Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 COMMISSION FILE NO. 0-6032
COMPASS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0593897
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
15 SOUTH 20TH STREET
BIRMINGHAM, ALABAMA 35233
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 933-3000
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $2 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of February 28, 1994, the aggregate market value of voting stock held by
non-affiliates was $856,892,603.
Indicate the number of shares outstanding of the registrant's class of common
stock, as of the latest practicable date.
Class Outstanding at February 28, 1994
Common Stock, $2 Par Value 36,463,515
Documents Incorporated by Reference Part of 10-K in which incorporated
Proxy Statement for 1994 annual Part III
meeting, except for information
referred to in Item 402(a)(8)
of Regulation S-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1--BUSINESS
Compass Bancshares, Inc. (the "Company") is a financial institutions holding
company with its principal place of business in Birmingham, Alabama. The
Company was organized in 1970 and commenced business in late 1971 upon the
acquisition of Central Bank & Trust Co. and State National Bank. The Company
subsequently acquired substantially all of the outstanding stock of additional
banks located in Alabama, 11 of which were merged in late 1981 to create
Central Bank of the South, Alabama's first statewide bank. In February, 1987,
the Company acquired First National Bank of Crosby near Houston, Texas, and
became the first out-of-state holding company to acquire a bank in Texas. Since
that time the Company has acquired 19 banks in the Houston and Dallas areas. In
November, 1993, the Company changed its name from Central Bancshares of the
South, Inc. to Compass Bancshares, Inc. and Central Bank of the South, the
Company's lead bank subsidiary, changed its name to Compass Bank ("Compass
Bank").
In addition to Compass Bank, the Company also owns Compass Bank, N.A., a
national bank headquartered in Pensacola, Florida, Compass Bank, a federal
savings bank headquartered in Jacksonville, Florida ("Compass Bank-Florida"),
Central Bank of the South, an Alabama banking corporation headquartered in
Anniston, Alabama, and Compass Banks of Texas, Inc., a Delaware bank holding
company ("Compass of Texas"), which owns Compass Bank-Houston in Houston,
Texas, and Compass Bank-Dallas in Dallas, Texas. The bank subsidiaries of the
Company and Compass of Texas are referred to collectively herein as the
"Subsidiary Banks". Compass of Texas also owns River Oaks Trust Company with
offices in Houston and Dallas, Texas.
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide them with capital and services of
various kinds. The Company derives substantially all of its income from
dividends from its subsidiaries. Such dividends are determined on an individual
basis, generally in relation to each subsidiary's earnings and capital
position.
SUBSIDIARY BANKS
Compass Bank conducts a general commercial banking and trust business at 89
locations, in 48 communities in Alabama. Compass Bank-Houston conducts a
general commercial banking business from 13 locations in Houston, Texas and
Compass Bank-Dallas conducts a general commercial banking business from 22
banking offices in Dallas and Collin Counties, Texas. River Oaks Trust Company
offers a full range of trust services to customers in Texas through its offices
in Houston and Dallas. Compass Bank, N.A. conducts a general commercial banking
business with five branches in Pensacola and Gulf Breeze, Florida. Compass
Bank-Florida conducts business from 16 locations in Jacksonville, Florida and 7
locations in Ft. Walton Beach, Florida. Central Bank of the South primarily
provides cash management services to commercial customers of the Subsidiary
Banks.
The Subsidiary Banks perform banking services customary for full service
banks of similar size and character for their customers in Alabama and north
Florida and the two largest metropolitan markets in Texas. Such services
include receiving demand and time deposit accounts, making personal and
commercial loans and furnishing personal and commercial checking accounts. The
Trust Division of Compass Bank and River Oaks Trust Company offer customers in
Alabama, Texas, North Carolina, Georgia and Florida a variety of fiduciary
services, including the administration and investment of funds of estates,
trusts and employee benefit plans. Other trust services include custodial and
portfolio management services, and acting as fiscal and paying agent and
trustee under corporate and government trust indentures. Through Compass
Bancshares Insurance, Inc., a wholly-owned subsidiary of Compass Bank, the
Subsidiary Banks make available to their customers and others, as agent for a
variety of insurance companies, term life insurance, fixed-rate annuities and
other insurance products.
The Subsidiary Banks provide correspondent banking services including loan
participations, investment services, and audit services to approximately 1,025
financial institutions located throughout the Southeast and Southwest. Through
the Correspondent and Investment Services Division of Compass Bank, the
Subsidiary Banks distribute or make available a variety of investment services
and products to institutional and individual investors including sales of
municipal bonds, U.S. Government securities and asset/liability services.
Through Compass Brokerage, Inc., a wholly-owned subsidiary of Compass Bank, the
Subsidiary Banks also provide discount brokerage services and variable-rate
annuities to individuals and businesses. Through Compass Bank's wholly-owned
subsidiary, Compass Financial Corporation, the Subsidiary Banks provide lease
financing services to individuals
1
and businesses. Compass Mortgage Corporation, a subsidiary of Compass Bank, was
organized in 1992 as a full-service mortgage corporation and currently
originates residential mortgage loans in Alabama, Texas and Florida.
NON-BANKING ACTIVITIES
Through wholly-owned subsidiaries, the Company is engaged in providing
credit-related insurance products to customers of the Subsidiary Banks and
owning real estate for bank premises. Revenues from operation of these
subsidiaries do not presently constitute a significant portion of the Company's
total operating revenues. The Company may subsequently engage in other
activities permissible for registered bank holding companies when suitable
opportunities develop. Any proposal for such further activities is subject to
approval by appropriate regulatory authorities. (See "Supervision and
Regulation".)
ACQUISITIONS
The Company may seek to acquire other banks and banking offices when suitable
opportunities develop. Discussions are held from time to time with institutions
primarily in Texas, Florida and Alabama about their possible affiliation with
the Company. It is impossible to predict accurately whether any discussions
will lead to agreement. Any bid or proposal for the acquisition of additional
banks is subject to approval by appropriate regulatory authorities. (See
"Supervision and Regulation".)
From 1991 to 1994, the Company acquired 15 financial institutions in Texas
and Florida. Acquisitions have been made on a competitive bid basis from the
Federal Deposit Insurance Corporation ("FDIC") and the Resolution Trust
Corporation ("RTC") and as the result of negotiations with boards of directors
and shareholders of the institutions. A list of the acquisitions completed from
1991 to 1994 with their asset size and closing dates follows (in thousands):
ASSETS METHOD OF
ACQUISITION DATE ACQUIRED ACCOUNTING
- ----------- -------- --------- ----------
Plaza National Bank............................... 1-31-91 $ 50,000 Purchase
Dallas, Texas
River Oaks Bancshares, Inc. ...................... 3-28-91 $ 427,000 Purchase
Houston, Texas
Gleneagles National Bank.......................... 5-9-91 $ 20,000 Purchase
Plano, Texas
Bank of Las Colinas, N.A. ........................ 5-9-91 $ 30,000 Purchase
Irving, Texas
Citizens & Builders Federal Savings, F.S.B. ...... 7-12-91 $ 39,000 Purchase
Pensacola, Florida
Promenade Bancshares, Inc. ....................... 7-31-91 $ 170,000 Purchase
Dallas, Texas
Ameriway Bank, N.A. .............................. 12-11-91 $ 40,000 Purchase
Houston, Texas
Interstate Bancshares, Inc. ...................... 6-18-92 $ 66,000 Pooling
Houston, Texas
City National Bancshares, Inc. ................... 10-28-92 $ 62,000 Pooling
Carrollton, Texas
FWNB Bancshares, Inc. ............................ 12-22-92 $ 161,000 Pooling
Plano, Texas
Cornerstone Bancshares, Inc. ..................... 1-19-93 $ 239,000 Pooling
Dallas, Texas
First Federal Savings Bank of Northwest Florida... 10-14-93 $ 101,000 Purchase
Ft. Walton Beach, Florida
Peoples Holding Company, Inc. .................... 10-21-93 $ 43,000 Purchase
Ft. Walton Beach, Florida
Spring National Bank.............................. 11-3-93 $ 75,000 Pooling
Houston, Texas
1st Performance National Bank..................... 1-27-94 $ 278,000 Purchase
Jacksonville, Florida
2
PENDING ACQUISITIONS
On November 19, 1993, the Company entered into a definitive agreement to
acquire Security Bank, N.A. ("Security") of Houston, Texas for Company common
stock having a market value of $11,250,000, subject to certain conditions. At
December 31, 1993, Security had assets of $82 million and equity of $6 million.
The transaction is expected to close in the second quarter of 1994 and will be
accounted for under the pooling-of-interests method of accounting.
On November 12, 1993, the Company entered into a definitive agreement to
acquire three branches of Anchor Savings Bank located in Jacksonville, Florida.
At December 31, 1993, these branches had total deposits of approximately $35
million.
COMPETITION
The Subsidiary Banks encounter intense competition in their businesses,
generally from other banks located in Alabama, Texas, Florida and adjoining
states and compete for interest bearing funds with other banks, mutual funds
and with many issuers of commercial paper and other securities which are not
banks. Competition also exists for the correspondent banking and securities
sales business, which is particularly important to Compass Bank, from
commercial and investment banks and brokerage firms. In the case of larger
customers, competition exists with financial institutions in Texas and other
major metropolitan areas in the United States, many of which are larger in
terms of capital, resources and personnel. Increasingly, in the conduct of
certain aspects of their businesses, the Subsidiary Banks compete with finance
companies, savings and loan associations, credit unions, mutual funds, factors,
insurance companies and similar financial institutions.
There is significant competition among bank holding companies in most of the
markets served by the Subsidiary Banks. At December 31, 1993, the five largest
bank holding companies in Alabama (including the Company) accounted for
approximately 68 percent of the state's total bank deposits. The Company
believes that intense competition for banking business among bank holding
companies in Alabama, Texas, and Florida will continue and that during 1994 the
competition may further intensify if additional regional bank holding companies
enter such states through the acquisition of local bank holding companies or
savings and loan institutions and with continued consolidation of savings and
loan institutions with and into bank holding companies. Competition among bank
holding companies is also significant in Texas where the Company's Texas
Subsidiary Banks are located in major metropolitan markets having populations
of 3.9 million and 3.7 million people. The Texas Subsidiary Banks are small in
terms of assets and deposits in comparison with the super-regional banks they
compete with in Houston and Dallas. Likewise, in Jacksonville and Fort Walton
Beach, Florida, Compass Bank-Florida encounters intense competition from other
financial institutions that are substantially larger in terms of assets and
deposits.
EMPLOYEES
At February 28, 1994, the Company and its subsidiaries had approximately
3,900 employees. The Company and its subsidiaries provide a variety of benefit
programs including group life, health, accident, and other insurance,
retirement and stock ownership plans. The Company also maintains training,
educational and affirmative action programs designed to equip employees for
positions of increasing responsibility in both management and operating
positions.
GOVERNMENT MONETARY POLICY
The Company and the Subsidiary Banks are affected by the credit policies of
monetary authorities, including the Board of Governors of the Federal Reserve
System. An important function of the Federal Reserve System is to regulate the
national supply of bank credit. Among the instruments of monetary policy used
by the Federal Reserve to implement these objectives are: open market
operations in U.S. Government securities, changes in the discount rate, reserve
requirements on member bank deposits and funds availability regulations. These
instruments are used in varying combinations to influence the overall growth of
bank loans, investments and deposits and may also affect interest rates charged
on loans or paid on deposits.
The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of financial institutions in the
past and will continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no
3
prediction can be made as to the future impact that changes in interest rates,
deposit levels or loan demand may have on the business and income of the
Company and the Subsidiary Banks.
SUPERVISION AND REGULATION
THE COMPANY
The Company and Compass of Texas are multi-bank holding companies within the
meaning of the BHC Act and are registered as such with the Federal Reserve. As
bank holding companies, the Company and Compass of Texas are required to file
with the Federal Reserve an annual report and such additional information as
the Federal Reserve may require pursuant to the Bank Holding Company Act ("BHC
Act"). The Federal Reserve may also make examinations of the Company and each
of its subsidiaries. Under the BHC Act, bank holding companies are prohibited,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than five percent of the voting shares of any company engaging in
activities other than banking or managing or controlling banks or furnishing
services to or performing services for their banking subsidiaries. However, the
BHC Act authorizes the Federal Reserve to permit bank holding companies to
engage in, and to acquire or retain shares of companies that engage in,
activities which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHC Act requires a bank holding company to obtain the prior approval of
the Federal Reserve before it may acquire substantially all of the assets of
any bank or ownership or control of any voting shares of any bank if, after
such acquisition, it would own or control, directly or indirectly, more than
five percent of the voting shares of any such bank. The BHC Act prohibits the
Federal Reserve from approving an application by a registered bank holding
company to acquire shares of a bank located outside of the state in which the
operations of the applicant's banking subsidiaries are principally conducted
unless such acquisition is specifically authorized by the laws of the state in
which the bank to be acquired is located or the acquisition involves a closed
or failed bank, which also requires special regulatory approval.
The States of Alabama, Florida, and Texas, where the Company currently
operates banking subsidiaries, each have laws relating specifically to
acquisitions of banks, bank holding companies, and other types of financial
institutions in those states by financial institutions that are based in, and
not based in, those states. In 1986, the State of Alabama enacted a regional
reciprocal banking act. In general, the Alabama statute permits Alabama banks
and bank holding companies to be acquired by regional bank holding companies
and effectively permits Alabama banks and bank holding companies to acquire
banks located in 14 other designated jurisdictions including Texas and Florida
if such jurisdictions have adopted reciprocal statutes. Texas law currently
permits out-of-state bank holding companies to acquire banks in Texas
regardless of where the acquiror is based, subject to the satisfaction of
various conditions such as agreements with respect to compliance with state law
and evidence as to certain financial matters.
Florida's regional reciprocal banking act, enacted in 1984, permits
acquisitions of banks and bank holding companies in Florida by financial
institutions based in 13 designated jurisdictions other than Florida including
Alabama, but not Texas. As a result of acquisitions in Texas which had the
effect of increasing its consolidated deposits outside of Florida's region, the
Company does not meet the definition of a regional bank holding company under
Florida law. Therefore, in order to complete certain acquisitions in Florida,
the Company established a Florida subsidiary federal savings bank into which
the Company merged the banks which it had agreed to acquire. Unless there is
additional growth by the Company within Florida's region or a change in
governing statutes at the state or federal level, the Company anticipates that
any Florida banks or other financial institutions that are acquired by it in
the future will be acquired as part of the Company's federal savings bank in
Florida.
Because the laws of the states designated in Alabama's and Florida's regional
reciprocal banking statutes are not uniform, there is an absence of complete
symmetry with respect to the permissibility of interstate expansion in Alabama,
Florida, Texas and other states in which the Company may in the future seek to
undertake acquisitions. Unless and until federal or state legislation is
enacted which permits nationwide interstate acquisitions of banks,
4
bank holding companies, and other types of financial institutions, the Company
may encounter various restrictions and limitations with respect to acquisitions
outside of the States of Alabama and Texas by virtue of state laws relating to
interstate expansion.
The Federal Reserve Act generally imposes certain limitations on extensions
of credit and other transactions by and between banks which are members of the
Federal Reserve System and other affiliates (which includes any holding company
of which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Banks which are not members of the Federal Reserve System are
also subject to these limitations. Further, federal law prohibits a bank
holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or the furnishing of services.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") enacted major regulatory reforms, stronger capital standards for
savings associations and stronger civil and criminal enforcement provisions.
FIRREA allows the acquisition of healthy and failed savings associations by
bank holding companies and imposes no interstate barriers on such bank holding
company acquisitions. With certain qualifications, FIRREA also allows bank
holding companies to merge acquired savings and loans into their existing
commercial bank subsidiaries. FIRREA also provides that a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository institution in danger of default.
In December, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. This act recapitalized the Bank Insurance Fund
("BIF") and the Savings Association Insurance Fund ("SAIF"), of which the
Subsidiary Banks are members, 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 not less than 2 percent of total tangible assets and not more
than 65 percent of the minimum leverage ratio to be prescribed by regulation
(except to the extent that 2 percent would be higher than such 65 percent
level). 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 5 percent of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. If the controlling
bank holding company fails to fulfill its obligations under FDICIA and files
(or has filed against it) a petition under the Federal Bankruptcy Code, the
FDIC's claim may be entitled to a priority in such bankruptcy proceeding over
third party creditors of the bank holding company.
An insured depository institution may not pay management fees to any person
having control of the institution nor may an institution, except under certain
circumstances and with prior regulatory approval, make any capital distribution
(including the payment of dividends) if, after making such payment or
distribution, the institution would be undercapitalized. FDICIA also restricts
the acceptance of brokered deposits by insured depository institutions
5
and contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts.
At December 31, 1993, the Subsidiary Banks were "well capitalized", and were
not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. The Subsidiary Banks do not
rely upon brokered deposits as a primary source of deposit funding, although
such deposits are sold through the Correspondent and Investment Services
Division of Compass Bank.
FDICIA contains numerous other provisions, including new reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy. In addition, FDICIA requires the FDIC to establish a system
of risk-based assessments for federal deposit insurance, by which banks that
pose a greater risk of loss to the FDIC (based on their capital levels and the
FDIC's level of supervisory concern) will pay a higher insurance assessment.
THE SUBSIDIARY BANKS
In general, federal and state banking laws and regulations govern all areas
of the operations of the Subsidiary Banks, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state banking regulatory agencies also
have the general authority to limit the dividends paid by insured banks and
bank holding companies if such payments may be deemed to constitute an unsafe
and unsound practice. Federal and state banking agencies also have authority to
impose penalties, initiate civil and administrative actions and take other
steps intended to prevent banks from engaging in unsafe or unsound practices.
Compass Bank, organized under the laws of the State of Alabama, is a member
of the Federal Reserve System. As such, it is supervised, regulated and
regularly examined by the Alabama State Banking Department and the Federal
Reserve. Compass Bank, N.A. is a national banking association and Compass Bank-
Florida is a federal savings bank which are subject to supervision, regulation
and examination by the Office of the Comptroller of the Currency ("OCC") and
the Office of Thrift Supervision ("OTS"), respectively. Compass Bank-Houston
and Compass Bank-Dallas, both of which are organized under the laws of the
State of Texas, are state banks that are not members of the Federal Reserve
System. The Texas banks are supervised, regulated and regularly examined by the
Department of Banking of the State of Texas and the FDIC. The Subsidiary Banks,
as participants in the BIF and the SAIF of the FDIC, are subject to the
provisions of the Federal Deposit Insurance Act and to examination by and
regulations of the FDIC. (See "Supervision and Regulation--Implications of
Being a Savings and Loan Holding Company".)
Compass Bank is governed by Alabama laws restricting the declaration and
payment of dividends to 90 percent of annual net income until its surplus funds
equal at least 20 percent of capital stock. Compass Bank has surplus in excess
of this amount. Compass Bank-Houston and Compass Bank-Dallas, governed by the
laws of the State of Texas, are, under certain circumstances, restricted in the
declaration and payment of dividends to the extent that before declaring any
dividends, each of these banks must transfer to its "certified surplus"
accounts an amount not less than 10 percent of the net profits of such bank
earned since the last dividend was declared, except that there is no
requirement for a transfer to certified surplus of a sum which would increase
the certified surplus to more than the capital stock of the respective bank. In
addition, Compass Bank-Houston has entered into an agreement with the
Commissioner of the Department of Banking of the State of Texas that it will
not declare dividends in excess of 50 percent of its current earnings. The
approval of the OCC is required if the total of all dividends declared by
Compass Bank, N.A. in any calendar year exceeds the total of the net profits
for that year, plus its retained net profits for the preceding two years, less
any required transfers to surplus. As a member of the Federal Reserve System,
Compass Bank is also subject to dividend limitations imposed by the Federal
Reserve that are similar to those applicable to national banks. (See
"Supervision and Regulation--Implications of Being a Savings and Loan Holding
Company".)
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
6
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 its 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
OCC, the Federal Reserve and the FDIC implementing that act are intended to
encourage regulated financial institutions to help meet the credit needs of
their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The CRA and such regulations provide that the appropriate
regulatory authority will assess the records of regulated financial
institutions in satisfying their continuing and affirmative obligations to help
meet the credit needs of their local communities as part of their regulatory
examination of the institution. The results of such examinations are made
public and are taken into account upon the filing of any application to
establish a domestic branch or to merge or to acquire the assets or assume the
liabilities of a bank. In the case of a bank holding company, the CRA
performance record of the banks involved in the transaction are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction. The
bank regulatory agencies have announced a proposal to revise the regulations
implementing the CRA. The proposal contemplates extensive changes to the
existing procedures for determining compliance with the CRA and the full effect
of the proposed regulations cannot be determined at this time.
IMPLICATIONS OF BEING A SAVINGS AND LOAN HOLDING COMPANY
As a result of the Company's ownership of a federal savings bank
headquartered in Florida, the Company is a savings and loan holding company
under Section 10 of the Home Owners' Loan Act, as amended ("HOLA").
Accordingly, the Company has registered with the OTS and is subject to OTS
regulations, supervision and reporting requirements.
With certain exceptions, a savings and loan holding company must obtain the
prior written approval of the OTS before acquiring control of an insured
savings association or savings and loan holding company through the acquisition
of stock or through a merger or some other business combination. HOLA prohibits
the OTS from approving an acquisition by a savings and loan holding company
which would result in the holding company controlling savings associations in
more than one state unless (i) the holding company is authorized to do so by
the FDIC as an emergency acquisition, (ii) the holding company controls a
savings association which operated an office in the additional state or states
on March 5, 1987, or (iii) the statutes of the state in which the savings
association to be acquired is located specifically permit a savings association
chartered by such state to be acquired by an out-of-state savings association
or savings and loan holding company.
As a subsidiary of a savings and loan holding company, Compass Bank-Florida
is subject to certain restrictions in its dealings with the Company and with
other companies affiliated with the Company. In addition, savings association
subsidiaries of savings and loan holding companies are required to give the OTS
thirty days' prior notice of any proposed payment of dividends to the savings
and loan holding company.
Compass Bank-Florida is subject to the capital adequacy guidelines of the
OTS. In general, a federal savings bank is required to satisfy three capital
requirements: (i) a leverage ratio, (ii) a Tier 1 (core) risk-based capital
ratio, and (iii) a total qualifying capital ratio. To be adequately capitalized
under the fully phased-in capital requirements for January 1, 1995, an
institution must meet or exceed (i) a leverage ratio of 4 percent, or a
leverage ratio of 3 percent if the institution received the top rating in its
most recent examination, (ii) a Tier 1 (core) risk-based capital ratio of 4
percent, and (iii) a total qualifying capital ratio of 8 percent.
