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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, 1998 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:
Title of each class Name of each exchange on which
None registered
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, 1999, the aggregate market value of voting stock held by
non-affiliates was $2,692,766,711.
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, 1999
Common Stock, $2 Par Value 75,586,434
Documents Incorporated by Reference Part of 10-K in which incorporated
Proxy Statement for 1999 annual Part III
meeting
except for information referred to
in
Item 402(a)(8) of Regulation S-K
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PART I
ITEM 1 -- BUSINESS
Compass Bancshares, Inc. (the "Company") is a bank holding company with its
principal place of business in Birmingham, Alabama. The Company was organized
in 1970 and commenced business in late 1971 upon the acquisition of Central
Bank & Trust Co. and State National Bank. The Company subsequently acquired
substantially all of the outstanding stock of additional banks located in
Alabama, 11 of which were merged in late 1981 to create Central Bank of the
South, Alabama's first statewide bank. In 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 February 1987, the
Company acquired First National Bank of Crosby near Houston, Texas, and became
the first out-of-state bank 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 December 1998, the
Company expanded into the state of Arizona with the acquisition of Tucson-
based Arizona Bank.
In addition to Compass Bank, the Company also owns Central Bank of the
South, an Alabama banking corporation headquartered in Anniston, Alabama, and
Arizona Bank, an Arizona state bank headquartered in Tucson, Arizona ("Arizona
Bank"). The bank subsidiaries of the Company are referred to collectively
herein as the "Subsidiary Banks."
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 250
bank offices, including 120 in Texas, 88 in Alabama, and 42 in Florida.
Arizona Bank conducts a general commercial banking business from 29 bank
offices in the State of Arizona. The Subsidiary Banks perform banking services
customary for full service banks of similar size and character. 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 offers its customers a variety of
fiduciary services, including portfolio management and the administration and
investment of funds of estates, trusts and employee benefit plans. 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.
Compass Bank provides correspondent banking services including educational
seminars and 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 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 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. Refer to "Supervision and Regulation."
1
Lines of Business
The Company is currently aligned along lines of business. Each line of
business is a strategic unit that serves a particular group of customers that
have certain common characteristics, through various products and services.
The Company's primary operating segments are Corporate Banking, Community
Banking, Retail Banking, Asset Management, and Treasury.
The Corporate Banking segment is responsible for providing a full array of
banking and investment services to business banking, commercial banking, and
other institutional clients in each of the Company's major metropolitan
markets. The Corporate Banking segment also includes a National Industries
unit that is responsible for serving larger national accounts, principally in
targeted industries. In addition to traditional credit and deposit products,
the Corporate Banking segment also supports its customers with capabilities in
treasury management, leasing, accounts receivable purchasing, asset-based
lending, international services, and interest rate protection and investment
products.
The Retail Banking segment serves the Company's consumer customers in each
of its major metropolitan markets through an extensive banking office network
and through the use of alternative delivery channels such as PC banking, the
internet, and telephone banking. The Retail Banking segment provides
individuals with comprehensive products and services, including home
mortgages, credit cards, deposit accounts, mutual funds, and brokerage and
insurance. In addition, Retail Banking also serves the Company's small
business customers.
The Community Banking segment is responsible for serving the Company's
Arizona markets, its Austin, Texas market, and its non-metropolitan markets
and provides the same products and services offered by the Corporate Banking
and Retail Banking segments. The Asset Management segment provides specialized
investment portfolio management, financial counseling, and customized services
to the Company's private clients and foundations as well as investment
management and retirement services to companies and their employees. The Asset
Management segment is also the discretionary investment manager of Expedition
Funds, the Company's family of proprietary mutual funds. The Treasury
segment's primary function is to manage the investment securities portfolio,
public entity deposits, interest rate risk, and liquidity and funding
positions of the Company.
Business Combinations
The Company may seek to combine with other banks and banking offices when
suitable opportunities develop. Discussions are held from time to time with
institutions 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 combination of additional banks is
subject to approval by appropriate regulatory authorities. Refer to
"Supervision and Regulation." Since the Company first expanded into Texas in
1987, the Company has combined with 45 financial institutions and engaged in
numerous asset and deposit purchase transactions.
On November 2, 1998, the Company signed a definitive agreement to acquire 15
branches in Arizona from Wells Fargo Bank, N.A. These branches, primarily in
the Phoenix area, will add approximately $412 million in deposits and $127
million in loans. The transaction is expected to close in the second quarter
of 1999 and be accounted for under the purchase method of accounting.
Competition
The Subsidiary Banks encounter intense competition in their businesses,
generally from other banks located in Alabama, Texas, Florida, Arizona, and
adjoining states, and compete for interest bearing funds with other banks,
mutual funds, and many non-bank issuers of commercial paper and other
securities. In substantially all of the markets served by the Subsidiary
Banks, Compass Bank encounters intense competition from other financial
institutions that are substantially larger in terms of assets and deposits.
Competition for the correspondent banking and securities sales business also
exists from commercial and investment banks and brokerage firms. In
2
the case of larger customers, competition exists with financial institutions
in 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 with operations
in Alabama, Texas, Florida, and Arizona will continue. During 1999 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.
Employees
At December 31, 1998, the Company and its subsidiaries employed
approximately 5,900 persons. The Company and its subsidiaries provide a
variety of benefit programs including retirement and stock ownership plans as
well as group life, health, accident, and other insurance. 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 ("Federal Reserve"). An important function of the Federal Reserve is to
regulate the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve to implement these objectives are open
market operations in U.S. Government securities, changes in the discount rate,
reserve requirements on member bank deposits, and funds availability
regulations. These instruments are used in varying combinations to influence
the overall growth of bank loans, investments, and deposits and may also
affect interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of financial institutions in the
past and will continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to the future
impact that changes in interest rates, deposit levels, or loan demand may have
on the business and income of the Company and the Subsidiary Banks.
SUPERVISION AND REGULATION
The Company
The Company is a multi-bank holding company within the meaning of the Bank
Holding Company Act ("BHC Act") and is registered as such with the Federal
Reserve. As a bank holding company, the Company is 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;
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
3
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, Texas, Florida, and Arizona, where the Company
currently operates banking offices, 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, Arizona, and Florida law currently permits out-of-state bank holding
companies to acquire banks in Texas, Arizona, 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 Arizona 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 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 are also
subject to these limitations. Further, federal law prohibits a bank holding
company and its subsidiaries from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or the
furnishing of services.
In December 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. This act recapitalized the Bank Insurance Fund
("BIF"), of which the Subsidiary Banks are members, and the Savings
Association Insurance Fund ("SAIF"), which insures certain of the Subsidiary
Banks' deposits; substantially revised statutory provisions, including capital
standards; restricted certain powers of state banks; gave regulators the
authority to limit officer and director compensation; and required holding
companies to guarantee the capital compliance of their banks in certain
instances. Among other things, FDICIA requires the federal banking agencies to
take "prompt corrective action" with respect to banks that do not meet minimum
capital requirements. FDICIA established five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized," as defined by
regulations adopted by the Federal Reserve, the FDIC, and the other federal
depository institution regulatory agencies. A depository institution is well
capitalized if it significantly exceeds the minimum level required by
regulation for each relevant capital measure, adequately capitalized if it
meets such measure, undercapitalized if it fails to meet any such measure,
significantly undercapitalized if it is significantly below such measure, and
critically undercapitalized if it fails to meet any critical capital level set
forth in the regulations. The critical capital level must be a level of
tangible equity capital equal to the greater of 2 percent of total tangible
assets or 65 percent of the minimum leverage ratio to be prescribed by
regulation. An institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it receives
an unsatisfactory examination rating.
If a depository institution fails to meet regulatory capital requirements,
the regulatory agencies can require submission and funding of a capital
restoration plan by the institution, place limits on its activities, require
the raising of additional capital and, ultimately, require the appointment of
a conservator or receiver for the institution. The obligation of a controlling
bank holding company under FDICIA to fund a capital restoration plan is
limited to the lesser of five percent of an undercapitalized subsidiary's
assets or the amount required to meet regulatory capital requirements. If the
controlling bank holding company fails to fulfill its obligations under FDICIA
and files (or has filed against it) a petition under the Federal Bankruptcy
Code, the FDIC's
4
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, 1998, the Subsidiary Banks were "well capitalized" and were
not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. The Subsidiary Banks do not
rely upon brokered deposits as a primary source of deposit funding; although,
such deposits are sold through the Correspondent and Investment Services
Division of Compass Bank.
FDICIA contains numerous other provisions, including new reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy. In addition, FDICIA requires the FDIC to establish a system
of risk-based assessments for federal deposit insurance, by which banks that
pose a greater risk of loss to the FDIC (based on their capital levels and the
FDIC's level of supervisory concern) will pay a higher insurance assessment.
The Subsidiary Banks
In general, federal and state banking laws and regulations govern all areas
of the operations of the Subsidiary Banks, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state banking regulatory agencies also
have the general authority to limit the dividends paid by insured banks and
bank holding companies if such payments may be deemed to constitute an unsafe
and unsound practice. Federal and state banking agencies also have authority
to impose penalties, initiate civil and administrative actions and take other
steps intended to prevent banks from engaging in unsafe or unsound practices.
Compass Bank, organized under the laws of the State of Alabama, is a member
of the Federal Reserve. As such, it is supervised, regulated and regularly
examined by the Alabama State Banking Department and the Federal Reserve.
Arizona Bank, which is also a member of the Federal Reserve, is supervised,
regulated and regularly examined by the Arizona State Banking Department and
the Federal Reserve. The Subsidiary Banks 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. Arizona Bank is governed by Arizona laws restricting a
bank from paying cash dividends except from capital surplus without the
approval of the state superintendent of banks. As members of the Federal
Reserve, Compass Bank and Arizona Bank 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
5
needs of their local community or communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of such
financial institutions. The CRA and such regulations provide that the
appropriate regulatory authority will assess the records of regulated
financial institutions in satisfying their continuing and affirmative
obligations to help meet the credit needs of their local communities as part
of their regulatory examination of the institution. The results of such
examinations are made public and are taken into account upon the filing of any
application to establish a domestic branch or to merge or to acquire the
assets or assume the liabilities of a bank. In the case of a bank holding
company, the CRA performance record of the banks involved in the transaction
are reviewed in connection with the filing of an application to acquire
ownership or control of shares or assets of a bank or to merge with any other
bank holding company. An unsatisfactory record can substantially delay or
block the transaction.
Other
Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts, and other financial institutions are being
considered by the executive branch of the federal government, Congress, and
various state governments, including Alabama, Texas, Florida, and Arizona.
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 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.
6
ITEM 1 -- STATISTICAL DISCLOSURE
Page(s)
-------
Consolidated Average Balances and Rate/Volume Variances .............. 28 & 29
Investment Securities and Investment Securities Available for Sale.... 15
Investment Securities and Investment Securities Available for Sale
Maturity Schedule.................................................... 16
Loan Portfolio........................................................ 13
Selected Loan Maturity and Interest Rate Sensitivity.................. 13
Nonperforming Assets.................................................. 34
Summary of Loan Loss Experience....................................... 32
Allocation of Allowance for Loan Losses............................... 33
Maturities of Time Deposits........................................... 18
Return on Equity and Assets........................................... 23
Short-Term Borrowings................................................. 19
Trading Account Composition........................................... 17
Capital Ratios........................................................ 24
Noninterest Income.................................................... 35
Noninterest Expense................................................... 36
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, Texas, and Arizona 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. Compass Bank currently occupies approximately 35 percent of
the River Oaks Bank Building and approximately 30 percent of the Post Oak
Building. The remaining space in both buildings is leased to multiple tenants.
ITEM 3 -- LEGAL PROCEEDINGS
The Company and its subsidiaries 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 seek
substantial sums as damages.
Among the actions which are pending are proceedings 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.
7
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 difficult 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 1998.
8
[This Page Intentionally Left Blank]
9
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
---- --- --------
1998:
First quarter......................................... $53 1/4 $41 1/2 $.2625
Second quarter........................................ 49 7/8 42 .2625
Third quarter......................................... 47 1/2 33 .2625
Fourth quarter........................................ 39 3/8 28 7/8 .2625
1997:
First quarter......................................... $32 1/8 $26 $.2367
Second quarter........................................ 37 1/4 29 1/8 .2367
Third quarter......................................... 39 3/4 34 1/2 .2367
Fourth quarter........................................ 46 5/8 37 1/8 .2367
As of January 31, 1999, there were approximately 7,600 shareholders of
record of common stock of which approximately 6,400 were residents of either
Alabama, Texas, Florida, or Arizona.
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 1998 accounted for under the pooling-of-interests method of
accounting.
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in Thousands Except Per Share Data)
Net interest income............... $ 579,387 $ 539,775 $ 487,566 $ 443,901 $ 412,362
Provision for loan losses......... 38,445 32,935 25,987 16,363 7,524
Net income........................ 180,880 166,242 146,334 132,567 118,598
Per common share data:
Basic earnings................... $ 2.40 $ 2.22 $ 1.98 $ 1.80 $ 1.62
Diluted earnings................. 2.35 2.17 1.94 1.76 1.59
Dividends declared............... 1.05 .95 .85 .75 .61
Balance sheet:
Average total equity............. $ 1,135,556 $ 1,006,311 $ 894,522 $ 790,635 $ 689,816
Average assets................... 15,423,162 13,972,411 12,701,623 11,375,547 9,682,858
Period-end FHLB and other
borrowings...................... 2,045,980 1,430,253 734,012 623,192 516,822
Period-end total equity.......... 1,196,141 1,068,019 952,509 873,479 734,629
Period-end assets................ 17,288,908 14,900,748 13,724,190 12,374,866 10,944,505
Performance ratios:
Return on average assets......... 1.17% 1.19% 1.15% 1.17% 1.22%
Return on average common equity.. 16.12 16.77 16.66 16.93 17.31
Return on average equity......... 15.93 16.52 16.36 16.77 17.19
10
CASH BASIS DISCLOSURES
The selected financial data presented in the following table details certain
information highlighting the performance of the Company for each of the three
years ended December 31, 1998, adjusted to exclude the amortization of
goodwill and other intangibles considered nonqualifying in regulatory capital
calculations, and related balances of goodwill and other intangibles resulting
from business combinations recorded by the Company under the purchase method
of accounting. Had these business combinations qualified for accounting under
the pooling of interests method, no intangible assets would have been
recorded. Since the amortization of goodwill and other intangibles does not
result in a cash expense, the economic value to shareholders under either
accounting method is essentially the same. Additionally, such amortization
does not impact the Company's liquidity and funds management activities.
Cash basis financial data is particularly relevant in that it provides an
additional basis for measuring a company's ability to support future growth
and pay dividends. Cash basis financial data, as defined herein, has not been
adjusted to exclude the impact of other noncash items such as depreciation,
provision for loan losses, and merger and integration related expenses except
as noted below. This is the only section of this report in which the Company's
financial results are discussed on a cash basis.
1998 1997 1996
-------- -------- --------
(in Thousands Except Per
Share Data)
Income statement:
Noninterest expense............................. $480,204 $433,639 $393,619
Net income before income tax expense............ 283,238 265,925 238,056
Net income...................................... 189,678 175,158 153,343
Per common share data:
Basic earnings.................................. $ 2.52 $ 2.34 $ 2.07
Diluted earnings................................ 2.46 2.29 2.03
Performance ratios:
Return on average tangible assets............... 1.24% 1.27% 1.22%
Return on average common equity................. 16.92 17.69 17.47
Return on average tangible common equity........ 18.93 20.33 19.76
Return on average equity........................ 16.70 17.41 17.14
Return on average tangible equity............... 18.63 19.92 19.30
Efficiency*..................................... 57.18 58.68 59.77
Goodwill and nonqualifying intangibles:
Goodwill average balance........................ $ 81,130 $ 85,625 $ 60,430
Nonqualifying intangible assets average
balance........................................ 36,280 41,163 39,728
Goodwill amortization (after tax)............... 5,155 4,960 3,453
Nonqualifying intangibles amortization (after
tax)........................................... 3,643 3,956 3,556
- --------
* Excludes merger and integration related expenses.
11
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
1998 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.
This report may contain forward-looking statements which are subject to
numerous assumptions, risks, and uncertainties. Statements pertaining to
future periods are subject to uncertainty because of the possibility of
changes in underlying factors and assumptions. Actual results could differ
materially from those contained in or implied by such forward-looking
statements for a variety of factors including: sharp and/or rapid changes in
interest rates; significant changes in the economic scenario from the current
anticipated scenario which could materially change anticipated credit quality
trends and the ability to generate loans; significant delay in or inability to
execute strategic initiatives designed to grow revenues and/or control
expenses; unforeseen business risks related to Year 2000 computer systems
issues; and significant changes in accounting, tax or regulatory practices or
requirements.
Summary
In 1998, the Company reported record net income of $180.9 million, a 9
percent increase over the Company's previous high of $166.2 million in 1997,
which represented a 14 percent increase over 1996. Basic earnings per share
for 1998 was $2.40 per share, also a record, compared with $2.22 per share in
1997 and $1.98 per share in 1996, representing an 8 percent increase in 1998
and a 12 percent increase in 1997. Diluted earnings per share increased to
$2.35 per share in 1998, an 8 percent increase, from $2.17 per share in 1997.
Diluted earnings per share in 1997 increased 12 percent over 1996. Pretax
income for 1998 was up $17.6 million, or 7 percent, over 1997 while income tax
expense increased 3 percent over the same period reflecting a decrease in the
Company's effective tax rate from 34.8 percent in 1997 to 33.6 percent in
1998.
Earning Assets
Average earning assets in 1998 increased 10 percent over 1997 due
principally to a 25 percent increase in average available-for-sale securities,
a 14 percent increase in investment securities, and a 6 percent increase in
loans. These increases were significantly impacted by the Company's
securitization activity for 1998 consisting of the securitization and sale of
approximately $400 million of indirect automobile loans in June and the
securitization and transfer of approximately $500 million in residential
mortgages to available-for-sale securities in September. These securitizations
resulted in a moderate shift in the average earning asset mix in 1998 with
loans at 69 percent, investment securities and investment securities available
for sale at 30 percent, and other earning assets at 1 percent. In 1997, loans
were 71 percent, investment securities and investment securities available for
sale were 27 percent, and other earning assets were 2 percent. 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 six percent in 1998 with much of the increase
concentrated in commercial, financial and agricultural loans, real estate
construction loans, and commercial real estate loans. Excluding the impact of
securitizations, average loans increased 12 percent in 1998. Total loans
outstanding at year end increased six percent over previous year-end levels.
Commercial, financial and agricultural loans, which were 31 percent of total
loans, increased 31 percent in 1998 compared to the previous year. Real estate
construction loans increased 49 percent while
12
commercial mortgage loans increased 15 percent from year-end 1997 to year-end
1998. Residential mortgage and consumer installment loans decreased 18 percent
and 10 percent, respectively, compared to 1997 levels due to the Company's
securitization activity. The 10 percent growth in the Company's loan portfolio
from 1996 to 1997 was primarily the result of an increase of 21 percent in
commercial, financial and agricultural loans, a 20 percent increase in real
estate construction loans, and a 15 percent increase in consumer installment
loans.
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 1998
continuing the trend of prior years. Residential real estate loans represented
26 percent of the total portfolio at December 31, 1998, down from the 33
percent reported in the prior year.
The Loan Portfolio table shows the classifications of loans by major
category at December 31, 1998, and for each of the preceding four years. The
second table shows maturities of certain loan classifications at December 31,
1998, and an analysis of the rate structure for such loans due in over one
year.
