Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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, 1995 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. [_]
As of January 31, 1996, the aggregate market value of voting stock held by
non-affiliates was $1,213,675,976.
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, 1996
----- -------------------------------
Common Stock, $2 Par Value 38,226,015
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
----------------------------------- ----------------------------------
Proxy Statement for 1996 annual meeting Part III
except for information referred to in
Item 402(a)(8) of Regulation S-K
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, Compass Bank-Dallas in Dallas, Texas, and Compass
Bank-San Antonio in San Antonio, 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 88
locations in 47 communities in Alabama. Compass Bank-Houston conducts a
general commercial banking business from 38 locations in Houston, Texas,
Compass Bank-Dallas conducts a general commercial banking business from 21
banking offices in Dallas and Collin Counties, Texas and Compass Bank-San
Antonio conducts a general commercial banking business from 10 banking offices
in San Antonio, 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, 17 locations in Jacksonville, Florida and 6
locations in Ft. Walton Beach, Florida. Central Bank of the South primarily
provides cash management depository 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
Northeastern and Northwestern Florida and the three 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
1
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 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 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.
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 and Florida 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 21 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
- ----------- -------- -------- ----------
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
Southwest Bankers, Inc. 3-7-95 $142,000 Pooling
San Antonio, Texas
On March 7, 1995, the Company completed the acquisition of Southwest
Bankers, Inc. ("Southwest"), of San Antonio, Texas, and its bank subsidiary,
The Bank of San Antonio, with the issuance of 949,987 shares of the Company's
common stock. At the date of acquisition, Southwest had assets of $142 million
and equity of $9
2
million. The transaction was accounted for under the pooling-of-interests
method of accounting and accordingly all prior period information has been
restated.
On February 1, 1996, the Company completed the acquisition of Flower Mound
Bancshares, Inc. ("Flower Mound"), of Dallas, Texas, and its bank subsidiary,
Security Bank, for 342,930 shares of the Company's common stock. At the date
of acquisition, Flower Mound had assets of $46 million and equity of $4.8
million. The transaction was accounted for under the pooling-of-interests
method of accounting.
PENDING ACQUISITIONS
On October 16, 1995, the Company signed a definitive agreement to acquire
Equitable BankShares, Inc. ("Equitable"), of Ft. Worth, Texas, and its bank
subsidiary, Equitable Bank. At December 31, 1995, Equitable had assets of $202
million and equity of $11.4 million. It is anticipated that the transaction
will close in the second quarter of 1996 and will be accounted for under the
pooling-of-interests method of accounting.
On November 28, 1995, the Company signed a definitive agreement to acquire
Peoples Bancshares, Inc. ("Peoples"), of Belton, Texas, and its bank
subsidiary, Peoples National Bank. At December 31, 1995, Peoples had assets of
$139 million and equity of $11.2 million. It is anticipated that the
transaction will close in the second quarter of 1996 and will be accounted as
a purchase.
The Company signed a definitive agreement on November 30, 1995, to acquire
Post Oak Bank ("Post Oak") of Houston, Texas, in a transaction to be accounted
for as a purchase. At December 31, 1995, Post Oak had assets of $322 million
and equity of $36.9 million. The transaction is expected to close in the
second quarter of 1996.
The Company signed a definitive agreement on December 15, 1995, to acquire
Royall Financial Corporation ("Royall") of Palestine, Texas, and its bank
subsidiary, Royall National Bank of Palestine. At December 31, 1995, Royall
had assets of $106 million and equity of $10.3 million. It is anticipated that
the transaction will close in the second quarter of 1996 and will be accounted
for under the pooling-of-interests method of accounting.
On February 21, 1996, the Company signed a definitive agreement to acquire
CFB Bancorp, Inc. ("CFB"), of Jacksonville, Florida, and its bank subsidiary,
Community First Bank. At December 31, 1995, CFB had assets of $311 million and
equity of $19.9 million. It is anticipated that the transaction will close in
the second quarter of 1996 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, 1995, the five largest
bank holding companies in Alabama (including the Company) accounted for
approximately 58 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 1996
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
3
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 4.2 million, 4.0
million, and 1.4 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, Dallas, and San Antonio. 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 December 31, 1995, the Company and its subsidiaries employed
approximately 4,100 persons. 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 prepare
employees for positions of increasing responsibility in both management and
operating positions.
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. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Act"), facilitates
branching and the establishment of agency relationships across state lines and
permits,
4
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, subject to certain state provisions, including the
establishment by states of a 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
five 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 1995, the State of Alabama enacted an
interstate banking act. In general, the Alabama statute implements the
Interstate Act, specifying five years as the minimum age of banks which may be
acquired and "opting into" interstate branching on May 31, 1997. Texas and
Florida law currently permits out-of-state bank holding companies to acquire
banks in Texas and Florida regardless of where the acquiror is based, subject
to the satisfaction of various provisions of state law, including the
requirement that the bank to be acquired has been in existence at least five
years in Texas and two years in Florida.
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 restoration plan is
limited to the lesser of five 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
5
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, 1995, 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.
During 1995, Congress considered various proposals for a one-time special
assessment to be charged on all SAIF deposits to fully capitalize the SAIF at
1.25 percent of insured deposits. The proposed amount of the special
assessment has been as high as $0.85 per $100 of SAIF deposits. Assuming that
a special assessment was applied at the $0.85 rate based upon SAIF insured
deposits at December 31, 1995, the Company would incur additional deposit
insurance premium expense of approximately $8.4 million which would be charged
against current period income. The timing and amount of such an assessment
cannot be accurately predicted at this time.
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, Compass Bank-Dallas, and Compass Bank-
San Antonio are each organized under the laws of the State of Texas and 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, Compass Bank-Dallas, and Compass
Bank-San Antonio, 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
6
of a sum which would increase the certified surplus to more than the capital
stock of the respective bank. 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.
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 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
7
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................... 13
Nonperforming Assets................................................... 37
Impaired Loans......................................................... 38
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..................................... 23
Assets/Liabilities Associated With Interest Rate Protection Contracts.. 23
Trading Account Interest Rate Contracts................................ 24
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 34
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
The Subsidiary Banks are defendants in legal proceedings arising in the
ordinary course of business. Some of these proceedings which relate to
lending, collections, servicing, investment, trust and other activities by
such subsidiaries seek substantial sums as damages.
Among the actions which are pending against the Subsidiary Banks are actions
filed as class actions in the State of Alabama. The actions are similar to
others that have been brought in recent years in Alabama against financial
institutions in that they seek punitive damages in transactions involving
relatively small amounts of actual damages. In recent years, juries in certain
Alabama state courts have rendered large punitive damage awards in such cases.
It may take a number of years to finally resolve some of these pending legal
proceedings due to their complexity and other reasons. It is not possible to
determine with any certainty at this time the potential exposure from the
proceedings. However, based upon the advice of legal counsel, management is of
the opinion that the ultimate resolution of these legal proceedings will not
have a material adverse effect on the Company's financial condition or results
of operations.
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 1995.
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
----- ---- --------
1995:
FIRST QUARTER......................................... $28 $21 1/2 $.28
SECOND QUARTER........................................ 29 1/4 25 1/2 .28
THIRD QUARTER......................................... 33 3/4 28 1/2 .28
FOURTH QUARTER........................................ 33 1/2 30 1/8 .28
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
As of January 31, 1996, there were 6,204 shareholders of record of common
stock of which 5,250 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 1995 accounted for under the pooling-of-interests method of accounting.
1995 1994 1993 1992 1991
----------- ---------- ---------- ---------- ----------
(in Thousands Except Per Share Data)
Net interest income..... $ 349,655 $ 336,768 $ 334,146 $ 322,774 $ 262,659
Provision for loan loss-
es..................... 10,235 3,404 35,856 53,175 38,751
Net income.............. 110,265 101,246 92,679 77,870 63,009
Per common share data:
Net income............. $ 2.88 $ 2.65 $ 2.39 $ 2.00 $ 1.68
Cash dividends de-
clared................ 1.12 .92 .76 .667 .587
Balance sheet:
Average total equity... $ 651,438 $ 585,078 $ 547,315 $ 488,224 $ 411,642
Average assets......... 9,490,964 8,151,495 7,244,377 6,927,468 6,244,755
Period-end FHLB and
other borrowings...... 584,852 487,916 328,928 207,730 20,336
Period-end total equi-
ty.................... 706,668 611,673 561,587 518,269 455,455
Period-end assets...... 10,262,247 9,265,137 7,453,859 7,210,151 6,898,873
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
1995 acquisitions accounted for using the pooling-of-interests accounting
method. 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 1995 was $110.3 million, a 9 percent increase over the
Company's previous high of $101.2 million in 1994. Net income for 1994 was 9
percent higher than 1993 net income of $92.7 million. The increases in net
income per common share for 1995 and 1994 were 9 percent and 11 percent,
respectively. Net income per common share increased 20 percent during 1993.
Pretax income for 1995 was up $17.8 million or 12 percent over 1994 while
income tax expense increased 17 percent over the same period due to an
increase in the effective tax rate in 1995 from 34 percent to 36 percent.
One significant factor in the growth of the Company has been the Company's
acquisitions in Texas, specifically the Houston and Dallas areas, since early
1987. The Texas expansion continued in 1995 and is expected to continue in
1996. 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. With the
acquisition of Southwest Bankers, Inc., in March, 1995, the size of the
Company's Texas operations has grown to $3.5 billion at December 31, 1995. 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 1996. 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 1995 increased 17 percent over 1994 due to
increases in both average loans and total investment securities. The average
earning asset mix continued to change during 1995 with loans at 69 percent,
investment securities and investment securities available for sale at 30
percent and other earning assets at 1 percent of total earning assets. In
1994, loans were 72 percent, investment securities and investment securities
available for sale were 24 percent and other earning assets were 4 percent of
average earning assets, changing modestly from 74 percent, 22 percent, and 4
percent, respectively, in 1993. The shift in the mix of average earning assets
during 1995 and 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 remains
committed to returning 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
place the Company in a position to react to interest rate movements and to
maximize the return on earning assets.
LOANS
Average loans increased 12 percent in 1995 with much of the increase
concentrated in residential mortgage, real estate construction, and
commercial, financial and agricultural loans. Total loans outstanding at year
end increased nine percent over previous year-end levels. The growth in the
loan portfolio resulted from the Company's ongoing efforts to increase the
loan portfolio through the origination of loans, especially one-to-four family
real estate mortgages. Real estate construction loans increased 13 percent,
residential mortgage loans increased 9 percent, consumer installment loans
increased 9 percent and commercial mortgage loans increased 6 percent from
year-end 1994 to year-end 1995. Commercial, financial and agricultural loans,
which were 21
12
percent of total loans in 1995, increased 11 percent compared to the previous
year. The 11 percent increase in the Company's loan portfolio from 1993 to
1994 occurred primarily in residential mortgage loans which increased 19
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. The volume of commercial, financial and agricultural loans, as
a percentage of total loans outstanding, increased slightly during 1995
reversing the declining trend of the prior five years, reflective of the
stabilization of the economy in the markets served. Residential real estate
loans represented 40 percent of the total portfolio at December 31, 1995,
unchanged from the prior year, as the mortgage refinancing boom of 1993 and
1994 subsided. Additionally, the Company experienced a 10 percent increase in
its indirect auto loan portfolio from 1994 to 1995. At December 31, 1995, 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, 1995.
The Loan Portfolio table shows the classifications of loans by major
category at December 31, 1995, and for each of the preceding four years. The
second table shows maturities of certain loan classifications at December 31,
1995, and an analysis of the rate structure for such loans due in over one
year.
LOAN PORTFOLIO
December 31
---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- ------------------- ------------------- ------------------- -------------------
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..... $1,315,746 20.7% $1,187,594 20.4% $1,143,017 21.7% $1,068,099 22.5% $ 983,791 24.3%
Real estate --
construction.... 426,207 6.7 378,121 6.5 262,700 5.0 240,087 5.1 205,081 5.0
Real estate --
mortgage:
Residential...... 2,519,816 39.6 2,310,520 39.6 1,936,516 36.8 1,500,729 31.6 1,058,095 26.1
Commercial....... 783,273 12.3 742,278 12.7 740,270 14.1 731,129 15.4 724,024 17.9
Consumer install-
ment............. 1,316,316 20.7 1,211,021 20.8 1,179,359 22.4 1,203,063 25.4 1,081,966 26.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
6,361,358 100.0% 5,829,534 100.0% 5,261,862 100.0% 4,743,107 100.0% 4,052,957 100.0%
===== ===== ===== ===== =====
Less: Unearned in-
come............. 311 1,226 3,548 6,768 8,824
Allowance for
loan losses.... 108,337 108,337 111,744 85,434 57,528
---------- ---------- ---------- ---------- ----------
Total loans....... $6,252,710 $5,719,971 $5,146,570 $4,650,905 $3,986,605
========== ========== ========== ========== ==========
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....... $ 774,288 $447,431 $ 94,027 $1,315,746 $280,938 $260,520
Real estate -- con-
struction.............. 273,487 132,690 20,030 426,207 64,739 87,981
---------- -------- -------- ---------- -------- --------
$1,047,775 $580,121 $114,057 $1,741,953 $345,677 $348,501
========== ======== ======== ========== ======== ========
13
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. On December 31, 1995, the Company adopted
the Financial Accounting Standards Board's Special Report, A Guide to
----------
Implementation of Statement 115 on Accounting for Certain Investments in Debt
- -----------------------------------------------------------------------------
and Equity Securities ("Special Report"). The Special Report allowed a company
- ---------------------
the one-time opportunity to reassess the appropriateness of its investment
securities classifications and to transfer securities from the held-to-
maturity portfolio to the available-for-sale portfolio without calling into
question the company's intent to hold other debt securities to maturity. Upon
adoption, the Company transferred held-to-maturity investment securities
totaling $828 million to its available-for-sale portfolio, and $33 million of
available-for-sale securities to its held-to-maturity portfolio. Generally,
individual holdings with greater than $10 million par value were transferred
to the available-for-sale portfolio in order to increase liquidity and
portfolio management capabilities, with smaller positions transferred to the
held-to-maturity portfolio.
At December 31, 1995, unrealized gains, net of unrealized losses, in the
Company's available-for-sale portfolio totaled $20.3 million as opposed to net
unrealized losses of $16.0 million at December 31, 1994. Under the
requirements of FAS115, shareholders' equity at December 31, 1995, has been
increased by $11.8 million to reflect the tax-effected unrealized gain
associated with the available-for-sale portfolio. At December 31, 1994, the
tax-effected unrealized loss of $11.7 million was reflected as a reduction of
shareholders' equity.
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. Management of the maturity of the portfolio is necessary to provide
liquidity and control interest rate risk. 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. As discussed earlier, the Company transferred
securities, primarily CMOs and U.S. Government agencies, between its held-to-
maturity and available-for-sale portfolios at December 31, 1995, upon adoption
of the Special Report.
There were no sales of held-to-maturity securities during 1995 while sales
of held-to-maturity securities in 1994 totaled less than $1 million.
Maturities of held-to-maturity securities in 1995 and 1994 were $361 million
and $302 million, respectively. During 1995, gross gains of $1.2 million were
realized on $32 million of mortgage-backed securities in the held-to-maturity
portfolio, which were classified as maturities in accordance with FAS115.
Sales and maturities of securities available for sale totaled $686 million and
$150 million, respectively, in 1995 while sales and maturities in the category
in 1994 were $240 million and $111 million. Net
14
gains realized during the year accounted for 2 percent and 4 percent of
noninterest income in 1995 and 1994, respectively. Gross unrealized gains in
the Company's held-to-maturity portfolio at year-end 1995 totaled $17.6
million and gross unrealized losses totaled $3.6 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
42 percent during 1995 after increasing 26 percent in 1994.
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
---------------------------------
1995 1994 1993
---------- ---------- ----------
(in Thousands)
Investment securities:
U.S. Treasury................................ $ -- $ 16,053 $ 3,021
U.S. Government agencies and corporations.... 525 98,116 29,828
Mortgage-backed pass-through securities...... 335,591 466,733 305,012
Collateralized mortgage obligations:
Agency...................................... 132,485 618,849 114,399
Corporate................................... 114,914 422,011 23,782
States and political subdivisions............ 70,710 78,472 108,409
Corporate bonds.............................. 67,179 162,306 43,571
Other........................................ 1,235 2,678 3,003
---------- ---------- ----------
722,639 1,865,218 631,025
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 331,138 651,117 259,200
U.S. Government agencies and corporations.... 95,788 2,998 6,003
Mortgage-backed pass-through securities...... 230,305 6,769 8,032
Collateralized mortgage obligations:
Agency...................................... 542,212 19,196 278,103
Corporate................................... 627,766 -- 49,416
Corporate bonds.............................. 130,543 -- --
Other........................................ 39,739 47,572 47,260
---------- ---------- ----------
1,997,491 727,652 648,014
Net unrealized gain (loss).................. 20,292 (15,972) 10,833
---------- ---------- ----------
2,017,783 711,680 658,847
---------- ---------- ----------
Total....................................... $2,740,422 $2,576,898 $1,289,872
========== ========== ==========
The maturities and weighted average yields of the investment securities and
investment securities available for sale at the end of 1995 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
------------------------------------------------------------------
After Five But
Within After One But Within After
One Year Within Five Years Ten Years Ten Years
-------------- ---------------------------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ----------- ---------------- ----- -------- -----
(in Thousands)
Investment securities:
U.S. Government agen-
cies and corporations. $ -- -- % $ 30 8.87% $ 68 7.38% $ 427 6.84%
Mortgage-backed pass-
through securities.... 5,656 7.08 222,653 7.68 94,386 7.57 12,896 7.51
Collateralized mortgage
obligations........... 64,160 7.63 125,400 7.22 14,756 7.53 43,083 6.74
States and political
subdivisions.......... 1,402 8.80 14,172 8.49 23,920 9.33 31,216 9.52
Other.................. 37,895 5.94 25,099 6.98 5,420 7.69 -- --
-------- ----------- -------- --------
109,113 7.03 387,354 7.52 138,550 7.86 87,622 7.79
-------- ----------- -------- --------
Investment securities
available for sale --
amortized cost:
U.S. Treasury.......... 144,627 4.88 186,501 5.79 10 8.76 -- --
U.S. Government agen-
cies and corporations. 3,906 6.86 85,331 6.94 6,551 9.42 -- --
Mortgage-backed pass-
through securities.... -- -- 16,073 7.03 214,232 6.89 -- --
Collateralized mortgage
obligations........... 400,002 7.53 625,158 7.09 10,000 6.83 134,818 7.09
Other.................. 35,774 5.75 131,392 6.41 -- -- 3,116 6.01
-------- ----------- -------- --------
584,309 6.76 1,044,455 6.76 230,793 7.01 137,934 7.06
-------- ----------- -------- --------
Total................. $693,422 6.81 $ 1,431,809 6.96 $369,343 7.33 $225,556 7.35
======== =========== ======== ========
While the weighted average stated maturities of total MBS and CMOs are 17.6
years and 19.7 years, respectively, the corresponding average expected lives
assumed in the above table are 5.0 years and 3.6 years. During a period of
rising rates, prepayment speeds generally slow on MBS and CMOs with a
resulting extension in average life, and vice versa. Given a 100 basis point
immediate and permanent parallel increase in rates, the expected average lives
for MBS and CMOs would be 5.4 and 4.2 years, respectively. By the same token,
a 100 basis point immediate and permanent parallel decrease in rates, the
expected average lives for MBS and CMOs would be 4.0 and 2.8 years,
respectively.