In general, a savings and loan holding company that has a federal savings
bank subsidiary that fails to meet the "qualified thrift lender" test is
required to become a bank holding company. In addition, if a federal savings
bank does not satisfy the "qualified thrift lender" test, then such federal
savings bank must either convert to a
7
bank or it (i) will be limited to establishing new branches as if it were a
national bank located in the same state, (ii) will be barred from obtaining new
Federal Home Loan Bank ("FHLB") advances, (iii) will be prohibited from making
any new investment or engaging in any new activity unless the investment or
activity is permitted for a national bank, and (iv) will be subject to the
dividend restrictions applicable to national banks. Moreover, three years after
it has failed to qualify as a "qualified thrift lender", a federal savings bank
must (i) divest any investments and activities not permitted for a national
bank and (ii) repay any of its outstanding Federal Home Loan Bank advances "as
promptly as can prudently be done" consistent with its safe and sound operation
and must divest any investment and cease any activity not permitted for a
national bank. Should a federal savings bank subsidiary of the Company fail the
"qualified thrift lender" test, that institution might be required to convert
to a bank and the Company's ability to retain it would be subject to question
in light of Florida law which does not now authorize the Company to acquire a
bank in that state.
To be a "qualified thrift lender" a federal savings bank must maintain
"qualified thrift investments" of at least 65 percent of its "portfolio assets"
as measured on a monthly average basis in nine out of the last twelve months.
The assets that qualify as "qualified thrift investments" include assets
generally related to the development of domestic residential (and other) real
property. "Portfolio assets" is defined as a federal savings bank's total
assets, minus (i) goodwill and other intangible assets, (ii) the value of
property used by the savings associations to conduct its business, and (iii)
subject to a maximum of 20 percent of total assets, liquid assets required to
be maintained under Section 6 of HOLA.
OTHER
Other legislative and regulatory proposals regarding changes in banking, and
the regulation of banks, thrifts and other financial institutions, are being
considered by the executive branch of the Federal government, Congress and
various state governments, including Alabama, Texas and Florida. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. It cannot be predicted accurately whether
any of these proposals will be adopted or, if adopted, how these proposals will
affect the Company or the Subsidiary Banks.
The Correspondent and Investment Services Division of Compass Bank is treated
as a municipal securities dealer and a government securities dealer for
purposes of the federal securities laws, and, therefore, is subject to certain
reporting requirements and/or regulatory controls by the Securities and
Exchange Commission (the "Commission"), the United States Department of the
Treasury and the Federal Reserve. Compass Brokerage, Inc. is a discount
brokerage service registered with the Commission and the National Association
of Securities Dealers, Inc. and is subject to certain reporting requirements
and regulatory control by these agencies. Compass Bancshares Insurance, Inc. is
a licensed insurance agent or broker for various insurance companies and is
subject to reporting and licensing regulations of the Alabama Insurance
Commission.
References to applicable statutes under the heading "Supervision and
Regulation" are brief summaries of portions thereof, do not purport to be
complete and are qualified in their entirety by reference to such statutes.
8
ITEM 1--STATISTICAL DISCLOSURE
PAGE(S)
-------
Consolidated Average Balances, Interest Income/Expense and
Yields/Rates.......................................................... 26 & 27
Rate/Volume Variance Analysis.......................................... 28 & 29
Investment Securities and Investment Securities Available for Sale..... 15
Investment Securities and Investment Securities Available for Sale Ma-
turity Schedule....................................................... 15
Loan Portfolio......................................................... 13
Selected Loan Maturity and Interest Rate Sensitivity................... 14
Nonperforming Assets................................................... 33
Summary of Loan Loss Experience........................................ 31
Allocation of Allowance for Loan Losses................................ 32
Maturities of Time Deposits............................................ 16
Return on Equity and Assets............................................ 23
Short-Term Borrowings.................................................. 17
Interest Rate Sensitivity Analysis..................................... 19
Interest Rate Protection Contracts..................................... 21
Interest Rate Contracts--Trading Account............................... 21
Leverage Ratio Calculations............................................ 23
Noninterest Income..................................................... 34
Noninterest Expense.................................................... 35
9
ITEM 2--PROPERTIES
The Company, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. The principal executive offices of the
Company are located at 15 South 20th Street, Birmingham, Alabama, in a 317,000
square-foot office building. During 1990, the Company entered into an agreement
with the University of Alabama at Birmingham Medical and Educational Foundation
("UAB") and Daniel Properties III Limited Partnership which, during 1991,
resulted in UAB acquiring the Company's former headquarters building and the
Company acquiring its current headquarters building. The Company occupied its
current headquarters in August, 1993, while maintaining a full service bank
facility at its former headquarters site.
The Subsidiary Banks own or lease various other offices and facilities in
Alabama, Florida and Texas, with remaining lease terms of 1 to 20 years,
exclusive of renewal options. In addition, the Company owns a 300,000 square-
foot administrative headquarters facility completed in early 1988 and the River
Oaks Bank Building in Houston, Texas, a 14-story, 168,000 square-foot office
building. The River Oaks Bank Building is 34 percent occupied by Compass Bank-
Houston and River Oaks Trust Company. The remaining space is leased to multiple
tenants. See "Summary of Significant Accounting Policies" and "Notes to
Consolidated Financial Statements" for information with respect to the amounts
at which bank premises, equipment and other real estate are carried and
information relating to commitments under long-term leases.
ITEM 3--LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is presently involved in any
material legal proceedings other than ordinary routine litigation incidental to
its business.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 19, 1993, the shareholders of the Company approved the change in
the name of the Company from Central Bancshares of the South, Inc. to Compass
Bancshares, Inc. With respect to the vote, 26,252,104 shares of the Company's
common stock were voted in favor of the name change, 150,958 shares were voted
against the change, and 224,482 shares abstained.
10
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low closing prices of the common
stock of the Company in the national over-the-counter market 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 and all share prices and dividends per share
prior to the third quarter of 1992 have been restated to take into account the
3-for-2 stock split with respect to the Company's common stock, which was
effected by a stock dividend paid on July 2, 1992.
HIGH LOW DIVIDEND
------- ------- --------
1993:
FIRST QUARTER........................................ $25 3/4 $22 1/2 $.19
SECOND QUARTER....................................... 26 1/2 22 1/2 .19
THIRD QUARTER........................................ 26 23 1/2 .19
FOURTH QUARTER....................................... 25 20 3/4 .19
1992:
First quarter........................................ $21 1/8 $18 1/2 $.1667
Second quarter....................................... 23 3/8 19 1/2 .1667
Third quarter........................................ 23 1/2 18 1/2 .1667
Fourth quarter....................................... 23 1/2 19 1/4 .1667
As of February 28, 1994, there were 5,901 shareholders of record of common
stock of which 5,010 were residents of either Alabama, Texas or Florida.
ITEM 6--SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five
years. All per share information for periods prior to July, 1992, has been
restated to reflect the 3-for-2 stock split with respect to the Company's
common stock, which was effected by a stock dividend paid on July 2, 1992.
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net interest income..... $ 325,264 $ 313,334 $ 254,621 $ 196,455 $ 165,690
Provision for loan loss-
es..................... 35,985 52,885 37,964 23,864 24,543
Net income.............. 89,260 75,390 62,784 52,082 43,341
Per common share data:
Net income............ $ 2.39 $ 2.01 $ 1.74 $ 1.52 $ 1.24
Cash dividends de-
clared............... .76 .667 .587 .533 .513
Balance sheet:
Average total equity.. $ 533,526 $ 477,891 $ 405,910 $ 343,964 $ 318,513
Average assets........ 7,047,256 6,737,664 6,068,112 5,240,192 4,733,509
Period-end FHLB and
other borrowings..... 325,437 203,913 13,181 11,750 11,238
Period-end total equi-
ty................... 545,584 506,426 449,640 359,822 330,107
Period-end assets..... 7,252,341 7,004,506 6,711,945 5,485,202 4,978,766
11
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report. Prior year information has been restated to reflect
1993 and 1992 acquisitions accounted for using the pooling-of-interests
accounting method and prior period per share data has been restated to reflect
a 3-for-2 stock split effected through the issuance of a 50 percent stock
dividend paid in July, 1992. Financial institutions acquired by the Company
during the past three years and accounted for as purchases are reflected in the
financial position and results of operations of the Company since the date of
their acquisition.
SUMMARY
Net income for 1993 was $89 million, an 18 percent increase over the
Company's previous high of $75 million in 1992. Net income for 1992 was 20
percent higher than 1991 net income of $63 million. The increases in net income
per common share for 1993 and 1992 were 19 percent and 16 percent,
respectively. Net income per common share increased 14 percent during 1991.
Pretax income for 1993 was up $24 million or 21 percent over 1992; however,
income tax expense increased $10 million or 26 percent over the same period due
to an increase in the Company's income subject to taxation and an increase in
the effective tax rate in 1993 from 34 percent to 35 percent.
One significant factor in the growth of the Company has been the Company's
acquisitions in Texas, specifically the Houston and Dallas areas, since late
1987. The Texas expansion continued throughout 1993 and is expected to continue
in 1994. Management expects the asset size of the Texas operations to continue
to increase from the December 31, 1993 level of $1.9 billion. In addition, the
Company has been able to expand its operations in north Florida and will seek
to continue to increase its presence in that market in 1994. For additional
information, see "Acquisitions" and "Pending Acquisitions" in Part I of this
report and the accompanying "Notes to the Consolidated Financial Statements,"
Note 10, Mergers and Acquisitions.
EARNING ASSETS
Average earning assets in 1993 increased five percent over 1992 due to
increases in both average loans and trading account securities. The average
earning asset mix continued to change during 1993 with loans at 74 percent,
investment securities and investment securities available for sale at 22
percent and other earning assets at 4 percent of the total. In 1992, loans were
68 percent, investment securities and investment securities available for sale
29 percent and other earning assets 3 percent. The mix of earning assets during
1993 and 1992 contributed to the higher net interest income. The mix of earning
assets is monitored on a continuous basis in order to react to favorable
interest rate movements and to maximize return on earning assets.
Average loans increased 14 percent in 1993 with much of the increase
concentrated in residential mortgage loans, commercial loans and consumer
installment loans. Total loans outstanding at year-end increased 11 percent
over previous year-end levels. The growth in the portfolio resulted from the
Company's ongoing efforts to increase the loan portfolio through the
origination of loans. Real estate construction loans increased 7 percent,
residential mortgage loans increased 30 percent, commercial mortgage loans
increased 1 percent and consumer installment loans decreased 1 percent from
year-end 1992 to year-end 1993. Commercial, financial and agricultural loans,
which were 22 percent of total loans in 1993, increased 7 percent compared to
the previous year. Residential real estate lending increased due to a rise in
demand for such loans, particularly due to the Company's introduction of
variable rate residential mortgage loans with low introductory rates in the
fourth quarter of 1992. Residential mortgage loans as a percentage of total
loans increased from 32 percent at year-end 1992 to 37 percent at year-end
1993. The 17 percent increase in the Company's loan portfolio from 1991 to 1992
occurred primarily in residential mortgage loans which increased 44 percent.
The Company's loan portfolio continues to reflect the diversity of the
markets served by the Subsidiary Banks. The condition of the economy in states
in which the Subsidiary Banks lend money is further reflected in the loan
12
portfolio mix. There has been a decline in the volume of commercial, financial
and agricultural loans and real estate construction loans, as a percentage of
total loans outstanding, for the past five years. This shift is reflective of
the general state of the economy in the markets served, specifically, the
softening of the demand for commercial real estate loans in those markets. With
fewer attractive lending opportunities in the commercial lending arena, other
lending opportunities were sought and brought about the increases in the other
categories within the portfolio. Specifically, the Company experienced an eight
percent increase in its indirect auto loan portfolio from 1992 to 1993. At
December 31, 1993, the Company's indirect loan portfolio, consisting primarily
of indirect automobile loans, represented 15 percent of total loans
outstanding.
The Company has not invested in loans that would be considered highly
leveraged transactions ("HLT") as defined by the Federal Reserve Board and
other regulatory agencies. The Company also had no significant foreign loans or
loans to lesser developed countries as of December 31, 1993.
The Loan Portfolio table shows the classifications of loans by major category
at December 31, 1993, and for each of the preceding four years. The second
table shows maturities of certain loan classifications at December 31, 1993,
and an analysis of the rate structure for such loans due in over one year.
LOAN PORTFOLIO
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS)
...................
Commercial,
financial and
agricultural......... $1,125,633 21.8% $1,051,461 22.7% $ 969,666 24.6% $ 917,796 26.6% $ 887,064 28.5%
Real estate--
construction......... 251,343 4.9 234,160 5.1 200,510 5.1 296,874 8.6 330,652 10.6
Real estate--
mortgage:
Residential.......... 1,897,908 36.8 1,462,339 31.6 1,016,837 25.7 790,342 22.9 651,121 21.0
Commercial........... 724,212 14.1 715,203 15.4 708,494 17.9 537,409 15.5 539,023 17.3
Consumer
installment.......... 1,151,281 22.4 1,168,240 25.2 1,054,688 26.7 913,601 26.4 702,090 22.6
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
5,150,377 100.0% 4,631,403 100.0% 3,950,195 100.0% 3,456,022 100.0% 3,109,950 100.0%
===== ===== ===== ===== =====
Less: Unearned
income........ 1,891 3,873 6,163 6,997 2,799
Allowance for
loan losses... 110,036 83,352 55,561 42,366 37,380
---------- ---------- ---------- ---------- ----------
Total loans........... $5,038,450 $4,544,178 $3,888,471 $3,406,659 $3,069,771
========== ========== ========== ========== ==========
13
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
RATE STRUCTURE FOR LOANS
MATURITY MATURING OVER ONE YEAR
----------------------------------------- -------------------------
ONE OVER ONE YEAR OVER PREDETERMINED FLOATING OR
YEAR OR THROUGH FIVE FIVE INTEREST ADJUSTABLE
LESS YEARS YEARS TOTAL RATE RATE
-------- ------------- ------- ---------- ------------- -----------
(IN THOUSANDS)
Commercial, financial
and agricultural....... $774,561 $312,143 $38,929 $1,125,633 $112,012 $239,060
Real estate--construc-
tion................... 180,421 54,887 16,035 251,343 22,026 48,896
-------- -------- ------- ---------- -------- --------
$954,982 $367,030 $54,964 $1,376,976 $134,038 $287,956
======== ======== ======= ========== ======== ========
On December 31, 1993, the Company adopted Financial Accounting Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities
("FAS115") which requires that a company's debt and equity securities be
classified based on management's intent to hold the securities into one of
three categories: (i) trading account securities, (ii) held-to-maturity
securities, or (iii) securities available for sale. Securities held in a
trading account are required to be reported at fair value, with unrealized
gains and losses included in earnings. Securities designated to be held to
maturity are reported at amortized cost. Securities classified as available for
sale are required to be reported at fair value with unrealized gains and
losses, net of taxes, excluded from earnings and shown separately as a
component of shareholder's equity. Previously, the Company's accounting
policies regarding trading account securities and held-to-maturity securities
were the same as those prescribed by FAS115. During all periods up to the date
of adoption, the Company reported securities available for sale at the lower-
of-cost-or-market with any valuation adjustment reflected in earnings as
required by generally accepted accounting principles at that time. FAS115 is
effective for fiscal years beginning after December 15, 1993 with earlier
adoption at December 31, 1993 permitted. The Company elected to adopt FAS115
prior to its effective date. At December 31, 1993, net unrealized gains in the
Company's available-for-sale portfolio totaled $10.4 million. Under the
requirements of FAS115, the tax-effected unrealized gain of $6.5 million has
been reflected as additional shareholders' equity.
The composition of the Company's total investment securities portfolio
reflects the Company's investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the Company's investment strategy are to maintain an appropriate level of
liquidity and provide a tool to assist in controlling the Company's interest
rate position while at the same time producing adequate levels of interest
income. For securities classified as held-to-maturity, the Company has the
ability, and it is management's intention, to hold such securities to maturity.
Management of the maturity of the portfolio is necessary to provide liquidity
and to control interest rate risk. Certain securities that may be sold prior to
maturity are reflected as investment securities available for sale on the
Company's balance sheet. During 1992, the Company transferred approximately
$566 million of investment securities from its held-to-maturity portfolio to
the available-for-sale classification. With the adoption of FAS115 on December
31, 1993, the Company transferred an additional $58 million of investment
securities to its available-for-sale portfolio. The transfer primarily involved
fixed-rate CMOs that could be required to be transferred to the available-for-
sale portfolio by Federal regulators in the future if sufficiently reduced
prepayment speeds are experienced on the underlying mortgages. During 1993 and
1992, gross sales of held-to-maturity securities were $40 million and $54
million, respectively, while maturities totaled $435 million and $695 million,
respectively. Sales and maturities of securities available for sale totaled $57
million and $252 million, respectively, in 1993 while sales in 1992 were $5
million. Gains associated with the sales were immaterial, accounting for less
than one percent of noninterest income. Gross unrealized gains in the Company's
held-to-maturity portfolio amounted to $28 million at year-end 1993 and gross
unrealized losses amounted to $1 million.
In recent years, the trend of the Company has been to invest in taxable
securities due to the lack of preferential treatment afforded tax-exempt
securities under the tax laws. Because of their liquidity, credit quality and
yield characteristics, the majority of the purchases of taxable securities have
been in mortgage-backed obligations. Total average investment securities,
including those available for sale, decreased 21 percent during 1993 after
increasing 9 percent from 1991. Total investment securities, including those
available for sale, at December 31, 1993, decreased 26 percent from year-end
1992.
14
The following table contains the carrying amount of the investment securities
portfolio at the end of each of the last three years.
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
--------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
Investment securities:
U.S. Treasury................................ $ 2,014 $ 37,640 $ 319,874
U.S. Government agencies and corporations.... 409,294 816,500 1,235,737
States and political subdivisions............ 107,280 151,961 167,027
Other........................................ 71,281 97,519 250,689
---------- ---------- ----------
589,869 1,103,620 1,973,327
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 254,973 292,216 --
U.S. Government agencies and corporations.... 277,730 177,096 --
Other........................................ 96,677 91,244 --
---------- ---------- ----------
629,380 560,556 --
Unrealized gain.............................. 10,421 -- --
---------- ---------- ----------
639,801 560,556 --
---------- ---------- ----------
Total........................................ $1,229,670 $1,664,176 $1,973,327
========== ========== ==========
The maturities and weighted average yields of the investment securities and
investment securities available for sale at the end of 1993 are presented in
the following table using primarily the average expected lives including the
effects of prepayments. The amounts and yields disclosed for investment
securities available for sale reflect the amortized cost rather than the net
carrying value, i.e., market value, of these securities. While the average
stated maturity of the mortgage-backed securities was 17.9 years, the weighted
average expected life assumed in the table is 5.4 years. The weighted average
expected life of investment securities at December 31, 1993, was 4.0 years with
a weighted average yield of 8.74 percent. The weighted average expected life of
investment securities available for sale was 5.5 years with a weighted average
yield of 5.24 percent. Taxable equivalent adjustments, using a 35 percent tax
rate, have been made in calculating yields on tax-exempt obligations.
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE MATURITY
SCHEDULE
MATURING
----------------------------------------------------------------------
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
-------------- ------------------- ------------------ --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ----- ---------- -------- ---------- ------- -------- -----
(IN THOUSANDS)
Investment securities:
U.S. Treasury......... $ 2,014 6.45% -- -- -- -- -- --
U.S. Government agen-
cies and corpora-
tions................ 83,682 8.84 $ 268,953 8.61% $ 56,189 8.59% $ 470 4.13%
States and political
subdivisions......... 15,093 9.19 15,042 9.26 18,531 8.82 58,614 9.46
Other................. 13,987 8.40 32,255 9.83 21,912 7.01 3,127 6.96
-------- ---------- ---------- --------
114,776 8.79 316,250 8.76 96,632 8.28 62,211 9.30
-------- ---------- ---------- --------
Investment securities
available for sale--am-
ortized cost:
U.S. Treasury......... 43,632 6.19 210,900 5.57 -- -- 441 10.88
U.S. Government agen-
cies and corpora-
tions................ 40,595 7.38 38,578 5.56 25,387 4.35 173,170 4.34
Other................. 22,105 5.89 62,431 4.68 -- -- 12,141 4.15
-------- ---------- ---------- --------
106,332 6.57 311,909 5.39 25,387 4.35 185,752 4.35
-------- ---------- ---------- --------
Total............... $221,108 7.73 $ 628,159 7.09 $ 122,019 7.46 $247,963 5.59
======== ========== ========== ========
15
Securities carried in the trading account, while interest bearing, are held
primarily for sale. The volume of activity is directly related to general
market conditions and reactions to the changing interest rate environment. The
average balance in the trading account portfolio for 1993 increased by 74
percent following a 5 percent decrease in 1992.
Average federal funds sold and securities purchased under agreements to
resell increased 29 percent in 1993 from 1992 levels compared to a 40 percent
decrease in 1992 from 1991. The average balance of interest bearing deposits in
other banks decreased 13 percent during 1993 from 1992 levels after decreasing
42 percent from 1991 to 1992. There were no foreign time deposits as of
December 31, 1993 or 1992.
DEPOSITS AND SHORT-TERM BORROWINGS
Changes in the Company's markets and the economy in general were also
reflected in the liability mix during 1993. The portion of average interest
bearing liabilities represented by interest bearing deposits, the primary
source of funding for the Company, remained unchanged from 79 percent in 1992
and 1991. Year-end deposit balances increased four percent in 1993 and six
percent in 1992. Falling interest rates during the three years ended December
31, 1993, had a greater impact on the composition of the deposit base than on
the aggregate amount of deposits outstanding. As a result of falling rates, the
Company was able to restructure the mix of deposits toward more consumer-
oriented, lower-cost sources of funds.
During 1993, the average balance of demand deposits and savings accounts
increased by $292 million while the average balance of certificates of deposit
and other time deposits declined by $41 million. The largest dollar increase in
average interest bearing deposits was in demand deposits, rising $104 million
or 20 percent from 1992. Average noninterest bearing demand deposits increased
$112 million, or 11 percent, after increasing 21 percent during 1992 and 1991.
The increase during 1993 was due primarily to internally generated growth with
a portion of the increase due to the Company's Florida acquisitions while the
increase in 1992 was due solely to internally generated growth. Savings
deposits, interest bearing demand deposits, and noninterest bearing demand
deposits accounted for 63 percent of total average deposits during 1993. For
1992, these lower cost deposits equaled 61 percent of all deposits. Total
average time deposits, including certificates of deposit over $100,000, were
approximately $2.0 billion in 1992 and 1993 with the large certificates of
deposit representing 24 percent of the total during both periods. The
maturities of certificates of deposit of $100,000 or more and other time
deposits of $100,000 or more issued by the Company at December 31, 1993, are
summarized in the following table:
MATURITIES OF TIME DEPOSITS
CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS
OVER OVER
$100,000 $100,000 TOTAL
------------ ---------- --------
(IN THOUSANDS)
Three months or less.......................... $321,963 $14,471 $336,434
Over three through six months................. 70,862 8,688 79,550
Over six through twelve months................ 39,251 -- 39,251
Over twelve months............................ 136,820 1,127 137,947
-------- ------- --------
$568,896 $24,286 $593,182
======== ======= ========
Borrowed funds consist of short-term borrowings, primarily in the form of
federal funds purchased, securities sold under agreements to repurchase, other
short-term borrowings, and FHLB and other borrowings. Average federal funds
purchased declined 34 percent during 1993 and average securities sold under
agreements to repurchase declined 11 percent. Average other short-term
borrowings, which include parent company commercial paper and trading account
short sales, increased 9 percent. The average balance of FHLB and other
borrowings increased during 1993 due to additional borrowings of $75 million of
subordinated debentures issued in the second quarter and $48 million in FHLB
advances in the third quarter of the year.
