appreciation right allows the holder to surrender an exercisable stock option
in exchange for common stock (at fair market value on the date of exercise),
cash, or in a combination thereof, in an amount equal to the excess of the fair
market value of covered shares over the option price of such shares. All
outstanding options were exercisable at December 31, 1994.
The following summary sets forth activity under the plan for the years ended
December 31:
1994 1993 1992
------------ ------------ ------------
Shares under option at end of year...... 958,124 812,572 714,202
Price range per share................. $9.17-$25.25 $9.17-$24.00 $5.27-$20.83
Shares under option exercised during the
year................................... 45,756 85,630 664,592
Price range per share................. $9.33-$24.00 $5.27-$20.17 $5.27-$20.17
At December 31, 1994, the shares under option included nonqualified options
issued to certain executives to acquire 30,000 shares of common stock which
provide for tandem stock appreciation rights that are exercisable only upon the
occurrence of certain contingent events. Because of the restrictions upon
exercise of the stock appreciation rights, no compensation expense has been
recorded with respect to these options.
The shares under option also included nonqualified options without stock
appreciation rights issued to certain executives to acquire shares of common
stock as follows: 100,515 shares at year-end 1994 and 105,350 at year-end 1993
and year-end 1992.
(9) DIVIDENDS FROM SUBSIDIARIES
Dividends paid by the Subsidiary Banks are the primary source of funds
available to the Company for payment of dividends to its shareholders and other
needs. Applicable Federal and state statutes and regulations impose
restrictions on the amounts of dividends that may be declared by the Subsidiary
Banks. In addition to the formal statutes and regulations, regulatory
authorities also consider the adequacy of each bank's total capital in relation
to its assets, deposits and other such items. Capital adequacy considerations
could further limit the availability of dividends from the Subsidiary Banks.
At December 31, 1994, approximately $134.8 million of the Subsidiary Banks'
net assets were available for payment of dividends without prior regulatory
approval. Additionally, the Company's Subsidiary Banks could have paid
additional dividends to the parent holding company in the amount of $99.8
million while continuing to meet the capital requirements for "well-
capitalized" banks at December 31, 1994.
60
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
(10) MERGERS AND ACQUISITIONS
The Company completed the acquisition of Cornerstone Bancshares, Inc.
("Cornerstone") in Dallas, Texas on January 19, 1993, through the issuance of
1,279,066 shares of the Company's common stock. The transaction was accounted
for under the pooling-of-interests method of accounting and accordingly all
prior period information has been restated to reflect the financial position
and results of operations of Cornerstone. Upon acquisition, Cornerstone had
assets of $239 million and equity of $15 million.
On October 14, 1993, the Company acquired First Federal Savings Bank of
Northwest Florida ("First Federal"), of Ft. Walton Beach, Florida for $13.7
million in cash. The acquisition was accounted for under the purchase method of
accounting. At the date of acquisition, First Federal had assets of $101
million and equity of $10 million.
On October 21, 1993, the Company acquired Peoples Holding Company, Inc.
("Liberty") and its bank subsidiary, Liberty Bank of Ft. Walton Beach, Florida
for $5.0 million in cash. At the date of acquisition, Liberty had assets of $43
million and equity of $4 million. The acquisition was accounted for as a
purchase.
On November 3, 1993, the Company completed the acquisition of Spring National
Bank ("Spring National"), of Houston, Texas with the issuance of 326,940 shares
of the Company's common stock. At the date of acquisition, Spring National had
assets of $75 million and equity of $6 million. The transaction was accounted
for under the pooling-of-interests method of accounting and accordingly all
prior period information has been restated to reflect the financial position
and results of operations of Spring National.
On January 27, 1994, the Company completed the acquisition of 1st Performance
National Bank ("1st Performance"), of Jacksonville, Florida in a cash
transaction. The acquisition was accounted for as a purchase. At the date of
acquisition, 1st Performance had assets of $278 million and equity of $35
million.
The Company completed the acquisition of Security Bank, N.A. ("Security") of
Houston, Texas on May 1, 1994, with the issuance of 465,297 shares of the
Company's common stock. At the date of acquisition, Security had assets of $76
million and equity of $6 million. The transaction was accounted for under the
pooling-of-interests method of accounting and accordingly all prior period
information has been restated.
On May 12, 1994, the Company acquired three branches of Anchor Savings Bank
in the Jacksonville, Florida area with deposits of $31 million and assets of $1
million, with the balance received in cash. The deposit assumption and branch
acquisition were accounted for as a purchase.
