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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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, 1997, the aggregate market value of voting stock held by
non-affiliates was $1,717,103,850.
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, 1997
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Common Stock, $2 Par Value 41,626,760
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
----------------------------------- ----------------------------------
Proxy Statement for 1997 annual meeting Part III
except for information referred to in
Item 402(a)(8) of Regulation S-K
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PART I
ITEM 1 -- BUSINESS
Compass Bancshares, Inc. (the "Company") is a bank holding company with its
principal place of business in Birmingham, Alabama. The Company was organized
in 1970 and commenced business in late 1971 upon the acquisition of Central
Bank & Trust Co. and State National Bank. The Company subsequently acquired
substantially all of the outstanding stock of additional banks located in
Alabama, 11 of which were merged in late 1981 to create Central Bank of the
South, Alabama's first statewide bank. In February, 1987, the Company acquired
First National Bank of Crosby near Houston, Texas, and became the first out-
of-state holding company to acquire a bank in Texas. The Company first
expanded into Florida in July, 1991, when it acquired Citizens & Builders
Federal Savings, F.S.B., in Pensacola, Florida. In November, 1993, the Company
changed its name from Central Bancshares of the South, Inc. to Compass
Bancshares, Inc. and Central Bank of the South, the Company's lead bank
subsidiary, changed its name to Compass Bank ("Compass Bank").
In addition to Compass Bank, the Company also owns Compass Bank, a Florida
state member bank headquartered in Jacksonville, Florida ("Compass Bank-
Florida"), Central Bank of the South, an Alabama banking corporation
headquartered in Anniston, Alabama, and Compass Banks of Texas, Inc., a
Delaware bank holding company ("Compass of Texas"), which owns Compass Bank, a
Texas state non-member bank headquartered in Houston, Texas ("Compass Bank-
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 87
locations in 45 communities in Alabama. Compass Bank-Texas conducts a general
commercial banking business from 42 banking offices in Houston, 24 banking
offices in the Dallas-Ft. Worth area, 16 banking offices in San Antonio, and 6
banking offices in Central and East 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, 22 locations in Jacksonville,
Florida and 6 locations in Ft. Walton Beach and Destin, Florida.
The Subsidiary Banks perform banking services customary for full service
banks of similar size and character for their customers in Alabama, Texas, and
Northeastern and Northwestern Florida. Such services include receiving demand
and time deposit accounts, making personal and commercial loans and furnishing
personal and commercial checking accounts. The Asset Management 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 audit
services, educational seminars, operational and investment services to
approximately 1,000 financial institutions located throughout the United
States. 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
1
individual investors including institutional sales, bond accounting,
safekeeping and interest rate risk analysis services. Through Compass
Brokerage, Inc., a wholly-owned subsidiary of Compass Bank, the Subsidiary
Banks also provide discount brokerage services, mutual funds, and variable and
fixed-rate annuities to individuals and businesses. Through Compass Bank's
wholly-owned subsidiary, Compass Financial Corporation, the Subsidiary Banks
provide lease financing services to individuals and businesses.
NONBANKING SUBSIDIARIES
Through wholly-owned subsidiaries, the Company is engaged in providing
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 36 financial institutions and numerous branch offices
in Texas and Florida. 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
- ----------- --------- --------- ----------
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
Flower Mound Bancshares, Inc. 2-1-96 $46,000 Pooling
Dallas, Texas
Equitable BankShares, Inc. 4-11-96 $184,000 Pooling
Dallas, Texas
Post Oak Bank 4-22-96 $323,000 Purchase
Houston, Texas
Peoples Bancshares, Inc. 5-21-96 $136,000 Purchase
Belton, Texas
Royall Financial Corporation 7-16-96 $109,000 Pooling
Palestine, Texas
CFB Bancorp, Inc. 8-23-96 $302,000 Purchase
Jacksonville, Florida
Texas American Bank 9-27-96 $65,000 Pooling
San Antonio, Texas
ProBank 10-24-96 $61,000 Purchase
Houston, Texas
2
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, with the issuance of 342,930 shares of the Company's common
stock. At the date of closing, Flower Mound had assets of $46 million and
equity of $5 million. The transaction was accounted for under the pooling-of-
interests method of accounting and accordingly all prior period information
has been restated.
On April 11, 1996, the Company completed the acquisition of Equitable
BankShares, Inc. ("Equitable"), of Dallas, Texas, and its bank subsidiary,
Equitable Bank, with the issuance of 954,962 shares of the Company's common
stock. At the date of closing, Equitable had assets of $184 million and equity
of $13 million. The transaction was accounted for under the pooling-of-
interests method of accounting and accordingly all prior period information
has been restated.
On April 22, 1996, the Company completed the purchase of Post Oak Bank, of
Houston, Texas. At the date of closing, Post Oak Bank had assets of $323
million and deposits of $276 million. The transaction was accounted for under
the purchase method of accounting.
On May 21, 1996, the Company completed the purchase of Peoples Bancshares,
Inc. ("Peoples"), of Belton, Texas, and its bank subsidiary, Peoples National
Bank. At the date of closing, Peoples had assets of $136 million and deposits
of $126 million. The transaction was accounted for under the purchase method
of accounting.
On July 16, 1996, the Company completed the acquisition of Royall Financial
Corporation ("Royall"), of Palestine, Texas, and its bank subsidiary, Royall
National Bank of Palestine, with the issuance of 549,986 shares of the
Company's common stock. At the date of closing, Royall had assets of $109
million and equity of $11 million. The transaction was accounted for under the
pooling-of-interests method of accounting and accordingly all prior period
information has been restated.
On August 23, 1996, the Company completed the acquisition of CFB Bancorp,
Inc. ("CFB"), of Jacksonville, Florida, and its bank subsidiary, Community
First Bank, through the issuance of 1,325,957 shares of the Company's common
stock. At the date of closing, CFB had assets of $302 million and deposits of
$253 million. The transaction was accounted for under the purchase method of
accounting.
On September 27, 1996, the Company completed the acquisition of Texas
American Bank ("Texas American"), of San Antonio, Texas, with the issuance of
324,977 shares of the Company's common stock. At the date of closing, Texas
American had assets of $65 million and equity of $5 million. The transaction
was accounted for under the pooling-of-interests method of accounting and
accordingly all prior period information has been restated.
The Company completed the acquisition of ProBank, of Houston, Texas, on
October 24, 1996. At the date of closing, ProBank had assets of $61 million
and deposits of $59 million. The transaction was accounted for under the
purchase method of accounting.
On January 15, 1997, the Company completed the acquisition of Enterprise
National Bank ("Enterprise"), of Jacksonville, Florida, with the issuance of
1,080,740 shares of the Company's common stock. At the date of closing,
Enterprise had assets of $171 million and equity of $18 million. The
transaction was accounted for under the pooling-of-interests method of
accounting and accordingly all prior period information will be restated in
the first quarter of 1997.
PENDING ACQUISITIONS
On September 18, 1996, the Company signed a letter of intent to acquire
Horizon Bancorp, Inc. ("Horizon"), and its subsidiary, Horizon Bank & Trust,
of Austin, Texas. At December 31, 1996, Horizon had assets of $147 million and
equity of $11 million. It is anticipated that the transaction will close in
the first quarter of 1997 and will be accounted for under the pooling-of-
interests method of accounting.
The Company signed a definitive agreement on October 3, 1996, to acquire
Greater Brazos Valley Bancorp, Inc. ("Greater Brazos"), and its subsidiary,
Commerce National Bank, of College Station, Texas. At
3
December 31, 1996, Greater Brazos had assets of $61 million and equity of $3
million. It is anticipated that the transaction will close in the first or
second quarter of 1997 and will be accounted for under the pooling-of-
interests method of accounting.
On January 14, 1997, the Company signed a letter of intent to acquire
Central Texas Bancorp, Inc. ("Central Texas"), and its subsidiary, Texas
National Bank of Waco, of Waco, Texas. At December 31, 1996, Central Texas had
assets of $213 million and equity of $18 million. It is anticipated that the
transaction will close in the second quarter of 1997 and will be accounted for
under the pooling-of-interests 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. The Company believes that intense
competition for banking business among bank holding companies in Alabama,
Texas, and Florida will continue and that during 1997 the competition may
further intensify if additional regional bank holding companies enter such
states through the acquisition of local bank holding companies or savings and
loan institutions and with continued consolidation of savings and loan
institutions with and into bank holding companies. Competition among bank
holding companies is also significant in Texas where Compass Bank-Texas is
located in major metropolitan markets having populations of 4.2 million, 4.0
million, and 1.4 million people. Compass Bank-Texas is small in terms of
assets and deposits in comparison with the super-regional banks it competes
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, 1996, the Company and its subsidiaries employed
approximately 4,800 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.
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.
4
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, 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 participating in interstate branching beginning 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
5
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 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, 1996, 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.
On September 30, 1996, Congress enacted the Deposit Insurance Fund Act of
1996 which required 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
special assessment required a payment of $0.657 per $100 of SAIF deposits. The
Company incurred additional deposit insurance premium expense of approximately
$7.2 million which was charged against current period income.
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.
6
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-Texas is organized under the laws of the State
of Texas and is a state bank that is not a member of the Federal Reserve
System. Compass Bank-Texas is 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-Texas, governed by the laws of the State
of Texas, is, under certain circumstances, restricted in the declaration and
payment of dividends to the extent that before declaring any dividends, it
must transfer to its "certified surplus" accounts an amount not less than 10
percent of the net profits earned since the last dividend was declared, except
that there is no requirement for a transfer to certified surplus of a sum
which would increase the certified surplus to more than the capital stock of
the 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.
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.
7
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
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)
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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..................................................... 39
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 289,000
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 306,000 square-foot administrative headquarters facility located in
Birmingham, Alabama. The Company also owns the River Oaks Bank Building in
Houston, Texas, a 14-story, 168,000 square-foot office building, and the Post
Oak Building in Houston, Texas, an 8-story, 124,000 square-foot office
building. The River Oaks Bank Building is 34 percent occupied by Compass Bank-
Texas and River Oaks Trust Company, while Compass Bank-Texas occupies
approximately 28 percent of the Post Oak Building. The remaining space in both
buildings 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 substantial compensatory and punitive damages
in connection with 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 1996.
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
------- ------- --------
1996:
FIRST QUARTER......................................... $34 5/8 $30 3/4 $.32
SECOND QUARTER........................................ 35 5/8 32 1/4 .32
THIRD QUARTER......................................... 34 5/8 31 1/8 .32
FOURTH QUARTER........................................ 39 3/4 34 1/2 .32
1995:
First quarter......................................... $ 28 $ 22 $.28
Second quarter........................................ 29 1/4 25 1/2 .28
Third quarter......................................... 33 28 1/2 .28
Fourth quarter........................................ 33 3/8 30 1/2 .28
As of January 31, 1997, there were approximately 6,200 shareholders of
record of common stock of which approximately 5,000 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 prior year information has been restated to reflect acquisitions
consummated during 1996 accounted for under the pooling-of-interests method of
accounting.
1996 1995 1994 1993 1992
----------- ----------- ---------- ---------- ----------
(in Thousands Except Per Share Data)
Net interest income..... $ 402,427 $ 368,954 $ 353,208 $ 347,966 $ 334,862
Provision for loan
losses.................. 17,630 11,008 3,816 36,089 53,326
Net income.............. 128,927 114,225 105,439 97,161 81,215
Per common share data:
Net income............. $ 3.19 $ 2.82 $ 2.62 $ 2.37 $ 1.98
Cash dividends
declared............... 1.28 1.12 .92 .76 .667
Balance sheet:
Average total equity... $ 752,832 $ 680,202 $ 608,320 $ 571,402 $ 508,585
Average assets......... 10,938,820 9,875,195 8,505,326 7,562,372 7,189,864
Period-end FHLB and
other borrowings...... 701,470 590,044 494,327 333,332 209,404
Period-end total
equity................. 803,062 737,463 637,877 584,995 538,217
Period-end assets...... 11,814,212 10,678,369 9,639,541 7,807,964 7,484,662
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
1996 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 1996 was $128.9 million, a 13 percent increase over the
Company's previous high of $114.2 million in 1995. Net income for 1995
increased 8 percent over 1994 net income of $105.4 million. The increases in
net income per common share for 1996 and 1995 were 13 percent and 8 percent,
respectively. Pretax income for 1996 was up $24.6 million, or 14 percent, over
1995 while income tax expense increased 16 percent over the same period due to
an increase in the effective tax rate in 1996 from 35.6 percent to 36.2
percent.
One significant factor in the growth of the Company has been the Company's
acquisitions in Texas since early 1987, specifically the Houston, Dallas and
San Antonio areas. The Texas expansion continued in 1996 and is expected to
continue in 1997. With the acquisition of seven financial institutions and one
branch in 1996, the size of the Company's Texas operations has grown to $4.7
billion at December 31, 1996. In addition, the Company expanded its Florida
operations with the acquisition of CFB Bancorp, Inc. of Jacksonville, Florida
and will continue to increase its presence in Florida in 1997. 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 1996 increased 11 percent over 1995 due to
increases in both average loans and total investment securities. The average
earning asset mix remained unchanged during 1996 with loans at 68 percent,
investment securities and investment securities available for sale at 30
percent and other earning assets at 2 percent of total earning assets after
shifting moderately in 1995. In 1994, loans were 71 percent, investment
securities and investment securities available for sale were 25 percent and
other earning assets were 4 percent of average earning assets. 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 10 percent in 1996 with much of the increase
concentrated in commercial, financial and agricultural loans, real estate
construction loans, and residential mortgage loans. Total loans outstanding at
year end increased 13 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. Commercial, financial and
agricultural loans, which were 23 percent of total loans in 1996, increased 26
percent compared to the previous year. Real estate construction loans
increased 24 percent, residential mortgage loans increased 12 percent,
commercial mortgage loans increased 10 percent and consumer installment loans
increased 2 percent from year-end 1995 to year-end 1996. The 9 percent
increase in the Company's loan portfolio from 1994 to 1995 occurred primarily
in commercial, financial and agricultural loans and residential mortgage loans
which increased 11 percent and 9 percent, respectively.
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 significantly during 1996
continuing the trend of the prior year, reflective of the stabilization of the
economy in the markets served. Residential real estate loans represented 39
percent of the total portfolio at December 31, 1996, unchanged from the prior
year.
12
The Company has not invested in loans that would be considered highly
leveraged transactions 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, 1996.
The Loan Portfolio table shows the classifications of loans by major
category at December 31, 1996, and for each of the preceding four years. The
second table shows maturities of certain loan classifications at December 31,
1996, and an analysis of the rate structure for such loans due in over one
year.
LOAN PORTFOLIO
December 31
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------- ------------------- ------------------- -------------------
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..... $1,729,332 23.2% $1,371,189 20.8% $1,233,496 20.5% $1,181,708 21.8% $1,093,071 22.5%
Real estate --
construction.... 554,565 7.4 447,101 6.8 397,499 6.6 278,040 5.1 252,190 5.2
Real estate --
mortgage:
Residential...... 2,880,368 38.6 2,568,893 39.1 2,350,993 39.1 1,972,775 36.4 1,531,093 31.5
Commercial....... 916,193 12.3 832,130 12.7 784,583 13.1 773,890 14.3 756,912 15.6
Consumer
installment...... 1,379,381 18.5 1,356,330 20.6 1,244,266 20.7 1,212,747 22.4 1,229,057 25.2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
7,459,839 100.0% 6,575,643 100.0% 6,010,837 100.0% 5,419,160 100.0% 4,862,323 100.0%
===== ===== ===== ===== =====
Less: Unearned
income........... 2,711 2,871 3,016 5,181 8,749
Allowance for loan
losses........... 118,473 111,235 110,958 114,233 87,463
---------- ---------- ---------- ---------- ----------
Total loans....... $7,338,655 $6,461,537 $5,896,863 $5,299,746 $4,766,111
========== ========== ========== ========== ==========
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....... $ 939,721 $683,917 $105,694 $1,729,332 $342,262 $447,349
Real estate --
construction.......... 371,318 163,626 19,621 554,565 25,495 157,752
---------- -------- -------- ---------- -------- --------
$1,311,039 $847,543 $125,315 $2,283,897 $367,757 $605,101
========== ======== ======== ========== ======== ========
13
INVESTMENT SECURITIES
The Company's investment securities are classified into one of three
categories based on management's intent to hold the securities: (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 $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 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, 1996, unrealized losses, net of unrealized gains, in the
Company's available-for-sale portfolio totaled $2.6 million as opposed to net
unrealized gains of $20.5 million at December 31, 1995. The tax-effect of such
unrealized gains and losses, together with any unamortized unrealized gain or
loss resulting from securities transferred at fair value from available-for-
sale to held-to-maturity, are reflected as adjustments of shareholders'
equity. Such adjustments caused shareholders' equity to be decreased by $2.8
million at December 31, 1996, and increased by $12.0 million at December 31,
1995.
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.
There were no sales of held-to-maturity securities during 1996 and 1995
while sales of held-to-maturity securities in 1994 totaled less than $1
million. During 1995, however, 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 generally accepted
accounting principles. Maturities of held-to-maturity securities in 1996,
1995, and 1994 were $233 million, $448 million and $335 million, respectively.
Sales and maturities of securities available for sale totaled $800 million and
$497 million, respectively, in 1996 while sales and maturities in the category
in 1995 were $686 million and $150 million. Net gains realized during the year
accounted for six percent, two percent, and three percent of noninterest
income in 1996, 1995, and 1994, respectively. Gross unrealized gains in the
Company's held-to-maturity portfolio at year-end 1996 totaled $13.2 million
and gross unrealized losses totaled $6.0 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
collateralized mortgage obligations ("CMOs"). Total average investment
securities, including those available for sale, increased 9 percent during
1996 after increasing 39 percent in 1995.
