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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

Compass Bancshares, Inc.

(Exact name of registrant as specified in its charter)

(205) 933-3000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  YES  [X]  NO  [   ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

As of January 31, 2000, the aggregate market value of voting and non-voting common equity held by non-affiliates was $2,236,517,395.

Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practicable date.

Table of Contents

Table of Contents

PART I

ITEM 1 — BUSINESS

      Compass Bancshares, Inc. (the “Company”) is a bank holding company with its principal place of business in Birmingham, Alabama. The Company was organized in 1970 and commenced business in late 1971 upon the acquisition of Central Bank & Trust Co. and State National Bank. The Company subsequently acquired substantially all of the outstanding stock of additional banks located in Alabama, 11 of which were merged in late 1981 to create Central Bank of the South, Alabama’s first statewide bank. In November 1993, the Company changed its name from Central Bancshares of the South, Inc. to Compass Bancshares, Inc. and Central Bank of the South, the Company’s lead bank subsidiary, changed its name to Compass Bank (“Compass Bank”). In February 1987, the Company acquired First National Bank of Crosby near Houston, Texas, and became the first out-of-state bank holding company to acquire a bank in Texas. The Company first expanded into Florida in July 1991, when it acquired Citizens & Builders Federal Savings, F.S.B., in Pensacola, Florida. In December 1998, the Company expanded into the state of Arizona with the acquisition of Tucson-based Arizona Bank. In January 2000 the Company expanded into New Mexico with the acquisition of Albuquerque-based Western Bancshares, Inc.

      In addition to Compass Bank, the Company also owns Central Bank of the South, an Alabama banking corporation headquartered in Anniston, Alabama. Central Bank of the South has limited activities. During 1999, the Company merged its Arizona state bank, Arizona Bank, into Compass Bank. The bank subsidiaries of the Company are referred to collectively herein as the “Subsidiary Banks.”

      The principal role of the Company is to supervise and coordinate the activities of its subsidiaries and to provide them with capital and services of various kinds. The Company derives substantially all of its income from dividends from its subsidiaries. Such dividends are determined on an individual basis, generally in relation to each subsidiary’s earnings and capital position.

Subsidiary Banks

      Compass Bank conducts a general commercial banking and trust business at 307 bank offices, including 122 in Texas, 88 in Alabama, 47 in Arizona, 41 in Florida, and 9 in New Mexico. The Subsidiary Banks perform banking services customary for full service banks of similar size and character. Such services include receiving demand and time deposit accounts, making personal and commercial loans and furnishing personal and commercial checking accounts. The Asset Management Division of Compass Bank offers its customers a variety of fiduciary services, including portfolio management and the administration and investment of funds of estates, trusts and employee benefit plans. Through Compass Bancshares Insurance, Inc., a wholly-owned subsidiary of Compass Bank, the Subsidiary Banks make available to their customers and others, as agent for a variety of insurance companies, term life insurance, fixed-rate annuities and other insurance products.

      Compass Bank provides correspondent banking services including educational seminars and operational and investment services to approximately 1,000 financial institutions located throughout the United States. Through the Correspondent and Investment Services Division of Compass Bank, the Subsidiary Banks distribute or make available a variety of investment services and products to institutional and individual investors including institutional sales, bond accounting, safekeeping and interest rate risk analysis services. Through Compass Brokerage, Inc., a wholly-owned subsidiary of Compass Bank, the Subsidiary Banks also provide discount brokerage services, mutual funds and variable annuities to individuals and businesses. Through Compass Bank’s wholly-owned subsidiary, Compass Financial Corporation, the Subsidiary Banks provide lease financing services to individuals and businesses.

Nonbanking Subsidiaries

      Through wholly-owned subsidiaries, the Company is engaged in providing insurance products to customers of the Subsidiary Banks and owning real estate for bank premises. Revenues from operation of these subsidiaries do not presently constitute a significant portion of the Company’s total operating revenues. The Company may subsequently engage in other activities permissible for registered bank holding companies when suitable

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Lines of Business

      The Company is currently aligned along lines of business. Each line of business is a strategic unit that serves a particular group of customers that have certain common characteristics, through various products and services. The Company’s primary operating segments are Corporate Banking, Retail Banking, Community Banking, Asset Management, and Treasury.

      The Corporate Banking segment is responsible for providing a full array of banking and investment services to business banking, commercial banking, and other institutional clients in each of the Company’s major metropolitan markets. The Corporate Banking segment also includes a National Industries unit that is responsible for serving larger national accounts, principally in targeted industries. In addition to traditional credit and deposit products, the Corporate Banking segment also supports its customers with capabilities in treasury management, leasing, accounts receivable purchasing, asset-based lending, international services, and interest rate protection and investment products.