On October 1, 1994, the Company completed the acquisition of 22 branches of
First Heights Bank, fsb, of Houston, Texas, with deposits of approximately $870
million and assets of $68 million, with the balance received in cash. The
deposit assumption and branch acquisition were accounted for as a purchase.
61
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
Presented below is summary operating information for the Company showing the
effect of the business combinations described above.
As Previously Effect of Currently
Reported Poolings Reported
------------- --------- ---------
(in Thousands)
1993:
Net interest income......................... $325,264 $3,749 $329,013
Provision for loan losses................... 35,985 321 36,306
Noninterest income.......................... 102,210 976 103,186
Noninterest expense......................... 253,970 3,733 257,703
Net income.................................. 89,260 458 89,718
1992:
Net interest income......................... $313,334 $3,590 $316,924
Provision for loan losses................... 52,885 290 53,175
Noninterest income.......................... 95,613 1,274 96,887
Noninterest expense......................... 242,262 3,683 245,945
Net income.................................. 75,390 613 76,003
Prior to its acquisition date in 1994, the entity accounted for under the
pooling-of-interests method had net interest income of $1.1 million and net
income of $80,000. There were no business combinations accounted for under the
purchase method of accounting in 1994 that materially affected the Company's
1994 or 1993 results of operations.
The Company entered into an agreement on June 16, 1994, to acquire Southwest
Bankers, Inc. ("Southwest"), of San Antonio, Texas, and its bank subsidiary,
The Bank of San Antonio, for 950,000 shares of the Company's common stock. At
December 31, 1994, Southwest had assets of $143 million and equity of $11
million. It is anticipated that the transaction will close in the first quarter
of 1995 and will be accounted for under the pooling-of-interests method of
accounting.
On September 23, 1994, the Company entered into an agreement to acquire The
American Bancorporation of the South ("American"), of Brevard County, Florida,
and its bank subsidiary, American Bank of the South, for up to $15,350,000 in
cash. American had total assets of $183 million and equity of $9 million at
December 31, 1994. The transaction is expected to close during the second
quarter of 1995 and will be accounted for under the purchase method of
accounting.
(11) BENEFIT PLANS
The Company sponsors a defined benefit pension plan pursuant to which
participants are entitled to an annual benefit upon retirement equal to a
percentage of the average base compensation (generally defined as direct cash
compensation exclusive of bonuses and commissions) earned in the five
consecutive years of benefit service which produces the highest average. The
percentage amount of the benefit is determined by multiplying the number of
years, up to 30, of a participant's service with the Company by 1.8 percent.
Benefits are reduced by Social Security payments at the rate of 1.8 percent of
primary Social Security benefits times years of service up to 30 years. All
employees of the Company who are over the age of 21 and have worked 1,000 hours
or more in their first 12 months of employment or 1,000 hours or more in any
calendar year thereafter are eligible to participate. Since 1989, under most
circumstances, employees are vested after five years of service. Prior to 1989,
the vesting period was 10 years. Benefits are payable monthly commencing on the
later of age 65 or the participant's date of retirement. Eligible participants
may retire at reduced benefit levels after reaching age 55, if they have at
least 10 years of service. The Company contributes amounts to the pension fund
sufficient to satisfy funding requirements of the Employee Retirement Income
Security Act.
62
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31:
1994 1993 1992
-------- -------- --------
(in Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits of $25,415,000, $26,594,000,
and $21,167,000 for 1994, 1993 and 1992,
respectively.................................. $(27,107) $(28,359) $(21,934)
======== ======== ========
Projected benefit obligation for service rendered
to date......................................... $(41,353) $(44,819) $(34,008)
Plan assets at fair value, primarily listed
stocks and U.S. bonds........................... 38,988 36,053 31,394
-------- -------- --------
Plan assets in excess of (less than) projected
benefit obligation............................ (2,365) (8,766) (2,614)
Unrecognized prior service cost.................. (199) 106 116
Unrecognized net loss............................ 8,099 13,032 5,850
Unrecognized net asset being amortized over 13
years........................................... (1,804) (2,248) (2,692)
-------- -------- --------
Net pension asset included in other assets..... $ 3,731 $ 2,124 $ 660
======== ======== ========
Net pension cost for 1994, 1993 and 1992 included the
following components:
1994 1993 1992
-------- -------- --------
(in Thousands)
Service cost-benefits earned during the period... $ 3,240 $ 2,409 $ 1,850
Interest cost on projected benefit obligation.... 3,305 2,800 2,416
Actual return on plan assets..................... 667 (2,221) (2,053)
Net amortization and deferral.................... (4,224) (1,127) (1,314)
-------- -------- --------
Net periodic pension cost........................ $ 2,988 $ 1,861 $ 899
======== ======== ========
The weighted average discount rate was 8.50 percent for 1994, 7.50 percent
for 1993 and 8.50 percent for 1992. The rate of increase in future compensation
levels was six percent for 1994, 1993 and 1992. Both rates are used in
determining the actuarial present value of the projected benefit obligation.
