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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 0-6032
COMPASS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0593897
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
15 SOUTH 20TH STREET
BIRMINGHAM, ALABAMA 35233
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 933-3000
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
None REGISTERED
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $2 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
As of January 31, 1998, the aggregate market value of voting stock held by
non-affiliates was $2,942,194,349.
Indicate the number of shares outstanding of the registrant's class of common
stock, as of the latest practicable date.
CLASS OUTSTANDING AT JANUARY 31, 1998
Common Stock, $2 Par Value 68,027,615
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
Proxy Statement for 1998 annual Part III
meeting
except for information referred to
in Item 402(a)(8) of Regulation S-K
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PART I
ITEM 1 -- BUSINESS
Compass Bancshares, Inc. (the "Company") is a bank holding company with its
principal place of business in Birmingham, Alabama. The Company was organized
in 1970 and commenced business in late 1971 upon the acquisition of Central
Bank & Trust Co. and State National Bank. The Company subsequently acquired
substantially all of the outstanding stock of additional banks located in
Alabama, 11 of which were merged in late 1981 to create Central Bank of the
South, Alabama's first statewide bank. In 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 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 Central Bank of the
South, an Alabama banking corporation headquartered in Anniston, Alabama, and
Compass Banks of Texas, Inc., a Delaware bank holding company ("Compass of
Texas"), which owns Compass Bank, a Texas state bank headquartered in Houston,
Texas ("Compass Bank-Texas"). The bank subsidiaries of the Company and Compass
of Texas are referred to collectively herein as the "Subsidiary Banks".
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide them with capital and services
of various kinds. The Company derives substantially all of its income from
dividends from its subsidiaries. Such dividends are determined on an
individual basis, generally in relation to each subsidiary's earnings and
capital position.
SUBSIDIARY BANKS
Compass Bank conducts a general commercial banking and trust business at 88
locations in 45 communities in Alabama and in 34 locations in 14 communities
in Florida. Compass Bank-Texas conducts a general commercial banking business
from 41 banking offices in Houston, 25 banking offices in the Dallas-Ft. Worth
area, 17 banking offices in San Antonio, 8 banking offices in Austin and 10
banking offices in Central and East Texas.
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 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.
The Subsidiary Banks provide correspondent banking services including audit
services, 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.
1
NONBANKING SUBSIDIARIES
Through wholly-owned subsidiaries, the Company is engaged in providing
insurance products to customers of the Subsidiary Banks and owning real estate
for bank premises. Revenues from operation of these subsidiaries do not
presently constitute a significant portion of the Company's total operating
revenues. The Company may subsequently engage in other activities permissible
for registered bank holding companies when suitable opportunities develop. Any
proposal for such further activities is subject to approval by appropriate
regulatory authorities. (See "Supervision and Regulation".)
ACQUISITIONS
The Company may seek to acquire other banks and banking offices when
suitable opportunities develop. Discussions are held from time to time with
institutions primarily in Texas and Florida about their possible affiliation
with the Company. It is impossible to predict accurately whether any
discussions will lead to agreement. Any bid or proposal for the acquisition of
additional banks is subject to approval by appropriate regulatory authorities.
(See "Supervision and Regulation".)
Since the Company first expanded to Texas in 1987 and to Florida in 1991,
the Company has acquired 40 financial institutions and numerous branch offices
in Texas and Florida. The following is a list of the acquisitions completed
during the past three years with their asset size (in thousands) and closing
dates.
Assets Method of
Acquisition Date Acquired Accounting
- ----------- -------- -------- ----------
Southwest Bankers, Inc. 3-7-95 $142,000 Pooling
San Antonio, Texas
Flower Mound Bancshares, Inc. 2-1-96 $46,000 Pooling
Dallas, Texas
Equitable BankShares, Inc. 4-11-96 $184,000 Pooling
Dallas, Texas
Post Oak Bank 4-22-96 $323,000 Purchase
Houston, Texas
Peoples Bancshares, Inc. 5-21-96 $136,000 Purchase
Belton, Texas
Royall Financial Corporation 7-16-96 $109,000 Pooling
Palestine, Texas
CFB Bancorp, Inc. 8-23-96 $302,000 Purchase
Jacksonville, Florida
Texas American Bank 9-27-96 $65,000 Pooling
San Antonio, Texas
ProBank 10-24-96 $61,000 Purchase
Houston, Texas
Enterprise National Bank 1-15-97 $171,000 Pooling
Jacksonville, Florida
Horizon Bancorp, Inc. 3-12-97 $154,000 Pooling
Austin, Texas
Greater Brazos Valley Bancorp, Inc. 4-17-97 $58,000 Pooling
College Station, Texas
Central Texas Bancorp, Inc. 7-15-97 $207,000 Pooling
Waco, Texas
2
ACQUISITIONS COMPLETED AFTER DECEMBER 31, 1997
On January 13, 1998, the Company completed the acquisition of G.S.B.
Investments, Inc. ("GSB") and its subsidiary, Gainesville State Bank, of
Gainesville, Florida, with the issuance of 1,649,807 shares of the Company's
common stock. At the date of closing, GSB had assets of $213 million and
equity of $22 million. The transaction was accounted for under the pooling-of-
interests method of accounting and, accordingly, all prior period information
will be restated in the first quarter of 1998.
The Company completed the acquisition of First University Corporation
("First University") and its subsidiary, West University Bank, N.A., of
Houston, Texas, on January 29, 1998, with the issuance of approximately
350,000 shares of the Company's common stock. At the date of closing, First
University had assets of $68 million and equity of $4 million. The transaction
was accounted for under the pooling-of-interests method of accounting and,
accordingly, all prior period information will be restated in the first
quarter of 1998.
On February 9, 1998, the Company completed the acquisition of Fidelity
Resources Company ("Fidelity") and its subsidiary, Fidelity Bank, N.A., of
Dallas, Texas, with the issuance of approximately 1,800,000 shares of the
Company's common stock. At the date of closing, Fidelity had assets of $335
million and equity of $20 million. The transaction was accounted for under the
pooling-of-interests method of accounting and, accordingly, all prior period
information will be restated in the first quarter of 1998.
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 from commercial and investment banks and brokerage firms. In
the case of larger customers, competition exists with financial institutions
in Texas and other major metropolitan areas in the United States, many of
which are larger in terms of capital, resources and personnel. Increasingly,
in the conduct of certain aspects of their businesses, the Subsidiary Banks
compete with finance companies, savings and loan associations, credit unions,
mutual funds, factors, insurance companies and similar financial institutions.
There is significant competition among bank holding companies in most of the
markets served by the Subsidiary Banks. The Company believes that intense
competition for banking business among bank holding companies in Alabama,
Texas and Florida will continue and that during 1998 the competition may
further intensify if additional regional bank holding companies enter such
states through the acquisition of local bank holding companies or savings and
loan institutions and with continued consolidation of savings and loan
institutions with and into bank holding companies. Competition among bank
holding companies is also significant in Texas where Compass Bank-Texas is
located in the major metropolitan markets of Dallas/Ft. Worth, Houston, San
Antonio and Austin having populations of approximately 4.6 million, 4.3
million, 1.5 million and 1.0 million people, respectively. Compass Bank-Texas
is small in terms of assets and deposits in comparison with the super-regional
banks it competes with. Likewise, in Jacksonville, Pensacola and Fort Walton
Beach, Florida, Compass Bank encounters intense competition from other
financial institutions that are substantially larger in terms of assets and
deposits.
EMPLOYEES
At December 31, 1997, the Company and its subsidiaries employed
approximately 5,500 persons. The Company and its subsidiaries provide a
variety of benefit programs including group life, health, accident, and other
insurance, retirement and stock ownership plans. The Company also maintains
training, educational and affirmative action programs designed to prepare
employees for positions of increasing responsibility.
3
GOVERNMENT MONETARY POLICY
The Company and the Subsidiary Banks are affected by the credit policies of
monetary authorities, including the Board of Governors of the Federal Reserve
System ("Federal Reserve"). An important function of the Federal Reserve is to
regulate the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve to implement these objectives are: open
market operations in U.S. Government securities, changes in the discount rate,
reserve requirements on member bank deposits and funds availability
regulations. These instruments are used in varying combinations to influence
the overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of financial institutions in the
past and will continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to the future
impact that changes in interest rates, deposit levels or loan demand may have
on the business and income of the Company and the Subsidiary Banks.
SUPERVISION AND REGULATION
THE COMPANY
The Company and Compass of Texas are multi-bank holding companies within the
meaning of the Bank Holding Company Act ("BHC Act") and are registered as such
with the Federal Reserve. As bank holding companies, the Company and Compass
of Texas are required to file with the Federal Reserve an annual report and
such additional information as the Federal Reserve may require pursuant to the
BHC Act. The Federal Reserve may also make examinations of the Company and
each of its subsidiaries. Under the BHC Act, bank holding companies are
prohibited, with certain exceptions, from acquiring direct or indirect
ownership or control of more than five percent of the voting shares of any
company engaging in activities other than banking or managing or controlling
banks or furnishing services to or performing services for their banking
subsidiaries. However, the BHC Act authorizes the Federal Reserve to permit
bank holding companies to engage in, and to acquire or retain shares of
companies that engage in, activities which the Federal Reserve determines to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
The BHC Act requires a bank holding company to obtain the prior approval of
the Federal Reserve before it may acquire substantially all the assets of any
bank or ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than five
percent of the voting shares of any such bank. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Act"), facilitates
branching and the establishment of agency relationships across state lines and
permits, commencing one year after enactment, bank holding companies to
acquire banks located in any state without regard to whether the transaction
is prohibited under any state law, subject to certain state provisions,
including the establishment by states of a minimum age of their local banks
subject to interstate acquisition of out-of-state bank holding companies. The
minimum age of local banks subject to interstate acquisition is limited to a
maximum of five years.
The States of Alabama, Florida and Texas, where the Company currently
operates banking subsidiaries, each have laws relating specifically to
acquisitions of banks, bank holding companies and other types of financial
institutions in those states by financial institutions that are based in, and
not based in, those states. In 1995, the State of Alabama enacted an
interstate banking act. In general, the Alabama statute implements the
Interstate Act, specifying five years as the minimum age of banks which may be
acquired and participating in interstate branching beginning May 31, 1997.
Texas and Florida law currently permits out-of-state bank holding companies to
acquire banks in Texas and Florida regardless of where the acquiror is based,
subject to the satisfaction of various provisions of state law, including the
requirement that the bank to be acquired has been in existence at least five
years in Texas and two years in Florida.
4
The Federal Reserve Act generally imposes certain limitations on extensions
of credit and other transactions by and between banks which are members of the
Federal Reserve and other affiliates (which includes any holding company of
which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Banks which are not members of the Federal Reserve are also
subject to these limitations. Further, federal law prohibits a bank holding
company and its subsidiaries from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or the
furnishing of services.
In December, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. This act recapitalized the Bank Insurance Fund
("BIF"), of which the Subsidiary Banks are members, and the Savings
Association Insurance Fund ("SAIF"), which insures certain of the Subsidiary
Banks' deposits, substantially revised statutory provisions, including capital
standards, restricted certain powers of state banks, gave regulators the
authority to limit officer and director compensation and required holding
companies to guarantee the capital compliance of their banks in certain
instances. Among other things, FDICIA requires the federal banking agencies to
take "prompt corrective action" with respect to banks that do not meet minimum
capital requirements. FDICIA established five capital tiers: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized", as defined by regulations
adopted by the Federal Reserve, the FDIC and the other federal depository
institution regulatory agencies. A depository institution is well capitalized
if it significantly exceeds the minimum level required by regulation for each
relevant capital measure, adequately capitalized if it meets such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in
the regulations. The critical capital level must be a level of tangible equity
capital equal to the greater of 2 percent of total tangible assets or 65
percent of the minimum leverage ratio to be prescribed by regulation. An
institution may be deemed to be in a capitalization category that is lower
than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
If a depository institution fails to meet regulatory capital requirements,
the regulatory agencies can require submission and funding of a capital
restoration plan by the institution, place limits on its activities, require
the raising of additional capital and, ultimately, require the appointment of
a conservator or receiver for the institution. The obligation of a controlling
bank holding company under FDICIA to fund a capital restoration plan is
limited to the lesser of five percent of an undercapitalized subsidiary's
assets or the amount required to meet regulatory capital requirements. If the
controlling bank holding company fails to fulfill its obligations under FDICIA
and files (or has filed against it) a petition under the Federal Bankruptcy
Code, the FDIC's 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, 1997, 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.
5
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.
Compass Bank-Texas is supervised, regulated and regularly examined by the
Department of Banking of the State of Texas and the Federal Reserve. The
Subsidiary Banks are subject to the provisions of the Federal Deposit
Insurance Act and to examination by and regulations of the FDIC.
Compass Bank is governed by Alabama laws restricting the declaration and
payment of dividends to 90 percent of annual net income until its surplus
funds equal at least 20 percent of capital stock. Compass Bank has surplus in
excess of this amount. Compass Bank-Texas, governed by the laws of the State
of Texas, is, under certain circumstances, restricted in the declaration and
payment of dividends to the extent that before declaring any dividends, it
must transfer to its "certified surplus" accounts an amount not less than 10
percent of the net profits earned since the last dividend was declared, except
that there is no requirement for a transfer to certified surplus of a sum
which would increase the certified surplus to more than the capital stock of
the bank. As members of the Federal Reserve, Compass Bank and Compass Bank-
Texas are subject to dividend limitations imposed by the Federal Reserve that
are similar to those applicable to national banks.
Federal law further provides that no insured depository institution may make
any capital distribution, including a cash dividend, if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements. Moreover, the federal bank regulatory agencies also have
the general authority to limit the dividends paid by insured banks if such
payments may be deemed to constitute an unsafe and unsound practice. Insured
banks are prohibited from paying dividends on their capital stock while in
default in the payment of any assessment due to the FDIC except in those cases
where the amount of the assessment is in dispute and the insured bank has
deposited satisfactory security for the payment thereof.
The Community Reinvestment Act of 1977 ("CRA") and the regulations of the
Federal Reserve and the FDIC implementing that act are intended to encourage
regulated financial institutions to help meet the credit needs of their local
community or communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of such financial institutions.
The CRA and such regulations provide that the appropriate regulatory authority
will assess the records of regulated financial institutions in satisfying
their continuing and affirmative obligations to help meet the credit needs of
their local communities as part of their regulatory examination of the
institution. The results of such examinations are made public and are taken
into account upon the filing of any application to establish a domestic branch
or to merge or to acquire the assets or assume the liabilities of a bank. In
the case of a bank holding company, the CRA performance record of the banks
involved in the transaction are reviewed in connection with the filing of an
application to acquire ownership or control of shares or assets of a bank or
to merge with any other bank holding company. An unsatisfactory record can
substantially delay or block the transaction.
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.
6
The Investment Services Division of Compass Bank is treated as a municipal
securities dealer and a government securities dealer for purposes of the
federal securities laws and, therefore, is subject to certain reporting
requirements and/or regulatory controls by the Securities and Exchange
Commission (the "Commission"), the United States Department of the Treasury
and the Federal Reserve. Compass Brokerage, Inc. is a discount brokerage
service registered with the Commission and the National Association of
Securities Dealers, Inc. and is subject to certain reporting requirements and
regulatory control by these agencies. Compass Bancshares Insurance, Inc. is a
licensed insurance agent or broker for various insurance companies and is
subject to reporting and licensing regulations of the Alabama Insurance
Commission.
References to applicable statutes under the heading "Supervision and
Regulation" are brief summaries of portions thereof, do not purport to be
complete and are qualified in their entirety by reference to such statutes.
7
ITEM 1 -- STATISTICAL DISCLOSURE
Page(s)
-------
Consolidated Average Balances, Interest Income/Expense and
Yields/Rates......................................................... 28 & 29
Rate/Volume Variance Analysis......................................... 30 & 31
Investment Securities and Investment Securities Available for Sale ... 14
Investment Securities and Investment Securities Available for Sale
Maturity Schedule ................................................... 15
Loan Portfolio ....................................................... 12
Selected Loan Maturity and Interest Rate Sensitivity ................. 12
Nonperforming Assets ................................................. 35
Summary of Loan Loss Experience ...................................... 33
Allocation of Allowance for Loan Losses .............................. 34
Maturities of Time Deposits .......................................... 17
Return on Equity and Assets .......................................... 23
Short-Term Borrowings ................................................ 18
Interest Rate Protection Contracts ................................... 21
Assets/Liabilities Associated With Interest Rate Protection Contracts
..................................................................... 21
Trading Account Interest Rate Contracts .............................. 22
Trading Account Composition .......................................... 16
Capital Ratios ....................................................... 24
Noninterest Income ................................................... 36
Noninterest Expense .................................................. 37
8
ITEM 2 -- PROPERTIES
The Company, through its subsidiaries, owns or leases buildings that are
used in the normal course of business. The principal executive offices of the
Company are located at 15 South 20th Street, Birmingham, Alabama, in a 289,000
square-foot office building. The Subsidiary Banks own or lease various other
offices and facilities in Alabama, Florida and Texas with remaining lease
terms of 1 to 20 years exclusive of renewal options. In addition, the Company
owns a 306,000 square-foot administrative headquarters facility located in
Birmingham, Alabama. The Company also owns the River Oaks Bank Building in
Houston, Texas, a 14-story, 168,000 square-foot office building, and the Post
Oak Building in Houston, Texas, an 8-story, 124,000 square-foot office
building. Compass Bank-Texas 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.
See "Summary of Significant Accounting Policies" and "Notes to Consolidated
Financial Statements" for information with respect to the amounts at which
bank premises, equipment and other real estate are carried and information
relating to commitments under long-term leases.
ITEM 3 -- LEGAL PROCEEDINGS
The Subsidiary Banks are defendants in legal proceedings arising in the
ordinary course of business. Some of these proceedings which relate to
lending, collections, servicing, investment, trust and other activities by
such subsidiaries seek substantial sums as damages.
Among the actions which are pending against the Subsidiary Banks are actions
filed as class actions in the State of Alabama. The actions are similar to
others that have been brought in recent years in Alabama against financial
institutions in that they seek substantial compensatory and punitive damages
in connection with transactions involving relatively small amounts of actual
damages. In recent years, juries in certain Alabama state courts have rendered
large punitive damage awards in such cases.
It may take a number of years to finally resolve some of these pending legal
proceedings due to their complexity and other reasons. It is 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 1997.
9
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low closing prices of the common
stock of the Company as reported through the National Association of
Securities Dealers, Inc. Automated Quotation National Market System and the
dividends paid thereon during the periods indicated. All per share information
for periods prior to April, 1997, 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 April 2, 1997. The prices shown do not reflect retail
mark-ups, mark-downs, or commissions. All share prices have been rounded to
the nearest 1/8 of one dollar.
High Low Dividend
---- ---- --------
1997:
FIRST QUARTER......................................... $32 1/8 $26 $.237
SECOND QUARTER........................................ 37 1/4 29 1/8 .237
THIRD QUARTER......................................... 39 3/4 34 1/2 .237
FOURTH QUARTER........................................ 46 5/8 37 1/8 .237
1996:
First quarter......................................... $23 1/8 $20 1/2 $.213
Second quarter........................................ 23 1/2 21 5/8 .213
Third quarter......................................... 23 1/8 21 .213
Fourth quarter........................................ 26 1/2 23 .213
As of January 31, 1998, there were approximately 7,000 shareholders of
record of common stock of which approximately 5,800 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 April, 1997, 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 April 2, 1997.
All prior year information has been restated to reflect acquisitions
consummated during 1997 accounted for under the pooling-of-interests method of
accounting.
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
(in Thousands Except Per Share Data)
Net interest income..... $ 475,165 $ 431,172 $ 394,559 $ 375,410 $ 366,609
Provision for loan
losses................. 22,412 20,215 11,664 4,357 36,365
Net income.............. 155,563 132,444 119,750 110,614 102,182
Per share data:
Basic earnings......... $ 2.37 $ 2.04 $ 1.84 $ 1.70 $ 1.55
Diluted earnings....... 2.34 2.03 1.83 1.69 1.54
Cash dividends
declared.............. .947 .853 .747 .613 .507
Balance sheet:
Average total equity... $ 898,719 $ 798,052 $ 719,134 $ 640,841 $ 598,838
Average assets......... 12,602,235 11,501,586 10,381,940 8,959,342 7,960,137
Period-end FHLB and
other borrowings...... 1,387,121 702,771 591,344 496,629 335,817
Period-end total
equity................ 960,008 849,089 780,144 672,062 615,197
Period-end assets...... 13,459,555 12,432,223 11,252,438 10,120,321 8,229,027
10
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
1997 acquisitions accounted for using the pooling-of-interests accounting
method. Financial institutions acquired by the Company during the past three
years and accounted for as purchases are reflected in the financial position
and results of operations of the Company since the date of their acquisition.
This report may contain forward-looking statements which are subject to
numerous assumptions, risks and uncertainties. Statements pertaining to future
periods are subject to uncertainty because of the possibility of changes in
underlying factors and assumptions. Actual results could differ materially
from those contained in or implied by such forward-looking statements for a
variety of factors including: sharp and/or rapid changes in interest rates;
significant changes in the economic scenario from the current anticipated
scenario which could materially change anticipated credit quality trends and
the ability to generate loans; significant delay in or inability to execute
strategic initiatives designed to grow revenues and/or control expenses; and
significant changes in accounting, tax or regulatory practices or
requirements.
SUMMARY
In 1997, the Company reported record net income of $155.6 million, a 17
percent increase over the Company's previous high of $132.4 million in 1996.
Net income for 1996 increased 11 percent over 1995 net income. Basic earnings
per share for 1997 was $2.37, also a record, compared with $2.04 in 1996 and
$1.84 in 1995, representing a 16 percent increase in 1997 and an 11 percent
increase in 1996. Diluted earnings per share increased to $2.34 in 1997, a 15
percent increase, from $2.03 in 1996. Diluted earnings per share in 1996
increased 11 percent over 1995. Pretax income for 1997 was up $30.4 million,
or 15 percent, over 1996 while income tax expense increased 10 percent over
the same period reflecting a decrease in the Company's effective tax rate from
36.3 percent in 1996 to 34.8 percent in 1997.
One significant factor in the growth of the Company has been the Company's
acquisitions in Texas since early 1987, specifically the Houston, Dallas, San
Antonio and Austin areas. The Texas expansion continued in 1997 and is
expected to continue in 1998. With the acquisition of three financial
institutions in 1997, the assets of the Company's Texas operations has grown
to $5.5 billion at December 31, 1997. In addition, the Company expanded its
Florida operations with the acquisition of Enterprise National Bank of
Jacksonville, Florida and has continued to increase its presence in Florida in
1998. For additional information, see "Acquisitions" and "Acquisitions
Completed After December 31, 1997" in Part I of this report and the
accompanying "Notes to the Consolidated Financial Statements," Note 11,
Business Combinations.
EARNING ASSETS
Average earning assets in 1997 increased 9 percent over 1996 due principally
to a 13 percent increase in average total loans. The average earning asset mix
shifted moderately in 1997 with loans at 71 percent, investment securities and
investment securities available for sale at 27 percent and other earning
assets at 2 percent. In 1996, loans were 69 percent, investment securities and
investment securities available for sale were 29 percent and other earning
assets were 2 percent, unchanged from 1995 levels. The mix of earning assets
is monitored on a continuous basis in order to place the Company in a position
to react to interest rate movements and to maximize the return on earning
assets.
LOANS
Average loans increased 13 percent in 1997 with much of the increase
concentrated in commercial, financial and agricultural loans, real estate
construction loans and consumer installment loans. Total loans outstanding at
11
year end increased 10 percent over previous year-end levels. Commercial,
financial and agricultural loans, which were 25 percent of total loans,
increased 20 percent in 1997 compared to the previous year. Real estate
construction loans increased 20 percent while consumer installment loans
increased 16 percent from year-end 1996 to year-end 1997. Residential mortgage
and commercial mortgage loans each increased one percent compared to 1996
levels. The 13 percent increase in the Company's loan portfolio from 1995 to
1996 was primarily the result of an increase of 26 percent in commercial,
financial and agricultural loans and a 12 percent increase in residential
mortgage loans.