The weighted average market prices as a percentage of par value for MBS and
CMOs at December 31, 1995, were 101.8 percent and 99.8 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, 1995, fixed-rate MBS and
CMOs totaled $278 million and $1,118 million, respectively, with corresponding
weighted average expected lives of 3.8 and 1.7 years. Adjustable rate MBS and
CMOs totaled $288 million and $300 million, respectively, with corresponding
weighted average expected lives of 6.1 and 10.4 years. Substantially all
adjustable-rate MBS and CMOs are subject to life rate caps, and MBS are also
generally subject to a two percent annual cap. The weighted average life caps
at year end were 11.42 percent and 9.63 percent for MBS and CMOs,
respectively, and the corresponding weighted average coupon rates at year end
were 7.05 percent and 6.96 percent. Given a 100 basis point immediate and
permanent parallel increase in rates, the estimated market prices for MBS and
CMOs would be 101.35 and 98.09, respectively. Given a 100 basis point
immediate and permanent parallel decrease in rates, the estimated market
prices for MBS and CMOs would be 104.14 and 100.48, 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 1995 decreased by 46
percent following a 24 percent
16
decrease in 1994. The composition of the Company's trading account at December
31, 1995 and 1994, is detailed below:
TRADING ACCOUNT COMPOSITION
DECEMBER 31, 1995 December 31, 1994
----------------- -----------------
(in Thousands)
U.S. Treasury and Govern-
ment agency............. $ 54,318 $26,599
States and political sub-
divisions............... 19,583 9,046
Mortgage-backed pass-
through securities...... 16,471 15,567
Other debt securities.... 396 201
Derivative securities:
Collateralized mortgage
obligations............ 8,472 5,344
Interest rate floors and
caps................... 2,676 1,178
Other options........... -- 77
-------- -------
$101,916 $58,012
======== =======
The balance in the trading account at December 31, 1995, increased from
year-end 1994 due to the need to carry more securities in inventory in order
to support increased customer demand. 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 collateralized
mortgage obligation inverse floaters ("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 decreased 59 percent in 1995 compared to a 49 percent increase in 1994.
The average balance of interest bearing deposits in other banks decreased 98
percent during 1995 from 1994 levels after decreasing 44 percent from 1993 to
1994. There were no foreign time deposits as of December 31, 1995 or 1994.
DEPOSITS AND BORROWED FUNDS
The Company's growth in assets during 1995 was funded primarily by deposit
growth, representing 54 percent of the $997 million increase in total
liabilities and shareholders' equity at December 31, 1995. A nine percent
increase in interest bearing deposits accounted for all of this increase as
noninterest bearing deposits remained unchanged. Growth in other liabilities
and in shareholders' equity represented 36 percent and 10 percent,
respectively, of the increase in total liabilities and shareholders' equity.
The $362 million increase in other liabilities consisted principally of a $292
million, or 60 percent, increase in Federal funds purchased and a $97 million,
or 20 percent, increase in FHLB and other borrowings, partially offset by a 20
percent decrease in securities sold under agreements to repurchase.
During 1994, 80 percent of the increase in total liabilities and
shareholders' equity was due to deposit growth as total deposits grew by $1.4
billion, the majority of which was attributable to the $865 million in
deposits acquired in the First Heights transaction. Noninterest bearing
deposits increased by $220 million, or 19 percent, while interest bearing
deposits increased by $1.2 billion, or 27 percent. A $140 million increase in
securities sold under agreements to repurchase along with a $159 million
increase in FHLB and other borrowings accounted for the majority of the $306
million, or 26 percent, increase in liabilities other than deposits.
Changes in the Company's markets and the economy in general, as well as the
First Heights acquisition, continued to impact the Company's liability mix
during 1995. While the portion of average interest bearing liabilities
represented by interest bearing deposits, the primary source of funding for
the Company, declined slightly from 81 percent in 1994 to 80 percent in 1995,
the average balance of certificates of deposits less than
17
$100,000 and other time deposits increased from 30 percent to 33 percent of
total interest bearing liabilities. Certificates of deposits less than
$100,000 and other time deposits represented 34 percent of average total
deposits in 1995, up from 29 percent in 1994. For the year, the average
balance of certificates of deposit less than $100,000 and other time deposits
increased 33 percent while certificates of deposit of $100,000 or more grew by
24 percent. Interest bearing demand deposits and savings accounts experienced
only modest increases of two percent and six percent, respectively.
The portion of average interest bearing liabilities represented by interest
bearing deposits increased from 79 percent in 1993 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
36 percent in 1993 to 39 percent in 1994.
During 1994, the average balance of demand deposits, savings accounts and
noninterest bearing deposits represented 61 percent of average total deposits,
down from 64 percent in 1993. This decline was a function of a 22 percent
increase in the average balance of certificates of deposit less than $100,000
and other time deposits and a 31 percent increase in the average balance of
certificates of deposits of $100,000 or more. This shift in the mix of
deposits was due principally to the acquisition of 22 branches of First
Heights in which time deposits constituted 73 percent of the $865 million of
total deposits assumed.
The maturities of certificates of deposit of $100,000 or more and other time
deposits of $100,000 or more outstanding at December 31, 1995, 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....................... $315,400 $25,887 $341,287
Over three through six months.............. 90,374 3,400 93,774
Over six through twelve months............. 146,213 -- 146,213
Over twelve months......................... 222,100 -- 222,100
-------- ------- --------
$774,087 $29,287 $803,374
======== ======= ========
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 increased 46 percent during 1995 and average
securities sold under agreements to repurchase increased 5 percent. Average
other short-term borrowings, which include parent company commercial paper and
trading account short sales, decreased 17 percent. During 1995, the average
balance of FHLB and other borrowings increased $187 million, or 53 percent, as
a result of additional FHLB advances of $175 million incurred in the third
quarter, partially offset by fourth quarter repayments of $75 million. The
average balance of FHLB and other borrowings increased 27 percent during 1994
due to additional borrowings of $50 million in subordinated debentures and
$110 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."
18
The Short-Term Borrowings table below 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.
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)
1995
FEDERAL FUNDS PURCHASED...... $ 848,078 $553,023 5.75% $ 776,308 5.53%
SECURITIES SOLD UNDER AGREE-
MENTS TO REPURCHASE......... 304,676 256,303 5.00 279,725 4.92
SHORT SALES.................. 38,096 25,090 5.85 24,245 5.13
COMMERCIAL PAPER............. 188,677 125,891 5.85 57,312 5.38
OTHER SHORT-TERM BORROWINGS.. 125,757 36,870 5.75 34,171 5.69
---------- -------- ----------
$1,505,284 $997,177 $1,171,761
========== ======== ==========
1994
Federal funds purchased...... $ 484,190 $377,907 4.56% $ 484,190 5.70%
Securities sold under agree-
ments to repurchase......... 348,418 243,227 3.54 348,418 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
---------- -------- ----------
$1,252,070 $846,261 $ 937,206
========== ======== ==========
1993
Federal funds purchased...... $ 496,390 $406,855 3.06% $ 411,704 3.01%
Securities sold under agree-
ments 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
---------- -------- ----------
$1,122,565 $855,404 $ 791,457
========== ======== ==========
LIQUIDITY MANAGEMENT
Liquidity is the ability of the Company 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 to 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, 1995, the Company's Subsidiary
Banks could have paid additional dividends to the parent holding company in
the amount of $104.4 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.
19
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 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 $1.0 billion,
or 16 percent, of the total loan portfolio at December 31, 1995. 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 decreased to $98 million primarily due
to the increase in trading account securities. Net cash used in investing
activities of $890 million consisted primarily of net loans originated of $546
million and available-for-sale securities purchased of $1.3 billion, largely
funded by maturities of investment securities held to maturity of $361
million, as well as sales and maturities of investment securities available
for sale of $686 million and $150 million, respectively. Net cash provided by
financing activities provided the remainder of funding sources for 1995. The
$832 million of net cash provided by financing activities consisted primarily
of a $540 million increase in deposits, a net increase of $97 million in FHLB
and other borrowings, and a $292 million increase in federal funds purchased
offset partially by a reduction of $69 million in securities sold under
agreements to repurchase. The increase in FHLB and other borrowings in 1995
consisted of additional FHLB advances of $175 million and repayments of $78
million.
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. The Company measures interest rate sensitivity 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,
1995 and 1994, 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)
1995
EARNING ASSETS:
LOANS, NET OF UNEARNED
INCOME................ $1,719,619 $ 471,594 $ 658,443 $1,356,725 $2,154,666 $6,361,047
TAXABLE INVESTMENT SE-
CURITIES.............. -- 149,554 96,255 325,552 71,091 642,452
TAX-EXEMPT INVESTMENT
SECURITIES............ -- 450 951 21,165 57,621 80,187
INVESTMENT SECURITIES
AVAILABLE FOR SALE.... -- 580,218 494,337 935,128 8,100 2,017,783
TRADING ACCOUNT SECURI-
TIES.................. 101,916 -- -- -- -- 101,916
FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED
UNDER AGREEMENTS TO
RESELL ............... 250,039 -- -- -- -- 250,039
INTEREST BEARING DEPOS-
ITS WITH OTHER BANKS.. -- -- -- -- 99 99
---------- --------- ----------- ---------- ---------- ----------
TOTAL EARNING ASSETS.. 2,071,574 1,201,816 1,249,986 2,638,570 2,291,577 9,453,523
INTEREST BEARING LIABIL-
ITIES:
DEMAND DEPOSITS........ -- 861,530 -- -- -- 861,530
SAVINGS DEPOSITS....... -- -- 1,364,371 -- 795,941 2,160,312
CERTIFICATES OF DEPOSIT
LESS THAN $100,000 AND
OTHER TIME DEPOSITS... 57,819 546,978 980,762 941,460 5,345 2,532,364
CERTIFICATES OF DEPOSIT
OF $100,000 OR MORE... 28,609 287,458 236,361 220,126 1,533 774,087
FEDERAL FUNDS PURCHASED
AND SECURITIES SOLD
UNDER AGREEMENTS TO
REPURCHASE............ 1,051,239 -- -- -- 4,794 1,056,033
OTHER SHORT-TERM
BORROWINGS............ 115,728 -- -- -- -- 115,728
FHLB AND OTHER
BORROWINGS............ -- 346,048 149 110,984 127,671 584,852
---------- --------- ----------- ---------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES.......... 1,253,395 2,042,014 2,581,643 1,272,570 935,284 8,084,906
EFFECT OF INTEREST RATE
SWAPS.................. 130,000 196,667 (188,667) (130,000) (8,000) --
---------- --------- ----------- ---------- ---------- ----------
INTEREST SENSITIVITY
GAP.................... 948,179 (643,531) (1,520,324) 1,236,000 1,348,293 $1,368,617
---------- --------- ----------- ---------- ---------- ==========
CUMULATIVE INTEREST SEN-
SITIVITY GAP........... $ 948,179 $ 304,648 $(1,215,676) $ 20,324 $1,368,617
========== ========= =========== ========== ==========
1994
Earning assets:
Loans, net of unearned
income ............... $1,387,021 $ 375,127 $ 1,599,037 $ 978,580 $1,488,543 $5,828,308
Taxable investment se-
curities.............. -- 352,980 306,914 842,223 273,787 1,775,904
Tax-exempt investment
securities............ -- 270 3,552 14,324 71,168 89,314
Investment securities
available for sale.... -- 94,214 264,041 350,752 2,673 711,680
Trading account securi-
ties.................. 58,012 -- -- -- -- 58,012
Federal funds sold and
securities purchased
under agreements to
resell ............... 46,535 -- -- -- -- 46,535
Interest bearing depos-
its with other banks.. -- -- -- -- 99 99
---------- --------- ----------- ---------- ---------- ----------
Total earning assets.. 1,491,568 822,591 2,173,544 2,185,879 1,836,270 8,509,852
Interest bearing liabil-
ities:
Demand deposits........ -- 844,335 -- -- -- 844,335
Savings deposits....... -- -- 1,427,119 -- 404,712 1,831,831
Certificates of deposit
less than $100,000 and
other time deposits... -- 564,301 807,325 1,010,144 20,697 2,402,467
Certificates of deposit
of $100,000 or more... -- 284,170 218,579 197,713 4,441 704,903
Federal funds purchased
and securities sold
under agreements to
repurchase............ 829,107 -- -- -- 3,501 832,608
Other short-term
borrowings............ 104,598 -- -- -- -- 104,598
FHLB and other
borrowings............ -- 247,552 137 111,581 128,646 487,916
---------- --------- ----------- ---------- ---------- ----------
Total interest bearing
liabilities........... 933,705 1,940,358 2,453,160 1,319,438 561,997 7,208,658
Effect of interest rate
swaps.................. (20,000) 226,000 (200,000) 2,000 (8,000) --
---------- --------- ----------- ---------- ---------- ----------
Interest sensitivity
gap.................... 537,863 (891,767) (479,616) 868,441 1,266,273 $1,301,194
---------- --------- ----------- ---------- ---------- ==========
Cumulative interest sen-
sitivity gap........... $ 537,863 $(353,904) $(833,520) $ 34,921 $1,301,194
========== ========= =========== ========== ==========
21
In the preceding tables, fixed-rate 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, 1995. For all other interest
earning assets and interest bearing liabilities, variable rate assets and
liabilities are reflected in the time interval of the asset 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, 1995, for the first year,
73 percent of earning asset funding sources will reprice compared to 48
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. This
characteristic is referred to as basis risk and relates to the possibility
that the repricing characteristics of assets tied to the Company's prime
lending rate are different from those of funding sources such as certificates
of deposit.
Varying interest rate environments can create unexpected changes in the
prepayments of assets and repricing of liabilities which are not reflected in
the Interest Rate Sensitivity Analysis. These changing prepayments may have
significant effects on the Company's net interest margin. Because of these
factors, an interest sensitivity gap report will not provide a comprehensive
assessment of the Company's exposure to changes in interest rates. Management
utilizes computerized interest rate simulation analysis to determine the
Company's expected sensitivity to changes in interest rates. Unique cash flows
for various interest rate environments can be used in the simulation model to
provide a better quality of predictive information to manage net interest
margin. The ability to change cash flows in the simulation model allows
management to see the impact that a variety of cash flow and interest rate
scenarios have on the net interest margin.
The simulation model is used to develop a better understanding of risks
other than prepayment and repricing of liabilities that may exist in the
structure of the balance sheet. The simulation model allows the Company to
test a variety of magnitudes to examine the impact of basis risk on interest
rate margin. Using a simulation model provides insight into how a change in
the slope of the yield curve will impact the interest margin. A change in the
shape of the yield curve impacts the dynamics of repricings and cash flows and
therefore the net interest margin. The model simulation tests the impact that
the timing of a change in interest rates may have on net interest margin.
Rates falling at different relativity over a time horizon will impact net
interest margin differently in each scenario. Interest rate simulation
modeling assists management in identifying risks to net interest margin thus
allowing management to reduce the volatility of the net interest margin as
appropriate. The Company's current simulation model, which includes December
31, 1995 balances and projected 1996 growth, indicated a decrease in net
interest income of less than two percent with an immediate and permanent 100
basis point increase or decrease in the general level of interest rates.
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 or money market instruments 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, 1995:
22
INTEREST RATE PROTECTION CONTRACTS
Weighted
Weighted Weighted Average
Average Rate* Average Repricing
Notional Carrying Estimated ------------- Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
---------- -------- ---------- -------- ---- ---------- ---------
(in Thousands)
Non-trading interest rate con-
tracts:
Swaps:
Pay fixed versus 3
mon. LIBOR........... $ 308,000 $ (68) $(3,993) 5.89% 6.19% 2.06 90
Receive fixed versus 3
mon. LIBOR........... 20,000 (9) (96) 4.74 5.81 0.96 90
Basis swaps+.......... 388,668 1,283 (1,728) 6.37 6.43 4.75 90
Caps purchased......... 260,000 1,261 165 -- * 1.57 90
Floors purchased....... 650,000 95 2,428 0.11 * 1.46 76
---------- ------ -------
$1,626,668 $2,562 $(3,224)
========== ====== =======
- --------
+ On $200 million notional, the Company receives interest based on the federal
funds rate and pays interest based on 3-month LIBOR. For the remainder, the
Company receives interest based on 3-month LIBOR plus 84 basis points and
pays interest based on the 1-year Constant Maturity Treasury plus 150 basis
points.