Loan Portfolio
December 31
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------- -------------------
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..... $3,087,861 30.6% $2,365,347 24.7% $1,950,227 22.5% $1,553,902 20.5% $1,359,323 19.9%
Real estate --
construction..... 1,186,533 11.7 794,816 8.3 661,391 7.6 524,341 6.9 477,944 7.0
Real estate --
mortgage:
Residential...... 2,599,841 25.7 3,160,490 33.0 3,121,381 36.0 2,790,745 36.7 2,530,951 37.1
Commercial....... 1,364,878 13.5 1,184,408 12.4 1,143,342 13.2 995,787 13.1 927,068 13.6
Consumer
installment...... 1,864,046 18.5 2,064,692 21.6 1,788,424 20.7 1,733,591 22.8 1,531,949 22.4
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
10,103,159 100.0% 9,569,753 100.0% 8,664,765 100.0% 7,598,366 100.0% 6,827,235 100.0%
===== ===== ===== ===== =====
Less: Unearned
income........... 1,874 6,040 10,080 11,499 9,678
Allowance for loan
losses........... 136,677 135,225 130,753 121,180 118,702
---------- ---------- ---------- ---------- ----------
Net loans......... $9,964,608 $9,428,488 $8,523,932 $7,465,687 $6,698,855
========== ========== ========== ========== ==========
Selected Loan Maturity and Interest Rate Sensitivity
Rate Structure For Loans
Maturity Maturing Over One Year
-------------------------------------------- ------------------------
Floating
One Over One Year Over Predetermined or
Year or Through Five Five Interest Adjustable
Less Years Years Total Rate Rate
---------- ------------- -------- ---------- ------------- ----------
(in Thousands)
Commercial, financial
and agricultural....... $1,655,454 $1,199,067 $233,340 $3,087,861 $705,204 $ 727,203
Real estate --
construction........... 699,892 425,265 61,376 1,186,533 94,555 392,086
---------- ---------- -------- ---------- -------- ----------
$2,355,346 $1,624,332 $294,716 $4,274,394 $799,759 $1,119,289
========== ========== ======== ========== ======== ==========
13
Investment Securities
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. 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) investment securities or (iii) investment 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.
Investment 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 accumulated
other comprehensive 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.
Maturities of investment securities in 1998, 1997, and 1996 were $657
million, $379 million, and $283 million, respectively. Sales and maturities of
investment securities available for sale totaled $716 million and $1.1
billion, respectively, in 1998 while sales and maturities in the portfolio in
1997 were $995 million and $552 million. Net gains realized during the year
accounted for two percent, four percent and six percent of noninterest income
in 1998, 1997, and 1996, respectively. Gross unrealized gains in the Company's
investment securities portfolio at year-end 1998 totaled $29.7 million and
gross unrealized losses totaled $1.8 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 collateralized mortgage obligations ("CMOs"). Total average
investment securities, including those available for sale, increased 21
percent during 1998 after remaining relatively unchanged in 1997, due in part
to the securitization and transfer of approximately $500 million in real
estate mortgages to securities available for sale in September 1998.
14
The following table reflects 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
--------------------------------
1998 1997 1996
---------- ---------- ----------
(in Thousands)
Investment securities:
U.S. Treasury................................ $ 4,724 $ 13,466 $ 17,980
U.S. Government agencies and corporations.... 8,263 63,930 87,809
Mortgage-backed pass-through securities...... 188,850 266,781 326,837
Collateralized mortgage obligations:
Agency...................................... 317,404 319,291 343,125
Corporate................................... 1,291,089 311,003 295,838
States and political subdivisions............ 79,909 97,529 100,533
Corporate bonds.............................. 4,970 27,604 40,389
Other........................................ 830 855 1,270
---------- ---------- ----------
1,896,039 1,100,459 1,213,781
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 132,861 150,575 163,424
U.S. Government agencies and corporations.... 112,173 187,706 148,538
Mortgage-backed pass-through securities...... 279,195 166,107 343,102
Collateralized mortgage obligations:
Agency...................................... 918,532 1,029,025 527,411
Corporate................................... 1,924,564 773,224 904,368
States and political subdivisions............ 38,082 27,173 48,490
Corporate bonds.............................. 113,073 90,329 116,592
Other........................................ 110,053 100,836 59,109
---------- ---------- ----------
3,628,533 2,524,975 2,311,034
Net unrealized gain (loss).................. 17,228 2,819 (3,322)
---------- ---------- ----------
3,645,761 2,527,794 2,307,712
---------- ---------- ----------
Total....................................... $5,541,800 $3,628,253 $3,521,493
========== ========== ==========
The maturities and weighted average yields of the investment securities and
investment securities available for sale portfolios at the end of 1998 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., fair value, of these securities. Taxable
equivalent adjustments, using a 35 percent tax rate, have been made in
calculating yields on tax-exempt obligations.
15
Investment Securities and Investment Securities Available for Sale Maturity
Schedule
Maturing
--------------------------------------------------------------------
After One But
Within Within Five After Five But After
One Year Years Within Ten Years Ten Years
-------------- ---------------- ------------------ --------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ---------- ----- ---------- ------- -------- -----
(in thousands)
Investment securities:
U.S. Treasury.......... $ 4,724 3.90% -- -- -- -- -- --
U.S. Government
agencies and
corporations.......... 4,171 6.30 $ 4,092 6.49% -- -- -- --
Mortgage-backed pass-
through securities.... 32,328 6.76 131,039 7.28 $ 10,788 6.72% $ 14,695 6.80%
Collateralized mortgage
obligations........... 239,849 6.98 943,237 6.91 352,010 6.64 73,397 6.66
States and political
subdivisions.......... 5,328 7.87 28,680 8.00 40,319 9.26 5,582 8.42
Corporate bonds and
other................. 25 8.01 5,275 8.70 500 7.61 -- --
-------- ---------- ---------- --------
286,425 6.91 1,112,323 6.99 403,617 6.91 93,674 6.79
-------- ---------- ---------- --------
Investment securities
available for sale --
amortized cost:
U.S. Treasury.......... 1,998 6.05 128,720 5.64 -- -- 2,143 5.03
U.S. Government
agencies and
corporations.......... 499 2.86 9,469 5.86 58,968 6.06 43,237 6.78
Mortgage-backed pass-
through securities.... 5,759 6.09 160,668 6.46 102,906 6.17 9,862 6.15
Collateralized mortgage
obligations........... 450,067 6.70 1,526,079 6.82 281,041 6.25 585,909 6.76
States and political
subdivisions.......... 2,686 7.68 13,003 7.26 10,792 7.07 11,601 7.27
Corporate bonds and
other................. 10,347 5.50 176,093 7.25 20,741 6.24 15,945 5.89
-------- ---------- ---------- --------
471,356 6.67 2,014,032 6.75 474,448 6.23 668,697 6.73
-------- ---------- ---------- --------
Total................. $757,781 6.76 $3,126,355 6.84 $ 878,065 6.54 $762,371 6.74
======== ========== ========== ========
While the weighted average stated maturities of total MBS and CMOs are 15.9
years and 26.8 years, respectively, the corresponding weighted average
expected lives assumed in the above table are 4.2 years and 4.5 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 4.8 and 6.6 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 2.4 and 1.4 years,
respectively.
The weighted average market prices as a percentage of par value for MBS and
CMOs at December 31, 1998, were 101.4 percent and 100.2 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
increased market yield on fixed rate securities and 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, 1998, fixed-rate MBS and CMOs
totaled $385.4 million and $3.9 billion, respectively, with corresponding
weighted average expected lives of 4.2 and 4.7 years. Adjustable-rate MBS and
CMOs totaled $176.3 million and $560.1 million, respectively, with
corresponding weighted average expected lives of 4.27 and 3.32 years.
Substantially all adjustable-rate MBS and CMOs are subject to life rate caps,
and MBS are also generally subject to a two percent annual cap. The weighted
average life caps at year end were 11.49 percent and 9.36 percent for MBS and
CMOs, respectively, and the corresponding weighted average coupon rates at
year end were 6.94 percent and 6.42 percent. Given a 100 basis point immediate
and permanent parallel increase in rates, the estimated market prices for MBS
and CMOs would be 99.7 and 97.8, respectively. Given a 100 basis point
immediate and permanent parallel decrease in rates, the estimated market
prices for MBS and CMOs would be 102.5 and 101.2, respectively.
Trading Account Securities and Other Earning Assets
Securities carried in the trading account, while interest bearing, are
primarily held for sale to institutional customers for their investment
portfolio and generally are sold within thirty days of purchase. 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
securities portfolio for 1998 decreased by 17 percent following a
16
15 percent increase in 1997. The following table details the composition of
the Company's trading account at December 31, 1998, 1997 and 1996.
Trading Account Composition
December 31
-------------------------
1998 1997 1996
-------- -------- -------
(in Thousands)
U.S. Treasury and Government agency.................. $ 44,605 $ 55,487 $48,785
States and political subdivisions.................... 20,400 8,135 9,738
Mortgage-backed pass-through securities.............. 50,379 34,282 25,281
Other debt securities................................ 3,000 281 727
Derivative securities:
Collateralized mortgage obligations................ 8,750 13,906 10,972
Interest rate floors and caps...................... 537 305 787
Other options...................................... -- 64 60
-------- -------- -------
$127,671 $112,460 $96,350
======== ======== =======
Average federal funds sold and securities purchased under agreements to
resell decreased 43 percent in 1998 compared to a 28 percent decrease in 1997.
The average balance of interest bearing deposits in other banks decreased 64
percent during 1998 from 1997 levels after decreasing 34 percent from 1996 to
1997.
Deposits and Borrowed Funds
Changes in the Company's markets and the economy in general were also
reflected in the liability mix during 1998. Average interest bearing deposits,
the primary source of funding for the Company, made up 76 percent of total
average interest bearing liabilities in 1998, down from 80 percent in 1997 and
84 percent in 1996. Contributing to the overall decrease in the proportion of
average interest bearing liabilities represented by average interest bearing
deposits relative to 1997 was the impact of investment alternatives pursued by
customers in response to the low level of interest rates. In addition, the mix
of average interest bearing deposits in 1998 and 1997 shifted from demand
deposits to savings due primarily to a program initiated by the Company during
1996. Under this program, deposit balances in certain NOW accounts above a
certain threshold are transferred to savings accounts, thereby reducing the
level of deposit reserves required to be maintained with the Federal Reserve.
Refer to Note 10, Regulatory Matters and Dividends from Subsidiaries, in the
"Notes to Consolidated Financial Statements" for a further discussion of
reserve requirements maintained with the Federal Reserve. As a result of this
program, during 1998 and 1997 NOW account balances averaging $858 million and
$626 million, respectively, were transferred to the savings category.
Contributing to the change in the mix of interest bearing liabilities in 1998
was a 9 percent decrease in average certificates of deposit less than $100,000
and other time deposits, offset in part by a 10 percent increase in average
certificates of deposit of $100,000 or more. During 1997, average certificates
of deposit less than $100,000 declined three percent while average
certificates of deposit of $100,000 or more increased by two percent.
17
The following table summarizes the maturities of certificates of deposit of
$100,000 or more and other time deposits of $100,000 or more outstanding at
December 31, 1998.
Maturities of Time Deposits
Certificates
of Deposit Other Time
Over Deposits Over
$100,000 $100,000 Total
------------ ------------- ----------
(in Thousands)
Three months or less..................... $ 733,960 $37,287 $ 771,247
Over three through six months............ 300,993 -- 300,993
Over six through twelve months........... 240,930 -- 240,930
Over twelve months....................... 172,455 -- 172,455
---------- ------- ----------
$1,448,338 $37,287 $1,485,625
========== ======= ==========
In order to support earning asset growth of 10 percent in 1998 and as a
result of consumers choosing investments other than deposits, the Company
relied more heavily on borrowed funds in 1998 continuing a trend that began in
1997. Borrowed funds consist of Federal Home Loan Bank ("FHLB") advances,
guaranteed preferred beneficial interests in the Company's junior subordinated
deferrable interest debentures ("Capital Securities") and other short-term
borrowings, primarily in the form of federal funds purchased, securities sold
under agreements to repurchase and other short-term borrowings. Included in
other short-term borrowings are trading account short sales and the commercial
paper of Compass Bancshares, Inc. Average federal funds purchased increased
$285 million, or 43 percent, and the average balance of FHLB and other
borrowings, including the Capital Securities, increased $506 million, or 49
percent, primarily as a result of additional FHLB advances of $829 million,
partially offset by repayments of $213 million. For a discussion of interest
rates and maturities of FHLB and other borrowings, refer to Note 5, FHLB and
Other Borrowings, and Note 6, Capital Securities and Preferred Stock, in the
"Notes to Consolidated Financial Statements."
18
The Short-Term Borrowings table below shows the distribution of the
Company's short-term borrowed funds and the weighted average interest rates
thereon at the end of each of the last three years. Also provided are the
maximum outstanding amounts of borrowings, the average amounts of borrowings
and the average interest rates at year end for the last three years.
Short-Term Borrowings
Year Ended December 31
---------------------------------------------------
Maximum Average
Outstanding Average Interest
At Any Average Interest Ending Rate At
Month End Balance Rate Balance Year End
----------- ---------- -------- ---------- --------
(in Thousands)
1998
Federal funds purchased... $1,696,945 $ 951,267 5.26% $1,447,495 4.67%
Securities sold under
agreements to
repurchase............... 445,552 244,505 4.94 288,571 4.30
Short sales............... 41,590 28,362 5.39 21,547 4.39
Commercial paper.......... 108,627 76,732 5.14 79,456 4.74
Other short-term
borrowings............... 110,898 65,374 5.57 58,401 4.48
---------- ---------- ----------
$2,403,612 $1,366,240 $1,895,470
========== ========== ==========
1997
Federal funds purchased... $1,124,246 $ 666,097 5.44% $ 927,795 5.48%
Securities sold under
agreements to
repurchase............... 366,682 244,560 5.11 243,871 5.13
Short sales............... 96,372 57,991 6.00 52,080 5.83
Commercial paper.......... 92,516 61,006 5.08 52,410 5.03
Other short-term
borrowings............... 237,207 92,474 5.80 79,063 6.29
---------- ---------- ----------
$1,917,023 $1,122,128 $1,355,219
========== ========== ==========
1996
Federal funds purchased... $ 658,925 $ 460,809 5.27% $ 606,414 5.27%
Securities sold under
agreements to
repurchase............... 311,758 256,424 4.71 206,053 5.00
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............... 144,302 71,610 5.72 119,014 6.05
---------- ---------- ----------
$1,290,952 $ 897,689 $1,016,080
========== ========== ==========
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 its
customers, whether they are depositors wishing to withdraw funds or borrowers
requiring funds to meet their credit needs. Without proper liquidity
management, the Company 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 its subsidiaries, 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, 1998, the Company's Subsidiary Banks could have paid additional
dividends to the parent holding company in the amount of $37.6 million while
continuing to meet the capital requirements for "well-capitalized" banks.
Also, the parent holding company has access to various capital markets as
evidenced by the issuance of the Capital Securities during the first quarter
of 1997. The parent holding company does not anticipate any liquidity
requirements in the near future that it will not be able to meet.
19
Asset and liability management functions not only to assure adequate
liquidity in order to meet the needs of the Company's customers, but also to
maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities so that the Company can earn a return that
meets 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 are 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. 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.
During 1997 and 1998, the Company has funded the growth in interest earning
assets through its increased reliance on borrowed funds as a direct result of
consumers choosing investments other than deposits as the general level of
interest rates has continued to decline and the stock market has remained
strong. FHLB and other borrowings increased by $596 million in 1997 and $616
million in 1998. For more information on the composition of the Company's
long-term borrowings, refer to Note 5, FHLB and Other Borrowings, in the
"Notes to Consolidated Financial Statements."
As disclosed in the Company's "Consolidated Statements of Cash Flows," net
cash provided by operating activities totaled $181 million primarily due to
net income. Net cash used in investing activities of $2.3 billion consisted
primarily of net loans originated of $1.4 billion, available-for-sale
securities purchased of $2.4 billion, and purchases of investment securities
of $1.5 billion, largely funded by maturities of investment securities of $657
million, proceeds from the sale of securitized indirect automobile loans of
$360 million, as well as sales and maturities of investment securities
available for sale of $716 million and $1.1 billion, respectively. Net cash
provided by financing activities provided the remainder of funding sources for
1998. The $2.2 billion of net cash provided by financing activities consisted
primarily of a net increase of $616 million in FHLB advances and other
borrowings, a $564 million increase in federal funds purchased and securities
sold under agreements to repurchase, and an increase of $1.1 billion in
deposits offset partially by the payment of $78 million in dividends.
Interest Rate Sensitivity Management
The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. The
Company manages its exposure to fluctuations in interest rates through
policies established by its Asset/Liability Management Committee ("ALCO"). The
ALCO meets at least monthly and has responsibility for approving
asset/liability management policies, formulating and implementing strategies
to improve balance sheet positioning and/or earnings and reviewing the
interest rate sensitivity of the Company.
Management utilizes an interest rate simulation model to estimate the
sensitivity of the Company's net interest income to changes in interest rates.
Such estimates are based upon a number of assumptions for each scenario,
including the level of balance sheet growth, deposit repricing characteristics
and the rate of prepayments.
The estimated impact on the Company's net interest income sensitivity over a
one-year time horizon at December 31, 1998 is shown in the following table
along with comparable prior year information. Such analysis
20
assumes an immediate and sustained parallel shift in interest rates, no
balance sheet growth, and the Company's estimate of how interest-bearing
transaction accounts will reprice in each scenario.
Percentage Increase (Decrease)
Principal/Notional in Interest Income /Expense
Amount of Earning Given Immediate and Sustained
Assets, Interest Parallel Interest Rate Shifts
Bearing ------------------------------------
Liabilities and Down 100 Up 100
Swaps Basis Points Basis Points
------------------ --------------- ---------------
(in Thousands)
December 31, 1998:
Assets which reprice in:
One year or less....... $ 5,670,836 (10.97)% 10.71%
Over one year.......... 10,127,706 (5.88) 2.87
-----------
$15,798,542 (7.73) 5.72
===========
Liabilities which
reprice in:
One year or less....... $ 9,967,789 (14.09) 17.44
Over one year.......... 3,435,149 (4.84) 9.23
-----------
$13,402,938 (11.08) 14.77
===========
Non-trading swaps....... $ 1,577,714 33.20 (37.13)
===========
Total net interest
income sensitivity.... (4.34) (3.03)
December 31, 1997:
Assets which reprice in:
One year or less....... $ 5,440,151 (9.02)% 10.20%
Over one year.......... 8,018,907 (3.20) 2.36
-----------
$13,459,058 (5.67) 5.69
===========
Liabilities which
reprice in:
One year or less....... $ 8,516,796 (12.63) 16.86
Over one year.......... 2,875,387 (4.58) 3.45
-----------
$11,392,183 (10.06) 12.58
===========
Non-trading swaps....... $ 1,561,303 (27.72) (75.80)
===========
Total net interest
income sensitivity.... (1.60) (2.60)
As shown in the table, net interest income sensitivity increased from
December 31, 1997, to December 31, 1998. In the down-rate scenario, the
sensitivity increased due in large part to the decrease in the general level
of interest rates during 1998. This decrease in interest rates resulted in
increased estimated prepayment speeds for mortgage loans and mortgage-backed
securities, including CMOs. Increased prepayments in a down-rate environment
result in reinvestment of cash flows at lower rates, thus increasing interest
rate sensitivity. The increase in sensitivity was also a function of the use
of less aggressive deposit repricing assumptions in the December 31, 1998
scenario due to the current low interest rate environment. In the up-rate
scenario, the slight increase in sensitivity is primarily due to an increase
in callable FHLB advances that, in the up-rate scenario, are expected to be
called requiring replacement of this funding at higher costs.
The ALCO policy, with which the Company complies, is based on the same
assumptions as the above table and provides that a 100 basis point increase or
decrease in interest rates should not reduce net interest income by more than
six percent. Certain financial instruments have been excluded from the above
analysis because of the no-growth assumption, including letters of credit and
commitments to extend credit. Trading account interest rate contracts and
options have also been excluded because they have no material impact on net
interest income.
21
The Company enters into various interest rate contracts not held in the
trading account ("interest rate protection products") to help manage the
Company's interest sensitivity. Such contracts generally have a fixed notional
principal amount and include interest rate swaps and interest rate caps and
floors. Interest rate swaps are contracts 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"). Interest rate caps and floors purchased or written are
contracts where the Company receives or pays, respectively, interest if the
specified index falls below the floor rate or rises above the cap rate. 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 is ultimately reflected as an adjustment 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. Refer to Note 7,
Off-Balance Sheet Instruments, of "Notes to Consolidated Financial Statements"
for the composition of the Company's interest rate protection contracts as
well as a discussion of interest rate risks, credit risks and concentrations
in off-balance sheet financial instruments.