The Company's loan portfolio continues to reflect the diversity of the
markets served by the Subsidiary Banks. The condition of the economy in states
in which the Subsidiary Banks lend money is further reflected in the loan
portfolio mix. The volume of commercial, financial and agricultural loans, as
a percentage of total loans outstanding, increased significantly during 1997
continuing the trend of prior years. Residential real estate loans represented
34 percent of the total portfolio at December 31, 1997, down from the 37
percent reported in the prior year.
The Company has not invested in loans that would be considered highly
leveraged transactions as defined by the Federal Reserve and other regulatory
agencies. The Company had no foreign loans or loans to lesser developed
countries as of December 31, 1997.
The Loan Portfolio table shows the classifications of loans by major
category at December 31, 1997, and for each of the preceding four years. The
second table shows maturities of certain loan classifications at December 31,
1997, and an analysis of the rate structure for such loans due in over one
year.
LOAN PORTFOLIO
December 31
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
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..... $2,209,396 25.5% $1,844,764 23.4% $1,465,063 21.1% $1,310,568 20.6% $1,245,496 21.8%
Real estate --
construction.... 718,462 8.3 599,473 7.6 485,408 7.0 432,656 6.8 311,693 5.5
Real estate --
mortgage:
Residential...... 2,987,745 34.4 2,944,237 37.3 2,634,544 37.9 2,421,233 38.1 2,029,508 35.5
Commercial....... 1,008,596 11.6 992,735 12.6 893,671 12.8 843,191 13.3 826,563 14.4
Consumer
installment...... 1,752,767 20.2 1,504,800 19.1 1,474,025 21.2 1,350,277 21.2 1,304,356 22.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
8,676,966 100.0% 7,886,009 100.0% 6,952,711 100.0% 6,357,925 100.0% 5,717,616 100.0%
===== ===== ===== ===== =====
Less: Unearned
income........... 5,410 9,337 9,848 8,903 11,319
Allowance for loan
losses........... 122,011 122,115 113,805 113,363 116,527
---------- ---------- ---------- ---------- ----------
Total loans....... $8,549,545 $7,754,557 $6,829,058 $6,235,659 $5,589,770
========== ========== ========== ========== ==========
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....... $1,144,713 $ 918,209 $146,474 $2,209,397 $461,114 $603,569
Real estate --
construction.......... 442,517 248,538 27,407 718,462 47,097 228,848
---------- ---------- -------- ---------- -------- --------
$1,587,230 $1,166,747 $173,881 $2,927,859 $508,211 $832,417
========== ========== ======== ========== ======== ========
12
INVESTMENT SECURITIES
The Company's investment securities are classified into one of three
categories based on management's intent to hold the securities: (i) trading
account securities, (ii) held-to-maturity securities or (iii) securities
available for sale. Securities held in a trading account are required to be
reported at fair value, with unrealized gains and losses included in earnings.
Securities designated to be held to maturity are reported at amortized cost.
Securities classified as available for sale are required to be reported at
fair value with unrealized gains and losses, net of taxes, excluded from
earnings and shown separately as a component of shareholders' equity. On
December 31, 1995, the Company adopted the Financial Accounting Standards
Board's Special Report, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities ("Special
Report"). The Special Report allowed a company the one-time opportunity to
reassess the appropriateness of its investment securities classifications and
to transfer securities from the held-to-maturity portfolio to the available-
for-sale portfolio without calling into question the company's intent to hold
other debt securities to maturity. Upon adoption, the Company transferred
held-to-maturity investment securities totaling $828 million to its available-
for-sale portfolio and $33 million of available-for-sale securities to its
held-to-maturity portfolio. Generally, individual holdings with greater than
$10 million par value were transferred to the available-for-sale portfolio in
order to increase liquidity and portfolio management capabilities, with
smaller positions transferred to the held-to-maturity portfolio.
The composition of the Company's total investment securities portfolio
reflects the Company's investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the Company's investment strategy are to maintain an appropriate level of
liquidity and provide a tool to assist in controlling the Company's interest
rate position while at the same time producing adequate levels of interest
income. For securities classified as held to maturity, the Company has the
ability, and it is management's intention, to hold such securities to
maturity. Management of the maturity of the portfolio is necessary to provide
liquidity and control interest rate risk. Certain securities that may be sold
prior to maturity are reflected as investment securities available for sale on
the Company's balance sheet.
Maturities of held-to-maturity securities in 1997, 1996 and 1995 were $371
million, $233 million and $466 million, respectively. During 1995, gross gains
of $1.2 million were realized on $32 million of mortgage-backed securities
("MBS") in the held-to-maturity portfolio, which were classified as maturities
in accordance with generally accepted accounting principles. Sales and
maturities of securities available for sale totaled $966 million and $552
million, respectively, in 1997 while sales and maturities in the portfolio in
1996 were $812 million and $497 million. Net gains realized during the year
accounted for four percent, six percent and two percent of noninterest income
in 1997, 1996 and 1995, respectively. Gross unrealized gains in the Company's
held-to-maturity portfolio at year-end 1997 totaled $19.2 million and gross
unrealized losses totaled $1.3 million.
In recent years, the trend of the Company has been to invest in taxable
securities due to the lack of preferential treatment afforded tax-exempt
securities under the tax laws. Because of their liquidity, credit quality and
yield characteristics, the majority of the purchases of taxable securities
have been in collateralized mortgage obligations ("CMOs"). Total average
investment securities, including those available for sale, was relatively
unchanged during 1997 after increasing 10 percent in 1996.
13
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
---------------------------------
1997 1996 1995
---------- ---------- ----------
(in Thousands)
Investment securities:
U.S. Treasury................................ $ 11,736 $ 16,990 $ --
U.S. Government agencies and corporations.... 24,348 40,767 1,975
Mortgage-backed pass-through securities...... 233,908 296,798 340,615
Collateralized mortgage obligations:
Agency...................................... 317,863 343,125 132,485
Corporate................................... 311,003 295,838 114,957
States and political subdivisions............ 74,161 86,467 71,159
Corporate bonds.............................. 27,604 40,389 67,678
Other........................................ 855 1,270 1,235
---------- ---------- ----------
1,001,478 1,121,644 730,104
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 127,993 144,625 395,880
U.S. Government agencies and corporations.... 66,952 72,010 151,860
Mortgage-backed pass-through securities...... 130,489 300,220 284,922
Collateralized mortgage obligations:
Agency...................................... 1,025,678 525,280 555,428
Corporate................................... 773,224 904,368 628,450
States and political subdivisions............ 827 6,271 18,120
Corporate bonds.............................. 90,329 116,592 131,874
Other........................................ 92,180 54,092 47,761
---------- ---------- ----------
2,307,672 2,123,458 2,214,295
Net unrealized gain (loss).................. 2,038 (2,784) 20,743
---------- ---------- ----------
2,309,710 2,120,674 2,235,038
---------- ---------- ----------
Total....................................... $3,311,188 $3,242,318 $2,965,142
========== ========== ==========
14
The maturities and weighted average yields of the investment securities and
investment securities available for sale portfolios at the end of 1997 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
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.......... $ 11,736 5.70% -- -- -- -- -- --
U.S. Government
agencies and
corporations.......... 5,342 6.03 $ 17,884 6.66% $ 1,122 6.50% -- --
Mortgage-backed pass-
through securities.... 8,954 5.61 184,916 7.55 40,038 7.00 -- --
Collateralized mortgage
obligations........... 82,303 6.97 449,786 7.42 40,562 6.69 $ 56,215 7.02%
States and political
subdivisions.......... 4,581 7.64 16,802 7.87 40,539 9.18 12,239 9.55
Corporate bonds and
other................. 11,792 6.13 7,624 8.73 4,050 7.11 4,993 7.81
-------- ----------- ---------- --------
124,708 6.66 677,012 7.46 126,311 7.57 73,447 7.47
-------- ----------- ---------- --------
Investment securities available
for sale -- amortized cost:
U.S. Treasury.......... 1,000 5.67 126,993 6.06 -- -- -- --
U.S. Government
agencies and
corporations.......... -- -- 66,952 6.83 -- -- -- --
Mortgage-backed pass-
through securities.... -- -- -- -- 130,489 6.58 -- --
Collateralized mortgage
obligations........... 302,097 6.64 1,353,720 6.76 122,885 6.95 20,200 7.17
States and political
subdivisions.......... 664 10.14 163 11.51 -- -- -- --
Corporate bonds and
other................. 45,672 6.14 75,998 6.92 45,958 6.79 14,881 5.91
-------- ----------- ---------- --------
349,433 6.58 1,623,826 6.72 299,332 6.76 35,081 6.63
-------- ----------- ---------- --------
Total.................. $474,141 6.60 $2,300,838 6.94 $ 425,643 7.01 $108,528 7.21
======== =========== ========== ========
While the weighted average stated maturities of total MBS and CMOs are 15.3
years and 23.0 years, respectively, the corresponding weighted average
expected lives assumed in the above table are 4.5 years and 3.0 years. During
a period of rising rates, prepayment speeds generally slow on MBS and CMOs
with a resulting extension in average life, and vice versa. Given a 100 basis
point immediate and permanent parallel increase in rates, the expected average
lives for MBS and CMOs would be 5.2 and 4.3 years, respectively. Similarly,
given a 100 basis point immediate and permanent parallel decrease in rates,
the expected average lives for MBS and CMOs would be 3.2 and 1.4 years,
respectively.
The weighted average market prices as a percentage of par value for MBS and
CMOs at December 31, 1997, were 101.9 percent and 99.9 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, 1997, fixed-rate MBS and CMOs
totaled $184 million and $2.3 billion, respectively, with corresponding
weighted average expected lives of 2.5 and 2.7 years. Adjustable-rate MBS and
CMOs totaled $180 million and $126 million, respectively, with corresponding
weighted average expected lives of 6.6 and 8.8 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 11.22 percent and 9.20 percent for MBS and CMOs,
respectively, and the corresponding weighted average coupon rates at year end
were 7.04 percent and 6.73 percent. Given a 100 basis point immediate and
permanent parallel increase in rates, the estimated market prices for MBS and
CMOs would be 100.8 and 97.1, respectively.
15
Given a 100 basis point immediate and permanent parallel decrease in rates,
the estimated market prices for MBS and CMOs would be 102.4 and 101.0,
respectively.
TRADING ACCOUNT SECURITIES AND OTHER EARNING ASSETS
Securities carried in the trading account, while interest bearing, are
primarily held for sale. The volume of activity is directly related to general
market conditions and reactions to the changing interest rate environment. The
average balance in the trading account securities portfolio for 1997 increased
by 17 percent following a 38 percent increase in 1996, as a result of
increased retail sales demand and a larger, more experienced sales force. The
following table details the composition of the Company's trading account at
December 31, 1997, 1996 and 1995.
TRADING ACCOUNT COMPOSITION
December 31
-------------------------
1997 1996 1995
-------- ------- --------
(in Thousands)
U.S. Treasury and Government agency.................. $ 55,487 $44,798 $ 54,318
States and political subdivisions.................... 8,135 9,738 19,583
Mortgage-backed pass-through securities.............. 34,282 24,371 16,471
Other debt securities................................ 281 727 396
Derivative securities:
Collateralized mortgage obligations................ 13,906 10,972 8,472
Interest rate floors and caps...................... 305 787 2,676
Other options...................................... 64 60 --
-------- ------- --------
$112,460 $91,453 $101,916
======== ======= ========
Average federal funds sold and securities purchased under agreements to
resell decreased 28 percent in 1997 compared to a 36 percent increase in 1996.
The average balance of interest bearing deposits in other banks decreased 61
percent during 1997 from 1996 levels after decreasing 70 percent from 1995 to
1996.
DEPOSITS AND BORROWED FUNDS
Changes in the Company's markets and the economy in general were also
reflected in the liability mix during 1997. Average interest bearing deposits,
the primary source of funding for the Company, made up 79 percent of total
average interest bearing liabilities in 1997, down from 83 percent in 1996 and
81 percent in 1995. Contributing to the overall decrease in average interest
bearing deposits relative to the prior year was the impact of investment
alternatives pursued by customers in response to the continued strength of the
stock and bond markets. In addition, the mix of average interest bearing
deposits in 1997 shifted from demand deposits to savings due primarily to a
program initiated by the Company during 1996. Under this program, deposit
balances in certain NOW accounts above a certain threshold are transferred to
savings accounts, thereby reducing the level of deposit reserves required to
be maintained with the Federal Reserve. See Note 1, Cash and Due From Banks,
in the "Notes to Consolidated Financial Statements" for a further discussion
of reserve requirements maintained with the Federal Reserve. As a result of
this program, during 1997 and 1996 NOW account balances averaging $626.4
million and $44.9 million, respectively, were transferred to the savings
category. Contributing to the change in the mix of interest bearing
liabilities in 1997 was a three percent decrease in average certificates of
deposit less than $100,000 and other time deposits, offset in part by a one
percent increase in average certificates of deposit of $100,000 or more.
During 1996, the increase in average interest bearing deposits as a
percentage of total interest bearing liabilities from the prior year was the
result of increases in all interest bearing deposit categories. Savings
deposits and certificates of deposit of $100,000 or more increased 33 percent
and 10 percent, respectively, while
16
demand deposits and certificates of deposit less than $100,000 and other time
deposits showed more modest increases of 5 percent and 4 percent,
respectively. The increases during 1996 were due primarily to internally
generated growth with a portion of the increase due to merger and acquisition
related activity.
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, 1997.
MATURITIES OF TIME DEPOSITS
Certificates Other Time
of Deposit Over Deposits Over
$100,000 $100,000 Total
--------------- ------------- ----------
(in Thousands)
Three months or less.................. $364,008 $28,287 $ 392,295
Over three through six months......... 128,285 2,000 130,285
Over six through twelve months........ 265,743 -- 265,743
Over twelve months.................... 229,976 -- 229,976
-------- ------- ----------
$988,012 $30,287 $1,018,299
======== ======= ==========
In order to support earning asset growth of nine percent in 1997 and as a
result of consumers choosing alternative investments other than deposits, the
Company relied more heavily on borrowed funds in 1997. Borrowed funds consist
of Federal Home Loan Bank ("FHLB") advances and other short-term borrowings,
primarily in the form of federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowings. Included in other
short-term borrowings are trading account short sales and the parent company's
commercial paper. Average federal funds purchased increased $205 million, or
45 percent, and other short-term borrowings increased $30 million, or 17
percent, while average securities sold under agreements to repurchase showed a
slight decrease of 3 percent during 1997. During 1997, the average balance of
FHLB and other borrowings increased $372 million, or 59 percent, primarily as
a result of additional FHLB advances of $1.2 billion, partially offset by
repayments of $573 million. For a discussion of interest rates and maturities
of FHLB and other borrowings, refer to Note 5, FHLB and Other Borrowings, in
the "Notes to Consolidated Financial Statements."
During the first quarter of 1997, the Company supplemented its funding
sources through the formation of a statutory business trust ("Compass Trust
I") which issued capital securities ("Capital Securities") to institutional
investors in the amount of $100 million. The proceeds from the issuance of the
Capital Securities and the issuance of $3.1 million of common securities were
concurrently used by Compass Trust I to purchase $103.1 million of guaranteed
preferred beneficial interests in Company's junior subordinated deferrable
interest debentures. The average balance of the Capital Securities is included
in FHLB and other borrowings in the tables on pages 28 and 29. For a further
discussion of Capital Securities, refer to Note 6, Capital Securities, in the
"Notes to Consolidated Financial Statements."
17
The Short-Term Borrowings table below shows the distribution of the
Company's short-term borrowed funds and the weighted average interest rates
thereon at the end of each of the last three years. Also provided are the
maximum outstanding amounts of borrowings, the average amounts of borrowings
and the average interest rates at year end for the last three years.
SHORT-TERM BORROWINGS
Year Ended December 31
------------------------------------------
Maximum Average
Outstanding Average Interest
At Any Average Interest Ending Rate At
Month End Balance Rate Balance Year End
----------- ---------- -------- ---------- --------
(in Thousands)
1997
FEDERAL FUNDS PURCHASED... $1,124,246 $ 665,956 5.44% $ 927,795 5.48%
SECURITIES SOLD UNDER
AGREEMENTS TO
REPURCHASE............... 364,682 243,040 5.11 241,372 5.12
SHORT SALES............... 96,372 57,991 6.00 52,080 5.83
COMMERCIAL PAPER.......... 92,516 61,006 5.08 52,410 5.03
OTHER SHORT-TERM
BORROWINGS............... 234,320 89,284 5.69 76,040 5.96
---------- ---------- ----------
$1,912,136 $1,117,277 $1,349,697
========== ========== ==========
1996
Federal funds purchased... $ 658,925 $ 460,648 5.27% $ 606,414 5.27%
Securities sold under
agreements to
repurchase............... 302,818 250,637 4.69 205,053 5.02
Short sales............... 61,907 35,024 5.84 36,703 6.06
Commercial paper.......... 114,060 73,822 5.02 47,896 4.88
Other short-term
borrowings............... 142,537 69,775 5.66 117,302 6.02
---------- ---------- ----------
$1,280,247 $ 889,906 $1,013,368
========== ========== ==========
1995
Federal funds purchased... $ 850,603 $ 560,213 5.75% $ 779,258 5.51%
Securities sold under
agreements to
repurchase............... 317,315 271,788 4.97 295,391 4.90
Short sales............... 38,096 25,090 5.85 24,245 5.13
Commercial paper.......... 188,677 125,891 5.85 57,312 5.38
Other short-term
borrowings............... 133,628 40,625 5.49 34,719 5.74
---------- ---------- ----------
$1,528,319 $1,023,607 $1,190,925
========== ========== ==========
LIQUIDITY MANAGEMENT
Liquidity is the ability of the Company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the
Company's ability to meet the day-to-day cash flow requirements of the
Subsidiary Banks' customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Subsidiary Banks would not be able to perform the
primary function of a financial intermediary and would, therefore, not be able
to meet the needs of the communities they serve. Additionally, the parent
holding company requires cash for various operating needs including dividends
to shareholders, business combinations, capital injections to the Subsidiary
Banks, the servicing of debt and the payment of general corporate expenses.
The primary source of liquidity for the parent holding company is dividends
from the Subsidiary Banks. At December 31, 1997, the Company's Subsidiary
Banks could have paid additional dividends to the parent holding company in
the amount of $139.3 million while continuing to meet the capital requirements
for "well-capitalized" banks. Also, the parent holding company has access to
various capital markets as evidenced by the issuance of the Capital Securities
during the first quarter of 1997 and the
18
issuance of subordinated debentures in 1994 and 1993. The parent holding
company does not anticipate any liquidity requirements in the near future that
it will not be able to meet.
Asset and liability management functions not only to assure adequate
liquidity in order for the Subsidiary Banks to meet the needs of their
customers, but also to maintain an appropriate balance between interest-
sensitive assets and interest-sensitive liabilities so that the Company can
earn a return that meets the investment requirements of its shareholders.
Daily monitoring of the sources and uses of funds is necessary to maintain an
acceptable cash position that meets both requirements. In a banking
environment, both assets and liabilities are considered sources of liquidity
funding and are monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a
lesser extent, sales of investment securities available for sale and trading
account securities. Other short-term investments such as federal funds sold,
securities purchased under agreements to resell and maturing interest bearing
deposits with other banks are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and noninterest bearing deposit accounts.
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings are additional sources of liquidity and,
basically, represent the Company's incremental borrowing capacity. These
sources of liquidity are short-term in nature and are used as necessary to
fund asset growth and meet short-term liquidity needs.
As disclosed in the Company's "Consolidated Statements of Cash Flows," net
cash provided by operating activities decreased to $45 million primarily due
to the increase in other assets offset by an increase in net income and
trading account securities. Net cash used in investing activities of $859
million consisted primarily of net loans originated of $812 million and
available-for-sale securities purchased of $1.8 billion, largely funded by
maturities of investment securities held to maturity of $371 million, as well
as sales and maturities of investment securities available for sale of $966
million and $552 million, respectively. Net cash provided by financing
activities provided the remainder of funding sources for 1997. The $794
million of net cash provided by financing activities consisted primarily of a
net increase of $584 million in FHLB advances and other borrowings, a $321
million increase in federal funds purchased, an increase of $36 million in
securities sold under agreements to repurchase and the issuance of $100
million in Capital Securities offset partially by a reduction of $177 million
in deposits and the payment of $62 million in dividends.
INTEREST RATE SENSITIVITY MANAGEMENT
The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. The
Company manages its exposure to fluctuations in interest rates through
policies established by its Asset/Liability Management Committee ("ALCO"). The
ALCO meets at least monthly and has responsibility for approving
asset/liability management policies, formulating and implementing strategies
to improve balance sheet positioning and/or earnings and reviewing the
interest rate sensitivity of the Company and the Subsidiary Banks.
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.
19
The estimated impact on the Company's net interest income sensitivity over a
one-year time horizon is shown below. 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.
Percentage Increase (Decrease)
Principal/Notional in Interest Income/Expense
Amount of Earning Given Immediate and Sustained
Assets, Interest Parallel Interest Rate Shifts
Bearing Liabilities ------------------------------------
and Swaps at Down 100 Up 100
December 31, 1997 Basis Points Basis Points
------------------- --------------- ---------------
(in Thousands)
Assets which reprice in:
One year or less...... $ 4,916,412 (9.02)% 10.20%
Over one year......... 7,248,264 (3.20) 2.36
------------
$ 12,164,676 (5.67) 5.69
============
Liabilities which
reprice in:
One year or less...... $ 7,744,763 (12.63) 16.86
Over one year......... 2,614,615 (4.58) 3.45
------------
$ 10,359,378 (10.06) 12.58
============
Non-trading swaps....... $ 1,561,303 (27.72) (75.80)
============
Total net interest
income sensitivity... (1.60) (2.60)
The ALCO policy, with which the Company complies, is based on the same
assumptions as the above table and provides that a 100 basis point increase or
decrease in interest rates should not reduce net interest income by more than
five percent. Certain financial instruments have been excluded from the above
analysis because of the no-growth assumption, including letters of credit and
commitments to extend credit. Trading account interest rate contracts and
options and non-trading caps purchased have also been excluded because they
have no material impact on net interest income.
The Company enters into various interest rate contracts not held in the
trading account ("interest rate protection products") to help manage the
Company's interest sensitivity. Such contracts generally have a fixed notional
principal amount and include interest rate swaps where the Company typically
receives or pays a fixed rate and a counterparty pays or receives a floating
rate based on a specified index, generally prime rate or the London Interbank
Offered Rate ("LIBOR") and 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. 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 7, Derivative Financial Instruments, of the
"Notes to Consolidated Financial Statements." The following table details
various information regarding interest rate protection contracts as of
December 31, 1997.
20
INTEREST RATE PROTECTION CONTRACTS
Weighted Weighted
Weighted Average Average
Average Rate* Expected Repricing
Notional Carrying Estimated ------------- Maturity Frequency
Amount Value Fair Value Received Paid (Years) (Days)
---------- -------- ---------- -------- ---- -------- ---------
(in Thousands)
Non-trading interest
rate contracts:
Swaps:
Pay fixed versus 3-
month LIBOR.......... $ 408,000 $ 25 $ (492) 5.81% 5.85% 1.23 90
Receive fixed versus
3-month LIBOR........ 950,000 1,836 6,551 6.77 5.87 4.08 90
Receive fixed versus
6-month LIBOR........ 25,000 22 94 6.23 5.81 1.21 180
Basis swaps+.......... 178,303 858 196 6.45 6.56 5.65 65
Caps purchased......... 60,000 89 -- -- * 0.36 90
---------- ------ ------
$1,621,303 $2,830 $6,349
========== ====== ======
- --------
+ On $128.3 million of a total notional amount of $178.3 million, the Company
receives interest based on three-month LIBOR plus 84 basis points and pays
interest based on the one-year Constant Maturity Treasury plus 150 basis
points. On the remaining $50 million notional, the Company receives interest
based on Prime minus 273.5 basis points and pays interest based on the
three-month LIBOR.
* 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, 1997.