* 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, 1995. 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 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 1995, there were $486,000 of deferred gains and $183,000 of deferred
losses on terminated interest rate protection contracts, which will be
recorded as net interest income (expense) of $432,000 in 1996, $(44,000) in
1997 and $(85,000) thereafter. The following table indicates the asset or
liability category with which the non-trading interest protection contracts
were associated at December 31, 1995:
ASSETS/LIABILITIES ASSOCIATED WITH INTEREST RATE PROTECTION CONTRACTS
Notional Principal Associated With
---------------------------------------------
Total
Notional FHLB Federal Funds
Principal Loans Investments++ Advances Purchased++
---------- -------- ------------- -------- -------------
(in Thousands)
Swaps:
Pay fixed........... $ 308,000 $ 8,000 $ -- $200,000 $100,000
Receive fixed....... 20,000 20,000 -- -- --
Basis swaps++....... 388,668 -- 188,668 -- 200,000
Caps.................. 260,000 260,000 -- -- --
Floors................ 650,000 650,000 -- -- --
---------- -------- -------- -------- --------
$1,626,668 $938,000 $188,668 $200,000 $300,000
========== ======== ======== ======== ========
- --------
++ Based on the nature of basis swaps, the levels of interest rate protection
provided by such contracts are substantially lower than indicated by their
notional principal amounts. Accordingly, the level of notional principal
shown cannot be directly compared to the related account balances.
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
23
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, 1995:
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 3
mon. LIBOR........... $ 20,000 $ 216 $ 216 6.02% 4.38% 0.34 90
Receive fixed versus:
3 mon. LIBOR......... 23,000 78 78 6.10 5.92 1.07 90
Prime................ 890 (15) (15) 6.80 8.57 2.71 1
Caps:
Purchased............. 87,500 107 107 0.36 * 0.83 76
Written............... 124,400 (189) (189) * -- 1.48 78
Floors:
Purchased............. 230,000 2,774 2,774 0.39 * 2.13 86
Written............... 167,500 (1,970) (1,970) * 0.30 2.23 57
-------- ------- -------
Total............... $653,290 $ 1,001 $ 1,001
======== ======= =======
- --------
* 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, 1995. 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.
In addition to the interest rate contracts shown above, the Company uses
other options and futures in the trading account. At December 31, 1995, the
trading account did not contain any other options, but did contain futures
contracts having a notional principal of $467 million. Such futures contracts
were used to help reduce the price sensitivity of the trading account.
During 1994, the Company implemented Financial 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
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.
24
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, 1995, increased 16 percent after
increasing 9 percent in 1994. Exclusive of the net change in unrealized
holding gains (losses) on securities available for sale in both 1994 and 1995,
net income after dividends accounted for 95 percent of the increase in
shareholders' equity in 1995 and for 98 percent of the increase in 1994.
Dividends of $43 million were declared on the Company's common stock in
1995, representing a 26 percent increase over 1994. The 1995 annual dividend
rate per common share was $1.12, a 22 percent increase over 1994. The dividend
payout ratio for 1995 was 39 percent compared to 35 percent for 1994 and 32
percent for 1993. 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 14 percent was achieved primarily through reinvested earnings.
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 1995 was 6.86 percent compared to 7.18 percent in
1994 and 7.56 percent in 1993. The decrease in 1995 was due primarily to the
impact of the October, 1994 acquisition of First Heights on the Company's
average assets. As noted above, exclusive of the change in unrealized holding
gains (losses) on securities available for sale, the increase in shareholders'
equity in 1995 and 1994 is due almost exclusively to the retention of
earnings. 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
-------------------
1995 1994 1993
----- ----- -----
Return on average assets................................... 1.16% 1.24% 1.28%
Return on average common equity............................ 16.93 17.30 17.19
Common stock dividend payout ratio......................... 38.89 34.72 31.80
Average equity to average assets ratio..................... 6.86 7.18 7.56
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 and other intangibles
disallowed by the Subsidiary Bank's regulators, divided by total quarterly
average assets minus goodwill, other disallowed intangibles, and the
unrealized gain (loss) on available-for-sale securities. The tangible leverage
ratio is defined as common shareholders' equity, minus all intangibles,
divided by total quarterly average assets minus all intangibles. Even though
core deposit intangibles and goodwill increased from
25
acquisitions during 1994 and 1993, the leverage ratio remained well within
regulatory guidelines: 6.73 percent at year-end 1995; 6.62 percent at year-end
1994; and 7.32 percent at year-end 1993. For the same periods, the tangible
leverage ratio was 6.53 percent at year-end 1995; 6.37 percent at year-end
1994; and 6.98 percent at year-end 1993. 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 $11.7 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. By the
same token, the $11.8 million increase in shareholders' equity at December 31,
1995, has not been included as a component of equity in computing the leverage
ratios.
LEVERAGE RATIO CALCULATIONS
December 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
(in Thousands)
Total fourth quarter average assets........ $9,893,164 $8,930,749 $7,441,420
Add: Unrealized holding (gain) loss on
available-for-sale securities............ 1,732 8,671 (118)
Less:Goodwill............................. 19,889 20,788 9,224
Other disallowed intangibles............ 11,356 13,333 1,716
---------- ---------- ----------
Tangible average assets before deduction of
other intangibles......................... 9,863,651 8,905,299 7,430,362
Less:Other intangibles.................... 20,496 23,027 27,482
---------- ---------- ----------
Tangible average assets................. $9,843,155 $8,882,272 $7,402,880
========== ========== ==========
Total period-end common shareholders' equi-
ty........................................ $ 706,668 $ 611,673 $ 561,587
Less: Goodwill............................ 19,889 20,788 9,224
Other disallowed intangibles............ 11,356 13,333 1,716
Net unrealized holding gain (loss) on
available-for-sale
securities............................ 11,812 (11,686) 6,767
---------- ---------- ----------
Total common shareholders' equity before
deduction of other
intangibles............................... 663,611 589,238 543,880
Less: Other intangibles................... 20,496 23,027 27,482
---------- ---------- ----------
Tangible period-end common shareholders'
equity.................................. $ 643,115 $ 566,211 $ 516,398
========== ========== ==========
Leverage ratio.......................... 6.73% 6.62% 7.32%
Tangible leverage ratio ................ 6.53 6.37 6.98
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 $664 million at December 31, 1995. 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 $872 million at year-end 1995. The percentage ratios, as calculated
under the guidelines, were 9.88 percent and 12.98 percent for Tier I and Total
Qualifying Capital, respectively, at year-end 1995. 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. Tier I capital increased in 1995 as a result of $68
million in earnings, net of dividends retained by the Company,
26
$3 million received from the exercise of stock options, and a $3 million
decrease in disallowed intangibles. This increase in Tier I capital more than
offset the increase in total risk-adjusted assets, resulting in the increase
in the Tier I capital ratio. However, Tier II Capital increased only $8
million during the year and, as a result, the Total Qualifying Capital ratio
decreased slightly in 1995. The decrease in Tier I and Total Qualifying
Capital ratios 1994 was due to the addition of higher-risk weighted assets,
primarily loans and investment securities, and goodwill and other intangibles
resulting from acquisitions.
December 31
-------------------
1995 1994 1993
----- ----- -----
Risk-based Capital Ratios:
Tier I Capital Ratio...................................... 9.88% 9.75% 10.55%
Total Qualifying Capital Ratio............................ 12.98 13.06 13.26
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 1995 for "well
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to assure that the Subsidiary Banks exceed the
guidelines.
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 1995 increased four percent over 1994 while
increasing less than one percent in 1994 over 1993. A 17 percent increase in
the volume of average earning assets, primarily total investment securities
and loans, more than offset a 53 basis point decline in net yield. In 1994,
the net yield on average total earning assets decreased 56 basis points while
the rate paid on interest bearing liabilities increased 30 basis points and
the net cost of funds increased 29 basis points. 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 24 percent in 1995 and 9 percent in 1994 after
decreasing 4 percent in 1993. Interest income in 1995 grew as a result of a 17
percent increase in the volume of average earning assets partially combined
with a 44 basis point increase in the average interest rate earned. A 12
percent increase in the volume of average loans along with a 56 basis point
increase in yield accounted for the 20 percent increase in fully taxable
equivalent interest income on loans. The increase in yield on loans resulted
from the overall rise in the general level of interest rates and the loan
growth generated during the year. 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 did not parallel the substantial
increase in the general level of interest rates that occurred during 1994, but
have continued to rise during 1995. Interest income on investment securities,
including securities available for sale, increased 46 percent from 1994 to
1995. This increase resulted from a 42 percent increase in the average balance
of total investment securities coupled with a 20 basis point increase in
yield. Interest income on trading securities declined 49 percent as a result
of a 46 percent decrease in the average balance.
Total interest expense increased by 51 percent in 1995 due to a 105 basis
point increase in the rate paid on interest bearing liabilities combined with
a 19 percent increase in average volume. Interest expense on interest
27
bearing deposits increased 46 percent as the result of a 92 basis point
increase in rate and a 17 percent increase in the average volume. The 28
percent increase in average borrowed funds, which includes interest bearing
liabilities that are not classified as deposits, coupled with a 155 basis
point increase in rate resulted in a 72 percent increase in interest expense
for this category. The increase in interest expense on average borrowed funds
for the year can be attributed to the fact that borrowed funds have variable
rates that increased as a function of the increase in the general level of
interest rates during 1995.
From 1993 to 1994, interest income increased 9 percent as a result of a 13
percent increase in the volume of average earning assets and a 27 basis point
decline in the yield on average earning assets. Fully taxable equivalent
interest income on loans rose 7 percent as a 9 percent increase in average
volume more than offset a 21 basis point decline in yield. Interest income on
investment securities, including securities available for sale, increased 16
percent from 1993 to 1994 as a result of a 26 percent increase in average
volume partially offset by a 54 basis point decrease in the yield on
investment securities. A 195 basis point increase in yield offset by a 24
percent decrease in average balance increased interest income on trading
securities by 1 percent in 1994.
A 30 basis point increase in the rate paid on interest bearing liabilities
coupled with a 14 percent increase in average volume resulted in a 24 percent
increase in interest expense on interest bearing liabilities in 1994. A
substantial portion of the increase in total interest expense was due to a 19
percent increase in interest expense on interest bearing deposits, resulting
from a 9 basis point increase in rate and a 17 percent increase in the average
volume. A 118 basis point increase in the rate paid on average borrowed funds,
along with a 6 percent increase in average volume, resulted in a 43 percent
increase 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 53 basis points to 4.01 percent in 1995 and decreased 56 basis points
to 4.54 percent in 1994. The steady decrease in net yield throughout 1995 was
a function of the issuance of additional borrowings and the repricing of
interest bearing liabilities in the increasing interest rate environment at
rates that outpaced the increase in yield on loans and investment securities.
This is evidenced by the fact the yield on interest earning assets increased
only 44 basis points while the rate paid on interest bearing liabilities
increased by 105 basis points. At the same time, the portion of interest
earning assets funded by interest bearing liabilities increased from 83
percent in 1994 to 85 percent in 1995, 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.
During 1995, the net yield on interest earning assets was modestly 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 three 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 two basis points and
interest income was increased by $1.0 million. At the same time, the impact of
interest rate contracts on interest bearing liabilities was less significant,
increasing interest expense by $300,000 and the net cost of funds by less than
one basis point. The impact of the use of interest rate contracts in 1995 was
substantially less than in 1994 when the positive impact on the net yield on
interest earning assets was 12 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.
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 1995, the net interest rate spread decreased 61 basis points
to 3.27 percent from the 1994 spread of 3.88 percent as the cost of interest
bearing liabilities rose to a greater extent than the yields earned on earning
assets. The decrease in 1994 was 57
28
basis points from 4.45 percent in 1993. 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 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
----------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Rate earned on interest earning assets............ 8.22% 7.77% 8.00% 8.70% 9.77%
Rate paid on interest bearing liabilities......... 5.01 3.96 3.66 4.32 6.07
Interest rate spread.............................. 3.21 3.81 4.34 4.38 3.70
Net yield on earning assets....................... 3.95 4.46 4.99 5.07 4.57
Interest income, as reported in "Consolidated Statements of Income", on a
nominal yield basis increased in 1995 by $141 million while net interest
income increased by $13 million. The 51 basis point decrease in the net yield
in 1995 was a result of an increase 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 1996 on
increasing net interest income while at the same time maintaining the current
levels in interest rate spreads and net yields.
29
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
Year Ended December 31
-------------------------------------------------------
1995 1994
--------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
---------- -------- ------ ---------- -------- ------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $6,089,560 $539,712 8.86% $5,417,095 $449,456 8.30%
Investment securities:
Taxable................ 1,632,052 123,175 7.55 982,560 75,001 7.63
Tax-exempt............. 85,035 7,895 9.29 96,582 9,095 9.42
---------- -------- ---------- --------
Total investment secu-
rities............... 1,717,087 131,070 7.63 1,079,142 84,096 7.79
Investment securities
available for sale.... 911,910 52,447 5.75 774,364 41,510 5.36
Trading account securi-
ties.................. 67,591 5,111 7.56 125,805 9,996 7.95
Federal funds sold and
securities purchased
under agreements to
resell................ 58,122 3,545 6.10 141,914 5,883 4.15
Interest bearing depos-
its with other banks.. 99 8 8.28 5,997 508 8.47
---------- -------- ---------- --------
Total earning assets.. 8,844,369 731,893 8.28 7,544,317 591,449 7.84
Allowance for loan
losses................ (106,758) (112,274)
Unrealized gain (loss)
on investment securi-
ties available for
sale.................. (5,470) (3,380)
Cash and due from
banks................. 387,654 366,106
Other assets........... 371,169 356,726
---------- ----------
Total assets.......... $9,490,964 $8,151,495
========== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Interest bearing liabil-
ities:
Deposits:
Demand................. $ 811,249 20,710 2.55 $ 794,096 19,114 2.41
Savings................ 1,913,093 74,814 3.91 1,808,936 56,658 3.13
Certificates of deposit
less than $100,000 and
other time deposits... 2,484,157 142,290 5.73 1,865,809 90,061 4.83
Certificates of deposit
of $100,000 or more... 778,807 46,363 5.95 628,926 29,254 4.65
---------- -------- ---------- --------
Total interest bearing
deposits............. 5,987,306 284,177 4.75 5,097,767 195,087 3.83
Federal funds purchased. 553,023 31,804 5.75 377,907 17,247 4.56
Securities sold under
agreements to repur-
chase.................. 256,303 12,819 5.00 243,227 8,599 3.54
Other short-term
borrowings............. 187,851 10,949 5.83 225,127 10,014 4.45
FHLB and other
borrowings............. 540,629 37,526 6.94 353,341 18,209 5.15
---------- -------- ---------- --------
Total interest bearing
liabilities.......... 7,525,112 377,275 5.01 6,297,369 249,156 3.96
---- ----
Noninterest bearing de-
mand deposits.......... 1,261,883 1,230,434
Accrued expenses and
other liabilities...... 52,531 38,614
Shareholders' equity.... 651,438 585,078
---------- ----------
Total liabilities and
shareholders' equity. $9,490,964 $8,151,495
========== ==========
Net interest income/net
interest spread........ 354,618 3.27% 342,293 3.88%
==== ====
Net yield on earning as-
sets................... 4.01% 4.54%
==== ====
Taxable equivalent ad-
justment:
Loans.................. 1,878 1,896
Investment securities.. 3,024 3,386
Investment securities
available for sale.... 7 190
Trading account securi-
ties.................. 54 53
-------- --------
Total taxable equiva-
lent adjustment...... 4,963 5,525
-------- --------
Net interest income..... $349,655 $336,768
======== ========
- --------
*Loans on nonaccrual status have been included in the computation of average
balances.
30
GROWTH RATE
Year Ended December 31 AVERAGE BALANCES
-------------------------------------------------------------------------------------- -------------------
1993 1992 1991
--------------------------- --------------------------- ---------------------------- ONE YEAR FIVE YEAR
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ 1995- COMPOUNDED
Balance Expense Rate Balance Expense Rate Balance Expens Rate 1994 1995-1990
---------- -------- ------ ---------- -------- ------ ---------- -------- ------- -------- ----------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $4,949,026 $421,202 8.51% $4,332,066 $406,274 9.38% $3,806,465 $404,083 10.62% 12.41% 12.49%
Investment securities:
Taxable................ 781,657 61,622 7.88 1,624,972 126,385 7.78 1,494,259 131,494 8.80 66.10 7.20
Tax-exempt............. 135,548 13,031 9.61 167,200 15,870 9.49 195,708 17,622 9.00 (11.96) (15.12)
---------- -------- ---------- -------- ---------- --------
Total investment secu-
rities............... 917,205 74,653 8.14 1,792,172 142,255 7.94 1,689,967 149,116 8.82 59.12 4.99
Investment securities
available for sale.... 556,701 33,245 5.97 55,618 3,789 6.81 -- -- -- 17.76 --
Trading account securi-
ties.................. 164,756 9,885 6.00 94,590 6,631 7.01 100,042 7,945 7.94 (46.27) (4.55)
Federal funds sold and
securities purchased
under agreements to
resell................ 95,560 2,920 3.06 82,936 2,753 3.32 129,954 7,258 5.59 (59.04) (17.59)
Interest bearing depos-
its with other banks.. 10,720 889 8.29 13,058 1,031 7.90 22,875 1,854 8.10 (98.35) (68.39)
---------- -------- ---------- -------- --------- -------
Total earning assets.. 6,693,968 542,794 8.11 6,370,440 562,733 8.83 5,749,303 570,256 9.92 17.23 12.10
Allowance for loan
losses................ (101,224) (68,701) (56,128) (4.91) 19.14
Unrealized gain (loss)
on investment securi-
ties available for
sale.................. 30 -- -- -- --
Cash and due from
banks................. 325,190 298,305 274,169 5.89 9.02
Other assets........... 326,413 327,424 277,411 4.05 11.81
---------- ---------- ----------
Total assets.......... $7,244,377 $6,927,468 $6,244,755 16.43 11.88
========== ========== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Interest bearing liabil-
ities:
Deposits:
Demand................. $ 660,757 16,202 2.45 $ 551,824 15,763 2.86 $ 455,070 20,182 4.43 2.16 16.90
Savings................ 1,706,197 49,222 2.88 1,624,841 56,107 3.45 1,393,717 74,141 5.32 5.76 15.24
Certificates of deposit
less than $100,000 and
other time deposits... 1,528,568 76,615 5.01 1,567,486 93,921 5.99 1,595,091 115,880 7.26 33.14 11.79
Certificates of deposit
of $100,000 or more... 479,307 21,624 4.51 489,269 24,745 5.06 464,174 31,326 6.75 23.83 10.13
---------- -------- ---------- -------- ---------- --------
Total interest bearing 4,374,829 163,663 3.74 4,233,420 190,536 4.50 3,908,052 241,529 6.18 17.45 13.23
deposits.............