14
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
---------------------------------
1996 1995 1994
---------- ---------- ----------
(in Thousands)
Investment securities:
U.S. Treasury............................... $ 16,990 $ -- $ 36,971
U.S. Government agencies and corporations... 39,767 975 151,473
Mortgage-backed pass-through securities..... 291,289 335,591 474,595
Collateralized mortgage obligations:
Agency..................................... 343,125 132,485 621,841
Corporate.................................. 295,838 114,957 422,063
States and political subdivisions........... 86,018 70,710 80,958
Corporate bonds............................. 39,890 67,179 162,306
Other....................................... 1,270 1,235 2,678
---------- ---------- ----------
1,114,187 723,132 1,952,885
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury............................... 121,154 368,793 686,147
U.S. Government agencies and corporations... 58,487 132,844 3,110
Mortgage-backed pass-through securities..... 278,158 263,053 12,472
Collateralized mortgage obligations:
Agency..................................... 518,475 547,712 20,240
Corporate.................................. 903,355 627,766 --
States and political subdivisions........... -- 10,472 8,836
Corporate bonds............................. 115,592 130,543 --
Other....................................... 48,513 41,048 48,784
---------- ---------- ----------
2,043,734 2,122,231 779,589
Net unrealized gain (loss)................. (2,631) 20,545 (16,763)
---------- ---------- ----------
2,041,103 2,142,776 762,826
---------- ---------- ----------
Total...................................... $3,155,290 $2,865,908 $2,715,711
========== ========== ==========
15
The maturities and weighted average yields of the investment securities and
investment securities available for sale portfolios at the end of 1996 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.
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE MATURITY
SCHEDULE
Maturing
----------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
-------------- -------------------------------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ----------- ------------------ ------- -------- -----
(in Thousands)
Investment securities:
U.S. Treasury.......... $ 9,021 5.48% $ 7,969 5.84% -- -- -- --
U.S. Government
agencies and
corporations.......... 3,031 6.38 31,632 6.60 $ 5,104 7.82% -- --
Mortgage-backed pass-
through securities.... 8,425 6.81 220,647 7.60 56,372 7.14 $ 5,845 6.48%
Collateralized mortgage
obligations........... 91,949 6.79 398,633 7.47 89,556 6.87 58,825 6.97
States and political
subdivisions.......... 4,896 7.94 20,627 7.87 37,218 8.80 23,277 9.49
Other.................. 28,057 6.12 7,710 10.35 400 7.70 4,993 7.31
-------- ----------- ---------- --------
145,379 6.61 687,218 7.50 188,650 7.35 92,940 7.56
-------- ----------- ---------- --------
Investment securities
available for sale--
amortized cost:
U.S. Treasury.......... 84,134 5.88 37,010 6.10 10 8.76 -- --
U.S. Government
agencies and
corporations.......... 30,975 6.34 27,512 6.14 -- -- -- --
Mortgage-backed pass-
through securities.... -- -- 89,444 6.78 188,714 6.80 -- --
Collateralized mortgage
obligations........... 245,599 6.81 1,003,635 6.74 108,394 6.79 64,202 6.81
Other.................. 35,613 6.51 123,628 6.41 -- -- 4,864 5.83
-------- ----------- ---------- --------
396,321 6.55 1,281,229 6.68 297,118 6.80 69,066 6.74
-------- ----------- ---------- --------
Total................. $541,700 6.57 $ 1,968,447 6.96 $ 485,768 7.01 $162,006 7.22
======== =========== ========== ========
While the weighted average stated maturities of total MBS and CMOs are 16.0
years and 19.4 years, respectively, the corresponding weighted average
expected lives assumed in the above table are 4.8 years and 3.7 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 5.2 and 4.3 years, respectively. Similarly,
given a 100 basis point immediate and permanent parallel decrease in rates,
the expected average lives for MBS and CMOs would be 4.2 and 2.6 years,
respectively.
The weighted average market prices as a percentage of par value for MBS and
CMOs at December 31, 1996, were 101.0 percent and 99.2 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, 1996, fixed-rate MBS and
CMOs totaled $325 million and $1,831 million, respectively, with corresponding
weighted average expected lives of 3.4 and 2.8 years. Adjustable rate MBS and
CMOs totaled $244 million and $230 million, respectively, with corresponding
weighted average expected lives of 6.7 and 10.9 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
16
life caps at year end were 11.43 percent and 9.72 percent for MBS and CMOs,
respectively, and the corresponding weighted average coupon rates at year end
were 7.05 percent and 6.75 percent. Given a 100 basis point immediate and
permanent parallel increase in rates, the estimated market prices for MBS and
CMOs would be 99.1 and 96.6, respectively. Given a 100 basis point immediate
and permanent parallel decrease in rates, the estimated market prices for MBS
and CMOs would be 102.6 and 100.8, 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 1996 increased by 38
percent following a 46 percent decrease in 1995. The composition of the
Company's trading account at December 31, 1996, 1995, and 1994, is detailed
below:
TRADING ACCOUNT COMPOSITION
December 31
------------------------
1996 1995 1994
------- -------- -------
(in Thousands)
U.S. Treasury and Government agency................... $44,797 $ 54,318 $26,599
States and political subdivisions..................... 9,738 19,583 9,046
Mortgage-backed pass-through securities............... 24,371 16,471 15,567
Other debt securities................................. 727 396 201
Derivative securities:
Collateralized mortgage obligations.................. 10,972 8,472 5,344
Interest rate floors and caps........................ 787 2,676 1,178
Other options........................................ 60 -- 77
------- -------- -------
$91,452 $101,916 $58,012
======= ======== =======
Although the trading account decreased slightly from December 31, 1995 to
December 31, 1996, the average balance increase from 1995 to 1996 was the
result of increased retail sales demand and a larger, more experienced sales
force.
Average federal funds sold and securities purchased under agreements to
resell increased 65 percent in 1996 compared to a 54 percent decrease in 1995.
The average balance of interest bearing deposits in other banks decreased 67
percent during 1996 from 1995 levels after decreasing 75 percent from 1994 to
1995. There were no foreign time deposits as of December 31, 1996 or 1995.
DEPOSITS AND BORROWED FUNDS
The Company's growth in assets during 1996 was funded primarily by deposit
growth, representing substantially all of the $1.1 billion increase in total
liabilities and shareholders' equity at December 31, 1996. The 14 percent
increase in total deposits was evenly distributed between noninterest bearing
deposits and interest bearing deposits with each increasing 14 percent from
1995. Shareholders' equity increased nine percent offsetting the decline in
liabilities other than deposits. The $60 million decrease in liabilities other
than deposits consisted principally of a $173 million, or 22 percent, decrease
in federal funds purchased and a 31 percent decrease in securities sold under
agreements to repurchase, partially offset by a $111 million, or 19 percent,
increase in FHLB and other borrowings.
During 1995, 56 percent of the increase in total liabilities and
shareholders' equity was due to deposit growth as total deposits grew by $579
million. Noninterest bearing deposits increased by $20 million, or 1 percent,
while interest bearing deposits increased by $560 million, or 9 percent. A
$287 million increase in federal funds purchased along with a $96 million
increase in FHLB and other borrowings accounted for the majority of the $360
million, or 24 percent, increase in liabilities other than deposits.
Changes in the Company's markets and the economy in general continued to
impact the Company's liability mix during 1996 with 58 percent of average
total deposits represented by demand deposits, savings accounts and
noninterest bearing deposits, up from 56 percent in 1995. While the portion of
average interest bearing liabilities
17
represented by interest bearing deposits, the primary source of funding for
the Company, increased slightly from 80 percent in 1995 to 83 percent in 1996,
the average balance of savings deposits increased from 26 percent to 31
percent of total interest bearing liabilities. Certificates of deposit less
than $100,000 and other time deposits represented 31 percent of average
interest bearing liabilities in 1996, down from 33 percent in 1995 while
certificates of deposit greater than $100,000 represented 10 percent of
average interest bearing liabilities in 1996, unchanged from 1995. For the
year, the average balance of savings accounts increased 34 percent while
certificates of deposit of $100,000 or more grew by 10 percent. Interest
bearing demand deposits and certificates of deposit less than $100,000 and
other time deposits experienced only modest increases of four percent.
During 1995, the average balance of demand deposits, savings accounts and
noninterest bearing deposits represented 56 percent of average total deposits,
down from 61 percent in 1994. This decline was a function of a 33 percent
increase in the average balance of certificates of deposit less than $100,000
and other time deposits and a 24 percent increase in the average balance of
certificates of deposits of $100,000 or more.
The maturities of certificates of deposit of $100,000 or more and other time
deposits of $100,000 or more outstanding at December 31, 1996, 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.......................... $392,814 $15,887 $408,701
Over three through six months................. 102,937 13,400 116,337
Over six through twelve months................ 171,193 -- 171,193
Over twelve months............................ 216,846 -- 216,846
-------- ------- --------
$883,790 $29,287 $913,077
======== ======= ========
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 decreased 18 percent during 1996 and average
securities sold under agreements to repurchase decreased 12 percent. Average
other short-term borrowings, which include parent company commercial paper and
trading account short sales, decreased less than one percent. During 1996, the
average balance of FHLB and other borrowings increased 14 percent due to a net
increase of $114 million in FHLB advances. During 1995, the average balance of
FHLB and other borrowings increased $186 million, or 52 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. 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."
In January, 1997, a statutory business trust ("Compass Trust I") was created
by the Company which issued capital securities ("Capital Securities") to
institutional investors in the amount of $100 million, representing guaranteed
preferred beneficial interests in $103.1 million of junior subordinated
deferrable interest debentures ("Subordinated Debentures") issued by the
Company to Compass Trust I. The Capital Securities bear an interest rate of
8.23 percent and are mandatorily redeemable by Compass Trust I upon the
repayment of the Subordinated Debentures by the Company. For regulatory
purposes, the Capital Securities will be treated as Tier I capital of the
Company. The Subordinated Debentures are the sole assets of Compass Trust I
and bear an interest rate of 8.23 percent with a maturity date of January 15,
2027, which may be shortened to a date not earlier than January 15, 2007. If
the Subordinated Debentures are redeemed in whole or in part prior to January
15, 2007, the redemption price of the Subordinated Debentures and the Capital
Securities will include a premium ranging from 4.12 percent in 2007 to 0.41
percent in 2016.
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)
1996:
FEDERAL FUNDS PURCHASED.... $ 655,700 $ 455,631 5.30% $ 602,914 5.30%
SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE.. 302,818 238,834 4.92 205,053 5.02
SHORT SALES................ 61,907 35,024 5.84 36,703 6.06
COMMERCIAL PAPER........... 114,060 73,822 5.02 47,896 4.88
OTHER SHORT-TERM
BORROWINGS................ 142,537 81,514 4.84 117,302 6.02
---------- ---------- ----------
$1,277,022 $ 884,825 $1,009,868
========== ========== ==========
1995:
Federal funds purchased.... $ 848,903 $ 555,701 5.78% $ 776,308 5.53%
Securities sold under
agreements to repurchase.. 317,315 271,788 4.96 295,391 4.90
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................ 131,628 40,347 5.47 34,719 5.74
---------- ---------- ----------
$1,524,619 $1,018,817 $1,187,975
========== ========== ==========
1994:
Federal funds purchased.... $ 489,255 $ 378,826 4.65% $ 489,255 5.70%
Securities sold under
agreements to repurchase.. 359,348 253,867 3.53 359,348 4.70
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................ 271,519 112,275 4.37 44,512 5.40
---------- ---------- ----------
$1,270,065 $ 859,186 $ 955,201
========== ========== ==========
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, 1996, the Company's Subsidiary
Banks could have paid additional dividends to the parent holding company in
the amount of $45.3 million while continuing to meet the capital requirements
for "well-capitalized" banks. Also, the parent holding company has access to
various
19
capital markets as evidenced by the issuance of the Capital Securities in
January, 1997, 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 in the near
future that it will not be able to meet.
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 $1.3 billion,
or 18 percent, of the total loan portfolio at December 31, 1996. Other short-
term investments such as federal funds sold, securities purchased under
agreements to resell and maturing interest bearing deposits with other banks
are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and noninterest bearing deposit accounts.
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings are additional sources of liquidity and basically
represent the Company's incremental borrowing capacity. These sources of
liquidity are short-term in nature and are used as necessary to fund asset
growth and meet short-term liquidity needs.
As disclosed in the Company's "Consolidated Statements of Cash Flows," net
cash provided by operating activities increased to $175 million primarily due
to the increase in earnings and the decrease in the trading account securities
category. Net cash used in investing activities of $396 million consisted
primarily of net loans originated of $413 million and available-for-sale
securities purchased of $1.3 billion, largely funded by maturities of
investment securities held to maturity of $233 million, as well as sales and
maturities of investment securities available for sale of $800 million and
$497 million, respectively. Net cash provided by financing activities provided
the remainder of funding sources for 1996. The $327 million of net cash
provided by financing activities consisted primarily of a $518 million
increase in deposits, a net increase of $112 million in FHLB and other
borrowings, and a $57 million increase in short-term borrowings offset
partially by a reduction of $90 million in securities sold under agreements to
repurchase and a reduction of $177 million in federal funds purchased . The
increase in FHLB and other borrowings in 1996 consisted of additional FHLB
advances of $162 million and repayments of $50 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,
1996 and 1995, 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)
1996
EARNING ASSETS:
LOANS, NET OF UNEARNED
INCOME................ $2,125,957 $ 743,288 $ 755,872 $2,335,729 $1,496,282 $7,457,128
INVESTMENT SECURITIES.. -- 174,610 128,542 664,116 146,919 1,114,187
INVESTMENT SECURITIES
AVAILABLE FOR SALE.... -- 346,196 394,730 1,233,785 66,392 2,041,103
TRADING ACCOUNT
SECURITIES............ 91,452 -- -- -- -- 91,452
FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED
UNDER AGREEMENTS TO
RESELL................ 54,804 -- -- -- -- 54,804
INTEREST BEARING
DEPOSITS WITH OTHER
BANKS................. -- -- 99 388 -- 487
---------- ---------- ----------- ---------- ---------- ----------
TOTAL EARNING ASSETS. 2,272,213 1,264,094 1,279,243 4,234,018 1,709,593 10,759,161
INTEREST BEARING
LIABILITIES:
DEMAND DEPOSITS........ -- 827,925 -- -- -- 827,925
SAVINGS DEPOSITS....... -- -- 1,502,623 -- 1,580,160 3,082,783
CERTIFICATES OF DEPOSIT
LESS THAN $100,000 AND
OTHER TIME DEPOSITS... 82,988 573,799 1,063,698 951,934 4,892 2,677,311
CERTIFICATES OF DEPOSIT
OF $100,000 OR MORE... 48,953 335,686 284,658 212,488 2,005 883,790
FEDERAL FUNDS PURCHASED
AND SECURITIES SOLD
UNDER AGREEMENTS TO
REPURCHASE............ 804,891 -- -- -- 3,076 807,967
OTHER SHORT-TERM
BORROWINGS............ 144,901 57,000 -- -- -- 201,901
FHLB AND OTHER
BORROWINGS............ -- 460,552 110,164 1,087 129,667 701,470
---------- ---------- ----------- ---------- ---------- ----------
TOTAL INTEREST
BEARING LIABILITIES. 1,081,733 2,254,962 2,961,143 1,165,509 1,719,800 9,183,147
EFFECT OF INTEREST RATE
SWAPS.................. 100,000 (262,507) (179,493) 350,000 (8,000) --
---------- ---------- ----------- ---------- ---------- ----------
INTEREST SENSITIVITY
GAP.................... 1,290,480 (1,253,375) (1,861,393) 3,418,509 (18,207) $1,576,014
---------- ---------- ----------- ---------- ---------- ==========
CUMULATIVE INTEREST
SENSITIVITY GAP........ $1,290,480 $ 37,105 $(1,824,288) $1,594,221 $1,576,014
========== ========== =========== ========== ==========
1995
Earning assets:
Loans, net of unearned
income................ $1,776,857 $ 487,292 $ 680,361 $1,401,879 $2,226,383 $6,572,772
Investment securities.. -- 150,106 97,272 346,954 128,800 723,132
Investment securities
available for sale.... -- 616,160 524,959 993,055 8,602 2,142,776
Trading account
securities............ 101,916 -- -- -- -- 101,916
Federal funds sold and
securities purchased
under agreements to
resell................ 274,347 -- -- -- -- 274,347
Interest bearing
deposits with other
banks................. -- -- -- -- 1,697 1,697
---------- --------- ----------- ---------- ---------- ----------
Total earning assets. 2,153,120 1,253,558 1,302,592 2,741,888 2,365,482 9,816,640
Interest bearing
liabilities:
Demand deposits........ -- 914,872 -- -- -- 914,872
Savings deposits....... -- -- 1,420,156 -- 828,485 2,248,641
Certificates of deposit
less than $100,000 and
other time deposits... 59,178 559,842 1,003,828 963,602 5,471 2,591,921
Certificates of deposit
of $100,000 or more... 29,557 296,989 244,198 227,423 1,585 799,752
Federal funds purchased
and securities sold
under agreements to
repurchase............ 1,066,834 -- -- -- 4,865 1,071,699
Other short-term
borrowings............ 116,276 -- -- -- -- 116,276
FHLB and other
borrowings............ -- 349,120 150 111,969 128,805 590,044
---------- --------- ----------- ---------- ---------- ----------
Total interest
bearing liabilities. 1,271,845 2,120,823 2,668,332 1,302,994 969,211 8,333,205
Effect of interest rate
swaps.................. 130,000 196,667 (188,667) (130,000) (8,000) --
---------- --------- ----------- ---------- ---------- ----------
Interest sensitivity
gap.................... 1,011,275 (670,598) (1,554,407) 1,308,894 1,388,271 $1,483,435
---------- --------- ----------- ---------- ---------- ==========
Cumulative interest
sensitivity gap........ $1,011,275 $ 340,677 $(1,213,730) $ 95,164 $1,483,435
========== ========= =========== ========== ==========
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, 1996. 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, 1996, for the first year,
69 percent of earning asset funding sources will reprice compared to 45
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 interest
rate risks other than expected payments and the repricing of assets and
liabilities. The simulation model allows the Company to test a variety of
changing interest rate scenarios to examine the impact of the different kinds
of interest rate risk, including basis risk and yield curve shape risk. The
model also tests the impact that the timing of a change in interest rates may
have on net interest margin. Rates rising or 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, 1996 balances and projected 1997 growth,
indicated a change 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, 1996:
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 contracts:
Swaps:
Pay fixed versus 3-
month LIBOR.......... $ 308,000 $ (224) $ 256 5.51% 6.19% 1.06 90
Receive fixed versus
3-month LIBOR........ 525,000 1,164 922 6.60 5.53 2.55 90
Receive fixed versus
6-month LIBOR........ 25,000 26 79 6.23 5.75 2.21 180
Basis swaps+.......... 154,493 938 (1,383) 6.34 7.03 8.64 90
Caps purchased......... 260,000 520 41 -- N/A 0.59 90
Floors purchased....... 450,000 -- 65 -- N/A 0.69 70
---------- ------ -------
$1,722,493 $2,424 $ (20)
========== ====== =======
- --------
+ On the $154.5 million notional, the Company receives interest based on
three-month LIBOR plus 84 basis points and pays interest based on the one-
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, 1996.