The net interest amount received or paid on an interest rate protection
contract represents an adjustment of the yield or rate on the respective asset
or liability with which such contract is associated. The gain or loss on a
terminated interest rate protection contract is deferred and amortized over
the remaining term of the original contract as an adjustment of yield or rate
on the asset or liability with which the original contract was associated. At
year-end 1997, there were no deferred gains and $84,000 of deferred losses on
terminated interest rate protection contracts, which will be recorded as net
interest expense through 1999. The following table indicates the asset or
liability category with which the non-trading interest rate protection
contracts were associated at December 31, 1997.
ASSETS/LIABILITIES ASSOCIATED WITH INTEREST RATE PROTECTION CONTRACTS
Notional Principal Associated With
Total --------------------------------------------------------------------
Notional Investment Certificates Federal Funds FHLB Subordinated
Principal Securities Loans of Deposit Purchased Advances Debentures
---------- ---------- -------- ------------ ------------- -------- ------------
(in Thousands)
Swaps:
Pay fixed.............. $ 408,000 $ -- $ 8,000 $ -- $100,000 $300,000 $ --
Receive fixed.......... 975,000 -- 700,000 150,000 -- -- 125,000
Basis swaps............ 178,303 128,303 -- 50,000 -- -- --
Caps purchased.......... 60,000 -- 60,000 -- -- -- --
---------- -------- -------- -------- -------- -------- --------
$1,621,303 $128,303 $768,000 $200,000 $100,000 $300,000 $125,000
========== ======== ======== ======== ======== ======== ========
In addition to interest rate protection contracts used to manage overall
interest sensitivity, the Company also enters into interest rate contracts for
the trading account. The primary purposes for using interest rate protection
contracts in the trading account are to facilitate customer transactions and
to protect cash market positions in the trading account against interest rate
movement. Changes in the estimated fair value of contracts in the trading
account are recorded in other noninterest income as trading account profits
and commissions. Net interest
21
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, 1997.
TRADING ACCOUNT INTEREST RATE CONTRACTS
Weighted
Weighted Weighted Average
Average Rate* Average Repricing
Notional Carrying Estimated ------------- Years to Frequency
Amount Value++ Fair Value Received Paid Expiration (Days)
-------- -------- ---------- -------- ---- ---------- ---------
(in Thousands)
Trading interest rate
contracts:
Swaps:
Receive fixed versus:
1-month LIBOR........ $ 5,000 $ 77 $ 77 6.23% 6.00% 2.02 30
3-month LIBOR........ 3,000 (11) (11) 5.90 6.05 3.96 90
Prime................ 260 (2) (2) 6.80 8.50 0.71 30
Receive variable
versus:
1-month LIBOR........ 5,000 (77) (77) 6.00 6.23 2.02 30
Caps:
Purchased............. 61,000 50 50 -- * 1.45 71
Written............... 49,400 (45) (45) * -- 1.26 56
Floors:
Purchased............. 71,000 264 264 0.06 * 2.01 70
Written............... 100,000 (353) (353) * 0.10 1.65 70
-------- ----- -----
Total............... $294,660 $ (97) $ (97)
======== ===== =====
- --------
* 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, 1997. For caps and floors, the rate shown represents the weighted
average net interest differential between the index rate and the cap or
floor rate.
++Positive carrying values represent assets of the Company while negative
amounts represent liabilities.
In addition to the interest rate contracts shown above, the Company uses
other options and futures in the trading account. At December 31, 1997, the
trading account contained other options purchased and written having weighted
average expiration dates shorter than three months, with a notional balance of
$10.5 million for purchased options and a notional balance of $5.0 million for
written options and estimated fair values of $65,000 and $(31,000),
respectively. Changes in the estimated fair value of these instruments are
recorded in other noninterest income as trading account profits and
commissions. The position of purchased options was taken in order to protect
the market value of the trading account against rising short-term interest
rates while maintaining limited risk to declining rates. At December 31, 1997,
futures contracts having a notional principal of $69 million were also used to
reduce the price sensitivity of the trading account.
CAPITAL RESOURCES
Shareholders' equity increased 13 percent in 1997 after increasing 9 percent
in 1996. Exclusive of the net change in unrealized holding gains (losses) on
securities available for sale in both 1997 and 1996, net income after
dividends accounted for substantially all of the increase in shareholders'
equity.
Dividends of $61.6 million were declared on the Company's common stock in
1997, representing a 22 percent increase over 1996. The 1997 annual dividend
rate per common share, after adjusting for a three-for-two stock split
effected in the form of a 50 percent stock dividend paid in April, 1997, was
$0.947, an 11 percent increase over 1996. The dividend payout ratio for 1997
was 40 percent compared to 38 percent for 1996 and 36
22
percent for 1995. The Company intends to continue a dividend payout ratio that
is competitive in the banking industry while maintaining an adequate level of
retained earnings to support continued growth. On February 16, 1998, the
Company's Board of Directors approved an 11 percent increase in the annual
dividend rate, raising it to $1.05 per common share for 1998. This marked the
seventeenth consecutive year the Company has increased its dividend.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The Company has
satisfied its capital requirements principally through the retention of
earnings. The Company's five-year compound growth rate in shareholders' equity
of 11 percent was achieved primarily through reinvested earnings.
Average shareholders' equity as a percentage of total average assets is one
measure used to determine capital strength. Overall, the Company's capital
position remains strong as the ratio of average shareholders' equity to
average assets for 1997 was 7.13 percent compared to 6.94 percent in 1996 and
6.93 percent in 1995. As noted above, exclusive of the net change in
unrealized holding gains (losses) on securities available for sale, the
increase in shareholders' equity in 1997 and 1996 is due almost exclusively to
the retention of earnings. In order to maintain this ratio at appropriate
levels with continued growth in total average assets, a corresponding level of
capital growth must be achieved. The table below summarizes these and other
key ratios for the Company for each of the last three years.
RETURN ON EQUITY AND ASSETS
December 31
-------------------
1997 1996 1995
----- ----- -----
Return on average assets................................... 1.23% 1.15% 1.15%
Return on average equity................................... 17.31 16.60 16.65
Dividend payout ratio...................................... 39.57 38.09 35.64
Average equity to average assets ratio..................... 7.13 6.94 6.93
In addition to the capital ratios mentioned above, banking industry
regulators have defined minimum regulatory capital ratios that the Company and
the Subsidiary Banks are required to maintain. These risk-based capital
guidelines take into consideration risk factors, as defined by the regulators,
associated with various categories of assets, both on and off of the balance
sheet. Under the guidelines, capital strength is measured in two tiers which
are used in conjunction with risk-adjusted assets to determine the risk-based
capital ratios. Tier I Capital is defined as common shareholders' equity,
excluding the net unrealized holding gain (loss) on available-for-sale
securities (except for net unrealized losses on marketable equity securities),
plus the Capital Securities, minus goodwill and other disallowed intangible
assets. Other disallowed intangibles represent intangible assets, other than
goodwill, recorded after February 19, 1992. Total Qualifying Capital is
defined as Tier I Capital plus Tier II capital components, which include such
items as qualifying allowance for loan losses and qualifying subordinated
debt.
At December 31, 1997, the Company's Tier I Capital and Total Qualifying
Capital totaled $961 million and $1.2 billion, respectively. The percentage
ratios, as calculated under the guidelines, were 9.84 percent and 12.36
percent for Tier I and Total Qualifying Capital, respectively, at year-end
1997, up from 8.70 percent and 11.41 percent at year-end 1996. These ratios
are well within the minimum requirements of four percent for Tier I Capital
and eight percent for Total Qualifying Capital. Tier I Capital increased in
1997 primarily as a result of the issuance of the Capital Securities in
January, 1997, and the $94 million in earnings retained by the Company, net of
dividends. While shareholders' equity increased 9 percent from December 31,
1995, to December 31, 1996, the increases in Tier I and Total Qualifying
Capital were significantly less due to the addition of $70 million in
intangibles resulting from the Company's purchase business combinations in
1996.
23
Two other important indicators of capital adequacy in the banking industry
are the leverage ratio and the tangible leverage ratio. The leverage ratio is
defined as Tier I Capital divided by total adjusted quarterly average assets.
Average quarterly assets are adjusted by subtracting the average unrealized
gain (loss) on available-for-sale securities (except for net unrealized losses
on marketable equity securities), period-end goodwill and other disallowed
intangibles. The tangible leverage ratio is defined similarly, except, by
definition, all other intangible assets not previously excluded are removed
from both the numerator and denominator. Even though core deposit intangibles
and goodwill increased due to purchase business combinations completed during
1996 and 1994, the leverage ratio remained well within regulatory guidelines:
7.45 percent at year-end 1997; 6.19 percent at year-end 1996 and 6.78 percent
at year-end 1995. The tangible leverage ratio was 7.33 percent at year-end
1997; 6.05 percent at year-end 1996 and 6.61 percent at year-end 1995. The
increase in both the leverage ratio and the tangible leverage ratio in 1997
was due primarily to the issuance of the Capital Securities in January, 1997,
while the decrease in 1996 of these ratios was due primarily to the
substantial increase in intangibles resulting from the purchase business
combinations completed by the Company in 1996.
The following table shows the calculation of capital ratios for the Company
for the last three years.
CAPITAL RATIOS
December 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(in Thousands)
Risk-based capital:
Tier I Capital........................ $ 960,580 $ 745,334 $ 732,426
Tangible Tier I Capital............... 944,304 727,023 711,930
Total Qualifying Capital.............. 1,207,049 977,217 948,789
Assets:
Net risk-adjusted assets.............. $ 9,761,989 $ 8,565,672 $ 7,303,259
Adjusted quarterly average assets..... 12,900,597 12,038,823 10,798,877
Adjusted tangible quarterly average
assets............................... 12,884,321 12,020,512 10,778,381
Ratios:
Tier I Capital........................ 9.84% 8.70% 10.03%
Total Qualifying Capital.............. 12.36 11.41 12.99
Leverage.............................. 7.45 6.19 6.78
Tangible leverage..................... 7.33 6.05 6.61
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 1997 for "well-
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to assure that the Subsidiary Banks exceed the
guidelines. For further information regarding the regulatory capital ratios of
the Company and the Subsidiary Banks, see Note 10, Regulatory Matters and
Dividends from Subsidiaries, in the "Notes to Consolidated Financial
Statements".
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially
impact net interest income. The following discussion of net interest income is
presented on a taxable equivalent basis, unless otherwise noted, to facilitate
performance comparisons among various taxable and tax-exempt assets.
Net interest income for 1997 increased 10 percent over 1996 while increasing
9 percent in 1996 over 1995. A nine percent increase in the volume of average
earning assets, primarily total loans, coupled with a three basis
24
point increase in the net yield were responsible for the increase in 1997. In
1996, an 11 percent increase in the volume of earning assets, primarily as a
result of a 10 percent increase in both total investment securities and total
loans, more than offset a 6 basis point decline in the net yield. The schedule
on pages 30 and 31 provides the detail of changes in interest income, interest
expense and net interest income due to changes in volumes and rates.
Interest income increased 10 percent in 1997 and 9 percent in 1996 after
increasing 24 percent in 1995. Interest income in 1997 grew as a result of a
nine percent increase in the volume of average earning assets coupled with a
three basis point increase in the average interest rate earned. A 13 percent
increase in the volume of average loans and a 6 basis point decrease in yield
accounted for the 12 percent increase in interest income on loans. Interest
income on investment securities, including securities available for sale,
increased two percent from 1996 to 1997. This increase resulted from a one
percent increase in the average balance of total investment securities and a
seven basis point increase in yield. Interest income on trading account
securities increased 10 percent as a result of a 17 percent increase in the
average balance.
Total interest expense increased by nine percent in 1997 due to a nine
percent increase in the average volume of interest bearing liabilities offset
partially by a one basis point decrease in the rate paid on interest bearing
liabilities. Interest expense on interest bearing deposits increased by one
percent as the result of a three percent increase in the average volume and a
nine basis point decrease in rate. The 40 percent increase in average borrowed
funds, which includes interest bearing liabilities that are not classified as
deposits, combined with a 4 basis point increase in rate resulted in a 40
percent increase in interest expense for this category. A 59 percent increase
in the average balance of FHLB advances and other borrowings, which includes
$100 million of Capital Securities, and a 45 percent increase in federal funds
purchased were primarily responsible for the increase in averaged borrowed
funds in comparison with the prior year.
From 1995 to 1996, interest income increased 9 percent as a result of an 11
percent increase in the volume of average earning assets and a 15 basis point
decrease in the yield on average earning assets. Interest income on loans rose
9 percent as a result of a 10 percent increase in average volume and a 13
basis point decrease in yield. Interest income on investment securities,
including securities available for sale, increased 8 percent from 1995 to 1996
as a result of a 10 percent increase in average volume and an 11 basis point
decrease in the yield on investment securities. A 38 percent increase in the
average balance offset by a 70 basis point decrease in yield increased
interest income on trading account securities by 26 percent in 1996.
A 12 basis point decrease in the rate paid on interest bearing liabilities
combined with an 11 percent increase in average volume resulted in an 8
percent increase in interest expense on interest bearing liabilities in 1996.
A substantial portion of the increase in total interest expense was due to a
13 percent increase in interest expense on interest bearing deposits,
resulting from a 14 percent increase in the average volume offset, in part, by
a 5 basis point decrease in rate. A 25 basis point decrease in the rate paid
on average borrowed funds, along with a 4 percent increase in average volume,
resulted in a 7 percent decrease in interest expense for this category.
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 increased three basis
points to 4.11 percent in 1997 after decreasing three basis points to 4.08
percent in 1996. The moderate increase in net yield in 1997 was a function of
the downward repricing of interest bearing deposits and FHLB and other
borrowings which outpaced the downward repricing of loans and total investment
securities. This is evidenced by the fact the yield on interest earning assets
increased three basis points while the rate paid on interest bearing
liabilities decreased by one basis point. At the same time, the portion of
interest earning assets funded by interest bearing liabilities in 1997 was 85
percent, unchanged from 1996.
25
During 1997, the net yield on interest earning assets was minimally impacted
by the Company's use of interest rate contracts, primarily interest rate swaps
and interest rate floors, increasing the taxable equivalent net yield on
interest earning assets by three basis points. The greatest impact from the
use of interest rate contracts was on the yield and interest income on loans
where the net yield was increased by five basis points and interest income was
increased by $4.3 million. At the same time, the impact of interest rate
contracts on interest bearing liabilities was less significant, decreasing
interest expense by less than $1 million. The impact of the use of interest
rate contracts in 1997 was greater than in 1996 when the positive impact on
the net yield on interest earning assets was one basis point. It is the
Company's intention to continue to use interest rate contracts to manage its
exposure to the changing interest rate environment in the future, although
there can be no assurance that the impact of interest rate contracts on the
earnings of future periods will be positive.
The interest rate spread measures the difference between the average yield
on earning assets and the average rate paid on interest bearing liabilities.
The interest rate spread eliminates the impact of noninterest bearing funds
and gives a direct perspective on the effect of market interest rate
movements. During 1997, the net interest rate spread increased four basis
points to 3.37 percent from the 1996 spread of 3.33 percent as the cost of
interest bearing liabilities declined slightly while the yields earned on
earning assets increased by three basis points. The decrease in 1996 was three
basis points from 3.36 percent in 1995. See the accompanying tables entitled
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" and
"Rate/Volume Variance Analysis" for more information.
The following table presents certain interest rates without modification for
tax equivalency. The table on pages 28 and 29 contains these same percentages
on a taxable equivalent basis. Tax-exempt earning assets continue to make up a
smaller percentage of total earning assets. As a result, the difference
between these interest rates with and without modification for tax equivalency
continues to narrow.
December 31
----------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Rate earned on interest earning assets............ 8.15% 8.11% 8.25% 7.75% 7.93%
Rate paid on interest bearing liabilities......... 4.81 4.82 4.94 3.89 3.60
Interest rate spread.............................. 3.34 3.29 3.31 3.86 4.33
Net yield on earning assets....................... 4.08 4.04 4.09 4.54 4.99
Interest income, as reported in the "Consolidated Statements of Income", on
a nominal yield basis increased in 1997 by $83.6 million while net interest
income increased by $44.0 million. The two basis point increase in the net
yield in 1997 was a result of an increase in the yields in the Company's
interest earning assets and a slight decrease in the cost of interest bearing
liabilities, as discussed earlier.
26
(INTENTIONALLY LEFT BLANK PAGE)
27
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
Year Ended December 31
---------------------------------------------------------
1997 1996
---------------------------- ----------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
----------- -------- ------ ----------- -------- ------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $ 8,277,033 $724,162 8.75% $ 7,316,748 $644,260 8.81%
Investment securities:
Taxable................ 1,025,158 74,045 7.22 794,661 57,806 7.27
Tax-exempt............. 84,930 7,319 8.62 88,410 7,976 9.02
----------- -------- ----------- --------
Total investment
securities........... 1,110,088 81,364 7.33 883,071 65,782 7.45
Investment securities
available for sale.... 2,045,412 134,976 6.60 2,233,594 145,872 6.53
Trading account
securities............ 109,462 7,031 6.42 93,604 6,419 6.86
Federal funds sold and
securities purchased
under agreements to
resell................ 99,829 5,252 5.26 138,010 7,244 5.25
Interest bearing
deposits with other
banks................. 456 29 6.36 1,167 71 6.08
----------- -------- ----------- --------
Total earning assets.. 11,642,280 952,814 8.18 10,666,194 869,648 8.15
Allowance for loan
losses................. (122,033) (117,274)
Unrealized gain (loss)
on investment
securities available
for sale............... (3,245) (3,216)
Cash and due from
banks.................. 482,294 489,934
Other assets............ 602,939 465,948
----------- -----------
Total assets.......... $12,602,235 $11,501,586
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Demand................. $ 466,184 10,857 2.33 $ 978,155 22,742 2.32
Savings................ 3,628,003 132,532 3.65 2,803,360 111,695 3.98
Certificates of deposit
less than $100,000 and
other time deposits... 2,675,472 151,538 5.66 2,767,833 157,635 5.70
Certificates of deposit
of $100,000 or more... 966,556 55,716 5.76 953,276 54,442 5.71
----------- -------- ----------- --------
Total interest bearing
deposits............. 7,736,215 350,643 4.53 7,502,624 346,514 4.62
Federal funds
purchased............. 665,956 36,213 5.44 460,648 24,255 5.27
Securities sold under
agreements to
repurchase............ 243,040 12,411 5.11 250,637 11,759 4.69
Other short-term
borrowings............ 208,281 11,666 5.60 178,621 9,703 5.43
FHLB and other
borrowings............ 997,347 62,936 6.31 625,722 42,002 6.71
----------- -------- ----------- --------
Total interest bearing
liabilities.......... 9,850,839 473,869 4.81 9,018,252 434,233 4.82
---- ----
Noninterest bearing
demand deposits........ 1,757,761 1,614,488
Accrued expenses and
other liabilities...... 94,916 70,794
Shareholders' equity.... 898,719 798,052
----------- -----------
Total liabilities and
shareholders'
equity............... $12,602,235 $11,501,586
=========== ===========
Net interest income/net
interest spread........ 478,945 3.37% 435,415 3.33%
==== ====
Net yield on earning
assets................. 4.11% 4.08%
==== ====
Taxable equivalent
adjustment:
Loans.................. 787 884
Investment securities.. 2,670 2,956
Investment securities
available for sale.... 230 334
Trading account
securities............ 93 69
-------- --------
Total taxable
equivalent
adjustment........... 3,780 4,243
-------- --------
Net interest income..... $475,165 $431,172
======== ========
- --------
* Loans on nonaccrual status have been included in the computation of average
balances.