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. The 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 1998, there were no deferred gains and there were $40,000 of deferred
losses on terminated interest rate protection contracts, which will be
recorded as net interest expense through 1999. See Note 7, Off-Balance Sheet
Instruments, of "Notes to Consolidated Financial Statements" for details
regarding the asset or liability category with which the Company's non-trading
interest protection contracts were associated at December 31, 1998.
In addition to interest rate protection contracts used to 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 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 account 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. See Note 7, Off-Balance Sheet Instruments, of "Notes to
Consolidated Financial Statements" for a summary of interest rate contracts
held in the trading account at December 31, 1998.
Capital Resources
Shareholders' equity increased 12 percent in both 1998 and 1997. Exclusive
of the change in accumulated other comprehensive income in both 1998 and 1997,
net income after dividends accounted for substantially all of the increase in
shareholders' equity.
Dividends of $75.2 million were declared on the Company's common stock in
1998, representing a 22 percent increase over 1997. The 1998 annual dividend
rate was $1.05 per common share, an 11 percent increase over 1997. The
dividend payout ratio for 1998 was 42 percent compared to 38 percent for 1997
and 35 percent for 1996. 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. On
February 15, 1999, the Company's Board of Directors approved a 14 percent
increase in the annual dividend rate, raising it to $1.20 per common share for
1999. This marked the eighteenth consecutive year the Company has increased
its dividend.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The Company has
satisfied its capital requirements principally through the retention of
earnings. The Company's five-year compound growth rate in shareholders' equity
of 13 percent was achieved primarily through reinvested earnings.
22
Average common shareholders' equity as a percentage of total average assets
is one measure used to determine capital strength. Overall, the Company's
capital position remains strong as the ratio of average common shareholders'
equity to average assets for 1998 was 7.16 percent compared to 6.97 percent in
1997 and 6.79 percent in 1996. As noted above, exclusive of the change in
accumulated other comprehensive income, the increase in shareholders' equity
in 1998 and 1997 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
-------------------
1998 1997 1996
----- ----- -----
Return on average assets................................. 1.17% 1.19% 1.13%
Return on average common equity.......................... 16.12 16.77 16.66
Dividend payout ratio.................................... 42.25 37.66 35.11
Average common shareholders' equity to average assets
ratio................................................... 7.16 6.97 6.79
In addition to the capital ratios mentioned above, banking industry
regulators have defined minimum regulatory capital ratios that the Company and
the Subsidiary Banks are required to maintain. These risk-based capital
guidelines take into consideration risk factors, as defined by the 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. Tier I Capital is defined as common shareholders' equity,
excluding the net unrealized holding gain (loss) on available-for-sale
securities (except for net unrealized losses on marketable equity securities),
plus perpetual preferred stock and the Capital Securities, minus goodwill and
other disallowed intangible assets. Other disallowed intangibles represent
intangible assets, other than goodwill, recorded after February 19, 1992.
Total Qualifying Capital is defined as Tier I Capital plus Tier II capital
components, which include such items as qualifying allowance for loan losses
and qualifying subordinated debt.
At December 31, 1998, the Company's Tier I Capital and Total Qualifying
Capital totaled $1.2 billion and $1.4 billion, respectively. The percentage
ratios, as calculated under the guidelines, were 8.81 percent and 10.71
percent for Tier I and Total Qualifying Capital, respectively, at year-end
1998, down from 9.87 percent and 12.38 percent at year-end 1997. These ratios
are well within the minimum requirements of four percent for Tier I Capital
and eight percent for Total Qualifying Capital. Tier I Capital increased by
$128 million, or 12 percent, in 1998 primarily as a result of earnings
retained by the Company, net of dividends, while risk-adjusted assets
increased by $2.8 billion, or 26 percent. This significantly greater growth in
risk-adjusted assets resulted in the decline in percentage ratios from 1997 to
1998.
Two other important indicators of capital adequacy in the banking industry
are the leverage ratio and the tangible leverage ratio. The leverage ratio is
defined as Tier I Capital divided by total adjusted quarterly average assets.
Average quarterly assets are adjusted by subtracting the average unrealized
gain (loss) on available-for-sale securities (except for net unrealized losses
on marketable equity securities), period-end goodwill and other disallowed
intangibles. The tangible leverage ratio is defined similarly, except, by
definition, all other intangible assets not previously excluded are removed
from both the numerator and denominator. The Company's leverage ratio was 7.26
percent at year-end 1998 and 7.41 percent at year-end 1997 while its tangible
leverage ratio was 7.16 percent at year-end 1998 and 7.30 percent at year-end
1997.
23
The following table shows the calculation of capital ratios for the Company
for the last two years.
Capital Ratios
December 31
------------------------
1998 1997
----------- -----------
(in Thousands)
Risk-based capital:
Tier I Capital...................................... $ 1,188,851 $ 1,060,482
Tangible Tier I capital............................. 1,172,053 1,044,206
Total Qualifying Capital............................ 1,445,132 1,329,208
Assets:
Net risk-adjusted assets............................ $13,490,712 $10,740,437
Adjusted quarterly average assets................... 16,386,203 14,311,832
Adjusted tangible quarterly average assets.......... 16,369,405 14,295,556
Ratios:
Tier I Capital...................................... 8.81% 9.87%
Total Qualifying Capital............................ 10.71 12.38
Leverage............................................ 7.26 7.41
Tangible leverage................................... 7.16 7.30
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 1998 for "well-
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to ensure that the Subsidiary Banks exceed the
guidelines. For further information regarding the regulatory capital ratios of
the Company and the Subsidiary Banks, see Note 10, Regulatory Matters and
Dividends from Subsidiaries, in the "Notes to Consolidated Financial
Statements".
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 following 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 1998 increased 7 percent over 1997 after increasing
11 percent in 1997 over 1996. A 10 percent increase in the volume of average
earning assets partially offset by a 10 basis point decrease in the net yield
was responsible for the increase in 1998. The increase in 1997 was a function
of a 10 percent increase in the volume of earning assets, primarily a 14
percent increase in total loans, coupled with a 4 basis point increase in the
net yield. The schedule on page 29 provides the detail of changes in interest
income, interest expense and net interest income due to changes in volumes and
rates.
Interest income increased 7 percent in 1998 as a result of a 10 percent
increase in the volume of average earning assets and an 18 basis point
decrease in the average interest rate earned. The decline in the yield on
average earning assets was due to decreases in yield in all significant
categories of earning assets including a 16 basis point decline in the yield
on loans, which was attributable in part to declines in the prime rate, and a
27 basis point decrease in the yield on investment securities. The decline in
the yield on loans was due in part to the Company's securitization and sale of
$400 million of indirect automobile loans with a weighted average yield to the
Company of 8.66 percent in June 1998. Conversely, the Company experienced only
a two basis point decline in the yield on investment securities available for
sale partly as a result of the Company's transfer of $500 million
24
in residential mortgages with a weighted average yield of 7.85 percent to the
investment securities available for sale portfolio in September 1998.
Total interest expense increased by eight percent in 1998 due to a nine
percent increase in the average volume of interest bearing liabilities offset
partially by a nine basis point decrease in the rate paid on interest bearing
liabilities. Interest expense on interest bearing deposits increased by two
percent as the result of a three percent increase in the average volume and a
seven basis point decrease in rate. For borrowed funds, which represents
interest bearing liabilities that are not classified as deposits, a 34 percent
increase in interest expense on FHLB advances and other borrowings was a
result of a 49 percent increase in the average balance coupled with a 66 basis
point decline in the rate paid. Similarly, a 43 percent increase in the
average balance of federal funds purchased offset by an 18 basis point
decrease in the rate paid resulted in a 38 percent increase in interest
expense in this category.
From 1996 to 1997, interest income increased 10 percent as a result of a 10
percent increase in the volume of average earning assets and a 3 basis point
increase in the yield on average earning assets. Interest income on loans rose
13 percent as a result of a 14 percent increase in average volume and a 6
basis point decrease in yield. Interest income on investment securities
increased 21 percent from 1996 to 1997 as a result of a 23 percent increase in
average volume and a 16 basis point decrease in the yield. For securities
available for sale, a six percent decrease in the average balance combined
with a seven basis point increase in yield resulted in a five percent decrease
in interest income.
A basis point decrease in the rate paid on interest bearing liabilities
combined with a 10 percent increase in average volume resulted in a 9 percent
increase in interest expense on interest bearing liabilities in 1997. This
increase was due to a 49 percent increase in interest expense on Federal funds
purchased and a 45 percent increase in interest expense on FHLB and other
borrowings. Both increases were primarily a function of increases in the
average balance of each category of 45 percent and 53 percent, respectively.
Interest expense on interest bearing deposits increased three percent as a
result of a four percent increase in average balance and an eight basis point
decline in the rate paid.
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 decreased 10 basis
points to 4.13 percent in 1998 after increasing 4 basis points to 4.23 percent
in 1997. The decline in 1998 was due to the 18 basis point decrease in the
yield on average interest earning assets which was only partially offset by a
9 basis point decline in the rate paid on interest bearing liabilities. The
moderate increase in net yield in 1997 was a function of the downward
repricing of interest bearing deposits and FHLB and other borrowings which
outpaced the downward repricing of loans and total investment securities. This
is evidenced by the fact the yield on interest earning assets increased three
basis points while the rate paid on interest bearing liabilities decreased by
one basis point.
During 1998, the net yield on interest earning assets was favorably impacted
by the Company's use of interest rate contracts, primarily interest rate
swaps, increasing the taxable equivalent net yield on interest earning assets
by eight basis points. 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 nine basis points and interest income was increased by $9.1
million. At the same time, the impact of interest rate contracts on interest
bearing liabilities was less significant, decreasing interest expense by less
than $3 million. The impact of the use of interest rate contracts was
significantly less in 1997 when the positive impact on the net yield on
interest earning assets was four basis points. It is the Company's intention
to continue to use interest rate contracts to manage its exposure to the
changing interest rate environment in the future, although there can be no
assurance that the impact of interest rate contracts on the earnings of future
periods will be positive.
The interest rate spread measures the difference between the average yield
on earning assets and the average rate paid on interest bearing liabilities.
The interest rate spread eliminates the impact of noninterest bearing funds
25
and gives a direct perspective on the effect of market interest rate
movements. During 1998, the net interest rate spread decreased nine basis
points to 3.39 percent from the 1997 spread of 3.48 percent. The increase in
1997 was four basis points from 3.44 percent in 1996. See the accompanying
table entitled "Consolidated Average Balances and Rate/Volume Variances" for
more information.
The following table presents certain interest rates without modification for
tax equivalency. The table on pages 28 and 29 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
----------------
1998 1997 1996
---- ---- ----
Rate earned on interest earning assets........................ 8.03% 8.20% 8.16%
Rate paid on interest bearing liabilities..................... 4.67 4.76 4.77
Interest rate spread.......................................... 3.36 3.44 3.39
Net yield on earning assets................................... 4.10 4.19 4.15
26
[This Page Intentionally Left Blank]
27
Consolidated Average Balance Sheets and Rate/Volume Variances
Taxable Equivalent Basis
Year Ended December 31
-------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
YIELD/RATE ANALYSIS ----------- ---------- ------ ----------- ---------- ------
Assets
Earning assets:
Loans, net of unearned
income*............... $ 9,711,614 $ 844,290 8.69% $ 9,121,879 $ 807,105 8.85%
Investment securities:
Taxable................ 1,296,731 90,339 6.97 1,111,675 80,249 7.22
Tax-exempt............. 90,487 7,638 8.44 105,091 8,950 8.52
----------- ---------- ----------- ----------
Total investment
securities........... 1,387,218 97,977 7.06 1,216,766 89,199 7.33
Investment securities
available for sale.... 2,836,701 185,563 6.54 2,273,843 149,252 6.56
Trading account
securities............ 94,674 5,939 6.27 113,456 7,316 6.45
Federal funds sold and
securities purchased
under agreements to
resell................ 90,439 4,847 5.36 158,329 8,381 5.29
Interest bearing
deposits with other
banks................. 807 51 6.32 2,214 137 6.19
----------- ---------- ----------- ----------
Total earning assets.. 14,121,453 1,138,667 8.06 12,886,487 1,061,390 8.24
Allowance for loan
losses................. (133,677) (132,220)
Unrealized gain (loss)
on investment
securities available
for sale............... 11,893 (3,763)
Cash and due from
banks.................. 641,291 560,218
Other assets............ 782,202 661,689
----------- -----------
Total assets.......... $15,423,162 $13,972,411
=========== ===========
Liabilities and
Shareholders' Equity
Interest bearing
liabilities:
Interest bearing demand
deposits.............. $ 551,944 12,608 2.28 $ 710,934 16,929 2.38
Savings deposits....... 4,534,614 165,981 3.66 3,950,934 144,443 3.66
Certificates of deposit
less than $100,000 and
other time deposits... 2,738,738 152,404 5.56 2,995,433 169,078 5.64
Certificates of deposit
of $100,000 or more... 1,157,666 65,714 5.68 1,048,859 60,065 5.73
----------- ---------- ----------- ----------
Total interest bearing
deposits............. 8,982,962 396,707 4.42 8,706,160 390,515 4.49
Federal funds
purchased............. 951,267 50,080 5.26 666,097 36,221 5.44
Securities sold under
agreement to
repurchase............ 244,505 12,081 4.94 244,560 12,492 5.11
Other short-term
borrowings............ 170,468 9,113 5.35 211,471 11,944 5.65
FHLB and other
borrowings............ 1,534,761 87,176 5.68 1,028,778 65,241 6.34
----------- ---------- ----------- ----------
Total interest bearing
liabilities.......... 11,883,963 555,157 4.67 10,857,066 516,413 4.76
---------- ---- ---------- ----
Net interest income/net
interest spread........ 583,510 3.39% 544,977 3.48%
==== ====
Noninterest bearing
demand deposits........ 2,263,473 2,007,749
Accrued expenses and
other liabilities...... 140,170 101,285
Shareholders' equity.... 1,135,556 1,006,311
----------- -----------
Total liabilities and
shareholders'
equity............... $15,423,162 $13,972,411
=========== ===========
Net yield on earning
assets................. 4.13% 4.23%
==== ====
Taxable equivalent
adjustment:
Loans.................. 508 786
Investment securities.. 2,662 3,160
Investment securities
available for sale.... 868 1,161
Trading account
securities............ 85 95
---------- ----------
Total taxable
equivalent
adjustment........... 4,123 5,202
---------- ----------
Net interest income..... $ 579,387 $ 539,775
========== ==========
- --------
* Includes nonaccrual loans.
28
Year Ended December 31
----------------------------
1996 Change in Interest Income/Expense Attributable to
---------------------------- ------------------------------------------------------
1998 1997
Average Income/ Yield/ -------------------------- --------------------------
Balance Expense Rate Volume Rate Mix Volume Rate Mix
YIELD/RATE ANALYSIS ----------- -------- ------ -------- -------- ------ -------- ------- -------
Assets
Earning assets:
Loans, net of unearned
income*............... $ 8,030,043 $715,466 8.91% $ 52,192 $(14,595) $ (412) $ 97,283 $(4,818) $ (826)
Investment securities:
Taxable................ 885,748 64,751 7.31 13,361 (2,779) (492) 16,515 (797) (220)
Tax-exempt............. 101,138 9,142 9.04 (1,244) (84) 16 357 (526) (23)
----------- -------- -------- -------- ------ -------- ------- -------
Total investment
securities........... 986,886 73,893 7.49 12,117 (2,863) (476) 16,872 (1,323) (243)
Investment securities
available for sale.... 2,422,574 157,140 6.49 36,923 (455) (157) (9,653) 1,696 69
Trading account
securities............ 98,618 6,742 6.84 (1,211) (204) 38 1,015 (385) (56)
Federal funds sold and
securities purchased 218,900 11,552 5.28 (3,591) 111 (54) (3,198) 22 5
under agreements to
resell................
Interest bearing
deposits with other 3,338 196 5.87 (87) 3 (2) (66) 11 (4)
banks................. ----------- -------- -------- -------- ------ -------- ------- -------
Total earning assets.. 11,760,359 964,989 8.21 96,343 (18,003) (1,063) 102,253 (4,797) (1,055)
Allowance for loan
losses................. (125,181)
Unrealized gain (loss)
on investment
securities available
for sale............... (3,922)
Cash and due from
banks.................. 549,846
Other assets............ 520,521
-----------
Total assets.......... $12,701,623
===========
Liabilities and
Shareholders' Equity
Interest bearing
liabilities:
Interest bearing demand
deposits.............. $ 1,183,927 27,842 2.35 (3,784) (711) 174 (11,115) 355 (153)
Savings deposits....... 3,048,870 119,906 3.93 21,363 -- 175 35,451 (8,232) (2,682)
Certificates of deposit
less than $100,000 and
other time deposits... 3,075,885 174,540 5.67 (14,478) (2,396) 200 (4,562) (923) 23
Certificates of deposit
of $100,000 or more... 1,025,169 58,347 5.69 6,235 (524) (62) 1,348 410 (40)
----------- -------- -------- -------- ------ -------- ------- -------
Total interest bearing
deposits............. 8,333,851 380,635 4.57 9,336 (3,631) 487 21,122 (8,390) (2,852)
Federal funds
purchased............. 460,809 24,266 5.27 15,513 (1,199) (455) 10,819 783 353
Securities sold under
agreement to
repurchase............ 256,424 12,065 4.71 (3) (416) 8 (559) 1,026 (40)
Other short-term
borrowings............ 180,456 9,851 5.46 (2,317) (634) 120 1,693 343 57
FHLB and other
borrowings............ 671,682 45,129 6.72 32,079 (6,790) (3,354) 23,997 (2,552) (1,333)
----------- -------- -------- -------- ------ -------- ------- -------
Total interest bearing
liabilities.......... 9,903,222 471,946 4.77 54,608 (12,670) (3,194) 57,072 (8,790) (3,815)
-------- ---- -------- -------- ------ -------- ------- -------
Net interest income/net
interest spread........ 493,043 3.44% $ 41,735 $ (5,333) $2,131 $ 45,181 $ 3,993 $ 2,760
==== ======== ======== ====== ======== ======= =======
Noninterest bearing
demand deposits........ 1,826,323
Accrued expenses and
other liabilities...... 77,556
Shareholders' equity.... 894,522
-----------
Total liabilities and
shareholders'
equity............... $12,701,623
===========
Net yield on earning
assets................. 4.19%
====
Taxable equivalent
adjustment:
Loans.................. 891
Investment securities.. 3,310
Investment securities
available for sale.... 1,206
Trading account
securities............ 70
--------
Total taxable
equivalent
adjustment........... 5,477
--------
Net interest income..... $487,566
========
29
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 estimated 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
optimistic in the midst of a stable economy overall. On a regional basis,
however, any economic slowdown in the Company's markets could have an effect
on most regional bank holding companies and could impact overall asset
quality. 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.
Loan review procedures, including loan grading, 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 department whose work is supplemented by regulatory agencies that
provide an additional level of review on an annual basis. Such internal 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. Management monitors the
entire loan portfolio, including loans acquired in business combinations, in
an effort to identify problem loans so that risks in the portfolio can be
identified on a timely basis and an appropriate allowance maintained.
The allowance for loan losses is established by risk group as follows:
. Large past due loans, classified loans and nonaccrual loans are evaluated
individually with specific reserves allocated based on management's
review.
. Smaller nonaccrual and adversely classified loans are assigned a portion
of the allowance based on loan grading. Smaller past due loans are
assigned a portion of the allowance using a formula that is based on the
severity of the delinquency.
. The remainder of the portfolio is also allocated a portion of the
allowance based on past loss experience and the economic conditions for
the particular loan portfolio. Allocation weights are assigned based on
the Company's historical loan loss experience in each loan category,
although a higher allocation weight may be used if current conditions
indicate that loan losses may exceed historical experience.