Federal funds purchased. 406,855 12,464 3.06 617,697 21,822 3.53 461,546 25,542 5.53 46.34 6.65
Securities sold under
agreements to repur-
chase.................. 240,474 6,741 2.80 270,660 9,084 3.36 406,804 22,146 5.44 5.38 (13.29)
Other short-term
borrowings............. 208,075 6,888 3.31 191,568 7,722 4.03 126,728 7,788 6.15 (16.56) 5.07
FHLB and other
borrowings............. 278,989 11,633 4.17 45,515 2,348 5.16 21,084 1,911 9.06 53.00 113.42
---------- -------- ---------- -------- --------- -------
Total interest bearing
liabilities.......... 5,509,222 201,389 3.66 5,358,860 231,512 4.32 4,924,214 298,916 6.07 19.50 11.85
---- ---- ----
Noninterest bearing de-
mand deposits.......... 1,149,861 1,031,832 854,745 2.56 12.19
Accrued expenses and
other liabilities...... 37,979 48,552 54,154 36.04 1.25
Shareholders' equity.... 547,315 488,224 411,642 11.34 12.79
---------- ---------- ----------
Total liabilities and
shareholders' equity. $7,244,377 $6,927,468 $6,244,755 16.43 11.88
========== ========== ==========
Net interest income/net
interest spread........ 341,405 4.45% 331,221 4.51% 271,340 3.85%
===== ===== =====
Net yield on earning as-
sets................... 5.10% 5.20% 4.72%
===== ===== =====
Taxable equivalent ad-
justment:
Loans.................. 2,188 2,454 2,528
Investment securities.. 4,686 5,840 6,082
Investment securities
available for sale.... 277 70 --
Trading account securi-
ties.................. 108 83 71
-------- -------- --------
Total taxable equiva-
lent adjustment...... 7,259 8,447 8,681
-------- -------- --------
Net interest income..... $334,146 $322,774 $262,659
======== ======== ========
- --------
*Loans on nonaccrual status have been included in the computation of average
balances.
31
RATE/VOLUME VARIANCE ANALYSIS
Taxable Equivalent Basis
Average Volume Change in Volume Average Rate
-------------------------------- --------------------- ----------------
1995 1994 1993 1995-1994 1994-1993 1995 1994 1993
---------- ---------- ---------- ---------- --------- ---- ---- ----
(in Thousands)
EARNING ASSETS:
Loans, net of unearned
income................. $6,089,560 $5,417,095 $4,949,026 $ 672,465 $468,069 8.86% 8.30% 8.51%
Investment securities:
Taxable................ 1,632,052 982,560 781,657 649,492 200,903 7.55 7.63 7.88
Tax-exempt............. 85,035 96,582 135,548 (11,547) (38,966) 9.29 9.42 9.61
---------- ---------- ---------- ---------- --------
Total investment secu-
rities................ 1,717,087 1,079,142 917,205 637,945 161,937 7.63 7.79 8.14
Investment securities
available for sale..... 911,910 774,364 556,701 137,546 217,663 5.75 5.36 5.97
Trading account securi-
ties................... 67,591 125,805 164,756 (58,214) (38,951) 7.56 7.95 6.00
Federal funds sold and
securities purchased
under agreements to
resell................. 58,122 141,914 95,560 (83,792) 46,354 6.10 4.15 3.06
Interest bearing depos-
its with other banks... 99 5,997 10,720 (5,898) (4,723) 8.28 8.47 8.29
---------- ---------- ---------- ---------- --------
Total earning assets... $8,844,369 $7,544,317 $6,693,968 $1,300,052 $850,349 8.28 7.84 8.11
========== ========== ========== ========== ========
INTEREST BEARING LIABIL-
ITIES:
Deposits:
Demand................. $ 811,249 $ 794,096 $ 660,757 $ 17,153 $133,339 2.55 2.41 2.45
Savings................ 1,913,093 1,808,936 1,706,197 104,157 102,739 3.91 3.13 2.88
Certificates of deposit
less than $100,000 and
other time deposits... 2,484,157 1,865,809 1,528,568 618,348 337,241 5.73 4.83 5.01
Certificates of deposit
of $100,000 or more... 778,807 628,926 479,307 149,881 149,619 5.95 4.65 4.51
---------- ---------- ---------- ---------- --------
Total interest bearing
deposits.............. 5,987,306 5,097,767 4,374,829 889,539 722,938 4.75 3.83 3.74
Federal funds purchased. 553,023 377,907 406,855 175,116 (28,948) 5.75 4.56 3.06
Securities sold under
agreements to
repurchase............. 256,303 243,227 240,474 13,076 2,753 5.00 3.54 2.80
Other short-term
borrowings............. 187,851 225,127 208,075 (37,276) 17,052 5.83 4.45 3.31
FHLB and other
borrowings............. 540,629 353,341 278,989 187,288 74,352 6.94 5.15 4.17
---------- ---------- ---------- ---------- --------
Total interest bearing
liabilities........... $7,525,112 $6,297,369 $5,509,222 $1,227,743 $788,147 5.01 3.96 3.66
========== ========== ========== ========== ======== ---- ---- ----
Net interest income/net
interest spread........ 3.27% 3.88% 4.45%
==== ==== ====
Net yield on earning as-
sets................... 4.01% 4.54% 5.10%
==== ==== ====
Net cost of funds....... 4.27% 3.30% 3.01%
==== ==== ====
32
Variance Attributed to
-------------------------------------------------------
Interest Income/Expense Variance 1995 1994
---------------------------- ------------------- --------------------------- --------------------------
1995 1994 1993 1995-1994 1994-1993 VOLUME RATE MIX Volume Rate Mix
-------- -------- -------- --------- --------- ------- -------- -------- ------- -------- -------
(in Thousands)
EARNING ASSETS:
Loans, net of unearned
income................. $539,712 $449,456 $421,202 $90,256 $28,254 $55,794 $ 30,655 $ 3,807 $39,836 $(10,581) $(1,001)
Investment securities:
Taxable................ 123,175 75,001 61,622 48,174 13,379 49,577 (845) (558) 15,838 (1,956) (503)
Tax-exempt............. 7,895 9,095 13,031 (1,200) (3,936) (1,087) (128) 15 (3,746) (267) 77
-------- -------- -------- ------- ------- ------- -------- -------- ------- -------- -------
Total investment secu-
rities................ 131,070 84,096 74,653 46,974 9,443 48,490 (973) (543) 12,092 (2,223) (426)
Investment securities
available for sale..... 52,447 41,510 33,245 10,937 8,265 7,373 3,026 538 12,998 (3,403) (1,330)
Trading account securi-
ties................... 5,111 9,996 9,885 (4,885) 111 (4,625) (483) 223 (2,337) 3,206 (758)
Federal funds sold and
securities purchased
under agreements to
resell................. 3,545 5,883 2,920 (2,338) 2,963 (3,474) 2,773 (1,637) 1,416 1,041 506
Interest bearing depos-
its with other banks... 8 508 889 (500) (381) (500) (11) 11 (392) 19 (8)
-------- -------- -------- ------- ------- ------- -------- -------- ------- -------- -------
Total earning assets... 731,893 591,449 542,794 140,444 48,655 103,058 34,987 2,399 63,613 (11,941) (3,017)
INTEREST BEARING LIABIL-
ITIES:
Deposits:
Demand................. 20,710 19,114 16,202 1,596 2,912 413 1,159 24 3,269 (297) (60)
Savings................ 74,814 56,658 49,222 18,156 7,436 3,262 14,083 811 2,964 4,218 254
Certificates of deposit
less than $100,000 and
other time deposits... 142,290 90,061 76,615 52,229 13,446 29,847 16,811 5,571 16,903 (2,832) (625)
Certificates of deposit
of $100,000 or more... 46,363 29,254 21,624 17,109 7,630 6,972 8,187 1,950 6,750 671 209
-------- -------- -------- ------- ------- ------- -------- -------- ------- -------- -------
Total interest bearing
deposits.............. 284,177 195,087 163,663 89,090 31,424 40,494 40,240 8,356 29,886 1,760 (222)
Federal funds purchased. 31,804 17,247 12,464 14,557 4,783 7,992 4,486 2,079 (887) 6,104 (434)
Securities sold under
agreements to
repurchase............. 12,819 8,599 6,741 4,220 1,858 462 3,566 192 77 1,761 20
Other short-term
borrowings............. 10,949 10,014 6,888 935 3,126 (1,658) 3,108 (515) 564 2,368 194
FHLB and other
borrowings............. 37,526 18,209 11,633 19,317 6,576 9,652 6,317 3,348 3,100 2,744 732
------- -------- -------- ------- ------- ------- -------- -------- ------- -------- -------
Total interest bearing
liabilities........... 377,275 249,156 201,389 128,119 47,767 56,942 57,717 13,460 32,740 14,737 290
-------- -------- -------- ------- ------- ------- -------- -------- ------- -------- -------
$354,618 $342,293 $341,405 $12,325 $ 888 $46,116 $(22,730) $(11,061) $30,873 $(26,678) $(3,307)
======== ======== ======== ======= ======= ======= ======== ======== ======= ======== =======
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 an 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.
Net loan charge-offs increased 27 percent in 1995 after decreasing 26
percent in 1994 and 57 percent in 1993. Increases in net charge-offs in
commercial, financial and agricultural loans and commercial real estate loans
constituted the majority of the total $2.2 million increase in net loan
charge-offs in 1995. The decrease in 1994 was due to decreased net charge-offs
in all loan categories with the exception of commercial real estate. The
decrease in net charge-offs in 1993 resulted from decreased net charge-offs in
commercial, financial and agricultural loans, commercial real estate loans,
and consumer installment loans. During 1995, net charge-offs of commercial,
financial and agricultural loans increased by $1.7 million and net charge-offs
of commercial real estate loans increased $500,000 while net charge-offs of
residential real estate mortgages decreased $200,000. With regard to the
Company's consumer installment loan portfolio, net charge-offs for credit card
receivables increased as a percentage of average volume from 2.42 percent in
1994 to 2.58 percent in 1995. Similarly, net charge-offs as a percentage of
loans in the Company's indirect consumer installment portfolio, consisting
primarily of new and used automobile loans, increased from 0.09 percent in
1994 to 0.12 percent in 1995.
34
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,
1995:
SUMMARY OF LOAN LOSS EXPERIENCE
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(in Thousands)
Loans, net of unearned
income:
Average outstanding
during the year....... $6,089,560 $5,417,095 $4,949,026 $4,332,066 $3,806,465
========== ========== ========== ========== ==========
Allowance for loan loss-
es:
Balance at beginning of
year.................. $ 108,337 $ 111,744 $ 85,434 $ 57,528 $ 44,366
Charge-offs:
Commercial, financial
and agricultural...... 4,545 3,876 5,338 6,381 11,646
Real estate -- con-
struction............. 228 65 645 315 4,064
Real estate -- mort-
gage:
Residential........... 333 462 856 1,329 1,129
Commercial............ 1,339 1,009 753 4,671 3,052
Consumer installment... 10,447 10,178 12,037 19,174 16,728
---------- ---------- ---------- ---------- ----------
Total............... 16,892 15,590 19,629 31,870 36,619
Recoveries:
Commercial, financial
and agricultural...... 2,343 3,381 4,196 2,309 1,245
Real estate -- con-
struction............. 155 50 50 304 56
Real estate -- mort-
gage:
Residential........... 200 131 325 332 288
Commercial............ 61 204 413 406 192
Consumer installment... 3,898 3,765 3,776 3,250 2,371
---------- ---------- ---------- ---------- ----------
Total............... 6,657 7,531 8,760 6,601 4,152
---------- ---------- ---------- ---------- ----------
Net charge-offs....... 10,235 8,059 10,869 25,269 32,467
Provision charged to in-
come................... 10,235 3,404 35,856 53,175 38,751
Additions due to acqui-
sitions................ -- 1,248 1,323 -- 6,878
---------- ---------- ---------- ---------- ----------
Balance at end of year.. $ 108,337 $ 108,337 $ 111,744 $ 85,434 $ 57,528
========== ========== ========== ========== ==========
Net charge-offs to aver-
age loans outstanding
during the year........ .17% .15% .22% .58% .85%
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
amount of the allowance remained unchanged at December 31, 1995 from December
31, 1994, representing 1.70 percent of outstanding loans compared to 1.86
percent at December 31, 1994 and 2.13 percent at December 31, 1993. As shown
in the following table, management determined that at December 31, 1995,
approximately 14.3 percent of the allowance for loan losses was related to
commercial, financial and agricultural loans, 26.3 percent was associated with
real estate loans and 19.7 percent was related to consumer installment loans.
Approximately 39.7 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. 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.
The amount of the allowance allocated to impaired loans by loan category is
presented in the table on page 38.
35
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31
---------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ---------------- ----------------
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.... $ 15,478 14.3% $ 14,084 13.0% $ 15,086 13.5% $13,755 16.1% $14,382 25.0%
Real estate--con-
struction........... 3,589 3.3 4,442 4.1 4,917 4.4 5,382 6.3 5,523 9.6
Real estate--mort-
gage:
Residential......... 9,594 8.9 5,417 5.0 3,352 3.0 2,990 3.5 3,624 6.3
Commercial.......... 15,256 14.1 13,217 12.2 16,538 14.8 9,141 10.7 6,616 11.5
Consumer installment. 21,378 19.7 20,475 18.9 18,102 16.2 20,163 23.6 19,732 34.3
Unallocated.......... 43,042 39.7 50,702 46.8 53,749 48.1 34,003 39.8 7,651 13.3
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
$108,337 100.0% $108,337 100.0% $111,744 100.0% $85,434 100.0% $57,528 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
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, 1995, were $22.1 million, an increase
of $2.4 million from year-end 1994. Nonperforming loans increased $200,000
from year-end 1994 to $12.9 million. The increase in nonperforming assets in
1995 was primarily due to the transfer of a large commercial real estate
credit previously on nonaccrual status to other real estate owned. During
1995, $7.5 million of loans were transferred to other real estate owned offset
by total sales of other real estate owned of $5.6 million. Of these sales,
$3.8 million were cash sales while $1.8 million represented loans originated
by the Subsidiary Banks to facilitate the sale of other real estate. During
1994, loans transferred to other real estate owned totaled $3.4 million, cash
sales were $6.8 million, and loans to facilitate the sale of other real estate
owned were $11.4 million.
Even though the stabilization in the commercial real estate market in the
Southeastern part of the country continued during 1995, management will
continue to monitor the Company's real estate and commercial loan portfolio
during 1996. Particular attention will be focused on those credits 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 $400,000 from year-end 1994 while foreclosed
real estate increased $2.2 million for the year. Loans past due 90 days or
more increased $1.3 million compared to the 1994 year-end level. Other
foreclosed or repossessed assets at year-end 1995 totaled $501,000. There were
no accruing loans greater than $500,000 past due 90 days or more at year-end
1995.
At December 31, 1995, nonperforming assets were 0.35 percent of loans
outstanding and foreclosed real estate held for sale compared to 0.34 percent
at year-end 1994. Nonaccrual loans and renegotiated loans as a percentage of
loans outstanding at year-end 1995 were 0.18 percent and 0.02 percent,
respectively.
36
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,
1995 and 1994.
NONPERFORMING ASSETS
December 31
-------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(in Thousands)
Loans on nonaccrual............... $11,808 $11,283 $12,238 $21,102 $29,215
Renegotiated loans................ 1,070 1,428 7,143 7,575 8,180
------- ------- ------- ------- -------
Total nonperforming loans....... 12,878 12,711 19,381 28,677 37,395
Other real estate................. 9,175 6,980 20,831 37,452 41,129
------- ------- ------- ------- -------
Total nonperforming assets...... $22,053 $19,691 $40,212 $66,129 $78,524
======= ======= ======= ======= =======
Loans 90 days past due............ $ 5,027 $ 3,745 $ 4,160 $ 3,604 $ 7,932
Total nonperforming loans as a
percentage of loans.............. .20% .22% .37% .61% .92%
Total nonperforming assets as a
percentage of loans
and ORE.......................... .35 .34 .76 1.39 1.92
Loans 90 days past due as a per-
centage of loans................. .08 .06 .08 .08 .20
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, 1995.
Details of nonaccrual loans at December 31, 1995 and 1994 appear below:
1995 1994
------- -------
(in Thousands)
Principal balance............................................... $11,808 $11,283
Interest that would have been recorded under original terms..... 1,374 1,358
Interest actually recorded...................................... 620 494
Details of loans with terms modified in troubled debt restructurings at
December 31, 1995 and 1994 appear below:
1995 1994
------- -------
(in Thousands)
Principal balance............................................... $ 1,070 $ 1,428
Interest that would have been recorded under original terms..... 116 111
Interest actually recorded...................................... 104 88
Effective January 1, 1995, the Company adopted 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 loans to be measured for impairment using one of three methods when
it is probable that all amounts, including principal and interest, will not be
collected in accordance with the contractual terms of the loan agreement. The
amount of impairment and any subsequent changes are recorded through the
provision for loan losses as an adjustment to the allowance for loan losses.
FAS114 applies to all loans, whether collateralized or uncollateralized,
except for large groups of smaller balance, homogeneous loans that are
collectively evaluated for impairment, loans that are measured at fair value
or at the lower of cost or fair value, leases, and debt securities.