16
The Short-Term Borrowings table 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
YEARS ENDED DECEMBER 31,
---------------------------------------------------
MAXIMUM AVERAGE
OUTSTANDING AVERAGE INTEREST
AT ANY AVERAGE INTEREST ENDING RATE AT
MONTH-END BALANCE RATE BALANCE YEAR-END
----------- ---------- -------- ---------- --------
(IN THOUSANDS)
1993
- ----
FEDERAL FUNDS PURCHASED.... $ 499,390 $ 409,031 3.05% $ 414,704 2.99%
SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE.. 267,630 238,234 2.81 205,707 2.56
SHORT SALES................ 34,660 23,546 4.28 25,656 4.10
COMMERCIAL PAPER........... 118,073 80,126 3.15 62,858 3.05
OTHER SHORT-TERM
BORROWINGS................ 203,569 104,403 3.24 82,500 3.26
---------- ---------- ----------
$1,123,322 $ 855,340 $ 791,425
========== ========== ==========
1992
- ----
Federal funds purchased.... $ 875,685 $ 617,692 3.53% $ 543,605 2.98%
Securities sold under
agreements to repurchase.. 341,953 266,972 3.36 232,247 2.92
Short sales................ 63,115 29,309 5.75 23,970 5.22
Commercial paper........... 88,910 70,332 3.62 34,302 3.26
Other short-term
borrowings................ 160,810 91,927 3.80 74,059 3.21
---------- ---------- ----------
$1,530,473 $1,076,232 $ 908,183
========== ========== ==========
1991
- ----
Federal funds purchased.... $ 670,975 $ 461,546 5.53% $ 669,975 3.94%
Securities sold under
agreements to repurchase.. 534,636 403,030 5.45 353,466 3.96
Short sales................ 65,136 40,201 7.38 20,128 5.41
Commercial paper........... 74,037 46,005 5.47 34,414 3.96
Other short-term
borrowings................ 62,809 40,522 5.66 62,809 4.13
---------- ---------- ----------
$1,407,593 $ 991,304 $1,140,792
========== ========== ==========
LIQUIDITY MANAGEMENT
Liquidity is the ability of a bank to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the Company's
ability to meet the day-to-day cash flow requirements of the Subsidiary Banks'
customers, whether they are depositors wishing to withdraw funds or borrowers
requiring funds to meet their credit needs. Without proper liquidity
management, the Subsidiary Banks would not be able to perform the primary
function of a financial intermediary and would, therefore, not be able to meet
the needs of the communities they serve.
Asset and liability management functions not only to assure adequate
liquidity in order for the Subsidiary Banks to meet the needs of their
customers, but also to maintain an appropriate balance between interest-
sensitive assets and interest-sensitive liabilities so that the Company can
also meet the investment requirements of its shareholders. Daily monitoring of
the sources and uses of funds is necessary to maintain an acceptable cash
position that meets both requirements. In a banking environment, both assets
and liabilities are considered sources of liquidity funding and both are,
therefore, monitored on a daily basis.
17
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. Installment loan payments are becoming an increasingly important
source of liquidity for the Subsidiary Banks as this portfolio continues to
grow. Real estate construction and commercial, financial and agricultural loans
that mature in one year or less amounted to $955 million or 19 percent of the
total loan portfolio at December 31, 1993. Investment securities and investment
securities available for sale maturing in the same time frame totaled $221
million or 18 percent of the investment securities portfolio at year-end 1993.
Other short-term investments such as federal funds sold, securities purchased
under agreements to resell and maturing interest bearing deposits with other
banks are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through various
customers' interest bearing and noninterest bearing deposit accounts. Federal
funds purchased, securities sold under agreements to repurchase and other
short-term borrowings are additional sources of liquidity and basically
represent the Company's incremental borrowing capacity. These sources of
liquidity are short-term in nature and are used as necessary to fund asset
growth and meet short-term liquidity needs.
As disclosed in the Company's Consolidated Statement of Cash Flows, net cash
provided by operating activities decreased $142 million primarily due to the
substantial increase in trading account securities of $133 million and the
increase in mortgage loans held for sale of $16 million offset to some extent
by the increase in net income. Net cash used in investing activities of $34
million consisted primarily of net loans originated of $389 million and held-
to-maturity securities and available-for-sale securities purchased of $34
million and $285 million, respectively, funded in part by maturities and
paydowns of investment securities held to maturity and investment securities
available for sale of $435 million and $252 million, respectively. This overall
decrease in the Company's investment securities portfolios was due to
management's continued efforts to reinvest funds in higher-yielding loans
rather than in investment securities. Net cash provided by financing activities
provided the remainder of funding sources for 1993. The $10 million of net cash
provided consisted primarily of a $61 million net increase in deposits, a net
increase of $119 million in FHLB and other borrowings, and a $39 million
increase in other short-term borrowings offset partially by a reduction of $155
million in federal funds purchased and securities sold under agreements to
repurchase. The increase in FHLB and other borrowings in 1993 consisted of $75
million of subordinated debentures issued by the Company during the second
quarter of the year along with additional FHLB advances of $48 million.
Additional cash used in financing activities included the September, 1993
redemption of all of the Company's preferred stock for $26 million, the payment
of common stock dividends of $28 million, and the payment of $2 million in
preferred stock dividends.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest bearing assets
and liabilities are subject to change in interest rates either at replacement,
repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of changes in
market interest rates. Effective interest rate sensitivity management seeks to
ensure that both assets and liabilities respond to changes in interest rates
within an acceptable time frame, thereby minimizing the effect of interest rate
movements on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the Company's
current portfolio that are subject to repricing at various time horizons:
immediate, 1 to 3 months, 4 to 12 months, 1 to 5 years and over 5 years and
non-rate sensitive. The differences are known as interest sensitivity gaps. The
following table shows interest sensitivity gaps for these different intervals
as of December 31, 1993 and 1992, including the effect of interest rate swaps,
interest rate floors, futures and other hedging instruments. Mortgage loans and
mortgage-backed securities are presented reflecting recent prepayment
experience of the Company.
18
INTEREST RATE SENSITIVITY ANALYSIS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
OVER FIVE
ONE- FOUR- ONE- YEARS AND
THREE TWELVE FIVE NON-RATE
IMMEDIATE MONTHS MONTHS YEARS SENSITIVE TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
1993
----
EARNING ASSETS:
LOANS, NET OF UNEARNED
INCOME................. $1,268,283 $ 466,581 $1,169,736 $1,224,368 $1,019,518 $5,148,486
TAXABLE INVESTMENT
SECURITIES............. -- 80,664 201,033 150,778 48,261 480,736
TAX-EXEMPT INVESTMENT
SECURITIES............. -- 712 1,789 92,894 13,738 109,133
INVESTMENT SECURITIES
AVAILABLE FOR SALE..... -- 342,632 54,996 218,139 24,034 639,801
TRADING ACCOUNT
SECURITIES............. 239,491 -- -- -- -- 239,491
FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED
UNDER AGREEMENTS TO
RESELL................. 140,043 -- -- -- -- 140,043
INTEREST BEARING
DEPOSITS WITH OTHER
BANKS.................. -- 376 9,999 -- 99 10,474
---------- ---------- ---------- ---------- ---------- ----------
TOTAL EARNING ASSETS... 1,647,817 890,965 1,437,553 1,686,179 1,105,650 6,768,164
INTEREST BEARING
LIABILITIES:
DEMAND DEPOSITS......... -- 717,534 -- -- -- 717,534
SAVINGS DEPOSITS........ -- -- 1,350,902 -- 253,606 1,604,508
CERTIFICATES OF DEPOSIT
LESS THAN $100,000 AND
OTHER TIME DEPOSITS.... -- 281,202 460,624 775,236 8,928 1,525,990
CERTIFICATES OF DEPOSIT
OF $100,000 OR MORE.... -- 321,963 110,113 134,377 2,443 568,896
FEDERAL FUNDS PURCHASED
AND SECURITIES SOLD
UNDER AGREEMENTS TO
REPURCHASE............. 599,411 -- -- -- 21,000 620,411
OTHER SHORT-TERM
BORROWINGS............. 171,014 -- -- -- -- 171,014
FHLB AND OTHER
BORROWINGS............. -- 196,039 50,123 813 78,462 325,437
---------- ---------- ---------- ---------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES........... 770,425 1,516,738 1,971,762 910,426 364,439 5,533,790
NONINTEREST BEARING
SOURCES OF FUNDS--NET... -- -- -- -- 1,234,374 1,234,374
---------- ---------- ---------- ---------- ---------- ----------
INTEREST SENSITIVITY
GAP................... 877,392 (625,773) (534,209) 775,753 (493,163) --
---------- ---------- ---------- ---------- ---------- ----------
CUMULATIVE INTEREST
SENSITIVITY GAP....... $ 877,392 $ 251,619 $(282,590) $ 493,163 $ -- $ --
========== ========== ========== ========== ========== ==========
1992
----
Earning assets:
Loans, net of unearned
income................. $1,080,729 $ 433,022 $1,029,672 $1,220,453 $ 863,654 $4,627,530
Taxable investment
securities............. -- 129,085 96,196 512,131 211,382 948,794
Tax-exempt investment
securities............. -- 1,916 1,436 24,044 127,430 154,826
Investment securities
available for sale..... -- 315,867 100,383 143,880 426 560,556
Trading account
securities............. 106,046 -- -- -- -- 106,046
Federal funds sold and
securities purchased
under agreements to
resell................. 57,883 -- -- -- -- 57,883
Interest bearing
deposits with other
banks.................. -- 495 293 10,088 -- 10,876
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets... 1,244,658 880,385 1,227,980 1,910,596 1,202,892 6,466,511
Interest bearing
liabilities:
Demand deposits......... -- 613,107 -- -- -- 613,107
Savings deposits........ -- -- 1,355,096 -- 235,105 1,590,201
Certificates of deposit
less than $100,000 and
other time deposits.... -- 371,413 476,685 160,166 445,912 1,454,176
Certificates of deposit
of $100,000 or more.... -- 232,317 131,730 158,157 30,956 553,160
Federal funds purchased
and securities sold
under agreements to
repurchase............. 775,852 -- -- -- -- 775,852
Other short-term
borrowings............. 132,331 -- -- -- -- 132,331
FHLB and other
borrowings............. -- 198,071 113 1,543 4,186 203,913
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities........... 908,183 1,414,908 1,963,624 319,866 716,159 5,322,740
Noninterest bearing
sources of funds--net... -- -- -- -- 1,143,771 1,143,771
---------- ---------- ---------- ---------- ---------- ----------
Interest sensitivity
gap..................... 336,475 (534,523) (735,644) 1,590,730 (657,038) --
---------- ---------- ---------- ---------- ---------- ----------
Cumulative interest
sensitivity gap......... $ 336,475 $ (198,048) $ (933,692) $ 657,038 $ -- $ --
========== ========== ========== ========== ========== ==========
19
In the preceding interest rate sensitivity analysis tables, variable rate
commercial loans totaling $670 million and $600 million at December 31, 1993,
and 1992, respectively, have been reflected as repricing immediately even
though these loans are protected from declines in the interest rate earned due
to interest rate floors associated with such loans.
As seen in the tables, for the first 365 days 65 percent of earning asset
funding sources will reprice compared to 59 percent of all interest earning
assets. Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting interest
rate sensitivity. In addition, the interest rate spread between an asset and
its supporting liability can vary significantly while the timing of repricing
for both the asset and the liability remains the same, thus impacting net
interest income. This characteristic is referred to as basis risk and relates
to the possibility that the repricing characteristics of short-term assets tied
to the Company's prime lending rate are different from those of short-term
funding sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and repricing of liabilities which are not
reflected in the interest sensitivity analysis report. These prepayments may
have significant effects on the Company's net interest margin. Because of these
factors an interest sensitivity gap report may not provide a complete
assessment of the Company's exposure to changes in interest rates. Management
utilizes computerized interest rate simulation analysis to determine the
Company's interest rate sensitivity. The above table indicates that the Company
is in a liability sensitive gap position at twelve months; however, due to the
factors cited, current simulation results indicate only minimal sensitivity to
parallel shifts in interest rates. Management also evaluates the condition of
the economy, the pattern of market interest rates and other economic data to
determine the appropriate mix and repricing characteristics of assets and
liabilities required to produce an optimal net interest margin.
In addition to the ongoing monitoring of interest-sensitive assets and
liabilities, the Company enters into various interest rate contracts not held
in the trading account ("interest rate protection contracts") to help manage
the Company's interest sensitivity. Such contracts generally have a fixed
notional principal amount and include (i) interest rate swaps where the Company
typically receives or pays a fixed rate and a counterparty pays or receives a
floating rate based on a specified index, (ii) interest rate caps and floors
purchased or written where the Company receives or pays, respectively, interest
if the specified index falls below the floor rate or rises above the cap rate,
and (iii) interest rate futures where the Company agrees to deliver or receive
securities or money market instruments at a designated future date and at a
specified price or yield. The interest rate risk factor in these contracts is
considered in the overall interest management strategy and the Company's
interest risk management program. The income or expense associated with
interest rate swaps, caps and floors and gains or losses in futures contracts
classified as hedges are ultimately reflected as adjustments to interest income
or expense. Changes in the estimated fair value of interest rate protection
contracts are not reflected in the financial statements until realized. A
discussion of interest rate risks, credit risks and concentrations in off-
balance sheet financial instruments is included in Note 6 of the Notes to
Consolidated Financial Statements. The following table details various
information regarding interest rate protection contracts as of December 31,
1993:
20
INTEREST RATE PROTECTION CONTRACTS
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE RATE AVERAGE REPRICING
NOTIONAL CARRYING ESTIMATED ------------- YEARS TO FREQUENCY
AMOUNT VALUE FAIR VALUE RECEIVED PAID EXPIRATION (YEARS)
---------- -------- ---------- -------- ---- ---------- ---------
(IN THOUSANDS)
Swaps:
Pay fixed........... $ 176,000 $ -- $(1,869) 3.68% 5.36% 2.93 0.23
Receive fixed....... 60,000 -- 578 6.75 3.46 1.28 0.31
Basis swaps+........ 200,000 -- (128) 3.30 3.41 2.13 0.25
Caps and floors:
Purchased........... 1,050,000 732 24,140 1.22 * 3.01 0.18
Written............. 200,000 341 1,000 * -- 2.13 0.08
---------- ------- -------
$1,686,000 $ 1,073 $23,721
========== ======= =======
- --------
+ Basis swaps represent swaps in which the Company receives interest based on a
variable interest rate index and pays interest based on a different variable
rate index.
* 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, 1993. For caps and floors, the rate shown represents the weighted average
net interest differential between the index rate and the cap or floor rate.
In addition to interest rate protection contracts used to help manage overall
interest sensitivity, the Company also enters into interest rate contracts for
the trading account. The primary purposes for using interest rate contracts in
the trading account are to facilitate customer transactions and to help protect
cash market positions in the trading account against interest rate movement.
Changes in the estimated fair value of contracts in the trading account are
recorded in other noninterest income as trading profits and commissions. Net
interest amounts received or paid on interest rate contracts in the trading
account are recorded as an adjustment of interest on trading account
securities. The following table summarizes interest rate contracts held in the
trading account at December 31, 1993:
INTEREST RATE CONTRACTS--TRADING ACCOUNT
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE RATE AVERAGE REPRICING
NOTIONAL CARRYING ESTIMATED ------------- YEARS TO FREQUENCY
AMOUNT VALUE FAIR VALUE RECEIVED PAID EXPIRATION (YEARS)
--------- -------- ---------- -------- ---- ---------- ---------
(IN THOUSANDS)
Swaps:
Pay fixed........... $ 116,500 $ (173) $ (173) 3.40% 4.63% 2.37 0.22
Receive fixed....... 15,787 8 8 5.38 4.69 3.23 0.14
Caps and floors:
Purchased........... 200,000 5,123 5,123 1.60 * 3.21 0.24
Written............. 248,100 (2,726) (2,726) * 0.78 2.74 0.16
--------- ------- -------
Total............. $ 580,387 $ 2,232 $ 2,232
========= ======= =======
- --------
* 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, 1993. For caps and floors, the rate shown represents the weighted average
net interest differential between the index rate and the cap or floor rate.
In addition to the interest rate contracts shown above, the Company also uses
exchange-traded options and futures in the trading account. At December 31,
1993, the trading account contained exchange-traded options purchased and
written, each having three month expiration dates, with notional principal
balances of $1,254 million and $700 million, respectively, and estimated fair
values of $288,000 and $(302,000), respectively. The notional principal amounts
indicated are substantially larger than the related credit or interest rate
risks. The net purchased position in exchange-traded options was taken at
December 31, 1993, in order to help protect the market value of
21
the trading account against rising short-term interest rates while maintaining
limited risk to declining rates. At December 31, 1993, futures contracts having
a notional principal of $161 million were also used to help reduce the interest
sensitivity of the trading account.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December, 1991, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 107, Disclosures about Fair Value of Financial
Instruments ("FAS107"). FAS107 requires the Company to disclose the fair value
of substantially all financial instruments, both assets and liabilities,
including those recognized and those not recognized in the Company's balance
sheet. There has been no impact to the Company's financial statements as a
result of the recognition, measurement or classification of financial
instruments. See "Notes to Consolidated Financial Statements," Note 15, Fair
Value of Financial Instruments for a discussion of the Company's accounting
policies and methodologies.
These disclosures should not be considered a surrogate of the liquidation
value of the Company or its Subsidiary Banks, but rather represent a good-faith
estimate of the increase or decrease in value of financial instruments held by
the Company since purchase, origination, or issuance. It should also be noted
that the Company has not valued any intangibles associated with the Company's
core deposits as is allowed by the provisions of FAS107.
CAPITAL RESOURCES
Shareholders' equity at December 31, 1993, increased 8 percent from December
31, 1992, after increasing 13 percent in 1992. Net income after dividends
accounted for 92 percent of the increase in shareholders' equity in 1993,
excluding the reduction in total shareholders' equity due to the redemption of
all of the Company's preferred stock, and for 90 percent of the increase in
1992. During 1991, the Company issued 261,000 shares of preferred stock in an
acquisition and sold 1,350,000 shares of common stock to European investors in
a private placement. These two transactions contributed $44 million to equity
and accounted for 49 percent of the increase in shareholders' equity for 1991.
During the third quarter of 1993, the Company redeemed all of the outstanding
preferred stock.
Dividends of $28 million were declared on the Company's common stock in 1993,
which represented a 24 percent increase over 1992. The 1993 annual dividend
rate per common share was $.76, a 14 percent increase over 1992. The dividend
payout ratio for 1993 was 32 percent compared to 33 percent for 1992 and 34
percent for 1991. 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.
During the fourth quarter of 1992, executive officers and other individuals
exercised stock options for 665,000 shares of common stock. In connection with
the exercise of options for 308,000 of the shares, the Company received as
payment the proceeds of a loan made by the Company for approximately $3
million. These shares have been reflected as issued and outstanding in the
Statements of Shareholders' Equity with an offsetting reduction of total
shareholders' equity for the amount of the loan. Additionally, the Company
realized tax benefits of $1.9 million from the exercise of nonqualified stock
options during the fourth quarter of 1992 which are reflected as increases in
surplus in the Statements of Shareholders' Equity.
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 12 percent was achieved primarily through reinvested earnings.
Average shareholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average shareholders'
equity to average assets for 1993 was 7.57 percent compared to 7.09 percent in
1992 and 6.69 percent in 1991. 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.
22
RETURN ON EQUITY AND ASSETS
DECEMBER 31,
-------------------
1993 1992 1991
----- ----- -----
Return on average assets................................... 1.27% 1.12% 1.03%
Return on average common equity............................ 16.98 16.12 15.75
Common dividend payout ratio............................... 31.80 33.33 33.91
Average equity to average assets ratio..................... 7.57 7.09 6.69
Two important indicators of capital adequacy in the banking industry are the
leverage ratio and the tangible leverage ratio. The leverage ratio is defined
as common shareholders' equity, minus goodwill and other intangibles disallowed
by the Subsidiary Bank's regulators, divided by total quarterly average assets
minus goodwill and other disallowed intangibles. The tangible leverage ratio is
defined as common shareholders' equity, minus all intangibles, divided by total
quarterly average assets minus all intangibles. Even though core deposit
intangibles and goodwill increased from acquisitions during 1993, the leverage
ratio remained well within regulatory guidelines: 7.31 percent at year-end
1993; 6.86 percent at year-end 1992; and 6.43 percent at year-end 1991. For the
same periods, the tangible leverage ratio was 6.95 percent at year-end 1993;
6.55 percent at year-end 1992; and 6.01 percent at year-end 1991. The detail
for the computation of these ratios is provided in the following table. Other
disallowed intangibles represent intangible assets, other than goodwill,
recorded after February 19, 1992, that are excluded from regulatory capital.
Other intangibles recorded before that date continue to be included in
regulatory capital under the "grandfather" provision of Federal Reserve
regulations. The $6.5 million increase in shareholders' equity resulting from
the Company's adoption of FAS115 on December 31, 1993, is not presently allowed
to be included in the calculation of regulatory capital by the Federal
regulators.
LEVERAGE RATIO CALCULATIONS
DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
Total fourth quarter average assets....... $7,241,032 $6,939,172 $6,547,287
Less: Goodwill.......................... 8,981 7,465 6,060
Other disallowed intangibles.......... 1,716 -- --
---------- ---------- ----------
Tangible average assets before deduction
of other intangibles..................... 7,230,335 6,931,707 6,541,227
Less: Other intangibles................. 27,535 23,124 29,210
---------- ---------- ----------
Tangible average assets............... $7,202,800 $6,908,583 $6,512,017
========== ========== ==========
Total period-end common shareholders' eq-
uity..................................... $ 545,584 $ 483,316 $ 426,530
Less: Goodwill.......................... 8,981 7,465 6,060
Other disallowed intangibles.......... 1,716 -- --
Cumulative effect of adopting FAS115.. 6,494 -- --
---------- ---------- ----------
Total common shareholders' equity before
deduction of other intangibles........... 528,393 475,851 420,470
Less: Other intangibles................. 27,535 23,124 29,210
---------- ---------- ----------
Tangible period-end common sharehold-
ers' equity.......................... $ 500,858 $ 452,727 $ 391,260
========== ========== ==========
Leverage ratio........................ 7.31% 6.86% 6.43%
Tangible leverage ratio............... 6.95 6.55 6.01
Risk-based capital guidelines were issued with graduated compliance beginning
in 1990 with full compliance by year-end 1992. The guidelines take into
consideration risk factors, as defined by regulators, associated with various
categories of assets, both on and off the balance sheet. Under the guidelines,
capital strength is measured in two tiers which are used in conjunction with
risk-adjusted assets to determine the risk-based capital ratios. The Company's
Tier I capital, which consists of common equity less goodwill and other
disallowed intangibles, amounted to $528 million at December 31, 1993. Tier II
capital components include supplemental capital components such as qualifying
allowance for loan losses and qualifying subordinated debt. Tier I capital plus
the Tier II capital
23
components is referred to as Total Qualifying Capital and was $666 million at
year-end 1993. The percentage ratios, as calculated under the guidelines, were
10.49 percent and 13.23 percent for Tier I and Total Qualifying Capital,
respectively, at year-end 1993. The $75 million of subordinated debt issued by
the Company in the second quarter of 1993 represented Tier II capital and
favorably impacted the Company's Total Qualifying Capital.