The unallocated portion of the allowance is for inherent losses which
probably exist as of the valuation date even though they may have not have
been identified by the more objective processes used for the allocated portion
of the allowance. This portion of the allowance is particularly subjective and
requires judgments based upon qualitative factors which do not lend themselves
to exact mathematical calculations. Some of the factors considered are changes
in credit concentrations, loan mix, changes in underwriting practices,
including the extent of portfolios of acquired institutions, historical loss
experience, and the general economic environment in the Company's markets.
While the total allowance is described as consisting of an allocated and an
unallocated portion, these terms are primarily used to describe a process.
Both portions are available to support inherent losses in the loan portfolio.
Approximately three percent of the Company's loan portfolio represents loans
to energy-related companies that are dependent on oil and natural gas
production as a source of repayment. The current low level of oil prices has
had an adverse impact on this segment of the portfolio. While management
reviews the status and the
30
prospects for this segment of the portfolio on an ongoing basis, the Company
has specifically allocated reserves for all large credits for which there is
concern as to collectibility. A continued weakness in energy prices is likely
to result in a higher level of nonperforming assets for the Company.
At December 31, 1998, the allowance for loan losses increased to $137
million from $135 million at year end 1997. As a percent of loans, the
allowance declined from 1.41 percent at December 31, 1997 to 1.35 percent at
December 31, 1998. The allowance decreased as a percentage of loans for the
following reasons:
. The Company's nonperforming assets increased because of one $22 million
energy credit secured by a combination of proved producing and proved
non-producing oil reserves that was placed on nonaccrual status during
1998. With regard to this loan, the Company has established specific
reserves that management believes are adequate to absorb the probable
loss on the credit. Excluding this loan, nonperforming assets and
nonaccrual loans at December 31, 1998, actually decreased from
December 31, 1997.
. The Company's energy loan portfolio and certain segments of the consumer
installment portfolio required a greater allocation of the allowance,
including a greater allocation for past due loans in these categories.
. Continued strength in the Company's real estate mortgage and commercial
real estate portfolios required a smaller allocation of the allowance.
. Management's favorable experience with the credit quality of the loan
portfolios of acquired entities warranted a reduced allowance,
particularly in the unallocated portion of the allowance.
Because of these factors, management believes that the allowance for loan
losses at December 31, 1998 is adequate.
As shown in the following table, net loan charge-offs in 1998 were $33.8
million, or 0.35 percent of average loans, compared with $28.5 million, or
0.31 percent of average loans, in 1997 and $23.6 million, or 0.29 percent of
average loans, in 1996. The increase in the level of net charge-offs in 1998
was concentrated in the consumer installment portfolio and commercial,
financial and agricultural portfolio continuing the trend from 1996 and 1997.
During 1998, net charge-offs of consumer installment loans and commercial,
financial and agricultural loans increased by $4.5 million and $1.6 million,
respectively. The Company's consumer installment portfolio was impacted by the
continuing nationwide deterioration in consumer credit quality, as indicated
by the increasingly high number of bankruptcies. Net charge-offs for the
credit card portfolio, which represented only 3 percent of the Company's loan
portfolio, increased as a percentage of average volume from 4.18 percent in
1997 to 4.50 percent in 1998. 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 0.65 percent in
1997 to 0.84 percent in 1998.
31
The following table sets forth information with respect to the Company's
loans and the allowance for loan losses for the last five years.
Summary of Loan Loss Experience
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(in Thousands)
Average loans, net of
unearned income,
outstanding during the
year................... $9,711,614 $9,121,879 $8,030,043 $7,196,077 $6,315,090
========== ========== ========== ========== ==========
Allowance for loan
losses, beginning of
year................... $ 135,225 $ 130,753 $ 121,180 $ 118,702 $ 121,425
Charge-offs:
Commercial, financial
and agricultural..... 9,434 7,260 6,800 5,520 5,525
Real estate --
construction......... 143 66 94 385 115
Real estate --
mortgage:
Residential......... 839 1,232 1,372 509 586
Commercial.......... 629 1,227 584 1,422 1,527
Consumer installment.. 31,807 26,616 22,270 14,994 12,521
---------- ---------- ---------- ---------- ----------
Total............. 42,852 36,401 31,120 22,830 20,274
Recoveries:
Commercial, financial
and agricultural..... 2,302 1,749 1,980 2,953 3,803
Real estate --
construction......... 302 184 229 208 57
Real estate --
mortgage:
Residential......... 129 219 387 265 212
Commercial.......... 84 249 272 84 214
Consumer installment.. 6,254 5,537 4,665 5,183 4,493
---------- ---------- ---------- ---------- ----------
Total............. 9,071 7,938 7,533 8,693 8,779
---------- ---------- ---------- ---------- ----------
Net charge-offs... 33,781 28,463 23,587 14,137 11,495
Provision charged to
income................. 38,445 32,935 25,987 16,363 7,524
Allowance for loans
acquired (sold)........ (3,212) -- 7,173 252 1,248
---------- ---------- ---------- ---------- ----------
Allowance for loan
losses, end of year.... $ 136,677 $ 135,225 $ 130,753 $ 121,180 $ 118,702
========== ========== ========== ========== ==========
Net charge-offs to
average loans
outstanding............ .35% .31% .29% .20% .18%
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 current and projected economic conditions. As
shown in the following table, management determined that at December 31, 1998,
approximately 36 percent of the allowance for loan losses was related to
commercial, financial and agricultural loans, 28 percent was associated with
real estate loans and 36 percent was related to consumer installment loans.
The portion of the allowance that has not been identified by the Company as
related to specific loan categories has been allocated to the individual loan
categories on a pro rata basis for purposes of the following table. The amount
of the allowance allocated to impaired loans by loan category is presented in
the table on page 34.
32
Allocation of Allowance For Loan Losses
December 31
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
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....... $ 48,521 35.5% $ 39,486 29.2% $ 34,650 26.5% $ 28,598 23.6% $ 28,963 24.4%
Real estate --
construction........... 12,574 9.2 9,736 7.2 9,806 7.5 6,665 5.5 9,140 7.7
Real estate -- mortgage:
Residential............ 12,574 9.2 18,390 13.6 20,528 15.7 17,935 14.8 11,158 9.4
Commercial............. 13,121 9.6 14,199 10.5 18,567 14.2 28,356 23.4 27,183 22.9
Consumer installment.... 49,887 36.5 53,414 39.5 47,202 36.1 39,626 32.7 42,258 35.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
$136,677 100.0% $135,225 100.0% $130,753 100.0% $121,180 100.0% $118,702 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Nonperforming Assets
Nonperforming assets include loans classified as nonaccrual or renegotiated
and foreclosed real estate. It is the general policy of the Company 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, 1998, were $56 million, an increase of
$17 million from year-end 1997. Nonperforming loans increased $17 million from
year-end 1997 to $49 million. The increase in nonperforming assets in 1998 was
due in large part to the classification of a $22 million energy-related loan
as nonaccrual in July 1998. As discussed previously, a portion of the
Company's loan portfolio is energy related and a continued weakness in energy
prices is likely to result in a higher level of nonperforming assets for the
Company. During 1998, $7.3 million of loans were transferred to other real
estate owned ("ORE") offset by total sales of other real estate owned of $8.3
million. Of these sales, $7.7 million were cash sales while $600,000
represented loans originated by the Company to facilitate the sale of other
real estate. During 1997, loans transferred to other real estate owned totaled
$7.8 million, cash sales were $8.8 million and loans to facilitate the sale of
other real estate owned were $1.0 million.
Renegotiated loans decreased $2 million from year-end 1997 while foreclosed
real estate remained relatively unchanged for the year. Loans past due 90 days
or more decreased $5 million compared to the 1997 year-end level. Other
foreclosed or repossessed assets at year-end 1998 totaled approximately $1.8
million.
At December 31, 1998, nonperforming assets were 0.55 percent of loans
outstanding and foreclosed real estate held for sale compared to 0.40 percent
at year-end 1997. Nonaccrual loans and renegotiated loans as a percentage of
loans outstanding at year-end 1998 were 0.47 percent and 0.01 percent,
respectively.
33
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,
1998 and 1997.
Nonperforming Assets
December 31
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in Thousands)
Nonacccrual loans................ $48,250 $29,304 $21,729 $15,203 $14,347
Renegotiated loans............... 665 2,334 2,840 1,479 1,903
------- ------- ------- ------- -------
Total nonperforming loans.... 48,915 31,638 24,569 16,682 16,250
Other real estate................ 6,657 6,813 8,527 11,488 11,370
------- ------- ------- ------- -------
Total nonperforming assets... $55,572 $38,451 $33,096 $28,170 $27,620
======= ======= ======= ======= =======
Accruing loans 90 days or more
past due........................ $ 8,699 $14,017 $ 9,741 $ 6,795 $ 4,937
Total nonperforming loans as a
percentage of loans............. .48% .33% .28% .22% .24%
Total nonperforming assets as a
percentage of loans and ORE..... .55 .40 .38 .37 .40
Loans 90 days or more past due as
a percentage of loans........... .09 .15 .11 .09 .07
Details of nonaccrual loans at December 31, 1998 and 1997 appear below:
1998 1997
------- -------
(in Thousands)
Principal balance.............................................. $48,250 $29,304
Interest that would have been recorded under original terms.... 4,218 2,618
Interest actually recorded..................................... 986 1,158
Details of loans with terms modified in troubled debt restructurings at
December 31, 1998 and 1997 appear below:
1998 1997
------- -------
(in Thousands)
Principal balance.............................................. $ 665 $ 2,334
Interest that would have been recorded under original terms.... 30 175
Interest actually recorded..................................... 41 132
Detailed in the table below are loans designated by the Company as impaired
at December 31, 1998, by loan category:
Nonaccrual Accruing Impaired
Impaired Loans Loans Total Total
----------------- ----------------- Impaired Related
Balance Allowance Balance Allowance Loans Allowance
------- --------- ------- --------- -------- ---------
(in Thousands)
Commercial, financial
and agricultural....... $28,773 $11,925 $ 4,094 $ 711 $32,867 $12,636
Real estate--
construction........... 1,335 114 178 6 1,513 120
Real estate mortgage:
Residential............ 310 5 -- -- 310 5
Commercial............. 4,351 512 7,256 417 11,607 929
------- ------- ------- ------ ------- -------
Total................. $34,769 $12,556 $11,528 $1,134 $46,297 $13,690
======= ======= ======= ====== ======= =======
34
Impaired loans totaled $46.3 million at December 31, 1998, with a total
related allowance of $13.7 million, with nonaccrual impaired loans totaling
$34.8 million with a related allowance of approximately $12.6 million.
Included in the $11.5 million of accruing impaired loans were loans totaling
approximately $100,000 for which there was no related allowance.
At December 31, 1997, impaired loans totaled $23.8 million with a total
related allowance of $3.7 million. Of these amounts, nonaccrual impaired loans
totaled $9.8 million with a related allowance of $1.5 million. Of the $14.0
million in accruing impaired loans, there were loans totaling approximately
$400,000 for which there was no related allowance.
As indicated in the table, $34.8 million of the $48.3 million of total
nonaccrual loans at December 31, 1998, were considered impaired. The balance
of nonaccrual loans consisted of residential mortgages and consumer
installment loans, primarily direct and indirect automobile loans.
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 and losses realized from the sale of investment
portfolio securities are included in noninterest income. Noninterest income
totaled $222.5 million in 1998, an increase of 15 percent from the prior year,
and $192.7 million in 1997, an increase of 13 percent from that reported in
1996.
Noninterest Income
Year Ended December 31 Percent Change
-------------------------- -------------------
1998 1997 1996 1998/1997 1997/1996
-------- -------- -------- --------- ---------
(in Thousands)
Service charges on deposit
accounts...................... $ 87,819 $ 76,914 $ 69,049 14.2% 11.4%
Trust fees..................... 16,769 16,062 17,342 4.4 (7.4)
Credit card service charges and
fees.......................... 14,583 13,414 11,424 8.7 17.4
Trading account profits and
commissions................... 14,685 14,388 13,767 2.1 4.5
Retail investment sales
income........................ 19,130 16,569 12,814 15.5 29.3
Investment securities gains,
net........................... 4,255 8,330 9,811 (48.9) (15.1)
Other.......................... 65,259 47,047 35,889 38.7 31.1
-------- -------- --------
Total noninterest income...... $222,500 $192,724 $170,096 15.5 13.3
======== ======== ========
Fee income from service charges on deposit accounts increased 14 percent in
1998 following an 11 percent increase in 1997. 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 1998 and
1997 were further influenced by the increase in both the number of accounts
and balances outstanding in transaction deposit accounts. Trust fees increased
four percent in 1998 after declining seven percent in 1997 due to the sale of
the Company's corporate trust division in 1997.
Trading account profits and commissions increased to $14.7 million in 1998,
relatively unchanged from $14.4 million for 1997. For 1998, trading account
profits related specifically to derivative securities were approximately $1.4
million, consisting entirely of profits related to collateralized mortgage
obligations held in the trading account. 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 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,
1998, see Note 7, Off-Balance Sheet Instruments, in the "Notes to Consolidated
Financial Statements."
35
Retail investment sales income, comprised primarily of mutual fund and
annuity sales income, increased 15 percent in 1998 and 29 percent in 1997
reflecting management's continued efforts to increase sales in this area.
Credit card service charge and fee income increased 9 percent in 1998 after
increasing 17 percent in 1997. An increase in interchange income accounted for
the increase in 1998 while the increase in 1997 was due to an increase in
merchants' discounts.
Other noninterest income increased 39 percent in 1998 and 31 percent in
1997. One significant component of the increase in other noninterest income in
1998 was a $4.3 million gain realized on the securitization and sale of
approximately $400 million in indirect automobile loans in June 1998.
Additionally, other noninterest income increased due to a $3.5 million
increase in mortgage banking income resulting from increased mortgage
originations and servicing-released sales and a $5.2 million increase in
income earned on tax-advantaged assets.
Noninterest Expense
Noninterest expense totaled $491.0 million in 1998, an increase of 10
percent from the prior year, and $444.7 million in 1997, an increase of 10
percent from that reported in 1996.
Noninterest Expense
Year Ended December 31 Percent Change
-------------------------- -------------------
1998 1997 1996 1998/1997 1997/1996
-------- -------- -------- --------- ---------
(in Thousands)
Salaries....................... $212,013 $198,916 $172,857 6.6% 15.1%
Commissions.................... 4,579 4,256 4,151 7.6 2.5
Other personnel expense........ 33,186 29,525 30,551 12.4 (3.4)
Net occupancy expense.......... 35,622 34,777 30,960 2.4 12.3
Equipment expense.............. 38,175 33,193 27,367 15.0 21.3
Professional services.......... 36,219 34,078 27,323 6.3 24.7
Marketing...................... 12,668 10,282 10,543 23.2 (2.5)
Amortization of intangibles.... 10,813 11,105 8,985 (2.6) 23.6
FDIC insurance................. 1,837 1,632 10,823 12.6 (84.9)
Other.......................... 84,167 81,349 75,908 3.5 7.2
-------- -------- --------
Total noninterest expense
before merger and integration
expenses...................... 469,279 439,113 399,468 6.9 9.9
Merger and integration
expenses...................... 21,738 5,631 3,136 * 79.6
-------- -------- --------
Total noninterest expense..... $491,017 $444,744 $402,604 10.4 10.5
======== ======== ========
- --------
*Not meaningful.
Salaries expense increased 7 percent and 15 percent, respectively, for 1998
and 1997 while other personnel expense increased 12 percent in 1998 following
a decrease of 3 percent in 1997. The increase in salaries in 1998 was the
result of regular merit increases and increased incentive expense. The
increase in 1997 was due to purchase business combinations completed in 1996
as well as regular merit increases. The increase in other personnel expense in
1998 was due to increased pension plan expense and employee group insurance
expense.
Net occupancy expense increased by 2 percent in 1998 following a 12 percent
increase in 1997. The increase in 1997 was due principally to purchase
business combinations completed during 1996, opening of new branches and
normal renovation of existing properties. Equipment expense increased 15
percent in 1998 and 21 percent in 1997. The increase in equipment expense
during 1998 and 1997 reflected the Company's completion of a program started
in 1996 to replace a majority of its core application systems with new
technology necessary to address the Company's Year 2000 readiness and to
support increased business growth.
Professional services expense increased six percent in 1998 due to increased
consulting expenses associated with the Company's internal service quality
initiatives while the increase in 1997 was the result of expenses associated
with the previously mentioned systems conversions.
36
During 1998, marketing expenses increased 23 percent to $12.7 million as a
result of increased advertising expenses incurred in connection with the
Company's new branding campaign. Amortization of intangibles increased 24
percent in 1997 as a result of purchase business combinations completed
throughout 1996.
Merger and integration expenses increased by $16.1 million in 1998 primarily
due to expenses of $12.6 million recorded in connection with the Company's
acquisition of Arizona Bank in the fourth quarter of 1998. The expenses for
1998, of which approximately $3.3 million were accrued and unpaid at year end,
included compensation expenses of $6.6 million, professional services and
brokers' fees of $6.0 million, data processing systems conversion costs of
$4.8 million, and other expenses of $4.3 million.
Income Taxes
Income tax expense increased $3.0 million, or 3 percent, to $91.5 million
for the year ended December 31, 1998. The effective tax rate as a percentage
of pretax income was 33.6 percent in 1998, 34.8 percent in 1997 and 36.1
percent in 1996. The statutory federal rate was 35 percent during 1998, 1997
and 1996. The decrease in the effective tax rate for 1998 and 1997 was
primarily attributable to the Company's increased investment in tax-advantaged
assets. For further information concerning the provision for income taxes,
refer to Note 13, Income Taxes, of the "Notes to Consolidated Financial
Statements."
Year 2000 Issues
The Company initiated a program in 1997 to review all of the computer
systems of the Company and its subsidiaries in order to determine whether the
systems were Year 2000 compliant. This study not only involved identifying any
required modifications or replacements of certain hardware and software
maintained by the Company, but also receiving assurance from vendors that the
appropriate actions have been taken or are being taken by them to remedy their
Year 2000 issues for computer systems that the vendors are responsible for
maintaining and that are relied upon by the Company.
As a financial institution, the Company's compliance has been closely
monitored by federal regulatory agencies which have completed two examinations
of the Company and its Year 2000 readiness in the past twelve months. The
Company is not aware of any existing regulatory restrictions imposed on it by
the federal regulatory authorities as a result of the Company's current plan
and implementation.
As of December 31, 1998, the Company has identified its information
technology ("IT") and non-IT systems and has completed the assessment phase of
each system's Year 2000 readiness. IT systems within the Company include
mainframe computer applications, including loan and deposit systems, while
non-IT systems typically include embedded technology, for example,
microcontrollers in elevators. In connection with the identification process,
each system was classified as to its importance within the Company with
systems categorized in one of four categories: mission critical, medium
priority, low priority or immaterial. Mission critical systems are those
identified as vital to a core business activity of the Company.
For each IT and non-IT system that was assessed as Year 2000 compliant,
testing was performed to confirm compliance while for each system that was not
found to be Year 2000 compliant, a three-step plan involving renovation,
validation and implementation was developed to bring the system into
compliance. Renovation is comprised of modifying or replacing hardware and
software in order to make the system compliant (the "Renovation Phase").
Validation involves testing the system to determine compliance after
modification (the "Validation Phase"). Implementation entails bringing the
compliant system into production (the "Implementation Phase"). As of December
31, 1998, 1 percent of the Company's mission critical systems were in the
Renovation Phase, 11 percent were in the Validation Phase, and 88 percent were
in the Implementation Phase. With regard to all mission critical systems, the
Company's plan called for the substantial completion of the Renovation Phase
for all systems and the Validation Phase for in-house systems by December 31,
1998. The Company's plan also outlines the substantial completion of the
Validation Phase for vendor supported systems by March 31, 1999, and the
substantial completion of the Implementation Phase by June 30, 1999.