The assumed long-term rate of return on plan assets was 10 percent in 1994,
1993 and 1992.
The Company maintains an employee stock ownership plan to which contributions
are made in amounts determined by the Board of Directors of the Company. Such
contributions are invested in stock of the Company and are ordinarily
distributed to employees upon their retirement or other termination of
employment. Contributions to the plan are allocated to the accounts of the
participants based upon their compensation, with right to such accounts vested
after five years of employment. The Company contributed $3.9 million during
1994, $3.9 million during 1993, and $3.4 million during 1992.
The Company has a qualified employee benefit plan under section 401(k) of the
Internal Revenue Code. Employees can contribute up to 10 percent of their
salaries to the plan on a pretax basis subject to regulatory limits and the
Company at its discretion can match up to 100 percent of 6 percent of the
participants' compensation. The Company's contributions are based on
predetermined income levels. The administrative costs incurred by the plan are
paid by the Company at no cost to the participants.
The Company also has a monthly investment plan. Under the plan, employees may
contribute monthly up to 10 percent of their salary and the Company contributes
30 cents for each one dollar of the employees'
63
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
contributions toward the purchase of common stock of the Company. The stock is
purchased in the open market and brokerage fees and other incidental expenses
are absorbed by the Company.
(12) OTHER NONINTEREST EXPENSE
The major components of other noninterest expense are as follows:
Year Ended December 31
-----------------------
1994 1993 1992
------- ------- -------
(in Thousands)
Bank travel and entertainment.......................... $ 6,608 $ 6,417 $ 6,326
Other real estate expenses............................. 779 3,351 8,007
Marketing.............................................. 6,820 5,859 5,240
Professional services.................................. 16,234 17,236 16,087
Supplies............................................... 7,546 6,998 6,570
Other.................................................. 34,741 37,020 35,087
------- ------- -------
$72,728 $76,881 $77,317
======= ======= =======
(13) INCOME TAX EXPENSE
For 1994 and 1993, the Company provides for income taxes using the asset and
liability method of accounting for income taxes under FAS109. For 1992, the
Company provides for income taxes using the deferred method of accounting for
income taxes under APB Opinion 11.
Income taxes for the year ended December 31, 1994 and 1993, were allocated
as follows:
1994 1993
-------- -------
(in Thousands)
Income from operations................................... $ 51,958 $48,472
Stockholders' equity, for net unrealized gains (losses)
on securities available for sale........................ (10,916) 3,952
-------- -------
$ 41,042 $52,424
======== =======
For the years ended December 31, 1994, 1993 and 1992, income tax expense
attributable to income from operations consists of:
Asset and Deferred
Liability Method Method
----------------- --------
1994 1993 1992
-------- -------- --------
(in Thousands)
Current income tax expense:
Federal.......................................... $ 46,534 $ 50,771 $ 45,522
State............................................ 3,722 4,458 4,124
-------- -------- --------
Total.......................................... 50,256 55,229 49,646
Deferred income tax expense (benefit):
Federal.......................................... 1,343 (6,091) (9,925)
State............................................ 359 (666) (1,033)
-------- -------- --------
Total.......................................... 1,702 (6,757) (10,958)
-------- -------- --------
Total income tax expense........................... $ 51,958 $ 48,472 $ 38,688
======== ======== ========
During 1994, the Company made income tax payments of approximately $46.8
million and received cash income tax refunds amounting to approximately $1.2
million. For 1993 and 1992, income tax payments were
64
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
approximately $60.9 million and $45.8 million, respectively. Cash income tax
refunds amounted to approximately $200,000 for both 1993 and 1992. Applicable
income tax expense on securities gains of $1.5 million, $400,000, and $400,000
for 1994, 1993 and 1992, respectively, are included in the provision for
income taxes.