DECEMBER 31,
-------------------
1993 1992 1991
----- ----- -----
Risk-based Capital Ratios:
Tier I Capital Ratio..................................... 10.49% 9.87% 9.70%
Total Qualifying Capital Ratio........................... 13.23 11.61 11.50
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 1993 for "well
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to assure that the Subsidiary Banks exceed the
guidelines.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially
impact net interest income. The discussion of net interest income is presented
on a taxable equivalent basis, unless otherwise noted, to facilitate
performance comparisons among various taxable and tax-exempt assets.
Net interest income for 1993 increased 3 percent over 1992 and 22 percent in
1992 over 1991. Increased volumes of earning assets and a historically high
interest rate spread generated the 1992 increase while in 1993 net interest
income grew at a slower rate due to a nine basis point decline in net yield on
earning assets. The schedule on pages 28 and 29 provides the detail of changes
in interest income, interest expense and net interest income due to changes in
volumes and rates.
Interest income decreased three percent in 1993 and one percent in 1992 after
increasing eight percent in 1991. Interest income in 1993 declined from 1992
despite a 5 percent increase in the volume of average earning assets due to a
71 basis point decline in the average interest rate. A 14 percent increase in
the volume of average loans accounted for the majority of the 4 percent rise in
fully taxable equivalent interest income on loans since rates declined 84 basis
points. Interest income on investment securities, including securities
available for sale, decreased 27 percent from 1992 to 1993. This decrease
resulted from an 83 basis point decrease in the yield on investment securities
available for sale offset by increases in the yield on taxable and tax-exempt
securities held-to-maturity of 20 and 30 basis points, respectively. Interest
income on trading securities increased by 49 percent as a result of a 74
percent increase in the average balance offset by a 101 basis point decline in
yield.
Total interest expense declined by 13 percent in 1993 due to a 66 basis point
decline in the rate paid on interest bearing liabilities, which more than
offset a 3 percent increase in volume. Interest expense on interest bearing
deposits decreased 14 percent as the result of a 76 basis point decrease in
rate and a 3 percent increase in the average volume. The one percent increase
in average borrowed funds, which includes interest bearing liabilities that are
not classified as deposits, was more than offset by the lower rates paid,
resulting in an eight percent decrease in interest expense for this category.
The trend in net interest income is commonly evaluated in terms of average
rates using the net yield and the interest rate spread. The net yield on
earning assets is computed by dividing fully taxable equivalent net interest
income by average total earning assets. This ratio represents the difference
between the average yield returned on average earning assets and the average
rate paid for all funds used to support those earning assets, including both
interest bearing and noninterest bearing sources of funds. The net yield
declined 9 basis points to 5.10 percent in 1993 following a 48 basis point rise
in 1992. The historically high net yield in 1992 of 5.19 percent resulted from
24
the substantial decline in the general level of interest rates over the past
few years coupled with an increase in the size of the Company's loan portfolio
which generally are higher yielding assets than investment securities. While
this loan growth continued throughout 1993, the 84 basis point decline in yield
on the loan portfolio was not enough to maintain the prior year level of net
yield given only a 66 basis point decrease in the cost of interest bearing
liabilities, down from a 175 basis point decline in the cost of interest
bearing liabilities from 1991 to 1992. The loan growth achieved in 1993 and
1992 was due primarily to the continued growth in the Company's indirect
lending portfolio and the favorable consumer response to the Company's
residential mortgage products.
During 1993, the net yield on interest earning assets was positively impacted
by the Company's use of interest rate contracts, primarily interest rate swaps
and interest rate floors, increasing the taxable equivalent net yield on
interest earning assets by 24 basis points. The use of interest rate contracts
impacted the yield and interest income on commercial loans where the net yield
was increased by 126 basis points and interest income was increased by $12
million. At the same time, the impact of interest rate contracts on interest
bearing liabilities was negligible, increasing interest expense by slightly
more than $2 million and the net cost of funds by 3 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 net cost of funds, defined as interest expense divided by average earning
assets, decreased 62 basis points in 1993, while the net yield on total earning
assets declined 9 basis points. The rate paid on interest bearing liabilities
fell 66 basis points below 1992 levels. In 1992, the yield on total earning
assets rose 48 basis points while the rate paid on interest bearing liabilities
declined 175 basis points and the net cost of funds decreased 157 basis points.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing liabilities. The
interest rate spread eliminates the impact of noninterest bearing funds and
gives a direct perspective on the effect of market interest rate movements. The
positive impact experienced from 1989 to 1992 from changes in the overall asset
and liability mix, combined with the favorable rate environment, did not
continue in 1993. The net interest rate spread decreased 5 basis points to 4.46
percent from the 1992 spread of 4.51 percent as the cost of interest bearing
liabilities fell at a slower pace than the yields earned on earning assets. The
increase in 1992 was 66 basis points from the 3.85 percent in 1991. See the
accompanying schedules entitled "Rate/Volume Variance Analysis" and
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" for
more information.
The following table presents certain interest rates without modification for
tax equivalency. The table on pages 26 and 27 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,
------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ----- -----
Rate earned on interest earning assets.......... 8.02% 8.71% 9.77% 10.46% 10.76%
Rate paid on interest bearing liabilities....... 3.67 4.33 6.08 7.42 8.08
Interest rate spread............................ 4.35 4.38 3.69 3.04 2.68
Net yield on earning assets..................... 4.99 5.06 4.56 4.06 3.80
Interest income, as reported in the consolidated statements of income, on a
nominal yield basis decreased in 1993 by $17 million while net interest income
increased by $12 million. The seven basis point decrease in the net yield in
1993 was primarily a result of a decrease in the yields in the Company's
interest earning assets, specifically its loan portfolio. The Company will
continue to focus its attention in 1994 on increasing net interest income while
at the same time maintaining the current levels in interest rate spreads and
net yields. However, it cannot be assured that the negative trend in net yield
experienced in 1993 will not continue due to interest rate fluctuations and
other factors.
25
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1993 1992
--------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ ---------- -------- ------
(IN THOUSANDS)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $4,837,321 $412,028 8.52% $4,227,721 $395,682 9.36%
Investment securities:
Taxable................ 734,171 58,772 8.01 1,571,993 122,728 7.81
Tax-exempt............. 134,916 12,978 9.62 167,101 15,579 9.32
---------- -------- ---------- --------
Total investment secu-
rities............... 869,087 71,750 8.26 1,739,094 138,307 7.95
Investment securities
available for sale.... 545,296 32,630 5.98 55,618 3,786 6.81
Trading account securi-
ties.................. 164,757 9,885 6.00 94,590 6,628 7.01
Federal funds sold and
securities purchased
under agreements to
resell................ 87,908 2,635 3.00 67,951 2,258 3.32
Interest bearing depos-
its with other banks.. 10,561 883 8.36 12,176 982 8.07
---------- -------- ---------- --------
Total earning assets.. 6,514,930 529,811 8.13 6,197,150 547,643 8.84
Allowance for loan loss-
es..................... (99,064) (66,660)
Unrealized gain (loss)
on investment
securities available
for sale............... 29 --
Cash and due from banks. 313,898 284,873
Other assets............ 317,463 322,301
---------- ----------
Total assets.......... $7,047,256 $6,737,664
========== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Interest bearing liabil-
ities:
Deposits:
Demand................. $ 631,461 15,714 2.49 $ 526,994 15,172 2.88
Savings................ 1,642,308 47,364 2.88 1,566,623 53,988 3.45
Certificates of deposit
less than $100,000 and
other time deposits... 1,501,697 75,757 5.04 1,535,681 92,539 6.03
Certificates of deposit
of $100,000 or more... 466,025 21,058 4.52 473,255 24,006 5.07
---------- -------- ---------- --------
Total interest bearing
deposits............. 4,241,491 159,893 3.77 4,102,553 185,705 4.53
Federal funds pur-
chased................ 409,031 12,462 3.05 617,692 21,822 3.53
Securities sold under
agreements to repur-
chase................. 238,234 6,693 2.81 266,972 8,974 3.36
Other short-term
borrowings............ 208,075 6,908 3.32 191,568 7,722 4.03
FHLB and other
borrowings............ 275,288 11,350 4.12 41,327 2,009 4.86
---------- -------- ---------- --------
Total interest bearing
liabilities.......... 5,372,119 197,306 3.67 5,220,112 226,232 4.33
---- ----
Noninterest bearing de-
mand deposits.......... 1,105,591 993,434
Accrued expenses and
other liabilities...... 36,020 46,227
Shareholders' equity.... 533,526 477,891
---------- ----------
Total liabilities and
shareholders' equity. $7,047,256 $6,737,664
========== ==========
Net interest income/net
interest spread........ 332,505 4.46% 321,411 4.51%
==== ====
Net yield on earning as-
sets................... 5.10% 5.19%
==== ====
Taxable equivalent ad-
justment:
Loans.................. 2,187 2,347
Investment securities.. 4,672 5,583
Investment securities
available for sale.... 274 67
Trading account securi-
ties.................. 108 80
-------- --------
Total taxable equiva-
lent adjustment...... 7,241 8,077
-------- --------
Net interest income..... $325,264 $313,334
======== ========
- --------
* Loans on nonaccrual status have been included in the computation of average
balances.
26
GROWTH RATE
YEARS ENDED DECEMBER 31, AVERAGE BALANCES
- ------------------------------------------------------------------------------------- -------------------
1991 1990 1989
- --------------------------- --------------------------- --------------------------- ONE YEAR FIVE YEAR
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ 1993- COMPOUNDED
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE 1992 1993-1988
------- -------- ------ ---------- -------- ------ ---------- -------- ------ -------- ----------
(IN THOUSANDS)
$3,702,542 $392,922 10.61% $3,266,382 $373,395 11.43% $2,949,808 $351,084 11.90% 14.42% 13.30%
1,453,947 128,155 8.81 1,122,766 101,804 9.07 882,513 78,805 8.93 (53.30) 3.27
195,628 17,617 9.01 193,006 18,195 9.43 197,801 19,057 9.63 (19.26) (13.26)
- ---------- -------- ---------- -------- ---------- --------
1,649,575 145,772 8.84 1,315,772 119,999 9.12 1,080,314 97,862 9.06 (50.03) (0.69)
-- -- -- -- -- -- -- -- -- 880.43 --
100,042 7,945 7.94 85,307 7,268 8.52 104,067 9,329 8.96 74.18 (0.90)
113,840 6,352 5.58 139,570 11,082 7.94 148,859 13,297 8.93 29.37 (11.91)
20,994 1,731 8.25 30,685 2,598 8.47 73,177 6,920 9.46 (13.26) (24.88)
- ---------- -------- ---------- -------- ---------- --------
5,586,993 554,722 9.93 4,837,716 514,342 10.63 4,356,225 478,492 10.98 5.13 10.96
(54,162) (42,577) (34,919) 48.61 26.84
-- -- -- -- --
263,595 241,926 232,639 10.19 7.30
271,686 203,127 179,564 (1.50) 14.53
- ---------- ---------- ----------
$6,068,112 $5,240,192 $4,733,509 4.59 10.78
========== ========== ==========
$ 436,146 19,437 4.46 $ 332,051 16,972 5.11 $ 272,362 13,709 5.03 19.82 21.64
1,350,691 72,055 5.33 927,513 60,809 6.56 762,357 52,706 6.91 4.83 17.57
1,556,845 113,499 7.29 1,382,722 112,225 8.12 1,203,542 102,309 8.50 (2.21) 9.89
441,478 29,829 6.76 449,602 36,104 8.03 533,826 47,390 8.88 (1.53) 3.19
- ---------- -------- ---------- -------- ---------- --------
3,785,160 234,820 6.20 3,091,888 226,110 7.31 2,772,087 216,114 7.80 3.39 12.98
461,546 25,542 5.53 399,946 32,224 8.06 403,538 37,262 9.23 (33.78) 4.72
403,030 21,965 5.45 520,721 39,150 7.52 434,967 37,387 8.60 (10.76) (14.00)
126,728 7,788 6.15 146,629 10,804 7.37 127,826 10,978 8.59 8.62 7.02
13,929 1,305 9.37 12,210 1,356 11.11 11,605 1,379 11.88 566.12 83.69
- ---------- -------- ---------- -------- ---------- --------
4,790,393 291,420 6.08 4,171,394 309,644 7.42 3,750,023 303,120 8.08 2.91 10.26
----- ----- -----
820,135 677,509 614,680 11.29 13.18
51,674 47,325 50,293 (22.08) (4.51)
405,910 343,964 318,513 11.64 13.17
- ---------- ---------- ----------
$6,068,112 $5,240,192 $4,733,509 4.59 10.78
========== ========== ==========
263,302 3.85% 204,698 3.21% 175,372 2.90%
===== ===== =====
4.71% 4.23% 4.03%
===== ===== =====
2,528 2,516 3,652
6,082 5,669 6,013
-- -- --
71 58 17
-------- -------- --------
8,681 8,243 9,682
-------- -------- --------
$254,621 $196,455 $165,690
======== ======== ========
27
RATE/VOLUME VARIANCE ANALYSIS
Taxable Equivalent Basis
AVERAGE VOLUME CHANGE IN VOLUME AVERAGE RATE
-------------------------------- -------------------- -----------------
1993 1992 1991 1993-1992 1992-1991 1993 1992 1991
---------- ---------- ---------- --------- --------- ---- ---- -----
(IN THOUSANDS)
EARNING ASSETS:
Loans, net of unearned
income................. $4,837,321 $4,227,721 $3,702,542 $609,600 $525,179 8.52% 9.36% 10.61%
Investment securities:
Taxable................ 734,171 1,571,993 1,453,947 (837,822) 118,046 8.01 7.81 8.81
Tax-exempt............. 134,916 167,101 195,628 (32,185) (28,527) 9.62 9.32 9.01
---------- ---------- ---------- -------- --------
Total investment
securities............ 869,087 1,739,094 1,649,575 (870,007) 89,519 8.26 7.95 8.84
Investment securities
available for sale..... 545,296 55,618 -- 489,678 55,618 5.98 6.81 --
Trading account
securities............. 164,757 94,590 100,042 70,167 (5,452) 6.00 7.01 7.94
Federal funds sold and
securities purchased
under agreements to
resell................. 87,908 67,951 113,840 19,957 (45,889) 3.00 3.32 5.58
Interest bearing
deposits with other
banks.................. 10,561 12,176 20,994 (1,615) (8,818) 8.36 8.07 8.25
---------- ---------- ---------- -------- --------
Total earning assets... $6,514,930 $6,197,150 $5,586,993 $317,780 $610,157 8.13 8.84 9.93
========== ========== ========== ======== ========
INTEREST BEARING LIABIL-
ITIES:
Deposits:
Demand................. $ 631,461 $ 526,994 $ 436,146 $104,467 $ 90,848 2.49 2.88 4.46
Savings................ 1,642,308 1,566,623 1,350,691 75,685 215,932 2.88 3.45 5.33
Certificates of deposit
less than $100,000 and
other time deposits... 1,501,697 1,535,681 1,556,845 (33,984) (21,164) 5.04 6.03 7.29
Certificates of deposit
of $100,000 or more... 466,025 473,255 441,478 (7,230) 31,777 4.52 5.07 6.76
---------- ---------- ---------- -------- --------
Total interest bearing
deposits.............. 4,241,491 4,102,553 3,785,160 138,938 317,393 3.77 4.53 6.20
Federal funds purchased. 409,031 617,692 461,546 (208,661) 156,146 3.05 3.53 5.53
Securities sold under
agreements to
repurchase............. 238,234 266,972 403,030 (28,738) (136,058) 2.81 3.36 5.45
Other short-term
borrowings............. 208,075 191,568 126,728 16,507 64,840 3.32 4.03 6.15
FHLB and other
borrowings............. 275,288 41,327 13,929 233,961 27,398 4.12 4.86 9.37
---------- ---------- ---------- -------- --------
Total interest bearing
liabilities........... $5,372,119 $5,220,112 $4,790,393 $152,007 $429,719 3.67 4.33 6.08
========== ========== ========== ======== ======== ---- ---- -----
Net interest income/net
intrest spread......... 4.46% 4.51% 3.85%
==== ==== =====
Net yield on earning
assets................. 5.10% 5.19% 4.71%
==== ==== =====
Net cost of funds....... 3.03% 3.65% 5.22%
==== ==== =====
28
VARIANCE ATTRIBUTED TO
--------------------------------------------------------
INTEREST INCOME/EXPENSE VARIANCE 1993 1992
- --------------------------- -------------------- ---------------------------- --------------------------
1993 1992 1991 1993-1992 1992-1991 VOLUME RATE MIX VOLUME RATE MIX
- -------- -------- -------- --------- --------- -------- -------- -------- ------- -------- -------
(IN THOUSANDS)
$412,028 $395,682 $392,922 $ 16,346 $ 2,760 $ 57,054 $(35,576) $ (5,132) $55,733 $(46,393) $(6,580)
58,772 122,728 128,155 (63,956) (5,427) (65,410) 3,113 (1,659) 10,405 (14,643) (1,189)
12,978 15,579 17,617 (2,601) (2,038) (3,001) 495 (95) (2,569) 622 (91)
- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------
71,750 138,307 145,772 (66,557) (7,465) (68,411) 3,608 (1,754) 7,836 (14,021) (1,280)
32,630 3,786 -- 28,844 3,786 33,333 (458) (4,031) -- -- 3,786
9,885 6,628 7,945 3,257 (1,317) 4,917 (953) (707) (433) (935) 51
2,635 2,258 6,352 377 (4,094) 663 (221) (65) (2,561) (2,569) 1,036
883 982 1,731 (99) (749) (130) 36 (5) (727) (38) 16
- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------
529,811 547,643 554,722 (17,832) (7,079) 27,426 (33,564) (11,694) 59,848 (63,956) (2,971)
15,714 15,172 19,437 542 (4,265) 3,008 (2,058) (408) 4,049 (6,880) (1,434)
47,364 53,988 72,055 (6,624) (18,067) 2,608 (8,806) (426) 11,519 (25,509) (4,077)
75,757 92,539 113,499 (16,782) (20,960) (2,048) (15,067) 333 (1,543) (19,685) 268
21,058 24,006 29,829 (2,948) (5,823) (367) (2,621) 40 2,147 (7,435) (535)
- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------
159,893 185,705 234,820 (25,812) (49,115) 3,201 (28,552) (461) 16,172 (59,509) (5,778)
12,462 21,822 25,542 (9,360) (3,720) (7,372) (3,003) 1,015 8,641 (9,236) (3,125)
6,693 8,974 21,965 (2,281) (12,991) (966) (1,474) 159 (7,415) (8,418) 2,842
6,908 7,722 7,788 (814) (66) 665 (1,362) (117) 3,985 (2,680) (1,371)
11,350 2,009 1,305 9,341 704 11,373 (305) (1,727) 2,567 (628) (1,235)
- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------
197,306 226,232 291,420 (28,926) (65,188) 6,901 (34,696) (1,131) 23,950 (80,471) (8,667)
- -------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------
$332,505 $321,411 $263,302 $ 11,094 $ 58,109 $ 20,525 $ 1,132 $(10,563) $35,898 $ 16,515 $ 5,696
======== ======== ======== ======== ======== ======== ======== ======== ======= ======== =======
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 anticipated future losses on loans. The amount for each year is
dependent upon many factors including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment
of loan portfolio quality, the value of collateral and general economic
factors.
The economic outlook for the states in which the Company does business is
guardedly optimistic in the midst of a gradual improvement of the economy
overall. Real estate values, affected by the recessionary pressures of prior
years, have shown a general stabilization in the Subsidiary Banks' markets. On
a regional basis, however, any additional economic slowdown in these markets
could have an effect on most regional bank holding companies and could be
reflected by little or no overall asset growth. Such an economic slowdown would
probably also have a negative impact on real estate lending as well as the
level of net charge-offs and delinquencies.
Since another economic slowdown could have an adverse effect on property
values and, for commercial development projects, cause an increase in vacancy
rates, the possibility exists for further write-downs, charge-offs and the
transfer of currently performing loans to a nonaccrual status in the real
estate and commercial loan categories. The mix of loans in the construction and
development portfolios are diversified in areas such as office buildings,
retail stores and malls, apartment buildings, health care facilities and
industrial warehouses. In addition, the Subsidiary Banks' specialized real
estate lending areas review, approve and monitor large real estate credits on a
continuing basis.
Loan review procedures, including such techniques as loan grading and on-site
reviews, are constantly utilized by the Company's loan review department in
order to ensure that potential problem loans are identified early in order to
lessen any potentially negative impact such problem loans may have on the
Company's earnings. Automated loan reports are prepared and used in conjunction
with the identification and monitoring of such loans on a monthly basis.
Management's involvement continues throughout the process and includes
participation in the work-out process and recovery activity. These formalized
procedures are monitored internally by the loan review area whose work is
supplemented by regulatory agencies that provide an additional level of review
on an annual basis. Such review procedures are quantified in monthly and
quarterly reports to senior management and are used in determining whether such
loans represent potential loss to the Company. Special reports are prepared for
consumer installment loans to identify trends unique to that portfolio. A
determination of a potential loss will result in a charge to the provision for
loan losses, thereby increasing the allowance for loan losses available for
potential risk. Management monitors the entire loan portfolio, including loans
acquired in business combinations, in an attempt to identify problem loans so
that risks in the portfolio can be timely identified and an appropriate
allowance maintained.
The provision for loan losses was decreased 32 percent in 1993 compared to an
increase of 39 percent in 1992 and 59 percent in 1991. The decreased provision
for 1993 primarily reflects the substantial decrease in nonperforming assets
from year-end 1992 to year-end 1993 as well as the significant decline in net
charge-offs for the year.