28
GROWTH RATE
Year Ended December 31 AVERAGE BALANCES
------------------------------------------------------------------------------------ -------------------
1995 1994 1993
---------------------------- --------------------------- --------------------------- ONE YEAR FIVE YEAR
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ 1996 - COMPOUNDED
Balance Expense Rate Balance Expense Rate Balance Expense Rate 1997 1992-1997
----------- -------- ------ ---------- -------- ------ ---------- -------- ------ -------- ----------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $ 6,630,916 $593,023 8.94% $5,896,098 $492,494 8.35% $5,352,301 $456,484 8.53% 13.12% 12.20%
Investment securities:
Taxable................ 1,725,045 129,240 7.49 1,074,309 80,957 7.54 953,115 69,903 7.33 29.01 (10.53)
Tax-exempt............. 96,388 8,710 9.04 108,431 10,145 9.36 152,687 13,813 9.05 (3.94) (13.72)
----------- -------- ---------- -------- ---------- --------
Total investment
securities........... 1,821,433 137,950 7.57 1,182,740 91,102 7.70 1,105,802 83,716 7.57 25.71 (10.80)
Investment securities
available for sale.... 1,022,153 58,144 5.69 882,502 45,509 5.16 556,701 34,200 6.14 (8.43) 105.64
Trading account
securities............ 67,591 5,112 7.56 125,805 9,996 7.95 164,756 9,885 6.00 16.94 2.96
Federal funds sold and
securities purchased
under agreements to
resell................ 101,135 6,163 6.09 169,766 7,045 4.15 136,880 3,970 2.90 (27.67) (3.33)
Interest bearing
deposits with other
banks................. 3,876 233 6.01 16,342 942 5.76 26,692 1,574 5.90 (60.93) (55.75)
----------- -------- ---------- -------- ---------- --------
Total earning assets.. 9,647,104 800,625 8.30 8,273,253 647,088 7.82 7,343,132 589,829 8.03 9.15 10.98
Allowance for loan
losses................. (112,139) (117,177) (105,951) 4.06 10.68
Unrealized gain (loss)
on investment
securities available
for sale............... (6,702) (4,535) 30 0.90 --
Cash and due from
banks.................. 441,593 411,888 365,487 (1.56) 7.53
Other assets............ 412,084 395,913 357,439 29.40 11.07
----------- ---------- ----------
Total assets.......... $10,381,940 $8,959,342 $7,960,137 9.57 10.84
=========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Demand................. $ 927,271 23,370 2.52 $ 906,941 20,957 2.31 $ 758,855 17,861 2.35 (52.34) (5.91)
Savings................ 2,110,294 80,825 3.83 2,009,700 62,068 3.09 1,890,270 53,914 2.85 29.42 15.37
Certificates of deposit
less than $100,000 and
other time deposits... 2,650,037 150,947 5.70 2,011,246 96,398 4.79 1,666,442 82,589 4.96 (3.34) 9.44
Certificates of deposit
of $100,000 or more... 868,531 51,335 5.91 689,426 31,377 4.55 536,207 23,319 4.35 1.39 12.09
----------- -------- ---------- -------- ---------- --------
Total interest bearing
deposits............. 6,556,133 306,477 4.67 5,617,313 210,800 3.75 4,851,774 177,683 3.66 3.11 10.68
Federal funds
purchased............. 560,213 32,222 5.75 378,938 17,288 4.56 409,227 12,480 3.05 44.57 1.48
Securities sold under
agreements to
repurchase............ 271,788 13,509 4.97 253,867 8,955 3.53 244,989 6,885 2.81 (3.03) (2.32)
Other short-term
borrowings............ 191,606 11,057 5.77 233,769 10,140 4.34 213,055 7,025 3.30 16.60 1.52
FHLB and other
borrowings............ 547,701 38,160 6.97 360,994 18,970 5.25 279,449 11,888 4.25 59.39 84.75
----------- -------- ---------- -------- ---------- --------
Total interest bearing
liabilities.......... 8,127,441 401,425 4.94 6,844,881 266,153 3.89 5,998,494 215,961 3.60 9.23 11.22
---- ---- ----
Noninterest bearing
demand deposits........ 1,477,219 1,430,777 1,320,633 8.87 8.64
Accrued expenses and
other liabilities...... 58,146 42,843 42,172 34.07 12.77
Shareholders' equity.... 719,134 640,841 598,838 12.61 11.07
----------- ---------- ----------
Total liabilities and
shareholders'
equity............... $10,381,940 $8,959,342 $7,960,137 9.57 10.84
=========== ========== ==========
Net interest income/net
interest spread........ 399,200 3.36% 380,935 3.93% 373,868 4.43%
==== ==== ====
Net yield on earning
assets................. 4.14% 4.60% 5.09%
==== ==== ====
Taxable equivalent
adjustment:
Loans.................. 1,118 1,896 2,188
Investment securities.. 3,225 3,386 4,686
Investment securities
available for sale.... 243 190 277
Trading account
securities............ 55 53 108
-------- -------- --------
Total taxable
equivalent
adjustment........... 4,641 5,525 7,259
-------- -------- --------
Net interest income..... $394,559 $375,410 $366,609
======== ======== ========
29
RATE/VOLUME VARIANCE ANALYSIS
Taxable Equivalent Basis
Average Volume Change in Volume Average Rate
---------------------------------- --------------------- ----------------
1997 1996 1995 1997-1996 1996-1995 1997 1996 1995
----------- ----------- ---------- --------- ---------- ---- ---- ----
(in Thousands)
EARNING ASSETS:
Loans, net of unearned
income................. $ 8,277,033 $ 7,316,748 $6,630,916 $ 960,285 $ 685,832 8.75% 8.81% 8.94%
Investment securities:
Taxable................ 1,025,158 794,661 1,725,045 230,497 (930,384) 7.22 7.27 7.49
Tax-exempt............. 84,930 88,410 96,388 (3,480) (7,978) 8.62 9.02 9.04
----------- ----------- ---------- --------- ----------
Total investment
securities........... 1,110,088 883,071 1,821,433 227,017 (938,362) 7.33 7.45 7.57
Investment securities
available for sale..... 2,045,412 2,233,594 1,022,153 (188,182) 1,211,441 6.60 6.53 5.69
Trading account
securities............. 109,462 93,604 67,591 15,858 26,013 6.42 6.86 7.56
Federal funds sold and
securities purchased
under agreements to
resell................. 99,829 138,010 101,135 (38,181) 36,875 5.26 5.25 6.09
Interest bearing
deposits with other
banks.................. 456 1,167 3,876 (711) (2,709) 6.36 6.08 6.01
----------- ----------- ---------- --------- ----------
Total earning assets... $11,642,280 $10,666,194 $9,647,104 $ 976,086 $1,019,090 8.18 8.15 8.30
=========== =========== ========== ========= ==========
INTEREST BEARING
LIABILITIES:
Deposits:
Demand................. $ 466,184 $ 978,155 $ 927,271 $(511,971) $ 50,884 2.33 2.32 2.52
Savings................ 3,628,003 2,803,360 2,110,294 824,643 693,066 3.65 3.98 3.83
Certificates of deposit
less than $100,000 and
other time deposits... 2,675,472 2,767,833 2,650,037 (92,361) 117,796 5.66 5.70 5.70
Certificates of deposit
of $100,000 or more... 966,556 953,276 868,531 13,280 84,745 5.76 5.71 5.91
----------- ----------- ---------- --------- ----------
Total interest bearing
deposits............. 7,736,215 7,502,624 6,556,133 233,591 946,491 4.53 4.62 4.67
Federal funds
purchased.............. 665,956 460,648 560,213 205,308 (99,565) 5.44 5.27 5.75
Securities sold under
agreements to
repurchase............. 243,040 250,637 271,788 (7,597) (21,151) 5.11 4.69 4.97
Other short-term
borrowings............. 208,281 178,621 191,606 29,660 (12,985) 5.60 5.43 5.77
FHLB and other
borrowings............. 997,347 625,722 547,701 371,625 78,021 6.31 6.71 6.97
----------- ----------- ---------- --------- ----------
Total interest bearing
liabilities........... $ 9,850,839 $ 9,018,252 $8,127,441 $ 832,587 $ 890,811 4.81 4.82 4.94
=========== =========== ========== ========= ========== ---- ---- ----
Net interest income/net
interest spread....... 3.37% 3.33% 3.36%
==== ==== ====
Net yield on earning
assets................ 4.11% 4.08% 4.14%
==== ==== ====
Net cost of funds...... 4.07% 4.07% 4.16%
==== ==== ====
30
Interest Income/Expense Variance
--------------------------- --------------------
1997 1996 1995 1997-1996 1996-1995
-------- -------- -------- --------- ---------
(in Thousands)
EARNING ASSETS:
Loans, net of unearned
income................. $724,162 $644,260 $593,023 $ 79,902 $ 51,237
Investment securities:
Taxable................ 74,045 57,806 129,240 16,239 (71,434)
Tax-exempt............. 7,319 7,976 8,710 (657) (734)
-------- -------- -------- -------- --------
Total investment
securities........... 81,364 65,782 137,950 15,582 (72,168)
Investment securities
available for sale..... 134,976 145,872 58,144 (10,896) 87,728
Trading account
securities............. 7,031 6,419 5,112 612 1,307
Federal funds sold and
securities purchased
under agreements to
resell................. 5,252 7,244 6,163 (1,992) 1,081
Interest bearing
deposits with other
banks.................. 29 71 233 (42) (162)
-------- -------- -------- -------- --------
Total earning assets... 952,814 869,648 800,625 83,166 69,023
INTEREST BEARING
LIABILITIES:
Deposits:
Demand................. 10,857 22,742 23,370 (11,885) (628)
Savings................ 132,532 111,695 80,825 20,837 30,870
Certificates of deposit
less than $100,000 and
other time deposits... 151,538 157,635 150,947 (6,097) 6,688
Certificates of deposit
of $100,000 or more... 55,716 54,442 51,335 1,274 3,107
-------- -------- -------- -------- --------
Total interest bearing
deposits............. 350,643 346,514 306,477 4,129 40,037
Federal funds
purchased.............. 36,213 24,255 32,222 11,958 (7,967)
Securities sold under
agreements to
repurchase............. 12,411 11,759 13,509 652 (1,750)
Other short-term
borrowings............. 11,666 9,703 11,057 1,963 (1,354)
FHLB and other
borrowings............. 62,936 42,002 38,160 20,934 3,842
-------- -------- -------- -------- --------
Total interest bearing
liabilities........... 473,869 434,233 401,425 39,636 32,808
-------- -------- -------- -------- --------
Net interest income/net
interest spread....... $478,945 $435,415 $399,200 $ 43,530 $ 36,215
======== ======== ======== ======== ========
Variance Attributed to
------------------------------------------------------
1997 1996
-------------------------- --------------------------
VOLUME RATE MIX Volume Rate Mix
-------- ------- ------- -------- ------- -------
EARNING ASSETS:
Loans, net of unearned
income................. $ 84,556 $(4,112) $ (542) $ 61,336 $(9,151) $ (948)
Investment securities:
Taxable................ 16,767 (409) (119) (69,704) (3,755) 2,025
Tax-exempt............. (314) (357) 14 (721) (14) 1
-------- ------- ------- -------- ------- -------
Total investment
securities........... 16,453 (766) (105) (70,425) (3,769) 2,026
Investment securities
available for sale..... (12,290) 1,523 (129) 68,912 8,611 10,205
Trading account
securities............. 1,087 (407) (68) 1,967 (477) (183)
Federal funds sold and
securities purchased
under agreements to
resell................. (2,004) 17 (5) 2,247 (854) (312)
Interest bearing
deposits with other
banks.................. (43) 3 (2) (163) 3 (2)
-------- ------- ------- -------- ------- -------
Total earning assets... 87,759 (3,742) (851) 63,874 (5,637) 10,786
INTEREST BEARING
LIABILITIES:
Deposits:
Demand................. (11,903) 38 (20) 1,282 (1,811) (99)
Savings................ 32,856 (9,288) (2,731) 26,544 3,256 1,070
Certificates of deposit
less than $100,000 and
other time deposits... (5,260) (864) 27 6,710 (21) (1)
Certificates of deposit
of $100,000 or more... 758 509 7 5,009 (1,734) (168)
-------- ------- ------- -------- ------- -------
Total interest bearing
deposits............. 16,451 (9,605) (2,717) 39,545 (310) 802
Federal funds
purchased.............. 10,810 794 354 (5,727) (2,724) 484
Securities sold under
agreements to
repurchase............. (356) 1,040 (32) (1,051) (758) 59
Other short-term
borrowings............. 1,611 302 50 (749) (649) 44
FHLB and other
borrowings............. 24,946 (2,517) (1,495) 5,436 (1,395) (199)
-------- ------- ------- -------- ------- -------
Total interest bearing
liabilities........... 53,462 (9,986) (3,840) 37,454 (5,836) 1,190
-------- ------- ------- -------- ------- -------
Net interest income/net
interest spread....... $ 34,297 $ 6,244 $ 2,989 $ 26,420 $ 199 $ 9,596
======== ======= ======= ======== ======= =======
31
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
optimistic in the midst of an improvement of the economy overall. On a
regional basis, however, any economic slowdown in the Subsidiary Banks'
markets could have an effect on most regional bank holding companies and could
impact overall asset growth. Such an economic slowdown would probably also
have a negative impact on real estate lending as well as the level of net
charge-offs and delinquencies.
Since an economic slowdown could have an adverse effect on property values
and, for commercial development projects, cause an increase in vacancy rates,
the possibility exists for 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 department whose work
is supplemented by regulatory agencies that provide an additional level of
review on an annual basis. Such internal review procedures are quantified in
monthly and quarterly reports to senior management and are used in determining
whether such loans represent potential loss to the Company. Special reports
are prepared for consumer installment loans to identify trends unique to that
portfolio. 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.
As shown in the following table, net loan charge-offs in 1997 were $22.5
million, or 0.27 percent of average loans, compared with $19.1 million, or
0.26 percent of average loans, in 1996 and $11.2 million, or 0.17 percent of
average loans, in 1995. The increase in the level of net charge-offs in 1997
was concentrated in the consumer installment, commercial real estate mortgages
and commercial, financial and agricultural portfolios. The increase in net
charge-offs in 1996 was attributable to increases in the consumer installment
and commercial, financial and agricultural portfolios, while the increase in
1995 was the result of increased net charge-offs in all loan categories with
the exception of residential real estate mortgages. During 1997, net charge-
offs of commercial real estate mortgages and commercial, financial and
agricultural loans increased by $636,000 and $400,000, respectively, and net
charge-offs of consumer installment loans increased by $2.3 million. The
Company's consumer installment portfolio was impacted by the continuing
nationwide deterioration in consumer credit quality, as indicated by the
increasingly high number of bankruptcies. Net charge-offs for the credit card
portfolio, which represented only three percent of the Company's loan
portfolio, increased as a percentage of average volume from 3.92 percent in
1996 to 4.21 percent in 1997. Net charge-offs as a percentage of loans in the
Company's indirect consumer installment portfolio, consisting primarily of new
and used automobile loans, was relatively unchanged from 0.28 percent in 1996
to 0.27 percent in 1997.
32
The following table sets forth information with respect to the Company's
loans and the allowance for loan losses for the last five years.
SUMMARY OF LOAN LOSS EXPERIENCE
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(in Thousands)
Average loans, net of
unearned income,
outstanding during the
year................... $8,277,033 $7,316,748 $6,630,916 $5,896,098 $5,352,301
========== ========== ========== ========== ==========
Allowance for loan
losses, beginning of
year................... $ 122,115 $ 113,805 $ 113,363 $ 116,527 $ 89,998
Charge-offs:
Commercial, financial
and agricultural..... 6,924 6,385 5,227 4,216 5,730
Real estate --
construction........ 66 38 385 70 660
Real estate -- mort-
gage:
Residential......... 1,171 1,328 491 486 897
Commercial.......... 1,227 584 1,339 1,065 927
Consumer installment.. 19,503 16,576 11,012 10,874 12,456
---------- ---------- ---------- ---------- ----------
Total............. 28,891 24,911 18,454 16,711 20,670
Recoveries:
Commercial, financial
and agricultural..... 1,624 1,485 2,561 3,548 4,403
Real estate --
construction........ 184 229 155 57 50
Real estate --
mortgage:
Residential......... 216 380 219 171 337
Commercial.......... 249 242 84 207 511
Consumer installment.. 4,102 3,497 4,213 3,959 3,929
---------- ---------- ---------- ---------- ----------
Total............. 6,375 5,833 7,232 7,942 9,230
---------- ---------- ---------- ---------- ----------
Net charge-offs... 22,516 19,078 11,222 8,769 11,440
Provision charged to
income................. 22,412 20,215 11,664 4,357 36,365
Additions due to
acquisitions........... -- 7,173 -- 1,248 1,604
---------- ---------- ---------- ---------- ----------
Allowance for loan
losses, end of year.... $ 122,011 $ 122,115 $ 113,805 $ 113,363 $ 116,527
========== ========== ========== ========== ==========
Net charge-offs to
average loans
outstanding............ .27% .26% .17% .15% .21%
When determining the adequacy of the allowance for loan losses, management
considers changes in the size and character of the loan portfolio, changes in
nonperforming and past due loans, historical loan loss experience, the
existing risk of individual loans, concentrations of loans to specific
borrowers or industries and existing and prospective economic conditions. The
allowance for loan losses at December 31, 1997, was $122.0 million, or 1.41
percent of loans, compared with $122.1 million, or 1.55 percent of loans, at
December 31, 1996, and $113.8 million, or 1.64 percent of loans, at December
31, 1995. As shown in the table below, management determined that at December
31, 1997, approximately 20 percent of the allowance for loan losses was
related to commercial, financial and agricultural loans, 22 percent was
associated with real estate loans and 27 percent was related to consumer
installment loans. Approximately 31 percent of the allowance remained
unallocated to any specific category due to uncertainties related to loan
portfolios acquired in connection with business combinations with regard to
underwriting standards and other factors. While additional provision is
provided with respect to these loans when identified as nonperforming, the
corresponding portion of the allowance remains a component of the total
allowance upon a loan's return to performing status. The amount of the
allowance allocated to impaired loans by loan category is presented in the
table on page 35.
33
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
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....... $ 24,660 20.2% $ 19,538 16.0% $ 16,274 14.3% $ 14,737 13.0% $ 15,731 13.5%
Real estate --
construction.......... 6,181 5.0 5,495 4.5 3,756 3.3 4,648 4.1 5,127 4.4
Real estate -- mortgage:
Residential............ 11,468 9.4 11,601 9.5 10,129 8.9 5,668 5.0 3,496 3.0
Commercial............. 8,877 7.3 10,502 8.6 16,046 14.1 13,830 12.2 17,246 14.8
Consumer installment.... 33,392 27.4 26,621 21.8 22,419 19.7 21,426 18.9 18,878 16.2
Unallocated............. 37,433 30.7 48,358 39.6 45,181 39.7 53,054 46.8 56,049 48.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
$122,011 100.0% $122,115 100.0% $113,805 100.0% $113,363 100.0% $116,527 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
NONPERFORMING ASSETS
Nonperforming assets include loans classified as nonaccrual or renegotiated
and foreclosed real estate. It is the general policy of the Subsidiary Banks
to stop accruing interest income and place the recognition of interest on a
cash basis when any commercial, industrial or real estate loan is 90 days or
more past due as to principal or interest and the ultimate collection of
either is in doubt, unless collection of both principal and interest is
assured by way of collateralization, guarantees or other security. Accrual of
interest income on consumer loans is suspended when any payment of principal
or interest, or both, is more than 120 days delinquent. When a loan is placed
on nonaccrual status, any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is
sufficient to cover the accrued interest or a guarantor assures payment of
interest.
Nonperforming assets at December 31, 1997, were $35.4 million, an increase
of $5.0 million from year-end 1996. Nonperforming loans increased $6.4 million
from year-end 1996 to $28.9 million. The increase in nonperforming assets in
1997 was due, in part, to nonperforming assets acquired in connection with
business combinations completed during 1997. During 1997, $7.8 million of
loans were transferred to other real estate owned ("ORE") offset by total
sales of other real estate owned of $9.4 million. Of these sales, $8.4 million
were cash sales while $1.0 million represented loans originated by the
Subsidiary Banks to facilitate the sale of other real estate. During 1996,
loans transferred to other real estate owned totaled $7.6 million, cash sales
were $4.1 million and loans to facilitate the sale of other real estate owned
were $1.8 million.
Even though the stabilization in the commercial real estate market in the
Southeastern part of the country continued during 1997, management will
continue to monitor the Company's real estate and commercial loan portfolio
during 1998. Particular attention will be focused on those credits identified
by the loan monitoring and review process. Management continues to emphasize
the need to maintain a low level of nonperforming assets and to return current
nonperforming assets to a performing status.
Renegotiated loans decreased $257,000 from year-end 1996 while foreclosed
real estate declined $1.4 million for the year. Loans past due 90 days or more
increased $3.9 million compared to the 1996 year-end level. Other foreclosed
or repossessed assets at year-end 1997 totaled approximately $420,000.
At December 31, 1997, nonperforming assets were 0.41 percent of loans
outstanding and foreclosed real estate held for sale compared to 0.39 percent
at year-end 1996. Nonaccrual loans and renegotiated loans as a percentage of
loans outstanding at year-end 1997 were 0.30 percent and 0.03 percent,
respectively.
34
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,
1997 and 1996.
NONPERFORMING ASSETS
December 31
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(in Thousands)
Nonaccrual loans................. $26,568 $19,955 $13,036 $12,940 $13,104
Renegotiated loans............... 2,334 2,591 1,070 1,597 7,450
------- ------- ------- ------- -------
Total nonperforming loans.... 28,902 22,546 14,106 14,537 20,554
Other real estate................ 6,483 7,883 10,250 8,579 23,224
------- ------- ------- ------- -------
Total nonperforming assets... $35,385 $30,429 $24,356 $23,116 $43,778
======= ======= ======= ======= =======
Accruing loans 90 days or more
past due........................ $12,995 $ 9,091 $ 5,957 $ 4,551 $ 4,324
Total nonperforming loans as a
percentage of loans............. .33% .29% .20% .23% .36%
Total nonperforming assets as a
percentage of loans and ORE..... .41 .39 .35 .36 .76
Loans 90 days or more past due as
a percentage of loans........... .15 .12 .09 .07 .08
Details of nonaccrual loans at December 31, 1997 and 1996 appear below:
1997 1996
------- -------
(in Thousands)
Principal balance.............................................. $26,568 $19,955
Interest that would have been recorded under original terms.... 2,618 1,884
Interest actually recorded..................................... 1,158 619
Details of loans with terms modified in troubled debt restructurings at
December 31, 1997 and 1996 appear below:
1997 1996
------- -------
(in Thousands)
Principal balance.............................................. $2,334 $2,591
Interest that would have been recorded under original terms.... 175 226
Interest actually recorded..................................... 132 181
Detailed in the table below are loans designated by the Company as impaired,
as defined by Financial Accounting Statement No. 114, Accounting by Creditors
for Impairment of a Loan, as amended by Financial Accounting Statement No.
118, Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures, ("FAS114"), at December 31, 1997, by loan category:
Nonaccrual Accruing
Impaired Loans Impaired Loans Total Total
----------------- ----------------- Impaired Related
Balance Allowance Balance Allowance Loans Allowance
------- --------- ------- --------- -------- ---------
(in Thousands)
Commercial, financial
and agricultural....... $6,379 $ 992 $ 4,308 $1,396 $10,687 $2,388
Real estate --
construction.......... 856 74 355 20 1,211 94
Real estate mortgage:
Residential........... 476 35 -- -- 476 35
Commercial............ 2,042 369 9,343 829 11,385 1,198
Consumer installment.... -- -- -- -- -- --
------ ------ ------- ------ ------- ------
Total............... $9,753 $1,470 $14,006 $2,245 $23,759 $3,715
====== ====== ======= ====== ======= ======
35
At December 31, 1997, impaired loans totaled $23.8 million with a total
related allowance of $3.7 million. Of these amounts, nonaccrual impaired loans
totaled $9.8 million with a related allowance of $1.5 million. Of the $14.0
million in accruing impaired loans, there were loans totaling approximately
$400,000 for which there was no related allowance.
Impaired loans totaled $25.7 million at December 31, 1996, with a total
related allowance of $4.8 million, with nonaccrual impaired loans totaling
$8.1 million with a related allowance of approximately $1.5 million. Included
in the $17.6 million of accruing impaired loans were loans totaling
approximately $200,000 for which there was no related allowance.
As indicated in the table, $9.8 million of the $26.6 million of total
nonaccrual loans at December 31, 1997, were considered impaired. The balance
of nonaccrual loans consisted of residential mortgages, credit card
receivables and consumer installment loans, primarily direct and indirect
automobile loans, that meet the definition of smaller balance, homogeneous
loans which are excluded from the scope of FAS114.
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities, including fee-based services, profits and
commissions earned through securities and insurance sales, and trading
activities. In addition, gains and losses realized from the sale of investment
portfolio securities are included in noninterest income. Noninterest income
totaled $181.5 million in 1997, an increase of 12 percent from the prior year,
and $161.4 million in 1996, an increase of 20 percent from that reported in
1995.
NONINTEREST INCOME
Year Ended December 31 Percent Change
-------------------------- -------------------
1997 1996 1995 1997/1996 1996/1995
-------- -------- -------- --------- ---------
(in Thousands)
Service charges on deposit
accounts...................... $ 70,944 $ 64,196 $ 58,801 10.5% 9.2%
Trust fees..................... 16,062 17,342 16,800 (7.4) 3.2
Trading account profits and
commissions................... 14,379 13,854 12,269 3.8 12.9
Investment securities gains,
net........................... 7,443 9,575 2,635 (22.3) 263.4
Retail investment sales
income........................ 16,557 12,805 9,014 29.3 42.1
Credit card service charges and
fees.......................... 12,451 10,701 8,764 16.4 22.1
Other.......................... 43,631 32,918 25,882 32.5 27.2
-------- -------- --------
Total noninterest income..... $181,467 $161,391 $134,165 12.4 20.3
======== ======== ========
Included in the results above are nonrecurring items of $8.8 million in
1997, $13.7 million in 1996 and $4.6 million in 1995. Nonrecurring items of
noninterest income include gains on sales of investment securities, gains on
the sale of premises and equipment and other real estate owned, gains on the
sales of branches and gains on loan settlements. Nonrecurring items
represented four percent of total noninterest income in 1997, eight percent in
1996 and three percent in 1995. The net gains on sales of investment
securities totaled $7.4 million in 1997, $9.6 million in 1996 and $2.6 million
in 1995, while gains on sales of branches totaled $2.5 million in 1996. After
adjusting for the nonrecurring items, noninterest income for 1997 totaled
$172.7 million, an increase of $25.0 million or 17 percent, over the adjusted
total of $147.7 million in 1996. After similarly adjusting for nonrecurring
items, 1996 noninterest income increased $18.1 million, or 14 percent,
relative to 1995.
Fee income from service charges on deposit accounts increased 11 percent in
1997 following a 9 percent increase in 1996. 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 1997 and
1996 were further influenced by the increase in both the number of accounts
and balances outstanding in transaction deposit accounts.
36
Trading account profits and commissions increased by $525,000 and $1.6
million in 1997 and 1996, respectively. For 1997, trading account profits
related specifically to derivative securities were approximately $1.0 million,
consisting of $800,000 of profits related to collateralized mortgage
obligations held in the trading account and $200,000 of profits on non-CMO
derivative securities, specifically options and interest rate swaps, caps and
floors. It should be noted that changes in the trading account profits and
commissions in future years cannot be predicted accurately because of the
uncertainty of changes in market conditions. There can be no assurance that
such amounts will continue at their current levels. For a discussion of
interest rate contracts held in the trading account and the composition of the
trading account at December 31, 1997, see page 16.
Retail investment sales income, comprised primarily of mutual fund and
annuity sales income, increased 29 percent in 1997 and 42 percent in 1996
reflecting management's continued efforts to increase sales in this area.
Credit card service charge and fee income increased 16 percent in 1997 after
increasing 22 percent in 1996. An increase in merchants' discounts accounted
for the increase in 1997 while the increase in 1996 also included an increase
in annual credit card fees.
Other noninterest income increased 33 percent in 1997 and 27 percent in
1996. Included in other noninterest income are ATM surcharge fees, insurance
fees and commissions, income from mortgage banking operations and
correspondent services fees.