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 1996, there were no deferred gains and $128,000 of deferred losses on
terminated interest rate protection contracts, which will be recorded as net
interest expense through 1999. The following table indicates the asset or
liability category with which the non-trading interest protection contracts
were associated at December 31, 1996:
ASSETS/LIABILITIES ASSOCIATED WITH INTEREST RATE PROTECTION CONTRACTS
Notional Principal Associated With
Total -----------------------------------------------------------
Notional FHLB Federal Funds CD's Less
Principal Loans Investments Advances Purchased Than $100,000
---------- ---------- ----------- -------- ------------- -------------
(in Thousands)
Swaps:
Pay fixed............. $ 308,000 $ 8,000 $ -- $200,000 $100,000 $ --
Receive fixed......... 550,000 400,000 -- -- -- 150,000
Basis swaps........... 154,493 -- 154,493 -- -- --
Caps................... 260,000 260,000 -- -- -- --
Floors................. 450,000 450,000 -- -- -- --
---------- ---------- -------- -------- -------- --------
$1,722,493 $1,118,000 $154,493 $200,000 $100,000 $150,000
========== ========== ======== ======== ======== ========
In addition to interest rate protection contracts used to help manage
overall interest sensitivity, the Company also enters into interest rate
contracts for the trading account. The primary purposes for using interest
rate contracts in the trading account are to facilitate customer transactions
and to help protect cash market positions in the trading account against
interest rate movement. Changes in the estimated fair value of contracts in
the trading account are recorded in other noninterest income as trading
profits and commissions. Net interest amounts received or paid on interest
rate contracts in the trading account are recorded as an adjustment of
interest on trading account securities. The following table summarizes
interest rate contracts held in the trading account at December 31, 1996:
23
TRADING ACCOUNT INTEREST RATE CONTRACTS
Weighted
Weighted Weighted Average
Estimated Average Rate* Average Repricing
Notional Carrying Fair ------------- Years to Frequency
Amount Value++ Value Received Paid Expiration (Days)
-------- -------- --------- -------- ---- ---------- ---------
(in Thousands)
Trading interest rate
contracts:
Swaps:
Receive fixed versus:
3-month LIBOR........ $ 3,000 $ (59) $ (59) 5.90% 5.57% 4.96 90
Prime................ 587 (10) (10) 6.80 8.25 1.71 1
Caps:
Purchased............. 86,000 217 217 -- N/A 1.58 77
Written............... 76,400 (101) (101) N/A -- 1.36 68
Floors:
Purchased............. 216,000 583 583 0.04 N/A 1.43 79
Written............... 203,500 (808) (808) N/A 0.10 1.64 59
-------- ----- -----
Total............... $585,487 $(178) $(178)
======== ===== =====
- --------
* 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, 1996. 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, 1996, the
trading account contained other options purchased, having weighted average
expiration dates shorter than three months, with a notional balance of $13.7
million and estimated fair value of $61,000. At December 31, 1996, there were
no other written options held in the trading account. The position of
purchased options was taken, in order to help protect the market value of the
trading account against rising short-term interest rates while maintaining
limited risk to declining rates. At December 31, 1996, futures contracts
having a notional principal of $119 million were also 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
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
Generally accepted accounting principles require the Company to disclose the
fair value of substantially all financial instruments, both assets and
liabilities, including those recognized and those not recognized in the
Company's balance sheet. There has been no impact to the Company's financial
statements as a result of the recognition, measurement or classification of
financial instruments. See "Notes to Consolidated Financial Statements," Note
15, Fair Value of Financial Instruments, for a discussion of the Company's
accounting policies and methodologies.
These disclosures should not be considered a surrogate of the liquidation
value of the Company or its Subsidiary Banks, but rather represent a good-
faith estimate of the increase or decrease in value of financial instruments
held by the Company since purchase, origination, or issuance. It should also
be noted that the Company has not valued any intangibles associated with the
Company's core deposits.
24
CAPITAL RESOURCES
Shareholders' equity at December 31, 1996, increased 9 percent after
increasing 16 percent in 1995. Exclusive of the net change in unrealized
holding gains (losses) on securities available for sale in both 1995 and 1996,
net income after dividends accounted for substantially all of the increase in
shareholders' equity.
Dividends of $50.5 million were declared on the Company's common stock in
1996, representing an 18 percent increase over 1995. The 1996 annual dividend
rate per common share was $1.28, a 14 percent increase over 1995. The dividend
payout ratio for 1996 was 39 percent compared to 37 percent for 1995 and 32
percent for 1994. 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 11 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 1996 was 6.88 percent compared to 6.89 percent in
1995 and 7.15 percent in 1994. The decrease in 1995 was due primarily to the
impact of the October, 1994 acquisition of 22 branches of First Heights Bank,
fsb, of Houston, Texas and related deposits of approximately $800 million 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
-------------------
1996 1995 1994
----- ----- -----
Return on average assets................................... 1.18% 1.16% 1.24%
Return on average common equity............................ 17.13 16.79 17.33
Common stock dividend payout ratio......................... 39.13 37.37 32.15
Average equity to average assets ratio..................... 6.88 6.89 7.15
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 acquisitions during 1996
and 1994, the leverage ratio remained well within regulatory guidelines: 6.11
percent at year-end 1996; 6.73 percent at year-end 1995; and 6.60 percent at
year-end 1994. For the same periods, the tangible leverage ratio was 5.96
percent at year-end 1996; 6.55 percent at year-end 1995; and 6.37 percent at
year-end 1994. The detail for the computation of these ratios is provided in
the following table. The decrease in both the leverage ratio and the tangible
leverage ratio in 1996 was due primarily to the substantial increase in
intangibles resulting from acquisitions completed by the Company in 1996.
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 $12.0 million increase in shareholders' equity at December
31, 1995, resulting from the increase in the fair value of the Company's
available-for-sale investment securities portfolio has not been included as a
component of equity in the calculation of regulatory capital by the Federal
regulators. By the same token, the $2.8 million decrease in shareholders'
equity at December 31, 1996, is not required to be deducted from the Company's
equity in computing the leverage ratios.
25
LEVERAGE RATIO CALCULATIONS
December 31
------------------------------------
1996 1995 1994
----------- ----------- ----------
(in Thousands)
Total fourth quarter average assets...... $11,553,725 $10,290,371 $9,298,088
Add: Unrealized holding loss on avail-
able-for-sale securities............... 2,531 1,834 9,259
Less: Goodwill.......................... 80,313 23,229 24,481
Other disallowed intangibles......... 25,699 11,679 13,707
----------- ----------- ----------
Tangible average assets before deduction
of other intangibles.................... 11,450,244 10,257,297 9,269,159
Less: Other intangibles................. 18,282 20,496 23,027
----------- ----------- ----------
Tangible average assets.............. $11,431,962 $10,236,801 $9,246,132
=========== =========== ==========
Total period-end common shareholders'
equity.................................. $ 803,062 $ 737,463 $ 637,877
Less: Goodwill.......................... 80,313 23,229 24,481
Other disallowed intangibles......... 25,699 11,679 13,707
Net unrealized holding gain (loss) on
available-for-sale securities...... (2,766) 11,978 (12,347)
----------- ----------- ----------
Total common shareholders' equity before
deduction of other intangibles.......... 699,816 690,577 612,036
Less: Other intangibles................. 18,282 20,496 23,027
----------- ----------- ----------
Tangible period-end common sharehold-
ers' equity........................... $ 681,534 $ 670,081 $ 589,009
=========== =========== ==========
Leverage ratio....................... 6.11% 6.73% 6.60%
Tangible leverage ratio.............. 5.96 6.55 6.37
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 $700 million at December 31, 1996. 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 totaled $926 million at year-end 1996. The percentage ratios, as
calculated under the guidelines, were 8.59 percent and 11.37 percent for Tier
I and Total Qualifying Capital, respectively, at year-end 1996, down from 9.95
percent and 13.00 percent at year-end 1995. Tier I capital decreased in 1996
as a result of a 17 percent increase in risk weighted assets, due to
acquisitions and internally generated growth, and only a 1 percent and 7
percent increase in Tier I and Tier II capital, respectively. While
shareholders' equity increased 9 percent from December 31, 1995 to December
31, 1996, the increases in Tier I and Total Qualifying Capital were
significantly less due to the addition of $70 million in intangibles resulting
from the Company's acquisitions in 1996. The increase in the Tier I ratio in
1995 was due primarily to $72 million in earnings retained by the Company, net
of dividends.
December 31
-------------------
1996 1995 1994
----- ----- -----
Risk-based Capital Ratios:
Tier I Capital Ratio...................................... 8.59% 9.95% 9.80%
Total Qualifying Capital Ratio............................ 11.37 13.00 13.04
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 1996 for "well-
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to assure that the Subsidiary Banks exceed the
guidelines. For further information regarding the regulatory capital ratios of
the Subsidiary Banks, see Note 9, Regulatory Matters and Dividends from
Subsidiaries, in the "Notes to Consolidated Financial Statements".
26
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially
impact net interest income. The discussion of net interest income is presented
on a taxable equivalent basis, unless otherwise noted, to facilitate
performance comparisons among various taxable and tax-exempt assets.
Net interest income for 1996 increased nine percent over 1995 while
increasing four percent in 1995 over 1994. An 11 percent increase in the
volume of average earning assets, primarily total investment securities and
loans, more than offset a 6 basis point decline in net yield. In 1995, a 17
percent increase in the volume of earning assets offset a 50 basis point
decline in the net yield. 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 9 percent in 1996 and 24 percent in 1995 after
increasing 9 percent in 1994. Interest income in 1996 grew as a result of an
11 percent increase in the volume of average earning assets partially offset
by a 15 basis point decrease in the average interest rate earned. A 10 percent
increase in the volume of average loans and a 14 basis point decrease in yield
accounted for the 8 percent increase in fully taxable equivalent interest
income on loans. Interest income on investment securities, including
securities available for sale, increased eight percent from 1995 to 1996. This
increase resulted from a 9 percent increase in the average balance of total
investment securities offset by an 11 basis point decrease in yield. Interest
income on trading securities increased 26 percent primarily as a result of a
38 percent increase in the average balance.
Total interest expense increased by 8 percent in 1996 due to an 11 percent
increase in average volume combined with a 12 basis point decrease in the rate
paid on interest bearing liabilities. Interest expense on interest bearing
deposits increased 13 percent as the result of a 15 percent increase in the
average volume and a 5 basis point decrease in rate. The 4 percent decrease in
average borrowed funds, which includes interest bearing liabilities that are
not classified as deposits, coupled with a 25 basis point decline in rate
resulted in an 8 percent decrease in interest expense for this category.
From 1994 to 1995, interest income increased 24 percent as a result of a 17
percent increase in the volume of average earning assets and a 45 basis point
increase in the yield on average earning assets. Fully taxable equivalent
interest income on loans rose 20 percent as a result of a 13 percent increase
in average volume and a 56 basis point increase in yield. Interest income on
investment securities, including securities available for sale, increased 46
percent from 1994 to 1995 as a result of 39 percent increase in average volume
and a 26 basis point increase in the yield on investment securities. A 39
basis point decrease in yield along with a 46 percent decrease in average
balance decreased interest income on trading securities by 49 percent in 1995.
A 104 basis point increase in the rate paid on interest bearing liabilities
combined with a 19 percent increase in average volume resulted in a 51 percent
increase in interest expense on interest bearing liabilities in 1995. A
substantial portion of the increase in total interest expense was due to a 45
percent increase in interest expense on interest bearing deposits, resulting
from a 91 basis point increase in rate and a 17 percent increase in the
average volume. A 153 basis point increase in the rate paid on average
borrowed funds, along with a 28 percent increase in average volume, resulted
in a 72 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 6 basis points to
27
4.00 percent in 1996 and decreased 50 basis points to 4.06 percent in 1995.
The moderate decrease in net yield in 1996 was a function of the downward
repricing of loans and investment securities outpacing the repricing of
interest bearing liabilities. This is evidenced by the fact the yield on
interest earning assets decreased 15 basis points while the rate paid on
interest bearing liabilities decreased by 12 basis points. At the same time,
the portion of interest earning assets funded by interest bearing liabilities
in 1996 was 85 percent, unchanged from 1995.
During 1996, the net yield on interest earning assets was minimally 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 two basis points, unchanged from 1995. The greatest
impact from the use of interest rate contracts was on the yield and interest
income on loans where the net yield was increased by 5 basis points and
interest income was increased by $2.7 million. At the same time, the impact of
interest rate contracts on interest bearing liabilities was less significant,
increasing interest expense by $1.3 million and the net cost of funds by 1
basis point. 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 1996, the net interest rate spread decreased 3 basis points
to 3.28 percent from the 1995 spread of 3.31 percent as the cost of interest
bearing liabilities declined to a lesser extent than the yields earned on
earning assets. The decrease in 1995 was 59 basis points from 3.90 percent in
1994. 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
----------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Rate earned on interest earning assets............ 8.08% 8.22% 7.75% 7.95% 8.67%
Rate paid on interest bearing liabilities......... 4.84 4.96 3.92 3.62 4.29
Interest rate spread.............................. 3.24 3.26 3.83 4.33 4.38
Net yield on earning assets....................... 3.96 4.02 4.49 4.99 5.07
Interest income, as reported in "Consolidated Statements of Income", on a
nominal yield basis increased in 1996 by $65.5 million while net interest
income increased by $33.5 million. The six basis point decrease in the net
yield in 1996 was a result of a decrease in the yields in the Company's
interest earning assets and a decrease in the cost of interest bearing
liabilities, as discussed earlier.
28
[THIS PAGE INTENTIONALLY LEFT BLANK]
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
Year Ended December 31
--------------------------------------------------------
1996 1995
---------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
----------- -------- ------ ---------- -------- ------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $ 6,921,047 $605,748 8.75% $6,283,876 $558,529 8.89%
Investment securities:
Taxable............... 788,416 57,410 7.28 1,708,713 128,340 7.51
Tax-exempt............ 87,962 7,948 9.04 86,867 8,567 9.86
----------- -------- ---------- --------
Total investment secu-
rities............... 876,378 65,358 7.46 1,795,580 136,907 7.62
Investment securities
available for sale.... 2,144,031 140,656 6.56 965,990 54,348 5.63
Trading account securi-
ties.................. 93,604 6,418 6.86 67,591 5,112 7.56
Federal funds sold and
securities purchased
under agreements to
resell................ 115,209 6,163 5.35 69,988 4,238 6.05
Interest bearing depos-
its with other banks.. 1,005 61 6.09 3,081 182 5.91
----------- -------- ---------- --------
Total earning assets.. 10,151,274 824,404 8.12 9,186,106 759,316 8.27
Allowance for loan loss-
es..................... (114,595) (109,501)
Unrealized gain (loss)
on investment securi-
ties available for
sale................... (2,910) (5,772)
Cash and due from banks. 460,334 411,889
Other assets............ 444,717 392,473
----------- ----------
Total assets.......... $10,938,820 $9,875,195
=========== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Interest bearing liabil-
ities:
Deposits:
Demand................ $ 899,092 20,820 2.32 $ 860,694 21,635 2.51
Savings............... 2,688,610 107,975 4.02 2,005,572 77,309 3.85
Certificates of de-
posit less than
$100,000 and other
time deposits........ 2,651,026 151,198 5.70 2,540,713 144,878 5.70
Certificates of de-
posit of $100,000 or
more................. 884,095 50,506 5.71 801,530 47,533 5.93
----------- -------- ---------- --------
Total interest bearing
deposits............. 7,122,823 330,499 4.64 6,208,509 291,355 4.69
Federal funds pur-
chased................ 455,631 24,161 5.30 555,701 32,093 5.78
Securities sold under
agreements to repur-
chase................. 238,834 11,759 4.92 271,788 13,490 4.96
Other short-term
borrowings............ 190,360 9,699 5.10 191,328 11,036 5.77
FHLB and other
borrowings............ 624,422 41,825 6.70 546,402 37,982 6.95
----------- -------- ---------- --------
Total interest bearing
liabilities.......... 8,632,070 417,943 4.84 7,773,728 385,956 4.96
-------- ---- -------- ----
Noninterest bearing de-
mand deposits.......... 1,487,824 1,367,089
Accrued expenses and
other liabilities...... 66,094 54,176
Shareholders' equity.... 752,832 680,202
----------- ----------
Total liabilities and
shareholders' equity. $10,938,820 $9,875,195
=========== ==========
Net interest income/net
interest spread........ 406,461 3.28% 373,360 3.31%
==== ====
Net yield on earning as-
sets................... 4.00% 4.06%
==== ====
Taxable equivalent ad-
justment:
Loans.................. 851 1,091
Investment securities.. 2,947 3,234
Investment securities
available for sale.... 168 26
Trading account securi-
ties.................. 68 55
-------- --------
Total taxable equiva-
lent adjustment...... 4,034 4,406
-------- --------
Net interest income..... $402,427 $368,954
======== ========
- --------
* Loans on nonaccrual status have been included in the computation of average
balances.