Net loan charge-offs decreased 58 percent in 1993 after decreasing 21 percent
in 1992 and increasing 65 percent in 1991. The decrease in 1993 was due to
decreased net charge-offs in all loan categories other than real estate--
construction. The decrease in net charge-offs in 1992 resulted from decreased
net charge-offs in commercial, financial and agricultural loans and real estate
construction loans offset somewhat by increased net charge-offs in the
Company's credit card portfolio. The increase in net charge-offs in 1991 was
attributable to losses on credit card receivables and commercial real estate
mortgage and construction loans as well as commercial, financial and
agricultural loans. During 1993, net charge-offs of commercial, financial and
agricultural loans decreased by 73 percent while net charge-offs of commercial
real estate mortgages declined 93 percent and net charge-offs of consumer
installment loans decreased 48 percent. With regard to the Company's consumer
installment loan portfolio, net charge-offs for credit card receivables
decreased as a percentage of loans from 5.68 percent in 1992 to 3.04 percent in
1993. Similarly, net charge-offs as a percentage of loans in the Company's
indirect consumer
30
installment portfolio, consisting primarily of new and used automobile loans,
decreased from 0.43 percent in 1992 to 0.14 percent in 1993. Net charge-offs on
residential mortgage loans declined by 51 percent from 1992 levels and
represented 5 percent of total net charge-offs up from 4 percent in 1992.
The following table sets forth information with respect to the Company's
loans and the allowance for loan losses for the five years ended December 31,
1993.
SUMMARY OF LOAN LOSS EXPERIENCE
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Loans, net of unearned
income:
Average outstanding
during the year...... $4,837,321 $4,227,721 $3,702,542 $3,266,382 $2,949,808
========== ========== ========== ========== ==========
Allowance for loan loss-
es:
Balance at beginning
of year.............. $ 83,352 $ 55,561 $ 42,366 $ 37,380 $ 31,795
Charge-offs:
Commercial, financial
and agricultural..... 5,268 6,248 11,141 7,764 9,878
Real estate--construc-
tion................. 645 315 3,986 2,470 118
Real estate--mortgage:
Residential......... 802 1,309 954 1,406 743
Commercial.......... 689 4,649 2,953 981 3,195
Consumer installment.. 11,897 18,981 16,532 9,605 8,423
---------- ---------- ---------- ---------- ----------
Total............... 19,301 31,502 35,566 22,226 22,357
Recoveries:
Commercial, financial
and agricultural..... 4,170 2,207 1,075 865 1,143
Real estate--construc-
tion................. 50 304 56 155 33
Real estate--mortgage:
Residential......... 308 302 262 106 127
Commercial.......... 410 381 192 83 56
Consumer installment.. 3,739 3,214 2,334 1,835 2,040
---------- ---------- ---------- ---------- ----------
Total............... 8,677 6,408 3,919 3,044 3,399
---------- ---------- ---------- ---------- ----------
Net charge-offs..... 10,624 25,094 31,647 19,182 18,958
Provision charged to in-
come................... 35,985 52,885 37,964 23,864 24,543
Additions due to acqui-
sitions................ 1,323 -- 6,878 304 --
---------- ---------- ---------- ---------- ----------
Balance at end of year.. $ 110,036 $ 83,352 $ 55,561 $ 42,366 $ 37,380
========== ========== ========== ========== ==========
Net charge-offs to
average loans
outstanding during the
year................... .22% .59% .85% .59% .64%
Management considers changes in the size and character of the loan portfolio,
changes in nonperforming and past due loans, historical loan loss experience,
the existing risk of individual loans, concentrations of loans to specific
borrowers or industries and existing and prospective economic conditions when
determining the adequacy of the allowance for loan losses. In connection with
business combinations, the Company has also provided additional reserves on the
acquired loan portfolios based on the nature and characteristics of the
acquired loans. The allowance increased 32 percent in 1993 and at year-end was
2.14 percent of outstanding loans compared to 1.80 percent at December 31, 1992
and 1.41 percent at December 31, 1991. The increase is due in part to
additional reserves on the loan portfolios acquired in business combinations.
As shown in the table below, management determined that at December 31, 1993,
approximately 14 percent of the allowance for loan losses was related to
commercial, financial and agricultural loans, 22 percent was related to real
estate loans and 16 percent was related to consumer installment loans. A
portion of the allowance, approximately 48 percent, remained
31
unallocated to any specific category. The nominal allowance allocations have
remained relatively stable from the 1992 level, with the decreases in
percentage allocation resulting from the increase in the unallocated portion of
the allowance. The increase in the unallocated portion of the allowance is due
to the favorable loan performance that the Company has experienced in the past
two years. While nonperforming assets and gross charge-offs have continued to
decline, the Company's provision for loan losses has decreased proportionately.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
-------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
----------------- ---------------- ---------------- ---------------- ----------------
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....... $ 14,801 13.5% $13,420 16.1% $13,890 25.0% $11,227 26.5% $10,429 27.9%
Real estate--
construction........... 4,840 4.4 5,251 6.3 5,334 9.6 7,668 18.1 7,962 21.3
Real estate--mortgage:
Residential............ 3,254 3.0 2,917 3.5 3,500 6.3 1,271 3.0 1,234 3.3
Commercial............. 16,247 14.8 8,919 10.7 6,390 11.5 4,406 10.4 5,682 15.2
Consumer installment.... 17,957 16.2 19,672 23.6 19,058 34.3 12,033 28.4 9,121 24.4
Unallocated............. 52,937 48.1 33,173 39.8 7,389 13.3 5,761 13.6 2,952 7.9
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$110,036 100.0% $83,352 100.0% $55,561 100.0% $42,366 100.0% $37,380 100.0%
======== ===== ======= ===== ======= ===== ======= ===== ======= =====
NONPERFORMING ASSETS
Nonperforming assets include loans classified as nonaccrual or renegotiated
and foreclosed real estate. It is the general policy of the Subsidiary Banks to
stop accruing interest income and place the recognition of interest on a cash
basis when any commercial, industrial or real estate loan is past due as to
principal or interest and the ultimate collection of either is in doubt.
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, 1993, were $40 million, a decrease of
$26 million from year-end 1992. Nonperforming loans were $19 million, a
decrease of $9 million from year-end 1992. The decrease in nonperforming loans
was the result of management's efforts in resolving a limited number of large,
unrelated, geographically-dispersed commercial real estate credits previously
on nonaccrual status. Some of the amounts removed from nonperforming status
were transferred to the other real estate owned category. During 1993, $8
million of loans were transferred to other real estate owned, offset by total
sales of other real estate owned of $24 million and writedowns of $2 million.
Of the $24 million in sales of other real estate, $16 million were cash sales
while $8 million represented loans originated by the Subsidiary Banks to
facilitate the sale of other real estate. During 1992, loans transferred to
other real estate owned totaled $21 million, cash sales were $10 million, loans
to facilitate the sale of other real estate owned were $8 million, and
writedowns totaled $5 million. Much of the increase in nonperforming assets
during 1991 was due to the Texas acquisitions, which added $16 million to
nonperforming assets. Without these acquisitions, total nonperforming assets
would have declined by 20 percent in 1991. These nonperforming assets were
acquired at a discount and are carried at appropriate values at the Subsidiary
Banks.
Even though the Southeastern part of the country experienced a stabilization
in the commercial real estate market during 1993, management closely monitored
and will continue to monitor the Company's real estate and commercial loan
portfolio during 1994. Particular attention will be focused on those credits
targeted by the loan
32
monitoring and review process. Management continues to emphasize the need to
maintain a low level of nonperforming assets and to return current
nonperforming assets to earning status.
Renegotiated loans decreased $429,000 from year-end 1992 while foreclosed
real estate decreased $17 million for the year. Loans past due 90 days or more
decreased $551,000 compared to the 1992 year-end level. No loans of $500,000
or more were past due 90 days or more at year-end 1993.
At December 31, 1993, nonperforming assets were 0.77 percent of loans
outstanding plus foreclosed real estate held for sale compared to 1.41 percent
at year-end 1992. Nonaccrual loans were 0.23 percent of loans outstanding at
year-end 1993 compared to the previous year-end level of 0.45 percent.
Renegotiated loans were 0.14 percent of loans outstanding at December 31,
1993, compared to 0.16 percent a year earlier.
Other foreclosed or repossessed assets at year-end 1993 totaled $303,000.
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,
1993 and 1992.
NONPERFORMING ASSETS
DECEMBER 31,
-------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
(IN THOUSANDS)
Loans on nonaccrual............... $12,024 $20,818 $28,664 $43,486 $47,181
Renegotiated loans................ 7,143 7,572 8,151 3,395 5,776
------- ------- ------- ------- -------
Total nonperforming loans....... 19,167 28,390 36,815 46,881 52,957
Other real estate................. 20,653 37,243 40,573 29,668 29,792
------- ------- ------- ------- -------
Total nonperforming assets...... $39,820 $65,633 $77,388 $76,549 $82,749
======= ======= ======= ======= =======
Loans 90 days or more past due.... $ 4,141 $ 3,590 $ 7,878 $ 4,010 $ 4,282
Total nonperforming loans as a
percentage of loans.............. .37% .61% .93% 1.36% 1.70%
Total nonperforming assets as a
percentage of loans and ORE...... .77 1.41 1.94 2.20 2.64
Loans 90 days or more past due as
a percentage of loans............ .08 .08 .20 .12 .14
Nonperforming loans acquired during 1991 through acquisitions amounted to $7
million. Other real estate acquired in these acquisitions amounted to $9
million.
There may be additional loans within the Company's portfolio that may become
classified as nonperforming as conditions dictate; however, management was not
aware of any such loans that are material in amount at December 31, 1993.
Details of nonaccrual loans at December 31, 1993 and 1992 appear below:
1993 1992
------- -------
(IN THOUSANDS)
Principal balance............................................... $12,024 $20,818
Interest that would have been recorded under original terms..... 1,606 1,706
Interest actually recorded...................................... 643 610
Details of loans with terms modified in troubled debt restructurings at
December 31, 1993 and 1992 appear below:
1993 1992
------- -------
(IN THOUSANDS)
Principal balance............................................... $7,143 $7,572
Interest that would have been recorded under original terms..... 578 635
Interest actually recorded...................................... 570 642
33
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities, including fee-based services and profits and
commissions earned through securities and insurance sales and trading
activities. In addition, gains or losses realized from the sale of investment
portfolio securities are included in noninterest income. Total noninterest
income for 1993 increased 7 percent compared to 1992 while noninterest income
for 1992 showed an increase of 11 percent from 1991.
NONINTEREST INCOME
YEARS ENDED DECEMBER 31, PERCENT CHANGE
------------------------ -------------------
1993 1992 1991 1993/1992 1992/1991
-------- ------- ------- --------- ---------
(IN THOUSANDS)
Service charges on deposit ac-
counts........................... $ 38,270 $35,602 $32,402 7.5% 9.9%
Trust fees........................ 16,648 14,190 11,522 17.3 23.2
Trading account profits and com-
missions......................... 12,307 14,589 12,574 (15.6) 16.0
Investment securities gains (loss-
es), net......................... 920 821 641 12.1 28.1
Credit card service charges and
fees............................. 6,710 6,265 6,227 7.1 0.6
Other............................. 27,355 24,146 22,789 13.3 6.0
-------- ------- -------
Total noninterest income........ $102,210 $95,613 $86,155 6.9 11.0
======== ======= =======
Fee income from service charges on deposit accounts increased 8 percent in
1993 following a 10 percent increase in 1992. 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 1993 and 1992 were
further influenced by the increase in both the number of accounts and balances
outstanding in transaction deposit accounts.
Trust fees or income from fee-based fiduciary activities increased 17 percent
in 1993 compared to the 23 percent increase in 1992. The increase in 1993 is
due primarily to growth in assets administered at the Trust Division of Compass
Bank and the Company's River Oaks Trust Company subsidiary from $4.9 billion at
the end of 1992 to $5.9 billion at December 31, 1993. Management fees on
corporate employee benefit plans and personal trusts further contributed to the
increase.
Trading account profits and commissions on bond sales and trading activities
decreased 16 percent during 1993 following an increase of 16 percent in 1992.
During 1993, the Company's trading account consisted primarily of mortgage-
backed securities, obligations of state and political subdivisions and U.S.
Treasury securities. The future results of the trading account activity are
dependent on factors such as movements in interest rates and changes in the
securities markets and, as such, cannot be predicted with certainty. For a
discussion of interest rate contracts held in the trading account, see page 21.
Credit card service charge and fee income increased seven percent in 1993
after increasing less than one percent in 1992. Increases in merchants'
discounts and in the annual credit card fees accounted for the increase.
Recurring items of other noninterest income increased $4 million in 1993 and
in 1992. The increase in 1993 resulted primarily from increases in commission
income on annuity sales and mutual funds sales and increased mortgage banking
income.
Nonrecurring items of other noninterest income equaled $3 million in 1993 and
$4 million for 1992. Nonrecurring items of noninterest income include net gains
on sales of investment portfolio securities, net gains on the sale of fixed
assets and other real estate owned, and gains on loan settlements. Nonrecurring
items represented three percent of overall noninterest income in 1993 and four
percent in 1992. The net gains on sales of investment securities in 1993 were
$920,000 compared to $821,000 in 1992. The gain in 1992 is net of a $355,000
writedown on investment securities available for sale. Also included in
nonrecurring noninterest income are the gains recognized on the sales of assets
such as fixed assets and other real estate owned. These gains increased from
$73,000 in 1992 to $1 million in 1993 due primarily to increased sales of other
real estate owned. Gains on loan
34
settlements at amounts in excess of the discounted carrying values relating to
the Company's 1990 and 1991 acquisitions of certain failed banks in Texas
accounted for 42 percent of the total nonrecurring income for 1993 compared to
77 percent in 1992.
NONINTEREST EXPENSE
Noninterest expense for 1993 increased 5 percent following an increase of 15
percent in 1992. Total salaries and other personnel expenses increased eight
percent from 1992 with regular incentive bonuses rising over 1992 levels as
performance goals for 1993 were achieved. Salaries alone increased 6 percent
during 1993 and 17 percent in 1992 due to normal increases relating to
additions to staff and merit increases, while the increase in 1992 also
reflected the impact of staff additions resulting from the Company's 1991
acquisitions. During 1993, sales commissions decreased 14 percent after
increasing 11 percent in 1992. Additionally, the Company's accrual for
projected contributions to the employee stock ownership plan, which is driven
by the Company's performance, contributed to the increase in employee benefits
expense in both years.
NONINTEREST EXPENSE
YEARS ENDED DECEMBER 31, PERCENT CHANGE
-------------------------- -------------------
1993 1992 1991 1993/1992 1992/1991
-------- -------- -------- --------- ---------
(IN THOUSANDS)
Salaries......................... $103,931 $ 97,777 $ 83,484 6.3% 17.1%
Commissions...................... 3,799 4,403 3,955 (13.7) 11.3
Other personnel expense.......... 21,574 18,949 15,357 13.9 23.4
Net occupancy expense............ 18,834 17,304 15,492 8.8 11.7
Equipment expense................ 17,996 16,063 13,599 12.0 18.1
Bank travel and entertainment.... 6,404 6,302 5,112 1.6 23.3
Other real estate expenses....... 3,338 7,997 7,781 (58.3) 2.8
Marketing........................ 5,799 5,131 3,480 13.0 47.4
Professional services............ 17,083 15,899 13,103 7.4 21.3
Supplies......................... 6,875 6,462 5,626 6.4 14.9
FDIC insurance................... 11,989 11,434 9,215 4.9 24.1
Other............................ 36,348 34,541 34,679 5.2 (0.4)
-------- -------- --------
Total noninterest expense...... $253,970 $242,262 $210,883 4.8 14.9
======== ======== ========
Net occupancy expense increased by 9 percent in 1993 following a 12 percent
increase in 1992. These increases in occupancy expense were due principally to
bank acquisitions, opening of new branches, and normal renovation of existing
properties. Equipment expense increased 12 percent in 1993 and 18 percent in
1992 due to equipment replacements and upgrades necessary to support increased
business growth.
Other noninterest expense, as reflected in the consolidated statements of
income, decreased by less than one percent compared to a nine percent increase
in 1992. Professional service expenses increased 7 percent in 1993 and 21
percent in 1992 while bank travel and entertainment expenses increased 2
percent in 1993 and 23 percent in 1992, primarily due to acquisition activity.
The amount the Subsidiary Banks paid for Federal deposit insurance increased
less than $1 million in 1993 after increasing more than $2 million in 1992. The
amount of FDIC insurance premiums paid by the Subsidiary Banks is a function of
both the Subsidiary Banks' deposit base and the rate at which insurance
premiums are assessed by the FDIC, which is based in part on the capital
adequacy of each bank. Because each of the Subsidiary Banks meets the
regulatory definition of "well capitalized", this expense reflects the lowest
possible assessment rate charged by the FDIC.
35
INCOME TAXES
The effective tax rate as a percentage of pretax income was 35 percent in
1993, 34 percent in 1992 and 32 percent in 1991. The effective tax rate in 1991
is lower than the statutory Federal rate of 34 percent primarily due to
investments in loans and securities earning interest income that is exempt from
Federal taxation.
The effective tax rate increased in 1993 due to the Omnibus Budget
Reconciliation Act of 1993 which increased the Company's statutory Federal tax
rate from 34 percent to 35 percent retroactive to January 1, 1993. The
effective tax rate increased in 1992 due to a larger percentage of taxable
income resulting from fewer tax- exempt investment securities and an increase
in non-deductible expenses related to acquisitions. In 1993 and 1992, the
Company's effective tax rate was 100 percent of the statutory Federal tax rate
compared to 94 percent in 1991. The Company's effective tax rate should
continue to equal or exceed the statutory Federal tax rate in future years.
Financial Accounting Statement No. 109, Accounting for Income Taxes
("FAS109"), was issued by the Financial Accounting Standards Board in February,
1992. The Company adopted FAS109 effective January 1, 1993, with no material
impact on the financial statements. Prior years' financial statements have not
been restated to apply the provisions of FAS109.
OTHER ACCOUNTING ISSUES
During the second quarter of 1993, the Financial Accounting Standards Board
("FASB") issued Financial Accounting Statement No. 114, Accounting by Creditors
for Impairment of a Loan ("FAS114"). FAS114 requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, which is the contractual interest rate
adjusted for any deferred loan fees or costs, premium, or discount existing at
the inception or acquisition of the loan. FAS114 is effective for fiscal years
beginning after December 15, 1994, with earlier adoption permitted. The Company
does not anticipate adopting FAS114 prior to its effective date. Presently, the
Company is unable to determine the impact that adoption of FAS114 will have on
the consolidated financial statements of the Company, but management
anticipates that the impact will not be material.
PENDING ACQUISITIONS
For information on pending acquisitions, see the accompanying "Notes to
Consolidated Financial Statements," Note 10, Mergers and Acquisitions.
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from that
of an industrial company in that virtually all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on
financial results depends upon the Company's ability to react to changes in
interest rates and, by such reaction, reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or
at the same magnitude, as the prices of other goods and services. As discussed
previously, management seeks to manage the relationship between interest-
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
Various information shown elsewhere in this Annual Report will assist in the
understanding of how well the Company is positioned to react to changing
interest rates and inflationary trends. In particular, the summary of net
interest income, the maturity distributions, the compositions of the loan and
securities portfolios, the data on the interest sensitivity of loans and
deposits, and the information related to off-balance sheet hedging activities
discussed in Note 6 of "Notes to Consolidated Financial Statements" should be
considered.
36
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.............................................. 38
Consolidated Balance Sheets as of December 31, 1993 and 1992.............. 39
Consolidated Statements of Income for the years ended December 31, 1993,
1992 and 1991............................................................ 40
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993, 1992 and 1991......................................... 41
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1992 and 1991...................................................... 42
Summary of Significant Accounting Policies--December 31, 1993, 1992 and
1991..................................................................... 43
Notes to Consolidated Financial Statements--December 31, 1993, 1992 and
1991..................................................................... 46
Quarterly Results (Unaudited)............................................. 64
37
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, 1993 and 1992, 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, 1993. 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, 1993 and 1992, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes to adopt the provisions of
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in 1993. Also, as discussed in
Note 1, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities at December
31, 1993.
KPMG Peat Marwick
January 14, 1994
Birmingham, Alabama
38
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1993 1992
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks................................ $ 279,622 $ 309,441
Interest bearing deposits with other banks............. 10,474 10,876
Investment securities (market value of $617,190 and
$1,143,923 for 1993 and 1992, respectively):
Taxable.............................................. 480,736 948,794
Tax-exempt........................................... 109,133 154,826
---------- ----------
Total investment securities........................ 589,869 1,103,620
Investment securities available for sale (unrealized
holding gain of $10,421 at December 31, 1993; market
value of $568,263 for 1992)........................... 639,801 560,556
Trading account securities............................. 239,491 106,046
Federal funds sold and securities purchased under
agreements to resell.................................. 140,043 57,883
Loans.................................................. 5,150,377 4,631,403
Less: Unearned income.................................. (1,891) (3,873)
Allowance for loan losses.......................... (110,036) (83,352)
---------- ----------
Net loans.......................................... 5,038,450 4,544,178
Premises and equipment, net............................ 173,911 150,519
Other assets........................................... 140,680 161,387
---------- ----------
TOTAL ASSETS....................................... $7,252,341 $7,004,506
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing.................................. $1,135,898 $1,138,635
Interest bearing..................................... 4,416,928 4,210,644
---------- ----------
Total deposits..................................... 5,552,826 5,349,279
Federal funds purchased................................ 414,704 543,605
Securities sold under agreements to repurchase......... 205,707 232,247
Other short-term borrowings............................ 171,014 132,331
Accrued expenses and other liabilities................. 37,069 36,705
FHLB and other borrowings.............................. 325,437 203,913
---------- ----------
Total liabilities.................................. 6,706,757 6,498,080
Shareholders' equity:
Cumulative, convertible preferred stock of $.10 par
value:
Authorized--25,000,000 shares;
Issued--261,134 in 1992; net of discount of
$3,003,000........................................ -- 23,110
Common stock of $2 par value:
Authorized--50,000,000 shares;
Issued--36,461,980 shares in 1993 and 36,394,067
shares in 1992.................................... 72,924 72,788
Loans to finance stock purchases..................... (6,576) (3,119)
Surplus.............................................. 33,285 31,562
Net unrealized holding gain on available-for-sale
securities.......................................... 6,494 --
Retained earnings.................................... 439,457 382,085
---------- ----------
Total shareholders' equity......................... 545,584 506,426
Commitments (Note 6)...................................