      The Retail Banking segment serves the Company’s consumer customers in each of its major metropolitan markets through an extensive banking office network and through the use of alternative delivery channels such as PC banking, the internet, and telephone banking. The Retail Banking segment provides individuals with comprehensive products and services, including home mortgages, credit cards, deposit accounts, mutual funds, and brokerage and insurance. In addition, Retail Banking also serves the Company’s small business customers.

      The Community Banking segment is responsible for serving the Company’s non-metropolitan markets and provides the same products and services offered by the Corporate Banking, Retail Banking, and Asset Management segments. The Asset Management segment provides specialized investment portfolio management, financial counseling, and customized services to the Company’s private clients and foundations as well as investment management and retirement services to companies and their employees. The Asset Management segment is also the discretionary investment manager of Expedition Funds, the Company’s family of proprietary mutual funds. The Treasury segment’s primary function is to manage the investment securities portfolio, public entity deposits, interest rate risk, and liquidity and funding positions of the Company.

Business Combinations

      The Company may seek to combine with other banks and banking offices when suitable opportunities develop. Discussions are held from time to time with institutions about their possible affiliation with the Company. It is impossible to predict accurately whether any discussions will lead to agreement. Any bid or proposal for the combination of additional banks is subject to approval by appropriate regulatory authorities. Refer to “Supervision and Regulation.” Since the Company first expanded to Texas in 1987, the Company has combined with 45 financial institutions and engaged in numerous asset and deposit purchase transactions.

      On April 19, 1999, the Company completed the purchase of 15 branches in Arizona from another financial institution. These branches, primarily in the Phoenix area, added approximately $400 million in deposits. The transaction was accounted for under the purchase method of accounting. Intangible assets resulting from the purchase totaled approximately $70 million.

      On October 20, 1999, the Company completed the acquisition of Hartland Bank, N.A., in Austin, Texas, with assets of approximately $300 million. The Company acquired all of the outstanding shares of Hartland Bank, N.A., in exchange for approximately $90 million in cash. The transaction was accounted for under the purchase method of accounting. Intangible assets resulting from the purchase totaled approximately $70 million.

      On January 13, 2000, the Company completed the acquisition of Western Bancshares, Inc. (“Western”) and its subsidiary, Western Bank, of Albuquerque, New Mexico, with the issuance of approximately 3.3 million shares of the Company’s common stock. At the date of closing, Western had assets of approximately $305 million. The transaction was accounted for under the pooling-of-interests method of accounting and, accordingly, all prior information will be restated in the first quarter of 2000.

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      On November 4, 1999, the Company signed a definitive agreement to merge with MegaBank Financial Corporation (“MegaBank”) and its subsidiary, MegaBank, of Denver, Colorado, with the planned exchange of the Company’s common stock. At December 31, 1999, MegaBank had approximately $300 million in assets. The transaction, pending shareholder and regulatory approval and the satisfaction of other conditions in the agreement, is expected to close in the second quarter of 2000 and be accounted for under the pooling-of-interests method of accounting.

Competition

      The Subsidiary Banks encounter intense competition in their businesses, generally from other banks located in Alabama, Arizona, Florida, New Mexico and Texas and adjoining states, and compete for interest bearing funds with other banks, mutual funds, and many non-bank issuers of commercial paper and other securities. In substantially all of the markets served by the Subsidiary Banks, Compass Bank encounters intense competition from other financial institutions that are substantially larger in terms of assets and deposits. Competition for the correspondent banking and securities sales business also exists from commercial and investment banks and brokerage firms. In the case of larger customers, competition exists with financial institutions in major metropolitan areas in the United States, many of which are larger in terms of capital, resources and personnel. Increasingly, in the conduct of certain aspects of their businesses, the Subsidiary Banks compete with finance companies, savings and loan associations, credit unions, mutual funds, factors, insurance companies and similar financial institutions.

      There is significant competition among bank holding companies in most of the markets served by the Subsidiary Banks. The Company believes that intense competition for banking business among bank holding companies with operations in Alabama, Arizona, Florida, New Mexico and Texas will continue. During 2000 the competition may further intensify if additional regional bank holding companies enter such states through the acquisition of local financial institutions.

Employees

      At December 31, 1999, the Company and its subsidiaries employed approximately 6,700 persons. The Company and its subsidiaries provide a variety of benefit programs including retirement and stock ownership plans as well as group life, health, accident, and other insurance. The Company also maintains training, educational and affirmative action programs designed to prepare employees for positions of increasing responsibility.

Government Monetary Policy

      The Company and the Subsidiary Banks are affected by the credit policies of monetary authorities including the Board of Governors of the Federal Reserve System (“Federal Reserve”). An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. Government securities, changes in the discount rate, reserve requirements on member bank deposits, and funds availability regulations. These instruments are used in varying combinations to influence the overall growth of bank loans, investments, and deposits and may also affect interest rates charged on loans or paid on deposits.