30
GROWTH RATE
Year Ended December 31 AVERAGE BALANCES
----------------------------------------------------------------------------------- -------------------
1994 1993 1992
--------------------------- --------------------------- --------------------------- ONE YEAR FIVE YEAR
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ 1996- COMPOUNDED
Balance Expense Rate Balance Expense Rate Balance Expense Rate 1995 1996-1991
---------- -------- ------ ---------- -------- ------ ---------- -------- ------ -------- ----------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $5,578,992 $464,514 8.33% $5,087,981 $433,559 8.52% $4,448,154 $417,895 9.39% 10.14% 12.08%
Investment securities:
Taxable............... 1,047,677 79,853 7.62 885,547 67,143 7.58 1,714,028 131,887 7.69 (53.86) (12.81)
Tax-exempt............ 98,723 9,556 9.68 142,365 13,314 9.35 169,004 15,945 9.43 1.26 (14.79)
---------- -------- ---------- -------- ---------- --------
Total investment secu-
rities............... 1,146,400 89,409 7.80 1,027,912 80,457 7.83 1,883,032 147,832 7.85 (51.19) (13.02)
Investment securities
available for sale.... 843,684 43,237 5.12 556,701 33,245 5.97 55,618 3,789 6.81 121.95 --
Trading account securi-
ties.................. 125,805 9,996 7.95 164,756 9,885 6.00 94,590 6,631 7.01 38.49 (1.32)
Federal funds sold and
securities purchased
under agreements to
resell................ 152,466 6,326 4.15 117,212 3,399 2.90 99,656 3,315 3.33 64.61 (4.16)
Interest bearing depos-
its with other banks.. 12,218 826 6.76 19,939 1,315 6.60 18,772 1,293 6.89 (67.39) (46.51)
---------- -------- ---------- -------- ---------- --------
Total earning assets.. 7,859,565 614,308 7.82 6,974,501 561,860 8.06 6,599,822 580,755 8.80 10.51 11.32
Allowance for loan loss-
es..................... (114,770) (103,566) (70,888) 4.65 14.50
Unrealized gain (loss)
on investment securi-
ties available for
sale................... (3,582) 30 -- (49.58) --
Cash and due from banks. 387,531 348,238 318,973 11.76 9.61
Other assets............ 376,582 343,168 341,957 13.31 8.96
---------- ---------- ----------
Total assets.......... $8,505,326 $7,562,372 $7,189,864 10.77 11.11
========== ========== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Interest bearing liabil-
ities:
Deposits:
Demand................ $ 841,308 19,942 2.37 $ 704,939 16,952 2.40 $ 588,655 16,605 2.82 4.46 13.26
Savings............... 1,906,063 59,062 3.10 1,787,984 51,171 2.86 1,691,701 58,169 3.44 34.06 13.22
Certificates of de-
posit less than
$100,000 and other
time deposits........ 1,915,330 91,729 4.79 1,577,900 78,388 4.97 1,617,201 96,196 5.95 4.34 9.98
Certificates of de-
posit of $100,000 or
more................. 645,780 29,857 4.62 494,895 22,133 4.47 504,824 25,432 5.04 10.30 12.92
---------- -------- ---------- -------- ---------- --------
Total interest bearing
deposits............. 5,308,481 200,590 3.78 4,565,718 168,644 3.69 4,402,381 196,402 4.46 14.73 11.92
Federal funds pur-
chased................ 378,826 17,288 4.56 408,529 12,473 3.05 617,697 21,822 3.53 (18.01) (0.27)
Securities sold under
agreements to repur-
chase................. 253,867 8,955 3.53 244,989 6,885 2.81 273,287 9,141 3.34 (12.12) (10.17)
Other short-term
borrowings............ 226,493 10,064 4.44 211,755 7,000 3.31 191,830 7,727 4.03 (0.51) 8.48
FHLB and other
borrowings............ 359,973 18,678 5.19 278,989 11,633 4.17 45,515 2,354 5.17 14.28 95.34
---------- -------- ---------- -------- ---------- --------
Total interest bearing
liabilities.......... 6,527,640 255,575 3.92 5,709,980 206,635 3.62 5,530,710 237,446 4.29 11.04 11.21
-------- ---- -------- ---- -------- ----
Noninterest bearing de-
mand deposits.......... 1,329,615 1,241,486 1,100,723 8.83 10.48
Accrued expenses and
other liabilities...... 39,751 39,504 49,846 22.00 3.63
Shareholders' equity.... 608,320 571,402 508,585 10.68 12.03
---------- ---------- ----------
Total liabilities and
shareholders' equity. $8,505,326 $7,562,372 $7,189,864 10.77 11.11
========== ========== ==========
Net interest income/net
interest spread........ 358,733 3.90% 355,225 4.44% 343,309 4.51%
==== ==== ====
Net yield on earning as-
sets................... 4.56% 5.09% 5.20%
==== ==== ====
Taxable equivalent ad-
justment:
Loans.................. 1,896 2,188 2,454
Investment securities.. 3,386 4,686 5,840
Investment securities
available for sale.... 190 277 70
Trading account securi-
ties.................. 53 108 83
-------- -------- --------
Total taxable equiva-
lent adjustment...... 5,525 7,259 8,447
-------- -------- --------
Net interest income..... $353,208 $347,966 $334,862
======== ======== ========
31
RATE/VOLUME VARIANCE ANALYSIS
Taxable Equivalent Basis
Average Volume Change in Volume Average Rate
--------------------------------- --------------------- ----------------
1996 1995 1994 1996-1995 1995-1994 1996 1995 1994
----------- ---------- ---------- --------- ---------- ---- ---- ----
(in Thousands)
EARNING ASSETS:
Loans, net of unearned
income................. $ 6,921,047 $6,283,876 $5,578,992 $ 637,171 $ 704,884 8.75% 8.89% 8.33%
Investment securities:
Taxable................ 788,416 1,708,713 1,047,677 (920,297) 661,036 7.28 7.51 7.62
Tax-exempt............. 87,962 86,867 98,723 1,095 (11,856) 9.04 9.86 9.68
----------- ---------- ---------- --------- ----------
Total investment
securities........... 876,378 1,795,580 1,146,400 (919,202) 649,180 7.46 7.62 7.80
Investment securities
available for sale..... 2,144,031 965,990 843,684 1,178,041 122,306 6.56 5.63 5.12
Trading account
securities............. 93,604 67,591 125,805 26,013 (58,214) 6.86 7.56 7.95
Federal funds sold and
securities purchased
under agreements to
resell................. 115,209 69,988 152,466 45,221 (82,478) 5.35 6.05 4.15
Interest bearing
deposits with other
banks.................. 1,005 3,081 12,218 (2,076) (9,137) 6.09 5.91 6.76
----------- ---------- ---------- --------- ----------
Total earning assets... $10,151,274 $9,186,106 $7,859,565 $ 965,168 $1,326,541 8.12 8.27 7.82
=========== ========== ========== ========= ==========
INTEREST BEARING
LIABILITIES:
Deposits:
Demand................. $ 899,092 $ 860,694 $ 841,308 $ 38,398 $ 19,386 2.32 2.51 2.37
Savings................ 2,688,610 2,005,572 1,906,063 683,038 99,509 4.02 3.85 3.10
Certificates of deposit
less than $100,000 and
other time deposits... 2,651,026 2,540,713 1,915,330 110,313 625,383 5.70 5.70 4.79
Certificates of deposit
of $100,000 or more... 884,095 801,530 645,780 82,565 155,750 5.71 5.93 4.62
----------- ---------- ---------- --------- ----------
Total interest bearing
deposits............. 7,122,823 6,208,509 5,308,481 914,314 900,028 4.64 4.69 3.78
Federal funds purchased. 455,631 555,701 378,826 (100,070) 176,875 5.30 5.78 4.56
Securities sold under
agreements to
repurchase............. 238,834 271,788 253,867 (32,954) 17,921 4.92 4.96 3.53
Other short-term
borrowings............. 190,360 191,328 226,493 (968) (35,165) 5.10 5.77 4.44
FHLB and other
borrowings............. 624,422 546,402 359,973 78,020 186,429 6.70 6.95 5.19
----------- ---------- ---------- --------- ----------
Total interest bearing
liabilities........... $ 8,632,070 $7,773,728 $6,527,640 $ 858,342 $1,246,088 4.84 4.96 3.92
=========== ========== ========== ========= ========== ---- ---- ----
Net interest income/net
interest spread....... 3.28% 3.31% 3.90%
==== ==== ====
Net yield on earning
assets................ 4.00% 4.06% 4.56%
==== ==== ====
Net cost of funds...... 4.12% 4.20% 3.25%
==== ==== ====
32
Variance Attributed to
------------------------------------------------------
Interest Income/Expense Variance 1996 1995
--------------------------- ------------------- ------------------------- ---------------------------
1996 1995 1994 1996-1995 1995-1994 VOLUME RATE MIX Volume Rate Mix
-------- -------- -------- --------- --------- ------- ------- ------- ------- -------- --------
(in Thousands)
EARNING ASSETS:
Loans, net of unearned
income................. $605,748 $558,529 $464,514 $47,219 $94,015 $56,634 $(8,546) $(869) $58,689 $ 31,365 $ 3,961
Investment securities:
Taxable................ 57,410 128,340 79,853 (70,930) 48,487 (69,123) (3,916) 2,109 50,384 (1,163) (734)
Tax-exempt............. 7,948 8,567 9,556 (619) (989) 108 (718) (9) (1,148) 180 (21)
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------- --------
Total investment
securities........... 65,358 136,907 89,409 (71,549) 47,498 (69,015) (4,634) 2,100 49,236 (983) (755)
Investment securities
available for sale..... 140,656 54,348 43,237 86,308 11,111 66,278 9,025 11,005 6,268 4,229 614
Trading account
securities............. 6,418 5,112 9,996 1,306 (4,884) 1,967 (478) (183) (4,625) (481) 222
Federal funds sold and
securities purchased
under agreements to
resell................. 6,163 4,238 6,326 1,925 (2,089) 2,738 (494) (319) (3,422) 2,905 (1,572)
Interest bearing
deposits with other
banks.................. 61 182 826 (121) (644) (123) 6 (4) (618) (104) 78
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------- --------
Total earning assets... 824,404 759,316 614,308 65,088 145,007 58,479 (5,121) 11,730 105,528 36,931 2,548
INTEREST BEARING
LIABILITIES:
Deposits:
Demand................. 20,820 21,635 19,942 (815) 1,693 965 (1,704) (76) 460 1,206 27
Savings................ 107,975 77,309 59,062 30,666 18,247 26,329 3,235 1,102 3,083 14,412 752
Certificates of deposit
less than $100,000 and
other time deposits... 151,198 144,878 91,729 6,320 53,149 6,290 28 2 29,950 17,491 5,709
Certificates of deposit
of $100,000 or more... 50,506 47,533 29,857 2,973 17,676 4,896 (1,744) (179) 7,201 8,440 2,035
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------- --------
Total interest bearing
deposits............. 330,499 291,355 200,590 39,144 90,765 38,480 (185) 849 40,694 41,549 8,523
Federal funds purchased. 24,161 32,093 17,288 (7,932) 14,805 (5,779) (2,625) 472 8,072 4,590 2,143
Securities sold under
agreements to
repurchase............. 11,759 13,490 8,955 (1,731) 4,535 (1,636) (108) 13 632 3,646 257
Other short-term
borrowings............. 9,699 11,036 10,064 (1,337) 972 (56) (1,288) 7 (1,563) 2,999 (465)
FHLB and other
borrowings............. 41,825 37,982 18,678 3,843 19,304 5,423 (1,383) (197) 9,673 6,345 3,286
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------- --------
Total interest bearing
liabilities........... 417,943 385,956 255,575 31,987 130,381 36,432 (5,589) 1,144 57,508 59,129 13,744
-------- -------- -------- ------- ------- ------- ------- ------- ------- -------- --------
Net interest income/net
interest spread....... $406,461 $373,360 $358,733 $33,101 $14,626 $22,047 $ 468 $10,586 $48,020 $(22,198) $(11,196)
======== ======== ======== ======= ======= ======= ======= ======= ======= ======== ========
Net yield on earning
assets................
Net cost of funds......
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 economic slowdown in these markets could have
an effect on most regional bank holding companies and could impact 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 write-downs, 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 64 percent in 1996 after increasing 29
percent in 1995 and decreasing 24 percent in 1994. Increases in net charge-
offs in consumer installment loans and commercial, financial and agricultural
loans constituted the majority of the total $6.8 million increase in net loan
charge-offs in 1996. The increase in 1995 was due to increased net charge-offs
in all loan categories with the exception of residential real estate
mortgages. The decrease in net charge-offs in 1994 resulted from decreased net
charge-offs in all categories of loans with the exception of commercial real
estate loans. During 1996, net charge-offs of commercial, financial and
agricultural loans increased by $1.8 million and net charge-offs of consumer
installment loans increased $5.6 million. With regard to the Company's
consumer installment loan portfolio, net charge-offs for credit card
receivables, which represented only 3 percent of the Company's loan portfolio,
increased as a percentage of average volume from 2.58 percent in 1995 to 3.89
percent in 1996. 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 0.12 percent in 1995 to 0.28 percent
in 1996.
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,
1996:
SUMMARY OF LOAN LOSS EXPERIENCE
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(in Thousands)
Loans, net of unearned
income:
Average outstanding
during the year....... $6,921,047 $6,283,876 $5,578,992 $5,087,981 $4,448,154
========== ========== ========== ========== ==========
Allowance for loan loss-
es:
Balance at beginning of
year.................. $ 111,235 $ 110,958 $ 114,233 $ 87,463 $ 59,608
Charge-offs:
Commercial, financial
and agricultural...... 5,745 4,924 4,028 5,410 6,681
Real estate--construc-
tion.................. 33 228 70 645 380
Real estate--mortgage:
Residential........... 1,284 471 473 884 1,357
Commercial............ 584 1,339 1,065 875 4,949
Consumer installment... 15,482 10,602 10,375 12,137 19,316
---------- ---------- ---------- ---------- ----------
Total............... 23,128 17,564 16,011 19,951 32,683
Recoveries:
Commercial, financial
and agricultural...... 1,397 2,395 3,428 4,315 2,387
Real estate--construc-
tion.................. 229 155 50 50 309
Real estate--mortgage:
Residential........... 373 206 169 328 444
Commercial............ 239 80 207 494 409
Consumer installment... 3,325 3,997 3,818 3,840 3,493
---------- ---------- ---------- ---------- ----------
Total............... 5,563 6,833 7,672 9,027 7,042
---------- ---------- ---------- ---------- ----------
Net charge-offs........ 17,565 10,731 8,339 10,924 25,641
Provision charged to in-
come................... 17,630 11,008 3,816 36,090 53,325
Additions due to acqui-
sitions................ 7,173 -- 1,248 1,604 171
---------- ---------- ---------- ---------- ----------
Balance at end of year.. $ 118,473 $ 111,235 $ 110,958 $ 114,233 $ 87,463
========== ========== ========== ========== ==========
Net charge-offs to aver-
age loans outstanding
during the year........ .25% .17% .15% .21% .58%
35
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 increased 7 percent to $118.5 million at December 31,
1996 from December 31, 1995, representing 1.59 percent of outstanding loans
compared to 1.69 percent at December 31, 1995 and 1.85 percent at December 31,
1994. As shown in the table below, management determined that at December 31,
1996, approximately 16.0 percent of the allowance for loan losses was related
to commercial, financial and agricultural loans, 22.6 percent was associated
with real estate loans and 21.8 percent was related to consumer installment
loans. Approximately 39.6 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.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- ----------------
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....... $ 18,952 16.0% $ 15,907 14.3% $ 14,425 13.0% $ 15,421 13.5% $14,082 16.1%
Real estate --
construction.......... 5,370 4.5 3,671 3.3 4,549 4.1 5,026 4.4 5,510 6.3
Real estate -- mortgage:
Residential............ 11,270 9.5 9,900 8.9 5,548 5.0 3,427 3.0 3,061 3.5
Commercial............. 10,116 8.6 15,684 14.1 13,537 12.2 16,906 14.8 9,359 10.7
Consumer installment.... 25,831 21.8 21,913 19.7 20,971 18.9 18,506 16.2 20,641 23.6
Unallocated............. 46,934 39.6 44,160 39.7 51,928 46.8 54,947 48.1 34,810 39.8
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
$118,473 100.0% $111,235 100.0% $110,958 100.0% $114,233 100.0% $87,463 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======= =====
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 collection of both principal and interest is
assured by way of collateralization, guarantees or other security. 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, 1996, were $28.9 million, an increase
of $5.8 million from year-end 1995. Nonperforming loans increased $8.2 million
from year-end 1995 to $21.9 million. The increase in nonperforming assets in
1996 was due in part to nonperforming assets acquired in connection with
business combinations completed during 1996. During 1996, $6.2 million of
loans were transferred to other real estate owned offset by total sales of
other real estate owned of $9.0 million. Of these sales, $7.2 million were
cash sales while $1.8 million represented loans originated by the Subsidiary
Banks to facilitate the sale of other real estate. During 1995, loans
transferred to other real estate owned totaled $7.6 million, cash sales were
$3.8 million, and loans to facilitate the sale of other real estate owned were
$1.8 million.
36
Even though the stabilization in the commercial real estate market in the
Southeastern part of the country continued during 1996, management will
continue to monitor the Company's real estate and commercial loan portfolio
during 1997. Particular attention will be focused on those credits identified
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 increased $1.4 million from year-end 1995 while
foreclosed real estate declined $2.5 million for the year. Loans past due 90
days or more increased $2.9 million compared to the 1995 year-end level. Other
foreclosed or repossessed assets at year-end 1996 totaled approximately
$850,000.
At December 31, 1996, nonperforming assets were 0.39 percent of loans
outstanding and foreclosed real estate held for sale compared to 0.35 percent
at year-end 1995. Nonaccrual loans and renegotiated loans as a percentage of
loans outstanding at year-end 1996 were 0.26 percent and 0.03 percent,
respectively.
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,
1996 and 1995.
NONPERFORMING ASSETS
December 31
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(in Thousands)
Loans on nonaccrual............... $19,336 $12,538 $12,128 $12,466 $21,762
Renegotiated loans................ 2,517 1,070 1,597 7,377 7,913
------- ------- ------- ------- -------
Total nonperforming loans..... 21,853 13,608 13,725 19,843 29,675
Other real estate................. 7,064 9,550 7,471 21,972 39,355
------- ------- ------- ------- -------
Total nonperforming assets.... $28,917 $23,158 $21,196 $41,815 $69,030
======= ======= ======= ======= =======
Accruing loans 90 days past due... $ 8,034 $ 5,181 $ 4,372 $ 4,203 $ 3,661
Total nonperforming loans as a
percentage of loans.............. .29% .21% .23% .37% .61%
Total nonperforming assets as a
percentage of loans
and ORE.......................... .39 .35 .35 .77 1.41
Loans 90 days past due as a per-
centage of loans................. .11 .08 .07 .08 .08
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, 1996.
37
Details of nonaccrual loans at December 31, 1996 and 1995 appear below:
1996 1995
------- -------
(in Thousands)
Principal balance............................................... $19,336 $12,538
Interest that would have been recorded under original terms..... 1,884 1,374
Interest actually recorded...................................... 619 620
Details of loans with terms modified in troubled debt restructurings at
December 31, 1996 and 1995 appear below:
1996 1995
------- -------
(in Thousands)
Principal balance............................................... $ 2,517 $ 1,070
Interest that would have been recorded under original terms..... 226 116
Interest actually recorded...................................... 181 104
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 credit losses as an adjustment to the allowance for credit
losses. FAS114 does not apply to debt securities, leases, loans that are
measured at fair value or at the lower of cost or fair value, or to smaller
balance, homogeneous loans that are collectively evaluated for impairment.