37
Detailed in the table below are loans designated by the Company as impaired,
as defined by FAS114, at December 31, 1995, by loan category:
IMPAIRED LOANS
Nonaccrual Accruing
Impaired Loans Impaired Loans Total Total
----------------- ----------------- Impaired Related
Balance Allowance Balance Allowance Loans Allowance
------- --------- ------- --------- -------- ---------
(in Thousands)
Commercial, financial
and agricultural....... $1,295 $400 $ 9,472 $ 3,344 $10,767 $ 3,744
Real estate--construc-
tion................... 876 86 350 15 1,226 101
Real estate mortgage:
Residential............ -- -- 121 60 121 60
Commercial............. 1,260 374 25,489 7,054 26,749 7,428
Consumer installment.... -- -- -- -- -- --
------ ---- ------- ------- ------- -------
Total................. $3,431 $860 $35,432 $10,473 $38,863 $11,333
====== ==== ======= ======= ======= =======
As indicated above, $3.4 million of total nonaccrual loans of $11.8 million
were considered impaired. The balance in nonaccrual loans consisted of
residential mortgages, credit card receivables, and consumer installment
loans, primarily direct and indirect automobile loans, that meet the
definition of smaller balance, homogeneous loans which are excluded from the
scope of FAS114. Of the $35.4 million in accruing impaired loans, there were
loans totaling approximately $203,000 for which there was no related
allowance.
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 1995 increased 39 percent while noninterest income for 1994
decreased 17 percent.
NONINTEREST INCOME
Year Ended December 31 Percent Change
-------------------------- -------------------
1995 1994 1993 1995/1994 1994/1993
-------- ------- -------- --------- ---------
(in Thousands)
Service charges on deposit ac-
counts......................... $ 51,956 $45,025 $ 39,720 15.4% 13.4%
Trust fees...................... 15,938 16,111 16,648 (1.1) (3.2)
Trading account profits (losses)
and commissions................ 12,269 (2,533) 11,351 584.4 (122.3)
Investment securities gains,
net............................ 2,630 3,224 1,036 (18.4) 211.2
Loss on purchase of securities
from common trust fund......... -- (8,222) -- -- --
Credit card service charges and
fees........................... 7,816 7,208 6,785 8.4 6.2
Other........................... 31,503 27,075 30,125 16.4 (10.1)
-------- ------- --------
Total noninterest income....... $122,112 $87,888 $105,665 38.9 (16.8)
======== ======= ========
Fee income from service charges on deposit accounts increased 15 percent in
1995 following a 13 percent increase in 1994. 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 1995 and
1994 were further influenced by the increase in both the number of accounts
and balances outstanding in transaction deposit accounts.
Trading account profits and commissions on bond sales and trading activities
increased by $14.8 million, from a loss of $2.5 million in 1994 to a profit of
$12.3 million in 1995. In 1994, 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. This $13.9 million decrease was due in large
part to an $8.4 million decline during the first two quarters of 1994 in the
market value of speculative securities held in the Company's trading account,
primarily inverse floaters. All inverse floaters held in the trading account
were sold prior to the end of the second quarter of 1994.
38
For 1995, trading account profits related specifically to derivative
securities were approximately $800,000, consisting of $1.5 million of profits
related to collateralized mortgage obligations held in the trading account
offset by $700,000 of losses on non-CMO derivative securities, specifically
options and interest rate swaps, caps, and floors. It should be noted that
changes in the trading account profits and commissions in future years 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 interest rate contracts
held in the trading account and the composition of the trading account at
December 31, 1995, see page 24.
The $8.2 million loss on purchase of securities from common trust fund in
1994 resulted from the purchase of inverse floaters by the Company during the
second quarter of 1994 from a common trust fund managed by the trust division
of the Company's lead bank. Due to the increase in the general level of
interest rates during the first six months of 1994, the common trust fund
customers faced significant losses on inverse floaters held in the portfolio.
In 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, its lead 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, 1995, these
securities were classified as held-to-maturity in the Company's investment
securities portfolio at $26.1 million, which represents its cost of $27.0
million less subsequent principal payments received. No other "high risk"
derivatives are held by the Company in its held-to-maturity and available-for-
sale portfolios at December 31, 1994 or 1995, other than these inverse
floaters held by the parent company.
Credit card service charge and fee income increased eight percent in 1995
after increasing six percent in 1994. Increases in merchants' discounts and in
the annual credit card fees accounted for the increase.
Recurring items of other noninterest income increased $27.0 million in 1995
following a decrease of $10.0 million in 1994. The increase in 1995 resulted
primarily from the lack of trading account losses experienced in 1994 along
with increases in service charge income.
Nonrecurring items of other noninterest income, excluding the loss on
purchase of securities from common trust fund, totaled $3.6 million in 1995
and $4.6 million for 1994. Nonrecurring items of noninterest income include
gains on sales of investment portfolio securities, gains on the sale of fixed
assets and other real estate owned, and gains on loan settlements.
Nonrecurring items represented three percent of overall noninterest income in
1995, five percent in 1994, and four percent in 1993. The net gains on sales
of investment securities in 1995 were $2.6 million compared to $3.2 million in
1994. 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 13 percent of the total
nonrecurring income for 1995 compared to 16 percent in 1994 and 32 percent in
1993.
NONINTEREST EXPENSE
Noninterest expense for 1995 increased eight percent following an increase
of two percent in 1994. Total salaries, benefits and commissions increased 8
percent from 1994 with regular incentive bonuses increasing 23 percent and
sales commission expense increasing 59 percent. Salaries alone increased eight
percent during 1995 and five percent in 1994 due to normal increases relating
to additions to staff and merit increases, while the increase in 1995 also
reflected the impact of staff additions resulting from the Company's
acquisition of First Heights in October, 1994. During 1995, other personnel
expense, primarily employee benefits, increased less than one percent after
decreasing six percent in 1994. 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.
39
NONINTEREST EXPENSE
Year Ended December 31 Percent Change
-------------------------- -------------------
1995 1994 1993 1995/1994 1994/1993
-------- -------- -------- --------- ---------
(in Thousands)
Salaries.................... $123,295 $113,679 $108,352 8.5% 4.9%
Commissions................. 3,989 2,501 3,812 59.5 (34.4)
Other personnel expense..... 21,100 20,939 22,295 0.8 (6.1)
Net occupancy expense....... 22,198 21,833 19,757 1.7 10.5
Equipment expense........... 20,334 20,341 18,393 -- 10.6
Bank travel and entertain-
ment....................... 7,150 6,787 6,601 5.3 2.8
Other real estate expenses.. 1,060 771 3,302 37.5 (76.7)
Marketing................... 6,519 6,820 5,860 (4.4) 16.4
Professional services....... 23,129 16,558 17,414 39.7 (4.9)
Supplies.................... 8,164 7,645 7,124 6.8 7.3
FDIC insurance.............. 9,533 14,088 12,393 (32.3) 13.7
Other....................... 43,540 35,597 37,904 22.3 (6.1)
-------- -------- --------
Total noninterest expense. $290,011 $267,559 $263,207 8.4 1.7
======== ======== ========
Net occupancy expense increased by 2 percent in 1995 following an 11 percent
increase in 1994. These increases in occupancy expense were due principally to
bank acquisitions, opening of new branches, and normal renovation of existing
properties. Equipment expense remained unchanged in 1995 after increasing 11
percent in 1994 due to equipment replacements and upgrades necessary to
support increased business growth.
Other noninterest expense, as reflected in the "Consolidated Statements of
Income", increased by 21 percent compared to a decrease of 5 percent in 1994.
Professional service expenses increased 40 percent in 1995 as a result of
increased acquisition activities and expenses incurred in connection with a
proxy contest initiated by three directors of the Company during the first
quarter of 1995. Bank travel and entertainment expenses increased five percent
in 1995, primarily due to acquisition activity. The amount the Subsidiary
Banks paid for federal deposit insurance decreased $4.6 million in 1995 after
increasing $1.7 million in 1994. The decrease in 1995 was due to a substantial
decrease in the statutory premium rates effective June 1, 1995, resulting in a
$3.6 million refund of deposit insurance premiums received during the third
quarter of the year and a substantial reduction in deposit insurance premiums
during the last seven months of the year. 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. Due to the fact that in the future insurance assessment
rates will be set as a function of the funding level of the BIF, it is not
possible to estimate the amount of FDIC insurance expense that will be paid by
the Company in future periods.
During 1995, Congress considered various proposals for a one-time special
assessment to be charged on all SAIF deposits to fully capitalize the SAIF at
1.25 percent of insured deposits. The proposed amount of the special
assessment has been as high as $0.85 per $100 of SAIF deposits. Assuming that
a special assessment were applied at the $0.85 rate based upon SAIF insured
deposits at December 31, 1995, the Company would incur additional deposit
insurance premium expense of approximately $8.4 million which would be charged
against current period income. The timing and amount of such an assessment
cannot be accurately predicted at this time.
INCOME TAXES
Income tax expense increased $8.8 million, or 17 percent, to $61.3 million
for the year ended December 31, 1995. The effective tax rate as a percentage
of pretax income was 36 percent in 1995 and 34 percent in 1994 and 1993. The
statutory federal rate was 35 percent during 1995, 1994, and 1993. For further
information concerning the provision for income taxes, refer to Note 13,
Income Taxes, of the "Notes to Consolidated Financial Statements".
40
OTHER ACCOUNTING ISSUES
During 1995, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Statement No. 123, Accounting for Stock-Based
--------------------------
Compensation, ("FAS123"). FAS123 encourages, but does not require, companies
- ------------
to account for stock compensation awards based on their fair value at the date
of grant, with the resulting compensation cost reflected as expense in the
statement of operations. FAS123 requires companies that choose not to reflect
the compensation cost in the statement of operations to provide footnote
disclosure of the pro forma effect of stock compensation awards on net income
and earnings per share. FAS123 is effective for fiscal years beginning after
December 15, 1995, with earlier adoption permitted. The Company chose not to
adopt FAS123 prior to its effective date and will adopt FAS123 in the first
quarter of 1996. Presently, the Company is unable to quantify the impact that
adoption of FAS123 will have on the consolidated financial statements of the
Company and whether it will choose to reflect stock compensation costs in its
statement of earnings or provide pro forma disclosure of the impact of such
costs.
In 1995, the FASB issued Financial Accounting Statement No. 121, Accounting
----------
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
- -----------------------------------------------------------------------
Disposed Of ("FAS121"). FAS121 prescribes the accounting for the impairment of
- -----------
long-lived assets, such as property, plant, and equipment; identifiable
intangibles, including patents and trademarks; and goodwill related to those
assets. FAS121 specifies when assets should be reviewed for impairment, how to
determine whether an asset or group of assets is impaired, how to measure an
impairment loss, and what financial statement disclosures are necessary.
FAS121 is effective for fiscal years beginning after December 15, 1995, with
earlier adoption permitted. The Company does not believe that the adoption of
FAS121 will have a material impact on its financial position or its results of
operations.
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 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, 1995 and 1994.............. 44
Consolidated Statements of Income for the years ended December 31, 1995,
1994 and 1993............................................................ 45
Consolidated Statements of Shareholders' Equity for the years ended Decem-
ber 31, 1995, 1994 and 1993.............................................. 46
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993...................................................... 47
Summary of Significant Accounting Policies -- December 31, 1995, 1994 and
1993..................................................................... 48
Notes to Consolidated Financial Statements -- December 31, 1995, 1994 and
1993..................................................................... 52
Quarterly Results (Unaudited)............................................. 73
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, 1995 and 1994, 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, 1995.
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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in the Summary of Significant Accounting Policies in 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 the Summary
---------------------------
of Significant Accounting Policies, 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, 1996
43
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
-----------------------
1995 1994
----------- ----------
(in Thousands)
ASSETS
Cash and due from banks............................... $ 530,941 $ 490,494
Interest bearing deposits with other banks............ 99 99
Investment securities (market value of $736,670 and
$1,813,671 for 1995 and 1994, respectively):
Taxable............................................. 642,452 1,775,904
Tax-exempt.......................................... 80,187 89,314
----------- ----------
Total investment securities....................... 722,639 1,865,218
Investment securities available for sale (unrealized
holding gain of $20,292 for 1995; unrealized holding
loss of $15,972 for 1994)............................ 2,017,783 711,680
Trading account securities............................ 101,916 58,012
Federal funds sold and securities purchased under
agreements to resell................................. 250,039 46,535
Loans................................................. 6,361,358 5,829,534
Less: Unearned income................................. (311) (1,226)
Allowance for loan losses........................... (108,337) (108,337)
----------- ----------
Net loans....................................... 6,252,710 5,719,971
Premises and equipment, net........................... 214,010 206,477
Other assets.......................................... 172,110 166,651
----------- ----------
TOTAL ASSETS.................................... $10,262,247 $9,265,137
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing................................. $ 1,400,819 $1,405,377
Interest bearing.................................... 6,328,293 5,783,536
----------- ----------
Total deposits.................................... 7,729,112 7,188,913
Federal funds purchased............................... 776,308 484,190
Securities sold under agreements to repurchase........ 279,725 348,418
Other short-term borrowings........................... 115,728 104,598
Accrued expenses and other liabilities................ 69,854 39,429
FHLB and other borrowings............................. 584,852 487,916
----------- ----------
Total liabilities................................. 9,555,579 8,653,464
Shareholders' equity:
Common stock of $2 par value:
Authorized--100,000,000 shares;
Issued--38,152,426 shares in 1995 and 37,922,435
shares in 1994................................... 76,305 75,845
Loans to finance stock purchases.................... (5,636) (5,914)
Surplus............................................. 44,725 41,547
Net unrealized holding gain (loss) on available-for-
sale securities.................................... 11,812 (11,686)
Retained earnings................................... 579,462 511,881
----------- ----------
Total shareholders' equity........................ 706,668 611,673
Commitments (Notes 6 and 7)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $10,262,247 $9,265,137
=========== ==========
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
---------------------------------------
1995 1994 1993
------------ ------------ ------------
(in Thousands Except Per Share Data)
INTEREST INCOME:
Interest and fees on loans........... $ 537,834 $ 447,560 $ 419,014
Interest on investment securities:
Taxable............................ 123,175 75,001 61,622
Tax-exempt......................... 4,871 5,709 8,345
------------ ------------ ------------
Total interest on investment se-
curities........................ 128,046 80,710 69,967
Interest on investment securities
available for sale.................. 52,440 41,320 32,968
Interest on trading account securi-
ties................................ 5,057 9,943 9,777
Interest on federal funds sold and
securities purchased under agree-
ments to resell..................... 3,545 5,883 2,920
Interest on interest bearing deposits
with other banks.................... 8 508 889
------------ ------------ ------------
TOTAL INTEREST INCOME............ 726,930 585,924 535,535
INTEREST EXPENSE:
Interest on deposits................. 284,177 195,087 163,663
Interest on federal funds purchased
and securities sold under agreements
to repurchase....................... 44,623 25,846 19,205
Interest on other short-term
borrowings.......................... 10,949 10,014 6,888
Interest on FHLB and other
borrowings.......................... 37,526 18,209 11,633
------------ ------------ ------------
TOTAL INTEREST EXPENSE........... 377,275 249,156 201,389
------------ ------------ ------------
Net interest income.............. 349,655 336,768 334,146
Provision for loan losses.............. 10,235 3,404 35,856
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVI-
SION FOR LOAN LOSSES............ 339,420 333,364 298,290
NONINTEREST INCOME:
Service charges on deposit accounts.. 51,956 45,025 39,720
Trust fees........................... 15,938 16,111 16,648
Trading account profits (losses) and
commissions......................... 12,269 (2,533) 11,351
Investment securities gains, net..... 2,630 3,224 1,036
Loss on purchase of securities from
common trust fund................... -- (8,222) --
Credit card service charges and fees. 7,816 7,208 6,785
Other................................ 31,503 27,075 30,125
------------ ------------ ------------
TOTAL NONINTEREST INCOME......... 122,112 87,888 105,665
------------ ------------ ------------
NONINTEREST EXPENSE:
Salaries, benefits and commissions... 148,384 137,119 134,459
Net occupancy expense................ 22,198 21,833 19,757
Equipment expense.................... 20,334 20,341 18,393
FDIC insurance....................... 9,533 14,088 12,393
Other................................ 89,562 74,178 78,205
------------ ------------ ------------
TOTAL NONINTEREST EXPENSE........ 290,011 267,559 263,207
------------ ------------ ------------
Net income before income tax ex-
pense........................... 171,521 153,693 140,748
Income tax expense..................... 61,256 52,447 48,069
------------ ------------ ------------
NET INCOME....................... $ 110,265 $ 101,246 $ 92,679
============ ============ ============
Net income per common share............ $ 2.88 $ 2.65 $ 2.39
Weighted average common shares out-
standing.............................. 38,340 38,147 38,137
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, 1995, 1994 AND 1993
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,
1992................... $23,110 $75,619 $(3,119) $37,784 $384,875 $ -- $ -- $518,269
Net income -- 1993..... -- -- -- 92,679 -- -- 92,679
Cash common dividends
declared ($.76 per
share)................ -- -- -- -- (27,502) -- -- (27,502)
Cash preferred
dividends declared
($5.98 per share)..... -- -- -- -- (1,531) -- -- (1,531)
Cash dividends declared
by pooled banks prior
to acquisition........ -- -- -- -- (524) -- -- (524)
Exercise of stock
options............... -- 135 -- 583 -- -- -- 718
Purchase of treasury
stock................. -- -- -- -- -- (410) -- (410)
Treasury shares issued
for options........... -- -- -- -- (235) 410 -- 175
Loans to finance stock
purchases............. -- -- (3,457) -- -- -- -- (3,457)
Issuance of common
stock................. -- -- -- 2,368 -- -- -- 2,368
Retirement of preferred
stock ................ (23,110) -- -- -- (2,855) -- -- (25,965)
Effect of adoption of
FASB Statement No.