      The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of financial institutions in the past and will continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to the future impact that changes in interest rates, deposit levels, or loan demand may have on the business and income of the Company and the Subsidiary Banks.

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SUPERVISION AND REGULATION

The Company

      The Company has filed a declaration with the Federal Reserve to be certified as a financial holding company (“FHC”) under the Gramm-Leach-Bliley Financial Modernization Act of 1999 (“GLB Act”) which is described below under “Supervision and Regulation — Recent Legislation.” The Company is required to file with the Federal Reserve an annual report and such additional information as the Federal Reserve may require pursuant to the Bank Holding Company Act of 1956 (“BHC Act”). The Federal Reserve also may make examinations of the Company and each of its subsidiaries. In addition, certain financial activities of the Company which are permitted by the GLB Act are subject to functional regulations by other state and federal regulatory authorities as described below.

      The Company continues to be regulated by the BHC Act which requires a bank holding company to obtain the prior approval of the Federal Reserve before it may acquire substantially all the assets of any bank or ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting shares of any such bank. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”), facilitates branching and the establishment of agency relationships across state lines and permits bank holding companies to acquire banks located in any state without regard to whether the transaction is prohibited under any state law, subject to certain state provisions, including the establishment by states of a minimum age of their local banks subject to interstate acquisition by out-of-state bank holding companies. The minimum age of local banks subject to interstate acquisition is limited to a maximum of five years.

      The States of Alabama, Arizona, Florida, New Mexico and Texas, where the Company currently operates banking offices, and Colorado where an acquisition is currently pending, each have laws relating specifically to acquisitions of banks, bank holding companies, and other types of financial institutions in those states by financial institutions that are based in, and not based in, those states. In 1995, the State of Alabama enacted an interstate banking act. In general, the Alabama statute implements the Interstate Act, specifying five years as the minimum age of banks which may be acquired and participating in interstate branching beginning May 31, 1997. The laws of each of Arizona, Colorado, Florida, New Mexico and Texas currently permit out-of-state bank holding companies to acquire banks in Arizona, Colorado, Florida, New Mexico and Texas, regardless of where the acquiror is based, subject to the satisfaction of various provisions of state law, including the requirement that the bank to be acquired has been in existence at least five years in Arizona, Colorado, New Mexico, and two years in Florida.

      The Federal Reserve Act generally imposes certain limitations on extensions of credit and other transactions by and between banks which are members of the Federal Reserve and other affiliates (which includes any holding company of which such bank is a subsidiary and any other non-bank subsidiary of such holding company). Banks which are not members of the Federal Reserve also are subject to these limitations. Further, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or the furnishing of services.

      In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) was enacted. This act recapitalized the Bank Insurance Fund (“BIF”), of which the Subsidiary Banks are members, and the Savings Association Insurance Fund (“SAIF”), which insures certain of the Subsidiary Banks’ deposits; substantially revised statutory provisions, including capital standards; restricted certain powers of state banks; gave regulators the authority to limit officer and director compensation; and required holding companies to guarantee the capital compliance of their banks in certain instances. Among other things, FDICIA requires the federal banking agencies to take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. FDICIA established five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” as defined by regulations adopted by the Federal Reserve, the FDIC, and the other federal depository institution regulatory agencies. A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below such measure, and critically

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      If a depository institution fails to meet regulatory capital requirements, the regulatory agencies can require submission and funding of a capital restoration plan by the institution, place limits on its activities, require the raising of additional capital and, ultimately, require the appointment of a conservator or receiver for the institution. The obligation of a controlling bank holding company under FDICIA to fund a capital restoration plan is limited to the lesser of five percent of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. If the controlling bank holding company fails to fulfill its obligations under FDICIA and files (or has filed against it) a petition under the Federal Bankruptcy Code, the FDIC’s claim may be entitled to a priority in such bankruptcy proceeding over third party creditors of the bank holding company.

      An insured depository institution may not pay management fees to any person having control of the institution nor may an institution, except under certain circumstances and with prior regulatory approval, make any capital distribution (including the payment of dividends) if, after making such payment or distribution, the institution would be undercapitalized. FDICIA also restricts the acceptance of brokered deposits by insured depository institutions and contains a number of consumer banking provisions, including disclosure requirements and substantive contractual limitations with respect to deposit accounts.

      At December 31, 1999, the Subsidiary Banks were “well capitalized” and were not subject to any of the foregoing restrictions, including, without limitation, those relating to brokered deposits. The Subsidiary Banks do not rely upon brokered deposits as a primary source of deposit funding; although, such deposits are sold through the Correspondent and Investment Services Division of Compass Bank.