NONINTEREST EXPENSE
Noninterest expense totaled $395.7 million in 1997, an increase of 9 percent
from the prior year, and $364.3 million in 1996, an increase of 10 percent
from that reported in 1995. Total salaries, benefits and commissions, as
reflected in the "Consolidated Statements of Income", increased 12 percent in
1997 and 1996. Salaries increased 15 percent during 1997 and 11 percent in
1996 due to normal increases relating to additions to staff, merit increases
and the completion of five business combination accounted for as purchases
during 1996, while the increase in 1997 also reflected an increase in
incentive bonuses of $5.9 million, or 70 percent. During 1997, other personnel
expense, consisting primarily of employee benefits, decreased 6 percent after
increasing 20 percent in 1996. The increase in other personnel expense during
1996 was due to increased pension plan and ESOP expense.
NONINTEREST EXPENSE
Year Ended December 31 Percent Change
-------------------------- -------------------
1997 1996 1995 1997/1996 1996/1995
-------- -------- -------- --------- ---------
(in Thousands)
Salaries........................ $179,293 $155,647 $139,932 15.2% 11.2%
Commissions..................... 4,256 4,151 3,985 2.5 4.2
Other personnel expense......... 27,454 29,136 24,326 (5.8) 19.8
Net occupancy expense........... 30,292 27,107 25,484 11.7 6.4
Equipment expense............... 29,373 24,438 23,531 20.2 3.9
Marketing....................... 8,914 9,446 7,834 (5.6) 20.6
Professional services........... 32,120 26,409 26,271 21.6 0.5
Supplies........................ 11,272 9,873 9,295 14.2 6.2
Amortization of intangibles..... 10,677 8,584 5,802 24.4 47.9
FDIC insurance.................. 1,491 10,813 10,292 (86.2) 5.1
Other........................... 60,585 58,670 54,379 3.3 7.9
-------- -------- --------
Total noninterest expense..... $395,727 $364,274 $331,131 8.6 10.0
======== ======== ========
Net occupancy expense increased by 12 percent in 1997 following a 6 percent
increase in 1996. These increases were due principally to the aforementioned
purchase business combinations completed during 1996, opening of new branches
and normal renovation of existing properties. Equipment expense increased 20
percent
37
in 1997 and 4 percent in 1996. The increase in equipment expense during 1997
reflected the Company's completion of a program started in 1996 to replace a
majority of its core application systems with new technology necessary to
support increased business growth and increased expenses associated with
purchase business combinations.
Federal Deposit Insurance Corporation ("FDIC") insurance expense totaled
$1.5 million compared with $10.8 million in 1996 and $10.3 million in 1995.
The decrease in FDIC insurance expense in 1997 was due to a substantial
decrease in the statutory premium rates in 1995. Offsetting the decrease in
the statutory premium rates in 1996 was a special one-time charge of $7.2
million incurred in the third quarter to provide for an assessment mandated by
the Deposit Insurance Funds Act of 1996 to recapitalize the Savings
Association Insurance Fund. 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.
Professional services expense increased 22 percent and supplies expense
increased 14 percent due to the previously mentioned systems conversions.
Amortization of intangibles increased 24 percent in 1997 after increasing 48
percent in 1996 as a result of purchase business combinations completed
throughout 1996.
INCOME TAXES
Income tax expense increased $7.3 million, or 10 percent, to $82.9 million
for the year ended December 31, 1997. The effective tax rate as a percentage
of pretax income was 34.8 percent in 1997, 36.3 percent in 1996 and 35.6
percent in 1995. The statutory federal rate was 35 percent during 1997, 1996
and 1995. The decrease in the effective tax rate for 1997 was primarily
attributable to increased investment in tax-advantaged assets. For further
information concerning the provision for income taxes, refer to Note 14,
Income Taxes, of the "Notes to Consolidated Financial Statements".
YEAR 2000 ISSUES
As with other companies, the Company has initiated a program to study the
impact on its computer systems in order to be Year 2000 compliant. This study
not only involves identifying any modifications or replacements of certain
hardware and software maintained by the Company, but also receiving assurance
from qualified, independent parties that the appropriate actions have or are
being taken by third parties to remedy their Year 2000 issues for computer
systems that the third party is responsible for maintaining and that are
relied upon by the Company. In addition, the Company is also taking
appropriate actions to receive assurance that its customers, principally
commercial lending customers, are taking necessary steps to remedy their Year
2000 issues due to the fact that noncompliance could adversely effect their
ability to repay borrowings to the Company.
Under this program, the Company has identified the computer systems which
will require either modification, upgrade or replacement. The Company
anticipates that in-house personnel will be primarily responsible for
completing these tasks and although outside contractors may be used, the costs
will not be significant. As such, the Company believes that the planned
modifications, upgrades and replacement of existing systems, along with third
party confirmation, will be completed in a timely fashion to assure Year 2000
compliance, and any related costs will not have a material impact on the
Company's results of operations, cash flows or financial condition in future
periods.
OTHER ACCOUNTING ISSUES
In 1996, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, ("FAS125"). FAS125
requires an entity to recognize the financial and servicing assets it controls
and the
38
liabilities it has incurred and to cease to recognize them as financial assets
when control has been surrendered in accordance with the criteria provided in
FAS125. Subsequently, the FASB issued Financial Accounting Statement No. 127,
Deferral of the Effective Date of Certain Provisions of SFAS No. 125, which
deferred until January 1, 1998, the implementation of certain aspects of the
original statement. The adoption of FAS125 is not expected to have a material
impact on the financial condition or operating results of the Company. The
Company will apply the new rules prospectively to transactions when required.
Additionally in 1997, the FASB issued Financial Accounting Statement No.
130, Reporting Comprehensive Income, ("FAS130") and Financial Accounting
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information, ("FAS131"). FAS130 establishes reporting and presentation
standards for comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions
and other events and circumstances arising from nonowner sources. FAS130 is
effective for both interim and annual financial statements issued for periods
beginning after December 15, 1997, and also applies to financial statements
presented for prior periods. FAS131 requires that financial and descriptive
information be disclosed for each reportable operating segment based on the
management approach. The management approach focuses on financial information
that an enterprise's decision makers use to assess performance and make
decisions about resource allocation. The statement also prescribes the
enterprise-wide disclosures to be made about products, services, geographic
areas and major customers. FAS131 is effective for annual financial statements
issued for periods beginning after December 15, 1997, and for interim
financial statements in the second year of application. The Company adopted
FAS130 and FAS131 on January 1, 1998, which did not result in a material
impact on the financial condition or results of operations of the Company.
PENDING ACQUISITIONS
For information on pending acquisitions, see the accompanying "Notes to
Consolidated Financial Statements", Note 11, Business Combinations.
IMPACT OF INFLATION AND CHANGING PRICES
A bank's asset and liability structure is substantially different from that
of an industrial company in that virtually all assets and liabilities of a
bank are monetary in nature. Management believes the impact of inflation on
financial results depends upon the Company's ability to react to changes in
interest rates and, by such reaction, reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or
at the same magnitude, as the prices of other goods and services. As discussed
previously, management seeks to manage the relationship between interest-
sensitive assets and liabilities in order to protect against wide interest
rate fluctuations, including those resulting from inflation.
Various information shown elsewhere in this Annual Report will assist in the
understanding of how well the Company is positioned to react to changing
interest rates and inflationary trends. In particular, the summary of net
interest income, the maturity distributions, the compositions of the loan and
securities portfolios, the data on the interest sensitivity of loans and
deposits and the information related to off-balance sheet hedging activities
discussed in Note 7, Derivative Financial Instruments, of the "Notes to
Consolidated Financial Statements" should be considered.
39
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............................................. 41
Consolidated Balance Sheets at December 31, 1997 and 1996................ 42
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995........................................................... 43
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995........................................ 44
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995..................................................... 45
Summary of Significant Accounting Policies -- December 31, 1997, 1996 and
1995.................................................................... 46
Notes to Consolidated Financial Statements -- December 31, 1997, 1996 and
1995.................................................................... 52
Quarterly Results (Unaudited)............................................ 76
40
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Birmingham, Alabama
January 14, 1998
41
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
------------------------
1997 1996
----------- -----------
(in Thousands)
ASSETS
Cash and due from banks.............................. $ 693,687 $ 713,274
Interest bearing deposits with other banks........... 399 492
Investment securities (fair value of $1,019,354 and
$1,128,747 for 1997 and 1996, respectively):
Taxable............................................ 921,679 1,027,673
Tax-exempt......................................... 79,799 93,971
----------- -----------
Total investment securities...................... 1,001,478 1,121,644
Investment securities available for sale (unrealized
holding gain of $2,038 for 1997; unrealized holding
loss of $2,784 for 1996)............................ 2,309,710 2,120,674
Trading account securities........................... 112,460 91,453
Federal funds sold and securities purchased under
agreements to resell................................ 69,073 105,040
Loans................................................ 8,676,966 7,886,009
Less: Unearned income................................ (5,410) (9,337)
Allowance for loan losses.......................... (122,011) (122,115)
----------- -----------
Net loans........................................ 8,549,545 7,754,557
Premises and equipment, net.......................... 296,557 263,858
Other assets......................................... 426,646 261,231
----------- -----------
TOTAL ASSETS..................................... $13,459,555 $12,432,223
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing................................ $ 2,009,985 $ 1,907,204
Interest bearing................................... 7,622,560 7,876,517
----------- -----------
Total deposits................................... 9,632,545 9,783,721
Federal funds purchased.............................. 927,795 606,414
Securities sold under agreements to repurchase....... 241,372 205,053
Other short-term borrowings.......................... 180,530 201,901
Accrued expenses and other liabilities............... 130,184 83,274
FHLB and other borrowings............................ 1,287,121 702,771
Guaranteed preferred beneficial interests in
Company's junior subordinated deferrable interest
debentures (Note 6)................................. 100,000 --
----------- -----------
Total liabilities................................ 12,499,547 11,583,134
Shareholders' equity:
Common stock of $2 par value:
Authorized -- 100,000,000 shares;
Issued -- 65,990,872 shares in 1997 and
43,734,959 shares in 1996....................... 131,982 87,470
Loans to finance stock purchases................... (4,675) (6,026)
Unearned restricted stock.......................... (2,775) (1,080)
Surplus............................................ 87,636 73,378
Net unrealized holding gain (loss) on available-
for-sale securities............................... 543 (2,890)
Retained earnings.................................. 747,297 698,237
----------- -----------
Total shareholders' equity....................... 960,008 849,089
Commitments (Notes 7 and 8)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $13,459,555 $12,432,223
=========== ===========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
42
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
--------------------------------------
1997 1996 1995
------------ ------------ ------------
(in Thousands Except Per Share Data)
INTEREST INCOME:
Interest and fees on loans............ $ 723,375 $ 643,376 $ 591,905
Interest on investment securities:
Taxable.............................. 74,045 57,806 129,240
Tax-exempt........................... 4,649 5,020 5,485
------------ ------------ ------------
Total interest on investment secu-
rities........................... 78,694 62,826 134,725
Interest on investment securities
available for sale................... 134,746 145,538 57,901
Interest on trading account
securities........................... 6,938 6,350 5,057
Interest on federal funds sold and
securities purchased under agreements
to resell............................ 5,252 7,244 6,163
Interest on interest bearing deposits
with other banks..................... 29 71 233
------------ ------------ ------------
TOTAL INTEREST INCOME............. 949,034 865,405 795,984
INTEREST EXPENSE:
Interest on deposits.................. 350,643 346,514 306,477
Interest on federal funds purchased
and securities sold under agreements
to repurchase........................ 48,624 36,014 45,731
Interest on other short-term
borrowings........................... 11,666 9,703 11,057
Interest on FHLB and other
borrowings........................... 55,140 42,002 38,160
Interest on guaranteed preferred
beneficial interests in Company's
junior subordinated deferrable
interest debentures.................. 7,796 -- --
------------ ------------ ------------
TOTAL INTEREST EXPENSE............ 473,869 434,233 401,425
------------ ------------ ------------
Net interest income............... 475,165 431,172 394,559
Provision for loan losses............... 22,412 20,215 11,664
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........ 452,753 410,957 382,895
NONINTEREST INCOME:
Service charges on deposit accounts... 70,944 64,196 58,801
Trust fees............................ 16,062 17,342 16,800
Trading account profits and
commissions.......................... 14,379 13,854 12,269
Investment securities gains, net...... 7,443 9,575 2,635
Retail investment sales income........ 16,557 12,805 9,014
Credit card service charges and fees.. 12,451 10,701 8,764
Other................................. 43,631 32,918 25,882
------------ ------------ ------------
TOTAL NONINTEREST INCOME.......... 181,467 161,391 134,165
------------ ------------ ------------
NONINTEREST EXPENSE:
Salaries, benefits and commissions.... 211,003 188,934 168,243
Net occupancy expense................. 30,292 27,107 25,484
Equipment expense..................... 29,373 24,438 23,531
FDIC insurance........................ 1,491 10,813 10,292
Other................................. 123,568 112,982 103,581
------------ ------------ ------------
TOTAL NONINTEREST EXPENSE......... 395,727 364,274 331,131
------------ ------------ ------------
Net income before income tax
expense.......................... 238,493 208,074 185,929
Income tax expense...................... 82,930 75,630 66,179
------------ ------------ ------------
NET INCOME........................ $ 155,563 $ 132,444 $ 119,750
============ ============ ============
Basic earnings per share................ $ 2.37 $ 2.04 $ 1.84
Basic weighted average shares
outstanding............................ 65,690 64,854 65,183
Diluted earnings per share.............. $ 2.34 $ 2.03 $ 1.83
Diluted weighted average shares
outstanding............................ 66,514 65,355 65,585
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
43
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Net
Unrealized
Holding Gain
Loans to (Loss) on
Finance Unearned Available- Total
Common Stock Retained Treasury Restricted For-Sale Shareholders'
Stock Purchases Surplus Earnings Stock Stock Securities Equity
-------- --------- ------- -------- -------- ---------- ------------ -------------
(in Thousands)
Balance, December 31,
1994................... $ 86,612 $(5,914) $61,387 $543,400 $ -- $ -- $(13,423) $672,062
Net income -- 1995...... -- -- -- 119,750 -- -- -- 119,750
Cash common dividends
declared ($.747 per
share)................. -- -- -- (42,684) -- -- -- (42,684)
Pre-merger transactions
of pooled entities..... 1 -- 2,562 (989) -- -- -- 1,574
Exercise of stock
options................ 458 -- 2,569 -- -- -- -- 3,027
Tax benefit of stock
options exercised...... -- -- 610 -- -- -- -- 610
Repayment of loans to
finance stock
purchases, net of
advances............... -- 286 -- -- -- -- -- 286
Change in unrealized
gain (loss) on
securities available
for sale............... -- -- -- -- -- -- 25,519 25,519
-------- ------- ------- -------- -------- ------- -------- --------
Balance, December 31,
1995................... 87,071 (5,628) 67,128 619,477 -- -- 12,096 780,144
Net income -- 1996...... -- -- -- 132,444 -- -- -- 132,444
Cash common dividends
declared ($.853 per
share)................. -- -- -- (50,454) -- -- -- (50,454)
Pre-merger transactions
of pooled entities..... -- -- 4,536 (3,093) -- -- -- 1,443
Exercise of stock
options................ 447 -- 3,866 (137) -- -- -- 4,176
Issuance of restricted
stock.................. -- -- -- -- -- (1,296) -- (1,296)
Tax benefit of stock
options exercised...... -- -- 162 -- -- -- -- 162
Loans to finance stock
purchases, net of
repayments............. -- (398) -- -- -- -- -- (398)
Amortization of
restricted stock....... -- -- -- -- -- 216 -- 216
Treasury shares
purchased.............. -- -- -- -- (46,769) -- -- (46,769)
Treasury shares issued
for business
combinations........... (48) -- (2,310) -- 46,769 -- -- 44,411
Cash paid for fractional
shares in business
combinations........... -- -- (4) -- -- -- -- (4)
Change in unrealized
gain (loss) on
securities available
for sale............... -- -- -- -- -- -- (14,986) (14,986)
-------- ------- ------- -------- -------- ------- -------- --------
Balance, December 31,
1996................... 87,470 (6,026) 73,378 698,237 -- (1,080) (2,890) 849,089
NET INCOME -- 1997...... -- -- -- 155,563 -- -- -- 155,563
CASH COMMON DIVIDENDS
DECLARED ($.947 PER
SHARE)................. -- -- -- (61,558) -- -- -- (61,558)
STOCK SPLIT............. 43,826 -- -- (43,866) -- -- -- (40)
PRE-MERGER TRANSACTIONS
OF POOLED ENTITIES..... 15 -- 6,474 (136) -- -- -- 6,353
SHARES ISSUED FOR
OPTIONS................ 545 -- 3,892 (943) -- -- -- 3,494
ISSUANCE OF RESTRICTED
STOCK.................. 126 -- 2,580 -- -- (2,706) -- --
TAX BENEFIT OF STOCK
OPTIONS EXERCISED...... -- -- 1,778 -- -- -- -- 1,778
REPAYMENT OF LOANS TO
FINANCE STOCK
PURCHASES, NET OF
ADVANCES............... -- 1,351 -- -- -- -- -- 1,351
AMORTIZATION OF
RESTRICTED STOCK....... -- -- -- -- -- 1,011 -- 1,011
SETTLEMENT OF REPURCHASE
LIABILITY ASSOCIATED
WITH 1996 TREASURY
STOCK TRANSACTION...... -- -- (450) -- -- -- -- (450)
CASH PAID FOR FRACTIONAL
SHARES IN BUSINESS
COMBINATIONS........... -- -- (16) -- -- -- -- (16)
CHANGE IN UNREALIZED
GAIN (LOSS) ON
SECURITIES AVAILABLE
FOR SALE............... -- -- -- -- -- -- 3,433 3,433
-------- ------- ------- -------- -------- ------- -------- --------
BALANCE, DECEMBER 31,
1997................... $131,982 $(4,675) $87,636 $747,297 $ -- $(2,775) $ 543 $960,008
======== ======= ======= ======== ======== ======= ======== ========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
44
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(in Thousands)
OPERATING ACTIVITIES:
Net income............................. $ 155,563 $ 132,444 $ 119,750
Adjustments to reconcile net income to
cash provided by operations:
Depreciation and amortization.......... 42,218 37,374 33,909
Accretion of discount and loan fees.... (13,175) (13,260) (16,476)
Provision for loan losses.............. 22,412 20,215 11,664
Net change in trading account
securities............................ (21,007) 10,463 (43,904)
Net change in mortgage loans available
for sale.............................. (2,415) (4,095) 2,462
Deferred tax expense................... 3,868 2,699 2,390
Net gain on sale of investment
securities............................ (7,443) (9,575) (2,635)
Net (gain) loss on sale of premises and
equipment............................. (433) (46) 146
Net gain on sale of other real estate
owned................................. (220) (77) (355)
Provision for losses on other real
estate owned, net of recoveries....... 167 221 530
Gain on sale of branches............... -- (2,515) --
(Increase) decrease in interest
receivable............................ (11,590) 2,973 (1,900)
Decrease in other assets............... (163,332) (7,293) (8,078)
Increase (decrease) in interest
payable............................... 4,736 (690) 18,454
Increase (decrease) in taxes payable... 13,871 (1,184) (596)
Increase (decrease) in other payables.. 22,253 15,117 (3,839)
----------- ----------- -----------
Net cash provided by operating
activities........................... 45,473 182,771 111,522
INVESTING ACTIVITIES:
Proceeds from maturities/calls of
investment securities................. 371,219 232,916 466,483
Purchases of investment securities..... (131,411) (341,387) (4,302)
Proceeds from sales of investment
securities available for sale......... 966,125 812,193 704,227
Proceeds from maturities/calls of
investment securities available for
sale.................................. 551,867 497,260 155,219
Purchases of investment securities
available for sale.................... (1,812,966) (1,297,749) (1,459,617)
Net (increase) decrease in federal
funds sold and securities purchased
under agreements to resell............ 35,967 253,109 (226,249)
Net increase in loan portfolio......... (812,393) (464,554) (605,568)
Net cash received (paid) in
acquisitions of banks................. 22,216 (87,772) --
Sale of branches....................... -- (47,273) --
Purchases of premises and equipment.... (57,753) (33,953) (28,581)
Net decrease in interest bearing
deposits with other banks............. 93 2,039 3,215
Proceeds from sales of other real
estate owned.......................... 8,446 7,717 4,073
----------- ----------- -----------
Net cash used by investing
activities........................... (858,590) (467,454) (991,100)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW
accounts and savings accounts......... 70,990 651,860 376,735
Net increase (decrease) in time
deposits.............................. (247,631) (93,657) 293,207
Net increase (decrease) in federal
funds purchased....................... 321,381 (176,271) 290,003
Net increase (decrease) in securities
sold under agreements to repurchase... 36,319 (90,338) (63,957)
Net increase (decrease) in short-term
borrowings............................ (21,371) 56,566 9,678
Proceeds from FHLB advances and other
borrowings............................ 898,500 162,500 175,904
Repayment of FHLB advances and other
borrowings............................ (314,242) (50,378) (79,269)
Issuance of guaranteed preferred
beneficial interests in Company's
junior subordinated deferrable
interest debentures................... 100,000 -- --
Purchase of treasury shares............ -- (45,342) --
Common dividends paid.................. (61,558) (50,454) (42,684)
Common dividends paid by pooled
entities prior to acquisition......... (136) (330) (851)
Exercise of stock options of pooled
entities prior to acquisition......... 6,489 -- 23
Repayment of loans to finance stock
purchases............................. 2,598 2,564 2,343
Cash paid in lieu of fractional
shares................................ (56) -- --
Proceeds from issuance of common
stock................................. -- -- 45
Proceeds from exercise of stock
options............................... 2,247 571 1,171
----------- ----------- -----------
Net cash provided by financing
activities........................... 793,530 367,291 962,348
----------- ----------- -----------
Net increase (decrease) in cash and due
from banks............................. (19,587) 82,608 82,770
Cash and due from banks at beginning of
the year............................... 713,274 630,666 547,896
----------- ----------- -----------
Cash and due from banks at end of the
year................................... $ 693,687 $ 713,274 $ 630,666
=========== =========== ===========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
45
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1997, 1996 AND 1995
The accounting principles followed by Compass Bancshares, Inc. (the
"Company") and its subsidiaries and the methods of applying these principles
conform with generally accepted accounting principles and with general
practices within the banking industry. Certain principles which significantly
affect the determination of financial position, results of operations and cash
flows are summarized below.
Prior years' financial statements have been restated to reflect acquisitions
consummated during 1997 accounted for using the pooling-of-interests method of
accounting. Financial institutions acquired by the Company during the past
three years and accounted for as purchases are reflected in the financial
position and results of operations of the Company since the date of their
acquisition. Certain items in prior years' financial statements have been
reclassified to conform with the current financial statement presentations.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, Compass Bank, the Company's lead bank subsidiary
headquartered in Birmingham, Alabama, ("Compass Bank"), Compass Banks of
Texas, which owns Compass Bank, headquartered in Houston, Texas, ("Compass
Bank- Texas"), Central Bank of the South, (collectively, the "Subsidiary
Banks"), Compass Land Holding Corporation and Compass Underwriters, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior year amounts
to conform with the current year presentation.
NATURE OF OPERATIONS
The Company operates 223 branches in 101 cities in Alabama, Texas and
Florida. The Company's branches in Alabama are located throughout the state
while its Florida branches are concentrated in the Jacksonville area and in
the Florida panhandle. In Texas, the Company's branches are primarily located
in the state's four largest metropolitan areas of Houston, Dallas, San Antonio
and Austin. The Company's primary source of income is interest income on loans
made to individuals, small businesses and large corporations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period, the most significant of which relates to the allowance for
loan losses. Actual results could differ from those estimates.
CONTINGENCIES
The Subsidiary Banks are defendants in legal proceedings arising in the
ordinary course of business. Some of these proceedings which relate to
lending, collections, servicing, investment, trust and other activities by
such subsidiaries seek substantial sums as damages. Among the actions which
are pending against the Subsidiary Banks are actions filed as class actions in
the State of Alabama. The actions are similar to others that have been brought
in recent years in Alabama against financial institutions in that they seek
substantial compensatory and punitive damages in connection with transactions
involving relatively small amounts of actual damages. In recent years, juries
in certain Alabama state courts have rendered large punitive damage awards in
such cases.