Detailed in the table below are loans designated by the Company as impaired,
as defined by FAS114, at December 31, 1996, 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....... $ 3,997 $ 742 $ 4,528 $ 1,276 $ 8,525 $2,018
Real estate--construc-
tion................... 1,981 189 348 16 2,329 205
Real estate--mortgage:
Residential............ 200 18 199 59 399 77
Commercial............. 1,898 536 12,563 1,943 14,461 2,479
Consumer installment.... -- -- -- -- -- --
------- ------- -------- ------- ------- ------
Total............... $ 8,076 $ 1,485 $ 17,638 $ 3,294 $25,714 $4,779
======= ======= ======== ======= ======= ======
At December 31, 1996, impaired loans totaled $25.7 million with a total
related allowance of $4.8 million. Of these amounts, nonaccrual impaired loans
totaled $8.1 million with a related allowance of $1.5 million. Of the $17.6
million in accruing impaired loans, there were loans totaling approximately
$200,000 for which there was no related allowance.
Impaired loans totaled $38.9 million at December 31, 1995, with a total
related allowance of $11.3 million, with nonaccrual impaired loans totaling
$3.4 million with a related allowance of approximately $900,000. Included in
the $35.4 million of accruing impaired loans were loans totaling approximately
$200,000 for which there was no related allowance.
As indicated above, of the $19.3 million of total nonaccrual loans at
December 31, 1996, $8.1 million were considered impaired. The balance of
nonaccrual loans consisted of residential mortgages, credit card receivables,
38
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.
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 increased 21 percent for 1996 and 37 percent for 1995.
NONINTEREST INCOME
Year Ended December 31 Percent Change
------------------------- -------------------
1996 1995 1994 1996/1995 1995/1994
-------- -------- ------- --------- ---------
(in Thousands)
Service charges on deposit ac-
counts......................... $ 61,035 $ 56,104 $49,107 8.8% 14.2%
Trust fees...................... 16,469 15,950 16,117 3.3 (1.0)
Trading account profits (losses)
and commissions................ 13,854 12,269 (2,533) 12.9 --
Investment securities gains,
net............................ 9,577 2,611 3,222 266.8 (19.0)
Loss on purchase of securities
from common trust fund......... -- -- (8,222) -- --
Retail investment sales income.. 12,805 9,014 6,022 42.1 49.7
Credit card service charges and
fees........................... 10,031 7,901 7,260 27.0 8.8
Other........................... 30,969 23,901 22,178 29.6 7.8
-------- -------- -------
Total noninterest income....... $154,740 $127,750 $93,151 21.1 37.1
======== ======== =======
Fee income from service charges on deposit accounts increased 9 percent in
1996 following a 14 percent increase in 1995. 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 1996 and
1995 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 $1.6 million and $14.8 million in 1996 and 1995, respectively. In
1994, trading account profits and commissions on bond sales and trading
activities represented a loss of $2.5 million, 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.
For 1996, trading account profits related specifically to derivative
securities were approximately $1.0 million, consisting of $700,000 of profits
related to collateralized mortgage obligations held in the trading account and
$300,000 of profits 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,
1996, see page 17.
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
39
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, 1996, these
securities were classified as held-to-maturity in the Company's investment
securities portfolio at $26.0 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, 1996, 1995, or 1994, other than these inverse
floaters held by the parent company.
Retail investment sales income increased 42 percent in 1996 and 50 percent
in 1995 reflecting management's continued efforts to increase sales in this
area. Credit card service charge and fee income increased 27 percent in 1996
after increasing 9 percent in 1995. Increases in merchants' discounts and
annual credit card fees accounted for the increase in 1996.
Nonrecurring items of other noninterest income totaled $13.0 million in 1996
and $3.9 million for 1995. Nonrecurring items of noninterest income include
gains on sales of investment securities, gains on the sale of fixed assets and
other real estate owned, gains on sales of branches, and gains on loan
settlements. Nonrecurring items represented eight percent of overall
noninterest income in 1996, three percent in 1995, and five percent in 1994.
The net gains on sales of investment securities in 1996 were $9.6 million
compared to $2.6 million in 1995, while gains on sales of branches in 1996
totaled $2.5 million.
Recurring items of other noninterest income increased $17.9 million in 1996
following an increase of $27.2 million in 1995. The increase in 1996 was due
to increases in service charges on deposit accounts, retail investment sales
income, and credit card service charges and fees while the increase in 1995
resulted primarily from the lack of trading account losses experienced in 1994
along with increases in service charge income.
NONINTEREST EXPENSE
Noninterest expense increased 9 percent in 1996 and 1995. Total salaries,
benefits and commissions, as reflected in the "Consolidated Statements of
Income", increased 12 percent from 1995. Salaries increased 11 percent during
1996 and 9 percent in 1995 due to normal increases relating to additions to
staff and merit increases, while the increase in 1996 also reflected an
increase in incentive bonuses of $5.0 million, or 57 percent. During 1996,
other personnel expense, primarily employee benefits, increased 21 percent
after increasing 1 percent in 1995. The increase in employee benefits during
1996 was due to increased pension plan and ESOP expense.
NONINTEREST EXPENSE
Year Ended December 31 Percent Change
-------------------------- -------------------
1996 1995 1994 1996/1995 1995/1994
-------- -------- -------- --------- ---------
(in Thousands)
Salaries......................... $145,432 $130,709 $119,846 11.3% 9.1%
Commissions...................... 4,151 3,989 2,501 4.1 59.5
Other personnel expense.......... 27,039 22,404 22,135 20.7 1.2
Net occupancy expense............ 25,232 23,707 23,170 6.4 2.3
Equipment expense................ 22,640 21,990 21,534 3.0 2.1
Marketing........................ 8,608 6,837 7,074 25.9 (3.4)
Professional services............ 23,776 24,185 17,472 (1.7) 38.4
Supplies......................... 9,125 8,600 8,053 6.1 6.8
FDIC insurance................... 10,052 9,891 14,745 1.6 (32.9)
Other............................ 61,431 55,916 46,510 9.9 20.2
-------- -------- --------
Total noninterest expense....... $337,486 $308,228 $283,040 9.5 8.9
======== ======== ========
Net occupancy expense increased by six percent in 1996 following a two
percent increase in 1995. These increases in occupancy expense were due
principally to bank acquisitions, opening of new branches, and normal
renovation of existing properties. Equipment expense increased three percent
in 1996 and two percent in 1995 due to equipment replacements and upgrades
necessary to support increased business growth.
40
Other noninterest expense, as reflected in the "Consolidated Statements of
Income", increased by 8 percent compared to an increase of 21 percent in 1995.
Professional service expenses, while decreasing slightly in 1996, increased 38
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. Marketing expense increased 26
percent in 1996, primarily due to increased advertising costs. The amount the
Subsidiary Banks paid for federal deposit insurance increased only $200,000 in
1996 after decreasing $4.9 million in 1995. The decreases in 1995 and 1996,
when compared to 1994, were due to a substantial decrease in the statutory
premium rates effective June, 1995, offset in 1996 by the payment of a special
Savings Association Insurance Fund ("SAIF") assessment of $7.2 million. 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.
INCOME TAXES
Income tax expense increased $9.9 million, or 16 percent, to $73.1 million
for the year ended December 31, 1996. The effective tax rate as a percentage
of pretax income was 36.2 percent in 1996, 35.6 percent in 1995 and 33.9
percent in 1994. The statutory federal rate was 35 percent during 1996, 1995,
and 1994. The increase in the effective tax rate for 1996 and 1995 was due
primarily to decreases in the amount of tax-exempt interest income. For
further information concerning the provision for income taxes, refer to Note
13, Income Taxes, of the "Notes to Consolidated Financial Statements".
OTHER ACCOUNTING ISSUES
In 1996, the Financial Accounting Standards Board ("FASB") issued Statement
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("FAS125"). FAS125 prescribes new accounting
and reporting standards for sales, securitizations, and servicing of
receivables and other financial assets, for certain secured borrowing and
collateral transactions, and for extinguishments of liabilities. FAS125
establishes new accounting standards for determining whether a transfer of
financial assets constitutes a sale and, if so, the determination of any
resulting gain or loss. FAS125 is to be applied to all transactions occurring
after December 31, 1996. The effective date of certain provisions of FAS125
was deferred by the FASB with the issuance of Statement No. 127, Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125. Management
does not believe that the adoption of FAS125 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, 1996 and 1995.............. 44
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994............................................................ 45
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994......................................... 46
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994...................................................... 47
Summary of Significant Accounting Policies -- December 31, 1996, 1995 and
1994..................................................................... 48
Notes to Consolidated Financial Statements -- December 31, 1996, 1995 and
1994..................................................................... 52
Quarterly Results (Unaudited)............................................. 77
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Birmingham, Alabama
January 21, 1997
43
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
------------------------
1996 1995
----------- -----------
(in Thousands)
ASSETS
Cash and due from banks.............................. $ 670,389 $ 565,188
Interest bearing deposits with other banks........... 487 1,697
Investment securities (market value of $1,121,347
and $737,166 for 1996 and 1995, respectively):
Taxable............................................ 1,020,665 642,945
Tax-exempt......................................... 93,522 80,187
----------- -----------
Total investment securities....................... 1,114,187 723,132
Investment securities available for sale (unrealized
holding loss of $2,631 for 1996; unrealized holding
gain of $20,545 for 1995)........................... 2,041,103 2,142,776
Trading account securities........................... 91,452 101,916
Federal funds sold and securities purchased under
agreements to resell................................ 54,804 274,347
Loans................................................ 7,459,839 6,575,643
Less: Unearned income................................ (2,711) (2,871)
Allowance for loan losses.......................... (118,473) (111,235)
----------- -----------
Net loans......................................... 7,338,655 6,461,537
Premises and equipment, net.......................... 250,218 227,928
Other assets......................................... 252,917 179,848
----------- -----------
TOTAL ASSETS..................................... $11,814,212 $10,678,369
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing................................. $ 1,748,790 $ 1,535,632
Interest bearing.................................... 7,471,809 6,555,186
----------- -----------
Total deposits.................................... 9,220,599 8,090,818
Federal funds purchased.............................. 602,914 776,308
Securities sold under agreements to repurchase....... 205,053 295,391
Other short-term borrowings.......................... 201,901 116,276
Accrued expenses and other liabilities............... 79,213 72,069
FHLB and other borrowings............................ 701,470 590,044
----------- -----------
Total liabilities................................. 11,011,150 9,940,906
Shareholders' equity:
Common stock of $2 par value:
Authorized -- 100,000,000 shares;
Issued -- 40,524,717 shares in 1996 and 40,325,281
shares in 1995.................................... 81,049 80,650
Loans to finance stock purchases.................... (6,026) (5,628)
Unearned restricted stock........................... (1,080) --
Surplus............................................. 58,126 54,698
Net unrealized holding gain (loss) on available-for-
sale securities.................................... (2,778) 11,978
Retained earnings................................... 673,771 595,765
----------- -----------
Total shareholders' equity........................ 803,062 737,463
Commitments (Notes 6 and 7)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $11,814,212 $10,678,369
=========== ===========
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
--------------------------------------
1996 1995 1994
------------ ------------ ------------
(in Thousands Except Per Share Data)
INTEREST INCOME:
Interest and fees on loans.............. $ 604,897 $ 557,438 $ 462,618
Interest on investment securities:
Taxable................................ 57,410 128,340 79,854
Tax-exempt............................. 5,001 5,333 6,169
------------ ------------ ------------
Total interest on investment securi-
ties................................. 62,411 133,673 86,023
Interest on investment securities avail-
able for sale.......................... 140,488 54,322 43,047
Interest on trading account securities.. 6,350 5,057 9,943
Interest on federal funds sold and secu-
rities purchased under agreements to
resell................................. 6,163 4,238 6,326
Interest on interest bearing deposits
with other banks....................... 61 182 826
------------ ------------ ------------
TOTAL INTEREST INCOME................. 820,370 754,910 608,783
INTEREST EXPENSE:
Interest on deposits.................... 330,499 291,355 200,590
Interest on federal funds purchased and
securities sold under agreements to
repurchase............................. 35,920 45,583 26,243
Interest on other short-term borrowings. 9,699 11,036 10,064
Interest on FHLB and other borrowings... 41,825 37,982 18,678
------------ ------------ ------------
TOTAL INTEREST EXPENSE................ 417,943 385,956 255,575
------------ ------------ ------------
Net interest income................... 402,427 368,954 353,208
Provision for loan losses................ 17,630 11,008 3,816
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES...................... 384,797 357,946 349,392
NONINTEREST INCOME:
Service charges on deposit accounts..... 61,035 56,104 49,107
Trust fees.............................. 16,469 15,950 16,117
Trading account profits (losses) and
commissions............................ 13,854 12,269 (2,533)
Investment securities gains, net........ 9,577 2,611 3,222
Loss on purchase of securities from com-
mon trust fund......................... -- -- (8,222)
Retail investment sales income.......... 12,805 9,014 6,022
Credit card service charges and fees.... 10,031 7,901 7,260
Other................................... 30,969 23,901 22,178
------------ ------------ ------------
TOTAL NONINTEREST INCOME.............. 154,740 127,750 93,151
------------ ------------ ------------
NONINTEREST EXPENSE:
Salaries, benefits and commissions...... 176,622 157,102 144,482
Net occupancy expense................... 25,232 23,707 23,170
Equipment expense....................... 22,640 21,990 21,534
FDIC insurance.......................... 10,052 9,891 14,745
Other................................... 102,940 95,538 79,109
------------ ------------ ------------
TOTAL NONINTEREST EXPENSE............. 337,486 308,228 283,040
------------ ------------ ------------
Net income before income tax expense.. 202,051 177,468 159,503
Income tax expense....................... 73,124 63,243 54,064
------------ ------------ ------------
NET INCOME............................ $ 128,927 $ 114,225 $ 105,439
============ ============ ============
Net income per common share.............. $ 3.19 $ 2.82 $ 2.62
Weighted average common shares outstand-
ing..................................... 40,371 40,513 40,320
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, 1996, 1995 AND 1994
Net Unrealized
Holding Gain
Loans to (Loss) on
Finance Available- Total
Common Stock Retained Treasury Deferred For-Sale Shareholders'
Stock Purchases Surplus Earnings Stock Compensation Securities Equity
-------- --------- -------- --------- -------- ------------ -------------- -------------
(in Thousands)
Balance December 31,
1993................... $ 80,100 $(6,576) $ 50,371 $ 453,868 $ -- $ -- $ 7,232 $ 584,995
Net income--1994........ -- -- -- 105,439 -- -- -- 105,439
Cash common dividends
declared
($.92 per share)....... -- -- -- (33,898) -- -- -- (33,898)
Pre-merger transactions
of pooled entities..... -- -- -- (766) -- -- -- (766)
Exercise of stock op-
tions.................. 91 -- 489 -- -- -- -- 580
Tax benefit of stock op-
tions 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.................. -- -- 425 -- -- -- -- 425
Change in unrealized
gain (loss) on
securities available
for sale............... -- -- -- -- -- -- (19,579) (19,579)
-------- ------- -------- --------- ------- ------- -------- ---------
Balance December 31,
1994................... 80,191 (5,914) 51,312 524,635 -- -- (12,347) 637,877
Net income--1995........ -- -- -- 114,225 -- -- -- 114,225
Cash common dividends
declared ($1.12 per
share)................. -- -- -- (42,684) -- -- -- (42,684)
Pre-merger transactions
of pooled entities..... 1 -- 207 (411) -- -- -- (203)
Exercise of stock op-
tions.................. 458 -- 2,569 -- -- -- -- 3,027
Tax benefit of stock op-
tions exercised........ -- -- 610 -- -- -- -- 610
Loans to finance stock
purchases, net of
repayments............. -- 286 -- -- -- -- -- 286
Change in unrealized
gain (loss) on
securities available
for sale............... -- -- -- -- -- -- 24,325 24,325
-------- ------- -------- --------- ------- ------- -------- ---------
Balance December 31,
1995................... 80,650 (5,628) 54,698 595,765 -- -- 11,978 737,463
NET INCOME--1996........ -- -- -- 128,927 -- -- -- 128,927
CASH COMMON DIVIDENDS
DECLARED ($1.28 PER
SHARE)................. -- -- -- (50,454) -- -- -- (50,454)
PRE-MERGER TRANSACTIONS
OF POOLED ENTITIES..... -- -- 1,446 (330) -- -- -- 1,116
EXERCISE OF STOCK OP-
TIONS.................. 447 -- 3,866 -- -- -- -- 4,313
ISSUANCE OF RESTRICTED
STOCK.................. -- -- -- -- -- (1,296) -- (1,296)
TAX BENEFIT OF STOCK OP-
TIONS EXERCISED........ -- -- 162 -- -- -- -- 162
LOANS TO FINANCE STOCK
PURCHASES, NET OF
REPAYMENTS............. -- (398) -- -- -- -- -- (398)
AMORTIZATION OF RE-
STRICTED STOCK......... -- -- -- -- -- 216 -- 216
PURCHASE OF TREASURY
STOCK.................. -- -- -- -- (47,017) -- -- (47,017)
TREASURY SHARES ISSUED
FOR OPTIONS............ -- -- -- (137) 248 -- -- 111
TREASURY SHARES ISSUED
FOR BUSINESS
COMBINATIONS........... (48) -- (2,310) -- 46,769 -- -- 44,411
CASH PAID FOR FRACTIONAL
SHARES IN BUSINESS
COMBINATIONS........... -- -- (4) -- -- -- -- (4)
SHAREHOLDER CONTRIBU-
TION................... -- -- 268 -- -- -- -- 268
CHANGE IN UNREALIZED
GAIN (LOSS) ON
SECURITIES AVAILABLE
FOR SALE............... -- -- -- -- -- -- (14,756) (14,756)
-------- ------- -------- --------- ------- ------- -------- ---------
BALANCE DECEMBER 31,
1996................... $ 81,049 $(6,026) $ 58,126 $ 673,771 $ -- $(1,080) $ (2,778) $ 803,062
======== ======= ======== ========= ======= ======= ======== =========
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
----------------------------------
1996 1995 1994
---------- ---------- ----------
(in Thousands)
OPERATING ACTIVITIES:
Net income.................................. $ 128,927 $ 114,225 $ 105,439
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization.............. 35,674 33,083 31,254
Accretion of discount and loan fees........ (13,326) (16,476) (12,524)
Provision for loan losses.................. 17,630 11,008 3,816
Net change in trading account securities... 10,464 (43,904) 203,466
Net change in mortgage loans available for
sale...................................... (4,070) 2,462 2,272
Deferred tax expense....................... 3,086 2,406 2,005
Net gain on sale of investment securities.. (9,577) (2,611) (3,218)
Loss on purchase of securities from common
trust fund................................ -- -- 8,222
Net (gain) loss on sale of premises and
equipment................................. (41) 146 (179)
Net gain on sale of other real estate
owned..................................... (77) (338) (108)
Provision for losses on other real estate
owned, net of recoveries.................. 221 530 (125)
Gain on sale of branches................... (2,515) -- --
(Increase) decrease in interest receivable. 3,630 (1,813) (19,871)
(Increase) decrease in other assets........ (4,818) (6,910) 3,366
Increase (decrease) in interest payable.... (683) 18,029 8,571
Increase (decrease) in taxes payable....... 138 (613) 1,961
Increase (decrease) in other payables...... 10,061 (4,228) (4,536)
---------- ---------- ----------
Net cash provided by operating activities. 174,724 104,996 329,811
INVESTING ACTIVITIES:
Proceeds from sales of investment
securities................................. -- -- 698
Proceeds from maturities/calls of investment
securities................................. 232,657 447,801 334,622
Purchases of investment securities.......... (340,621) (4,302) (1,354,003)
Proceeds from sales of investment securities
available for sale......................... 799,697 685,648 242,350
Proceeds from maturities/calls of investment
securities available for sale.............. 497,260 150,062 113,877
Purchases of investment securities available
for sale................................... (1,297,384) (1,384,385) (664,150)
Net (increase) decrease in federal funds
sold and securities purchased under
agreements to resell....................... 282,420 (221,934) 263,484
Net increase in loan portfolio.............. (413,196) (578,648) (474,748)
Net cash received (paid) in acquisitions of
banks...................................... (87,772) -- 811,471
Proceeds from sale of branches.............. (47,273) -- --
Purchases of premises and equipment......... (30,988) (28,302) (29,244)
Net decrease in interest bearing deposits
with other banks........................... 1,844 3,215 11,631
Proceeds from sales of other real estate
owned...................................... 7,207 3,841 7,398
---------- ---------- ----------
Net cash used by investing activities..... (396,149) (927,004) (736,614)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW
accounts and savings accounts.............. 619,531 363,479 113,556
Net increase (decrease) in time deposits.... (101,443) 215,868 219,990
Net increase (decrease) in federal funds
purchased.................................. (176,821) 287,053 70,451
Net increase (decrease) in securities sold
under agreements to repurchase............. (90,338) (63,957) 144,114
Net increase (decrease) in short-term
borrowings................................. 56,566 9,678 (66,484)
Proceeds from FHLB advances and other
borrowings................................. 162,500 175,904 161,512
Repayment of FHLB advances and other
borrowings................................. (50,378) (79,222) (2,004)
Purchase of treasury shares................. (45,590) -- (14)
Common dividends paid....................... (50,454) (42,684) (33,898)
Common dividends paid by pooled banks prior
to acquisition............................. (330) (411) (767)
Repayment of loans to finance stock
purchases.................................. 2,564 2,343 747
Proceeds from issuance of common stock...... -- -- 425
Proceeds from exercise of stock options..... 819 1,171 586
---------- ---------- ----------
Net cash provided by financing activities. 326,626 869,222 608,214
---------- ---------- ----------
Net increase in cash and due from banks...... 105,201 47,214 201,411
Cash and due from banks at beginning of the
year........................................ 565,188 517,974 316,563
---------- ---------- ----------
Cash and due from banks at end of the year... $ 670,389 $ 565,188 $ 517,974
========== ========== ==========
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, 1996, 1995 AND 1994
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 1996 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, (collectively, the "Subsidiary Banks"),
Compass Land Holding Corporation and Compass Underwriters, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS
The Company operates 208 branches in 96 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 primarily 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.