      FDICIA contains numerous other provisions, including new reporting requirements, termination of the “too big to fail” doctrine except in special cases, limitations on the FDIC’s payment of deposits at foreign branches and revised regulatory standards for, among other things, real estate lending and capital adequacy. In addition, FDICIA requires the FDIC to establish a system of risk-based assessments for federal deposit insurance, by which banks that pose a greater risk of loss to the FDIC (based on their capital levels and the FDIC’s level of supervisory concern) will pay a higher insurance assessment.

The Subsidiary Banks

      In general, federal and state banking laws and regulations govern all areas of the operations of the Subsidiary Banks, including reserves, loans, mortgages, capital, issuances of securities, payment of dividends and establishment of branches. Federal and state banking regulatory agencies also have the general authority to limit the dividends paid by insured banks and bank holding companies if such payments may be deemed to constitute an unsafe and unsound practice. Federal and state banking agencies also have authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices.

      Compass Bank, organized under the laws of the State of Alabama, is a member of the Federal Reserve. As such, it is supervised, regulated and regularly examined by the Alabama State Banking Department and the Federal Reserve. The Subsidiary Banks are subject to the provisions of the Federal Deposit Insurance Act and to examination by and regulations of the FDIC.

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      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. As a member of the Federal Reserve, Compass Bank is subject to dividend limitations imposed by the Federal Reserve that are similar to those applicable to national banks.

      Federal law further provides that no insured depository institution may make any capital distribution, including a cash dividend, if, after making the distribution, the institution would not satisfy one or more of its minimum capital requirements. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments may be deemed to constitute an unsafe and unsound practice. Insured banks are prohibited from paying dividends on their capital stock while in default in the payment of any assessment due to the FDIC except in those cases where the amount of the assessment is in dispute and the insured bank has deposited satisfactory security for the payment thereof.

      The Community Reinvestment Act of 1977 (“CRA”) and the regulations of the Federal Reserve and the FDIC implementing that act are intended to encourage regulated financial institutions to help meet the credit needs of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions. The CRA and such regulations provide that the appropriate regulatory authority will assess the records of regulated financial institutions in satisfying their continuing and affirmative obligations to help meet the credit needs of their local communities as part of their regulatory examination of the institution. The results of such examinations are made public and are taken into account upon the filing of any application to establish a domestic branch or to merge or to acquire the assets or assume the liabilities of a bank. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction.

Recent Legislation

      The GLB Act was enacted on November 12, 1999. The GLB Act permits bank holding companies meeting certain management, capital and community reinvestment standards to engage in a substantially broader range of non-banking activities than were permitted previously, including insurance underwriting and merchant banking activities. The Company has certified that it meets this criteria. The GLB Act repeals sections 20 and 32 of the Glass Steagall Act, permitting affiliations of banks with securities firms and registered investment companies. The Act authorizes FHCs which permit banks to be under common control with securities firms, insurance companies, investment companies and other financial interests. Some of these affiliations also are permissible for bank subsidiaries. The GLB Act gives the Federal Reserve broad authority to regulate FHCs, but provides for functional regulation of subsidiary activities by the SEC, FTC, state insurance and securities authorities and similar regulatory agencies.

      The GLB Act includes significant provisions regarding the privacy of financial information. These new financial privacy provisions generally require a financial institution to adopt a privacy policy regarding its practices for sharing nonpublic personal information and to disclose such policy to their customers, both at the time the customer relationship is established and at least annually during the relationship. These provisions also prohibit the Company from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to opt out of the disclosure.

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ITEM 1 — STATISTICAL DISCLOSURE

ITEM 2 — PROPERTIES

      The Company, through its subsidiaries, owns or leases buildings that are used in the normal course of business. The principal executive offices of the Company are located at 15 South 20th Street, Birmingham, Alabama, in a 289,000 square-foot office building. The Subsidiary Banks own or lease various other offices and facilities in Alabama, Arizona, Florida, and Texas with remaining lease terms of 1 to 20 years exclusive of renewal options. In addition, the Company owns a 306,000 square-foot administrative headquarters facility located in Birmingham, Alabama. The Company also owns the River Oaks Bank Building in Houston, Texas, a 14-story, 168,000 square-foot office building, and the Post Oak Building in Houston, Texas, an 8-story, 124,000 square-foot office building. Compass Bank currently occupies approximately 35 percent of the River Oaks Bank Building and approximately 30 percent of the Post Oak Building. The remaining space in both buildings is leased to multiple tenants.

ITEM 3 — LEGAL PROCEEDINGS

      The Company and its subsidiaries are defendants in legal proceedings arising in the ordinary course of business. Some of these proceedings which relate to lending, collections, servicing, investment, trust and other activities seek substantial sums as damages.