37
In addition, the Company is also taking appropriate actions to receive
assurance that its customers, principally commercial lending customers, are
taking necessary steps to address their Year 2000 issues since noncompliance
could adversely effect their ability to repay borrowings to the Company. As of
December 31, 1998, the Company has evaluated the readiness of a majority of
its commercial lending customers as well as a substantial majority of its
financial instrument issuers, broker/dealer counterparties, and federal funds
counterparties. Based on these assessments, management currently believes that
there is a low risk of a material detrimental impact on the Company's results
of operations and financial position because of third party business
disruptions or failures related to Year 2000 events. The Company's assessment
of these parties will be ongoing throughout 1999 in order to identify any
changes in third party readiness that could negatively impact the Company.
During 1997 and 1998, the Company paid $21.7 million related to Year 2000
compliance and anticipates additional payments of approximately $3.2 million.
A substantial portion of these costs have been or will be capitalized in the
installation of software and hardware and will be amortized over the life of
the related assets. There has been no material increase in IT salaries expense
due to Year 2000 compliance activities as many of the system renovations have
coincided with previously planned system replacements or enhancements, the
costs of which have been included in the costs disclosed above. The deferral
of certain other IT projects in order to assure Year 2000 readiness has not
had, and is not expected to have, a material impact on the Company's financial
condition and results of operations.
While a failure to achieve Year 2000 compliance with regard to IT and non-IT
systems could have an adverse impact on the Company's results of operations
and financial condition due to inability to perform normal lending, investing
and deposit gathering functions, the Company believes that its Year 2000
readiness will be essentially completed by the target date of June 30, 1999,
and that any impact of failure to achieve Year 2000 compliance with any of the
Company's systems will be immaterial.
The Company's contingency plans have concentrated on potential funding needs
that may arise if there are disruptions in the Company's normal sources of
funds as a result of Year 2000 events, including increased withdrawals by
depositors and the inability of corporate customers to maintain their usual
levels of deposits because of disruptions in their business caused by Year
2000-related computer problems. The plan also addresses the possibility that
some of the Company's federal funds counterparties may be unable to sell
federal funds to the Company and that some of its downstream federal funds
counterparties may increase borrowing over normal levels. However, the
Company's plan does not address funding requirements arising from the systemic
failure of the financial system in the United States or globally. The
Company's plan also addresses other potential failures by third parties to
fully remedy their systems. This plan will be continually updated as more
information becomes available on the Year 2000 status of the Company's funds
providers and as funding sources are evaluated and procedures to access those
sources are put in place.
Other Accounting Issues
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, ("FAS133"). FAS133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. FAS133 will significantly change the accounting
treatment of derivative instruments and, depending upon the underlying risk
management strategy, these accounting changes could affect future earnings,
assets, liabilities, and shareholders' equity. As a result, the Company may
reconsider its risk management strategies since the new standard would not
reflect the results of many of those strategies in the same manner as current
accounting practice. The Company is presently evaluating the impact of FAS133
on its computer systems and accounting policies and is also closely monitoring
the deliberations of the FASB's derivative implementation task force. The
Company will be required to adopt FAS133 on January 1, 2000. Presently, the
Company has not yet quantified the impact that the adoption will have on the
consolidated financial statements of the Company.
38
Pending Acquisitions
For information on pending acquisitions, see the accompanying "Notes to
Consolidated Financial Statements", Note 11, Business Combinations.
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 7, Off-Balance Sheet Instruments, of the "Notes to
Consolidated Financial Statements" should be considered.
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............................................. 40
Consolidated Balance Sheets as of December 31, 1998 and 1997............. 41
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996........................................................... 42
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996........................................ 43
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996..................................................... 44
Notes to Consolidated Financial Statements -- December 31, 1998, 1997 and
1996.................................................................... 45
Quarterly Results (Unaudited)............................................ 74
39
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Birmingham, Alabama
January 19, 1999
40
Compass Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
------------------------
1998 1997
----------- -----------
(in Thousands)
Assets
Cash and due from banks............................. $ 831,614 $ 793,922
Investment securities (fair value of $1,923,938 and
$1,119,462 for 1998 and 1997, respectively)........ 1,896,039 1,100,459
Investment securities available for sale............ 3,645,761 2,527,794
Trading account securities.......................... 127,671 112,460
Federal funds sold and securities purchased
under agreements to resell......................... 27,786 154,632
Loans............................................... 10,103,159 9,569,753
Less: Unearned income............................... (1,874) (6,040)
Allowance for loan losses......................... (136,677) (135,225)
----------- -----------
Net loans....................................... 9,964,608 9,428,488
Premises and equipment, net......................... 353,009 330,182
Other assets........................................ 442,420 452,811
----------- -----------
Total assets.................................... $17,288,908 $14,900,748
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Noninterest bearing............................... $ 2,551,958 $ 2,300,451
Interest bearing.................................. 9,461,488 8,606,711
----------- -----------
Total deposits.................................. 12,013,446 10,907,162
Federal funds purchased and securities sold under
agreements to repurchase........................... 1,736,066 1,171,666
Other short-term borrowings......................... 159,404 183,553
Accrued expenses and other liabilities.............. 137,871 140,095
FHLB and other borrowings........................... 1,945,980 1,330,253
Guaranteed preferred beneficial interests in
Company's junior
subordinated deferrable interest debentures
(Note 6)........................................... 100,000 100,000
----------- -----------
Total liabilities............................... 16,092,767 13,832,729
Shareholders' equity:
Preferred stock................................... 28,750 31,750
Common stock of $2 par value:
Authorized -- 200,000,000 shares;
Issued -- 75,567,333 shares in 1998 and
73,757,289 shares in 1997...................... 151,135 147,514
Surplus........................................... 126,813 111,731
Loans to finance stock purchases.................. (2,941) (5,224)
Unearned restricted stock......................... (3,472) (2,775)
Accumulated other comprehensive income............ 10,555 977
Retained earnings................................. 885,301 784,046
----------- -----------
Total shareholders' equity...................... 1,196,141 1,068,019
----------- -----------
Total liabilities and shareholders' equity...... $17,288,908 $14,900,748
=========== ===========
See accompanying notes to consolidated financial statements.
41
Compass Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
Year Ended December 31
------------------------------
1998 1997 1996
---------- ---------- --------
(in Thousands Except Per Share
Data)
Interest income:
Interest and fees on loans.................... $ 843,782 $ 806,319 $714,575
Interest on investment securities............. 95,315 86,039 70,583
Interest on investment securities available
for sale..................................... 184,695 148,091 155,934
Interest on trading account securities........ 5,854 7,221 6,672
Interest on federal funds sold and securities
purchased under agreements to resell......... 4,898 8,518 11,748
---------- ---------- --------
Total interest income....................... 1,134,544 1,056,188 959,512
Interest expense:
Interest on deposits.......................... 396,707 390,515 380,635
Interest on federal funds purchased and
securities sold under agreements to
repurchase................................... 62,161 48,713 36,331
Interest on other short-term borrowings....... 9,113 11,944 9,851
Interest on FHLB and other borrowings......... 78,946 57,445 45,129
Interest on guaranteed preferred beneficial
interests in Company's junior subordinated
deferrable interest debentures............... 8,230 7,796 --
---------- ---------- --------
Total interest expense...................... 555,157 516,413 471,946
---------- ---------- --------
Net interest income......................... 579,387 539,775 487,566
Provision for loan losses....................... 38,445 32,935 25,987
---------- ---------- --------
Net interest income after provision for loan
losses..................................... 540,942 506,840 461,579
Noninterest income:
Service charges on deposit accounts........... 87,819 76,914 69,049
Trust fees.................................... 16,769 16,062 17,342
Credit card service charges and fees.......... 14,583 13,414 11,424
Trading account profits and commissions....... 14,685 14,388 13,767
Retail investment sales income................ 19,130 16,569 12,814
Investment securities gains, net.............. 4,255 8,330 9,811
Other......................................... 65,259 47,047 35,889
---------- ---------- --------
Total noninterest income.................... 222,500 192,724 170,096
Noninterest expense:
Salaries, benefits and commissions............ 249,778 232,697 207,559
Net occupancy expense......................... 35,622 34,777 30,960
Equipment expense............................. 38,175 33,193 27,367
Professional services......................... 36,219 34,078 27,323
Merger and integration........................ 21,738 5,631 3,136
Other......................................... 109,485 104,368 106,259
---------- ---------- --------
Total noninterest expense................... 491,017 444,744 402,604
---------- ---------- --------
Net income before income tax expense........ 272,425 254,820 229,071
Income tax expense.............................. 91,545 88,578 82,737
---------- ---------- --------
Net income.................................. $ 180,880 $ 166,242 $146,334
========== ========== ========
Basic earnings per share........................ $ 2.40 $ 2.22 $ 1.98
Basic weighted average shares outstanding....... 74,197 73,442 72,605
Diluted earnings per share...................... $ 2.35 $ 2.17 $ 1.94
Diluted weighted average shares outstanding..... 75,830 75,392 74,233
See accompanying notes to consolidated financial statements.
42
Compass Bancshares, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996
Accumulated
Other Total
Preferred Common Retained Comprehensive Shareholders' Comprehensive
Stock Stock Surplus Earnings Income Other Equity Income
--------- -------- -------- -------- ------------- ------- ------------- -------------
(in Thousands)
Balance, December 31,
1995................... $31,750 $ 97,406 $ 89,322 $648,236 $12,741 $(5,915) $ 873,540
Net income -- 1996...... -- -- -- 146,334 -- -- 146,334 $ 146,334
Change in unrealized
gain (loss) on
securities available
for sale............... -- -- -- -- (15,944) -- (15,944) (15,944)
---------
Comprehensive income.... $ 130,390
=========
Common dividends
declared ($.853 per
share)................. -- -- -- (50,454) -- -- (50,454)
Preferred dividends
declared............... -- -- -- (2,923) -- -- (2,923)
Pre-merger transactions
of pooled entities..... -- -- 6,629 (5,194) -- -- 1,435
Exercise of stock
options................ -- 447 4,028 (137) -- -- 4,338
Issuance of restricted
stock.................. -- -- -- -- -- (1,296) (1,296)
Loans to finance stock
purchases, net of
repayments............. -- -- -- -- -- (375) (375)
Amortization of
restricted stock....... -- -- -- -- -- 216 216
Treasury shares
purchased.............. -- -- -- -- -- (46,769) (46,769)
Treasury shares issued
for business
combinations........... -- (48) (2,310) -- -- 46,769 44,411
Cash paid for fractional
shares in business
combinations........... -- -- (4) -- -- -- (4)
------- -------- -------- -------- ------- ------- ----------
Balance, December 31,
1996................... 31,750 97,805 97,665 735,862 (3,203) (7,370) 952,509
Net income -- 1997...... -- -- -- 166,242 -- -- 166,242 $ 166,242
Change in unrealized
gain (loss) on
securities available
for sale............... -- -- -- -- 4,180 -- 4,180 4,180
---------
Comprehensive income.... $ 170,422
=========
Common dividends
declared ($.947 per
share)................. -- -- -- (61,558) -- -- (61,558)
Preferred dividends
declared............... -- -- -- (3,067) -- -- (3,067)
Stock split............. -- 48,994 -- (49,034) -- -- (40)
Pre-merger transactions
of pooled entities..... -- 44 6,282 (3,456) -- -- 2,870
Exercise of stock
options................ -- 545 5,670 (943) -- -- 5,272
Issuance of restricted
stock.................. -- 126 2,580 -- -- (2,706) --
Repayment of loans to
finance stock
purchases, net of
advances............... -- -- -- -- -- 1,066 1,066
Amortization of
restricted stock....... -- -- -- -- -- 1,011 1,011
Settlement of repurchase
liability associated
with treasury stock
transaction............ -- -- (450) -- -- -- (450)
Cash paid for fractional
shares in business
combinations........... -- -- (16) -- -- -- (16)
------- -------- -------- -------- ------- ------- ----------
Balance, December 31,
1997................... 31,750 147,514 111,731 784,046 977 (7,999) 1,068,019
Net income -- 1998...... -- -- -- 180,880 -- -- 180,880 $ 180,880
Change in unrealized
gain (loss) on
securities available
for sale............... -- -- -- -- 9,578 -- 9,578 9,578
---------
Comprehensive income.... $ 190,458
=========
Common dividends
declared ($1.05 per
share)................. -- -- -- (75,238) -- -- (75,238)
Preferred dividends
declared............... -- -- -- (2,996) -- -- (2,996)
Pre-merger transactions
of pooled entities..... -- (29) 2,587 -- -- -- 2,558
Exercise of stock
options................ -- 787 9,750 (1,379) -- -- 9,158
Issuance of restricted
stock.................. -- 142 2,980 -- -- (3,122) --
Cancellation of
restricted stock....... -- (32) (459) -- -- 387 (104)
Issuance of common stock
for acquisition
accounted for as
pooling-of-interests... -- 500 (501) (12) -- -- (13)
Repayment of loans to
finance stock
purchases, net of
advances............... -- -- -- -- -- 2,283 2,283
Amortization of
restricted stock....... -- -- -- -- -- 2,038 2,038
Conversion of preferred
stock.................. (3,000) 2,253 747 -- -- -- --
Cash paid for fractional
shares in business
combinations........... -- -- (22) -- -- -- (22)
------- -------- -------- -------- ------- ------- ----------
Balance, December 31,
1998................... $28,750 $151,135 $126,813 $885,301 $10,555 $(6,413) $1,196,141
======= ======== ======== ======== ======= ======= ==========
See accompanying notes to consolidated financial statements.
43
Compass Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(in Thousands)
Operating Activities:
Net income............................. $ 180,880 $ 166,242 $ 146,334
Adjustments to reconcile net income to
cash provided by operations:
Depreciation and amortization......... 50,110 45,497 40,143
Accretion of discount and loan fees... (16,261) (13,233) (13,260)
Provision for loan losses............. 38,445 32,935 25,987
Net change in trading account
securities........................... (15,211) (16,110) 10,539
Net change in mortgage loans held for
sale................................. (32,439) (1,642) (4,095)
Deferred tax expense.................. 4,548 2,082 2,706
Gain on sale of securitized loans..... (4,264) -- --
Gain on sale of investment
securities........................... (4,255) (8,330) (9,811)
(Gain) loss on sale of premises and
equipment............................ 1,482 (431) 222
Gain on sale of other real estate
owned................................ (764) (252) (110)
Provision for losses on other real
estate owned, net of recoveries...... -- 437 329
Gain on sale of branches.............. -- -- (2,515)
Increase in other assets.............. (12,426) (176,165) (8,179)
Increase (decrease) in other
liabilities.......................... (8,450) 54,110 12,475
----------- ----------- -----------
Net cash provided by operating
activities.......................... 181,395 85,140 200,765
Investing Activities:
Proceeds from maturities/calls of
investment securities................. 656,591 378,902 282,624
Purchases of investment securities..... (1,450,044) (145,884) (393,709)
Proceeds from sales of investment
securities available for sale......... 716,182 995,058 842,272
Proceeds from maturities/calls of
investment securities available for
sale.................................. 1,099,034 551,867 541,200
Purchases of investment securities
available for sale.................... (2,393,344) (1,871,754) (1,383,561)
Net decrease in federal funds sold and
securities purchased under agreements
to resell............................. 126,846 56,656 250,095
Net increase in loan portfolio......... (1,407,040) (933,257) (607,168)
Net cash received (paid) in
acquisitions of banks................. -- 22,216 (87,772)
Sale of securitized loans.............. 359,680 -- --
Sale of branches....................... -- -- (47,273)
Purchases of premises and equipment.... (54,033) (65,758) (38,582)
Proceeds from sales of other real
estate owned.......................... 7,677 8,760 8,574
----------- ----------- -----------
Net cash used by investing
activities.......................... (2,338,451) (1,003,194) (633,300)
Financing Activities:
Net increase in demand deposits, NOW
accounts and savings accounts......... 959,468 213,252 737,501
Net increase (decrease) in time
deposits.............................. 146,816 (264,557) (8,256)
Net increase (decrease) in federal
funds purchased and securities sold
under agreements to repurchase........ 564,400 359,199 (265,609)
Net increase (decrease) in short-term
borrowings............................ (24,149) (20,060) 45,184
Proceeds from FHLB advances and other
borrowings............................ 829,004 963,300 179,326
Repayment of FHLB advances and other
borrowings............................ (213,369) (375,086) (68,787)
Issuance of guaranteed preferred
beneficial interests in Company's
junior subordinated deferrable
interest debentures................... -- 100,000 --
Cash paid in lieu of fractional
shares................................ (22) (56) (4)
Purchase of treasury shares............ -- -- (45,342)
Common and preferred dividends paid.... (78,234) (64,625) (53,377)
Pre-merger transactions of pooled
entities.............................. 2,558 6,353 (330)
Repayment of loans to finance stock
purchases............................. 5,121 2,598 2,564
Proceeds from exercise of stock
options............................... 3,155 2,247 571
----------- ----------- -----------
Net cash provided by financing
activities.......................... 2,194,748 922,565 523,441
----------- ----------- -----------
Net increase (decrease) in cash and due
from banks............................. 37,692 4,511 90,906
Cash and due from banks at beginning of
the year............................... 793,922 789,411 698,505
----------- ----------- -----------
Cash and due from banks at end of the
year................................... $ 831,614 $ 793,922 $ 789,411
=========== =========== ===========
See accompanying notes to consolidated financial statements.
44
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
The accounting principles followed by Compass Bancshares, Inc. and its
subsidiaries (the "Company") 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 business
combinations consummated during 1998 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.
Basis of Presentation
The consolidated financial statements include the accounts of Compass
Bancshares, Inc. and its subsidiaries, Compass Bank, the Company's lead bank
subsidiary headquartered in Birmingham, Alabama, ("Compass Bank"), Arizona
Bank, and Central Bank of the South, (collectively, the "Subsidiary Banks"),
Compass Land Holding Corporation and Compass Underwriters, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior year amounts
to conform with the current year presentation.
Nature of Operations
The Company operates 279 branches in Alabama, Texas, Florida and Arizona.
The Company's branches in Alabama are located throughout the state while its
Florida branches are concentrated in the Jacksonville and Gainesville areas
and in the Florida panhandle. In Texas the Company's branches are primarily
located in the state's four largest metropolitan areas of Houston, Dallas, San
Antonio and Austin. The Company's Arizona operations are primarily located in
the Tucson area.
Use of Estimates
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, the
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.
Securities
Securities are held in three portfolios: (i) trading account securities,
(ii) investment securities, and (iii) investment securities available for
sale. Trading account securities are stated at fair value. Investment
securities are held to maturity and are stated at cost adjusted for
amortization of premiums and accretion of discounts. With regard to investment
securities, 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 accumulated other comprehensive income, a separate component of
shareholders' equity.
45
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
Interest earned on investment securities, 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."
Loans
All loans are stated at principal outstanding. Interest income on loans is
recognized primarily on the level yield method. Loan fees, net of direct
costs, are reflected as an adjustment to the yield of the related loan over
the term of the loan. The Company does not have a concentration of loans to
any one industry.
It is the general policy of the Company 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.
Generally, the Company evaluates loans for impairment when a portion of a
loan is internally risk rated as substandard or doubtful. All nonaccrual loans
not meeting the definition of smaller balance homogeneous loans are considered
impaired. Smaller balance homogeneous loans include residential mortgages,
credit card receivables, and consumer installment loans, primarily direct and
indirect automobile loans. 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 fair
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
consistent with its nonaccrual policy.
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 Company generally follows 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 for loan losses.
Merger and Integration Expenses
Merger and integration expenses, as presented in the "Consolidated
Statements of Income," represent costs associated with business combinations
completed by the Company and costs associated with maintaining the
46
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
Company's mergers and acquisition department. These costs primarily include
compensation expense incurred, data processing systems conversion costs,
professional fees and brokers' fees.
Intangibles
Intangibles are included in other assets in the "Consolidated Balance
Sheets." 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. The Company periodically reviews its intangible assets for
impairment. Intangible assets totaled $112.1 million and $122.8 million at
December 31, 1998 and 1997, respectively.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary
differences between financial reporting and tax bases of assets and
liabilities and are measured using the tax rates and laws that are expected to
be in effect when the differences are anticipated to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized as
income or expense in the period that includes the change.