CONTINGENCIES
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
substantial compensatory and punitive damages in connection with 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.
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 fair value. Investment securities
held to
48
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
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.
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
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. Loan fees, net of direct costs,
are reflected as an adjustment to the yield of the related loan over the term
of the loan.
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 collection of both principal and interest is assured by way of
collateralization, guarantees or other security. 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 credit losses as an adjustment to the allowance for credit
losses. FAS114 does not apply to debt securities, leases, loans that are
49
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
measured at fair value or at the lower of cost or fair value, or to smaller
balance, homogeneous loans that are collectively evaluated for impairment. 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 has
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.
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".
STOCK BASED COMPENSATION
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
50
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
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. The Company adopted FAS123 in the
first quarter of 1996 and has elected to provide pro forma disclosures related
to the compensation cost of stock compensation awards.
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. Under the asset and
liability method, 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 the
asset and liability method, 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.
51
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(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, 1996 and 1995 were approximately $79.0 million and $86.0 million,
respectively.
(2) CASH FLOWS
The Company paid approximately $418.6 million, $367.9 million and $247.0
million in interest on deposits and other liabilities during 1996, 1995 and
1994, respectively.
A schedule of the Company's noncash investing and financing activities for
the years ended December 31, 1996, 1995 and 1994 follows:
December 31
-----------------------------
1996 1995 1994
-------- -------- ----------
(in Thousands)
Transfers of loans to other real estate owned... $ 6,197 $ 7,555 $ 3,569
Loans to facilitate the sale of other real es-
tate owned..................................... 1,800 1,756 11,421
Transfer of securities to investment securities
available for sale............................. -- 827,543 --
Transfer of securities available for sale to
held-to-maturity securities.................... 193,129 33,257 224,971
Tax benefit realized upon exercise of stock op-
tions.......................................... 162 610 27
Loans to finance stock purchases................ 2,962 2,065 85
Change in unrealized gain (loss) on available-
for-sale securities............................ (23,176) 37,308 (27,964)
Conversion of debentures ....................... 790 -- --
Repurchase liability associated with treasury
stock transaction.............................. 1,427 -- --
Issuance of treasury stock upon exercise of
stock options.................................. 248 -- 14
Acquisitions:
Assets acquired................................ $860,089 $ 327,889
Liabilities assumed............................ 725,548 1,139,538
-------- ----------
Net assets acquired/(liabilities assumed)..... 134,541 (811,649)
Treasury stock issued.......................... 46,769 --
-------- ----------
Cash paid/(received)........................... $ 87,772 $ (811,649)
======== ==========
Divestiture of branches:
Liabilities sold............................... $ 79,378
Assets sold.................................... 29,590
--------
Net liabilities sold.......................... $ 49,788
========
52
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(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, 1996 and 1995 were as
follows:
1996 1995
--------------------- ---------------------
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....... $ 56,757 $ 56,919 $ 975 $ 988
Mortgage-backed pass-through se-
curities........................ 291,289 296,186 335,591 345,301
CMOs and other mortgage deriva-
tive products................... 638,963 638,351 247,442 248,297
States and political subdivi-
sions........................... 86,018 88,860 70,710 74,195
Corporate........................ 39,890 39,754 67,179 67,123
Foreign.......................... 760 757 770 767
Other............................ 510 520 465 495
---------- ---------- ---------- ----------
Total.......................... $1,114,187 $1,121,347 $ 723,132 $ 737,166
========== ========== ========== ==========
1996 1995
--------------------- ---------------------
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 corporations....... $ 180,128 $ 179,641 $ 507,440 $ 501,637
Mortgage-backed pass-through se-
curities........................ 277,090 278,158 261,790 263,053
CMOs and other mortgage deriva-
tive products................... 1,419,221 1,421,830 1,189,346 1,175,478
States and political subdivi-
sions........................... -- -- 10,525 10,472
Corporate........................ 116,170 115,592 132,627 130,543
Other............................ 744 744 5,063 5,063
Equity securities................. 47,750 47,769 35,985 35,985
---------- ---------- ---------- ----------
Total.......................... $2,041,103 $2,043,734 $2,142,776 $2,122,231
========== ========== ========== ==========
Securities with principal amounts of approximately $1,182.1 million and
$1,130.2 million at December 31, 1996 and 1995, respectively, were pledged to
secure public deposits and for other purposes as required by law. The
unrealized gains and unrealized losses on investment securities and investment
securities available for sale related to the various categories as of December
31, 1996 and 1995, are detailed in the following table.
53
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
1996 1995
--------------------- ---------------------
UNREALIZED UNREALIZED Unrealized Unrealized
GAINS LOSSES Gains Losses
---------- ---------- ---------- ----------
(in Thousands)
Investment securities:
Debt securities:
U.S. Treasury and other U.S.
Government agencies
and corporations................ $ 162 $ -- $ 13 $ --
Mortgage-backed pass-through se-
curities........................ 5,193 296 9,857 147
CMOs and other mortgage deriva-
tive products................... 4,804 5,416 3,900 3,045
States and political subdivi-
sions........................... 2,906 64 3,504 19
Corporate........................ 128 264 316 372
Foreign.......................... -- 3 -- 3
Other............................ 10 -- 30 --
------- ------- ------- ------
Total........................... $13,203 $ 6,043 $17,620 $3,586
======= ======= ======= ======
Investment securities available for
sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies
and corporations................ $ 620 $ 133 $ 6,048 $ 245
Mortgage-backed pass-through se-
curities........................ 1,706 2,774 1,397 2,660
CMOs and other mortgage deriva-
tive products................... 4,941 7,550 14,938 1,070
States and political subdivi-
sions........................... -- -- 54 1
Corporate........................ 578 -- 2,084 --
Other............................ -- -- -- --
Equity securities................. -- 19 -- --
------- ------- ------- ------
Total........................... $ 7,845 $10,476 $24,521 $3,976
======= ======= ======= ======
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.
1996
---------------------
Carrying Market
Amount Value
---------- ----------
(in Thousands)
Investment securities:
Maturing within one year................................ $ 45,005 $ 45,109
Maturing after one but within five years................ 67,938 68,213
Maturing after five but within ten years................ 42,722 44,371
Maturing after ten years................................ 28,270 29,117
---------- ----------
183,935 186,810
Mortgage-backed pass-through securities and CMOs........ 930,252 934,537
---------- ----------
Total................................................. $1,114,187 $1,121,347
========== ==========
54
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
1996
---------------------
Market Amortized
Value Cost
---------- ----------
(in Thousands)
Investment securities available for sale:
Maturing within one year................................. $ 151,146 $ 150,722
Maturing after one but within five years................. 188,771 188,150
Maturing after five but within ten years................. 11 10
Maturing after ten years................................. 4,864 4,864
---------- ----------
344,792 343,746
Mortgage-backed pass-through securities and CMOs......... 1,696,311 1,699,988
---------- ----------
Total................................................... $2,041,103 $2,043,734
========== ==========
There were no sales of held-to-maturity securities in 1996 and 1995.
Proceeds from sales of investment securities classified as held-to-maturity
were $700,000 in 1994, with 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 generally accepted
accounting principles. Proceeds from sales of available-for-sale investment
securities were $799.7 million in 1996, $685.6 million in 1995, and $242.4
million in 1994. Gross gains of $9.8 million in 1996, $2.6 million in 1995 and
$4.0 million in 1994, and gross losses of $200,000 in 1996 and $1.2 million in
1995, 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. During 1996, investment securities available for sale totaling
$193.1 million were transferred to the held-to-maturity portfolio at a market
value of $192.6 million. No securities were transferred to the trading
portfolio during either 1996 or 1995.
(4) LOANS AND ALLOWANCES FOR LOAN LOSSES AND LOSSES ON OTHER REAL ESTATE
At December 31, 1996 and 1995, the composition of the loan portfolio was as
follows:
1996 1995
---------- ----------
(in Thousands)
Commercial, financial and agricultural.................... $1,729,332 $1,371,189
Real estate -- construction............................... 554,565 447,101
Real estate -- mortgage................................... 3,796,561 3,401,023
Consumer installment...................................... 1,379,381 1,356,330
---------- ----------
$7,459,839 $6,575,643
========== ==========
During 1996 and 1995, 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,
1996 and 1995,
55
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
amounted to $48.4 million and $36.8 million, respectively. The change from
December 31, 1995, to December 31, 1996, reflects payments amounting to $33.9
million, advances of $32.7 million, and other changes of $12.8 million. Other
changes in loans to certain executive officers and directors during the year
represent changes in the composition of the Company's board of directors. 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 activity in the allowance for loan losses for the years
ended December 31, 1996, 1995 and 1994 follows:
1996 1995 1994
--------- --------- ---------
(in Thousands)
Balance at beginning of year................... $111,235 $110,958 $114,233
Add: Provision charged to income............... 17,630 11,008 3,816
Additions due to acquisitions................ 7,173 -- 1,248
Deduct: Loans charged off...................... 23,128 17,564 16,011
Loan recoveries............................. (5,563) (6,833) (7,672)
--------- --------- ---------
Net charge-offs........................... 17,565 10,731 8,339
--------- --------- ---------
Balance at end of year......................... $118,473 $111,235 $110,958
========= ========= =========
At December 31, 1996 and 1995, the Company's recorded investment in loans
considered to be impaired under FAS114 was $25.7 million and $38.9 million,
respectively, of which $8.1 million and $3.4 million were on nonaccrual
status. Included in the $25.7 million of impaired loans at December 31, 1996
is $25.5 million of impaired loans for which the related allowance is $4.8
million and $200,000 of loans for which there is no related allowance. At
December 31, 1995, $38.7 million of impaired loans had a related allowance of
$11.3 million and $200,000 of loans with no related allowance. The average
recorded investment in impaired loans during the years ended December 31, 1996
and 1995, was approximately $31.4 million and $42.7 million, respectively. For
the years ended December 31, 1996 and 1995, the Company recognized interest
income on impaired loans of approximately $2.2 million and $3.3 million,
respectively, during the periods those loans were considered impaired.
Details of nonaccrual loans at December 31, 1996 and 1995 appear below:
1996 1995
------- -------
(in Thousands)
Principal balance............................................... $19,336 $12,538
Interest that would have been recorded under original terms..... 1,884 1,374
Interest actually recorded...................................... 619 620
Details of loans with terms modified in troubled debt restructurings at
December 31, 1996 and 1995 appear below:
1996 1995
------ ------
(in
Thousands)
Principal balance................................................. $2,517 $1,070
Interest that would have been recorded under original terms....... 226 116
Interest actually recorded........................................ 181 104
56
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
A summary of the activity in the allowance for losses on other real estate
for the years ended December 31, 1996, 1995 and 1994, follows:
1996 1995 1994
------- ------- -------
(in Thousands)
Balance at beginning of year......................... $ 1,542 $ 1,700 $ 3,129
Provision charged to income.......................... 221 530 459
Charge-offs.......................................... (719) (688) (1,304)
Recoveries........................................... -- -- (584)
------- ------- -------
Balance at end of year............................... $ 1,044 $ 1,542 $ 1,700
======= ======= =======
Other real estate, net of the allowance for losses, totaled $7.1 million at
December 31, 1996, and $9.6 million at December 31, 1995, and is reported in
other assets in the "Consolidated Balance Sheets".
(5) FHLB AND OTHER BORROWINGS
At December 31, 1996, 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, 1996, the net carrying amount of these debentures was $124.4
million.
The Company had a mortgage amounting to $4.4 million as of December 31,
1996, 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, 1996, the Company also had $572.7 million in outstanding
advances from the Federal Home Loan Bank of which $208 million matures in
1997, $100 million matures in 1998, $62.5 million matures in 1999 and $100
million matures in 2000. The Company had an additional $100 million that is
callable monthly and carries an interest rate of 4.88 percent and an
additional $2.2 million that is comprised of 22 advances with an average
maturity of 15 years with an average interest rate of 7.39 percent. 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 three-month LIBOR rate
and interest payments are due quarterly. The advances are secured by first
mortgages of $1.5 billion carried on the books of Compass Bank.
57
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(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:
1996 1995
------------------- -------------------
OTHER THAN Other Than
TRADING TRADING Trading Trading
------- ----------- ------- -----------
(in Thousands)
Commitments to extend credit........... $ -- $ 2,728,409 $ -- $ 2,180,504
Standby and commercial letters of
credit................................ -- 66,450 -- 40,907
Forward and futures contracts.......... 169,345 -- 485,975 --
Interest rate swap agreements.......... 3,587 1,012,493 43,890 716,668
Floors and caps written................ 279,900 -- 291,900 --
Floors and caps purchased.............. 302,000 710,000 317,500 910,000
Other options purchased................ 13,730 -- -- --
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.
58
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The primary purposes for using interest rate contracts in the trading
account are to facilitate customer transactions and to help protect cash
market positions in the trading account against interest rate movement.
Changes in the estimated fair value of contracts in the trading account are
recorded in other noninterest income as trading profits and commissions. Net
interest amounts received or paid on interest rate contracts in the trading
account are recorded as an adjustment of interest on trading account
securities.
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, 1996:
Weighted
Weighted Average
Weighted Average Rate* Average Repricing
Notional Carrying Estimated ---------------------- Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
---------- -------- ---------- ------------- -------- ---------- ---------
(in Thousands)
Non-trading interest
rate contracts:
Swaps:
Pay fixed versus 3-
month LIBOR........... $ 308,000 $ (224) $ 256 5.51% 6.19% 1.06 90
Receive fixed versus 3-
month LIBOR........... 525,000 1,164 922 6.60 5.53 2.55 90
Receive fixed versus 6-
month LIBOR........... 25,000 26 79 6.23 5.75 2.21 180
Basis swaps+........... 154,493 938 (1,383) 6.34 7.03 8.64 90
Caps purchased.......... 260,000 520 41 -- N/A 0.59 90
Floors purchased........ 450,000 -- 65 -- N/A 0.69 70
---------- ------ ------
$1,722,493 $2,424 $ (20)
========== ====== ======
- --------
+ On the $154.5 million notional, the Company receives interest based on
three-month LIBOR plus 84 basis points and pays interest based on the one-
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, 1996.