      Among the actions which are pending are actions filed as class actions in the States of Alabama and Texas. The actions are similar to others that have been brought in recent years in Alabama and Texas against financial institutions in that they seek substantial compensatory and punitive damages in connection with transactions involving relatively small amounts of actual damages. In recent years, juries in certain Alabama and Texas state courts have rendered large punitive damage awards in such cases.

      It may take a number of years to finally resolve some of these pending legal proceedings due to their complexity and other reasons. It is difficult to determine with any certainty at this time the potential exposure from the proceedings. However, based upon the advice of legal counsel, management is of the opinion that the ultimate resolution of these legal proceedings will not have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matter was submitted to a vote of security holders by solicitation of proxies or otherwise during the fourth quarter of 1999.

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PART II

      The following table sets forth the high and low closing prices of the common stock of the Company as reported through the National Association of Securities Dealers, Inc. Automated Quotation National Market System and the dividends paid thereon during the periods indicated. The prices shown do not reflect retail mark-ups, mark-downs, or commissions. All share prices have been rounded to the nearest 1/8 of one dollar.

      As of January 31, 2000, there were approximately 7,200 shareholders of record of common stock of which approximately 6,050 were residents of either Alabama, Arizona, Florida, New Mexico or Texas.

ITEM 6 — SELECTED FINANCIAL DATA

      The following table sets forth selected financial data for the last five years.

CASH BASIS DISCLOSURES

      The selected financial data presented in the following table details certain information highlighting the performance of the Company for each of the three years ended December 31, 1999, adjusted to exclude the amortization of goodwill and other intangibles considered nonqualifying in regulatory capital calculations, and related balances of goodwill and other intangibles resulting from business combinations recorded by the

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      Cash basis financial data is particularly relevant in that it provides an additional basis for measuring a company’s ability to support future growth and pay dividends. Cash basis financial data, as defined herein, has not been adjusted to exclude the impact of merger and integration related expenses or other noncash items such as depreciation and provision for loan losses, except as noted below. This is the only section of this report in which the Company’s financial results are discussed on a cash basis.

*	Excludes merger and integration related expenses.

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company and its subsidiaries during the past three years. The discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial data presented elsewhere in this report. Prior information has been restated to reflect acquisitions accounted for using the pooling-of-interests accounting method. Financial institutions acquired by the Company during the past three years and accounted for as purchases are reflected in the financial position and results of operations of the Company since the date of their acquisition.

      This report may contain forward-looking statements which are subject to numerous assumptions, risks and uncertainties. Statements pertaining to future periods are subject to uncertainty because of the possibility of changes in underlying factors and assumptions. Actual results could differ materially from those contained in or implied by such forward-looking statements for a variety of factors including: sharp and/or rapid changes in interest rates; significant changes in the economic scenario from the current anticipated scenario which could materially change anticipated credit quality trends and the ability to generate loans; significant delay in or

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Summary

      In 1999, the Company reported record net income of $217.0 million, a 20 percent increase over the Company’s previous high of $180.9 million in 1998, which represented a 9 percent increase over 1997. Basic earnings per share for 1999 was $1.90 per share, also a record, compared with $1.60 per share in 1998 and $1.48 per share in 1997, representing a 19 percent increase in 1999 and an 8 percent increase in 1998. Diluted earnings per share increased to $1.88 per share in 1999, a 20 percent increase, from $1.57 per share in 1998. Diluted earnings per share in 1998 increased eight percent over 1997. Pretax income for 1999 was up $58.8 million, or 22 percent, over 1998 while income tax expense increased 25 percent over the same period reflecting an increase in the Company’s effective tax rate from 33.6 percent in 1998 to 34.5 percent in 1999.

Earning Assets

      Average earning assets in 1999 increased 15 percent over 1998 due principally to a 48 percent increase in average available-for-sale securities, a 19 percent increase in investment securities, and a 6 percent increase in loans. These increases were significantly impacted by the Company’s securitization activity for 1999 consisting of the securitization and transfer of substantially all of approximately $500 million of residential mortgages in February, 1999 and the securitization and transfer of substantially all of approximately $500 million of indirect automobile loans in September, 1999 to available-for-sale securities. These securitizations resulted in a moderate shift in the average earning asset mix in 1999 with loans at 63 percent, investment securities and investment securities available for sale at 36 percent and other earning assets at 1 percent. In 1998, loans were 69 percent, investment securities and investment securities available for sale were 30 percent and other earning assets were 1 percent. The mix of earning assets is monitored on a continuous basis in order to place the Company in a position to react to interest rate movements and to maximize the return on earning assets.