It may take a number of years to finally resolve some of these pending legal
proceedings due to their complexity and other reasons. It is 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
46
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
ultimate resolution of these legal proceedings will not have a material
adverse effect on the Company's financial condition or results of operations.
SECURITIES
Securities are held in three portfolios: (i) trading account securities,
(ii) held-to-maturity securities and (iii) securities available for sale.
Trading account securities are stated at fair value. Investment securities
held to maturity are stated at cost adjusted for amortization of premiums and
accretion of discounts. With regard to investment securities held to maturity,
management has the intent and ability to hold such securities until maturity.
Investment securities available for sale are classified as such due to the
fact that management may decide to sell certain securities prior to maturity
for liquidity, tax planning or other valid business purposes. Increases and
decreases in the net unrealized gain (loss) on the portfolio of securities
available for sale are reflected as adjustments to the carrying value of the
portfolio and, for the tax-effected amounts, as adjustments to the separate
component of shareholders' equity.
Interest earned on investment securities held to maturity, investment
securities available for sale and trading account securities is included in
interest income. Net gains and losses on the sale of investment securities
available for sale, computed principally on the specific identification
method, are shown separately in noninterest income in the "Consolidated
Statements of Income".
As part of the Company's overall interest rate risk management, the Company
uses interest rate futures, swaps, caps and floors. Interest rate futures
contracts are accounted for as hedges provided the criteria in Financial
Accounting Statement No. 80 ("FAS80"), Accounting for Futures Contracts, are
met. For interest rate swaps, caps and floors that are designated as synthetic
alterations of existing assets or liabilities and that meet the Company's
criteria for interest rate risk, changes in the fair value are not reflected
in the financial statements until realized. Interest rate futures contracts
that do not meet the hedge criteria of FAS80 and interest rate swaps, caps and
floors that do not reduce the Company's overall interest rate risk are
accounted for as trading contracts and marked to market through net income.
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. Gains or losses on terminated swaps, caps and floors are deferred
and amortized as an adjustment of net interest income over the remaining life
of the original contract.
Interest income or expense related to interest rate swaps, caps and floors
is recorded over the life of the agreement as an adjustment to net interest
income. Changes in fair value of futures contracts and options used in the
securities trading portfolio, as well as changes in fair value of short-sale
transactions, are recognized currently by the mark-to-market method of
accounting and are recorded in the noninterest income section of the
"Consolidated Statements of Income" as trading account profits and
commissions. Income received as an intermediary for customers under interest
rate contracts is amortized over the life of the respective contract and
recorded in trading account profits and commissions.
LOANS
All loans are stated at principal outstanding. Interest income on
installment loans is recognized primarily on the level yield method. Interest
income on other loans is credited to income based primarily on the principal
outstanding at appropriate rates of interest. Loan fees, net of direct costs,
are reflected as an adjustment to the yield of the related loan over the term
of the loan.
It is the general policy of the Subsidiary Banks to stop accruing interest
income and place the recognition of interest on a cash basis when any
commercial, industrial or real estate loan is 90 days or more past due as to
47
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
principal or interest and/or the ultimate collection of either is in doubt,
unless collection of both principal and interest is assured by way of
collateralization, guarantees or other security. Accrual of interest income on
consumer installment loans is suspended when any payment of principal or
interest, or both, is more than 120 days delinquent. Credit cards and the
related accrued interest is charged off when the receivable is more than 150
days past due. When a loan is placed on a nonaccrual basis, any interest
previously accrued but not collected is reversed against current income unless
the collateral for the loan is sufficient to cover the accrued interest or a
guarantor assures payment of interest.
Effective January 1, 1995, the Company adopted Financial Accounting
Statement No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Financial Accounting Statement No. 118, Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures, ("FAS114"). FAS114
requires loans to be measured for impairment using one of three methods when
it is probable that all amounts, including principal and interest, will not be
collected in accordance with the contractual terms of the loan agreement. The
amount of impairment and any subsequent changes are recorded through the
provision for credit losses as an adjustment to the allowance for credit
losses. FAS114 does not apply to debt securities, leases, loans that are
measured at fair value or at the lower of cost or fair value or to smaller
balance, homogeneous loans that are collectively evaluated for impairment. In
addition, it applies to all loans that are restructured in a troubled debt
restructuring involving a modification of terms. However, such loans
restructured prior to the effective date of FAS114 that are performing in
accordance with their restructured terms are accounted for in accordance with
Financial Accounting Statement No. 15, Accounting by Debtors and Creditors for
Troubled Debt Restructurings. In evaluating impairment, the Company has
identified residential mortgages, credit card receivables, and consumer
installment loans, primarily direct and indirect automobile loans, as smaller
balance homogeneous loans that are excluded from the scope of FAS114.
Generally, the Company evaluates a loan for impairment in accordance with
FAS114 when a portion of the loan is internally risk rated as substandard or
doubtful. All nonaccrual loans not meeting the definition of smaller balance
homogeneous loans are considered impaired. As required by FAS114, the Company
generally measures impairment based upon the present value of the loan's
expected future cash flows, except where foreclosure or liquidation is
probable or when the primary source of repayment is provided by real estate
collateral. In these circumstances, impairment is measured based upon the fair
value of the collateral. In addition, in certain rare circumstances,
impairment may be based on the loan's observable fair value. Impairment with
regard to substantially all of the Company's impaired loans has been measured
based on the fair value of the underlying collateral.
The Company's policy for recognizing interest income on impaired loans is
the same as the policy applied to nonaccrual loans prior to the adoption of
FAS114. Adopting FAS114 did not affect the Company's charge-off policy. It is
generally the Company's policy to charge off a portion of a loan if the
recoverability of principal is in doubt. The adoption of FAS114 did not have a
material effect on the Company's financial position or results of operations.
ALLOWANCE FOR LOAN LOSSES
The amount of the provision for loan losses charged to income is determined
on the basis of several factors including actual loss experience, current and
expected economic conditions and periodic examinations and appraisals of the
loan portfolio. Such provisions, less net loan charge-offs, comprise the
allowance for loan losses which is deducted from loans and is available for
future loan charge-offs.
The Subsidiary Banks generally follow the policy of charging off loans
determined to be uncollectible by management, the Company's loan examination
division or Federal and state supervisory authorities. Subsequent recoveries
are credited to the allowance for loan losses.
48
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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.
INTANGIBLES
Intangibles are included in other assets in the "Consolidated Balance
Sheets". The amortization periods for these assets are dependent upon the type
of intangible. Goodwill is amortized over a period not greater than 20 years;
core deposit and other identifiable intangibles are amortized over a period
based on the life of the intangible which generally varies from 10 to 25
years. Goodwill is amortized using the straight-line method and other
identifiable intangibles are amortized using accelerated methods as
appropriate. The Company periodically reviews its intangible assets for
impairment. Intangible assets totaled $116.0 million and $125.1 million at
December 31, 1997 and 1996, respectively.
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".
TREASURY STOCK
Stock repurchases are accounted for using the cost method.
STOCK BASED COMPENSATION
During 1995, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Statement No. 123, Accounting for Stock-Based
Compensation, ("FAS123"). FAS123 encourages, but does not require, companies
to account for stock compensation awards based on their fair value at the date
of grant, with the resulting compensation cost reflected as expense in the
statement of operations. FAS123 requires companies that choose not to reflect
the compensation cost in the statement of operations to provide footnote
disclosure of the pro forma effect of stock compensation awards on net income
and earnings per share. The Company adopted FAS123 in the first quarter of
1996 and has elected to provide pro forma disclosures related to the
compensation cost of stock compensation awards.
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.
MARKETING EXPENSE
The Company expenses all marketing related costs, including advertising
costs, as incurred.
49
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
INCOME TAXES
The Company and its subsidiaries provide for income taxes using the asset
and liability method in accordance with Financial Accounting Statement No.
109, Accounting for Income Taxes. The Company files a consolidated tax return.
NET INCOME PER COMMON SHARE
During 1996, the FASB issued Financial Accounting Statement No. 128,
Earnings per Share, ("FAS128"). FAS128 specifies the computation, presentation
and disclosure requirements for earnings per share, replacing the presentation
of primary earnings per share with the presentation of basic earnings per
share. For entities with complex capital structures, the presentation of fully
diluted earnings per share is replaced with diluted earnings per share. FAS128
is effective for both interim and annual financial statements issued for
periods ending after December 15, 1997, with earlier adoption prohibited. The
Company adopted FAS128 on December 31, 1997, and, as required, all periods
presented in the consolidated financial statements have been restated to
reflect the adoption of the statement.
Presented below is a summary of the components used to calculate basic and
diluted earnings per share for the year ended December 31, 1997, 1996 and
1995:
Year Ended December 31
--------------------------------------
1997 1996 1995
------------ ------------ ------------
(in Thousands Except Per Share Data)
BASIC EARNINGS PER SHARE:
Weighted average common shares
outstanding........................... 65,690 64,854 65,183
============ ============ ============
Net income............................. $ 155,563 $ 132,444 $ 119,750
============ ============ ============
Basic earnings per share............... $ 2.37 $ 2.04 $ 1.84
============ ============ ============
DILUTED EARNINGS PER SHARE:
Weighted average common shares
outstanding........................... 65,690 64,854 65,183
Net effect of the assumed exercise of
stock options and nonvested restricted
stock-based on the treasury stock
method using average market price for
the year.............................. 824 501 402
------------ ------------ ------------
Total weighted average common shares
and common stock equivalents
outstanding........................... 66,514 65,355 65,585
============ ============ ============
Net income............................. $ 155,563 $ 132,444 $ 119,750
============ ============ ============
Diluted earnings per share............. $ 2.34 $ 2.03 $ 1.83
============ ============ ============
In January, 1998, the Company completed the acquisitions of G.S.B.
Investments, Inc. and First University Corporation. In addition, during
February, 1998, the Company completed the acquisition of Fidelity Resources
Company. Each of these acquisitions were accounted for under the pooling-of-
interests method of accounting and, accordingly, all prior period information
will be restated in the first quarter of 1998. The Company issued 3.8 million
of its common shares as a result of these acquisitions. These transactions are
more fully discussed in Note 11, Business Combinations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1996, the FASB issued Financial Accounting Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, ("FAS125"). FAS125 requires an entity to
50
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
recognize the financial and servicing assets it controls and the liabilities
it has incurred and to cease to recognize them as financial assets when
control has been surrendered in accordance with the criteria provided in
FAS125. Subsequently, the FASB issued Financial Accounting Statement No. 127,
Deferral of the Effective Date of Certain Provisions of SFAS No. 125, which
deferred until January 1, 1998, the implementation of certain aspects of the
original statement. The adoption of FAS125 is not expected to have a material
impact on the financial condition or operating results of the Company. The
Company will apply the new rules prospectively to transactions when required.
In June, 1997, the FASB issued Financial Accounting Statement No. 130,
Reporting Comprehensive Income, ("FAS130") and Financial Accounting Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information,
("FAS131"). FAS130 establishes reporting and presentation standards for
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events
and circumstances arising from nonowner sources. FAS130 is effective for both
interim and annual financial statements issued for periods beginning after
December 15, 1997, and also applies to financial statements presented for
prior periods. FAS131 requires that financial and descriptive information be
disclosed for each reportable operating segment based on the management
approach. The management approach focuses on financial information that an
enterprise's decision makers use to assess performance and make decisions
about resource allocation. The statement also prescribes the enterprise-wide
disclosures to be made about products, services, geographic areas and major
customers. FAS131 is effective for annual financial statements issued for
periods beginning after December 15, 1997, and for interim financial
statements in the second year of application. The Company adopted FAS130 and
FAS131 on January 1, 1998.
51
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(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, 1997 and 1996 were approximately $64.6 million and $87.9 million,
respectively.
(2) CASH FLOWS
The Company paid approximately $469.1 million, $434.9 million and $383.0
million in interest on deposits and other liabilities during 1997, 1996 and
1995, respectively. A following table presents the Company's noncash investing
and financing activities for the years ended December 31, 1997, 1996 and 1995.
December 31
----------------------------
1997 1996 1995
-------- -------- --------
(in Thousands)
Transfers of loans to other real estate owned.... $ 7,754 $ 6,197 $ 7,555
Loans to facilitate the sale of other real estate
owned........................................... 974 1,800 1,756
Transfer of securities to investment securities
available for sale.............................. -- -- 827,543
Transfer of securities available for sale to
held-to-maturity securities..................... 118,947 193,129 33,257
Tax benefit realized upon exercise of stock
options......................................... 1,778 162 610
Loans to finance stock purchases................. 1,247 2,962 2,065
Change in unrealized gain (loss) on available-
for-sale securities............................. 4,795 (23,618) 39,172
Conversion of debentures......................... -- 790 --
Repurchase liability associated with treasury
stock transaction............................... -- 1,427 --
Issuance of treasury stock upon exercise of stock
options......................................... 943 137 --
Issuance of restricted stock..................... 2,706 1,296 --
Acquisitions:
Assets acquired................................. $ 3,445 $860,089
Liabilities assumed............................. 25,661 725,548
-------- --------
Net assets acquired (liabilities assumed)...... (22,216) 134,541
Treasury stock issued........................... -- 46,769
-------- --------
Cash paid (received)............................ $(22,216) $ 87,772
======== ========
Divestiture of branches:
Liabilities sold................................ $ 79,378
Assets sold..................................... 29,590
--------
Net liabilities sold........................... $ 49,788
========
52
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(3) INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
The following table presents the adjusted cost and approximate fair value of
investment securities and investment securities available for sale at December
31, 1997 and 1996.
1997 1996
--------------------- ---------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
---------- ---------- ---------- ----------
(in Thousands)
Investment securities:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.................... $ 36,084 $ 36,317 $ 57,757 $ 57,897
Mortgage-backed pass-through
securities...................... 233,908 239,080 296,798 301,669
CMOs and other mortgage
derivative products............. 628,866 637,950 638,963 638,351
States and political
subdivisions.................... 74,161 77,603 86,467 89,307
Corporate........................ 27,604 27,550 40,389 40,246
Foreign.......................... 855 854 760 757
Other............................ -- -- 510 520
---------- ---------- ---------- ----------
Total.......................... $1,001,478 $1,019,354 $1,121,644 $1,128,747
========== ========== ========== ==========
1997 1996
--------------------- ---------------------
FAIR AMORTIZED Fair Amortized
VALUE COST Value Cost
---------- ---------- ---------- ----------
(in Thousands)
Investment securities available for
sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.................... $ 195,973 $ 194,945 $ 217,110 $ 216,635
Mortgage-backed pass-through
securities...................... 130,322 130,489 299,080 300,220
CMOs and other mortgage
derivative products............. 1,800,086 1,798,902 1,426,970 1,429,648
States and political
subdivisions.................... 837 827 6,271 6,271
Corporate........................ 90,389 90,329 117,170 116,592
Foreign.......................... -- -- 100 100
Other............................ 1,301 1,301 4,718 4,718
Equity securities................. 90,802 90,879 49,255 49,274
---------- ---------- ---------- ----------
Total.......................... $2,309,710 $2,307,672 $2,120,674 $2,123,458
========== ========== ========== ==========
Securities with principal amounts of approximately $1.1 billion and $1.2
billion at December 31, 1997 and 1996, respectively, were pledged to secure
public deposits and for other purposes as required by law. The following table
details unrealized gains and unrealized losses on investment securities and
investment securities available for sale related to the various categories as
of December 31, 1997 and 1996.
53
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
1997 1996
--------------------- ---------------------
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.................... $ 235 $ 2 $ 162 $ 22
Mortgage-backed pass-through
securities...................... 5,327 155 5,193 322
CMOs and other mortgage
derivative products............. 10,093 1,009 4,804 5,416
States and political
subdivisions.................... 3,448 6 2,906 66
Corporate........................ 58 112 128 271
Foreign.......................... -- 1 -- 3
Other............................ -- -- 10 --
------- ------ ------- -------
Total.......................... $19,161 $1,285 $13,203 $ 6,100
======= ====== ======= =======
Investment securities available for
sale:
Debt securities:
U.S. Treasury and other U.S.
Government agencies and
corporations.................... $ 1,036 $ 8 $ 734 $ 259
Mortgage-backed pass-through
securities...................... -- 167 1,706 2,846
CMOs and other mortgage
derivative products............. 4,313 3,129 4,941 7,619
States and political
subdivisions.................... 12 2 -- --
Corporate........................ 93 33 578 --
Foreign.......................... -- -- -- --
Other............................ -- -- -- --
Equity securities................. -- 77 -- 19
------- ------ ------- -------
Total.......................... $ 5,454 $3,416 $ 7,959 $10,743
======= ====== ======= =======
The maturity of the securities portfolio is presented in the tables below.
1997
---------------------
Carrying Fair
Amount Value
---------- ----------
(in Thousands)
Investment securities:
Maturing within one year................................ $ 33,451 $ 33,538
Maturing after one but within five years................ 42,310 42,772
Maturing after five but within ten years................ 45,711 48,080
Maturing after ten years................................ 17,232 17,934
---------- ----------
138,704 142,324
Mortgage-backed pass-through securities and CMOs........ 862,774 877,030
---------- ----------
Total................................................ $1,001,478 $1,019,354
========== ==========
54
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
Fair Amortized
Value Cost
----------- -----------
(in Thousands)
Investment securities available for sale:
Maturing within one year............................... $ 47,355 $ 47,336
Maturing after one but within five years............... 271,066 270,106
Maturing after five but within ten years............... 46,000 45,958
Maturing after ten years............................... 14,881 14,881
----------- -----------
379,302 378,281
Mortgage-backed pass-through securities and CMOs....... 1,930,408 1,929,391
----------- -----------
Total................................................. $ 2,309,710 $ 2,307,672
=========== ===========
During 1995, gross gains of $1.2 million were realized on $32.2 million of
mortgage-backed pass-through securities in the held-to-maturity portfolio,
which were classified as maturities in accordance with generally accepted
accounting principles. Proceeds from sales of available-for-sale investment
securities were $966.1 million in 1997, $812.2 million in 1996 and $704.2
million in 1995. Gross gains of $8.2 million in 1997, $9.8 million in 1996 and
$2.6 million in 1995 and gross losses of $729,000 in 1997, $198,000 in 1996
and $1.2 million in 1995 were realized on such sales.
On December 31, 1995, the Company adopted the Financial Accounting Standards
Board's Special Report, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities ("Special
Report"). The Special Report allowed a company the one-time opportunity to
reassess the appropriateness of its investment securities classifications and
to transfer securities from the held-to-maturity portfolio to the available-
for-sale portfolio without calling into question the company's intent to hold
other debt securities to maturity. Upon adoption, the Company transferred
held-to-maturity investment securities totaling $827.5 million to its
available-for-sale portfolio and $33.3 million of available-for-sale
securities to its held-to-maturity portfolio. Generally, individual holdings
with greater than $10 million par were transferred to the available-for-sale
portfolio in order to increase liquidity and portfolio management
capabilities, with smaller positions transferred to the held-to-maturity
portfolio. During 1997, investment securities available for sale totaling
$118.9 million were transferred to the held-to-maturity portfolio at a fair
value of $119.4 million. No securities were transferred to the trading
portfolio during either 1997 or 1996.
(4) LOANS AND ALLOWANCES FOR LOAN LOSSES
The following presents the composition of the loan portfolio at December 31,
1997 and 1996.
1997 1996
---------- ----------
(in Thousands)
Commercial, financial and agricultural................... $2,209,396 $1,844,764
Real estate -- construction.............................. 718,462 599,473
Real estate -- mortgage.................................. 3,996,341 3,936,972
Consumer installment..................................... 1,752,767 1,504,800
---------- ----------
$8,676,966 $7,886,009
========== ==========
During 1997 and 1996, 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,
1997 and 1996, amounted to $55.6 million and $48.4 million, respectively. The
change from December 31, 1996, to
55
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
December 31, 1997, reflects payments amounting to $16.4 million, advances of
$22.0 million, and other changes of $1.6 million. Other changes in loans to
certain executive officers and directors during the year represent changes in
the composition of the Company's board of directors. Such loans are made in
the ordinary course of business at normal credit terms, including interest
rate and collateral requirements, and do not represent more than normal credit
risk.
The Company does not have a concentration of loans to any one industry.
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995
-------- -------- --------
(in Thousands)
Balance at beginning of year..................... $122,115 $113,805 $113,363
Add: Provision charged to income................. 22,412 20,215 11,664
Additions due to acquisitions.................. -- 7,173 --
Deduct: Loans charged off........................ 28,891 24,911 18,454
Loan recoveries............................... (6,375) (5,833) (7,232)
-------- -------- --------
Net charge-offs............................... 22,516 19,078 11,222
-------- -------- --------
Balance at end of year........................... $122,011 $122,115 $113,805
======== ======== ========
At December 31, 1997 and 1996, the Company's recorded investment in loans
considered to be impaired under FAS114 was $23.8 million and $25.7 million,
respectively, of which $9.8 million and $8.1 million, respectively, were on
nonaccrual status. Included in the $23.8 million of impaired loans at December
31, 1997 is $23.4 million of impaired loans for which the related allowance is
$3.7 million and $400,000 of loans for which there is no related allowance. At
December 31, 1996, $25.5 million of impaired loans had a related allowance of
$4.8 million and $200,000 of loans with no related allowance. Average impaired
loans during the years ended December 31, 1997 and 1996, were approximately
$24.5 million and $31.4 million, respectively.
Nonperforming assets at December 31, 1997, 1996 and 1995 are detailed in the
following table.
December 31
-----------------------
1997 1996 1995
------- ------- -------
(in Thousands)
Nonaccrual loans....................................... $26,568 $19,955 $13,036
Renegotiated loans..................................... 2,334 2,591 1,070
------- ------- -------
Total nonperforming loans............................. 28,902 22,546 14,106
Other real estate...................................... 6,483 7,883 10,250
------- ------- -------
Total nonperforming assets............................ $35,385 $30,429 $24,356
======= ======= =======
56
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(5) FHLB AND OTHER BORROWINGS
At December 31, 1997, the Company had 7 percent subordinated debentures of
$75 million maturing in 2003 and 8.375 percent subordinated debentures of $50
million maturing in 2004, with interest paid semi- annually on both
debentures. At December 31, 1997, the net carrying amount of these debentures
was $124.4 million.
The Company had a mortgage amounting to $4.2 million as of December 31,
1997, 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, 1997, the Company also had $1.2 billion in outstanding
advances from the Federal Home Loan Bank of which $200 million matures in
1998, $272.5 million matures in 1999 and $200 million matures in 2000. The
Company had an additional $486 million that is callable quarterly and carries
a weighted average interest rate of 4.87 percent. The interest rate on the
remaining advances resets quarterly based on the three- month LIBOR rate and
interest payments are due quarterly. The advances are secured by first
mortgages of $1.6 billion carried on the books of Compass Bank and Compass
Bank-Texas.
(6) CAPITAL SECURITIES
In January, 1997, the Company formed a wholly owned Delaware statutory
business trust, Compass Trust I, which issued $100 million of guaranteed
preferred beneficial interests in the Company's junior subordinated deferrable
interest debentures ("Capital Securities") that qualify as Tier I capital
under Federal Reserve Board guidelines. All of the common securities of
Compass Trust I are owned by the Company. The proceeds from the issuance of
the Capital Securities ($100 million) and common securities ($3.1 million)
were used by Compass Trust I to purchase $103.1 million of junior subordinated
deferrable interests debentures of the Company which carries an interest rate
of 8.23 percent. The debentures represent the sole asset of Compass Trust I.
The debentures and related income statement effects are eliminated in the
Company's financial statements.
The Capital Securities accrue and pay distributions semiannually at a rate
of 8.23 percent per annum of the stated liquidation value of $1,000 per
capital security. The Company has entered into contractual arrangements which,
taken collectively, fully and unconditionally guarantee payment of: (i)
accrued and unpaid distributions required to be paid on the Capital
Securities; (ii) the redemption price with respect to any capital securities
called for redemption by Compass Trust I and (iii) payments due upon a
voluntary or involuntary liquidation, winding-up or termination of Compass
Trust I.