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $7,252,341 $7,004,506
========== ==========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
39
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------------------
1993 1992 1991
------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans........... $ 409,841 $ 393,335 $ 390,394
Interest on investment securities:
Taxable............................ 58,772 122,728 128,155
Tax-exempt......................... 8,306 9,996 11,535
------------ ------------ ------------
Total interest on investment
securities...................... 67,078 132,724 139,690
Interest on investment securities
available for sale.................. 32,356 3,719 --
Interest on trading account
securities.......................... 9,777 6,548 7,874
Interest on federal funds sold and
securities purchased under
agreements to resell................ 2,635 2,258 6,352
Interest on interest bearing deposits
with other banks.................... 883 982 1,731
------------ ------------ ------------
TOTAL INTEREST INCOME............ 522,570 539,566 546,041
INTEREST EXPENSE:
Interest on deposits................. 159,893 185,705 234,820
Interest on federal funds purchased
and securities sold under agreements
to repurchase....................... 19,155 30,796 47,507
Interest on other short-term
borrowings.......................... 6,908 7,722 7,788
Interest on FHLB and other
borrowings.......................... 11,350 2,009 1,305
------------ ------------ ------------
TOTAL INTEREST EXPENSE........... 197,306 226,232 291,420
------------ ------------ ------------
Net interest income.............. 325,264 313,334 254,621
Provision for loan losses.............. 35,985 52,885 37,964
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES....... 289,279 260,449 216,657
NONINTEREST INCOME:
Service charges on deposit accounts.. 38,270 35,602 32,402
Trust fees........................... 16,648 14,190 11,522
Trading account profits and
commissions......................... 12,307 14,589 12,574
Investment securities gains, net..... 920 1,176 641
Writedown of securities available for
sale................................ -- (355) --
Credit card service charges and fees. 6,710 6,265 6,227
Other................................ 27,355 24,146 22,789
------------ ------------ ------------
TOTAL NONINTEREST INCOME......... 102,210 95,613 86,155
NONINTEREST EXPENSE:
Salaries, benefits and commissions... 129,304 121,129 102,796
Net occupancy expense................ 18,834 17,304 15,492
Equipment expense.................... 17,996 16,063 13,599
FDIC insurance....................... 11,989 11,434 9,215
Other................................ 75,847 76,332 69,781
------------ ------------ ------------
TOTAL NONINTEREST EXPENSE........ 253,970 242,262 210,883
------------ ------------ ------------
Net income before income tax
expense......................... 137,519 113,800 91,929
Income tax expense..................... 48,259 38,410 29,145
------------ ------------ ------------
NET INCOME....................... $ 89,260 $ 75,390 $ 62,784
============ ============ ============
Net income per common share............ $ 2.39 $ 2.01 $ 1.74
Weighted average common shares
outstanding........................... 36,721 36,396 35,128
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
40
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
NET
UNREALIZED
HOLDING
LOANS TO GAIN ON
FINANCE AVAILABLE- TOTAL
PREFERRED COMMON STOCK RETAINED TREASURY FOR-SALE SHAREHOLDERS'
STOCK STOCK PURCHASES SURPLUS EARNINGS STOCK SECURITIES EQUITY
--------- ------- --------- ------- -------- -------- ---------- -------------
(IN THOUSANDS)
Balance December 31,
1990................... $ -- $46,951 $ -- $33,266 $289,506 $(9,901) $ -- $359,822
Net income--1991....... -- -- -- -- 62,784 -- -- 62,784
Cash common dividends
declared ($.59 per
share)................ -- -- -- -- (18,725) -- -- (18,725)
Cash preferred
dividends declared
($6.09 per share)..... -- -- -- -- (1,591) -- -- (1,591)
Cash dividends declared
by pooled banks prior
to acquisition........ -- -- -- -- (171) -- -- (171)
Exercise of stock
options............... -- 117 -- 687 (123) 1,332 -- 2,013
Purchase of treasury
stock................. -- -- -- -- -- (43) -- (43)
Issuance of common
stock................. -- 572 -- 13,914 (657) 8,612 -- 22,441
Issuance of preferred
stock................. 23,110 -- -- -- -- -- -- 23,110
------- ------- ------- ------- -------- ------- ------ --------
Balance December 31,
1991................... 23,110 47,640 -- 47,867 331,023 -- -- 449,640
Net income--1992....... -- -- -- -- 75,390 -- -- 75,390
Effect of 3-for-2 stock
split................. -- 23,880 -- (23,897) -- -- -- (17)
Cash common dividends
declared ($.67 per
share)................ -- -- -- -- (22,120) -- -- (22,120)
Cash preferred
dividends declared
($8.00 per share)..... -- -- -- -- (2,089) -- -- (2,089)
Cash dividends declared
by pooled banks prior
to acquisition........ -- -- -- -- (114) -- -- (114)
Exercise of stock
options............... -- 1,268 (3,119) 5,216 (5) 9 -- 3,369
Tax benefit of stock
options exercised..... -- -- -- 1,908 -- -- -- 1,908
Purchase of treasury
stock................. -- -- -- -- -- (9) -- (9)
Issuance of common
stock................. -- -- -- 468 -- -- -- 468
------- ------- ------- ------- -------- ------- ------ --------
Balance December 31,
1992................... 23,110 72,788 (3,119) 31,562 382,085 -- -- 506,426
NET INCOME--1993....... -- -- -- -- 89,260 -- -- 89,260
CASH COMMON DIVIDENDS
DECLARED ($.76 PER
SHARE)................ -- -- -- -- (27,502) -- -- (27,502)
CASH PREFERRED
DIVIDENDS DECLARED
($5.98 PER SHARE)..... -- -- -- -- (1,531) -- -- (1,531)
EXERCISE OF STOCK
OPTIONS............... -- 136 -- 583 -- -- -- 719
PURCHASE OF TREASURY
STOCK................. -- -- -- -- -- (410) -- (410)
TREASURY SHARES ISSUED
FOR OPTIONS........... -- -- -- (235) -- 410 -- 175
LOANS TO FINANCE STOCK
PURCHASES............. -- -- (3,457) -- -- -- -- (3,457)
ISSUANCE OF COMMON
STOCK................. -- -- -- 1,375 -- -- -- 1,375
RETIREMENT OF PREFERRED
STOCK................. (23,110) -- -- -- (2,855) -- -- (25,965)
EFFECT OF ADOPTION OF
FASB STATEMENT NO.
115--ACCOUNTING FOR
CERTAIN INVESTMENTS IN
DEBT AND EQUITY
SECURITIES............ -- -- -- -- -- -- 6,494 6,494
------- ------- ------- ------- -------- ------- ------ --------
BALANCE DECEMBER 31,
1993................... $ -- $72,924 $(6,576) $33,285 $439,457 $ -- $6,494 $545,584
======= ======= ======= ======= ======== ======= ====== ========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
41
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income..................................... $ 89,260 $ 75,390 $ 62,784
Adjustments to reconcile net income to cash
provided/(used) by operations:
Depreciation and amortization................ 26,237 22,830 16,941
Accretion of discount and loan fees.......... (9,013) (10,145) (7,089)
Provision for loan losses.................... 35,985 52,885 37,964
Net change in trading account securities..... (133,445) (25,931) (7,694)
Deferred tax benefit......................... (6,816) (10,881) (2,391)
Net change in mortgage loans available for
sale........................................ (15,795) -- --
Gain on sale of investment securities........ (920) (1,176) (641)
Gain on sale of premises and equipment....... (34) (61) (2,579)
Gain on sale of other real estate owned...... (926) (12) (302)
Provision for losses on other real estate
owned....................................... 1,602 5,100 7,331
Writedown of investment securities available
for sale.................................... -- 355 --
(Increase)/decrease in interest receivable... 8,153 4,307 (10,152)
(Increase)/decrease in other assets.......... (1,478) 33,874 (16,976)
Decrease in interest payable................. (3,764) (8,232) (2,423)
Increase/(decrease) in taxes payable......... 103 (5,308) 1,060
Increase/(decrease) in other payables........ 4,547 3,316 (5,219)
-------- -------- --------
Net cash provided/(used) by operating ac-
tivities.................................. (6,304) 136,311 70,614
INVESTING ACTIVITIES:
Proceeds from sales of investment securities... 40,207 54,511 176,191
Proceeds from maturities/calls of investment
securities.................................... 434,522 695,415 242,761
Purchases of investment securities............. (34,445) (446,325) (809,325)
Proceeds from sales of investment securities
available for sale............................ 57,347 5,296 --
Proceeds from maturities/calls of investment
securities available for sale................. 251,826 -- --
Purchases of investment securities available
for sale...................................... (284,748) -- --
Net (increase)/decrease in federal funds sold
and securities purchased under agreements to
resell........................................ (75,099) 46,246 90,466
Net increase in loan portfolio................. (389,203) (727,171) (171,336)
Proceeds from sales of loans................... -- 5,336 8,473
Acquisition of banks, net of cash acquired..... (16,016) -- 5,205
Purchases of premises and equipment............ (37,248) (33,913) (25,710)
Proceeds from sales of premises and equipment.. 2,140 622 8,136
Net decrease in interest bearing deposits with
other banks................................... 803 2,722 19,628
Proceeds from sales of other real estate owned. 16,133 9,691 15,214
-------- -------- --------
Net cash used by investing activities...... (33,781) (387,570) (440,297)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts
and savings accounts.......................... 59,503 204,555 168,912
Net increase in time deposits.................. 1,661 86,633 145,606
Net increase/(decrease) in federal funds pur-
chased........................................ (128,901) (126,370) 270,945
Net decrease in securities sold under agree-
ments to repurchase........................... (26,540) (121,219) (183,890)
Net increase in short-term borrowings.......... 38,681 14,980 22,758
Proceeds from FHLB advances and other
borrowings.................................... 122,505 198,000 --
Repayment of other borrowings.................. (3,481) (7,273) (3,052)
Purchase of treasury shares.................... (410) (9) (43)
Common dividends paid.......................... (27,502) (22,234) (18,896)
Preferred dividends paid....................... (1,531) (2,089) (1,591)
Redemption of preferred stock.................. (25,965) -- --
Proceeds from issuance of common stock......... -- 468 22,441
Proceeds from exercise of stock options........ 2,246 6,484 2,013
-------- -------- --------
Net cash provided by financing activities.. 10,266 231,926 425,203
-------- -------- --------
Net increase/(decrease) in cash and due from
banks........................................... (29,819) (19,333) 55,520
Cash and due from banks at beginning of the year. 309,441 328,774 273,254
-------- -------- --------
Cash and due from banks at end of the year....... $279,622 $309,441 $328,774
======== ======== ========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
42
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1993, 1992 AND 1991
The accounting principles followed by Compass Bancshares, Inc. (the
"Company") and its subsidiaries and the methods of applying these principles
conform with generally accepted accounting principles and with general
practices within the banking industry. Certain principles which significantly
affect the determination of financial position, results of operations and cash
flows are summarized below.
Certain items in prior years' financial statements have been reclassified to
conform with the current financial statement presentations.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, Compass Bank (and its wholly-owned subsidiaries), Central
Bank of the South, Compass Bank, N.A., Compass Bank-Florida, Compass Banks of
Texas, Inc. (and its wholly-owned subsidiaries) (collectively, the "Subsidiary
Banks"), Compass Land Holding Corporation and Compass Underwriters, Inc. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
SECURITIES
Securities are held in three portfolios: (i) trading account securities, (ii)
held-to-maturity securities, and (iii) securities available for sale. Trading
account securities are stated at market value. Investment securities held to
maturity are stated at cost adjusted for amortization of premiums and accretion
of discounts. With regard to investment securities held to maturity, management
has the intent and ability to hold such securities until maturity. On December
31, 1993, the Company adopted Financial Accounting Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("FAS115")
which requires that investment securities available for sale be reported at
fair value with any unrealized gains or losses excluded from earnings and
reflected as a separate component of stockholders' equity. The adoption of
FAS115 did not affect the Company's methodology for determining the carrying
value of its trading account securities or its investment securities held to
maturity. During all periods prior to the date of adoption, the Company
reported securities available for sale at the lower-of-cost-or-market with any
valuation adjustment reflected in earnings as required by generally accepted
accounting principles at that time. Additionally, FAS115 specifies accounting
principles in regard to transfers among the three portfolios and the conditions
that would permit such transfers. Investment securities available for sale are
classified as such due to the fact that management may decide to sell certain
securities prior to maturity for liquidity, tax planning or other valid
business purposes. The adoption of FAS115 resulted in the addition of $6.5
million to stockholders' equity at December 31, 1993, representing the tax-
effected net unrealized gain on the Company's available-for-sale portfolio at
that date. With the adoption of FAS115, the Company transferred additional
securities totaling $58 million, primarily fixed-rate CMOs, to the available-
for-sale portfolio at December 31, 1993. Subsequent increases and decreases in
the net unrealized gain/loss on the portfolio of securities available for sale
will be reflected as adjustments to the carrying value of the portfolio and as
adjustments to the component of shareholders' equity.
Interest earned on investment securities held to maturity, investment
securities available for sale, and trading account securities is included in
interest income. Net gains and losses on the sale of investment securities held
to maturity and investment securities available for sale, computed principally
on the specific identification method, are shown separately in noninterest
income in the consolidated statements of income.
As part of the Company's overall interest rate risk management, the Company
uses interest rate futures, swaps, caps and floors. Gains and losses on futures
contracts are deferred and amortized over the lives of the hedged assets or
liabilities as an adjustment to interest income or expense. Interest income or
expense related to interest rate swaps, caps and floors is recorded over the
life of the agreement as an adjustment to net interest income.
Gains or losses on futures contracts used in the securities trading
portfolio, as well as gains or losses on short-sale transactions, are
recognized currently by the mark-to-market method of accounting and are
recorded in the noninterest income section of the consolidated statements of
income. Income received as an intermediary for customers under interest rate
contracts is amortized over the life of the respective contract and recorded in
noninterest income.
43
LOANS
All loans are stated at principal outstanding. Interest income on installment
loans is recognized primarily on the level yield method. Interest income on
other loans is credited to income based primarily on the principal outstanding
at appropriate rates of interest.
It is the general policy of the Company's Subsidiary Banks to stop accruing
interest income and place the recognition of interest on a cash basis when any
commercial, industrial or real estate loan is past due as to principal or
interest and the ultimate collection of either is in doubt. 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. When a loan is placed
on a nonaccrual basis, any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is
sufficient to cover the accrued interest or a guarantor assures payment of
interest.
ALLOWANCE FOR LOAN LOSSES
The amount of the provision for loan losses charged to income is determined
on the basis of several factors including actual loss experience, current and
expected economic conditions and periodic examinations and appraisals of the
loan portfolio. Such provisions, less net loan charge-offs, comprise the
allowance for loan losses which is deducted from loans and is available for
future loan charge-offs.
The Subsidiary Banks generally follow the policy of charging off loans
determined to be uncollectible by management, the Company's loan examination
division or Federal and state supervisory authorities. Subsequent recoveries
are credited to the allowance.
OTHER REAL ESTATE
For real estate acquired through foreclosure and in-substance foreclosed
assets, a new cost basis is established at fair value at the time of
foreclosure. Subsequent to foreclosure, foreclosed assets are carried at the
lower of fair value less estimated costs to sell or cost, with the difference
recorded as a valuation allowance, on an individual asset basis. Subsequent
decreases in fair value and increases in fair value, up to the value
established at foreclosure, are recognized as charges or credits to expense.
Other real estate, net of allowance for losses, is reported in other assets in
the consolidated balance sheets.
LOAN FEES
The Company accounts for loan fees and origination costs in accordance with
Financial Accounting Statement No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Direct Costs of Leases
("FAS91"). The basic requirement of FAS91 calls for the Company to treat loan
fees, net of direct costs, as an adjustment to the yield of the related loan
over the term of the loan.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using primarily the straight-line method over the
estimated useful lives of assets.
AMORTIZATION OF INTANGIBLES
Intangibles are included in other assets. The amortization periods for these
assets are dependent upon the type of intangible. Goodwill is amortized over a
period not greater than 20 years; core deposit and other identifiable
intangibles are amortized over a period based on the life of the intangible
which generally varies from 10 to 20 years. Goodwill is amortized using the
straight-line method and other identifiable intangibles are amortized using
accelerated methods as appropriate.
44
TREASURY STOCK
Stock repurchases are accounted for using the cost method.
INCOME TAX EXPENSE
For 1993, the Company and its subsidiaries provide for income tax using the
asset and liability method of accounting for income tax in accordance with
Financial Accounting Statement No. 109, Accounting for Income Taxes ("FAS109").
For 1992 and 1991, the Company and its subsidiaries provide for income tax
using the deferred method of accounting for income taxes under APB Opinion 11.
Under the asset and liability method prescribed by FAS109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under FAS109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Pursuant to the deferred method under APB Opinion 11, deferred income taxes
are recognized for income and expense items that are reported in different
years for financial reporting purposes and income tax purposes using the tax
rate applicable for the year of the calculation. Under the deferred method,
deferred taxes are not adjusted for subsequent changes in tax rates.
Effective January 1, 1993, the Company adopted FAS109, with no material
impact on the financial statements. Prior years' financial statements have not
been restated to apply the provisions of FAS109.
EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have various employee benefit plans which
cover substantially all employees. Pension expense is determined based on an
actuarial valuation. The Company contributes amounts to the pension fund
sufficient to satisfy funding requirements of the Employee Retirement Income
Security Act. Contributions to the various other plans are determined by the
Board of Directors.
NET INCOME PER COMMON SHARE
Primary net income per common share is calculated based on the weighted
average shares of common stock and common stock equivalents outstanding during
the year. Common stock equivalents included in the computations represent the
dilutive effect of shares issuable under stock options granted by the Company.
For purposes of this calculation, net income is adjusted for preferred stock
dividends paid by the Company during the year. All prior period per share data
has been restated to reflect a 3-for-2 stock split effected through the
issuance of a 50 percent stock dividend paid in July, 1992.
45
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1992 AND 1991
(1) CASH AND DUE FROM BANKS
The Subsidiary Banks are required to maintain cash balances with the Federal
Reserve. The average amounts of those balances for the years ended December 31,
1993 and 1992 were approximately $77,491,000 and $69,694,000, respectively.
(2) CASH FLOWS
The Company paid approximately $201,070,000, $234,464,000 and $293,843,000 in
interest on deposits and other liabilities during 1993, 1992 and 1991,
respectively.
DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
Schedule of noncash investing and financing
activities:
Transfers of loans to other real estate owned..... $ 7,552 $ 20,625 $ 21,151
Loans to facilitate the sale of other real estate. 8,362 7,771 577
Transfer of securities to investment securities
available for sale............................... 86,704 566,137 --
Issuance of preferred stock in acquisition........ -- -- 23,110
Tax benefit realized upon exercise of stock
options.......................................... -- 1,908 --
Debt reduction through issuance of stock.......... -- -- 1,195
- --------
Acquisitions of banks:
Fair value of assets acquired................... $165,313
Liabilities assumed............................. 146,723
--------
Cash paid..................................... $ 18,590
========
(3) INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
The adjusted cost and approximate market value of investment securities and
investment securities available for sale at December 31, 1993 and 1992 were as
follows:
1993 1992
----------------- ---------------------
CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE
-------- -------- ---------- ----------
(IN THOUSANDS)
Investment securities:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations...................... $ 28,718 $ 32,636 $ 84,377 $ 88,773
Mortgage-backed securities......... 394,638 409,667 792,460 821,899
States and political subdivisions.. 107,280 112,601 151,961 154,805
Corporate.......................... 55,305 58,120 51,341 54,773
Foreign............................ 470 417 475 422
Other.............................. 1,986 2,048 2,931 2,989
Equity securities.................... 1,472 1,701 20,075 20,262
-------- -------- ---------- ----------
Total............................ $589,869 $617,190 $1,103,620 $1,143,923
======== ======== ========== ==========
46
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
1993 1992
------------------ -----------------
MARKET AMORTIZED CARRYING MARKET
VALUE COST AMOUNT VALUE
-------- --------- -------- --------
(IN THOUSANDS)
Investment securities available for sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and corporations. $262,474 $254,973 $292,216 $298,963
Mortgage-backed securities............ 327,578 327,146 248,804 248,804
Corporate............................. 12,934 12,683 10,183 10,805
Other................................. 1,407 1,407 4,640 4,737
Equity securities....................... 35,408 33,171 4,713 4,954
-------- -------- -------- --------
Total............................... $639,801 $629,380 $560,556 $568,263
======== ======== ======== ========
Securities with principal amounts of approximately $793,165,000 and
$962,690,000 at December 31, 1993 and 1992, respectively, were sold under
agreements to repurchase or pledged to secure public deposits and for other
purposes as required by law. Unrealized gains and unrealized losses on
investment securities held to maturity for 1993 were $28,343,000 and
$1,022,000, respectively. For investment securities available for sale,
unrealized gains and unrealized losses at year-end 1993 were $10,531,000 and
$110,000, respectively. The unrealized gains and unrealized losses on
investment securities and investment securities available for sale related to
the various categories as of December 31, 1993 and 1992 are detailed in the
following table.
1993 1992
--------------------- ---------------------
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.................. $ 3,932 $ 14 $ 4,559 $ 163
Mortgage-backed securities..... 15,956 927 30,217 778
States and political
subdivisions.................. 5,349 28 3,487 643
Corporate...................... 2,815 -- 3,432 --
Foreign........................ -- 53 -- 53
Other.......................... 62 -- 58 --
Equity securities................ 229 -- 187 --
------- ------ ------- ------
Total........................ $28,343 $1,022 $41,940 $1,637
======= ====== ======= ======
Investment securities available for
sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.................. $ 7,611 $ 110 $ 6,788 $ 41
Mortgage-backed securities..... 432 -- -- --
Corporate...................... 251 -- 622 --
Other.......................... -- -- 98 1
Equity securities................ 2,237 -- 241 --
------- ------ ------- ------
Total........................ $10,531 $ 110 $ 7,749 $ 42
======= ====== ======= ======
47
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
The maturity of the securities portfolio is presented in the tables below.
No maturity breakdown is presented for mortgage-backed securities because of
the unpredictability as to the timing and amount of principal repayments on
these securities.
1993
------------------
CARRYING MARKET
AMOUNT VALUE
-------- ---------
(IN THOUSANDS)
Investment securities:
Maturing within one year................................... $ 31,502 $ 32,474
Maturing after one but within five years................... 48,528 51,555
Maturing after five but within ten years................... 54,572 59,385
Maturing after ten years................................... 60,629 64,109
-------- --------
195,231 207,523
Mortgage-backed securities................................. 394,638 409,667
-------- --------
Total.................................................... $589,869 $617,190
======== ========
MARKET AMORTIZED
VALUE COST
-------- ---------
(IN THOUSANDS)
Investment securities available for sale:
Maturing within one year................................... $ 66,530 $ 63,731
Maturing after one but within five years................... 245,056 238,062
Maturing after ten years................................... 637 441
-------- --------
312,223 302,234
Mortgage-backed securities................................. 327,578 327,146
-------- --------
Total.................................................... $639,801 $629,380
======== ========
Proceeds from sales of investment securities classified as held-to-maturity
were $40,207,000 in 1993, $54,511,000 in 1992, and $176,191,000 in 1991. Gross
gains realized on those sales were $193,000 in 1993, $1,176,000 in 1992, and
$1,848,000 in 1991. Gross losses realized on sales totaled $1,207,000 in 1991.
Proceeds from sales of available-for-sale investment securities were
$57,347,000 in 1993 and $5,296,000 in 1992. Gross gains realized on those
sales were $727,000 in 1993. There were no losses realized on sales in 1993 or
in 1992. There were no transfers of securities from the available-for-sale
portfolio to the trading securities portfolio.