Loans

      Average loans, adjusted for the impact of purchase acquisitions and securitizations, increased 19 percent in 1999. Total loans outstanding at year end increased seven percent over previous year-end levels. Commercial, financial and agricultural loans, which were 32 percent of total loans, increased 11 percent in 1999 compared to the previous year. Real estate construction loans increased 40 percent while commercial mortgage loans increased 17 percent from year-end 1998 to year-end 1999. Residential mortgage and consumer installment loans decreased 5 percent and 14 percent, respectively, compared to 1998 levels due to the Company’s 1999 securitization activity.

      The 1998 total loans outstanding increased six percent over previous year-end levels. Commercial, financial and agricultural loans, which were 31 percent of total loans, increased 31 percent in 1998 compared to the previous year. Real estate construction loans increased 49 percent while commercial mortgage loans increased 15 percent from year-end 1997 to year-end 1998. Residential mortgage and consumer installment loans decreased 18 percent and 10 percent, respectively, compared to 1997 levels due to the Company’s 1998 securitization activity.

      The Company’s loan portfolio continues to reflect the diversity of the markets served by the Subsidiary Banks. The condition of the economy in states in which the Subsidiary Banks lend money is further reflected in the loan portfolio mix. The volume of commercial, financial and agricultural loans, as a percentage of total loans outstanding, continued the growth trend of prior years. Residential real estate loans represented 23 percent and 26 percent of the total portfolio at December 31, 1999 and 1998, respectively, down from the 33 percent at December 31, 1997. The declines in the Residential real estate loans are primarily the result of a $500 million securitization during 1999 and a $500 million securitization during 1998. Consumer installment loans decreased from 22 percent of the loan portfolio at December 31, 1997 to 15 percent at December 31, 1999. The decrease in Consumer installment portfolio is primarily the result of a $500 million indirect automobile securitization during 1999 and a $400 million indirect automobile securitization during 1998.

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      The Loan Portfolio table shows the classifications of loans by major category at December 31, 1999, and for each of the preceding four years. The second table shows maturities of certain loan classifications at December 31, 1999, and an analysis of the rate structure for such loans due in over one year.

Loan Portfolio

				December 31
				1999								1998								1997								1996
								Percent								Percent								Percent								Percent
								of								of								of								of
				Amount				Total				Amount				Total				Amount				Total				Amount				Total
				(in Thousands)
Commercial, financial and agricultural				$	3,436,256				31.8	%		$	3,087,921				30.6	%		$	2,365,347				24.7	%		$	1,950,227				22.5	%
Real estate — construction					1,661,798				15.4				1,186,533				11.7				794,816				8.3				661,391				7.6
Real estate — mortgage:
		Residential			2,482,582				23.0				2,599,841				25.7				3,160,490				33.0				3,121,381				36.0
		Commercial			1,595,241				14.8				1,364,878				13.5				1,184,408				12.4				1,143,342				13.2
Consumer installment					1,613,620				15.0				1,868,704				18.5				2,070,109				21.6				1,788,424				20.7
					10,789,497				100.0	%			10,107,877				100.0	%			9,575,170				100.0	%			8,664,765				100.0	%
Less: Unearned income					566								1,874								6,040								10,080
		Allowance for loan losses			143,082								136,677								135,225								130,753
	Net loans			$	10,645,849							$	9,969,326							$	9,433,905							$	8,523,932

[Additional columns below]

[Continued from above table, first column(s) repeated]

				December 31
				1995
								Percent
								of
				Amount				Total
				(in Thousands)
Commercial, financial and agricultural				$	1,553,902				20.5	%
Real estate — construction					524,341				6.9
Real estate — mortgage:
		Residential			2,790,745				36.7
		Commercial			995,787				13.1
Consumer installment					1,733,591				22.8
					7,598,366				100.0	%
Less: Unearned income					11,499
		Allowance for loan losses			121,180
	Net loans			$	7,465,687

Selected Loan Maturity and Interest Rate Sensitivity

Investment Securities

      The composition of the Company’s total investment securities portfolio reflects the Company’s investment strategy of maximizing portfolio yields commensurate with risk and liquidity considerations. The primary objectives of the Company’s investment strategy are to maintain an appropriate level of liquidity and provide a tool to assist in controlling the Company’s interest rate position while at the same time producing adequate levels of interest income. The Company’s investment securities are classified into one of three categories based on management’s intent to hold the securities: (i) trading account securities, (ii) investment securities or (iii) investment securities available for sale. Securities held in a trading account are required to be reported at fair value, with unrealized gains and losses included in earnings. Investment securities designated to be held to maturity are reported at amortized cost. Securities classified as available for sale are required to be reported at fair value with unrealized gains and losses, net of taxes, excluded from earnings and shown separately as a component of accumulated other comprehensive income. For securities classified as held to maturity, the Company has the

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      Maturities of investment securities in 1999, 1998, and 1997 were $398 million, $657 million, and $379 million, respectively. Sales and maturities of investment securities available for sale during 1999 totaled $431 million and $984 million, respectively, while sales and maturities in the portfolio in 1998 were $716 million and $1.1 billion, respectively. Sales and maturities during 1997 were $995 million and $552 million, respectively. Net gains realized during the year accounted for one percent, two percent and four percent of noninterest income in 1999, 1998, and 1997, respectively. Gross unrealized gains in the Company’s investment securities portfolio at year-end 1999 totaled $7.9 million and gross unrealized losses totaled $63.9 million.