115 -- Accounting for
Certain Investments in
Debt and Equity
Securities............ -- -- -- -- -- -- 6,767 6,767
------- ------- ------- ------- -------- ----- ------- --------
Balance December 31,
1993................... -- 75,754 (6,576) 40,735 444,907 -- 6,767 561,587
Net income -- 1994..... -- -- -- -- 101,246 -- -- 101,246
Cash common dividends
declared ($.92 per
share)................ -- -- -- -- (33,898) -- -- (33,898)
Cash dividends declared
by pooled banks prior
to acquisition........ -- -- -- -- (366) -- -- (366)
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.............. -- -- -- -- -- -- (18,453) (18,453)
------- ------- ------- ------- -------- ----- ------- --------
Balance December 31,
1994................... -- 75,845 (5,914) 41,547 511,881 -- (11,686) 611,673
NET INCOME -- 1995..... -- -- -- -- 110,265 -- -- 110,265
CASH COMMON DIVIDENDS
DECLARED ($1.12 PER
SHARE)................ -- -- -- -- (42,684) -- -- (42,684)
EXERCISE OF STOCK
OPTIONS............... -- 459 -- 2,569 -- -- -- 3,028
TAX BENEFIT OF STOCK
OPTIONS EXERCISED..... -- -- -- 610 -- -- -- 610
LOANS TO FINANCE STOCK
PURCHASES, NET OF
REPAYMENTS............ -- -- 278 -- -- -- -- 278
ISSUANCE OF COMMON
STOCK................. -- 1 -- (1) -- -- -- --
CHANGE IN UNREALIZED
GAIN/LOSS ON
SECURITIES AVAILABLE
FOR SALE.............. -- -- -- -- -- -- 23,498 23,498
------- ------- ------- ------- -------- ----- ------- --------
BALANCE DECEMBER 31,
1995................... $ -- $76,305 $(5,636) $44,725 $579,462 $ -- $11,812 $706,668
======= ======= ======= ======= ======== ===== ======= ========
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
---------------------------------
1995 1994 1993
---------- ---------- ---------
(in Thousands)
OPERATING ACTIVITIES:
Net income................................. $ 110,265 $ 101,246 $ 92,679
Adjustments to reconcile net income to cash
provided (used) by operations:
Depreciation and amortization.............. 30,721 29,011 26,974
Accretion of discount and loan fees........ (16,522) (12,524) (9,081)
Provision for loan losses.................. 10,235 3,404 35,856
Net change in trading account securities... (43,904) 203,466 (133,445)
Net change in mortgage loans available for
sale...................................... 2,462 2,272 (17,346)
Deferred tax expense (benefit)............. 2,637 1,698 (7,208)
Net gain on sale of investment securities.. (2,630) (3,224) (1,036)
Loss on purchase of securities from common
trust fund................................ -- 8,222 --
Net (gain) loss on sale of premises and
equipment................................. 175 (164) (37)
Net gain on sale of other real estate
owned..................................... (280) (75) (980)
Provision for losses on other real estate
owned, net of recoveries.................. 378 (203) 1,602
(Increase) decrease in interest receivable. (1,682) (19,635) 8,214
(Increase) decrease in other assets........ (7,512) 4,225 1,916
Increase (decrease) in interest payable.... 17,711 8,549 (3,814)
Increase (decrease) in taxes payable....... (267) 1,985 103
Increase (decrease) in other payables...... (3,744) (4,664) 5,109
---------- ---------- ---------
Net cash provided (used) by operating ac-
tivities................................. 98,043 323,589 (494)
INVESTING ACTIVITIES:
Proceeds from sales of investment securi-
ties...................................... -- 698 48,846
Proceeds from maturities/calls of invest-
ment securities........................... 361,091 302,203 451,602
Purchases of investment securities......... (4,302) (1,315,882) (58,826)
Proceeds from sales of investment securi-
ties available for sale................... 685,708 239,767 57,347
Proceeds from maturities/calls of invest-
ment securities available for sale........ 150,062 110,752 251,826
Purchases of investment securities avail-
able for sale............................. (1,311,595) (655,364) (284,748)
Net (increase) decrease in federal funds
sold and securities purchased under agree-
ments to resell........................... (203,504) 250,779 (76,611)
Net increase in loan portfolio............. (545,908) (449,947) (390,344)
Net cash received (paid) in acquisitions of
banks..................................... -- 811,649 (16,942)
Purchases of premises and equipment........ (25,967) (27,795) (40,125)
Proceeds from sales of premises and equip-
ment...................................... 757 1,167 2,143
Net decrease in interest bearing deposits
with other banks.......................... -- 10,376 1,001
Proceeds from sales of other real estate
owned..................................... 3,842 6,843 16,253
---------- ---------- ---------
Net cash used by investing activities..... (889,816) (714,754) (38,578)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW ac-
counts and savings accounts............... 341,118 101,825 62,514
Net increase (decrease) in time deposits... 199,081 222,942 (4,107)
Net increase (decrease) in federal funds
purchased................................. 292,118 65,386 (130,901)
Net increase (decrease) in securities sold
under agreements to repurchase............ (68,693) 139,679 (25,931)
Net increase (decrease) in short-term
borrowings................................ 11,130 (66,484) 38,681
Proceeds from FHLB advances and other
borrowings................................ 175,000 159,619 126,126
Repayment of FHLB advances and other
borrowings................................ (78,156) (179) (7,428)
Purchase of treasury shares................ -- (14) (410)
Common dividends paid...................... (42,684) (33,898) (27,502)
Preferred dividends paid................... -- -- (1,531)
Common dividends paid by pooled banks prior
to acquisition............................ -- (366) (524)
Redemption of preferred stock.............. -- -- (25,965)
Repayment of loans to finance stock pur-
chases.................................... 2,343 747 --
Proceeds from issuance of common stock..... -- 296 2,368
Proceeds from exercise of stock options.... 963 586 552
---------- ---------- ---------
Net cash provided by financing activities. 832,220 590,139 5,942
---------- ---------- ---------
Net increase (decrease) in cash and due from
banks...................................... 40,447 198,974 (33,130)
Cash and due from banks at beginning of the
year....................................... 490,494 291,520 324,650
---------- ---------- ---------
Cash and due from banks at end of the year.. $ 530,941 $ 490,494 $ 291,520
========== ========== =========
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, 1995, 1994 AND 1993
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 1995 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 Bancorporation of Texas (and its wholly-owned
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.
NATURE OF OPERATIONS
The Company operates 185 branches in 89 cities in Alabama, Texas, and
Florida. The Company's branches in Alabama are located throughout the state
while its Florida branches are concentrated in the Jacksonville area and in
the Florida panhandle. In Texas, the Company's branches are located in the
state's three largest metropolitan areas of Houston, Dallas, and San Antonio.
The Company's primary source of income is interest income on loans made to
individuals, small businesses, and large corporations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period, the most significant of which relates to the allowance for
loan losses. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES
The Subsidiary Banks are defendants in legal proceedings arising in the
ordinary course of business. Some of these proceedings which relate to
lending, collections, servicing, investment, trust and other activities by
such subsidiaries seek substantial sums as damages. Among the actions which
are pending against the Subsidiary Banks are actions filed as class actions in
the State of Alabama. The actions are similar to others that have been brought
in recent years in Alabama against financial institutions in that they seek
punitive damages in transactions involving relatively small amounts of actual
damages. In recent years, juries in certain Alabama state courts have rendered
large punitive damage awards in such cases.
It may take a number of years to finally resolve some of these pending legal
proceedings due to their complexity and other reasons. It is not possible to
determine with any certainty at this time the potential exposure from the
proceedings. However, based upon the advice of legal counsel, management is of
the opinion that the ultimate resolution of these legal proceedings will not
have a material adverse effect on the Company's financial condition or results
of operations.
During 1995, Congress considered various proposals for a one-time special
assessment to be charged on all SAIF deposits to fully capitalize the SAIF at
1.25 percent of insured deposits. The proposed amount of the
48
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
special assessment has been as high as $0.85 per $100 of SAIF deposits.
Assuming that a special assessment were applied at the $0.85 rate based upon
SAIF insured deposits at December 31, 1995, the Company would incur additional
deposit insurance premium expense of approximately $8.4 million which would be
charged against current period income. The timing and amount of such an
assessment cannot be accurately predicted at this time.
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. Increases and
decreases in the net unrealized gain/loss on the portfolio of securities
available for sale are reflected as adjustments to the carrying value of the
portfolio and, for the tax-effected amounts, as adjustments to the separate
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 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.
49
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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/or 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.
Effective January 1, 1995, the Company adopted 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 loans to be measured for impairment using one of three methods when
it is probable that all amounts, including principal and interest, will not be
collected in accordance with the contractual terms of the loan agreement. The
amount of impairment and any subsequent changes are recorded through the
provision for loan losses as an adjustment to the allowance for loan losses.
FAS114 applies to all loans, whether collateralized or uncollateralized,
except for large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, loans that are measured at fair value
or at the lower of cost or fair value, leases, and debt securities. In
addition, it applies to all loans that are restructured in a troubled debt
restructuring involving a modification of terms. However, such loans
restructured prior to the effective date of FAS114 that are performing in
accordance with their restructured terms are accounted for in accordance with
Financial Accounting Statement No. 15, Accounting by Debtors and Creditors for
---------------------------------------
Troubled Debt Restructurings. In evaluating impairment, the Company identified
- ----------------------------
residential mortgages, credit card receivables, and consumer installment
loans, primarily direct and indirect automobile loans, as smaller balance
homogeneous loans that are excluded from the scope of FAS114.
Generally, the Company evaluates a loan for impairment in accordance with
FAS114 when a portion of the loan is internally risk rated as substandard or
doubtful. All nonaccrual loans not meeting the definition of smaller balance
homogeneous loans are considered impaired. As required by FAS114, the Company
generally measures impairment based upon the present value of the loan's
expected future cash flows, except where foreclosure or liquidation is
probable or when the primary source of repayment is provided by real estate
collateral. In these circumstances, impairment is measured based upon the fair
value of the collateral. In addition, in certain rare circumstances,
impairment may be based on the loan's observable market value. Impairment with
regard to substantially all of the Company's impaired loans has been measured
based on the fair value of the underlying collateral.
The Company's policy for recognizing interest income on impaired loans is
the same as the policy applied to nonaccrual loans prior to the adoption of
FAS114. Adopting FAS114 did not affect the Company's charge-off policy. It is
generally the Company's policy to charge off a portion of a loan if the
recoverability of principal is in doubt. The adoption of FAS114 did not have a
material effect on the Company's financial position or results of operations.
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.
50
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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.
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 TAXES
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"). Under the asset and liability method of 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.
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.
51
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(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, 1995 and 1994 were approximately $83.4 million and $86.5 million,
respectively.
(2) CASH FLOWS
The Company paid approximately $359.6 million, $240.6 million and $205.2
million in interest on deposits and other liabilities during 1995, 1994 and
1993, respectively.
December 31
-----------------------------
1995 1994 1993
-------- ---------- ---------
(in Thousands)
SCHEDULE OF NONCASH INVESTING AND FINANCING AC-
TIVITIES:
Transfers of loans to other real estate owned. $ 7,522 $ 3,427 $ 8,112
Loans to facilitate the sale of other real es-
tate owned................................... 1,756 11,375 8,692
Transfer of securities to investment securi-
ties available for sale...................... 827,543 -- 92,282
Transfer of securities available for sale to
held-to-maturity securities.................. 33,257 224,971 --
Tax benefit realized upon exercise of stock
options...................................... 610 27 --
Loans to finance stock purchases.............. 2,065 85 3,457
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, 1995 and 1994 were as
follows:
1995 1994
----------------- ---------------------
CARRYING MARKET Carrying Market
AMOUNT VALUE Amount Value
-------- -------- ---------- ----------
(in Thousands)
Investment securities:
Debt securities:
U.S. Treasury and other U.S. Gov-
ernment agencies and corporations. $ 525 $ 535 $ 114,169 $ 112,568
Mortgage-backed pass-through secu-
rities............................ 335,591 345,301 466,733 460,171
CMOs and other mortgage derivative
products.......................... 247,399 248,254 1,040,860 999,465
States and political subdivisions.. 70,710 74,195 78,472 77,881
Corporate.......................... 67,179 67,123 162,306 160,662
Foreign............................ 770 767 770 770
Other.............................. 465 495 424 445
Equity securities.................... -- -- 1,484 1,709
-------- -------- ---------- ----------
Total............................ $722,639 $736,670 $1,865,218 $1,813,671
======== ======== ========== ==========
52
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
1995 1994
--------------------- ------------------
MARKET AMORTIZED Market Amortized
VALUE COST Value Cost
---------- ---------- -------- ---------
(in Thousands)
Investment securities available for
sale:
Debt securities:
U.S. Treasury and other U.S. Gov-
ernment agencies and corpora-
tions............................ $ 432,492 $ 426,926 $638,429 $654,115
Mortgage-backed pass-through secu-
rities........................... 228,987 230,305 6,479 6,769
CMOs and other mortgage derivative
products......................... 1,183,938 1,169,978 19,200 19,196
Corporate......................... 132,627 130,543 8,600 8,600
Other............................. 5,063 5,063 5,687 5,687
Equity securities................... 34,676 34,676 33,285 33,285
---------- ---------- -------- --------
Total........................... $2,017,783 $1,997,491 $711,680 $727,652
========== ========== ======== ========
Securities with principal amounts of approximately $1,071.1 million and
$890.7 million at December 31, 1995 and 1994, 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 1995
were $17.6 million and $3.6 million, respectively. For investment securities
available for sale, unrealized gains and unrealized losses at year-end 1995
were $24.0 million and $3.7 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, 1995 and 1994,
are detailed in the following table:
1995 1994
--------------------- ---------------------
UNREALIZED UNREALIZED Unrealized Unrealized
GAINS LOSSES Gains Losses
---------- ---------- ---------- ----------
(in Thousands)
Investment securities:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and corpo-
rations....................... $ 10 $ -- $1,271 $ 2,872
Mortgage-backed pass-through
securities.................... 9,857 147 3,133 9,695
CMOs and other mortgage deriva-
tive products................. 3,900 3,045 433 41,828
States and political subdivi-
sions......................... 3,504 19 899 1,490
Corporate...................... 316 372 637 2,281
Foreign........................ -- 3 -- --
Other.......................... 30 -- 21 --
Equity securities................ -- -- 225 --
------- ------ ------ -------
Total........................ $17,617 $3,586 $6,619 $58,166
======= ====== ====== =======
Investment securities available for
sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and corpo-
rations....................... $ 5,690 $ 124 $ 224 $15,910
Mortgage-backed pass-through
securities.................... 1,295 2,613 -- 290
CMOs and other mortgage deriva-
tive products................. 14,925 965 4 --
Corporate...................... 2,084 -- -- --
Other.......................... -- -- -- --
Equity securities................ -- -- -- --
------- ------ ------ -------
Total........................ $23,994 $3,702 $ 228 $16,200
======= ====== ====== =======
53
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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.
1995
---------------------
CARRYING MARKET
AMOUNT VALUE
---------- ----------
(IN THOUSANDS)
Investment securities:
Maturing within one year................................ $ 39,297 $ 39,425
Maturing after one but within five years................ 39,301 39,579
Maturing after five but within ten years................ 29,408 30,827
Maturing after ten years................................ 31,643 33,284
---------- ----------
139,649 143,115
Mortgage-backed pass-through securities and CMOs........ 582,990 593,555
---------- ----------
Total................................................. $ 722,639 $ 736,670
========== ==========
MARKET AMORTIZED
VALUE COST
---------- ----------
(IN THOUSANDS)
Investment securities available for sale:
Maturing within one year................................ $ 184,465 $ 184,307
Maturing after one but within five years................ 409,176 403,224
Maturing after five but within ten years................ 8,101 6,561
Maturing after ten years................................ 3,116 3,116
---------- ----------
604,858 597,208
Mortgage-backed pass-through securities and CMOs........ 1,412,925 1,400,283
---------- ----------
Total................................................. $2,017,783 $1,997,491
========== ==========
There were no sales of held-to-maturity securities in 1995. Proceeds from
sales of investment securities classified as held-to-maturity were $700,000 in
1994 and $48.8 million in 1993, with gross gains of $300,000 realized on such
sales in 1993 and no gross losses realized during the last three years. During
1995, gross gains of $1.2 million were realized on $32.2 million of mortgage-
backed pass-through securities in the held-to-maturity portfolio, which were
classified as maturities in accordance with FAS115. Proceeds from sales of
available-for-sale investment securities were $685.7 million in 1995, $239.8
million in 1994, and $57.3 million in 1993. Gross gains of $2.6 million in
1995, $3.2 million in 1994 and $700,000 in 1993, and gross losses of $1.2
million in 1995 and $40,000 in 1994, were realized on such sales.
On December 31, 1995, the Company adopted the Financial Accounting Standards
Board's Special Report, A Guide to Implementation of Statement 115 on
---------------------------------------------
Accounting for Certain Investments in Debt and Equity Securities ("Special
- ----------------------------------------------------------------
Report"). The Special Report allowed a company the one-time opportunity to
reassess the appropriateness of its investment securities classifications and
to transfer securities from the held-to-maturity portfolio to the available-
for-sale portfolio without calling into question the company's intent to hold
other debt securities to maturity. Upon adoption, the Company transferred
held-to-maturity investment securities totaling $827.5 million to its
available-for-sale portfolio, and $33.3 million of available-for-sale
securities to its held-to-maturity portfolio. Generally, individual holdings
with greater than $10 million par were transferred to the available-for-sale
portfolio in order to increase liquidity and portfolio management
capabilities, with smaller positions transferred to the held-to-maturity
portfolio.
54
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
During 1994, $225.0 million of available-for-sale securities were
transferred to the held-to-maturity portfolio. 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. No securities were
transferred to the trading portfolio during either 1995 or 1994.