Derivative Financial Instruments
As part of the Company's overall interest rate risk management, the Company
uses interest rate swaps, caps and floors. For interest rate swaps, caps and
floors that are designated as synthetic alterations of existing assets or
liabilities and that meet the Company's tolerance for interest rate risk,
changes in the fair value are not reflected in the financial statements until
realized. 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.
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. Changes in the fair value of options used in the securities trading
portfolio, as well as changes in fair value of 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" as trading account profits and commissions.
Securitization and Sales of Receivables
When the Company sells receivables in securitizations, it retains interest-
only strips, one or more subordinated tranches, servicing rights, and in some
cases a cash reserve account, all of which are retained interests in the
securitized assets. Gain or loss on sale of the receivables depends in part on
the previous carrying amount of retained interests, allocated in proportion to
their fair value. Subsequent to the sales, certain retained interests are
carried at fair value as investment securities available for sale. To obtain
fair values, quoted market prices are used if available. However, quotes are
generally not available for retained interests, so the Company generally
estimates fair value based on the present value of future cash flows expected
under management's best estimates of the key assumptions -- credit losses,
prepayment speeds, forward yield curves, and discount rates commensurate with
the risks involved.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, ("FAS133"). FAS133 establishes
47
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company will be required to adopt FAS133 on
January 1, 2000. Presently, the Company has not yet quantified the impact that
the adoption of FAS133 will have on the consolidated financial statements of
the Company.
(2) Investment Securities and Investment Securities Available for Sale
The following table presents the adjusted cost and approximate fair value of
investment securities and investment securities available for sale at December
31, 1998 and 1997.
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(in Thousands)
Investment securities:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.................... $ 12,987 $ 13,053 $ 77,396 $ 77,584
Mortgage-backed pass-through
securities...................... 188,850 192,540 266,781 272,201
CMOs and other mortgage
derivative products............. 1,608,493 1,628,233 630,294 639,363
States and political
subdivisions.................... 79,909 84,303 97,529 101,910
Corporate........................ 4,970 4,979 27,604 27,550
Foreign.......................... 830 830 855 854
---------- ---------- ---------- ----------
Total.......................... $1,896,039 $1,923,938 $1,100,459 $1,119,462
========== ========== ========== ==========
1998 1997
--------------------- ---------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
---------- ---------- ---------- ----------
(in Thousands)
Investment securities available for
sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.................... $ 247,359 $ 245,034 $ 339,581 $ 338,281
Mortgage-backed pass-through
securities...................... 280,118 279,195 165,990 166,107
CMOs and other mortgage
derivative products............. 2,857,500 2,843,096 1,803,433 1,802,249
States and political
subdivisions.................... 38,921 38,082 27,642 27,173
Corporate........................ 113,831 113,073 90,389 90,329
Other............................ 16,537 18,346 1,301 1,301
Equity securities................. 91,495 91,707 99,458 99,535
---------- ---------- ---------- ----------
Total.......................... $3,645,761 $3,628,533 $2,527,794 $2,524,975
========== ========== ========== ==========
48
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
Securities with principal amounts of approximately $2.8 billion and $1.2
billion at December 31, 1998 and 1997, respectively, were pledged to secure
public deposits and Federal Home Loan Bank advances and for other purposes as
required or permitted by law. The following table details unrealized gains and
losses on investment securities and investment securities available for sale
as of December 31, 1998 and 1997.
1998 1997
--------------------- ---------------------
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.................... $ 69 $ 3 $ 240 $ 52
Mortgage-backed pass-through
securities...................... 3,769 79 5,586 166
CMOs and other mortgage
derivative products............. 21,451 1,711 10,093 1,024
States and political
subdivisions.................... 4,395 1 4,387 6
Corporate........................ 9 -- 58 112
Foreign.......................... -- -- -- 1
------- ------ ------- ------
Total.......................... $29,693 $1,794 $20,364 $1,361
======= ====== ======= ======
Investment securities available for
sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.................... $ 2,847 $ 522 $ 1,376 $ 76
Mortgage-backed pass-through
securities...................... 1,197 274 82 199
CMOs and other mortgage
derivative products............. 17,134 2,730 4,319 3,135
States and political
subdivisions.................... 897 58 472 3
Corporate........................ 758 -- 93 33
Other............................ -- 1,809 -- --
Equity securities................. -- 212 -- 77
------- ------ ------- ------
Total.......................... $22,833 $5,605 $ 6,342 $3,523
======= ====== ======= ======
49
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
The maturity of the securities portfolio is presented in the following
tables.
1998
---------------------
Carrying Fair
Amount Value
---------- ----------
(in Thousands)
Investment securities:
Maturing within one year................................ $ 14,248 $ 14,305
Maturing after one but within five years................ 38,047 39,026
Maturing after five but within ten years................ 40,819 44,023
Maturing after ten years................................ 5,582 5,811
---------- ----------
98,696 103,165
Mortgage-backed pass-through securities and CMOs........ 1,797,343 1,820,773
---------- ----------
Total................................................ $1,896,039 $1,923,938
========== ==========
Fair Amortized
Value Cost
---------- ----------
(in Thousands)
Investment securities available for sale:
Maturing within one year................................ $ 15,586 $ 15,530
Maturing after one but within five years................ 328,369 327,285
Maturing after five but within ten years................ 91,296 90,501
Maturing after ten years................................ 72,892 72,926
---------- ----------
508,143 506,242
Mortgage-backed pass-through securities and CMOs........ 3,137,618 3,122,291
---------- ----------
Total................................................ $3,645,761 $3,628,533
========== ==========
Proceeds from sales of available-for-sale investment securities were $716.2
million in 1998, $995.1 million in 1997, and $842.3 million in 1996. Gross
gains of $4.4 million in 1998, $9.0 million in 1997, and $10.0 million in 1996
and gross losses of $123,000 in 1998, $740,000 in 1997, and $203,000 in 1996
were realized on such sales. No securities were transferred to the trading
portfolio during either 1998 or 1997.
(3) Loans and Allowance for Loan Losses
The following presents the composition of the loan portfolio at December
31, 1998 and 1997.
1998 1997
----------- ----------
(in Thousands)
Commercial, financial and agricultural.................. $ 3,087,861 $2,365,347
Real estate -- construction............................. 1,186,533 794,816
Real estate -- mortgage................................. 3,964,719 4,344,898
Consumer installment.................................... 1,864,046 2,064,692
----------- ----------
$10,103,159 $9,569,753
=========== ==========
During 1998, the Company securitized approximately $400 million of its
indirect automobile loan portfolio and sold certificates to investors bearing
interest rates ranging from 5.659 percent to 5.9 percent, recognizing a gain
of $4.3 million. The Company will continue to service the underlying
automobile loans for a fee.
50
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
Additionally, in September 1998, the Company securitized approximately $500
million of real estate mortgages and transferred the resulting securities to
its available-for-sale portfolio.
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1998, 1997 and 1996 follows:
1998 1997 1996
-------- -------- --------
(in Thousands)
Balance at beginning of year..................... $135,225 $130,753 $121,180
Add: Provision charged to income................. 38,445 32,935 25,987
Additions due to acquisitions.................. -- -- 7,173
Deduct: Allowance on loans sold.................. 3,212 -- --
Loans charged off............................. 42,852 36,401 31,120
Loan recoveries............................... (9,071) (7,938) (7,533)
-------- -------- --------
Net charge-offs............................... 33,781 28,463 23,587
-------- -------- --------
Balance at end of year........................... $136,677 $135,225 $130,753
======== ======== ========
At December 31, 1998 and 1997, the Company's recorded investment in loans
considered to be impaired was $46.3 million and $23.8 million, respectively,
of which $34.8 million and $9.8 million, respectively, were on nonaccrual
status. Included in the $46.3 million of impaired loans at December 31, 1998,
is $46.2 million of impaired loans for which the related allowance is $13.7
million and $100,000 of loans for which there is no related allowance. At
December 31, 1997, $23.4 million of impaired loans had a related allowance of
$3.7 million and $400,000 of loans with no related allowance. Average impaired
loans during the years ended December 31, 1998 and 1997, were approximately
$34.0 million and $24.5 million, respectively.
Nonperforming assets at December 31, 1998, 1997 and 1996 are detailed in the
following table.
December 31
-----------------------
1998 1997 1996
------- ------- -------
(in Thousands)
Nonaccrual loans....................................... $48,250 $29,304 $21,729
Renegotiated loans..................................... 665 2,334 2,840
------- ------- -------
Total nonperforming loans............................. 48,915 31,638 24,569
Other real estate...................................... 6,657 6,813 8,527
------- ------- -------
Total nonperforming assets............................ $55,572 $38,451 $33,096
======= ======= =======
(4) Deposits
Certificates of deposit of less than $100,000 totaled $2.6 billion at
December 31, 1998, while certificates of deposit of $100,000 or more totaled
$1.4 billion. At December 31, 1998, the scheduled maturities of certificates
of deposit were as follows (in thousands):
1999........................................................... $3,146,985
2000........................................................... 481,983
2001........................................................... 173,082
2002........................................................... 139,586
2003........................................................... 54,403
Thereafter..................................................... 20,208
----------
Total......................................................... $4,016,247
==========
51
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
(5) FHLB and Other Borrowings
The following table details the Company's FHLB advances and other long-term
borrowings at December 31, 1998 and 1997, including maturities and interest
rates as of December 31, 1998.
December 31
Maturity ----------------------
Date 1998 1997
--------- ---------- ----------
(in Thousands)
Subordinated debentures:
7% subordinated debentures.................. 2003 $ 75,000 $ 75,000
8.375% subordinated debentures.............. 2004 50,000 50,000
9.375% subordinated debentures.............. 2005 10,000 10,000
Discount.................................... (450) (542)
---------- ----------
Total subordinated debentures.............. 134,550 134,458
Mortgages and notes payable:
8.875% mortgage............................. 2008 3,930 4,712
FHLB advances:
LIBOR-based floating rate (weighted average
rate of 5.12%)............................. 1999-2001 872,500 672,500
Fixed rate, callable quarterly (weighted
average rate of 4.84%)..................... 1999-2008 935,000 518,583
---------- ----------
1,807,500 1,191,083
---------- ----------
$1,945,980 $1,330,253
========== ==========
The 9.375 percent subordinated debentures of $10 million were redeemed on
January 15, 1999. The FHLB advances are secured by first mortgages and
investment securities totaling $2.4 billion.
The following table presents maturity information for the Company's FHLB and
other borrowings as of December 31, 1998.
Mortgages
Subordinated and Notes FHLB
Debentures Payable Advances
------------ --------- ----------
(in Thousands)
Maturing:
1999......................................... $ -- $ 236 $ 672,500
2000......................................... -- 280 253,000
2001......................................... -- 306 300,000
2002......................................... -- 335 --
2003......................................... 74,768 366 --
Thereafter................................... 59,782 2,407 582,000
-------- ------ ----------
Total....................................... $134,550 $3,930 $1,807,500
======== ====== ==========
(6) Capital Securities and Preferred Stock
Capital Securities
In January 1997, the Company formed a wholly-owned Delaware statutory
business trust, Compass Trust I, which issued $100 million of guaranteed
preferred beneficial interests in the Company's junior subordinated deferrable
interest debentures ("Capital Securities") that qualify as Tier I capital
under Federal Reserve Board guidelines. All of the common securities of
Compass Trust I are owned by the Company. The proceeds from the
52
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
issuance of the Capital Securities ($100 million) and common securities ($3.1
million) were used by Compass Trust I to purchase $103.1 million of junior
subordinated deferrable interests debentures of the Company which carries an
interest rate of 8.23 percent. The debentures represent the sole asset of
Compass Trust I. The debentures and related income statement effects are
eliminated in the Company's financial statements.
The Capital Securities accrue and pay distributions semiannually at a rate
of 8.23 percent per annum of the stated liquidation value of $1,000 per
capital security. The Company has entered into contractual arrangements which,
taken collectively, fully and unconditionally guarantee payment of: (i)
accrued and unpaid distributions required to be paid on the Capital
Securities; (ii) the redemption price with respect to any capital securities
called for redemption by Compass Trust I; and (iii) payments due upon a
voluntary or involuntary liquidation, winding-up or termination of Compass
Trust I.
The Capital Securities are mandatorily redeemable upon the maturity of the
debentures on January 15, 2027, or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the debentures purchased by
Compass Trust I: (i) in whole or in part, on or after January 15, 2007, and
(ii) in whole (but not in part) at any time within 90 days following the
occurrence and during the continuation of a tax event or capital treatment
event (as defined in the offering circular). As specified in the indenture, if
the debentures are redeemed prior to maturity, the redemption price will be
the principal amount, any accrued but unpaid interest, plus a premium ranging
from 4.12 percent in 2007 to 0.41 percent in 2016.
Preferred Stock
With the acquisition of Arizona Bank, the Company issued preferred stock in
exchange for two issues of Arizona Bank preferred stock. In accordance with
generally accepted accounting principles, the financial statements of the
Company have been restated to reflect the preferred stock as issued and
outstanding for all periods in which the Arizona Bank preferred stock was
issued and outstanding.
In connection with its acquisition of Arizona Bank, all 120,000 shares of
Series C Preferred Stock ("Series C") were converted into 1,126,388 shares of
the Company's common stock. Dividends of $2.375 per share were paid on Series
C during 1996 and 1997 with dividends of $1.78 per share paid in 1998 prior to
conversion. At December 31, 1998, outstanding preferred stock consisted of
460,000 shares of Series E 10.5 percent noncumulative, nonparticipating
perpetual preferred stock, $25 par value ("Series E") and 690,000 shares of
Series F 9.125 percent noncumulative, nonparticipating perpetual preferred
stock, $25 par value ("Series F").
Shares of Series E may be redeemed, in whole or in part, at the option of
the Company on any dividend payment date on or after November 15, 1999, at a
price of $25 per share, plus dividends declared and unpaid from the dividend
payment date immediately preceding the date fixed for redemption. Dividends of
$2.625 per share were paid each year on Series E during 1998, 1997, and 1996.
Shares of Series F may be redeemed, in whole or in part, at the option of the
Company on any dividend payment date on or after February 15, 1999, at a
premium. Dividends of $2.28 per share were paid on Series F in 1998 and 1997
with dividends of $2.07 per share paid in 1996.
(7) Off-Balance Sheet Instruments
The Company is a party to derivative financial instruments in the normal
course of business for trading purposes and for purposes other than trading 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
53
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
derivative financial instruments, as well as the Company's commitments to
extend credit and standby letters of credit, as of December 31, 1998 and 1997.
1998 1997
------------------- -------------------
Other Than Other Than
Trading Trading Trading Trading
-------- ---------- -------- ----------
(in Thousands)
Commitments to extend credit.......... $ -- $4,522,761 $ -- $3,591,520
Standby and commercial letters of
credit............................... -- 91,382 -- 76,769
Forward and futures contracts......... 73,845 -- 121,925 25,000
Interest rate swap agreements......... 3,000 1,577,714 13,260 1,561,303
Floors and caps written............... 137,900 -- 149,400 --
Floors and caps purchased............. 147,500 -- 132,000 60,000
Other options written................. -- -- 5,000 --
Other options purchased............... -- -- 10,525 --
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 and 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 swap transactions
generally involve the exchange of fixed and floating rate interest payment
obligations without the exchange of the underlying principal amounts. 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.
Entering into interest rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the
contracts but also the interest rate risk associated with unmatched positions.
Notional principal amounts often are used to express the volume of these
transactions; however, the amounts potentially subject to credit risk are much
smaller.
The primary purposes for using interest rate contracts in the trading
account are to facilitate customer transactions and to help protect cash
market positions in the trading account against interest rate movement.
Changes in the estimated fair value of contracts in the trading account are
recorded in other noninterest income
54
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
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, 1998:
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 $ 67 $ 67 5.90% 5.31% 2.96 90
Caps:
Purchased.............. 76,500 60 60 -- * 1.98 83
Written................ 60,900 (60) (60) * -- 2.31 78
Floors:
Purchased.............. 71,000 478 478 (0.36) * 1.01 70
Written................ 77,000 (507) (507) * (0.44) 0.92 72
-------- ----- -----
Total................ $288,400 $ 38 $ 38
======== ===== =====
- --------
* 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, 1998. 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 in the preceding table, the
Company uses other options and futures in the trading account. At December 31,
1998, the trading account contained no other options purchased and written,
although during 1998, the Company did hold other options in the trading
account. The net purchased position in other options assists in protecting the
fair value of the trading account against rising short-term interest rates
while maintaining limited risk to declining rates. At December 31, 1998,
futures contracts having a notional principal of $51 million were also used to
assist in reducing the price sensitivity of the trading account.
For derivative financial instruments held or issued for trading purposes,
the fair values as of December 31, 1998 and 1997, and the average fair value
during those years, are presented in the following table.
1998 1997
--------------------- ---------------------
Period-End Average Period-End Average
Fair Value Fair Value Fair Value Fair Value
---------- ---------- ---------- ----------
(in Thousands)
Swaps............................... $ 67 $ 39 $(13) $(62)
Floors and caps:
Assets............................. 538 425 314 386
Liabilities........................ (567) (499) (398) (462)
Other options:
Assets............................. -- 77 65 186
Liabilities........................ -- (20) (31) (65)
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
55
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
credit and standby letters of credit is represented by the contractual amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For interest rate contracts, including caps, floors and swap
transactions 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, 1998, the Company estimates its credit risk in the
event of total counterparty default to be $7.1 million for interest rate swaps
and $499,000 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 $21.5 million at December 31, 1998, 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. 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 assist in managing 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 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, 1998.
Weighted Weighted
Weighted Average Average
Average Rate* Expected Repricing
Notional Carrying Estimated ------------- Maturity Frequency
Amount Value Fair Value Received Paid (Years) (Days)
---------- -------- ---------- -------- ---- -------- ---------
(in Thousands)
Non-trading interest
rate contracts:
Swaps:
Pay fixed versus 3-
month LIBOR........... $ 100,000 $ (88) $(1,748) 5.22% 5.72% 2.58 90
Receive fixed versus 3-
month LIBOR........... 1,359,770 3,402 7,975 6.43 5.27 0.42 90
Receive fixed versus 6-
month LIBOR........... 25,000 50 47 6.23 5.41 0.21 180
Basis swaps+........... 92,944 436 (162) 6.09 6.97 4.32 90
---------- ------ -------
$1,577,714 $3,800 $ 6,112
========== ====== =======
- --------
+ 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, 1998.
56
Compass Bancshares, Inc. and Subsidiaries
Summary of Significant Accounting Policies -- (Continued)
December 31, 1998, 1997 and 1996
At December 31, 1998, swaps, caps and floors acquired for other than trading
purposes were associated with the following asset or liability categories:
Notional Principal Associated With
-------------------------------------------------------
Total Fixed-Rate
Notional Adjustable-Rate FHLB Subordinated
Principal Loans Investments Advances CDs Debentures
---------- -------- --------------- -------- -------- ------------
(in Thousands)
Swaps:
Pay fixed.............. $ 100,000 $ -- $ -- $100,000 $ -- $ --
Receive fixed.......... 1,384,770 684,770 -- -- 650,000 50,000
Basis swaps............ 92,944 -- 92,944 -- -- --
---------- -------- ------- -------- -------- -------
$1,577,714 $684,770 $92,944 $100,000 $650,000 $50,000
========== ======== ======= ======== ======== =======
(8) Commitments and Contingencies
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, 1998, for leased facilities (in
thousands):
1999......................................... $ 9,391
2000......................................... 8,762
2001......................................... 7,928
2002......................................... 6,298
2003......................................... 2,873
Thereafter.................................... 10,144
--------
$ 45,396
========
Minimum rentals for all operating leases charged to earnings totaled $17.7
million, $15.9 million and $14.0 million for years ended December 31, 1998,
1997 and 1996, respectively.