At December 31, 1996, 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 CD's Less
Principal Loans Investments Advances Purchased Than $100,000
---------- ---------- ----------- -------- ------------- -------------
(in Thousands)
Swaps:
Pay fixed.............. $ 308,000 $ 8,000 $ -- $200,000 $100,000 $ --
Receive fixed.......... 550,000 400,000 -- -- -- 150,000
Basis swaps............ 154,493 -- 154,493 -- -- --
Caps.................... 260,000 260,000 -- -- -- --
Floors.................. 450,000 450,000 -- -- -- --
---------- ---------- -------- -------- -------- --------
$1,722,493 $1,118,000 $154,493 $200,000 $100,000 $150,000
========== ========== ======== ======== ======== ========
59
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The following table summarizes interest rate contracts held in the trading
account at December 31, 1996:
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:
Receive fixed versus:
3 month LIBOR........ $ 3,000 $ (59) $ (59) 5.90% 5.57% 4.96 90
Prime................ 587 (10) (10) 6.80 8.25 1.71 1
Caps:
Purchased............. 86,000 217 217 -- N/A 1.58 77
Written............... 76,400 (101) (101) N/A -- 1.36 68
Floors:
Purchased............. 216,000 583 583 0.04 N/A 1.43 79
Written............... 203,500 (808) (808) N/A 0.10 1.64 59
-------- ----- -----
Total................ $585,487 $(178) $(178)
======== ===== =====
- --------
* 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, 1996. 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, 1996, the
trading account contained other options purchased, having weighted average
expiration dates shorter than three months, with a notional balance of $13.7
million and estimated fair value of $61,000. At December 31, 1996, there were
no other written options held in the trading account. The position of
purchased options was taken in order to help protect the market value of the
trading account against rising short-term interest rates while maintaining
limited risk to declining rates. At December 31, 1996, futures contracts
having a notional principal of $119 million were also 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, 1996 and 1995, and the average fair value
during those years, are as follows:
1996 1995
--------------------- ---------------------
PERIOD-END AVERAGE Period-End Average
FAIR VALUE FAIR VALUE Fair Value Fair Value
---------- ---------- ---------- ----------
(in Thousands)
Swaps............................... $ (69) $ (59) $ 279 $ 708
Floors and caps:
Assets............................. 800 1,386 2,881 2,233
Liabilities........................ (909) (1,215) (2,159) (1,824)
Other options:
Assets............................. 61 89 -- 158
Liabilities........................ -- (23) -- (193)
The net trading profits (losses) for derivative financial instruments during
1996 were $922,000 for forwards and futures; $(229,000) for swaps; $(656,000)
for floors and caps; and $(86,000) for other options. Such amounts
represent only a portion of total trading account profits and commissions. The
total trading account profit for
60
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
1996 was $13.9 million, an increase of $1.6 million from 1995 trading profits
and commissions totaling $12.3 million. This 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 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"). All inverse floaters held in the trading account were sold prior
to the end of the second quarter of 1994.
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 swaps, caps
and floors, 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, 1996, the Company estimates
its credit risk in the event of total counterparty default to be $1.2 million
for interest rate swaps and $734,000 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 $36.7 million at December 31, 1996, 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.
61
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(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 market lease rates. Certain real property leases
contain purchase options. Management expects that most leases will be renewed
or replaced with new leases in the normal course of business.
The following is a schedule 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, 1996, for leased facilities (in
thousands):
1997 $ 5,532
1998 4,736
1999 3,829
2000 3,208
2001 2,700
2002-2006 4,505
2007-2011 779
2012-2016 403
2017-2069 1,025
-------
$26,717
=======
Minimum rentals for all operating leases charged to earnings totaled $11.1
million, $10.4 million and $9.9 million for years ended December 31, 1996,
1995 and 1994, respectively.
(8) STOCK OPTION AND STOCK APPRECIATION RIGHT PLANS
The Company has three 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, the 1989 Long Term Incentive Plan and the
1996 Long Term Incentive Plan, 2,475,000, 1,500,000 and 1,900,000 shares,
respectively, of the Company's common stock have been reserved for issuance.
The options granted under the plans may be exercised within 5 years and 10
years from the date of grant. The incentive stock option agreements state that
incentive options may be exercised in whole or in part until expiration date,
but for options issued before 1987, no incentive stock option may be exercised
if an incentive stock option is outstanding that was granted before the
granting of such option. The plans also provide for the granting of stock
appreciation rights to certain 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.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB25"), and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation ("FAS123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
62
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
Pro forma information regarding net income and earnings per share is
required by FAS123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.19
percent and 7.54 percent; dividend yields of 3.89 percent and 4.31 percent;
volatility factors of the expected market price of the Company's common stock
of 0.224 and 0.226; and a weighted-average expected life of the options of
3.67 and 3.78 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Because the vast majority of the Company's options granted in 1996 and all
of the Company's options granted in 1995 vested immediately, the estimated
fair value of the options is expensed in the year of grant for purposes of pro
forma disclosures. The Company's actual and pro forma information follows (in
thousands except for earnings per share information):
Year Ended
December 31
-----------------
1996 1995
-------- --------
NET INCOME:
As reported........................................... $128,927 $114,225
Pro forma............................................. 127,105 113,113
NET INCOME PER COMMON SHARE:
As reported........................................... $ 3.19 $ 2.82
Pro forma............................................. 3.15 2.79
The following summary sets forth activity under the plan for the years ended
December 31:
1996 1995 1994
--------------------- -------------------- ------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
EXERCISE Exercise Exercise
OPTIONS PRICE Options Price Options Price
---------- --------- --------- --------- ------- ---------
Outstanding--beginning
of the year............ 939,236 $20.61 958,374 $17.59 812,822 $15.90
Granted................ 367,925 33.15 228,940 26.03 217,640 23.31
Exercised.............. (191,631) 16.32 (229,613) 13.19 (45,756) 12.81
Forfeited.............. (1,830) 21.53 (18,465) 23.15 (26,332) 21.25
---------- --------- -------
Outstanding--end of the
year................... 1,113,700 $25.49 939,236 20.61 958,374 17.59
========== ========= =======
Weighted-average fair
value of options
granted during the
year................... $ 5.31 $ 4.86
Of the 1,113,700 outstanding options at December 31, 1996, 1,091,200 were
exercisable with the remaining 22,500 having a vesting period of three years.
All options outstanding at December 31, 1995 and 1994 were exercisable on
those respective dates. Exercise prices for options outstanding as of December
31, 1996 ranged from $9.33 to $38.00. Unexercised options with exercise prices
of less than $20.00 for 109,600 shares had a weighted average contractual life
of 2.9 years and a weighted average exercise price of $10.30, while
unexercised options with exercise prices greater than $20.00 for 1,004,100
shares had a weighted average contractual life of 6.9 years and a weighted
average exercise price of $27.15.
63
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
At December 31, 1996, the shares under option included nonqualified options
issued to certain executives to acquire 30,000 shares of common stock which
provide for tandem stock appreciation rights that are exercisable only upon
the occurrence of certain contingent events. Because of the restrictions upon
exercise of the stock appreciation rights, no compensation expense has been
recorded with respect to these options.
The shares under option also included nonqualified options without stock
appreciation rights issued to certain executives to acquire shares of common
stock as follows: 69,724 shares at year-end 1996, 19,640 shares at year-end
1995, and 100,515 shares at year-end 1994.
During 1996, the Company issued 39,350 shares of restricted common stock to
certain executive officers with a fair value at issuance of $1,296,189. The
issued shares vest ratably over five years. Because the restricted stock is
legally issued and outstanding, the fair value of the restricted stock at
issuance is reflected in common stock and surplus with a corresponding offset
for the amount of unearned compensation expense. During 1996, compensation
expense of $216,030 was recognized in connection with the restricted stock.
(9) REGULATORY MATTERS AND DIVIDENDS FROM SUBSIDIARIES
The Company and the Subsidiary Banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory-- and
possibly additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Subsidiary Banks must meet specific
capital guidelines that involve quantitative measures of the Subsidiary Banks'
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification of the
Company and the Subsidiary Banks are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Subsidiary Banks to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier
I capital (as defined) to average assets (as defined). Management believes, as
of December 31, 1996, that the Company and the Subsidiary Banks meet all
capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the appropriate
regulatory agencies categorized the Subsidiary Banks as "well-capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well-capitalized", the Subsidiary Banks must maintain minimum total risk-
based, Tier I risk-based, and leverage ratios as set forth in the following
table. There are no conditions or events since that notification that
management believes have changed the Subsidiary Banks' category.
64
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The actual capital amounts and ratios of the Company and the Subsidiary
Banks at December 31, 1996 and 1995, are presented in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- -------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ---------- ----------------- --------
AS OF DECEMBER 31, 1996:
Total Capital (to Risk
Weighted Assets):
CONSOLIDATED........... $926,179 11.37% $ 651,467 >8.0% N/A
Compass Bank-Alabama... 436,222 10.08 346,105 >8.0 432,631 >10.0%
Compass Bank-Texas..... 350,545 11.04 254,133 >8.0 317,666 >10.0
Compass Bank-Florida... 74,466 11.34 52,545 >8.0 65,681 >10.0
Tier I Capital (to Risk
Weighted Assets):
CONSOLIDATED........... $699,816 8.59% $ 325,734 >4.0% N/A
Compass Bank-Alabama... 381,922 8.83 173,052 >4.0 259,578 >6.0%
Compass Bank-Texas..... 308,860 9.72 127,067 >4.0 190,600 >6.0
Compass Bank-Florida... 67,635 10.30 26,273 >4.0 39,409 >6.0
Tier I Capital (to
Average Assets):
CONSOLIDATED........... $699,816 6.11% $ 458,010 >4.0% N/A
Compass Bank-Alabama... 381,922 6.30 242,307 >4.0 302,884 >5.0%
Compass Bank-Texas..... 308,860 6.87 179,906 >4.0 224,882 >5.0
Compass Bank-Florida... 67,635 6.66 40,642 >4.0 50,803 >5.0
AS OF DECEMBER 31, 1995:
Total Capital (to Risk
Weighted Assets):
CONSOLIDATED........... $901,877 13.00% $ 555,028 >8.0% N/A
Compass Bank-Alabama... 460,911 11.68 315,712 >8.0 394,641 >10.0%
Compass Bank-Texas..... 299,774 11.25 213,265 >8.0 266,581 >10.0
Compass Bank-Florida... 51,978 15.55 26,735 >8.0 33,419 >10.0
Tier I Capital (to Risk
Weighted Assets):
CONSOLIDATED........... $690,577 9.95% $ 277,514 >4.0% N/A
Compass Bank-Alabama... 411,267 10.42 157,856 >4.0 236,784 >6.0%
Compass Bank-Texas..... 265,852 9.97 106,633 >4.0 159,949 >6.0
Compass Bank-Florida... 47,796 14.30 13,368 >4.0 20,052 >6.0
Tier I Capital (to
Average Assets):
CONSOLIDATED........... $690,577 6.73% $ 410,292 >4.0% N/A
Compass Bank-Alabama... 411,267 6.95 236,705 >4.0 295,881 >5.0%
Compass Bank-Texas..... 265,852 7.04 151,080 >4.0 188,849 >5.0
Compass Bank-Florida... 47,796 8.17 23,415 >4.0 29,268 >5.0
Capital amounts and ratios at December 31, 1995, have been restated to
reflect acquisitions in 1996 accounted for under the pooling-of-interests
method of accounting as well as the merger in June, 1996, of the Company's
three subsidiary banks in Texas into Compass Bank-Texas.
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
65
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
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, 1996, approximately $104.7 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 $45.3
million while continuing to meet the capital requirements for "well-
capitalized" banks at December 31, 1996.
(10) MERGERS AND ACQUISITIONS
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.
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, with the issuance of 342,930 shares of the Company's common
stock. At the date of closing, Flower Mound had assets of $46 million and
equity of $5 million. The transaction was accounted for under the pooling-of-
interests method of accounting and accordingly all prior period information
has been restated.
On April 11, 1996, the Company completed the acquisition of Equitable
BankShares, Inc. ("Equitable"), of Dallas, Texas, and its bank subsidiary,
Equitable Bank, with the issuance of 954,962 shares of the Company's common
stock. At the date of closing, Equitable had assets of $184 million and equity
of $13 million. The transaction was accounted for under the pooling-of-
interests method of accounting and accordingly all prior period information
has been restated.
On April 22, 1996, the Company completed the purchase of Post Oak Bank, of
Houston, Texas. At the date of closing, Post Oak Bank had assets of $323
million and deposits of $276 million. The transaction was accounted for under
the purchase method of accounting.
On May 21, 1996, the Company completed the purchase of Peoples Bancshares,
Inc. ("Peoples"), of Belton, Texas, and its bank subsidiary, Peoples National
Bank. At the date of closing, Peoples had assets of $136 million and deposits
of $126 million. The transaction was accounted for under the purchase method
of accounting.
On July 16, 1996, the Company completed the acquisition of Royall Financial
Corporation ("Royall"), of Palestine, Texas, and its bank subsidiary, Royall
National Bank of Palestine, with the issuance of 549,986 shares of the
Company's common stock. At the date of closing, Royall had assets of $109
million and equity of $11 million. The transaction was accounted for under the
pooling-of-interests method of accounting and accordingly all prior period
information has been restated.
On August 23, 1996, the Company completed the acquisition of CFB Bancorp,
Inc. ("CFB"), of Jacksonville, Florida, and its bank subsidiary, Community
First Bank, through the issuance of 1,325,957 shares of the Company's common
stock. At the date of closing, CFB had assets of $302 million and deposits of
$253 million. The transaction was accounted for under the purchase method of
accounting.
66
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
On September 27, 1996, the Company completed the acquisition of Texas
American Bank ("Texas American"), of San Antonio, Texas, with the issuance of
324,977 shares of the Company's common stock. At the date of closing, Texas
American had assets of $65 million and equity of $5 million. The transaction
was accounted for under the pooling-of-interests method of accounting and
accordingly all prior period information has been restated.
The Company completed the acquisition of ProBank, of Houston, Texas, on
October 24, 1996. At the date of closing, ProBank had assets of $61 million
and deposits of $59 million. The transaction was accounted for under the
purchase method of accounting.
Presented below is summary operating information for the Company showing the
effect of the business combinations completed in 1996;
As Previously Effect of Currently
Reported Poolings Reported
------------- --------- ---------
(in Thousands)
1995:
Net interest income.......................... $349,655 $19,299 $368,954
Provision for loan losses.................... 10,235 773 11,008
Noninterest income........................... 122,112 5,638 127,750
Noninterest expense.......................... 290,011 18,217 308,228
Net income................................... 110,265 3,960 114,225
1994:
Net interest income.......................... $336,768 $16,440 $353,208
Provision for loan losses.................... 3,404 412 3,816
Noninterest income........................... 87,888 5,263 93,151
Noninterest expense.......................... 267,559 15,481 283,040
Net income................................... 101,246 4,193 105,439
The entities acquired in 1996 that were accounted for under the pooling-of-
interests method of accounting had net interest income of $7.5 million and net
income of $2.2 million in 1996 prior to their respective acquisition dates.
The pro forma effect of business combinations in 1996 accounted for under the
purchase method of accounting on net interest income, net income, and net
income per share was not material.
On January 15, 1997, the Company completed the acquisition of Enterprise
National Bank ("Enterprise"), of Jacksonville, Florida, with the issuance of
1,080,740 shares of the Company's common stock. At the date of closing,
Enterprise had assets of $171 million and equity of $18 million. The
transaction was accounted for under the pooling-of-interests method of
accounting and accordingly all prior period information will be restated in
the first quarter of 1997.
On September 18, 1996, the Company signed a letter of intent to acquire
Horizon Bancorp, Inc. ("Horizon"), and its subsidiary, Horizon Bank & Trust,
of Austin, Texas. At December 31, 1996, Horizon had assets of $147 million and
equity of $11 million. It is anticipated that the transaction will close in
the first quarter of 1997 and will be accounted for under the pooling-of-
interests method of accounting.
The Company signed a definitive agreement on October 3, 1996, to acquire
Greater Brazos Valley Bancorp, Inc. ("Greater Brazos"), and its subsidiary,
Commerce National Bank, of College Station, Texas. At December 31, 1996,
Greater Brazos had assets of $61 million and equity of $3 million. It is
anticipated that the transaction will close in the first or second quarter of
1997 and will be accounted for under the pooling-of-interests method of
accounting.
On January 14, 1997, the Company signed a letter of intent to acquire
Central Texas Bancorp, Inc. ("Central Texas"), and its subsidiary, Texas
National Bank of Waco, of Waco, Texas. At December 31, 1996, Central Texas had
assets of $213 million and equity of $18 million. It is anticipated that the
transaction will close in the second quarter of 1997 and will be accounted for
under the pooling-of-interest method of accounting.
67
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(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:
1996 1995 1994
-------- -------- --------
(in Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits of $35,267, $34,204 and $25,415
for 1996, 1995 and 1994, respectively.......... $(37,473) $(36,131) $(27,107)
======== ======== ========
Projected benefit obligation for service rendered
to date......................................... $(57,858) $(56,608) $(41,353)
Plan assets at fair value, primarily listed
stocks and U.S. bonds........................... 60,050 49,952 38,988
-------- -------- --------
Plan assets in excess of (less than) projected
benefit obligation............................. 2,192 (6,656) (2,365)
Unrecognized prior service cost.................. (171) (185) (199)
Unrecognized net loss............................ 7,461 15,016 8,099
Unrecognized net asset being amortized over 13
years........................................... (916) (1,360) (1,804)
-------- -------- --------
Net pension asset included in other assets...... $ 8,566 $ 6,815 $ 3,731
======== ======== ========
Net pension cost for 1996, 1995 and 1994 included the following components:
1996 1995 1994
-------- -------- --------
(in Thousands)
Service cost-benefits earned during the period... $ 4,191 $ 2,832 $ 3,240
Interest cost on projected benefit obligation.... 4,197 3,486 3,305
Actual return on plan assets..................... (5,735) (6,703) 667
Net amortization and deferral.................... 1,212 2,682 (4,224)
-------- -------- --------
Net periodic pension cost........................ $ 3,865 $ 2,297 $ 2,988
======== ======== ========
The weighted average discount rate was 8.00 percent for 1996, 7.50 percent
for 1995, and 8.50 percent for 1994. The rate of increase in future
compensation levels was six percent for 1996, 1995 and 1994. 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 9.50
percent in 1996 and 1995 and 10 percent in 1994.
The Company maintains an employee stock ownership plan to which
contributions are made in amounts determined by the Board of Directors of the
Company. Such contributions are invested in stock of the Company
68
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
and are ordinarily distributed to employees upon their retirement or other
termination of employment. Contributions to the plan are allocated to the
accounts of the participants based upon their compensation, with right to such
accounts vested after five years of employment. The Company contributed $4.8
million during 1996, $1.1 million during 1995, and $3.9 million during 1994.