Income tax expense attributable to income from operations differed from the
amount computed by applying the Federal statutory income tax rate to pretax
earnings for the following reasons:
Asset and Liability Method Deferred Method
------------------------------------- ------------------
1994 1993 1992
------------------ ------------------ ------------------
PERCENT Percent Percent
OF PRETAX of Pretax of Pretax
AMOUNT EARNINGS Amount Earnings Amount Earnings
------- --------- ------- --------- ------- ---------
(in Thousands)
Income tax expense at
Federal statutory rate. $53,070 35.0% $48,367 35.0% $38,995 34.0%
Increase (decrease)
resulting from:
Tax-exempt interest... (3,286) (2.2) (4,121) (3.0) (4,970) (4.3)
State income tax
expense net of
Federal income tax
benefit.............. 2,653 1.7 2,465 1.8 2,040 1.8
Other................. (479) (0.3) 1,761 1.3 2,623 2.3
------- ---- ------- ---- ------- ----
Income tax expense.. $51,958 34.2% $48,472 35.1% $38,688 33.8%
======= ==== ======= ==== ======= ====
For the year ended December 31, 1992, the deferred income tax benefit
results from income and expense amounts reported for financial statements in
different years than for income tax purposes. The tax effects of those timing
differences are presented below (in Thousands):
1992
--------
Provision for loan losses....................................... $(11,428)
Other, net...................................................... 470
--------
Total....................................................... $(10,958)
========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1994 and 1993, are presented below:
1994 1993
------- -------
(in Thousands)
Deferred tax assets:
Allowance for loan losses..................................... $36,875 $39,316
Loan fees..................................................... 2,655 2,825
Accrued expenses.............................................. 1,091 3,191
Lease financing............................................... 2,705 1,605
Net unrealized losses on securities available for sale........ 6,964 --
Other deferred tax assets..................................... 1,554 1,909
------- -------
Total assets................................................ 51,844 48,846
Deferred tax liabilities:
Premises and equipment........................................ 10,031 9,147
Core deposit and other acquired intangibles................... 7,426 9,880
Net unrealized gains on securities available for sale......... -- 3,952
Other deferred tax liabilities................................ 4,150 4,844
------- -------
Total liabilities........................................... 21,607 27,823
------- -------
Net deferred tax asset.......................................... $30,237 $21,023
======= =======
The Company believes that the deferred tax asset is recoverable.
65
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
(14) PARENT COMPANY
The condensed financial information for Compass Bancshares, Inc. (Parent
Company Only) is presented as follows:
Parent Company Only
Balance Sheets
December 31
------------------
1994 1993
-------- --------
(in Thousands)
ASSETS
Cash and due from banks.................................... $ 1,104 $115,847
Collateralized mortgage obligation inverse floaters........ 26,229 --
Reverse repurchase agreements with affiliates.............. 62,625 --
Investment in subsidiaries:
Banks.................................................... 452,466 399,734
Bank holding companies................................... 230,349 173,945
Other.................................................... 6,274 6,248
-------- --------
689,089 579,927
Other assets............................................... 2,921 410
-------- --------
TOTAL ASSETS......................................... $781,968 $696,184
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper........................................... $ 45,330 $ 62,858
Accrued expenses and other liabilities..................... 11,843 7,490
Other borrowings........................................... 124,182 74,499
-------- --------
Total liabilities.................................... 181,355 144,847
Shareholders' equity:
Common stock of $2 par value:
Authorized -- 100,000,000 shares;
Issued -- 36,972,448 shares in 1994 and 36,927,277
shares in 1993........................................ 73,945 73,854
Loans to finance stock purchases......................... (5,914) (6,576)
Surplus.................................................. 37,862 37,050
Net unrealized holding gain (loss) on available-for-sale
securities.............................................. (11,509) 6,545
Retained earnings........................................ 506,229 440,464
-------- --------
Total shareholders' equity........................... 600,613 551,337
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $781,968 $696,184
======== ========
66
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
(14) PARENT COMPANY, Continued
Parent Company Only
Statements of Income
Year Ended December 31
-------------------------
1994 1993 1992
------- ------- -------
(in Thousands)
INCOME:
Cash dividends from subsidiaries.................. $59,515 $32,850 $24,185
Interest on investments with affiliates........... 4,271 4,149 2,950
Loss on purchase of securities from common trust