The Company and its subsidiaries 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 seek
substantial sums as damages. Among the actions which are pending 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 difficult 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
57
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
ultimate resolution of these legal proceedings will not have a material
adverse effect on the Company's financial condition or results of operations.
(9) Stock Based Compensation
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, 3,712,500, 2,250,000 and 2,850,000 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 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
following summary sets forth activity under the plan for the years ended
December 31:
1998 1997 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- -------- ---------- -------- ---------- --------
Outstanding, beginning
of the year............ 2,049,340 $21.70 1,670,625 $16.99 1,408,895 $13.74
Granted................ 888,586 43.88 766,915 29.00 551,922 22.10
Exercised.............. (449,453) 18.83 (334,279) 14.42 (287,447) 10.88
Forfeited.............. (113,392) 34.93 (53,921) 23.27 (2,745) 14.35
---------- ---------- ----------
Outstanding, end of the
year................... 2,375,081 $29.91 2,049,340 $21.70 1,670,625 $16.99
========== ========== ==========
Weighted average fair
value of options
granted during the
year................... $ 8.32 $ 5.32 $ 3.54
Exercisable, end of the
year................... 1,425,730 1,461,610 1,636,800
Of the 2,375,081 outstanding options at December 31, 1998, 1,425,730 were
exercisable with the remaining 949,351 having a remaining vesting period of
two or three years. Exercise prices for options outstanding as of December 31,
1998 ranged from $6.22 to $44.625. Unexercised options with exercise prices of
less than $20.00 for 577,630 shares had a weighted average contractual life of
4.43 years and a weighted average exercise price of $15.48 while unexercised
options with exercise prices greater than $20.00 for 1,797,451 shares had a
weighted average contractual life of 8.19 years and a weighted average
exercise price of $34.55.
At December 31, 1998, 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 rights.
The shares under option also included nonqualified options without stock
appreciation rights issued to certain executives to acquire shares of common
stock as follows: 229,926 shares at year-end 1998, 102,282 shares at year-end
1997 and 104,586 shares at year-end 1996.
58
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
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 rather than
Financial Accounting Statement No. 123, Accounting for Stock-Based
Compensation. 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.
Pro forma information regarding net income and earnings per share is
presented as if the Company had accounted for its employee stock options under
the fair value method. The fair value for these options was estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.49 percent, 6.12 percent and 5.19 percent; dividend yields
of 2.39 percent, 3.33 percent and 3.89 percent; volatility factors of the
expected market price of the Company's common stock of 0.217, 0.213 and 0.224;
and a weighted-average expected life of the options of 3.50, 4.00 and 3.67
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, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Company's options granted in 1998 and 1997 vest ratably over a period of
three years, therefore for purposes of pro forma disclosures, the compensation
expense related to these options has been allocated over the vesting period.
Because the vast majority of the Company's options granted in 1996 vested
immediately, the estimated fair value of the options for 1996 has been
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
--------------------------
1998 1997 1996
-------- -------- --------
Net income:
As reported........................................ $180,880 $166,242 $146,334
Pro forma.......................................... 177,227 165,041 144,512
Basic earnings per share:
As reported........................................ $ 2.40 $ 2.22 $ 1.98
Pro forma.......................................... 2.35 2.21 1.95
Diluted earnings per share:
As reported........................................ $ 2.35 $ 2.17 $ 1.94
Pro forma.......................................... 2.30 2.15 1.91
During 1998, 1997 and 1996, the Company issued 86,191, 94,800 and 59,025
shares, respectively, of restricted common stock with a fair value at issuance
of $3,686,736, $2,706,224 and $1,296,189, respectively. The shares issued in
1998 and 1997 vest ratably over a three year period while the shares issued in
1996 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 1998, 1997 and 1996,
compensation expense of $2,038,206, $1,010,967 and $216,030, respectively, was
recognized in connection with the restricted stock.
59
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
(10) 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 each bank's 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 the regulators to ensure capital
adequacy require the Company and the Subsidiary Banks to maintain minimum core
capital ("Tier I Capital") of at least four percent of risk-weighted assets,
minimum total capital ("Total Qualifying Capital") of at least eight percent
of risk-weighted assets and a minimum leverage ratio of four percent of
adjusted quarterly assets. Management believes, as of December 31, 1998, that
the Company and the Subsidiary Banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998, 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
Qualifying Capital, Tier I Capital and leverage ratios of at least 10 percent,
6 percent and 5 percent, respectively. There are no conditions or events since
that notification that management believes have changed the Subsidiary Banks'
category.
The following table presents the actual capital amounts and ratios of the
Company and its significant subsidiary banks at December 31, 1998 and 1997.
Total Qualifying Capital Tier I Capital Leverage
------------------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ---------- -------- ----- ---------- -----
As of December 31, 1998:
Consolidated........... $ 1,445,132 10.71% $1,188,851 8.81% $1,188,851 7.26%
Compass Bank........... 1,317,812 10.24 1,149,051 8.93 1,149,051 7.39
Arizona Bank........... 67,589 11.15 49,981 8.24 49,981 6.19
As of December 31, 1997:
Consolidated........... $ 1,329,208 12.38% $1,060,482 9.87% $1,060,482 7.41%
Compass Bank........... 1,173,501 11.57 1,004,730 9.91 1,004,730 7.42
Arizona Bank........... 69,425 11.94 52,152 8.97 52,152 7.31
Capital amounts and ratios at December 31, 1997, have been restated to
reflect the merger in October 1998, of the Company's Texas subsidiary bank
into Compass Bank.
Dividends paid by the Subsidiary Banks are the primary source of funds
available to the Company for payment of dividends to its shareholders and
other needs. Applicable federal and state statutes and regulations impose
restrictions on the amounts of dividends that may be declared by the
Subsidiary Banks. In addition to the formal statutes and regulations,
regulatory authorities also consider the adequacy of each bank's total capital
in relation to its assets, deposits and other such items. Capital adequacy
considerations could further limit the availability of dividends from the
Subsidiary Banks. At December 31, 1998, approximately $225.6 million of the
Subsidiary Banks' net assets were available for payment of dividends without
prior regulatory approval.
60
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
Additionally, the Company's Subsidiary Banks could have paid additional
dividends to the parent holding company in the amount of $37.6 million while
continuing to meet the capital requirements for "well-capitalized" banks at
December 31, 1998.
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, 1998 and 1997 were approximately $94.6 million and $102.9 million,
respectively.
(11) Business Combinations
Completed Mergers
Summarized below are the mergers completed by the Company during the years
ended December 31, 1998 and 1997, all of which were accounted for under the
pooling-of-interests method of accounting and, accordingly, all prior period
information has been restated.
Common
dollars in millions Location Date Assets Equity Shares Issued
- ------------------------------------------------------------------------------------
Arizona Bank............ Tucson, Arizona 12/15/98 $806 $54 4,350,000
Hill Country Bank....... Austin, Texas 8/1/98 109 10 728,075
Fidelity Resources
Company................ Dallas, Texas 2/9/98 335 20 1,800,077
First University
Corporation............ Houston, Texas 1/29/98 68 4 349,874
GSB Investments, Inc.... Gainesville, Florida 1/13/98 213 22 1,649,807
Central Texas Bancorp,
Inc.................... Waco, Texas 7/15/97 207 19 1,537,444
Greater Brazos Valley
Bancorp, Inc........... College Station, Texas 4/17/97 58 3 323,918
Horizon Bancorp, Inc.... Austin, Texas 3/12/97 154 11 1,333,220
Enterprise National
Bank................... Jacksonville, Florida 1/15/97 171 18 1,620,782
Presented below is summary operating information for the Company showing the
effect of the business combinations completed during 1998.
As Effect
Previously of Currently
Reported Poolings Reported
---------- -------- ---------
(in Thousands)
1997:
Net interest income.............................. $475,165 $64,610 $539,775
Provision for loan losses........................ 22,412 10,523 32,935
Noninterest income............................... 181,467 11,257 192,724
Noninterest expense.............................. 395,727 49,017 444,744
Net income....................................... 155,563 10,679 166,242
1996:
Net interest income.............................. $431,172 $56,394 $487,566
Provision for loan losses........................ 20,215 5,772 25,987
Noninterest income............................... 161,391 8,705 170,096
Noninterest expense.............................. 364,274 38,330 402,604
Net income....................................... 132,444 13,890 146,334
The entities acquired in 1998 that were accounted for under the pooling-of-
interests method of accounting had net interest income of $39.0 million and
net income of $8.5 million prior to their respective acquisition dates in
1998.
61
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
On December 9, 1998, the Company completed the acquisition of Albrecht and
Associates, which provides specialized divestment and advisory services to the
oil and gas production industry, located in Houston, Texas through the
issuance of 250,000 shares of the Company's common stock. At acquisition,
Albrecht and Associates had total assets of less than $1 million. The
transaction was accounted for under the pooling-of-interests method of
accounting, but due to immateriality, prior periods have not been restated.
Pending Acquisitions
On November 2, 1998, the Company signed a definitive agreement to acquire 15
banking offices in Arizona from Wells Fargo Bank, N.A. These branches,
primarily in the Phoenix area, will add approximately $412 million in
deposits. The transaction is expected to close in the second quarter of 1999
and be accounted for under the purchase method of accounting.
(12) 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. Employees are
generally vested after five years of service. Benefits are payable monthly
commencing on the later of age 65 or the participant's date of retirement.
Eligible participants may retire at reduced benefit levels after reaching age
55, if they have at least 10 years of service. The Company contributes amounts
to the pension fund sufficient to satisfy funding requirements of the Employee
Retirement Income Security Act.
62
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
The following tables set forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31:
1998 1997
------- -------
(in Thousands)
Projected benefit obligation, beginning of year............... $76,608 $57,858
Service cost.................................................. 5,959 4,228
Interest cost................................................. 5,516 4,647
Actuarial loss................................................ 4,321 11,318
Benefits paid................................................. (1,697) (1,443)
------- -------
Projected benefit obligation, end of year.................... 90,707 76,608
Fair value of plan assets, beginning of year.................. 74,841 60,050
Actual return on plan assets.................................. 15,323 10,083
Employer contributions........................................ -- 6,151
Benefits paid................................................. (1,697) (1,443)
------- -------
Fair value of plan assets, end of year--primarily listed
stocks and U.S. bonds....................................... 88,467 74,841
------- -------
Funded status of plan......................................... (2,240) (1,767)
Unrecognized transition asset................................. (28) (472)
Unrecognized prior service cost............................... 862 925
Unrecognized net loss......................................... 8,747 13,090
------- -------
Net pension asset included in other assets................... $ 7,341 $11,776
======= =======
1998 1997
------- -------
(in Thousands)
Net pension asset, beginning of year.......................... $11,776 $ 8,566
Employer contributions........................................ -- 6,151
Net period pension cost....................................... (4,435) (2,941)
------- -------
Net pension asset, end of year................................ $ 7,341 $11,776
======= =======
Net pension cost for 1998, 1997 and 1996 included the following components:
1998 1997 1996
------- ------- -------
(in Thousands)
Service cost........................................ $ 5,959 $ 4,228 $ 4,191
Interest cost....................................... 5,516 4,646 4,197
Amortization of prior service cost.................. 63 63 (14)
Recognized net actuarial loss....................... 377 83 622
Estimated return on plan assets..................... (7,036) (5,635) (4,687)
Amortization of unrecognized transitional asset..... (444) (444) (444)
------- ------- -------
Net periodic pension cost......................... $ 4,435 $ 2,941 $ 3,865
======= ======= =======
The weighted average discount rate was 7.00 percent for 1998, 7.25 percent
for 1997 and 8.00 percent for 1996. The rate of increase in future
compensation levels was six percent for 1998, 1997 and 1996. 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 1998, 1997 and 1996. Prior service cost is amortized on a straight-
line basis.
63
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
In 1997, the Company established benefit plans for certain key executives
that provide additional retirement benefits not otherwise provided in the
Company's basic benefit plans. As of December 31, 1998, this plan had an
unfunded projected benefit obligation of $3.5 million and a net plan liability
of $1.1 million that is reflected in accrued expenses and other liabilities in
the "Consolidated Balance Sheets." Net periodic plan expense was $567,000 and
$511,000 in 1998 and 1997, respectively.
The Company maintains an employee stock purchase 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 that is purchased on the
open market 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
$2.7 million during 1998, $3.1 million during 1997, and $2.9 million during
1996.
The Company has a qualified employee benefit plan under section 401(k) of
the Internal Revenue Code. Employees can contribute up to 15 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 and totaled $3.3 million in 1998, $2.4 million in
1997 and $1.9 million in 1996. 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. Costs incurred by the Company under the plan were $2.2 million in
1998, $1.8 million in 1997, and $1.6 million in 1996 and are reflected in
salaries, benefits and commissions expense.
(13) Income Taxes
For the years ended December 31, 1998, 1997 and 1996, income tax expense
attributable to income from operations consists of:
1998 1997 1996
------- ------- -------
(in Thousands)
Current income tax expense:
Federal............................................... $86,011 $83,375 $74,152
State................................................. 986 3,121 5,879
------- ------- -------
Total............................................... 86,997 86,496 80,031
------- ------- -------
Deferred income tax expense:
Federal............................................... 4,123 1,753 1,878
State................................................. 425 329 828
------- ------- -------
Total............................................... 4,548 2,082 2,706
------- ------- -------
Total income tax expense............................... $91,545 $88,578 $82,737
======= ======= =======
During 1998, the Company made income tax payments of approximately $64.2
million and received cash income tax refunds amounting to approximately $2.6
million. For 1997 and 1996, income tax payments were approximately $77.0
million and $79.3 million, respectively. Cash income tax refunds amounted to
approximately $2.0 million for 1997 and $1.4 million for 1996. Applicable
income tax expense of $1.6 million,
64
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
$3.1 million and $3.7 million for 1998, 1997 and 1996, respectively, on net
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:
1998 1997 1996
----------------- ----------------- -----------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Earnings Amount Earnings Amount Earnings
------- -------- ------- -------- ------- --------
(in Thousands)
Income tax expense at
federal statutory rate.. $95,349 35.0% $89,169 35.0% $80,175 35.0%
Increase (decrease)
resulting from:
Tax-exempt interest and
other income........... (5,991) (2.2) (5,117) (2.0) (3,894) (1.7)
State income tax expense
net of federal income
tax benefit............ 917 0.3 2,236 0.9 4,398 1.9
Other................... 1,270 0.5 2,290 0.9 2,058 0.9
------- ---- ------- ---- ------- ----
Income tax expense.... $91,545 33.6% $88,578 34.8% $82,737 36.1%
======= ==== ======= ==== ======= ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998, 1997 and 1996, are presented below:
1998 1997 1996
------- ------- -------
(in Thousands)
Deferred tax assets:
Allowance for loan losses............................. $50,643 $45,001 $41,739
Net unrealized losses on securities available for
sale................................................. -- -- 1,803
Other deferred tax assets............................. 5,023 4,584 6,282
------- ------- -------
Total assets........................................ 55,666 49,585 49,824
Deferred tax liabilities:
Premises and equipment................................ 8,775 8,744 6,098
Lease financing....................................... 20,892 9,491 5,637
Prepaid pension expense............................... 2,684 4,129 3,168
Core deposit and other acquired intangibles........... 9,076 10,919 12,521
Net unrealized gains on securities available for
sale................................................. 6,410 413 --
Other deferred tax liabilities........................ 5,678 3,346 3,378
------- ------- -------
Total liabilities................................... 53,515 37,042 30,802
------- ------- -------
Net deferred tax asset................................. $ 2,151 $12,543 $19,022
======= ======= =======
65
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
(14) Parent Company
The condensed financial information for Compass Bancshares, Inc. (Parent
Company Only) is presented as follows:
Balance Sheets
December 31
---------------------
1998 1997
---------- ----------
(in Thousands)
Assets
Cash and due from banks.................................. $ 1,781 $ 959
Investment securities.................................... 23,234 25,714
Reverse repurchase agreements with affiliates............ 116,106 90,797
Investment in subsidiaries............................... 1,364,841 1,230,008
Other assets............................................. 7,182 8,520
---------- ----------
Total assets.......................................... $1,513,144 $1,355,998
========== ==========
Liabilities and Shareholders' Equity
Commercial paper......................................... $ 79,456 $ 52,410
Accrued expenses and other liabilities................... 9,904 8,018
Junior subordinated debt payable to subsidiary trusts ... 103,093 103,093
Subordinated debentures and other borrowings............. 124,550 124,458
---------- ----------
Total liabilities..................................... 317,003 287,979
Shareholders' equity..................................... 1,196,141 1,068,019
---------- ----------
Total liabilities and shareholders' equity............ $1,513,144 $1,355,998
========== ==========
Statements of Income
Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(in Thousands)
Income:
Cash dividends from subsidiaries............... $ 74,593 $ 38,067 $179,215
Interest on investments with affiliates........ 8,012 8,114 4,920
Other.......................................... 3,184 3,710 3,258
-------- -------- --------
Total income................................. 85,789 49,891 187,393
Expense:
Interest on commercial paper and other
borrowings.................................... 20,995 19,757 15,435
Other.......................................... 4,314 3,306 3,066
-------- -------- --------
Total expense................................ 25,309 23,063 18,501
Income before income tax benefit and equity in
undistributed earnings of subsidiaries......... 60,480 26,828 168,892
Applicable income tax benefit................... (5,299) (4,190) (3,874)
-------- -------- --------
65,779 31,018 172,766
Equity in undistributed earnings (dividends in
excess of earnings) of subsidiaries............ 115,101 135,224 (26,432)
-------- -------- --------
Net income................................... $180,880 $166,242 $146,334
======== ======== ========
66
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
(14) Parent Company, Continued
Statements of Cash Flows
Year Ended December 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(in Thousands)
Operating Activities:
Net income................................... $ 180,880 $ 166,242 $ 146,334
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization............... 2,027 1,203 403
Dividends in excess of earnings (equity in
undistributed earnings).................... (115,101) (135,224) 26,432
Increase in other assets.................... (964) (2,722) (170)
Increase (decrease) in other liabilities.... 1,886 (10,349) 2,295
--------- --------- ---------
Net cash provided by operating activities.. 68,728 19,150 175,294
Investing Activities:
Proceeds from maturities/calls of investment
securities.................................. 2,480 523 187
Net (increase) decrease in reverse repurchase
agreements with affiliates.................. (25,309) 32,382 (23,635)
Capital contributions made to subsidiaries... (4,701) (9,582) (4,274)
Acquisition of banks......................... -- -- (98,482)
Advances to subsidiaries on notes
receivable.................................. -- (40,000) --
(Purchases) sales of premises and equipment.. -- 455 (64)
--------- --------- ---------
Net cash used by investing activities...... (27,530) (16,222) (126,268)
Financing Activities:
Net increase (decrease) in commercial paper.. 27,046 (52,486) 47,584
Issuance of junior subordinated debentures... -- 103,093 --
Cash paid in lieu of fractional shares....... (22) (56) --
Purchase of treasury shares.................. -- -- (45,342)
Common and preferred dividends paid.......... (78,234) (64,625) (54,469)
Pre-merger transactions of pooled entities... 2,558 6,658 --
Repayment of loans to finance stock options.. 5,121 2,598 2,564
Proceeds from exercise of stock options...... 3,155 2,247 571
--------- --------- ---------
Net cash used by financing activities...... (40,376) (2,571) (49,092)
--------- --------- ---------
Net increase (decrease) in cash and due from
banks........................................ 822 357 (66)
Cash and due from banks at beginning of the
year......................................... 959 602 668
--------- --------- ---------
Cash and due from banks at end of the year.... $ 1,781 $ 959 $ 602
========= ========= =========
(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
67
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
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 subsidiaries, 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 following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Cash and due from 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. 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.
Trading account securities: Fair 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 Company on comparable loans as to
credit risk and term.
Off-balance sheet instruments: Fair value of the Company's off-balance
sheet instruments (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. 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 Company 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, which includes the Company's Capital Securities, 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. FHLB and other borrowings includes the Capital Securities.