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
------------------------
1996 1995 1994
-------- ------- -------
(in Thousands)
Marketing.............................................. $ 8,608 $ 6,837 $ 7,074
Professional services.................................. 23,776 24,185 17,472
Supplies............................................... 9,125 8,600 8,053
Other.................................................. 61,431 55,916 46,510
-------- ------- -------
$102,940 $95,538 $79,109
======== ======= =======
(13) INCOME TAXES
Income taxes for the years ended December 31, 1996, 1995 and 1994, were
allocated as follows:
1996 1995 1994
------- ------- -------
(in Thousands)
Income from operations............................... $73,124 $63,243 $54,064
Shareholders' equity, for net unrealized gains
(losses) on securities available for sale........... (8,932) 14,498 (10,916)
------- ------- -------
$64,192 $77,741 $43,148
======= ======= =======
69
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
For the years ended December 31, 1996, 1995 and 1994, income tax expense
attributable to income from operations consists of:
1996 1995 1994
------- ------- -------
(in Thousands)
Current income tax expense:
Federal............................................... $65,194 $56,313 $48,337
State................................................. 4,844 4,524 3,722
------- ------- -------
Total............................................... 70,038 60,837 52,059
------- ------- -------
Deferred income tax expense:
Federal............................................... 2,254 2,396 1,646
State................................................. 832 10 359
------- ------- -------
Total............................................... 3,086 2,406 2,005
------- ------- -------
Total income tax expense............................... $73,124 $63,243 $54,064
======= ======= =======
During 1996, the Company made income tax payments of approximately $68.9
million and received cash income tax refunds amounting to approximately $1.4
million. For 1995 and 1994, income tax payments were approximately $61.6
million and $48.5 million, respectively. Cash income tax refunds amounted to
approximately $700,000 for 1995 and $1.2 million for 1994. Applicable income
tax expense of $3.6 million, $1.0 million, and $1.5 million for 1996, 1995 and
1994, respectively, on securities gains is 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:
1996 1995 1994
------------------ ------------------ ------------------
PERCENT Percent Percent
OF PRETAX of Pretax of Pretax
AMOUNT EARNINGS Amount Earnings Amount Earnings
------- --------- ------- --------- ------- ---------
(in Thousands)
Income tax expense at
federal statutory rate. $70,718 35.0% $62,114 35.0% $55,826 35.0%
Increase (decrease) re-
sulting from:
Tax-exempt interest.... (2,958) (1.4) (3,203) (1.8) (3,442) (2.2)
State income tax ex-
pense net of federal
income tax benefit.... 3,689 1.8 2,947 1.6 2,653 1.7
Other.................. 1,675 0.8 1,385 0.8 (973) (0.6)
------- ---- ------- ---- ------- ----
Income tax expense... $73,124 36.2% $63,243 35.6% $54,064 33.9%
======= ==== ======= ==== ======= ====
70
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996, 1995 and 1994, are presented below:
1996 1995 1994
-------- -------- --------
(in Thousands)
Deferred tax assets:
Allowance for loan losses.......................... $ 40,386 $ 36,699 $ 37,018
Loan fees.......................................... 1,210 2,827 2,655
Accrued expenses................................... 1,590 961 1,098
Net unrealized losses on securities available for
sale.............................................. 1,686 -- 7,252
Other deferred tax assets.......................... 3,945 2,476 2,685
-------- -------- --------
Total assets...................................... 48,817 42,963 50,708
Deferred tax liabilities:
Premises and equipment............................. 5,359 5,208 4,140
Lease financing.................................... 5,637 3,999 3,608
Prepaid pension expense............................ 3,168 2,496 1,365
Core deposit and other acquired intangibles........ 12,521 6,806 7,426
Net unrealized gains on securities available for
sale.............................................. -- 7,246 --
Other deferred tax liabilities..................... 3,201 2,836 2,893
-------- -------- --------
Total liabilities................................. 29,886 28,591 19,432
-------- -------- --------
Net deferred tax asset.............................. $ 18,931 $ 14,372 $ 31,276
======== ======== ========
71
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(14) PARENT COMPANY
The condensed financial information for Compass Bancshares, Inc. (Parent
Company Only) is presented as follows:
Balance Sheets
December 31
--------------------
1996 1995
---------- --------
(in Thousands)
ASSETS
Cash and due from banks.................................. $ 87 $ 142
Collateralized mortgage obligation inverse floaters...... 25,973 26,145
Reverse repurchase agreements with affiliates............ 123,179 99,544
Investment in subsidiaries:
Banks................................................... 493,846 490,815
Bank holding companies.................................. 367,741 280,657
Other................................................... 35,040 32,718
---------- --------
896,627 804,190
Other assets............................................. 4,357 2,840
---------- --------
TOTAL ASSETS.......................................... $1,050,223 $932,861
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper......................................... $ 47,896 $ 57,312
Accrued expenses and other liabilities................... 17,899 13,812
Other borrowings......................................... 181,366 124,274
---------- --------
Total liabilities..................................... 247,161 195,398
Shareholders' equity:
Common stock of $2 par value:
Authorized--100,000,000 shares; Issued--40,524,717
shares in 1996 and 40,325,281 shares in 1995.......... 81,049 80,650
Loans to finance stock purchases........................ (6,026) (5,628)
Unearned restricted stock............................... (1,080) --
Surplus................................................. 58,126 54,698
Net unrealized holding gain (loss) on available-for-sale
securities............................................. (2,778) 11,978
Retained earnings....................................... 673,771 595,765
---------- --------
Total shareholders' equity............................ 803,062 737,463
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $1,050,223 $932,861
========== ========
72
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(14) PARENT COMPANY, Continued
Statements of Income
Year Ended December 31
-----------------------------
1996 1995 1994
-------- --------- --------
(in Thousands)
INCOME:
Cash dividends from subsidiaries.............. $175,200 $ 71,337 $ 59,915
Interest on investments with affiliates....... 4,920 8,275 4,271
Loss on purchase of securities from common
trust fund................................... -- -- (8,222)
Other......................................... 3,274 2,885 4,010
-------- --------- --------
TOTAL INCOME................................ 183,394 82,497 59,974
EXPENSE:
Interest on commercial paper and other
borrowings................................... 15,435 16,928 10,293
Other......................................... 2,976 4,617 1,385
-------- --------- --------
TOTAL EXPENSE............................... 18,411 21,545 11,678
Income before income tax expense and equity
in undistributed earnings of subsidiaries.. 164,983 60,952 48,296
Applicable income tax benefit.................. (3,864) (3,849) (4,761)
-------- --------- --------
168,847 64,801 53,057
EQUITY IN UNDISTRIBUTED EARNINGS (DIVIDENDS IN
EXCESS OF EARNINGS)
OF SUBSIDIARIES:
Banks........................................ (30,534) 22,022 27,360
Bank holding companies....................... (9,513) 28,007 25,331
Other........................................ 127 (605) (309)
-------- --------- --------
(39,920) 49,424 52,382
-------- --------- --------
NET INCOME.................................. $128,927 $ 114,225 $105,439
======== ========= ========
73
(14) PARENT COMPANY, Continued
Statements of Cash Flows
Year Ended December 31
----------------------------
1996 1995 1994
-------- -------- --------
(in Thousands)
OPERATING ACTIVITIES:
Net income...................................... $128,927 $114,225 $105,439
Adjustments to reconcile net income to cash pro-
vided by operations:
Depreciation and amortization.................. 323 95 76
Dividends in excess of earnings (equity in un-
distributed earnings)......................... 39,920 (49,424) (52,382)
Loss on purchase of securities from common
trust fund.................................... -- -- 8,222
(Increase) decrease in interest receivable..... 27 (60) (244)
(Increase) decrease in other assets............ (673) 572 (2,678)
Increase (decrease) in interest payable........ (12) 214 1,086
Increase (decrease) in taxes payable........... (270) (408) 1,223
Increase in other payables..................... 3,979 1,651 2,919
-------- -------- --------
Net cash provided by operating activities..... 172,221 66,865 63,661
INVESTING ACTIVITIES:
Proceeds from maturities of investment securi-
ties........................................... 172 84 762
Purchases of investment securities.............. -- -- (35,213)
Increase in reverse repurchase agreements with
affiliates..................................... (23,635) (36,919) (62,625)
Capital contributions made to subsidiaries...... (4,274) -- (45,894)
Acquisition of banks............................ (98,942) -- (35,319)
Advances to subsidiaries on notes............... (126) -- --
Payments from subsidiaries on notes............. -- -- 4,085
Purchase of loans from subsidiaries............. -- -- (3,535)
Purchase of premises and equipment.............. (64) (426) --
-------- -------- --------
Net cash used by investing activities......... (126,869) (37,261) (177,739)
FINANCING ACTIVITIES:
Net increase (decrease) in other short-term
borrowings..................................... 47,584 11,982 (17,528)
Proceeds from other borrowings.................. -- -- 49,618
Repayment of other borrowings................... -- (2,974) (518)
Common dividends paid........................... (50,784) (43,095) (34,664)
Proceeds from exercise of stock options......... 819 963 882
Proceeds from repayments of loans to finance
stock purchases................................ 2,564 2,343 747
Purchase of treasury stock...................... (45,590) -- (14)
-------- -------- --------
Net cash used by financing activities......... (45,407) (30,781) (1,477)
-------- -------- --------
Net decrease in cash and due from banks......... (55) (1,177) (115,555)
Cash and due from banks at beginning of year.... 142 1,319 116,874
-------- -------- --------
Cash and due from banks at end of year.......... $ 87 $ 142 $ 1,319
======== ======== ========
74
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(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: 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 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.
75
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
AT DECEMBER 31, 1996 At December 31, 1995
--------------------- ---------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
---------- ---------- ---------- ----------
(in Thousands)
FINANCIAL INSTRUMENTS:
Assets:
Cash and due from banks........ $ 670,389 $ 670,389 $ 565,188 $ 565,188
Interest bearing deposits in
other banks................... 487 487 1,697 1,697
Investment securities.......... 1,114,187 1,121,346 723,132 737,166
Investment securities available
for sale...................... 2,041,103 2,041,103 2,142,776 2,142,776
Trading account securities..... 91,452 91,452 101,916 101,916
Federal funds sold and securi-
ties purchased under agree-
ments to resell............... 54,804 54,804 274,347 274,347
Loans.......................... 7,457,128 7,445,569 6,572,772 6,576,700
Off-balance sheet instruments.. 2,424 (20) 2,562 (3,224)
Liabilities:
Noninterest bearing deposits... $1,748,790 $1,748,790 $1,535,632 $1,535,632
Interest bearing deposits...... 7,471,809 7,505,856 6,555,186 6,598,853
Federal funds purchased........ 602,914 602,914 776,308 776,308
Securities sold under agree-
ments to repurchase........... 205,053 205,053 295,391 295,391
Other short-term borrowings.... 201,901 201,901 116,276 116,276
FHLB and other borrowings...... 701,470 704,411 590,044 597,845
(16) SUBSEQUENT EVENT -- ISSUANCE OF CAPITAL SECURITIES
In January, 1997, a statutory business trust ("Compass Trust I") was created
by the Company which issued capital securities ("Capital Securities") to
institutional investors in the amount of $100 million, representing guaranteed
preferred beneficial interests in $103.1 million in junior subordinated
deferrable interest debentures ("Subordinated Debentures") issued by the
Company to Compass Trust I. The Capital Securities bear an interest rate of
8.23 percent and are mandatorily redeemable by Compass Trust I upon the
repayment of the Subordinated Debentures by the Company. For regulatory
purposes, the Capital Securities will be treated as Tier I capital of the
Company. The Subordinated Debentures are the sole assets of Compass Trust I
and bear an interest rate of 8.23 percent with a maturity of date of January
15, 2027, which may be shortened to a date not earlier than January 15, 2007.
If the Subordinated Debentures are redeemed in whole or in part prior to
January 15, 2007, the redemption price of the Subordinated Debentures and the
Capital Securities will include a premium ranging from 4.12 percent in 2007 to
0.41 percent in 2016.
(17) SUBSEQUENT EVENT -- STOCK SPLIT (UNAUDITED)
On February 18, 1997, the Company announced a three-for-two stock split to
be effected in the form of a 50 percent stock dividend payable on April 2,
1997, to shareholders of record on March 17, 1997.
76
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(18) QUARTERLY RESULTS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 1996 and
1995 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in Thousands Except Per Share Data)
1996:
TOTAL INTEREST INCOME..... $ 195,721 $ 200,603 $ 208,144 $ 215,902
TOTAL INTEREST EXPENSE.... 100,002 102,035 106,374 109,532
NET INTEREST INCOME....... 95,719 98,568 101,770 106,370
PROVISION FOR LOAN LOSSES. 3,462 5,040 4,433 4,695
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSS-
ES....................... 92,257 93,528 97,337 101,675
TOTAL NONINTEREST INCOME.. 43,470 34,555 37,200 39,515
TOTAL NONINTEREST EXPENSE. 77,048 79,654 93,913 86,871
INCOME TAX EXPENSE........ 21,301 17,136 14,815 19,872
NET INCOME................ 37,378 31,293 25,809 34,447
PER COMMON SHARE:
NET INCOME............... 0.92 0.78 0.65 0.84
CASH DIVIDENDS........... 0.32 0.32 0.32 0.32
STOCK PRICE RANGE:
HIGH.................... 34 5/8 35 5/8 34 5/8 39 3/4
LOW..................... 30 3/4 32 1/4 31 1/8 34 1/2
CLOSE................... 32 1/4 32 3/4 34 3/8 39 3/4
1995:
Total interest income..... $ 178,829 $ 185,807 $ 193,151 $ 197,123
Total interest expense.... 87,624 95,021 100,328 102,983
Net interest income....... 91,205 90,786 92,823 94,140
Provision for loan losses. 1,488 2,300 4,690 2,530
Net interest income after
provision for loan loss-
es....................... 89,717 88,486 88,133 91,610
Total noninterest income.. 27,519 33,634 32,325 34,272
Total noninterest expense. 78,200 77,208 73,168 79,652
Income tax expense........ 13,652 15,960 16,949 16,682
Net income................ 25,384 28,952 30,341 29,548
Per common share:
Net income............... 0.63 0.72 0.75 0.73
Cash dividends........... 0.28 0.28 0.28 0.28
Stock price range:
High.................... 28 29 1/4 33 33 3/8
Low..................... 22 25 1/2 28 1/2 30 1/2
Close................... 26 1/8 28 7/8 31 1/4 33
77
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.
78
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, 1996 and 1995............................................. 44
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994....................................... 45
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994........................... 46
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................................... 47
Summary of Significant Accounting Policies --
December 31, 1996, 1995 and 1994....................................... 48
Notes to Consolidated Financial Statements --
December 31, 1996, 1995 and 1994....................................... 52
Quarterly Results (Unaudited)........................................... 77
(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)
79
(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)
(10) Material Contracts
(a) Compass Bancshares, Inc., 1982 Long Term Incentive Plan
(incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form S-8 filed June 15, 1983,
with the Commission)
(b) Compass Bancshares, Inc., 1989 Long Term Incentive Plan
(incorporated by reference to Exhibit 28 to the Company's
Registration Statement on Form S-8 filed February 21, 1991,
with the Commission)
(c) Compass Bancshares, Inc., 1996 Long Term Incentive Plan
(incorporated by reference to Exhibit 4(g) to the Company's
Registration Statement on Form S-8, Registration No.
333-15117, filed October 30, 1996, with the Commission)
(d) Employment Agreement, dated December 14, 1994, between
Compass Bancshares, Inc. and D. Paul Jones, Jr.
(incorporated by reference to Exhibit 10(d) to the
December 31, 1994 Form 10-K filed with the Commission)
(e) Employment Agreement, dated December 14, 1994, between
Compass Bancshares, Inc. and Jerry W. Powell (incorporated
by reference to Exhibit 10(e) to the December 31, 1994 Form
10-K filed with the Commission)
(f) Employment Agreement, dated December 14, 1994, between
Compass Bancshares, Inc. and Garrett R. Hegel (incorporated
by reference to Exhibit 10(f) to the December 31, 1994 Form
10-K filed with the Commission)
(g) Employment Agreement, dated December 14, 1994, between
Compass Bancshares, Inc. and Byrd Williams (incorporated by
reference to Exhibit 10(g) to the December 31, 1994 Form
10-K filed with the Commission)
(h) Employment Agreement, dated December 14, 1994, between
Compass Bancshares, Inc. and Charles E. McMahen
(incorporated by reference to Exhibit 10(h) to the
December 31, 1994 Form 10-K filed with the Commission)
(i) Employment Agreement, dated December 14, 1994, between
Compass Bancshares, Inc. and G. Ray Stone (incorporated by
reference to Exhibit 10(i) to the Company's Registration
Statement on Form S-8, Registration No. 333-15373, filed
November 1, 1996, with the Commission)
(11) Statement Re: Computation of Per Share Earnings..................... 82
(12) Statement Re: Computation of Ratios................................. 83
80
(21) Subsidiaries of the Registrant...................................... 84
(23) Consents of Experts and Counsel
(27) Financial Data Schedule
Certain financial statement schedules and exhibits have been omitted because
they are not applicable.
81
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 17, 1997
By /s/ D. Paul Jones, Jr.
___________________________________
D. PAUL JONES, JR.
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
Date: February 17, 1997
By /s/ Garrett R. Hegel
___________________________________
GARRETT R. HEGEL
CHIEF FINANCIAL OFFICER
Date: February 17, 1997
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/ Charles W. Daniel February 17, 1997
- -------------------------------------
CHARLES W. DANIEL
/s/ W. Eugene Davenport February 17, 1997
- -------------------------------------
W. EUGENE DAVENPORT
/s/ Jack C. Demetree February 17, 1997
- -------------------------------------
JACK C. DEMETREE
85
SIGNATURES, CONTINUED
DIRECTORS DATE
/s/ Marshall Durbin, Jr. February 17, 1997
- -------------------------------------
MARSHALL DURBIN, JR.
/s/ Tranum Fitzpatrick February 17, 1997
- -------------------------------------
TRANUM FITZPATRICK
/s/ George W. Hansberry February 17, 1997
- -------------------------------------
GEORGE W. HANSBERRY
/s/ D. Paul Jones, Jr. February 17, 1997
- -------------------------------------
D. PAUL JONES, JR.
/s/ John S. Stein February 17, 1997
- -------------------------------------
JOHN S. STEIN
/s/ Robert J. Wright February 17, 1997
- -------------------------------------
ROBERT J. WRIGHT
86