fund............................................. (8,222) -- --
Other............................................. 4,010 641 458
------- ------- -------
TOTAL INCOME.................................. 59,574 37,640 27,593
EXPENSE:
Interest on commercial paper and other borrowings. 10,043 6,008 2,580
Other............................................. 841 4,147 1,656
------- ------- -------
TOTAL EXPENSE................................. 10,884 10,155 4,236
------- ------- -------
Income before income tax expense and equity in
undistributed earnings of subsidiaries....... 48,690 27,485 23,357
Applicable income tax benefit....................... (4,370) (1,562) (318)
------- ------- -------
53,060 29,047 23,675
EQUITY IN UNDISTRIBUTED EARNINGS (DIVIDENDS IN
EXCESS OF EARNINGS) OF SUBSIDIARIES:
Banks............................................. 27,359 42,772 36,518
Bank holding companies............................ 19,225 18,845 15,716
Other............................................. 27 (946) 94
------- ------- -------
46,611 60,671 52,328
------- ------- -------
NET INCOME.................................... $99,671 $89,718 $76,003
======= ======= =======
67
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
(14) PARENT COMPANY, Continued
Parent Company Only
Statements of Cash Flows
Year Ended December 31
-----------------------------
1994 1993 1992
--------- -------- --------
(in Thousands)
OPERATING ACTIVITIES:
Net income...................................... $ 99,671 $ 89,718 $ 76,003
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization/(accretion)..... 76 (319) 28
Equity in undistributed earnings.............. (46,611) (60,671) (52,328)
Loss on purchase of securities from common
trust fund................................... 8,222 -- --
(Increase)/decrease in interest receivable.... (244) -- 65
(Increase)/decrease in other assets........... (2,678) 2,852 (233)
Increase in interest payable.................. 1,086 956 13
Increase/(decrease) in taxes payable.......... 1,100 (267) 267
Increase/(decrease) in other payables......... 2,567 (1,339) 6,361
--------- -------- --------
Net cash provided by operating activities... 63,189 30,930 30,176
INVESTING ACTIVITIES:
Proceeds from maturities/calls of investment
securities..................................... 762 -- --
Purchases of investment securities.............. (35,213) -- --
(Increase)/decrease in investment securities
available for sale............................. -- 5,000 (4,633)
(Increase)/decrease in reverse repurchase
agreements with affiliates..................... (62,625) 12,900 38,217
Net increase in loan portfolio.................. -- -- (3,051)
Capital contributions made to subsidiaries...... (45,894) (3,730) (7,502)
Acquisition of banks............................ (35,319) (18,590) --
Advances to subsidiaries on notes............... -- (2,431) --
Payments from subsidiaries on notes............. 4,085 7,506 --
Purchase of loans from subsidiaries............. (3,535) -- --
--------- -------- --------
Net cash provided/(used) by investing
activities................................. (177,739) 655 23,031
FINANCING ACTIVITIES:
Net increase/(decrease) in other short-term
borrowings..................................... (17,528) 28,556 (113)
Proceeds from other borrowings.................. 49,618 74,463 --
Repayment of other borrowings................... -- -- (1,000)
Common dividends paid........................... (33,898) (27,502) (22,127)
Preferred dividends paid........................ -- (1,531) (2,089)
Redemption of preferred stock................... -- (25,965) --
Proceeds from exercise of stock options......... 882 2,246 6,170
Proceeds from repayments of loans to finance
stock purchases................................ 747 -- --
Purchase of treasury stock...................... (14) (410) (9)
--------- -------- --------
Net cash provided/(used) by financing
activities................................. (193) 49,857 (19,168)
--------- -------- --------
Net increase/(decrease) in cash and due from
banks.......................................... (114,743) 81,442 34,039
Cash and due from banks at beginning of year.... 115,847 34,405 366
--------- -------- --------
Cash and due from banks at end of year.......... $ 1,104 $115,847 $ 34,405
========= ======== ========
68
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Statement No. 107, Disclosures about Fair Value of
Financial Instruments ("FAS107") requires disclosure of fair value information
about financial instruments, whether or not recognized on the face of the
balance sheet, for which it is practicable to estimate that value. The
assumptions used in the estimation of the fair value of the Company's financial
instruments are detailed below. Where quoted prices are not available, fair
values are based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. The following disclosures should not be considered a surrogate of the
liquidation value of the Company or its Subsidiary Banks, but rather represent
a good-faith estimate of the increase or decrease in value of financial
instruments held by the Company since purchase, origination or issuance. The
Company has not undertaken any steps to value any intangibles, which is
permitted by the provisions of FAS107.