68
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
At December 31, 1998 At December 31, 1997
----------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ---------- ----------
(in Thousands)
Financial Instruments:
Assets:
Cash and due from banks........ $ 831,614 $ 831,614 $ 793,922 $ 793,922
Investment securities.......... 1,896,039 1,923,938 1,100,459 1,119,462
Investment securities available
for sale...................... 3,645,761 3,645,761 2,527,794 2,527,794
Trading account securities..... 127,671 127,671 112,460 112,460
Federal funds sold and
securities purchased under
agreements to resell.......... 27,786 27,786 154,632 154,632
Loans.......................... 10,101,285 10,137,966 9,563,713 9,592,404
Off-balance sheet instruments... 3,800 6,112 3,800 6,349
Liabilities:
Noninterest bearing deposits... $ 2,551,958 $ 2,551,958 $2,300,451 $2,300,451
Interest bearing deposits...... 9,461,488 9,483,795 8,606,711 8,630,163
Federal funds purchased and
securities sold under
agreements to repurchase...... 1,736,066 1,736,066 1,171,666 1,171,666
Other short-term borrowings.... 159,404 159,404 183,553 183,553
FHLB and other borrowings...... 2,045,980 2,035,530 1,430,253 1,431,969
(16) Segment Information
In June 1997, the FASB issued Financial Accounting Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information,
("FAS131"). FAS131 requires that financial and descriptive information be
disclosed for each reportable operating segment based on the management
approach. The management approach focuses on financial information that an
enterprise's decision makers use to assess performance and make decisions
about resource allocation. The statement also prescribes the enterprise-wide
disclosures to be made about products, services, geographic areas and major
customers. The Company adopted FAS131 as of January 1, 1998.
The Company's segment information is presented by line of business. Each
line of business is a strategic unit that serves a particular group of
customers that have certain common characteristics, through various products
and services. The Company's reportable operating segments are Corporate
Banking, Community Banking, Retail Banking, Asset Management, and Treasury.
The Corporate Banking segment is responsible for providing a full array of
banking and investment services to business banking, commercial banking, and
other institutional clients in each of the Company's major metropolitan
markets. The Corporate Banking segment also includes a National Industries
unit that is responsible for serving larger national accounts, principally in
targeted industries. In addition to traditional credit and deposit products,
the Corporate Banking segment also supports its customers with capabilities in
treasury management, leasing, accounts receivable purchasing, asset-based
lending, international services, and interest rate protection and investment
products.
The Retail Banking segment serves the Company's consumer customers in each
of its major metropolitan markets through an extensive banking office network
and through the use of alternative delivery channels such
69
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
as PC banking, the internet, and telephone banking. The Retail Banking segment
provides individuals with comprehensive products and services, including home
mortgages, credit cards, deposit accounts, mutual funds, and brokerage and
insurance. In addition, Retail Banking also serves the Company's small
business customers.
The Community Banking segment is responsible for serving the Company's
Arizona markets, its Austin, Texas market, and its non-metropolitan markets
and provides the same products and services offered by the Corporate Banking
and Retail Banking segments.
The Asset Management segment provides specialized investment portfolio
management, traditional credit products, financial counseling, and customized
services to the Company's private clients and foundations as well as
investment management and retirement services to companies and their
employees. The Asset Management segment is also the discretionary investment
manager of Expedition Funds, the Company's family of proprietary mutual funds.
The Treasury segment's primary function is to manage the investment
securities portfolio, public entity deposits, interest rate risk, and
liquidity and funding positions of the Company.
Corporate Support and Other includes activities that are not directly
attributable to the reportable segments. Included in this category are the
activities of the parent company and support functions, i.e., accounting, loan
review, etc., along with the Company's indirect automobile portfolio and the
elimination of intercompany transactions.
The following table presents the segment information for the Company's
segments as of and for the year ended December 31, 1998. It is not practical
to provide information for 1997 and 1996.
Corporate
Corporate Community Retail Asset Support
Banking Banking Banking Management Treasury and Other Consolidated
---------- ---------- ---------- ---------- ---------- ---------- ------------
Net interest income..... $ 168,695 $ 141,188 $ 143,471 $ 26,123 $ 108,403 $ (8,493) $ 579,387
Noninterest income...... 35,953 44,586 98,103 18,966 16,270 8,622 222,500
Noninterest expense..... 65,782 89,812 131,696 20,460 4,998 178,269 491,017
---------- ---------- ---------- -------- ---------- ---------- -----------
Segment net income..... $ 138,866 $ 95,962 $ 109,878 $ 24,629 $ 119,675 $ (178,140) 310,870
========== ========== ========== ======== ========== ==========
Provision for loan
losses................. 38,445
-----------
Net income before income
tax expense............ 272,425
Income tax expense...... 91,545
-----------
Net income............. $ 180,880
===========
Average total assets.... $4,586,481 $2,060,266 $ 945,927 $397,557 $6,753,680 $ 679,253 $15,423,162
Average total loans..... 4,410,035 1,903,997 826,891 387,752 1,077,788 1,105,151 9,711,614
Average total deposits.. 1,676,221 3,697,300 4,962,533 575,449 807,586 (472,654) 11,246,435
Period-end total
assets................. $5,089,570 $2,225,025 $ 923,693 $476,737 $8,072,787 $ 501,096 $17,288,908
Period-end total loans.. 4,884,673 2,063,812 800,393 468,959 888,109 995,339 10,101,285
Period-end total
deposits............... 1,900,136 3,952,091 4,980,326 735,207 1,064,835 (619,149) 12,013,446
The financial information presented was derived from the internal
profitability reporting system used by management to monitor and manage the
financial performance of the Company. This information is based on internal
management accounting policies which have been developed to reflect the
underlying economics of the businesses. These policies address the
methodologies applied in connection with funds transfer pricing. Funds
transfer pricing was used in the determination of net interest income by
assigning a standard cost (credit) for funds used (provided) to assets and
liabilities based on their maturity, prepayment, and/or repricing
characteristics.
70
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
The development and application of these methodologies is a dynamic process.
Accordingly, financial results may be revised periodically to reflect
management accounting enhancements, changes in risk profile, or changes in the
Company's organizational structure. In addition, unlike financial accounting,
there is no authoritative literature for management accounting similar to
generally accepted accounting principles. Consequently, reported results are
not necessarily comparable with those presented by other financial
institutions.
(17) Earnings Per Share
Presented below is a summary of the components used to calculate basic and
diluted earnings per share for the years ended December 31, 1998, 1997 and
1996:
Year Ended December 31
--------------------------
1998 1997 1996
-------- -------- --------
(in Thousands Except Per
Share Data)
BASIC EARNINGS PER SHARE:
Net income......................................... $180,880 $166,242 $146,334
Less: Dividends on non-convertible and convertible
preferred stock................................... 2,996 3,067 2,923
-------- -------- --------
Net income available to common shareholders........ $177,884 $163,175 $143,411
======== ======== ========
Weighted average common shares outstanding......... 74,197 73,442 72,605
======== ======== ========
Basic earnings per share........................... $ 2.40 $ 2.22 $ 1.98
======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income......................................... $180,880 $166,242 $146,334
Less: Dividends on non-convertible preferred
stock............................................. 2,782 2,782 2,638
-------- -------- --------
Net income available to common shareholders and
assumed conversions............................... $178,098 $163,460 $143,696
======== ======== ========
Weighted average common shares outstanding......... 74,197 73,442 72,605
Net effect of the assumed exercise of stock options
and nonvested restricted stock -- based on the
treasury stock method using average market price
for the year...................................... 797 824 502
Assumed conversion of preferred stock.............. 836 1,126 1,126
-------- -------- --------
Weighted average common shares outstanding used to
calculate earnings per common share............... 75,830 75,392 74,233
======== ======== ========
Diluted earnings per share......................... $ 2.35 $ 2.17 $ 1.94
======== ======== ========
(18) Comprehensive Income
In June 1997, the FASB issued Financial Accounting Statement No. 130,
Reporting Comprehensive Income, ("FAS130") which establishes reporting and
presentation standards for comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is defined
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances arising from nonowner sources.
The adoption of FAS130 in 1998 did not have a material impact on the Company's
financial condition or its results of operations.
71
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
The following is a summary of the components of other comprehensive income:
Year Ended December 31
------------------------
1998 1997 1996
------- ------- --------
(in Thousands)
Other comprehensive income, before tax:
Unrealized holding gain (loss) on investment
securities available for sale, net.................. $19,901 $14,524 $(14,966)
Reclassification adjustment for gains (losses)
on investment securities available for sale......... 4,255 8,330 9,811
------- ------- --------
Other comprehensive income, before income taxes..... 15,646 6,194 (24,777)
Income tax expense (benefit) related to other
comprehensive income:
Unrealized holding gain (loss) on investment
securities
available for sale, net............................. 7,640 5,092 (5,153)
Reclassification adjustment for gains (losses)
on investment securities available for sale......... 1,572 3,078 3,680
------- ------- --------
Total income tax expense (benefit) related
to other comprehensive income.................... 6,068 2,014 (8,833)
------- ------- --------
Other comprehensive income, after income taxes........ $ 9,578 $ 4,180 $(15,944)
======= ======= ========
72
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
(19) Supplemental Disclosure for Statement of Cash Flows
The Company paid approximately $556.0 million, $549.7 million and $556.3
million in interest on deposits and other liabilities during 1998, 1997 and
1996, respectively. The following table presents the Company's noncash
investing and financing activities for the years ended December 31, 1998, 1997
and 1996.
December 31
---------------------------
1998 1997 1996
-------- -------- --------
(in Thousands)
Schedule of noncash investing and financing
activities:
Transfers of loans to other real estate owned.... $ 7,324 $ 7,754 $ 6,197
Loans to facilitate the sale of other real estate
owned........................................... 574 974 1,800
Transfer of securities available for sale to
investment securities........................... -- 118,947 193,129
Securitization and transfer of loans to
securities available for sale................... 484,549 -- --
Tax benefit realized upon exercise of stock
options......................................... 3,165 1,778 162
Loans to finance stock purchases................. 2,838 1,247 2,962
Change in unrealized gain (loss) on available-
for-sale securities............................. 14,860 6,115 (25,318)
Assets retained in loan securitization and sale.. 36,593 -- --
Issuance of restricted stock..................... 3,122 2,706 1,296
Conversion of preferred stock.................... 3,000 -- --
Receipt/issuance of treasury stock upon exercise
of stock options................................ 2,472 943 137
Purchase business combinations:
Assets acquired................................. $ 3,445 $860,089
Liabilities assumed............................. 25,661 725,548
-------- --------
Net assets acquired (liabilities assumed)...... (22,216) 134,541
Treasury stock issued........................... -- 46,769
-------- --------
Cash paid (received)........................... $(22,216) $ 87,772
======== ========
(20) Subsequent Events (Unaudited)
On February 15, 1999, 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,
1999, to shareholders of record on March 15, 1999. Basic earnings per share on
a restated basis was $1.60 per share for 1998, $1.48 per share for 1997, and
$1.32 per share for 1996. Diluted earnings per share on a restated basis was
$1.57 per share for 1998, $1.45 per share for 1997, and $1.29 per share for
1996.
On February 15, 1999, the Company redeemed all outstanding shares of the
Company's Series F preferred stock at a price of $25.75 per share. In
connection with the early redemption, the Company paid a redemption premium of
approximately $500,000.
73
Compass Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
December 31, 1998, 1997 and 1996
(21) Quarterly Results (Unaudited)
A summary of the unaudited results of operations for each quarter of 1998 and
1997 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in Thousands Except Per Share
Data)
1998
Total interest income......... $270,200 $277,896 $289,891 $296,557
Total interest expense........ 132,156 135,673 142,343 144,985
Net interest income........... 138,044 142,223 147,548 151,572
Provision for loan losses..... 8,064 8,531 8,532 13,318
Net interest income after
provision for loan losses.... 129,980 133,692 139,016 138,254
Total noninterest income...... 53,979 56,268 55,927 56,326
Total noninterest expense..... 114,983 118,107 122,172 135,755
Income tax expense............ 23,371 24,314 24,389 19,471
Net income.................... 45,605 47,539 48,382 39,354
Per common share:
Basic earnings............... 0.61 0.63 0.65 0.51
Diluted earnings............. 0.59 0.62 0.63 0.51
Cash dividends............... 0.2625 0.2625 0.2625 0.2625
Stock price range:
High........................ 53 1/4 49 7/8 47 1/2 39 3/8
Low......................... 41 1/2 42 33 28 7/8
Close....................... 50 1/4 45 1/8 33 38 1/8
1997
Total interest income......... $252,490 $264,501 $268,012 $271,185
Total interest expense........ 121,085 127,752 133,310 134,266
Net interest income........... 131,405 136,749 134,702 136,919
Provision for loan losses..... 7,237 7,282 8,761 9,655
Net interest income after
provision for loan losses.... 124,168 129,467 125,941 127,264
Total noninterest income...... 43,312 46,218 49,905 53,289
Total noninterest expense..... 104,662 111,001 109,823 119,258
Income tax expense............ 22,938 22,855 22,200 20,585
Net income.................... 39,880 41,829 43,823 40,710
Per common share:
Basic earnings............... 0.53 0.56 0.59 0.54
Diluted earnings............. 0.52 0.55 0.57 0.53
Cash dividends............... 0.2367 0.2367 0.2367 0.2367
Stock price range:
High........................ 32 1/8 37 1/4 39 3/4 46 5/8
Low......................... 26 29 1/8 34 1/2 37 1/8
Close....................... 29 5/8 33 5/8 38 7/8 43 3/4
74
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.
75
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............................................ 40
Consolidated Balance Sheets as of
December 31, 1998 and 1997............................................. 41
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996....................................... 42
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996....................................... 43
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................................... 44
Notes to Consolidated Financial Statements --
December 31, 1998, 1997 and 1996....................................... 45
Quarterly Results (Unaudited)........................................... 74
(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
(b) Certificate of Amendment, dated May 20, 1986, to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-4, Registration No. 33-46086
filed with the Commission)
(c) Certificate of Amendment, dated May 15, 1987, to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3.1.2 to the Company's
Post-Effective Amendment No. 1 to Registration Statement on
Form S-4, Registration No. 33-10797 filed with the Commission)
(d) Certificate of Amendment, dated September 19, 1994, to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3.5(1) to the Company's
Registration Statement on Form S-4, Registration No. 33-55899
filed with the Commission)
(e) Certificate of Amendment, dated November 8, 1993 to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3(d) to the Company's
Registration Statement on Form S-4, Registration No. 33-51919
filed with the Commission)
(f) Bylaws of Compass Bancshares, Inc. (Amended and Restated as of
March 15, 1982)
76
(c) Exhibits (continued)
Page
----
(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 Charles E. McMahen (incorporated by reference
to Exhibit 10(h) to the December 31, 1994 Form 10-K filed with the
Commission)
(h) 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)
(i) Compass Bancshares, Inc., Employee Stock Ownership Benefit
Restoration Plan, dated as of May 1, 1997
(j) Compass Bancshares, Inc., Supplemental Retirement Plan, dated as
of May 1, 1997
(k) Deferred Compensation Plan for Compass Bancshares, Inc., dated as
of February 1, 1996
(12) Statement Re: Computation of Ratios................................ 78
(21) Subsidiaries of the Registrant..................................... 79
(23) Consents of experts and counsel
(27) Financial Data Schedule (filed electronically only)
Certain financial statement schedules and exhibits have been omitted because
they are not applicable.
77
Exhibit 12 -- Statement Re: Computation of Ratios
Compass Bancshares, Inc.
Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
Year Ended December 31
--------------------------
1998 1997 1996
-------- -------- --------
(in Thousands)
Pretax income...................................... $272,425 $254,820 $229,071
Add fixed charges:
Interest on deposits.............................. 396,707 390,515 380,635
Interest on borrowings............................ 158,450 125,898 91,311
Portion of rental expense representing interest
expense.......................................... 5,891 5,291 4,658
-------- -------- --------
Total fixed charges.............................. 561,048 521,704 476,604
-------- -------- --------
Income before fixed charges....................... $833,473 $776,524 $705,675
======== ======== ========
Total fixed charges.............................. $561,048 $521,704 $476,604
Preferred stock dividends.......................... 2,996 3,067 2,923
Tax effect of preferred stock dividends............ 1,516 1,634 1,653
-------- -------- --------
Combined fixed charges and preferred stock
dividends......................................... $565,560 $526,405 $481,180
======== ======== ========
Pretax income...................................... $272,425 $254,820 $229,071
Add fixed charges (excluding interest on deposits):
Interest on borrowings............................ 158,450 125,898 91,311
Portion of rental expense representing interest
expense.......................................... 5,891 5,291 4,658
-------- -------- --------
Total fixed charges.............................. 164,341 131,189 95,969
-------- -------- --------
Income before fixed charges (excluding interest on
deposits)......................................... $436,766 $386,009 $325,040
======== ======== ========
Total fixed charges.............................. $164,341 $131,189 $ 95,969
Preferred stock dividends.......................... 2,996 3,067 2,923
Tax effect of preferred stock dividends............ 1,516 1,634 1,653
-------- -------- --------
Combined fixed charges and preferred stock
dividends......................................... $168,853 $135,890 $100,545
======== ======== ========
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends:
Including interest on deposits.................... 1.47x 1.48x 1.47x
Excluding interest on deposits.................... 2.59x 2.84x 3.23x
78
Exhibit 12 -- Statement Re: Computation of Ratios (Continued)
Compass Bancshares, Inc.
Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31
--------------------------
1998 1997 1996
-------- -------- --------
(in Thousands)
Pretax income....................................... $272,425 $254,820 $229,071
Add fixed charges:
Interest on deposits............................... 396,707 390,515 380,635
Interest on borrowings............................. 158,450 125,898 91,311
Portion of rental expense representing interest
expense........................................... 5,891 5,291 4,658
-------- -------- --------
Total fixed charges............................... 561,048 521,704 476,604
-------- -------- --------
Income before fixed charges........................ $833,473 $776,524 $705,675
======== ======== ========
Pretax income....................................... $272,425 $254,820 $229,071
Add fixed charges (excluding interest on deposits):
Interest on borrowings............................. 158,450 125,898 91,311
Portion of rental expense representing interest
expense........................................... 5,891 5,291 4,658
-------- -------- --------
Total fixed charges............................... 164,341 131,189 95,969
-------- -------- --------
Income before fixed charges (excluding interest on
deposits)......................................... $436,766 $386,009 $325,040
======== ======== ========
Ratio of Earnings to Fixed Charges:
Including interest on deposits..................... 1.49x 1.49x 1.48x
Excluding interest on deposits..................... 2.66x 2.94x 3.39x
Exhibit 21 -- Subsidiaries of the Registrant
State or Other Jurisdiction
Subsidiaries of Incorporation
- ------------ ---------------------------
Compass Bank Alabama
Central Bank of the South Alabama
Arizona Bank Arizona
79
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 15, 1999 /s/ D. Paul Jones, Jr.
By ____________________________________
D. Paul Jones, Jr.
Chairman and Chief Executive
Officer
Date: February 15, 1999 /s/ Garrett R. Hegel
By ____________________________________
Garrett R. Hegel
Chief Financial Officer
Date: February 15, 1999 /s/ Timothy L. Journy
By ____________________________________
Timothy L. Journy
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 15, 1999
- ------------------------------------
Charles W. Daniel
/s/ W. Eugene Davenport February 15, 1999
- ------------------------------------
W. Eugene Davenport
80
SIGNATURES, Continued
Directors Date
/s/ Jack C. Demetree February 15, 1999
- -------------------------------------
Jack C. Demetree
/s/ Marshall Durbin, Jr. February 15, 1999
- -------------------------------------
Marshall Durbin, Jr.
/s/ Tranum Fitzpatrick February 15, 1999
- -------------------------------------
Tranum Fitzpatrick
/s/ Carl J. Gessler, Jr. February 15, 1999
- -------------------------------------
Carl J. Gessler, Jr.
/s/ D. Paul Jones, Jr. February 15, 1999
- -------------------------------------
D. Paul Jones, Jr.
/s/ John S. Stein February 15, 1999
- -------------------------------------
John S. Stein
/s/ Robert J. Wright February 15, 1999
- -------------------------------------
Robert J. Wright
81