(4) LOANS AND ALLOWANCES FOR LOAN LOSSES AND LOSSES ON OTHER REAL ESTATE
At December 31, 1995 and 1994, the composition of the loan portfolio was as
follows:
1995 1994
---------- ----------
(in Thousands)
Commercial, financial and agricultural................... $1,315,746 $1,187,594
Real estate -- construction.............................. 426,207 378,121
Real estate -- mortgage.................................. 3,303,089 3,052,798
Consumer installment..................................... 1,316,316 1,211,021
---------- ----------
$6,361,358 $5,829,534
========== ==========
During 1995 and 1994, 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,
1995 and 1994, amounted to $28.1 million and $75.8 million, respectively. The
change from December 31, 1994, to December 31, 1995, reflects payments
amounting to $56.5 million, advances of $8.6 million and other additions of
$200,000. 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, 1995, 1994 and 1993 follows:
1995 1994 1993
-------- -------- --------
(in Thousands)
Balance at beginning of year...................... $108,337 $111,744 $ 85,434
Add:Provision charged to income................... 10,235 3,404 35,856
Additions due to acquisitions.................. -- 1,248 1,323
Deduct:Loans charged off.......................... 16,892 15,590 19,629
Loan recoveries................................ (6,657) (7,531) (8,760)
-------- -------- --------
Net charge-offs............................. 10,235 8,059 10,869
-------- -------- --------
Balance at end of year............................ $108,337 $108,337 $111,744
======== ======== ========
At December 31, 1995, the Company's recorded investment in loans considered
to be impaired under FAS114 was $38.9 million, of which $3.4 million were on
nonaccrual status. Included in this amount is $38.7 million of impaired loans
for which the related allowance is $11.3 million and $200,000 of loans for
which there is no related allowance. The average recorded investment in
impaired loans during the year ended December 31, 1995, was approximately
$42.7 million. For the year ended December 31, 1995, the Company recognized
interest income on impaired loans of approximately $3.3 million during the
period those loans were considered impaired.
55
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Details of nonaccrual loans at December 31, 1995 and 1994 appear below:
1995 1994
------- -------
(in Thousands)
Principal balance............................................... $11,808 $11,283
Interest that would have been recorded under original terms..... 1,374 1,358
Interest actually recorded...................................... 620 494
Details of loans with terms modified in troubled debt restructurings at
December 31, 1995 and 1994 appear below:
1995 1994
------- -------
(in Thousands)
Principal balance............................................... $ 1,070 $ 1,428
Interest that would have been recorded under original terms..... 116 111
Interest actually recorded...................................... 104 88
A summary of the transactions in the allowance for losses on other real
estate for the years ended December 31, 1995, 1994 and 1993, follows:
1995 1994 1993
------- ------- -------
(in Thousands)
Balance at beginning of year......................... $ 1,700 $ 3,129 $ 5,093
Provision charged to income.......................... 378 381 1,602
Charge-offs.......................................... (536) (1,226) (3,566)
Recoveries........................................... -- (584) --
------- ------- -------
Balance at end of year............................... $ 1,542 $ 1,700 $ 3,129
======= ======= =======
Other real estate, net of the allowance for losses, totaled $9.2 million at
December 31, 1995, and $7.0 million at December 31, 1994, and is reported in
other assets in the "Consolidated Balance Sheets".
(5) FHLB AND OTHER BORROWINGS
At December 31, 1995, 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, 1995, the net carrying amount of these debentures was $124.3
million.
The Company had a mortgage amounting to $4.6 million as of December 31,
1995, 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, 1995, the Company also had $456 million in outstanding
advances from the Federal Home Loan Bank of which $48 million matures in 1996,
$208 million matures in 1997, $100 million matures in 1998 and $100 million
matures in 2000. 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 $680 million carried on the books
of Compass Bank.
56
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(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:
1995 1994
------------------- -------------------
OTHER Other
THAN Than
TRADING TRADING Trading Trading
-------- ---------- -------- ----------
(in Thousands)
Commitments to extend credit........... $ -- $2,180,504 $ -- $2,091,549
Standby and commercial letters of cred-
it.................................... -- 40,907 -- 44,871
Forward and futures contracts.......... 485,975 -- 161,405 --
Interest rate swap agreements.......... 43,890 716,668 71,896 446,000
Floors and caps written................ 291,900 -- 283,900 400,000
Floors and caps purchased.............. 317,500 910,000 262,500 1,050,000
Other options written.................. -- -- 2,000 --
Other options purchased................ -- -- 182,000 --
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 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. 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 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.
57
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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.
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 to help manage the Company's interest sensitivity. 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.
The following table details various information regarding swaps, caps and
floors used for other than trading purposes as of December 31, 1995:
Weighted
Weighted Weighted Average
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 3-
month LIBOR.......... $ 308,000 $ (68) $ (3,993) 5.89% 6.19% 2.06 90
Receive fixed versus
3-month LIBOR........ 20,000 (9) (96) 4.74 5.81 0.96 90
Basis swaps+.......... 388,668 1,283 (1,728) 6.37 6.43 4.75 90
Caps purchased......... 260,000 1,261 165 -- * 1.57 90
Floors purchased....... 650,000 95 2,428 0.11 * 1.46 76
---------- ------ --------
$1,626,668 $2,562 $ (3,224)
========== ====== ========
- --------
+ On $200 million notional, the Company receives interest based on the federal
funds rate and pays interest based on 3-month LIBOR. For the remainder, the
Company receives interest based on 3-month LIBOR plus 84 basis points and
pays interest based on the 1-year Constant Maturity Treasury plus 150 basis
points.
* 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, 1995. For caps and floors, the rate shown represents the weighted
average net interest differential between the index rate and the cap or
floor rate.
At December 31, 1995, swaps, caps and floors acquired for other than trading
purposes were associated with the following asset or liability categories:
Notional Principal Associated With
----------------------------------------------
Total
Notional FHLB Federal Funds
Principal Loans Investments++ Advances Purchased++
---------- -------- ------------- --------- -------------
(in Thousands)
Swaps:
Pay fixed.......... $ 308,000 $ 8,000 $ -- $ 200,000 $100,000
Receive fixed...... 20,000 20,000 -- -- --
Basis swaps++...... 388,668 -- 188,668 -- 200,000
Caps................. 260,000 260,000 -- -- --
Floors............... 650,000 650,000 -- -- --
---------- -------- -------- --------- --------
$1,626,668 $938,000 $188,668 $ 200,000 $300,000
========== ======== ======== ========= ========
- --------
++ Based on the nature of basis swaps, the levels of interest rate protection
provided by such contracts are substantially lower than indicated by their
notional principal amounts. Accordingly, the level of notional principal
shown cannot be directly compared to the related account balances.
58
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
The following table summarizes interest rate contracts held in the trading
account at December 31, 1995:
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 3-
month LIBOR.......... $ 20,000 $ 216 $ 216 6.02% 4.38% 0.34 90
Receive fixed versus:
3-month LIBOR........ 23,000 78 78 6.10 5.92 1.07 90
Prime................ 890 (15) (15) 6.80 8.57 2.71 1
Caps:
Purchased............ 87,500 107 107 0.36 * 0.83 76
Written.............. 124,400 (189) (189) * -- 1.48 78
Floors:
Purchased............ 230,000 2,774 2,774 0.39 * 2.13 86
Written.............. 167,500 (1,970) (1,970) * 0.30 2.23 57
-------- ------- -------
Total............... $653,290 $ 1,001 $ 1,001
======== ======= =======
- --------
* 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, 1995. 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.
In addition to the interest rate contracts shown above, the Company also
uses other options and futures in the trading account. At December 31, 1995,
the trading account did not contain any other options, but did contain futures
contracts having a notional principal of $467 million. Such futures contracts
were used to help reduce the price sensitivity of the trading account.
For derivative financial instruments held or issued for trading purposes,
the fair values as of December 31, 1995 and 1994, and the average fair value
during those years, were as follows:
1995 1994
--------------------- ---------------------
PERIOD-END AVERAGE Period-End Average
FAIR VALUE FAIR VALUE Fair Value Fair Value
---------- ---------- ---------- ----------
(IN THOUSANDS) (in Thousands)
Swaps............................... $ 279 $ 708 $ 1,511 $ 2,384
Floors and caps:
Assets............................. 2,881 2,233 1,178 2,227
Liabilities........................ (2,159) (1,824) (1,527) (1,548)
Other options:
Assets............................. -- 158 78 129
Liabilities........................ -- (193) (15) (35)
The net trading profits (losses) for derivative financial instruments during
1995 were $150,000 for forwards and futures; $(1.2) million for swaps;
$288,000 for floors and caps; and $(558,000) for other options. Such amounts
represent only a portion of total trading account profits and commissions. The
total trading account profit for 1995 was $12.3 million, an increase of $14.8
million from 1994 trading losses and commissions
59
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
totaling $(2.5) million. Such increase is attributable to an increased number
of experienced salespersons during the year and an overall increase in
customer demand. 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 1994 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 one-month LIBOR.
Therefore, for each 100 basis point increase in one-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 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 and caps for the amount required to replace such
contracts in the event of counterparty default. At December 31, 1995, the
Company estimates its credit risk in the event of total counterparty default
to be $117,000 for interest rate swaps and $5.2 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 $24.2 million at December 31, 1995, 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.
60
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
The following is a schedule 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, 1995, for leased facilities (in
thousands):
1996............................ $ 5,055
1997............................ 3,492
1998............................ 2,617
1999............................ 2,186
2000............................ 1,805
2001-2005........................ 3,514
2006-2010........................ 274
2011-2015........................ 98
2016-2069........................ 1,044
-------
$20,085
=======
Minimum rentals for all operating leases charged to earnings totaled $10.1
million, $9.6 million and $7.5 million for the years ended December 31, 1995,
1994 and 1993, respectively.
(8) STOCK OPTION AND STOCK APPRECIATION RIGHTS 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 the 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, 1995.
The following summary sets forth activity under the plan for the years ended
December 31:
1995 1994 1993
------------- ------------- -------------
Shares under option at the end of the
year................................ 939,236 958,374 812,822
Price range per share.............. $ 9.17-$28.38 $ 9.17-$25.25 $ 9.17-$24.00
Shares under option granted during
the year............................ 228,940 217,640 189,700
Price range per share.............. $26.00-$28.38 $23.25-$25.25 $22.00-$24.75
Shares under option exercised during
the year............................ 229,613 45,756 85,630
Price range per share.............. $ 9.33-$26.00 $ 9.33-$24.00 $ 5.27-$20.17
Forfeitures of stock options for 1995, 1994 and 1993 totaled 18,465, 26,332
and 5,450 shares, respectively.
At December 31, 1995, 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.
61
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
The shares under option also included nonqualified options without stock
appreciation rights issued to certain executives to acquire shares of common
stock as follows: 19,640 shares at year-end 1995, 100,515 shares at year-end
1994 and 105,350 at year-end 1993.
(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, 1995, approximately $174.5 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 $104.4
million while continuing to meet the capital requirements for "well-
capitalized" banks at December 31, 1995.
(10) MERGERS AND ACQUISITIONS
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 acquisition was 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
acquisition was accounted for as a purchase.
The Company completed the acquisition of Southwest Bankers, Inc.
("Southwest"), of San Antonio, Texas, and its bank subsidiary, The Bank of San
Antonio, on March 7, 1995, through the issuance of 949,987 shares of the
Company's common stock. At the date of acquisition, Southwest had assets of
$142 million and equity of $9 million. The transaction was accounted for under
the pooling-of-interests method of accounting and accordingly all prior period
information has been restated.
62
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
Presented below is summary operating information for the Company showing the
effect of the business combination described on the preceding page.
As Previously Effect of Currently
Reported Poolings Reported
------------- --------- ---------
(in Thousands)
1994:
Net interest income.......................... $331,368 $5,400 $336,768
Provision for loan losses.................... 3,404 -- 3,404
Noninterest income........................... 85,631 2,257 87,888
Noninterest expense.......................... 261,966 5,593 267,559
Net income................................... 99,671 1,575 101,246
1993:
Net interest income.......................... $329,013 $5,133 $334,146
Provision for loan losses.................... 36,306 (450) 35,856
Noninterest income........................... 103,186 2,479 105,665
Noninterest expense.......................... 257,703 5,504 263,207
Net income................................... 89,718 2,961 92,679
Prior to its acquisition date in 1995, Southwest Bankers, Inc. had net
interest income of $992,000 and net income of $267,000.
On August 29, 1995, the Company signed a definitive agreement to acquire
Flower Mound Bancshares, Inc. ("Flower Mound"), of Dallas, Texas, and its bank
subsidiary, Security Bank, for 340,000 shares of the Company's common stock.
At December 31, 1995, Flower Mound had assets of $48 million and equity of
$4.5 million. It is anticipated that the transaction will close in the first
quarter of 1996 and will be accounted for under the pooling-of-interests
method of accounting.
On October 16, 1995, the Company signed a definitive agreement to acquire
Equitable BankShares, Inc. ("Equitable"), of Ft. Worth, Texas, and its bank
subsidiary, Equitable Bank. At December 31, 1995, Equitable had assets of $202
million and equity of $11.4 million. It is anticipated that the transaction
will close in the second quarter of 1996 and will be accounted for under the
pooling-of-interests method of accounting.
On November 28, 1995, the Company signed a definitive agreement to acquire
Peoples Bancshares, Inc. ("Peoples"), of Belton, Texas, and its bank
subsidiary, Peoples National Bank. At December 31, 1995, Peoples had assets of
$139 million and equity of $11.2 million. It is anticipated that the
transaction will close in the second quarter of 1996 and will be accounted for
as a purchase.
The Company signed a definitive agreement on November 30, 1995, to acquire
Post Oak Bank ("Post Oak") of Houston, Texas, in a transaction to be accounted
for as a purchase. At December 31, 1995, Post Oak had assets of $322 million
and equity of $36.9 million. The transaction is expected to close in the
second quarter of 1996.
The Company signed a definitive agreement on December 15, 1995, to acquire
Royall Financial Corporation ("Royall") of Palestine, Texas, and its bank
subsidiary, Royall National Bank of Palestine. At December 31, 1995, Royall
had assets of $106 million and equity of $10.3 million. It is anticipated that
the transaction will close in the second quarter of 1996 and will be accounted
for under the pooling-of-interests method of accounting.
On November 27, 1995, the Company signed a letter of intent to acquire CFB
Bancorp, Inc. ("CFB"), of Jacksonville, Florida, and its bank subsidiary,
Community First Bank. At December 31, 1995, CFB had assets of $311 million and
equity of $19.9 million. It is anticipated that the transaction will close in
the second quarter of 1996 and will be accounted for under the purchase method
of accounting.
63
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(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.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31:
1995 1994 1993
-------- -------- --------
(in Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits of $34,204, $25,415, and
$26,594 for 1995, 1994 and 1993, respectively. $(36,131) $(27,107) $(28,359)
======== ======== ========
Projected benefit obligation for service rendered
to date......................................... $(56,608) $(41,353) $(44,819)
Plan assets at fair value, primarily listed
stocks and U.S. bonds........................... 49,952 38,988 36,053
-------- -------- --------
Plan assets in excess of (less than) projected
benefit obligation............................ (6,656) (2,365) (8,766)
Unrecognized prior service cost.................. (185) (199) 106
Unrecognized net loss............................ 15,016 8,099 13,032
Unrecognized net asset being amortized over 13
years........................................... (1,360) (1,804) (2,248)
-------- -------- --------
Net pension asset included in other assets..... $ 6,815 $ 3,731 $ 2,124
======== ======== ========
Net pension cost for 1995, 1994 and 1993 included the following components:
1995 1994 1993
------ ------ ------
(in Thousands)
Service cost-benefits earned during the period.......... $2,832 $3,240 $2,409
Interest cost on projected benefit obligation........... 3,486 3,305 2,800
Actual return on plan assets............................ (6,703) 667 (2,221)
Net amortization and deferral........................... 2,682 (4,224) (1,127)
------ ------ ------
Net periodic pension cost............................... $2,297 $2,988 $1,861
====== ====== ======
The weighted average discount rate was 7.50 percent for 1995, 8.50 percent
for 1994, and 7.50 percent for 1993. The rate of increase in future
compensation levels was six percent for 1995, 1994 and 1993. 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 1995, 1994 and 1993.
64
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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 the 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 the right to such accounts
vested after five years of employment. The Company contributed $1.1 million
during 1995, $3.9 million during 1994, and $3.9 million during 1993.
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 dollar of the employees' 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.
In 1995, the Company established a deferred compensation plan for executive
officers which enables certain executive officers of the Company to defer up
to a percentage of their salary annually.