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Cash and due from banks and interest bearing deposits with other banks:
Fair value equals the carrying value of such assets.
Investment securities and investment securities available for sale: Fair
values for investment securities are based on quoted market prices.
Trading account securities: Fair value and book value of the Company's
trading account securities (including off-balance sheet instruments) are
based on quoted market prices where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments except in the case of certain options and swaps where pricing
models are used.
Federal funds sold and securities purchased under agreements to resell:
Due to the short-term nature of these assets, the carrying values of these
assets approximate their fair value.
Loans: For variable rate loans, those repricing within six months or
less, fair values are based on carrying values. The fair value of certain
mortgage loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for any differences
in loan characteristics, with servicing retained. The fair value of the
Company's credit card portfolio is based on quoted market prices. The
Company's indirect lending portfolio, consisting primarily of indirect new
and used auto loans, was valued based on securitization transactions with
servicing retained. Fixed rate commercial loans, other installment loans,
and certain real estate mortgage loans were valued using discounted cash
flows. The discount rate used to determine the present value of these loans
was based on interest rates currently being charged by the Subsidiary Banks
on comparable loans as to credit risk and term.
Off-balance-sheet instruments: Fair value of the Company's off-balance-
sheet instruments (futures, forwards, swaps, caps, floors and options
written) are based on quoted market prices. The Company's loan commitments
are negotiated at current market rates and are relatively short-term in
nature and, as a matter of policy, the Company generally makes commitments
for fixed rate loans for relatively short periods of time, therefore, the
estimated value of the Company's loan commitments approximates carrying
amount.
Deposit liabilities: The fair values of demand deposits are, as required
by FAS107, equal to the carrying value of such deposits. Demand deposits
include noninterest bearing demand deposits, savings accounts, NOW accounts
and money market demand accounts. The fair value of variable rate term
deposits, those repricing within six months or less, approximates the
carrying value of these deposits.
69
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
Discounted cash flows have been used to value fixed rate term deposits and
variable rate term deposits having an interest rate floor that has been
reached. The discount rate used is based on interest rates currently being
offered by the Subsidiary Banks on comparable deposits as to amount and
term.
Short-term borrowings: The carrying value of Federal funds purchased,
securities sold under agreements to repurchase and other short-term
borrowings approximates their carrying values.
FHLB and other borrowings: The fair value of the Company's fixed rate
borrowings are estimated using discounted cash flows, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amount of the Company's variable rate
borrowings approximates their fair values.
AT DECEMBER 31, 1994 At December 31, 1993
--------------------- ---------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
---------- ---------- ---------- ----------
(in Thousands)
FINANCIAL INSTRUMENTS:
Assets:
Cash and due from banks..... $ 483,253 $ 483,253 $ 283,783 $ 283,783
Interest bearing deposits in
other banks................ 99 99 10,474 10,474
Investment securities....... 1,813,337 1,764,407 604,464 631,794
Investment securities
available for sale......... 701,940 701,940 645,454 645,454
Trading account securities.. 58,012 58,012 239,491 239,491
Federal funds sold and
securities purchased under
agreements to resell....... 46,535 46,535 144,764 144,764
Loans....................... 5,762,700 5,691,722 5,200,935 5,351,671
Off-balance sheet
instruments................ 213 4,230 1,073 22,770
Liabilities:
Noninterest bearing
deposits................... $1,364,797 $1,364,797 $1,156,039 $1,156,039
Interest bearing deposits... 5,697,607 5,683,090 4,469,058 4,504,442
Federal funds purchased..... 484,189 484,189 414,704 414,704
Securities sold under
agreements to repurchase... 348,235 348,235 208,739 208,739
Other short-term borrowings. 104,598 104,598 171,014 171,014
FHLB and other borrowings... 484,942 478,090 325,437 325,437
70
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994, 1993 AND 1992
(16) QUARTERLY RESULTS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 1994 and
1993 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in Thousands Except Per Share Data)
1994:
TOTAL INTEREST INCOME.................. $ 132,208 $ 138,582 $ 143,659 $ 163,275
TOTAL INTEREST EXPENSE................. 51,114 56,408 62,664 76,170
NET INTEREST INCOME.................... 81,094 82,174 80,995 87,105
PROVISION FOR LOAN LOSSES.............. 2,278 27 1,099 --
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES........................... 78,816 82,147 79,896 87,105
TOTAL NONINTEREST INCOME............... 19,028 15,717 26,103 24,783
TOTAL NONINTEREST EXPENSE.............. 61,013 62,308 67,555 71,090
INCOME TAX EXPENSE..................... 12,919 11,134 13,614 14,291
NET INCOME............................. 23,912 24,422 24,830 26,507
PER COMMON SHARE:
NET INCOME........................... 0.64 0.66 0.67 0.71