      In recent years, because of their liquidity, credit quality and yield characteristics, the majority of the purchases of taxable securities have been in collateralized mortgage obligations (“CMOs”). Total average investment securities, including those available for sale, increased 38 and 21 percent during 1999 and 1998, respectively, after remaining relatively unchanged in 1997. The increases over the past two years are due in part to the securitization and transfer of approximately $1 billion and $500 million of loans to securities available for sale during 1999 and 1998, respectively.

      The following table reflects the carrying amount of the investment securities portfolio at the end of each of the last three years.

Investment Securities and Investment Securities Available for Sale

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      The maturities and weighted average yields of the investment securities and investment securities available for sale portfolios at the end of 1999 are presented in the following table using primarily the average expected lives including the effects of prepayments. The amounts and yields disclosed for investment securities available for sale reflect the amortized cost rather than the net carrying value, (i.e., fair value) of these securities. Taxable equivalent adjustments, using a 35 percent tax rate, have been made in calculating yields on tax-exempt obligations.

Investment Securities and Investment Securities Available for Sale Maturity Schedule

      While the weighted average stated maturities of total mortgage-backed securities (“MBS”) and CMOs are 15.6 years and 24.7 years, respectively, the corresponding weighted average expected lives assumed in the above table are 5.1 years and 6.4 years. During a period of rising rates, prepayment speeds generally slow on MBS and CMOs with a resulting extension in average life, and vice versa. At December 31, 1999, given a 100 basis point immediate and permanent parallel increase in rates, the expected average lives for MBS and CMOs would be 5.3 and 6.8 years, respectively. Similarly, given a 100 basis point immediate and permanent parallel decrease in rates, the expected average lives for MBS and CMOs would be 4.8 and 5.0 years, respectively.

      The weighted average market prices as a percentage of par value for MBS and CMOs at December 31, 1999, were 97.6 percent and 95.5 percent, respectively. The market prices for MBS and CMOs generally decline in a rising rate environment due to the resulting increase in average life as well as the decreased market yield on fixed rate securities and impact of annual and life rate caps on adjustable-rate securities. The opposite is generally true during a period of falling rates. At December 31, 1999, fixed-rate MBS and CMOs totaled $402.1 million and $4.2 billion, respectively, with corresponding weighted average expected lives of 5.2 and 6.3 years. Adjustable-rate MBS and CMOs totaled $110.3 million and $85.2 million, respectively, with corresponding weighted average expected lives of 4.8 and 8.6 years. Substantially all adjustable-rate MBS and CMOs are subject to life rate caps, and MBS are also generally subject to a two percent annual cap. The weighted average life caps at year end were 11.4 percent and 12.4 percent for MBS and CMOs, respectively, and the corresponding weighted average coupon rates at year end were 6.25 percent and 6.61 percent. At December 31, 1999, given a 100 basis point immediate and permanent parallel increase in rates, the estimated market prices for MBS and CMOs would

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Trading Account Securities and Other Earning Assets

      Securities carried in the trading account, while interest bearing, are primarily held for sale to institutional customers for their investment portfolio and generally are sold within thirty days of purchase. The volume of activity is directly related to general market conditions and reactions to the changing interest rate environment. The average balance in the trading account securities portfolio for 1999 decreased by 26 percent following a 17 percent decrease in 1998. The following table details the composition of the Company’s trading account at December 31, 1999, 1998 and 1997.

Trading Account Composition

      Average federal funds sold and securities purchased under agreements to resell decreased 40 percent in 1999 compared to a 43 percent decrease in 1998. The average balance of interest bearing deposits in other banks decreased 40 percent during 1999 from 1998 levels after decreasing 64 percent from 1997 to 1998.