The Capital Securities are mandatorily redeemable upon the maturity of the
debentures on January 15, 2027, or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the debentures purchased by
Compass Trust I: (i) in whole or in part, on or after January 15, 2007, and
(ii) in whole (but not in part) at any time within 90 days following the
occurrence and during the continuation of a tax event or capital treatment
event (as defined in the offering circular). As specified in the indenture, if
the debentures are redeemed prior to maturity, the redemption price will be
the principal amount, any accrued but unpaid interest, plus a premium ranging
from 4.12 percent in 2007 to 0.41 percent in 2016.
57
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(7) DERIVATIVE FINANCIAL INSTRUMENTS
The Company is a party to derivative financial instruments in the normal
course of business for trading purposes and for other than trading purposes to
meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. The following table summarizes the contract or
notional amount of all derivative financial instruments as of December 31,
1997 and 1996.
1997 1996
------------------- -------------------
OTHER Other
THAN Than
TRADING TRADING Trading Trading
-------- ---------- -------- ----------
(in Thousands)
Commitments to extend credit.......... $ -- $3,468,099 $ -- $2,889,523
Standby and commercial letters of
credit............................... -- 72,670 -- 70,031
Forward and futures contracts......... 121,925 -- 169,345 --
Interest rate swap agreements......... 13,260 1,561,303 3,587 1,012,493
Floors and caps written............... 149,400 -- 279,900 --
Floors and caps purchased............. 132,000 60,000 302,000 710,000
Other options written................. 5,000 -- -- --
Other options purchased............... 10,525 -- 13,730 --
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby letters of credit are commitments issued by the Company to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions, and expire in
decreasing amounts. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Company holds various assets as collateral supporting those
commitments for which collateral is deemed necessary.
Forward and futures contracts are contracts for delayed delivery of
securities or money market instruments in which the seller agrees to make
delivery of a specified instrument, at a designated future date and at a
specific price or yield. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
securities' values and interest rates.
The Company enters into a variety of interest rate contracts, including
interest rate caps and floors, interest rate options and interest rate swap
agreements, in its trading activities. Interest rate swap transactions
generally involve the exchange of fixed and floating rate interest payment
obligations without the exchange of the underlying principal amounts. Interest
rate options are contracts that allow the holder of the option to purchase or
sell a financial instrument at a specified price and within a specified period
of time from or to the seller, or writer, of the option. As a writer of
options, the Company receives a premium at the outset and then bears the risk
of the unfavorable change in the price of the financial instrument underlying
the option.
Entering into interest rate swap agreements involves not only the risk of
dealing with counterparties and their ability to meet the terms of the
contracts but also the interest rate risk associated with unmatched positions.
Notional principal amounts often are used to express the volume of these
transactions; however, the amounts potentially subject to credit risk are much
smaller.
58
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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, 1997:
Weighted
Weighted Weighted Average
Average Rate* Average Repricing
Notional Carrying Estimated ------------- Years to Frequency
Amount Value++ Fair Value Received Paid Expiration (Days)
-------- -------- ---------- -------- ---- ---------- ---------
(in Thousands)
Trading interest rate
contracts:
Swaps:
Receive fixed versus:
1-month LIBOR......... $ 5,000 $ 77 $ 77 6.23% 6.00% 2.02 30
3-month LIBOR......... 3,000 (11) (11) 5.90 6.05 3.96 90
Prime................. 260 (2) (2) 6.80 8.50 0.71 30
Receive variable
versus:
1-month LIBOR......... 5,000 (77) (77) 6.00 6.23 2.02 30
Caps:
Purchased.............. 61,000 50 50 -- * 1.45 71
Written................ 49,400 (45) (45) * -- 1.26 56
Floors:
Purchased.............. 71,000 264 264 0.06 * 2.01 70
Written................ 100,000 (353) (353) * 0.10 1.65 70
-------- ----- -----
Total................ $294,660 $ (97) $ (97)
======== ===== =====
- --------
* 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, 1997. For caps and floors, the rate shown represents the weighted
average net interest differential between the index rate and the cap or
floor rate.
++Positive carrying values represent assets of the Company while negative
amounts represent liabilities.
In addition to the interest rate contracts shown above, the Company uses
other options and futures in the trading account. At December 31, 1997, the
trading account contained other options purchased and written having weighted
average expiration dates shorter than three months, with a notional balance of
$10.5 million for purchased options and a notional balance of $5.0 million for
written options and estimated fair values of $65,000 and $(31,000),
respectively. The net purchased position in other options was taken in order
to assist in protecting the market value of the trading account against rising
short-term interest rates while maintaining limited risk to declining rates.
At December 31, 1997, futures contracts having a notional principal of $69
million were also used to assist in reducing the price sensitivity of the
trading account.
59
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
For derivative financial instruments held or issued for trading purposes,
the fair values as of December 31, 1997 and 1996, and the average fair value
during those years, are presented in the following table.
1997 1996
--------------------- ---------------------
PERIOD-END AVERAGE Period-End Average
FAIR VALUE FAIR VALUE Fair Value Fair Value
---------- ---------- ---------- ----------
(in Thousands)
Swaps............................... $ (13) $ (62) $ (69) $ (59)
Floors and caps:
Assets............................. 314 386 800 1,386
Liabilities........................ (398) (462) (909) (1,215)
Other options:
Assets............................. 65 186 61 89
Liabilities........................ (31) (65) -- (23)
The net trading profits (losses) for derivative financial instruments during
1997 were $(48,000) for forwards and futures; $56,000 for swaps; $79,000 for
floors and caps; and $(273,000) for other options. Such amounts represent only
a portion of total trading account profits and commissions. The total trading
account profit for 1997 was $14.4 million, an increase of $500,000 from 1996.
Derivative financial instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated financial statements. The Company's exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by
the contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for on-
balance sheet instruments. For interest rate contracts, including caps, floors
and swap transactions, forward and futures contracts and other options, the
contract or notional amounts significantly exceed the ultimate exposure to
credit loss. The Company has credit risk on uncollateralized interest rate
swaps and purchased floors and caps for the amount required to replace such
contracts in the event of counterparty default. At December 31, 1997, the
Company estimates its credit risk in the event of total counterparty default
to be $6.5 million for interest rate swaps and $304,000 for purchased floors
and caps. The Company controls the credit risk of its interest rate contracts
through credit approvals, limits and monitoring procedures.
The Company also has recorded as liabilities certain short-sale transactions
amounting to $52.1 million at December 31, 1997, which could result in losses
to the extent the ultimate obligation exceeds the amount of the recorded
liability. The amount of the ultimate obligation under such transactions will
be affected by movements in the financial markets, which are not determinable,
and the point at which securities are purchased to cover the short sales. The
short-sale transactions relate principally to U.S. Government securities for
which there is an active, liquid market. The Company does not expect the
amount of losses, if any, on such transactions to be material. In addition to
the ongoing monitoring of interest-sensitive assets and liabilities, the
Company enters into various interest rate contracts not held in the trading
account to assist in managing the Company's interest sensitivity. The interest
rate risk factor in these contracts is considered in the overall interest
management strategy and the Company's interest risk management program. The
income or expense associated with interest rate swaps, caps and floors 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.
60
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The following table details various information regarding swaps, caps and
floors used for other than trading purposes as of December 31, 1997.
Weighted Weighted
Weighted Average Average
Average Rate* Expected Repricing
Notional Carrying Estimated ------------- Maturity Frequency
Amount Value Fair Value Received Paid (Years) (Days)
---------- -------- ---------- -------- ---- -------- ---------
(in Thousands)
Non-trading interest
rate contracts:
Swaps:
Pay fixed versus 3-
month LIBOR........... $ 408,000 $ 25 $ (492) 5.81% 5.85% 1.23 90
Receive fixed versus 3-
month LIBOR........... 950,000 1,836 6,551 6.77 5.87 4.08 90
Receive fixed versus 6-
month LIBOR........... 25,000 22 94 6.23 5.81 1.21 180
Basis swaps+........... 178,303 858 196 6.45 6.56 5.65 65
Caps purchased......... 60,000 89 -- -- * 0.36 90
---------- ------- -------
$1,621,303 $ 2,830 $ 6,349
========== ======= =======
- --------
+ On $128.3 million of a total notional amount of $178.3 million, the Company
receives interest based on three-month LIBOR plus 84 basis points and pays
interest based on the one-year Constant Maturity Treasury plus 150 basis
points. On the remaining $50 million notional, the Company receives interest
based on Prime minus 273.5 basis points and pays interest based on the
three-month LIBOR.
* 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, 1997.
At December 31, 1997, swaps, caps and floors acquired for other than trading
purposes were associated with the following asset or liability categories:
Notional Principal Associated With
Total --------------------------------------------------------------------
Notional Investment Certificates Federal Funds FHLB Subordinated
Principal Securities Loans of Deposit Purchased Advances Debentures
---------- ---------- -------- ------------ ------------- -------- ------------
(in Thousands)
Swaps:
Pay fixed.............. $ 408,000 -- $ 8,000 -- $100,000 $300,000 --
Receive fixed.......... 975,000 -- 700,000 $150,000 -- -- $125,000
Basis swaps............ 178,303 $128,303 -- 50,000 -- -- --
Caps purchased.......... 60,000 -- 60,000 -- -- -- --
---------- -------- -------- -------- -------- -------- --------
$1,621,303 $128,303 $768,000 $200,000 $100,000 $300,000 $125,000
========== ======== ======== ======== ======== ======== ========
61
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(8) COMMITMENTS
The Company and its subsidiaries lease certain facilities and equipment for
use in their businesses. The leases for facilities generally run for periods
of 10 to 20 years with various renewal options, while leases for equipment
generally have terms not in excess of 5 years. The majority of the leases for
facilities contain rental escalation clauses with fixed rental increases or
increases tied to changes in market lease rates. Certain real property leases
contain purchase options. Management expects that most leases will be renewed
or replaced with new leases in the normal course of business.
The following is a schedule of future minimum rentals required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1997, for leased facilities (in
thousands):
1998 $ 6,312
1999 5,220
2000 4,343
2001 3,786
2002 2,999
2003-2007 3,098
2008-2012 864
2013-2017 569
2018-2069 1,729
-------
$28,920
=======
Minimum rentals for all operating leases charged to earnings totaled $14.2
million, $12.5 million and $11.9 million for years ended December 31, 1997,
1996 and 1995, respectively.
(9) STOCK OPTION AND STOCK APPRECIATION RIGHT PLANS
The Company has three long-term incentive stock option plans for key senior
officers of the Company and its subsidiaries. The stock option plans provide
for these key employees to purchase shares of the Company's $2.00 par value
common stock at the fair market value at the date of the grant. Pursuant to
the 1982 Long Term Incentive Plan, the 1989 Long Term Incentive Plan and the
1996 Long Term Incentive Plan, 3,712,500, 2,250,000 and 2,850,000 shares,
respectively, of the Company's common stock have been reserved for issuance.
The options granted under the plans may be exercised within 5 years and 10
years from the date of grant. The incentive stock option agreements state that
incentive options may be exercised in whole or in part until expiration date,
but for options issued before 1987 no incentive stock option may be exercised
if an incentive stock option is outstanding that was granted before the
granting of such option. The plans also provide for the granting of stock
appreciation rights to certain holders of nonqualified stock options. A stock
appreciation right allows the holder to surrender an exercisable stock option
in exchange for common stock (at fair market value on the date of exercise),
cash, or in a combination thereof, in an amount equal to the excess of the
fair market value of covered shares over the option price of such shares.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Statement No. 123, Accounting for Stock-Based
Compensation ("FAS123"), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
62
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
Pro forma information regarding net income and earnings per share is
required by FAS123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.12 percent, 5.19 percent and 7.54 percent; dividend yields of 3.33 percent,
3.89 percent and 4.31 percent; volatility factors of the expected market price
of the Company's common stock of 0.213, 0.224 and 0.226; and a weighted-
average expected life of the options of 4.00, 3.67 and 3.78 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The Company's options granted in 1997 vest ratably over a period of three
years, therefore for purposes of pro forma disclosures, the compensation
expense related to these options has been allocated over the vesting period.
Because the vast majority of the Company's options granted in 1996 and all of
the Company's options granted in 1995 vested immediately, the estimated fair
value of the options for those years has been expensed in the year of grant
for purposes of pro forma disclosures. The Company's actual and pro forma
information follows (in thousands except for earnings per share information):
Year Ended December 31
--------------------------
1997 1996 1995
-------- -------- --------
NET INCOME:
As reported.................................. $155,563 $132,444 $119,750
Pro forma.................................... 154,362 130,622 118,638
BASIC EARNINGS PER SHARE:
As reported.................................. $ 2.37 $ 2.04 $ 1.84
Pro forma.................................... 2.35 2.01 1.82
DILUTED EARNINGS PER SHARE:
As reported.................................. $ 2.34 $ 2.03 $ 1.83
Pro forma.................................... 2.32 2.00 1.81
63
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The following summary sets forth activity under the plan for the years ended
December 31:
1997 1996 1995
-------------------- -------------------- --------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
OPTIONS PRICE Options Price Options Price
---------- -------- ---------- -------- ---------- --------
Outstanding, beginning
of the year............ 1,670,625 $16.99 1,408,895 $13.74 1,437,590 $11.73
Granted................ 766,915 29.00 551,922 22.10 343,423 17.35
Exercised.............. (334,279) 14.42 (287,447) 10.88 (344,420) 8.79
Forfeited.............. (53,921) 23.27 (2,745) 14.35 (27,698) 15.43
---------- ---------- ----------
Outstanding, end of the
year................... 2,049,340 $21.70 1,670,625 $16.99 1,408,895 $13.74
========== ========== ==========
Weighted average fair
value of options
granted during the
year................... $ 5.32 $ 3.54 $ 3.24
Exercisable end of the
year................... 1,461,610 1,636,800 1,408,895
Of the 2,049,340 outstanding options at December 31, 1997, 1,461,610 were
exercisable with the remaining 587,730 having a vesting period of three years.
Exercise prices for options outstanding as of December 31, 1997, ranged from
$6.22 to $37.44. Unexercised options with exercise prices of less than $20.00
for 837,758 shares had a weighted average contractual life of 5.1 years and a
weighted average exercise price of $15.02 while unexercised options with
exercise prices greater than $20.00 for 1,211,582 shares had a weighted
average contractual life of 8.4 years and a weighted average exercise price of
$26.32.
At December 31, 1997, the shares under option included nonqualified options
issued to certain executives to acquire 45,000 shares of common stock which
provide for tandem stock appreciation rights that are exercisable only upon
the occurrence of certain contingent events. Because of the restrictions upon
exercise of the stock appreciation rights, no compensation expense has been
recorded with respect to these rights.
The shares under option also included nonqualified options without stock
appreciation rights issued to certain executives to acquire shares of common
stock as follows: 102,282 shares at year-end 1997, 104,586 shares at year-end
1996 and 29,460 shares at year-end 1995.
During 1997 and 1996, the Company issued 94,800 and 59,025 shares,
respectively, of restricted common stock to certain executive officers with a
fair value at issuance of $2,706,224 and $1,296,189, respectively. The shares
issued in 1997 vest ratably over a three year period while the shares issued
in 1996 vest ratably over five years. Because the restricted stock is legally
issued and outstanding, the fair value of the restricted stock at issuance is
reflected in common stock and surplus with a corresponding offset for the
amount of unearned compensation expense. During 1997 and 1996, compensation
expense of $1,010,967 and $216,030, respectively, was recognized in connection
with the restricted stock.
(10) REGULATORY MATTERS AND DIVIDENDS FROM SUBSIDIARIES
The Company and the Subsidiary Banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory --and
possibly additional discretionary -- actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Subsidiary Banks must meet
specific capital guidelines that involve quantitative measures of each bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification of the
Company and the Subsidiary Banks are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
64
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
Quantitative measures established by the regulators to ensure capital
adequacy require the Company and the Subsidiary Banks to maintain minimum core
capital ("Tier I Capital") of at least four percent of risk-weighted assets,
minimum total capital ("Total Qualifying Capital") of at least eight percent
of risk-weighted assets and a minimum leverage ratio of four percent of
adjusted quarterly assets. Management believes, as of December 31, 1997, that
the Company and the Subsidiary Banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the appropriate
regulatory agencies categorized the Subsidiary Banks as "well-capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well-capitalized", the Subsidiary Banks must maintain minimum Total
Qualifying Capital, Tier I Capital and leverage ratios of at least 10 percent,
6 percent and 5 percent, respectively. There are no conditions or events since
that notification that management believes have changed the Subsidiary Banks'
category.
The following table presents the actual capital amounts and ratios of the
Company and its significant subsidiary banks at December 31, 1997 and 1996.
Total Qualifying Capital Tier I Capital Leverage
---------------------------------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------------- ----- -------- -----
AS OF DECEMBER 31, 1997:
Consolidated........... $ 1,207,049 12.36% $960,580 9.84% $960,580 7.45%
Compass Bank........... 649,187 10.97 535,219 9.05 535,219 6.83
Compass Bank-Texas..... 465,456 12.13 417,685 10.88 417,685 7.99
AS OF DECEMBER 31, 1996:
Consolidated........... $ 977,217 11.41% $745,334 8.70% $745,334 6.19%
Compass Bank........... 530,274 10.33 465,896 9.07 465,896 6.44
Compass Bank-Texas..... 390,093 11.35 345,818 10.06 345,818 7.02
Capital amounts and ratios at December 31, 1996, have been restated to
reflect acquisitions in 1997 accounted for under the pooling-of-interests
method of accounting as well as the merger in September, 1997, of the
Company's Florida subsidiary bank into Compass Bank.
Dividends paid by the Subsidiary Banks are the primary source of funds
available to the Company for payment of dividends to its shareholders and
other needs. Applicable federal and state statutes and regulations impose
restrictions on the amounts of dividends that may be declared by the
Subsidiary Banks. In addition to the formal statutes and regulations,
regulatory authorities also consider the adequacy of each bank's total capital
in relation to its assets, deposits and other such items. Capital adequacy
considerations could further limit the availability of dividends from the
Subsidiary Banks.
At December 31, 1997, approximately $230.8 million of the Subsidiary Banks'
net assets were available for payment of dividends without prior regulatory
approval. Additionally, the Company's Subsidiary Banks could have paid
additional dividends to the parent holding company in the amount of $139.3
million while continuing to meet the capital requirements for "well-
capitalized" banks at December 31, 1997.
65
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(11) BUSINESS COMBINATIONS
Completed Acquisitions
Summarized below are the acquisitions completed by the Company during the
years ended December 31, 1997 and 1996, along with the related accounting
treatment. All of the acquisitions completed by the Company during 1997 were
accounted for under the pooling-of-interests method of accounting and,
accordingly, all prior period information has been restated.
EQUITY/ COMMON
dollars in millions LOCATION DATE ASSETS DEPOSITS* SHARES ISSUED
- ------------------------------------------------------------------------------------------
POOLINGS-OF-INTEREST
Central Texas Bancorp,
Inc. .................. Waco, Texas 7/15/97 $207 $ 19 1,537,444
Greater Brazos Valley
Bancorp, Inc........... College Station, Texas 4/17/97 58 3 323,918
Horizon Bancorp, Inc.... Austin, Texas 3/12/97 154 11 1,333,220
Enterprise National
Bank................... Jacksonville, Florida 1/15/97 171 18 1,620,782
Texas American Bank..... San Antonio, Texas 9/27/96 65 5 487,466
Royall Financial
Corporation............ Palestine, Texas 7/16/96 109 11 824,979
Equitable BankShares,
Inc.................... Dallas, Texas 4/11/96 184 13 1,432,443
Flower Mound Bancshares,
Inc.................... Dallas, Texas 2/1/96 46 5 514,395
PURCHASES
ProBank................. Houston, Texas 10/24/96 61 59 --
CFB Bancorp, Inc........ Jacksonville, Florida 8/23/96 302 253 1,988,936
Peoples Bancshares,
Inc.................... Belton, Texas 5/21/96 136 126 --
Post Oak Bank........... Houston, Texas 4/22/96 323 276 --
- --------
* For business combinations accounted for under the pooling-of-interests
method of accounting, acquired equity is presented. For business
combinations accounted for under the purchase method of accounting, acquired
deposits is presented.
Presented below is summary operating information for the Company showing the
effect of the business combinations completed during 1997.
As Previously Effect of Currently
Reported Poolings Reported
------------- --------- ---------
(in Thousands)
1996:
Net interest income.......................... $402,427 $28,745 $431,172
Provision for loan losses.................... 17,630 2,585 20,215
Noninterest income........................... 154,740 6,651 161,391
Noninterest expense.......................... 337,486 26,788 364,274
Net income................................... 128,927 3,517 132,444
1995:
Net interest income.......................... $368,954 $25,605 $394,559
Provision for loan losses.................... 11,008 656 11,664
Noninterest income........................... 127,750 6,415 134,165
Noninterest expense.......................... 308,228 22,903 331,131
Net income................................... 114,225 5,525 119,750
66
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The entities acquired in 1997 that were accounted for under the pooling-of-
interests method of accounting had net interest income of $6.4 million and net
income of $1.1 million prior to their respective acquisition dates in 1997.
Acquisitions Completed after December 31, 1997
On January 13, 1998, the Company completed the acquisition of G.S.B.
Investments, Inc. ("GSB") of Gainesville, Florida, and its bank subsidiary,
Gainesville State Bank, with the issuance of 1,649,807 shares of the Company's
common stock. At the date of closing, GSB had assets of $213 million and
equity of $22 million. The transaction was accounted for under the pooling-of-
interests method of accounting and, accordingly, all prior period information
will be restated in the first quarter of 1998.
On January 29, 1998, the Company completed the acquisition of First
University Corporation ("First University"), and its subsidiary, West
University Bank, N.A., of Houston, Texas with the issuance of approximately
350,000 shares of the Company's common stock. At the date of closing, First
University had assets of $68 million and equity of $4 million. The transaction
was accounted for under the pooling-of-interests method of accounting and,
accordingly, all prior period information will be restated in the first
quarter of 1998.
On February 9, 1998, the Company completed the acquisition of Fidelity
Resources Company ("Fidelity"), and its subsidiary, Fidelity Bank, N.A., of
Dallas, Texas with the issuance of approximately 1,800,000 shares of the
Company's common stock. At the date of closing, Fidelity had assets of $335
million and equity of $20 million. The transaction was accounted for under the
pooling-of-interests method of accounting and, accordingly, all prior period
information will be restated in the first quarter of 1998.
(12) BENEFIT PLANS
The Company sponsors a defined benefit pension plan pursuant to which
participants are entitled to an annual benefit upon retirement equal to a
percentage of the average base compensation (generally defined as direct cash
compensation exclusive of bonuses and commissions) earned in the five
consecutive years of benefit service which produces the highest average. The
percentage amount of the benefit is determined by multiplying the number of
years, up to 30, of a participant's service with the Company by 1.8 percent.
Benefits are reduced by Social Security payments at the rate of 1.8 percent of
primary Social Security benefits times years of service up to 30 years. All
employees of the Company who are over the age of 21 and have worked 1,000
hours or more in their first 12 months of employment or 1,000 hours or more in
any calendar year thereafter are eligible to participate. 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.
67
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31:
1997 1996 1995
-------- -------- --------
(in Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits of $45,284, $35,267 and $34,204
for 1997, 1996 and 1995, respectively.......... $(48,162) $(37,473) $(36,131)
======== ======== ========
Projected benefit obligation for service
rendered to date............................... $(76,608) $(57,858) $(56,608)
Plan assets at fair value, primarily listed
stocks and U.S. bonds.......................... 74,841 60,050 49,952
-------- -------- --------
Plan assets in excess of (less than) projected
benefit obligation............................. (1,767) 2,192 (6,656)
Unrecognized prior service cost................. 925 (171) (185)
Unrecognized net loss........................... 13,090 7,461 15,016
Unrecognized net asset being amortized over 13
years.......................................... (472) (916) (1,360)
-------- -------- --------
Net pension asset included in other assets...... $ 11,776 $ 8,566 $ 6,815
======== ======== ========
Net pension cost for 1997, 1996 and 1995 included the following components:
1997 1996 1995
-------- ------- -------
(in Thousands)
Service cost-benefits earned during the period..... $ 4,228 $ 4,191 $ 2,832
Interest cost on projected benefit obligation...... 4,646 4,197 3,486
Actual return on plan assets....................... (10,083) (5,735) (6,703)
Net amortization and deferral...................... 4,150 1,212 2,682
-------- ------- -------
Net periodic pension cost.......................... $ 2,941 $ 3,865 $ 2,297
======== ======= =======
The weighted average discount rate was 8.0 percent for 1997, 7.50 percent
for 1996 and 8.50 percent for 1995. The rate of increase in future
compensation levels was six percent for 1997, 1996 and 1995. Both rates are
used in determining the actuarial present value of the projected benefit
obligation. The assumed long-term rate of return on plan assets was 9.50
percent in 1997 and 1996 and 10.50 percent in 1995.