CASH DIVIDENDS....................... 0.23 0.23 0.23 0.23
STOCK PRICE RANGE:
HIGH............................... 24 26 3/4 26 23 3/4
LOW................................ 21 23 23 21
CLOSE.............................. 23 24 3/4 23 5/8 22
1993:
Total interest income.................. $ 132,504 $ 132,036 $ 131,230 $ 132,143
Total interest expense................. 49,567 49,275 49,941 50,117
Net interest income.................... 82,937 82,761 81,289 82,026
Provision for loan losses.............. 11,774 10,001 6,512 8,019
Net interest income after provision for
loan losses........................... 71,163 72,760 74,777 74,007
Total noninterest income............... 25,733 26,841 24,262 26,350
Total noninterest expense.............. 62,063 64,418 63,842 67,380
Income tax expense..................... 12,925 12,539 12,384 10,624
Net income............................. 21,908 22,644 22,813 22,353
Per common share:
Net income........................... 0.58 0.59 0.60 0.60
Cash dividends....................... 0.19 0.19 0.19 0.19
Stock price range:
High............................... 25 3/4 26 1/2 26 25
Low................................ 22 1/2 22 1/2 23 1/2 20 3/4
Close.............................. 25 24 1/2 23 5/8 22
71
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Executive Compensation and Other
Information" in the Proxy Statement for the Annual Meeting of Shareholders
which is to be filed with the Securities and Exchange Commission.
ITEM 11 -- EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation and Other Information" in the Proxy
Statement for the Annual Meeting of Shareholders which is to be filed with the
Securities and Exchange Commission; provided, however, that such incorporation
by reference shall not be deemed to specifically incorporate by reference the
information referred to in Item 402(a)(8) of Securities and Exchange Commission
Regulation S-K.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by this item is incorporated by reference from the
sections entitled "Holdings of Voting Securities" and "Election of Directors"
in the Proxy Statement for the Annual Meeting of Shareholders which is to be
filed with the Securities and Exchange Commission.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
section entitled "Certain Transactions" in the Proxy Statement for the Annual
Meeting of Shareholders which is to be filed with the Securities and Exchange
Commission.
72
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) INDEX OF DOCUMENTS FILED AS PART OF THIS REPORT:
Compass Bancshares, Inc. and Subsidiaries
Financial Statements
Page
----
Independent Auditors' Report............................................. 43
Consolidated Balance Sheets as of December 31, 1994 and 1993............. 44
Consolidated Statements of Income for the years ended
December 31, 1994, 1993 and 1992........................................ 45
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1993 and 1992........................................ 46
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992........................................ 47
Summary of Significant Accounting Policies --
December 31, 1994, 1993 and 1992........................................ 48
Notes to Consolidated Financial Statements --
December 31, 1994, 1993 and 1992........................................ 51
Quarterly Results (Unaudited)............................................ 71
(B) REPORTS ON FORM 8-K
The Company filed a Form 8-K on October 14, 1994, with regard to the
acquisition of 22 branches of First Heights Bank, fsb, of Houston, Texas.
(C) EXHIBITS
(3) Articles of Incorporation and By-Laws of Compass Bancshares, Inc.
(a) Restated Certificate of Incorporation of Compass Bancshares, Inc.,
dated May 17, 1982, (incorporated by reference to the Company's
December 31, 1982 Form 10-K filed with the Commission)
(b) Certificate of Amendment, dated May 20, 1986, to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-4, Registration No. 33-46086 filed
with the Commission)
(c) Certificate of Amendment, dated May 15, 1987, to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3.1.2 to the Company's Post-
Effective Amendment No. 1 to Registration Statement on Form S-4,
Registration No. 33-10797 filed with the Commission)
(d) Certificate of Amendment, dated September 19, 1994, to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3.5(1) to the Company's
Registration Statement on Form S-4, Registration No. 33-55899 filed
with the Commission)
(e) Certificate of Amendment, dated November 8, 1993 to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3(d) to the Company's
Registration Statement on Form S-4, Registration No. 33-51919 filed
with the Commission)
(f) Bylaws of Compass Bancshares, Inc. (Amended and Restated as of
March 15, 1982) (incorporated by reference to the Company's
December 31, 1982 Form 10-K filed with the Commission)
73
(10) Material Contracts
Page
----
(a) Compass Bancshares, Inc., 1982 Long Term Incentive Plan
(incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form S-8 filed June 15, 1983, with the
Commission)
(b) Compass Bancshares, Inc., 1989 Long Term Incentive Plan
(incorporated by reference to Exhibit 28 to the Company's
Registration Statement on Form S-8 filed February 21, 1991, with
the Commission)
(c) Supplemental Retirement Agreement, dated as of March 18, 1991,
between Compass Bank and Harry B. Brock, Jr. (incorporated by
reference to Exhibit 10(c) to the Company's Form 10-K for the
year ended December 31, 1991 filed March 26, 1992, with the
Commission)
(d) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and D. Paul Jones, Jr.