(12) OTHER NONINTEREST EXPENSE
The major components of other noninterest expense are as follows:
Year Ended December 31
-----------------------
1995 1994 1993
------- ------- -------
(in Thousands)
Bank travel and entertainment.......................... $ 7,150 $ 6,787 $ 6,601
Other real estate expenses............................. 1,060 771 3,302
Marketing.............................................. 6,519 6,820 5,860
Professional services.................................. 23,129 16,558 17,414
Supplies............................................... 8,164 7,645 7,124
Other.................................................. 43,540 35,597 37,904
------- ------- -------
$89,562 $74,178 $78,205
======= ======= =======
(13) INCOME TAXES
Income taxes for the years ended December 31, 1995, 1994 and 1993, were
allocated as follows:
1995 1994 1993
------- ------- -------
(in Thousands)
Income from operations................................ $61,256 $52,447 $48,069
Stockholders' equity, for net unrealized gains
(losses)
on securities available for sale..................... 14,215 (11,007) 3,952
------- ------- -------
$75,471 $41,440 $52,021
======= ======= =======
65
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
For the years ended December 31, 1995, 1994 and 1993, income tax expense
attributable to income from operations consists of:
1995 1994 1993
------- ------- -------
(in Thousands)
Current income tax expense:
Federal.............................................. $54,112 $47,027 $50,819
State................................................ 4,507 3,722 4,458
------- ------- -------
Total.............................................. 58,619 50,749 55,277
Deferred income tax expense (benefit):
Federal.............................................. 2,627 1,339 (6,542)
State................................................ 10 359 (666)
------- ------- -------
Total.............................................. 2,637 1,698 (7,208)
------- ------- -------
Total income tax expense............................... $61,256 $52,447 $48,069
======= ======= =======
During 1995, the Company made income tax payments of approximately $58.8
million and received cash income tax refunds amounting to approximately
$700,000. For 1994 and 1993, income tax payments were approximately $47.3
million and $60.9 million, respectively. Cash income tax refunds amounted to
approximately $1.2 million for 1994 and $200,000 for 1993. Applicable income
tax expense on securities gains of $1.0 million, $1.5 million, and $400,000
for 1995, 1994 and 1993, 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:
1995 1994 1993
------------------ ------------------ ------------------
PERCENT Percent Percent
OF PRETAX of Pretax of Pretax
AMOUNT EARNINGS Amount Earnings Amount Earnings
------- --------- ------- --------- ------- ---------
(in Thousands)
Income tax expense at
federal statutory rate. $60,032 35.0% $53,793 35.0% $49,262 35.0%
Increase (decrease) re-
sulting from:
Tax-exempt interest... (3,034) (1.8) (3,286) (2.1) (4,121) (2.9)
State income tax
expense net of
federal
income tax benefit... 2,936 1.7 2,653 1.7 2,465 1.8
Other................. 1,322 0.8 (713) (0.5) 463 0.3
------- ---- ------- ---- ------- ----
Income tax expense.. $61,256 35.7% $52,447 34.1% $48,069 34.2%
======= ==== ======= ==== ======= ====
66
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995, 1994 and 1993, are presented below:
1995 1994 1993
------- ------- -------
(in Thousands)
Deferred tax assets:
Allowance for loan losses............................ $36,510 $36,981 $39,422
Loan fees............................................ 2,827 2,655 2,825
Accrued expenses..................................... 958 1,091 3,191
Lease financing...................................... 4,155 2,705 1,605
Net unrealized losses on securities available for
sale................................................ -- 7,055 --
Other deferred tax assets............................ 1,684 1,957 2,266
------- ------- -------
Total assets....................................... 46,134 52,444 49,309
Deferred tax liabilities:
Premises and equipment............................... 13,008 10,064 9,159
Prepaid pension expense.............................. 2,496 1,365 767
Core deposit and other acquired intangibles.......... 6,806 7,426 9,880
Net unrealized gains on securities available for
sale................................................ 7,160 -- 3,952
Other deferred tax liabilities....................... 2,733 2,807 4,077
------- ------- -------
Total liabilities.................................. 32,203 21,662 27,835
------- ------- -------
Net deferred tax asset................................. $13,931 $30,782 $21,474
======= ======= =======
67
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(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
------------------
1995 1994
-------- --------
(in Thousands)
ASSETS
Cash and due from banks.................................... $ 142 $ 1,319
Collateralized mortgage obligation inverse floaters........ 26,145 26,229
Reverse repurchase agreements with affiliates.............. 99,544 62,625
Investment in subsidiaries:
Banks.................................................... 488,814 452,466
Bank holding companies................................... 278,327 244,679
Other.................................................... 6,261 6,274
-------- --------
773,402 703,419
Other assets............................................... 2,833 2,922
-------- --------
TOTAL ASSETS......................................... $902,066 $796,514
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper........................................... $ 57,312 $ 45,330
Accrued expenses and other liabilities..................... 13,812 12,355
Other borrowings........................................... 124,274 127,156
-------- --------
Total liabilities.................................... 195,398 184,841
Shareholders' equity:
Common stock of $2 par value:
Authorized--100,000,000 shares;
Issued--38,152,426 shares in 1995 and 37,922,448
shares in 1994........................................ 76,305 75,845
Loans to finance stock purchases......................... (5,636) (5,914)
Surplus.................................................. 44,725 41,547
Net unrealized holding gain (loss) on available-for-sale
securities.............................................. 11,812 (11,686)
Retained earnings........................................ 579,462 511,881
-------- --------
Total shareholders' equity........................... 706,668 611,673
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $902,066 $796,514
======== ========
68
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(14) PARENT COMPANY, Continued
Parent Company Only
Statements of Income
Year Ended December 31
---------------------------
1995 1994 1993
-------- -------- -------
(in Thousands)
INCOME:
Cash dividends from subsidiaries................ $ 70,926 $ 59,515 $32,850
Interest on investments with affiliates......... 8,275 4,271 4,149
Loss on purchase of securities from common trust
fund........................................... -- (8,222) --
Other........................................... 2,885 4,010 641
-------- -------- -------
TOTAL INCOME................................ 82,086 59,574 37,640
EXPENSE:
Interest on commercial paper and other
borrowings..................................... 16,928 10,293 6,291
Other........................................... 4,617 1,385 4,573
-------- -------- -------
TOTAL EXPENSE............................... 21,545 11,678 10,864
Income before income tax expense and equity
in undistributed earnings of subsidiaries.. 60,541 47,896 26,776
Applicable income tax benefit..................... (3,849) (4,761) (2,773)
-------- -------- -------
64,390 52,657 29,549
EQUITY IN UNDISTRIBUTED EARNINGS (DIVIDENDS IN
EXCESS OF EARNINGS)
OF SUBSIDIARIES:
Banks........................................... 22,022 27,359 42,772
Bank holding companies.......................... 23,866 21,203 21,304
Other........................................... (13) 27 (946)
-------- -------- -------
45,875 48,589 63,130
-------- -------- -------
NET INCOME.................................. $110,265 $101,246 $92,679
======== ======== =======
69
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(14) PARENT COMPANY, Continued
Parent Company Only
Statements of Cash Flows
Year Ended December 31
----------------------------
1995 1994 1993
-------- -------- --------
(in Thousands)
OPERATING ACTIVITIES:
Net income..................................... $110,265 $101,246 $ 92,679
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization (accretion).... 95 76 (319)
Equity in undistributed earnings............. (45,875) (48,589) (63,130)
Loss on purchase of securities from common
trust fund.................................. -- 8,222 --
Increase in interest receivable.............. (60) (244) --
(Increase) decrease in other assets.......... 572 (2,678) 2,852
Increase in interest payable................. 214 1,086 927
Increase (decrease) in taxes payable......... (408) 1,223 (611)
Increase (decrease) in other payables........ 1,651 2,919 (979)
-------- -------- --------
Net cash provided by operating activities.. 66,454 63,261 31,419
INVESTING ACTIVITIES:
Proceeds from maturities/calls of investment
securities.................................... 84 762 --
Purchases of investment securities............. -- (35,213) --
Decrease in investment securities available for
sale.......................................... -- -- 5,000
(Increase) decrease in reverse repurchase
agreements with affiliates.................... (36,919) (62,625) 12,900
Capital contributions made to subsidiaries..... -- (45,894) (3,730)
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) --
Purchase of premises and equipment............. (426) -- --
-------- -------- --------
Net cash provided (used) by investing ac-
tivities.................................. (37,261) (177,739) 655
FINANCING ACTIVITIES:
Net increase (decrease) in other short-term
borrowings.................................... 11,982 (17,528) 28,556
Proceeds from other borrowings................. -- 49,618 78,084
Repayment of other borrowings.................. (2,974) (518) (3,947)
Common dividends paid.......................... (42,684) (34,264) (27,887)
Preferred dividends paid....................... -- -- (1,531)
Redemption of preferred stock.................. -- -- (25,965)
Proceeds from exercise of stock options........ 963 882 2,246
Proceeds from repayments of loans to finance
stock purchases............................... 2,343 747 --
Purchase of treasury stock..................... -- (14) (410)
-------- -------- --------
Net cash provided (used) by financing ac-
tivities.................................. (30,370) (1,077) 49,146
-------- -------- --------
Net increase (decrease) in cash and due from
banks......................................... (1,177) (115,555) 81,220
Cash and due from banks at beginning of year... 1,319 116,874 35,654
-------- -------- --------
Cash and due from banks at end of year......... $ 142 $ 1,319 $116,874
======== ======== ========
70
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(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. Discounted cash flows have been used to
value fixed rate term deposits and variable rate term deposits having an
interest
71
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
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, 1995 At December 31, 1994
--------------------- ---------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
---------- ---------- ---------- ----------
(in Thousands)
FINANCIAL INSTRUMENTS:
Assets:
Cash and due from banks....... $ 530,941 $ 530,941 $ 490,494 $ 490,494
Interest bearing deposits in
other banks.................. 99 99 99 99
Investment securities......... 722,639 736,670 1,865,218 1,813,671
Investment securities avail-
able for sale................ 2,017,783 2,017,783 711,680 711,680
Trading account securities.... 101,916 101,916 58,012 58,012
Federal funds sold and securi-
ties purchased
under agreements to resell... 250,039 250,039 46,535 46,535
Loans......................... 6,361,047 6,400,951 5,828,308 5,756,522
Off-balance sheet instruments. 2,562 (3,224) 213 4,230
Liabilities:
Noninterest bearing deposits.. $1,400,819 $1,400,819 $1,405,377 $1,405,377
Interest bearing deposits .... 6,328,293 6,370,449 5,783,536 5,768,800
Federal funds purchased....... 776,308 776,308 484,190 484,190
Securities sold under agree-
ments to repurchase.......... 279,725 279,725 348,418 348,418
Other short-term borrowings... 115,728 115,728 104,598 104,598
FHLB and other borrowings .... 584,852 592,584 487,916 481,022
72
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(16) QUARTERLY RESULTS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 1995 and
1994 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in Thousands Except Per Share Data)
1995:
TOTAL INTEREST INCOME.................. $ 172,371 $ 178,903 $ 185,940 $189,716
TOTAL INTEREST EXPENSE................. 85,650 92,871 98,030 100,724
NET INTEREST INCOME.................... 86,721 86,032 87,910 88,992
PROVISION FOR LOAN LOSSES.............. 1,300 2,120 4,480 2,335
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES........................... 85,421 83,912 83,430 86,657
TOTAL NONINTEREST INCOME............... 26,318 32,283 30,725 32,786
TOTAL NONINTEREST EXPENSE.............. 74,239 72,976 69,001 73,795
INCOME TAX EXPENSE..................... 13,159 15,412 16,220 16,465
NET INCOME............................. 24,341 27,807 28,934 29,183
PER COMMON SHARE:
NET INCOME........................... 0.64 0.72 0.76 0.76
CASH DIVIDENDS....................... 0.28 0.28 0.28 0.28
STOCK PRICE RANGE:
HIGH............................... 28 29 1/4 33 3/4 33 1/2
LOW................................ 21 1/2 25 1/2 28 1/2 30 1/8
CLOSE.............................. 26 1/8 28 7/8 31 1/4 33
1994:
Total interest income.................. $ 134,001 $ 140,532 $ 145,842 $ 165,549
Total interest expense ................ 51,731 57,087 63,397 76,941
Net interest income.................... 82,270 83,445 82,445 88,608
Provision for loan losses.............. 2,278 27 1,099 --
Net interest income after provision for
loan losses........................... 79,992 83,418 81,346 88,608
Total noninterest income............... 19,670 16,281 26,635 25,302
Total noninterest expense.............. 62,423 63,734 68,907 72,495
Income tax expense..................... 13,060 11,269 13,689 14,429
Net income............................. 24,179 24,696 25,385 26,986
Per common share:
Net income........................... 0.63 0.65 0.67 0.70
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
73
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.
74
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, 1995 and 1994............. 44
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993........................................ 45
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993........................................ 46
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993........................................ 47
Summary of Significant Accounting Policies --
December 31, 1995, 1994 and 1993........................................ 48
Notes to Consolidated Financial Statements --
December 31, 1995, 1994 and 1993........................................ 52
Quarterly Results (Unaudited)............................................ 73
(B) REPORTS ON FORM 8-K
None
(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)
75
(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 of Form S-8 filed June 15, 1983, with
the Commission )
(b) Compass Bancshares, Inc., 1989 Long Term Incentive Plan (incor-
porated by reference to Exhibit 28 to the Company's Registration
Statement on Form S-8 filed February 21, 1991, with the Commis-
sion)
(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 Commis-
sion)
(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.................... 77
(12) Statement Re: Computation of Ratios................................ 78
(21) Subsidiaries of the Registrant..................................... 80
(23) Consents of Experts and Counsel
(27) Financial Data Schedule
Certain financial statement schedules and exhibits have been omitted because
they are not applicable.
76
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
COMPASS BANCSHARES, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
Year Ended December 31
--------------------------------------
1995 1994 1993
------------ ------------ ------------
(in Thousands Except Per Share Data)
PRIMARY:
Weighted average shares outstanding.... 38,072 37,896 37,837
Net effect of the assumed exercise of
stock options -- based on the treasury
stock method using average market
price................................. 268 251 300
------------ ------------ -----------
Total weighted average shares and
common stock equivalents outstanding.. 38,340 38,147 38,137
============ ============ ===========
Net income............................. $ 110,265 $ 101,246 $ 92,679
Preferred dividends.................... -- -- 1,531
------------ ------------ -----------
Net income available to common
shareholders.......................... $ 110,265 $ 101,246 $ 91,148
============ ============ ===========
Net income per common share............ $ 2.88 $ 2.65 $ 2.39
============ ============ ===========
FULLY DILUTED:
Weighted average shares outstanding.... 38,072 37,896 37,837
Net effect of the assumed conversion of
the preferred stock................... -- -- 816
Net effect of the assumed exercise of
stock options -- based on the treasury
stock method using average market
price or year-end market price,
whichever is higher................... 353 251 300
------------ ------------ -----------
Total weighted average shares and
common stock equivalents outstanding.. 38,425 38,147 38,953
============ ============ ===========
Net income............................. $ 110,265 $ 101,246 $ 92,679
============ ============ ===========
Net income per common share............ $ 2.87 $ 2.65 $ 2.38
============ ============ ===========
77
EXHIBIT 12 -- STATEMENT RE: COMPUTATION OF RATIOS
COMPASS BANCSHARES, INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
Year Ended December 31
--------------------------
1995 1994 1993
-------- -------- --------
(in Thousands)
Pretax income....................................... $171,521 $153,693 $140,748
Add fixed charges:
Interest on deposits.............................. 284,177 195,087 163,663
Interest on borrowings............................ 93,098 54,069 37,726
Portion of rental expense representing interest
expense.......................................... 3,357 3,196 2,491
-------- -------- --------
Total fixed charges............................. 380,632 252,352 203,880
-------- -------- --------
Income before fixed charges....................... $552,153 $406,045 $344,628
======== ======== ========
Total fixed charges................................. $380,632 $252,352 $203,880
Preferred stock dividends........................... -- -- 1,531
Tax effect of preferred stock dividends............. -- -- 794
-------- -------- --------
Combined fixed charges and preferred stock divi-
dends.............................................. $380,632 $252,352 $206,205
======== ======== ========
Pretax income....................................... $171,521 $153,693 $140,748
Add fixed charges (excluding interest on deposits):
Interest on borrowings............................ 93,098 54,069 37,726
Portion of rental expense representing interest
expense.......................................... 3,357 3,196 2,491
-------- -------- --------
Total fixed charges............................. 96,455 57,265 40,217
-------- -------- --------
Income before fixed charges (excluding interest on
deposits)........................................ $267,976 $210,958 $180,965
======== ======== ========
Total fixed charges................................. $ 96,455 $ 57,265 $ 40,217
Preferred stock dividends........................... -- -- 1,531
Tax effect of preferred stock dividends............. -- -- 794
-------- -------- --------
Combined fixed charges and preferred stock divi-
dends.............................................. $ 96,455 $ 57,265 $ 42,542
======== ======== ========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS:
Including interest on deposits 1.45X 1.61x 1.67x
Excluding interest on deposits 2.78X 3.68x 4.25x
78
EXHIBIT 12 -- STATEMENT RE: COMPUTATION OF RATIOS (CONTINUED)
COMPASS BANCSHARES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31
---------------------------
1995 1994 1993
-------- -------- --------
(in Thousands)
Pretax income..................................... $171,521 $153,693 $140,748
Add fixed charges:
Interest on deposits............................ 284,177 195,087 163,663
Interest on borrowings.......................... 93,098 54,069 37,726
Portion of rental expense representing interest
expense........................................ 3,357 3,196 2,491
-------- -------- --------
Total fixed charges........................... 380,632 252,352 203,880
-------- -------- --------
Income before fixed charges..................... $552,153 $406,045 $344,628
======== ======== ========
Pretax income..................................... $171,521 $153,693 $140,748
Add fixed charges (excluding interest on depos-
its):
Interest on borrowings.......................... 93,098 54,069 37,726
Portion of rental expense representing interest
expense........................................ 3,357 3,196 2,491
-------- -------- --------
Total fixed charges........................... 96,455 57,265 40,217
-------- -------- --------
Income before fixed charges (excluding interest
on deposits)................................... $267,976 $210,958 $180,965
======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES:
Including interest on deposits.................. 1.45X 1.61x 1.69x
Excluding interest on deposits.................. 2.78X 3.68x 4.50x
79
EXHIBIT 21 -- SUBSIDIARIES OF THE REGISTRANT
STATE OR OTHER JURISDICTION
SUBSIDIARIES OF INCORPORATION
- ------------ ---------------------------
Compass Bank........................................ Alabama
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
Compass Bank--San Antonio........................... Texas
River Oaks Trust Company............................ Texas
80
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 19, 1996 By /s/ D. Paul Jones, Jr.
-------------------------------
D. PAUL JONES, JR.
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
Date: February 19, 1996 By /s/ Garrett R. Hegel
-------------------------------
GARRETT R. HEGEL
CHIEF FINANCIAL OFFICER
Date: February 19, 1996 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 19, 1996
- -------------------------------------
HARRY B. BROCK, JR.
/s/ Stanley M. Brock February 19, 1996
- -------------------------------------
STANLEY M. BROCK
/s/ Charles W. Daniel February 19, 1996
- -------------------------------------
CHARLES W. DANIEL
81
SIGNATURES, CONTINUED
DIRECTORS DATE
--------- ----
/s/ W. Eugene Davenport February 19, 1996
- -------------------------------------
W. EUGENE DAVENPORT
February 19, 1996
- -------------------------------------
GARRY NEIL DRUMMOND, SR.
/s/ Marshall Durbin, Jr. February 19, 1996
- -------------------------------------
MARSHALL DURBIN, JR.
/s/ Tranum Fitzpatrick February 19, 1996
- -------------------------------------
TRANUM FITZPATRICK
/s/ George W. Hansberry February 19, 1996
- -------------------------------------
GEORGE W. HANSBERRY
/s/ D. Paul Jones, Jr. February 19, 1996
- -------------------------------------
D. PAUL JONES, JR.
/s/ Goodwin L. Myrick February 19, 1996
- -------------------------------------
GOODWIN L. MYRICK
/s/ John S. Stein February 19, 1996
- -------------------------------------
JOHN S. STEIN
82