The Company maintains an employee stock purchase plan to which contributions
are made in amounts determined by the Board of Directors of the Company. Such
contributions are invested in stock of the Company 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 $3.1 million during
1997, $4.8 million during 1996, and $1.1 million during 1995.
The Company has a qualified employee benefit plan under section 401(k) of
the Internal Revenue Code. Employees can contribute up to 10 percent of their
salaries to the plan on a pretax basis subject to regulatory limits and the
Company at its discretion can match up to 100 percent of 6 percent of the
participants' compensation. The Company's contributions are based on
predetermined income levels and totaled $2.4 million in 1997, $2.1 million in
1996 and $1.4 million in 1995. The administrative costs incurred by the plan
are paid by the Company at no cost to the participants.
The Company also has a monthly investment plan. Under the plan, employees
may contribute monthly up to 10 percent of their salary and the Company
contributes 30 cents for each dollar of the employees' contributions toward
the purchase of common stock of the Company. The stock is purchased in the
open market and brokerage fees and other incidental expenses are absorbed by
the Company.
68
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
In 1995, the Company established a deferred compensation plan for executive
officers which enables certain executive officers of the Company to defer a
portion of their annual salary. In 1997, the Company established benefit plans
for certain key executives that provide additional retirement benefits not
otherwise provided in the Company's basic benefit plans.
(13) OTHER NONINTEREST EXPENSE
The major components of other noninterest expense are as follows:
Year Ended December 31
--------------------------
1997 1996 1995
-------- -------- --------
(in Thousands)
Marketing........................................... $ 8,914 $ 9,446 $ 7,834
Professional services............................... 32,120 26,409 26,271
Supplies............................................ 11,272 9,873 9,295
Amortization of intangibles......................... 10,677 8,584 5,802
Other............................................... 60,585 58,670 54,379
-------- -------- --------
$123,568 $112,982 $103,581
======== ======== ========
(14) INCOME TAXES
For the years ended December 31, 1997, 1996 and 1995, income tax expense
attributable to income from operations consists of:
1997 1996 1995
------- ------- -------
(in Thousands)
Current income tax expense:
Federal............................................... $76,845 $67,862 $59,018
State................................................. 2,217 5,069 4,771
------- ------- -------
Total............................................... 79,062 72,931 63,789
------- ------- -------
Deferred income tax expense:
Federal............................................... 3,349 1,867 2,459
State................................................. 519 832 (69)
------- ------- -------
Total............................................... 3,868 2,699 2,390
------- ------- -------
Total income tax expense............................... $82,930 $75,630 $66,179
======= ======= =======
During 1997, the Company made income tax payments of approximately $69.8
million and received cash income tax refunds amounting to approximately $2.0
million. For 1996 and 1995, income tax payments were approximately $72.2
million and $64.3 million, respectively. Cash income tax refunds amounted to
approximately $1.4 million for 1996 and $700,000 for 1995. Applicable income
tax expense of $2.8 million, $3.6 million and $1.0 million for 1997, 1996 and
1995, respectively, on net securities gains is included in the provision for
income taxes.
69
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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:
1997 1996 1995
------------------ ------------------ ------------------
PERCENT Percent Percent
OF PRETAX of Pretax of Pretax
AMOUNT EARNINGS Amount Earnings Amount Earnings
------- --------- ------- --------- ------- ---------
(in Thousands)
Income tax expense at
federal statutory
rate................... $83,472 35.0% $72,826 35.0% $65,075 35.0%
Increase (decrease)
resulting from:
Tax-exempt interest.... (2,839) (1.2) (3,084) (1.5) (3,411) (1.8)
State income tax
expense net of federal
income tax benefit.... 1,778 0.8 3,834 1.8 3,059 1.6
Other.................. 519 0.2 2,054 1.0 1,456 0.8
------- ---- ------- ---- ------- ----
Income tax expense... $82,930 34.8% $75,630 36.3% $66,179 35.6%
======= ==== ======= ==== ======= ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997, 1996 and 1995, are presented below:
1997 1996 1995
------- ------- -------
(in Thousands)
Deferred tax assets:
Allowance for loan losses............................. $42,008 $41,007 $37,122
Loan fees............................................. 509 1,313 2,842
Accrued expenses...................................... 644 1,603 970
Net unrealized losses on securities available for
sale................................................. -- 1,673 --
Other deferred tax assets............................. 3,676 4,039 2,521
------- ------- -------
Total assets......................................... 46,837 49,635 43,455
Deferred tax liabilities:
Premises and equipment................................ 8,025 5,564 5,249
Lease financing....................................... 9,491 5,637 3,999
Prepaid pension expense............................... 4,129 3,168 2,496
Core deposit and other acquired intangibles........... 10,919 12,521 6,806
Net unrealized gains on securities available for
sale................................................. 341 -- 7,160
Other deferred tax liabilities........................ 3,296 3,343 2,959
------- ------- -------
Total liabilities.................................... 36,201 30,233 28,669
------- ------- -------
Net deferred tax asset................................. $10,636 $19,402 $14,786
======= ======= =======
70
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(15) PARENT COMPANY
The condensed financial information for Compass Bancshares, Inc. (Parent
Company Only) is presented as follows:
Balance Sheets
December 31
----------------------
1997 1996
---------- ----------
(in Thousands)
ASSETS
Cash and due from banks................................ $ 453 $ 87
Collateralized mortgage obligation inverse floaters.... 25,714 25,973
Reverse repurchase agreements with affiliates.......... 90,797 123,179
Investment in subsidiaries:
Banks................................................. 615,981 505,316
Bank holding companies................................ 438,950 373,042
Other................................................. 69,863 64,296
---------- ----------
1,124,794 942,654
Other assets........................................... 6,219 4,357
---------- ----------
TOTAL ASSETS........................................ $1,247,977 $1,096,250
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Commercial paper....................................... $ 52,410 $ 47,896
Accrued expenses and other liabilities................. 8,008 17,899
Other borrowings:
Junior subordinated deferrable interest debentures
(Note 6)............................................. 103,093 --
Subordinated debentures and other borrowings.......... 124,458 181,366
---------- ----------
Total liabilities................................... 287,969 247,161
Shareholders' equity:
Common stock of $2 par value:
Authorized -- 100,000,000 shares; Issued --
65,990,872 shares in 1997 and 43,734,959 shares in
1996................................................ 131,982 87,470
Loans to finance stock purchases...................... (4,675) (6,026)
Unearned restricted stock............................. (2,775) (1,080)
Surplus............................................... 87,636 73,378
Net unrealized holding gain (loss) on available-for-
sale securities...................................... 543 (2,890)
Retained earnings..................................... 747,297 698,237
---------- ----------
Total shareholders' equity.......................... 960,008 849,089
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $1,247,977 $1,096,250
========== ==========
71
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(15) PARENT COMPANY, Continued
Statements of Income
Year Ended December 31
----------------------------
1997 1996 1995
-------- -------- --------
(in Thousands)
INCOME:
Cash dividends from subsidiaries................ $ 35,000 $176,292 $ 71,916
Interest on investments with affiliates......... 8,114 4,920 8,275
Other........................................... 3,721 3,274 2,885
-------- -------- --------
TOTAL INCOME.................................. 46,835 184,486 83,076
EXPENSE:
Interest on commercial paper and other
borrowings..................................... 19,757 15,435 16,928
Other........................................... 2,969 2,976 4,617
-------- -------- --------
TOTAL EXPENSE................................. 22,726 18,411 21,545
Income before income tax benefit and equity in
undistributed earnings of subsidiaries....... 24,109 166,075 61,531
Applicable income tax benefit.................... (4,091) (3,864) (3,849)
-------- -------- --------
28,200 169,939 65,380
EQUITY IN UNDISTRIBUTED EARNINGS (DIVIDENDS IN
EXCESS OF EARNINGS) OF SUBSIDIARIES:
Banks........................................... 62,773 (29,592) 23,479
Bank holding companies.......................... 64,039 (8,030) 31,496
Other........................................... 551 127 (605)
-------- -------- --------
127,363 (37,495) 54,370
-------- -------- --------
NET INCOME.................................... $155,563 $132,444 $119,750
======== ======== ========
72
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(15) PARENT COMPANY, Continued
Statements of Cash Flows
Year Ended December 31
------------------------------
1997 1996 1995
--------- --------- --------
(in Thousands)
OPERATING ACTIVITIES:
Net income.................................... $ 155,563 $ 132,444 $119,750
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization................ 1,124 324 95
Dividends in excess of earnings (equity in
undistributed earnings)..................... (127,363) 37,495 (54,370)
(Increase) decrease in interest receivable... (1,003) 28 (60)
(Increase) decrease in other assets.......... (1,719) (198) 572
Increase (decrease) in interest payable...... 3,911 (12) 214
Increase (decrease) in taxes payable......... 213 (269) (408)
Increase (decrease) in other payables........ (14,465) 2,570 1,651
--------- --------- --------
Net cash provided by operating activities... 16,261 172,382 67,444
INVESTING ACTIVITIES:
Proceeds from maturities/calls of investment
securities................................... 523 187 84
(Increase) decrease in reverse repurchase
agreements with affiliates................... 32,382 (23,635) (36,919)
Capital contributions made to subsidiaries.... (9,582) (4,274) --
Acquisition of banks.......................... -- (98,482) --
Advances to subsidiaries on notes............. (40,000) -- --
(Purchases) sales of premises and equipment... 455 (64) (426)
--------- --------- --------
Net cash used by investing activities....... (16,222) (126,268) (37,261)
FINANCING ACTIVITIES:
Net increase (decrease) in other short-term
borrowings................................... (52,486) 47,584 11,982
Proceeds from other borrowings................ 103,093 -- --
Repayment of other borrowings................. -- -- (2,974)
Common dividends paid......................... (61,558) (51,546) (43,674)
Proceeds from exercise of stock options....... 2,247 571 963
Proceeds from repayments of loans to finance
stock purchases.............................. 2,598 2,564 2,343
Cash paid for fractional shares............... (56) -- --
Exercise of stock options of pooled entities
prior to acquisition......................... 6,489 -- --
Purchase of treasury stock.................... -- (45,342) --
--------- --------- --------
Net cash provided (used) by financing
activities................................. 327 (46,169) (31,360)
--------- --------- --------
Net increase (decrease) in cash and due from
banks........................................ 366 (55) (1,177)
Cash and due from banks at beginning of year.. 87 142 1,319
--------- --------- --------
Cash and due from banks at end of year........ $ 453 $ 87 $ 142
========= ========= ========
73
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Statement No. 107, Disclosures about Fair Value of
Financial Instruments ("FAS107") requires disclosure of fair value information
about financial instruments, whether or not recognized on the face of the
balance sheet, for which it is practicable to estimate that value. The
assumptions used in the estimation of the fair value of the Company's
financial instruments are detailed below. Where quoted prices are not
available, fair values are based on estimates using discounted cash flows and
other valuation techniques. The use of discounted cash flows can be
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. The following disclosures should not be
considered a surrogate of the liquidation value of the Company or its
Subsidiary Banks, but rather represent a good-faith estimate of the increase
or decrease in value of financial instruments held by the Company since
purchase, origination or issuance. The Company has not undertaken any steps to
value any intangibles, which is permitted by the provisions of FAS107.
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Cash and due from banks and interest bearing deposits with other banks:
Fair value equals the carrying value of such assets.
Investment securities and investment securities available for sale: Fair
values for investment securities are based on quoted market prices.
Trading account securities: Fair value and book value of the Company's
trading account securities (including off-balance sheet instruments) are
based on quoted market prices where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments except in the case of certain options and swaps where pricing
models are used.
Federal funds sold and securities purchased under agreements to resell: Due
to the short-term nature of these assets, the carrying values of these
assets approximate their fair value.
Loans: Loans were valued using discounted cash flows. The discount rate
used to determine the present value of these loans was based on interest
rates currently being charged by the Subsidiary Banks on comparable loans
as to credit risk and term.
Off-balance sheet instruments: Fair value of the Company's off-balance
sheet instruments (futures, forwards, swaps, caps, floors and options
written) are based on quoted market prices. The Company's loan commitments
are negotiated at current market rates and are relatively short-term in
nature and, as a matter of policy, the Company generally makes commitments
for fixed rate loans for relatively short periods of time, therefore, the
estimated value of the Company's loan commitments approximates carrying
amount.
Deposit liabilities: The fair values of demand deposits are, as required by
FAS107, equal to the carrying value of such deposits. Demand deposits
include noninterest bearing demand deposits, savings accounts, NOW accounts
and money market demand accounts. The fair value of variable rate term
deposits, those repricing within six months or less, approximates the
carrying value of these deposits. Discounted cash flows have been used to
value fixed rate term deposits and variable rate term deposits having an
interest rate floor that has been reached. The discount rate used is based
on interest rates currently being offered by the Subsidiary Banks on
comparable deposits as to amount and term.
Short-term borrowings: The carrying value of federal funds purchased,
securities sold under agreements to repurchase and other short-term
borrowings approximates their carrying values.
FHLB and other borrowings: The fair value of the Company's fixed rate
borrowings are estimated using discounted cash flows, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amount of the Company's variable rate
borrowings approximates their fair values. FHLB and other borrowings
includes the Capital Securities.
74
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
AT DECEMBER 31, 1997 At December 31, 1996
--------------------- ---------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
---------- ---------- ---------- ----------
(in Thousands)
FINANCIAL INSTRUMENTS:
Assets:
Cash and due from banks......... $ 693,687 $ 693,687 $ 713,274 $ 713,274
Interest bearing deposits in
other banks.................... 399 399 492 492
Investment securities........... 1,001,478 1,019,354 1,121,644 1,128,747
Investment securities available
for sale....................... 2,309,710 2,309,710 2,120,674 2,120,674
Trading account securities...... 112,460 112,460 91,453 91,453
Federal funds sold and
securities purchased under
agreements to resell........... 69,073 69,073 105,040 105,040
Loans........................... 8,671,556 8,697,571 7,876,672 7,864,463
Off-balance sheet instruments... 2,830 6,349 2,424 (20)
Liabilities:
Noninterest bearing deposits.... $2,009,985 $2,009,985 $1,907,204 $1,907,204
Interest bearing deposits....... 7,622,560 7,643,331 7,876,517 7,912,408
Federal funds purchased......... 927,795 927,795 606,414 606,414
Securities sold under agreements
to repurchase.................. 241,372 241,372 205,053 205,053
Other short-term borrowings..... 180,530 180,530 201,901 201,901
FHLB and other borrowings....... 1,387,121 1,388,785 702,771 705,717
75
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(17) QUARTERLY RESULTS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 1997 and
1996 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in Thousands Except Per Share Data)
1997
TOTAL INTEREST INCOME..... $ 227,158 $ 237,632 $ 241,059 $ 243,185
TOTAL INTEREST EXPENSE.... 110,874 117,114 122,600 123,281
NET INTEREST INCOME....... 116,284 120,518 118,459 119,904
PROVISION FOR LOAN
LOSSES................... 5,354 4,809 6,690 5,559
NET INTEREST INCOME AFTER
PROVISION FOR LOAN
LOSSES................... 110,930 115,709 111,769 114,345
TOTAL NONINTEREST INCOME.. 40,871 43,229 46,574 50,793
TOTAL NONINTEREST
EXPENSE.................. 94,127 99,780 98,616 103,204
INCOME TAX EXPENSE........ 21,040 21,403 20,299 20,188
NET INCOME................ 36,634 37,755 39,428 41,746
PER SHARE:
BASIC EARNINGS........... 0.56 0.57 0.60 0.64
DILUTED EARNINGS......... 0.55 0.57 0.59 0.63
CASH DIVIDENDS........... 0.237 0.237 0.237 0.237
STOCK PRICE RANGE:
HIGH.................... 32 1/8 37 1/4 39 3/4 46 5/8
LOW..................... 26 29 1/8 34 1/2 37 1/8
CLOSE................... 29 5/8 33 5/8 38 7/8 43 3/4
1996
Total interest income..... $ 206,563 $ 211,646 $ 219,584 $ 227,612
Total interest expense.... 104,020 106,004 110,452 113,757
Net interest income....... 102,543 105,642 109,132 113,855
Provision for loan
losses................... 3,715 5,405 4,950 6,145
Net interest income after
provision for loan
losses................... 98,828 100,237 104,182 107,710
Total noninterest income.. 44,933 36,211 39,094 41,153
Total noninterest
expense.................. 82,917 85,615 100,873 94,869
Income tax expense........ 22,090 17,911 15,479 20,150
Net income................ 38,754 32,922 26,924 33,844
Per share:
Basic earnings........... 0.59 0.52 0.42 0.51
Diluted earnings......... 0.59 0.51 0.42 0.51
Cash dividends........... 0.213 0.213 0.213 0.213
Stock price range:
High.................... 23 1/8 23 1/2 23 1/8 26 1/2
Low..................... 20 1/2 21 5/8 21 23
Close................... 21 1/2 21 7/8 22 7/8 26 1/2
76
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Executive Compensation and
Other Information" in the Proxy Statement for the Annual Meeting of
Shareholders which is to be filed with the Securities and Exchange Commission.
ITEM 11 -- EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation and Other Information" in the Proxy
Statement for the Annual Meeting of Shareholders which is to be filed with the
Securities and Exchange Commission; provided, however, that such incorporation
by reference shall not be deemed to specifically incorporate by reference the
information referred to in Item 402(a)(8) of Securities and Exchange
Commission Regulation S-K.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from the
sections entitled "Holdings of Voting Securities" and "Election of Directors"
in the Proxy Statement for the Annual Meeting of Shareholders which is to be
filed with the Securities and Exchange Commission.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
section entitled "Certain Transactions" in the Proxy Statement for the Annual
Meeting of Shareholders which is to be filed with the Securities and Exchange
Commission.
77
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............................................ 41
Consolidated Balance Sheets at
December 31, 1997 and 1996............................................. 42
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995....................................... 43
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995....................................... 44
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................................... 45
Summary of Significant Accounting Policies --
December 31, 1997, 1996 and 1995....................................... 46
Notes to Consolidated Financial Statements --
December 31, 1997, 1996 and 1995....................................... 52
Quarterly Results (Unaudited)........................................... 76
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
(3) Articles of Incorporation and By-Laws of Compass Bancshares, Inc.
(a) Restated Certificate of Incorporation of Compass Bancshares,
Inc., dated May 17, 1982
(b) Certificate of Amendment, dated May 20, 1986, to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-4, Registration No. 33-46086
filed with the Commission)
(c) Certificate of Amendment, dated May 15, 1987, to Restated
Certificate of Incorporation of Compass Bancshares, Inc.
(incorporated by reference to Exhibit 3.1.2 to the Company's
Post-Effective Amendment No. 1 to Registration Statement on
Form S-4, Registration No. 33-10797 filed with the Commission)
(d) Certificate of Amendment, dated September 19, 1994, to Restated
Certificate of Incorporation of Compass Bancshares, Inc. (incorporated
by reference to Exhibit 3.5(1) to the Company's Registration Statement
on Form S-4, Registration No. 33-55899 filed with the Commission)
(e) Certificate of Amendment, dated November 8, 1993 to Restated Certificate
of Incorporation of Compass Bancshares, Inc. (incorporated by reference
to Exhibit 3(d) to the Company's Registration Statement on Form S-4,
Registration No. 33-51919 filed with the Commission)
(f) Bylaws of Compass Bancshares, Inc. (Amended and Restated as of March 15,
1982)
78
(c) EXHIBITS (CONTINUED)
Page
----
(10)Material Contracts
(a) Compass Bancshares, Inc., 1982 Long Term Incentive Plan
(incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form S-8 filed June 15, 1983, with the
Commission)
(b) Compass Bancshares, Inc., 1989 Long Term Incentive Plan
(incorporated by reference to Exhibit 28 to the Company's
Registration Statement on Form S-8 filed February 21, 1991, with
the Commission)
(c) Compass Bancshares, Inc., 1996 Long Term Incentive Plan
(incorporated by reference to Exhibit 4(g) to the Company's
Registration Statement on Form S-8, Registration No. 333-15117,
filed October 30, 1996, with the Commission)
(d) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and D. Paul Jones, Jr. (incorporated by reference
to Exhibit 10(d) to the December 31, 1994 Form 10-K filed with the
Commission)
(e) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Jerry W. Powell (incorporated by reference to
Exhibit 10(e) to the December 31, 1994 Form 10-K filed with the
Commission)
(f) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Garrett R. Hegel (incorporated by reference
to Exhibit 10(f) to the December 31, 1994 Form 10-K filed with the
Commission)
(g) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Byrd Williams (incorporated by reference to
Exhibit 10(g) to the December 31, 1994 Form 10-K filed with the
Commission)
(h) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Charles E. McMahen (incorporated by reference
to Exhibit 10(h) to the December 31, 1994 Form 10-K filed with the
Commission)
(i) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and G. Ray Stone (incorporated by reference to
Exhibit 10(i) to the Company's Registration Statement on Form S-8,
Registration No. 333-15373, filed November 1, 1996, with the
Commission)
(j) Compass Bancshares, Inc., Employee Stock Ownership Benefit
Restoration Plan, date as of May 1, 1997
(k) Compass Bancshares, Inc., Supplemental Retirement Plan, dated as
of May 1, 1997
(l) Deferred Compensation Plan for Compass Bancshares, Inc., dated as
of February 1, 1996
(12)Statement Re: Computation of Ratios................................. 80
(21)Subsidiaries of the Registrant...................................... 81
(23)Consents of experts and counsel
(27)Financial Data Schedule (filed electronically only)
Certain financial statement schedules and exhibits have been omitted because
they are not applicable.
79
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
COMPASS BANCSHARES, INC.
Date: February 16, 1998
By /s/ D. Paul Jones, Jr.
___________________________________
D. PAUL JONES, JR.
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
Date: February 16, 1998
By /s/ Garrett R. Hegel
___________________________________
GARRETT R. HEGEL
CHIEF FINANCIAL OFFICER
Date: February 16, 1998
By /s/ Michael A. Bean
___________________________________
MICHAEL A. BEAN
CHIEF ACCOUNTING OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS D. PAUL JONES, JR., JERRY W. POWELL AND DANIEL
B. GRAVES, AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AS AGENT
WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION FOR HIM AND IN HIS NAME,
PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS TO
THIS FORM 10-K AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER
DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS WITH FULL POWER
AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY AND TO ALL INTENTS
AND PURPOSES AS THEY MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, AND THEIR SUBSTITUTE OR
SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
DIRECTORS DATE
/s/ W. Eugene Davenport February 16, 1998
- -------------------------------------
W. EUGENE DAVENPORT
- -------------------------------------
CHARLES W. DANIEL
- -------------------------------------
JACK C. DEMETREE
82
SIGNATURES, CONTINUED
DIRECTORS DATE
/s/ Marshall Durbin, Jr. February 16, 1998
- -------------------------------------
MARSHALL DURBIN, JR.
/s/ Tranum Fitzpatrick February 16, 1998
- -------------------------------------
TRANUM FITZPATRICK
/s/ George W. Hansberry February 16, 1998
- -------------------------------------
GEORGE W. HANSBERRY
/s/ D. Paul Jones, Jr. February 16, 1998
- -------------------------------------
D. PAUL JONES, JR.
/s/ John S. Stein February 16, 1998
- -------------------------------------
JOHN S. STEIN
/s/ Robert J. Wright February 16, 1998
- -------------------------------------
ROBERT J. WRIGHT
83