(e) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Jerry W. Powell
(f) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Garrett R. Hegel
(g) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Byrd Williams
(h) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Charles E. McMahen
(11) Statement Re: Computation of Per Share Earnings.................. 75
(12) Statement Re: Computation of Ratios.............................. 76
(21) Subsidiaries of the Registrant................................... 77
(23) Consents of experts and counsel
(27) Financial Data Schedule
Certain financial statement schedules and exhibits have been omitted because
they are not applicable.
74
EXHIBIT 21 -- SUBSIDIARIES OF THE REGISTRANT
STATE OR OTHER JURISDICTION
SUBSIDIARIES OF INCORPORATION
- ------------ ---------------------------
Compass Bank........................................ Alabama
Compass Mortgage Corporation........................ Delaware
Central Bank of the South........................... Alabama
Compass Bank........................................ Florida
Compass Banks of Texas, Inc......................... Delaware
Compass Bancorporation of Texas, Inc................ Delaware
Compass Bank -- Dallas.............................. Texas
Compass Bank -- Houston............................. Texas
River Oaks Trust Company............................ Texas
78
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
COMPASS BANCSHARES, INC.
Date: February 1, 1995 By /s/ D. Paul Jones, Jr.
-------------------------------------
D. PAUL JONES, JR.
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
Date: February 1, 1995 By /s/ Garrett R. Hegel
-------------------------------------
GARRETT R. HEGEL
CHIEF FINANCIAL OFFICER
Date: February 1, 1995 By /s/ Michael A. Bean
-------------------------------------
MICHAEL A. BEAN
CHIEF ACCOUNTING OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS D. PAUL JONES, JR., JERRY W. POWELL AND DANIEL
B. GRAVES, AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AS AGENT WITH
FULL POWER OF SUBSTITUTION AND RESUBSTITUTION FOR HIM AND IN HIS NAME, PLACE
AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS TO THIS
FORM 10-K AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS WITH FULL POWER AND AUTHORITY TO DO AND
PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND
ABOUT THE PREMISES, AS FULLY AND TO ALL INTENTS AND PURPOSES AS THEY MIGHT OR
COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-
FACT AND AGENTS, AND THEIR SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE
TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
DIRECTORS DATE
--------- ----
/s/ Harry B. Brock, Jr. February 1, 1995
- -------------------------------------
HARRY B. BROCK, JR.
/s/ Stanley M. Brock February 1, 1995
- -------------------------------------
STANLEY M. BROCK
/s/ Charles W. Daniel February 1, 1995
- -------------------------------------
CHARLES W. DANIEL
79
SIGNATURES, CONTINUED
DIRECTORS DATE
--------- ----
/s/ W. Eugene Davenport February 1, 1995
- -------------------------------------
W. EUGENE DAVENPORT
/s/ Garry Neil Drummond, Sr. February 1, 1995
- -------------------------------------
GARRY NEIL DRUMMOND, SR.
/s/ Marshall Durbin, Jr. February 1, 1995
- -------------------------------------
MARSHALL DURBIN, JR.
/s/ Tranum Fitzpatrick February 1, 1995
- -------------------------------------
TRANUM FITZPATRICK
/s/ D. Paul Jones, Jr. February 1, 1995
- -------------------------------------
D. PAUL JONES, JR.
/s/ G. W. "Red" Leach, Jr. February 1, 1995
- -------------------------------------
G. W. "RED" LEACH, JR.
/s/ Goodwin L. Myrick February 1, 1995
- -------------------------------------
GOODWIN L. MYRICK
/s/ John S. Stein February 1, 1995
- -------------------------------------
JOHN S. STEIN
80