With the adoption of FAS115 on December 31, 1993, the Company transferred an
additional $58 million of investment securities to its available-for-sale
portfolio. The transfer primarily involved fixed-rate CMOs that could be
required to be transferred to the available-for-sale portfolio by Federal
regulators in the future if sufficiently reduced prepayment speeds are
experienced on the underlying mortgages.
(4) LOANS AND ALLOWANCES FOR LOAN LOSSES AND LOSSES ON OTHER REAL ESTATE
At December 31, 1993 and 1992, the composition of the loan portfolio was as
follows:
1993 1992
---------- ----------
(IN THOUSANDS)
Commercial, financial and agricultural................... $1,125,633 $1,051,461
Real estate--construction................................ 251,343 234,160
Real estate--mortgage.................................... 2,622,120 2,177,542
Consumer installment..................................... 1,151,281 1,168,240
---------- ----------
$5,150,377 $4,631,403
========== ==========
48
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
During 1993 and 1992, certain executive officers and directors of the Company
and its principal subsidiary, Compass Bank, including their immediate families
and companies with which they are associated, were loan customers of the
Subsidiary Banks. Total loans outstanding to these persons at December 31, 1993
and 1992 amounted to $56,660,000 and $54,393,000, respectively. The change from
December 31, 1992 to December 31, 1993, reflects payments amounting to
$25,580,000 and advances of $27,847,000. Such loans are made in the ordinary
course of business at normal credit terms, including interest rate and
collateral requirements, and do not represent more than normal credit risk.
The Company does not have a concentration of loans to any one industry.
A summary of the transactions in the allowance for loan losses for the years
ended December 31, 1993, 1992 and 1991 follows:
1993 1992 1991
-------- ------- -------
(IN THOUSANDS)
Balance at beginning of year........................ $ 83,352 $55,561 $42,366
Add: Provision charged to income.................... 35,985 52,885 37,964
Additions due to acquisitions.................... 1,323 -- 6,878
Deduct: Loans charged off........................... 19,301 31,502 35,566
Loan recoveries................................ (8,677) (6,408) (3,919)
-------- ------- -------
Net charge-offs............................... 10,624 25,094 31,647
-------- ------- -------
Balance at end of year.............................. $110,036 $83,352 $55,561
======== ======= =======
Details of nonaccrual loans at December 31, 1993 and 1992 appear below:
1993 1992
------- -------
(IN THOUSANDS)
Principal balance............................................... $12,024 $20,818
Interest that would have been recorded under original terms..... 1,606 1,706
Interest actually recorded...................................... 643 610
Details of loans with terms modified in troubled debt restructurings at
December 31, 1993 and 1992 appear below:
1993 1992
------- -------
(IN THOUSANDS)
Principal balance............................................... $ 7,143 $ 7,572
Interest that would have been recorded under original terms..... 578 635
Interest actually recorded...................................... 570 642
A summary of the transactions in the allowance for losses on other real
estate for the years ended December 31, 1993 and 1992 follows:
1993 1992
------- -------
(IN THOUSANDS)
Balance at beginning of year.................................. $ 5,196 $ 1,534
Provision charged to income................................... 1,602 5,100
Charge-offs................................................... (3,964) (1,474)
Recoveries.................................................... 981 36
------- -------
Balance at end of year........................................ $ 3,815 $ 5,196
======= =======
49
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
Other real estate, net of the allowance for losses, totaled $20,653,000 at
December 31, 1993, and $37,243,000 at December 31, 1992, and is reported in
other assets in the consolidated balance sheets.
(5) FHLB AND OTHER BORROWINGS
At December 31, 1993, the Company had 7 percent subordinated debentures of
$75,000,000 maturing in 2003 with interest paid semi-annually. At December 31,
1993, the net carrying amount of these debentures was $74,499,000.
The Company had a mortgage amounting to $4,938,000 as of December 31, 1993
secured by the River Oaks Bank Building in Houston, Texas. The 8.875 percent
mortgage has monthly principal and interest payments of approximately $50,000
and matures December 31, 2008.
At December 31, 1993, the Company also had $246,000,000 in outstanding
advances from the Federal Home Loan Bank of which $100,000,000 matures in 1995,
$48,000,000 matures in 1996, and $98,000,000 matures in 1997. The interest rate
on these advances resets quarterly based on the 3-month LIBOR rate and interest
payments are due quarterly. These advances are secured by first mortgages of
$378,000,000 carried on the books of Compass Bank.
(6) OFF-BALANCE SHEET RISK AND COMMITMENTS
The Company and its subsidiaries lease certain facilities and equipment for
use in their businesses. The leases for facilities generally run for periods of
10 to 20 years with various renewal options, while leases for equipment
generally have terms not in excess of 5 years. The majority of the leases for
facilities contain rental escalation clauses with fixed rental increases or
increases tied to changes in consumer indexes. Certain real property leases
contain purchase options.
Management expects that most leases will be renewed or replaced with new
leases in the normal course of business.
The following is a schedule by years of future minimum rentals required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1993, for leased facilities (in
Thousands):
1994................. $ 3,682
1995................. 3,235
1996................. 2,659
1997................. 2,212
1998................. 1,828
1999-2003............ 5,707
2004-2008............ 203
2009-2013............ 98
2014-2072............ 1,084
-------
$20,708
=======
50
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
Minimum rentals for all operating leases charged to earnings totaled
$7,087,000, $8,072,000 and $7,194,000 for years ended December 31, 1993, 1992
and 1991, respectively.
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters of
credit, forward and futures contracts, interest rate swap agreements, options
written, and floors and caps written. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated financial statements. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
in the particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments to extend credit and issuing standby and commercial letters of
credit as it does for on-balance sheet instruments. For interest rate caps,
floors and swap transactions, forward and futures contracts and options
written, the contract or notional amounts do not represent ultimate exposure to
credit loss. The Company controls the credit risk of its financial instruments
through credit approvals, limits and monitoring procedures.
The following table summarizes the contract or notional amount of various
off-balance sheet instruments and commitments as of December 31:
OFF-BALANCE SHEET INSTRUMENTS AND COMMITMENTS
1993 1992
---------- ----------
(IN THOUSANDS)
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit.......................... $1,433,551 $1,144,563
Standby and commercial letters of credit.............. 52,382 43,533
Financial instruments whose notional or contract
amounts exceed the amount of credit risk*:
Forward and futures contracts......................... $ 179,790 $ 7,933
Interest rate swap agreements......................... 568,287 447,966
Exchange-traded options written....................... 700,000 52,000
Exchange-traded options purchased..................... 1,254,000 6,250
Floors and caps written............................... 448,100 176,100
Floors and caps purchased............................. 1,250,000 1,140,000
- --------
* The Company has credit risk on uncollateralized interest rate swaps and
purchased floors for the amount required to replace such contracts in the
event of counterparty default. At December 31, 1993, the Company estimates
its credit risk in the event of total counterparty default to be $900,000 for
interest rate swaps and $27.6 million for purchased floors and caps.
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.
51
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
Standby letters of credit are commitments issued by the Company to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions and expire in
decreasing amounts. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Company holds various assets as collateral supporting those
commitments for which collateral is deemed necessary.
Forward and futures contracts are contracts for delayed delivery of
securities or money market instruments in which the seller agrees to make
delivery of a specified instrument at a designated future date at a specific
price or yield. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities' values and
interest rates.
The Company enters into a variety of interest rate contracts, including
interest rate caps and floors written, interest rate options written and
interest rate swap agreements, in its trading activities and in managing its
interest rate exposure. Interest rate caps and floors written by the Company
enable customers to transfer, modify or reduce their interest rate risk.
Interest rate options are contracts that allow the holder of the option to
purchase or sell a financial instrument at a specified price and within a
specified period of time from or to the seller, or writer, of the option. As a
writer of options, the Company receives a premium at the outset and then bears
the risk of the unfavorable change in the price of the financial instrument
underlying the option.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into interest rate swap agreements
involves not only the risk of dealing with counterparties and their ability to
meet the terms of the contracts but also the interest rate risk associated with
unmatched positions. Notional principal amounts often are used to express the
volume of these transactions, however, the amounts potentially subject to
credit risk are much smaller.
The Company also has recorded as liabilities certain short-sale transactions
amounting to $25,656,000 at December 31, 1993, 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 and mortgage-
backed securities for which there is an active, liquid market. The Company does
not expect the amount of losses, if any, on such transactions to be material.
(7) STOCK OPTION AND STOCK APPRECIATION RIGHT PLANS
The Company has two long-term incentive stock option plans for key senior
officers of the Company and its subsidiaries. The stock option plans provide
for these key employees to purchase shares of the Company's $2.00 par value
common stock at the fair market value at the date of the grant. Pursuant to the
1982 Long Term Incentive Plan and the 1989 Long Term Incentive Plan, 2,475,000
and 1,500,000 shares, respectively, of the Company's common stock have been
reserved for issuance. The options granted under the plans may be exercised
within 10 years from the date of grant. The incentive stock option agreements
state that incentive options may be exercised in whole or in part until
expiration date, but for options issued before 1987 no incentive stock option
may be exercised if an incentive stock option is outstanding that was granted
before the granting of such option. The plans also provide for the granting of
stock appreciation rights to holders of nonqualified stock options. A stock
appreciation right allows the holder to surrender an exercisable stock option
in exchange for common stock (at fair market value on the date of exercise),
cash, or in a combination thereof, in an amount equal to the excess of the
52
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
fair market value of covered shares over the option price of such shares. All
outstanding options were exercisable at December 31, 1993.
The following summary sets forth activity under the plan for the years ended
December 31 (restated for the 3-for-2 stock split in 1992):
1993 1992 1991
------------ ------------ ------------
Shares under option at end of year...... 814,272 714,202 1,175,121
Price range per share................. $9.17-$24.00 $5.27-$20.83 $5.27-$14.83
Shares under option exercised during the
year................................... 85,630 664,592 227,175
Price range per share................. $5.27-$20.17 $5.27-$20.17 $6.05-$11.50
At December 31, 1993, the shares under option included nonqualified options
issued to certain executives to acquire 30,000 shares of common stock which
provide for tandem stock appreciation rights that are exercisable only upon
the occurrence of certain contingent events. Because of the restrictions upon
exercise of the stock appreciation rights, no compensation expense has been
recorded with respect to these options.
The shares under option also included nonqualified options without stock
appreciation rights issued to certain executives to acquire shares of common
stock as follows: 105,350 shares at year-end 1993 and year-end 1992 and
120,651 shares at year-end 1991.
(8) DIVIDENDS FROM SUBSIDIARIES
Dividends paid by the Subsidiary Banks are the primary source of funds
available to the Company for payment of dividends to its shareholders and
other needs. Applicable Federal and state statutes and regulations impose
restrictions on the amounts of dividends that may be declared by the
Subsidiary Banks. In addition to the formal statutes and regulations,
regulatory authorities also consider the adequacy of each bank's total capital
in relation to its assets, deposits and other such items. Capital adequacy
considerations could further limit the availability of dividends from the
Subsidiary Banks.
At December 31, 1993, approximately $97,455,000 of the Subsidiary Banks' net
assets were available for payment of dividends without prior regulatory
approval.
(9) MERGERS AND ACQUISITIONS
On June 18, 1992, the Company completed the acquisition of Interstate
Bancshares, Inc. ("Interstate") of Houston, Texas. In the acquisition, the
Company exchanged 211,992 shares of the Company's common stock for the
outstanding common shares of Interstate plus $308,550 in cash for the
outstanding preferred shares of Interstate. The acquisition was accounted for
under the pooling-of-interests method. The assets and equity of Interstate at
acquisition date were $66 million and $4 million, respectively.
On October 28, 1992, the Company acquired City National Bancshares, Inc.
("City National") of Carrollton, Texas through the exchange of 397,448 shares
of the Company's common stock for the outstanding stock of City National. The
acquisition was accounted for as a pooling-of-interests. Upon acquisition,
City National had assets and equity of $62 million and $7 million,
respectively.
On December 22, 1992, the Company completed the acquisition of FWNB
Bancshares, Inc. ("First Western") of Plano, Texas. The Company issued 704,923
shares of its common stock for the outstanding shares of First
53
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
Western. The acquisition was accounted for as a pooling-of-interests. Upon
acquisition, First Western had assets of $161 million and equity of $8 million.
The Company completed the acquisition of Cornerstone Bancshares, Inc.
("Cornerstone") in Dallas, Texas on January 19, 1993, through the issuance of
1,279,066 shares of the Company's common stock. The transaction was accounted
for under the pooling-of-interests method of accounting and accordingly all
prior period information has been restated to reflect the financial position
and results of operations of Cornerstone. Upon acquisition, Cornerstone had
assets of $239 million and equity of $15 million.
On October 14, 1993, the Company acquired First Federal Savings Bank of
Northwest Florida ("First Federal"), of Ft. Walton Beach, Florida for $13.7
million in cash. The acquisition was accounted for under the purchase method of
accounting. At the date of acquisition, First Federal had assets of $101
million and equity of $10 million.
On October 21, 1993, the Company acquired Peoples Holding Company, Inc.
("Liberty") and its bank subsidiary, Liberty Bank of Ft. Walton Beach, Florida
for $5.0 million in cash. At the date of acquisition, Liberty had assets of $43
million and equity of $4 million. The acquisition was accounted for as a
purchase.
On November 3, 1993, the Company completed the acquisition of Spring National
Bank ("Spring National"), of Houston, Texas with the issuance of 326,940 shares
of the Company's common stock. At the date of acquisition, Spring National had
assets of $75 million and equity of $6 million. The transaction was accounted
for under the pooling-of-interests method of accounting and accordingly all
prior period information has been restated to reflect the financial position
and results of operations of Spring National.
On January 27, 1994, the Company completed the acquisition of 1st Performance
National Bank ("1st Performance"), of Jacksonville, Florida in a cash
transaction. The acquisition was accounted for as a purchase. At the date of
acquisition, 1st Performance had assets of $278 million and equity of $25
million.
Presented below is summary operating information for the Company showing the
effect of the business combinations described above.
AS PREVIOUSLY EFFECT OF CURRENTLY
REPORTED POOLINGS REPORTED
------------- --------- ---------
(IN THOUSANDS)
1992:
Net interest income......................... $298,739 $14,595 $313,334
Provision for loan losses................... 49,956 2,929 52,885
Noninterest income.......................... 91,465 4,148 95,613
Noninterest expense......................... 228,033 14,229 242,262
Net income.................................. 74,371 1,019 75,390
1991:
Net interest income......................... $241,058 $13,563 $254,621
Provision for loan losses................... 36,373 1,591 37,964
Noninterest income.......................... 81,781 4,374 86,155
Noninterest expense......................... 196,125 14,758 210,883
Net income.................................. 61,496 1,288 62,784
Prior to their respective acquisition dates in 1993, the entities accounted
for under the pooling-of-interests method had net interest income of $3.4
million and net income of $800,000.
54
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
On November 19, 1993, the Company entered into a definitive agreement to
acquire Security Bank, N.A. ("Security") of Houston, Texas for Company common
stock having a market value of $11,250,000, subject to certain conditions. At
December 31, 1993, Security had assets of $77 million and equity of $6 million.
The transaction is expected to close in the second quarter of 1994 and to be
accounted for under the pooling-of-interests method of accounting.
On November 12, 1993, the Company entered into a definitive agreement to
acquire three branches of Anchor Savings Bank located in Jacksonville, Florida.
At December 31, 1993, these branches had total deposits of approximately $35
million.
(10) BENEFIT PLANS
The Company sponsors a defined benefit pension plan pursuant to which
participants are entitled to an annual benefit upon retirement equal to a
percentage of the average base compensation (generally defined as direct cash
compensation exclusive of bonuses and commissions) earned in the five
consecutive years of benefit service which produces the highest average. The
percentage amount of the benefit is determined by multiplying the number of
years, up to 30, of a participant's service with the Company by 1.8 percent.
Benefits are reduced by Social Security payments at the rate of 1.8 percent of
primary Social Security benefits times years of service up to 30 years. All
employees of the Company who are over the age of 21 and have worked 1,000 hours
or more in their first 12 months of employment or 1,000 hours or more in any
calendar year thereafter are eligible to participate. Since 1989, under most
circumstances, employees are vested after five years of service. Prior to 1989,
the vesting period was 10 years. Benefits are payable monthly commencing on the
later of age 65 or the participant's date of retirement. Eligible participants
may retire at reduced benefit levels after reaching age 55, if they have at
least 10 years of service. The Company contributes amounts to the pension fund
sufficient to satisfy funding requirements of the Employee Retirement Income
Security Act.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31:
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits of $26,594,000, $21,167,000,
and $17,832,000 for 1993, 1992 and 1991, re-
spectively.................................... $(28,359) $(21,934) $(18,418)
======== ======== ========
Projected benefit obligation for service rendered
to date......................................... $(44,819) $(34,008) $(27,422)
Plan assets at fair value, primarily listed
stocks and U.S. bonds........................... 36,053 31,394 29,875
-------- -------- --------
Plan assets in excess of (less than) projected
benefit obligation............................ (8,766) (2,614) 2,453
Unrecognized prior service cost.................. 106 116 127
Unrecognized net loss............................ 13,032 5,850 1,892
Unrecognized net asset being amortized over 13
years........................................... (2,248) (2,692) (3,136)
-------- -------- --------
Net pension asset included in other assets..... $ 2,124 $ 660 $ 1,336
======== ======== ========
Net pension cost for 1993, 1992 and 1991 included the following components:
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
Service cost-benefits earned during the period....... $ 2,409 $ 1,850 $ 1,456
Interest cost on projected benefit obligation........ 2,800 2,416 2,057
Actual return on plan assets......................... (2,221) (2,053) (4,179)
Net amortization and deferral........................ (1,127) (1,314) 1,202
------- ------- -------
Net periodic pension cost............................ $ 1,861 $ 899 $ 536
======= ======= =======
55
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
The weighted average discount rate was 7.50 percent for 1993 and 8.50 percent
for 1992 and 1991. The rate of increase in future compensation levels was six
percent for 1993, 1992 and 1991. Both rates are used in determining the
actuarial present value of the projected benefit obligation. The assumed long-
term rate of return on plan assets was 10 percent in 1993, 1992 and 1991.
The Company maintains an employee stock ownership plan to which contributions
are made in amounts determined by the Board of Directors of the Company. Such
contributions are invested in stock of the Company and are ordinarily
distributed to employees upon their retirement or other termination of
employment. Contributions to the plan are allocated to the accounts of the
participants based upon their compensation, with right to such accounts vested
after five years of employment. The Company contributed $3,874,000 during 1993,
$3,380,000 during 1992, and $2,766,000 during 1991.
The Company has a qualified employee benefit plan under section 401(k) of the
Internal Revenue Code. Employees can contribute up to 10 percent of their
salaries to the plan on a pre-tax basis subject to regulatory limits and the
Company at its discretion can match up to 100 percent of 6 percent of the
participants' compensation. The Company's contributions are based on
predetermined income levels. The administrative costs incurred by the plan are
paid by the Company at no cost to the participants.
The Company also has a monthly investment plan. Under the plan, employees may
contribute monthly up to 10 percent of their salary and the Company contributes
30 cents for each one dollar of the employees' 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.
(11) OTHER NONINTEREST EXPENSE
The major components of other noninterest expense are as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
Bank travel and entertainment....................... $ 6,404 $ 6,302 $ 5,112
Other real estate expenses.......................... 3,338 7,997 7,781
Marketing........................................... 5,799 5,131 3,480
Professional services............................... 17,083 15,899 13,103
Supplies............................................ 6,875 6,462 5,626
Other............................................... 36,348 34,541 34,679
-------- -------- --------
$ 75,847 $ 76,332 $ 69,781
======== ======== ========
(12) INCOME TAX EXPENSE
Income taxes for the year ended December 31, 1993, were allocated as follows
(in Thousands):
Income from operations............................................ $48,259
Stockholders' equity, for net unrealized gains on securities
available for sale............................................... 3,927
-------
$52,186
=======
56
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
For the years ended December 31, 1993, 1992 and 1991 income tax expense
attributable to income from operations consists of:
1993 1992 1991
------- -------- -------
(IN THOUSANDS)
Current income tax expense:
Federal.......................................... $50,617 $ 45,133 $28,614
State............................................ 4,458 4,158 2,852
------- -------- -------
Total.......................................... 55,075 49,291 31,466
------- -------- -------
Deferred income tax benefit:
Federal.......................................... (6,150) (9,848) (2,101)
State............................................ (666) (1,033) (220)
------- -------- -------
Total.......................................... (6,816) (10,881) (2,321)
------- -------- -------
Total income tax expense........................... $48,259 $ 38,410 $29,145
======= ======== =======
During 1993, the Company made income tax payments of approximately
$60,480,000 and received cash income tax refunds amounting to approximately
$207,000. For 1992 and 1991, income tax payments were approximately $45,282,000
and $31,828,000, respectively. Cash income tax refunds amounted to
approximately $247,000 and $479,000 for 1992 and 1991, respectively. Applicable
income tax expense on securities gains of $347,000, $249,000, and $213,000 for
1993, 1992 and 1991, respectively, are included in the provision for income
taxes.
Income tax expense attributable to income from operations differed from the
amount computed by applying the Federal statutory income tax rate to pretax
earnings for the following reasons:
1993 1992 1991
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT EARNINGS AMOUNT EARNINGS AMOUNT EARNINGS
------- --------- ------- --------- ------- ---------
(IN THOUSANDS)
Income tax expense at
Federal statutory rate. $48,131 35.0% $38,692 34.0% $31,256 34.0%
Increase (decrease) re-
sulting from:
Tax-exempt interest... (4,121) (3.0) (4,970) (4.4) (5,742) (6.2)
State income tax ex-
pense net of Federal
income tax benefit... 2,465 1.8 2,063 1.8 1,737 1.9
Other................. 1,784 1.3 2,625 2.4 1,894 2.0
------- ---- ------- ---- ------- ----
Income tax expense.. $48,259 35.1% $38,410 33.8% $29,145 31.7%
======= ==== ======= ==== ======= ====
The Omnibus Budget Reconciliation Act of 1993 increased the Federal statutory
rate from 34 percent to 35 percent. The Act was signed into law on August 10,
1993, and the rate increase was made retroactive to January 1, 1993. The net
effect of the rate change did not have a material impact on the financial
statements.
57
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
For the years ended December 31, 1992 and 1991, deferred income tax expense
(benefit), results from income and expense amounts reported for financial
statements in different years than for income tax purposes. The tax effects of
those timing differences are presented below.