Deposits and Borrowed Funds

      Changes in the Company’s markets and the economy in general were also reflected in the liability mix during 1999. Average deposits totaled $12.5 billion, an 11 percent increase over prior year levels. Excluding the impact of purchase transactions completed during 1999, average deposits increased eight percent. The growth in deposits was primarily attributable to a 14 percent increase in average transaction accounts (noninterest bearing deposits, savings and money market accounts, and interest bearing checking accounts) as average noninterest bearing deposits increased 11 percent and average interest bearing transaction accounts increased 15 percent. As part of its overall funding strategy, the Company focuses on the mix of deposits and, in particular, maintaining an appropriate level of transaction accounts as a percentage of total deposits. During 1999, average transactions accounts accounted for 67 percent of total deposits compared to 65 percent in 1998 and 62 percent in 1997. Average interest bearing deposits, the primary source of funding for the Company, made up 73 percent of total average interest bearing liabilities in 1999, down from 76 percent in 1998 and 80 percent in 1997. Contributing to the overall decrease in the proportion of average interest bearing liabilities represented by average interest bearing deposits was the impact of the issuance of approximately $275 million of subordinated debentures in 1999, primarily for capital purposes. In addition, the mix of average interest bearing deposits in 1999 and 1998 shifted from demand deposits to savings due primarily to a program initiated by the Company during 1996. Under this program, deposit balances in certain NOW accounts above a certain threshold are swept to savings accounts on a daily basis, thereby reducing the level of deposit reserves required to be maintained with the Federal Reserve. Refer to Note 10, Regulatory Matters and Dividends from Subsidiaries, in the Notes to Consolidated Financial Statements for a further discussion of reserve requirements maintained with the Federal Reserve.

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      The following table summarizes the maturities of certificates of deposit of $100,000 or more and other time deposits of $100,000 or more outstanding at December 31, 1999.

Maturities of Time Deposits

      While the Company continues to emphasize funding earning asset growth through internal deposit generation, average earning asset growth has exceeded that of deposit growth. As a result, the Company has relied more heavily on borrowed funds as a supplemental source of funding. Borrowed funds consist of Federal Home Loan Bank (“FHLB”) advances, guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures (“Capital Securities”) and other short-term borrowings, primarily in the form of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings. Average borrowed funds increased $805 million and $750 million in 1999 and 1998, respectively. Included in other short-term borrowings are trading account short sales and the commercial paper of the Company. For a discussion of interest rates and maturities of FHLB and other borrowings, refer to Note 6, FHLB and Other Borrowings, and Note 7, Capital Securities and Preferred Stock, in the Notes to Consolidated Financial Statements.

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      The Short-Term Borrowings table below shows the distribution of the Company’s short-term borrowed funds and the weighted average interest rates thereon at the end of each of the last three years. Also provided are the maximum outstanding amounts of borrowings, the average amounts of borrowings and the average interest rates at year end for the last three years.

Short-Term Borrowings

Liquidity Management

      Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities they serve. Additionally, the parent holding company requires cash for various operating needs including: dividends to shareholders; business combinations; capital injections to its subsidiaries; the servicing of debt; and the payment of general corporate expenses. The primary source of liquidity for the parent holding company is dividends from the Subsidiary Banks. At December 31, 1999, the Company’s Subsidiary Banks could have paid additional dividends to the parent holding

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      Asset and liability management functions not only to assure adequate liquidity in order to meet the needs of the Company’s customers, but also to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that the Company can earn a return that meets the investment requirements of its shareholders. Daily monitoring of the sources and uses of funds is necessary to maintain an acceptable cash position that meets both requirements.

      The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and, to a lesser extent, sales of investment securities available for sale and trading account securities. Other short-term investments such as federal funds sold, securities purchased under agreements to resell and maturing interest bearing deposits with other banks are additional sources of liquidity funding.

      The liability portion of the balance sheet provides liquidity through various customers’ interest bearing and noninterest bearing deposit accounts. Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity. These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs.

      During 1999 and 1998, the Company has funded the growth in interest earning assets through its increased deposits and borrowed funds. Deposits increased by $795 million in 1999 and $1.1 billion in 1998. FHLB and other borrowings increased by $518 million in 1999 and $616 million in 1998. For more information on the composition of the Company’s long-term borrowings, refer to Note 6, FHLB and Other Borrowings, in the Notes to Consolidated Financial Statements.

Interest Rate Sensitivity Management

      The Company’s net interest income, and the fair value of its financial instruments, are influenced by changes in the level of interest rates. The Company manages its exposure to fluctuations in interest rates through policies established by its Asset/ Liability Management Committee (“ALCO”). The ALCO meets periodically and has responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company.

      Management utilizes an interest rate simulation model to estimate the sensitivity of the Company’s net interest income to changes in interest rates. Such estimates are based upon a number of assumptions for each scenario, including the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments.

      The estimated impact on the Company’s net interest income sensitivity over a one-year time horizon at December 31, 1999 is shown below along with comparable prior year information. Such analysis assumes an immediate and sustained parallel shift in interest rates, no balance sheet growth and the Company’s estimate of how interest-bearing transaction accounts will reprice in each scenario.

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