1992 1991
-------- -------
(IN THOUSANDS)
Provision for loan losses.................................... $(11,399) $(3,216)
Other, net................................................... 518 895
-------- -------
Total...................................................... $(10,881) $(2,321)
======== =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1993 are presented below (in Thousands):
Deferred tax assets:
Allowance for loan losses....................................... $39,223
Loan fees....................................................... 2,825
Accrued expenses................................................ 3,191
Lease financing................................................. 1,605
Other deferred tax assets....................................... 1,909
-------
Total assets.................................................. 48,753
-------
Deferred tax liabilities:
Premises and equipment.......................................... 9,141
Core deposit and other acquired intangibles..................... 9,880
Net unrealized gains on securities available for sale........... 3,927
Other deferred tax liabilities.................................. 4,855
-------
Total liabilities............................................. 27,803
-------
Net deferred tax asset............................................ $20,950
=======
The Company believes that the deferred tax asset is recoverable.
58
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(13) PARENT COMPANY
The condensed financial information for Compass Bancshares, Inc. (Parent
Company Only) is presented as follows:
Parent Company Only
Balance Sheets
DECEMBER 31,
------------------
1993 1992
-------- --------
(IN THOUSANDS)
ASSETS
Cash and due from banks.................................... $115,847 $ 34,405
Investment securities available for sale--taxable.......... -- 4,633
Reverse repurchase agreements with affiliates.............. -- 12,900
Investment in subsidiaries:................................
Banks.................................................... 399,734 334,397
Bank holding companies................................... 168,192 151,292
Other.................................................... 6,248 7,193
-------- --------
574,174 492,882
Other assets............................................... 410 4,048
-------- --------
TOTAL ASSETS........................................... $690,431 $548,868
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper........................................... $ 62,858 $ 34,302
Accrued expenses and other liabilities..................... 7,490 8,140
Other borrowings........................................... 74,499 --
-------- --------
Total liabilities...................................... 144,847 42,442
Shareholders' equity:
Cumulative, convertible preferred stock of $.10 par val-
ue:
Authorized--25,000,000 shares;
Issued--261,134 shares in 1992; net of discount of
$3,003,000............................................ -- 23,110
Common stock of $2 par value:
Authorized--50,000,000 shares;
Issued--36,461,980 shares in 1993 and 36,394,067 shares
in 1992............................................... 72,924 72,788
Loans to finance stock purchases......................... (6,576) (3,119)
Surplus.................................................. 33,285 31,562
Net unrealized holding gain on available-for-sale securi-
ties.................................................... 6,494 --
Retained earnings........................................ 439,457 382,085
-------- --------
Total shareholders' equity............................. 545,584 506,426
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $690,431 $548,868
======== ========
59
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(13) PARENT COMPANY, Continued
Parent Company
Statements of Income
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
INCOME:
Cash dividends from bank subsidiaries.......... $ 32,850 $ 24,185 $ 63,583
Interest on investments with affiliates........ 4,149 2,950 3,118
Other.......................................... 641 458 15
-------- -------- --------
TOTAL INCOME................................. 37,640 27,593 66,716
EXPENSE:
Interest on commercial paper and other
borrowings.................................... 6,008 2,580 2,633
Other.......................................... 4,147 1,656 389
-------- -------- --------
TOTAL EXPENSE................................ 10,155 4,236 3,022
Income before income tax expense and equity
in undistributed earnings of subsidiaries... 27,485 23,357 63,694
Applicable income tax expense (benefit).......... (1,562) (318) 48
-------- -------- --------
29,047 23,675 63,646
EQUITY IN UNDISTRIBUTED EARNINGS (DIVIDENDS IN
EXCESS OF EARNINGS) OF SUBSIDIARIES:
Banks.......................................... 42,772 36,518 (12,187)
Bank holding companies......................... 18,387 15,103 11,054
Other.......................................... (946) 94 271
-------- -------- --------
60,213 51,715 (862)
-------- -------- --------
NET INCOME................................... $ 89,260 $ 75,390 $ 62,784
======== ======== ========
60
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(13) PARENT COMPANY, Continued
Parent Company Only
Statements of Cash Flows
YEARS ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income....................................... $ 89,260 $ 75,390 $ 62,784
Adjustments to reconcile net income to cash pro-
vided by operations:
Depreciation and amortization/(accretion)...... (319) 28 35
(Equity in undistributed earnings)/dividends in
excess of earnings of subsidiaries............ (60,213) (51,715) 862
Decrease in interest receivable................ -- 65 120
(Increase)/decrease in other assets............ 2,852 (233) 794
Increase/(decrease) in interest payable........ 956 13 (150)
Increase/(decrease) in taxes payable........... (267) 267 24
Increase/(decrease) in other payables.......... (1,339) 6,361 (4,725)
-------- -------- --------
Net cash provided by operating activities.... 30,930 30,176 59,744
INVESTING ACTIVITIES:
(Increase)/decrease in investment securities
available for sale.............................. 5,000 (4,633) --
(Increase)/decrease in reverse repurchase agree-
ments with affiliates........................... 12,900 38,217 (15,663)
Net (increase) decrease in loan portfolio........ -- (3,051) 16
Capital contributions made to subsidiaries....... (3,730) (7,502) (47,169)
Acquisition of banks............................. (18,590) -- --
Advances to subsidiaries on notes................ (2,431) -- --
Payments from subsidiaries on notes.............. 7,506 -- 800
-------- -------- --------
Net cash provided/(used) by investing activi-
ties........................................ 655 23,031 (62,016)
FINANCING ACTIVITIES:
Net increase/(decrease) in other short-term
borrowings...................................... 28,556 (113) (171)
Proceeds from other borrowings................... 74,463 -- --
Repayment of other borrowings.................... -- (1,000) (900)
Common dividends paid............................ (27,502) (22,127) (18,753)
Preferred dividends paid......................... (1,531) (2,089) (1,591)
Redemption of preferred stock.................... (25,965) -- --
Proceeds from issuance of common stock........... -- -- 22,010
Proceeds from exercise of stock options.......... 2,246 6,170 2,013
Purchase of treasury stock....................... (410) (9) (43)
-------- -------- --------
Net cash provided/(used) by financing activi-
ties........................................ 49,857 (19,168) 2,565
-------- -------- --------
Net increase in cash and due from banks............ 81,442 34,039 293
Cash and due from banks at beginning of year....... 34,405 366 73
-------- -------- --------
Cash and due from banks at end of year............. $115,847 $ 34,405 $ 366
======== ======== ========
61
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Statement No. 107, Disclosures about Fair Value of
Financial Instruments ("FAS107") requires disclosure of fair value information
about financial instruments, whether or not recognized on the face of the
balance sheet, for which it is practicable to estimate that value. The
assumptions used in the estimation of the fair value of the Company's financial
instruments are detailed below. Where quoted prices are not available, fair
values are based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. The following disclosures should not be considered a surrogate of the
liquidation value of the Company or its Subsidiary Banks, but rather represent
a good-faith estimate of the increase or decrease in value of financial
instruments held by the Company since purchase, origination or issuance. The
Company has not undertaken any steps to value any intangibles, which is
permitted by the provisions of FAS107.
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Cash and cash equivalents and interest bearing deposits with other banks:
Fair value equals the carrying value of such assets.
Investment securities and investment securities available for sale: Fair
values for investment securities are based on quoted market prices.
Trading account securities: Fair value and book value of the Company's
trading account securities (including off-balance sheet instruments) are
based on quoted market prices where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments except in the case of certain options and swaps where pricing
models are used.
Federal funds sold and securities purchased under agreements to resell:
Due to the short-term nature of these assets, the carrying values of these
assets approximate their fair value.
Loans: For variable rate loans, those repricing within six months or
less, fair values are based on carrying values. The fair value of certain
mortgage loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for any differences
in loan characteristics, with servicing retained. The fair value of the
Company's credit card portfolio is based on quoted market prices. The
Company's indirect lending portfolio, consisting primarily of indirect new
and used auto loans, was valued based on securitization transactions with
servicing retained. Fixed rate commercial loans, other installment loans,
and certain real estate mortgage loans were valued using discounted cash
flows. The discount rate used to determine the present value of these loans
was based on interest rates currently being charged by the Subsidiary Banks
on comparable loans as to credit risk and term.
Off-balance-sheet instruments: Fair value of the Company's off-balance-
sheet instruments (futures, forwards, swaps, caps, floors and options
written) are based on quoted market prices. The Company's loan commitments
are negotiated at current market rates and are relatively short-term in
nature and, as a matter of policy, the Company generally makes commitments
for fixed rate loans for relatively short periods of time, therefore, the
estimated value of the Company's loan commitments approximates carrying
amount. The fair value of stand-by letters of credit is based on current
rates offered by the Company for letters of credit of similar remaining
duration and 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 non-interest bearing demand deposits, savings accounts, NOW
accounts and money market demand accounts. The fair value of variable rate
term deposits, those repricing within six months or less, equals the
carrying value of these deposits. Discounted cash flows have been used to
value fixed rate term deposits and variable rate term deposits having an
interest rate floor that has been
62
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
reached. The discount rate used is based on interest rates currently being
offered by the Subsidiary Banks on comparable deposits as to amount and
term.
Short-term borrowings: The carrying value of Federal funds purchased,
securities sold under agreements to repurchase and other short-term
borrowings approximates their carrying values.
FHLB and other borrowings: The fair value of the Company's fixed rate
borrowings are estimated using discounted cash flows, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amount of the Company's variable rate
borrowings approximates their fair values.
AT DECEMBER 31, 1993 AT DECEMBER 31, 1992
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
FINANCIAL INSTRUMENTS:
Assets:
Cash and due from banks........ $ 279,622 $ 279,622 $ 309,441 $ 309,441
Interest bearing deposits in
other banks................... 10,474 10,474 10,876 10,876
Investment securities.......... 589,869 617,190 1,103,620 1,143,958
Investment securities available
for sale...................... 639,801 639,801 560,556 568,263
Trading account securities..... 239,491 239,491 106,046 106,046
Federal funds sold and securi-
ties purchased under agree-
ments to resell............... 140,043 140,043 57,883 57,883
Loans.......................... 5,038,450 5,184,477 4,544,178 4,668,155
Off-balance sheet instruments.. 1,073 22,770 -- 21,168
Liabilities:
Noninterest bearing deposits... $1,135,898 $1,135,898 $1,138,635 $1,138,635
Interest bearing deposits...... 4,416,928 4,451,899 4,210,644 4,231,031
Federal funds purchased........ 414,704 414,704 543,605 543,605
Securities sold under
agreements to repurchase...... 205,707 205,707 232,247 232,247
Other short-term borrowings.... 171,014 171,014 132,331 132,331
FHLB and other borrowings...... 325,437 325,437 203,913 203,913
63
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(15) QUARTERLY RESULTS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 1993 and
1992 follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
1993:
TOTAL INTEREST INCOME.................. $ 131,126 $ 130,679 $ 129,915 $ 130,850
TOTAL INTEREST EXPENSE................. 49,155 48,869 49,550 49,732
NET INTEREST INCOME.................... 81,971 81,810 80,365 81,118
PROVISION FOR LOAN LOSSES.............. 11,679 9,926 6,437 7,943
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES........................... 70,292 71,884 73,928 73,175
TOTAL NONINTEREST INCOME............... 25,524 26,581 24,042 26,063
TOTAL NONINTEREST EXPENSE.............. 61,126 63,481 62,989 66,374
INCOME TAX EXPENSE..................... 12,900 12,480 12,313 10,566
NET INCOME............................. 21,790 22,504 22,668 22,298
PER COMMON SHARE:
NET INCOME........................... 0.58 0.60 0.60 0.61
CASH DIVIDENDS....................... 0.19 0.19 0.19 0.19
STOCK PRICE RANGE:
HIGH............................... 25 3/4 26 1/2 26 25
LOW................................ 22 1/2 22 1/2 23 1/2 20 3/4
CLOSE.............................. 25 24 1/2 23 5/8 22
1992:
Total interest income.................. $ 136,314 $ 135,607 $ 134,184 $ 133,461
Total interest expense................. 62,015 58,966 54,069 51,182
Net interest income.................... 74,299 76,641 80,115 82,279
Provision for loan losses.............. 13,219 12,006 14,171 13,489
Net interest income after provision for
loan losses........................... 61,080 64,635 65,944 68,790
Total noninterest income............... 22,952 24,020 25,083 23,558
Total noninterest expense.............. 56,668 60,319 61,967 63,308
Income tax expense..................... 8,773 9,381 9,920 10,336
Net income............................. 18,591 18,955 19,140 18,704
Per common share:
Net income........................... 0.50 0.50 0.52 0.49
Cash dividends....................... 0.1667 0.1667 0.1667 0.1667
Stock price range:
High............................... 21 1/8 23 3/8 23 1/2 23 1/2
Low................................ 18 1/2 19 1/2 18 1/2 19 1/4
Close.............................. 20 22 1/8 21 1/2 23 1/2
64
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 to
be held May 16, 1994, 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 to be held May 16, 1994, 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 to be held May
16, 1994, 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 to be held May 16, 1994, which is to be filed with the
Securities and Exchange Commission.
65
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........................................ 38
Consolidated Balance Sheets as of December 31, 1993 and 1992........ 39
Consolidated Statements of Income for the years ended December 31,
1993, 1992 and 1991................................................ 40
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993, 1992 and 1991................................... 41
Consolidated Statements of Cash Flows for the years ended December
31, 1993, 1992 and 1991............................................ 42
Summary of Significant Accounting Policies--December 31, 1993, 1992
and 1991........................................................... 43
Notes to Consolidated Financial Statements--December 31, 1993, 1992
and 1991........................................................... 46
Quarterly Results (Unaudited)....................................... 64
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K on November 9, 1993, announcing the
change in the name of the Company from Central Bancshares of the
South, Inc. to Compass Bancshares, Inc.
(c) EXHIBITS
(3)Articles of Incorporation and By-Laws of Compass Bancshares,
Inc.
(a) Restated Certificate of Incorporation of Compass Bancshares,
Inc. dated May 17, 1982, (incorporated by reference to the
Company's December 31, 1982 Form 10-K filed with the Commis-
sion)
(b) Certificate of Amendment dated May 20, 1986, to Restated Cer-
tificate of Incorporation of Compass Bancshares, Inc. (incor-
porated by reference to Exhibit 3.2 of the Company's Registra-
tion Statement on Form S-4, Registration No. 33-46086 filed
with the Commission)
(c) Certificate of Amendment dated May 15, 1987, to Restated Cer-
tificate of Incorporation of Compass Bancshares, Inc. (incor-
porated 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 November 8, 1993, to Restated
Certificate of Incorporation of Compass Bancshares, Inc. (in-
corporated by reference to Exhibit 3(d) to the Company's Reg-
istration Statement on Form S-4, Registration No. 33-51919
filed with the Commission)
(e) Bylaws of Compass Bancshares, Inc. (Amended and Restated as of
March 15, 1982) (incorporated by reference to the Company's
December 31, 1982 Form 10-K filed with the Commission)
66
PAGE
----
(10) Material Contracts
(a) Compass Bancshares, Inc., 1982 Long Term Incentive Plan (in-
corporated by reference to Exhibit 1 to the Company's Regis-
tration Statement on Form S-8 filed June 15, 1983, with the
Commission)
(b) Compass Bancshares, Inc., 1989 Long Term Incentive Plan (in-
corporated by reference to Exhibit 28 to the Company's Regis-
tration Statement on Form S-8 filed February 21, 1991, with
the Commission)
(c) Supplemental Retirement Agreement, dated as of March 18, 1991,
between Compass Bank and Harry B. Brock, Jr. (incorporated by
reference to Exhibit 10(c) to the Company's Form 10-K for the
year ended December 31, 1991, filed March 26, 1992, with the
Commission)
(11) Statement Re: Computation of Per Share Earnings 68
(12) Statement Re: Computation of Ratios 69
(21) Subsidiaries of the Registrant 71
(23) Consents of experts and counsel
Certain financial statement schedules and exhibits have been omitted because
they are not applicable.
67
EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
COMPASS BANCSHARES, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
PRIMARY:
Weighted average shares outstanding... 36,421 35,836 34,687
Net effect of the assumed exercise of
stock options--based on the
treasury stock method using average
market price......................... 300 560 441
------------ ------------ ------------
Total weighted average shares and com-
mon stock equivalents
outstanding.......................... 36,721 36,396 35,128
============ ============ ============
Net income............................ $ 89,260 $ 75,390 $ 62,784
Preferred dividends................... 1,531 2,089 1,591
------------ ------------ ------------
Net income available to common share-
holders.............................. $ 87,729 $ 73,301 $ 61,193
============ ============ ============
Net income per common share........... $ 2.39 $ 2.01 $ 1.74
============ ============ ============
FULLY DILUTED:
Weighted average shares outstanding... 36,421 35,836 34,687
Net effect of the assumed conversion
of the preferred stock............... 817 1,111 1,047
Net effect of the assumed exercise of
stock options--based on the
treasury stock method using average
market price or year-end market
price, whichever is higher........... 300 641 624
------------ ------------ ------------
Total weighted average shares and com-
mon stock equivalents
outstanding.......................... 37,538 37,588 36,358
============ ============ ============
Net income............................ $ 89,260 $ 75,390 $ 62,784
============ ============ ============
Net income per common share........... $ 2.38 $ 2.01 $ 1.73
============ ============ ============
68
EXHIBIT 12--STATEMENT RE: COMPUTATION OF RATIOS
COMPASS BANCSHARES, INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
Pretax income....................................... $137,519 $113,800 $ 91,929
Add fixed charges:
Interest on deposits.............................. 159,893 185,705 234,820
Interest on borrowings............................ 37,413 40,527 56,600
Portion of rental expense representing interest
expense.......................................... 2,362 2,691 2,398
-------- -------- --------
Total fixed charges............................. 199,668 228,923 293,818
-------- -------- --------
Income before fixed charges....................... $337,187 $342,723 $385,747
======== ======== ========
Total fixed charges................................. $199,668 $228,923 $293,818
Preferred stock dividends........................... 1,531 2,089 1,591
Tax effect of preferred stock dividends............. 828 1,064 739
-------- -------- --------
Combined fixed charges and preferred stock divi-
dends.............................................. $202,027 $232,076 $296,148
======== ======== ========
Pretax income....................................... $137,519 $113,800 $ 91,929
Add fixed charges (excluding interest on deposits):
Interest on borrowings............................ 37,413 40,527 56,600
Portion of rental expense representing interest
expense.......................................... 2,362 2,691 2,398
-------- -------- --------
Total fixed charges............................. 39,775 43,218 58,998
-------- -------- --------
Income before fixed charges (excluding interest on
deposits)........................................ $177,294 $157,018 $150,927
======== ======== ========
Total fixed charges................................. $ 39,775 $ 43,218 $ 58,998
Preferred stock dividends........................... 1,531 2,089 1,591
Tax effect of preferred stock dividends............. 828 1,064 739
-------- -------- --------
Combined fixed charges and preferred stock divi-
dends.............................................. $ 42,134 $ 46,371 $ 61,328
======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES:
Including interest on deposits.................... 1.67X 1.48x 1.30x
Excluding interest on deposits.................... 4.21X 3.39x 2.46x
69
EXHIBIT 12--STATEMENT RE: COMPUTATION OF RATIOS (Continued)
COMPASS BANCSHARES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
(IN THOUSANDS)
Pretax income....................................... $137,519 $113,800 $ 91,929
Add fixed charges:
Interest on deposits.............................. 159,893 185,705 234,820
Interest on borrowings............................ 37,413 40,527 56,600
Portion of rental expense representing interest
expense.......................................... 2,362 2,691 2,398
-------- -------- --------
Total fixed charges............................. 199,668 228,923 293,818
-------- -------- --------
Income before fixed charges....................... $337,187 $342,723 $385,747
======== ======== ========
Pretax income....................................... $137,519 $113,800 $ 91,929
Add fixed charges (excluding interest on deposits):
Interest on borrowings............................ 37,413 40,527 56,600
Portion of rental expense representing interest
expense.......................................... 2,362 2,691 2,398
-------- -------- --------
Total fixed charges............................. 39,775 43,218 58,998
-------- -------- --------
Income before fixed charges (excluding interest on
deposits)........................................ $177,294 $157,018 $150,927
======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES:
Including interest on deposits.................... 1.69X 1.50x 1.31x
Excluding interest on deposits.................... 4.46X 3.63x 2.56x
70
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
STATE OR OTHER JURISDICTION
SUBSIDIARIES OF INCORPORATION
- ------------ ---------------------------
Compass Bank Alabama
Compass Mortgage Corporation Delaware
Central Bank of the South Alabama
Compass Bank, N.A. United States
Compass Bank United States
Compass Banks of Texas, Inc. Delaware
Compass Bancorporation of Texas, Inc. Delaware
Compass Bank--Dallas Texas
Compass Bank--Houston Texas
River Oaks Trust Company Texas
71
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 21, 1994 By /s/ D. Paul Jones, Jr.
----------------------------------
D. PAUL JONES, JR.
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
Date: February 21, 1994 By /s/ Garrett R. Hegel
----------------------------------
GARRETT R. HEGEL
CHIEF FINANCIAL OFFICER
Date: February 21, 1994 By /s/ Michael A. Bean
----------------------------------
MICHAEL A. BEAN
CHIEF ACCOUNTING OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS D. PAUL JONES, JR., JERRY W. POWELL AND DANIEL
B. GRAVES, AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AS AGENT WITH
FULL POWER OF SUBSTITUTION AND RESUBSTITUTION FOR HIM AND IN HIS NAME, PLACE
AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS TO THIS
FORM 10-K AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS FULL POWER AND AUTHORITY TO DO AND
PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND
ABOUT THE PREMISES, AS FULLY AND TO ALL INTENTS AND PURPOSES AS THEY MIGHT OR
COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-
FACT AND AGENTS, AND THEIR SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE
TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
DIRECTORS DATE
/s/ Harry B. Brock, Jr. February 21, 1994
- -------------------------------------
HARRY B. BROCK, JR.
/s/ Stanley M. Brock February 21, 1994
- -------------------------------------
STANLEY M. BROCK
/s/ Charles W. Daniel February 21, 1994
- -------------------------------------
CHARLES W. DANIEL
72
DIRECTORS DATE
/s/ W. Eugene Davenport February 21, 1994
- -------------------------------------
W. EUGENE DAVENPORT
/s/ Garry Neil Drummond, Sr. February 21, 1994
- -------------------------------------
GARRY NEIL DRUMMOND, SR.
February 21, 1994
- -------------------------------------
MARSHALL DURBIN, JR.
/s/ Tranum Fitzpatrick February 21, 1994
- -------------------------------------
TRANUM FITZPATRICK
/s/ Thomas E. Jernigan February 21, 1994
- -------------------------------------
THOMAS E. JERNIGAN
/s/ D. Paul Jones, Jr. February 21, 1994
- -------------------------------------
D. PAUL JONES, JR.
/s/ G. W. "Red" Leach, Jr. February 21, 1994
- -------------------------------------
G.W. "RED" LEACH, JR.
/s/ Goodwin L. Myrick February 21, 1994
- -------------------------------------
GOODWIN L. MYRICK
/s/ John S. Stein February 21, 1994
- -------------------------------------
JOHN S. STEIN
73