Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NO. 0-6032
COMPASS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0593897
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
15 SOUTH 20TH STREET
BIRMINGHAM, ALABAMA 35233
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 933-3000
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $2 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of January 31, 1995, the aggregate market value of voting stock held by non-
affiliates was $942,893,559.
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, 1995
----- -------------------------------
Common Stock, $2 Par Value 36,976,218
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
----------------------------------- ----------------------------------
Proxy Statement for 1995 annual Part III
meeting except for information
referred to in Item 402(a)(8) of
Regulation S-K
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1 -- BUSINESS
Compass Bancshares, Inc. (the "Company") is a bank holding company with its
principal place of business in Birmingham, Alabama. The Company was organized
in 1970 and commenced business in late 1971 upon the acquisition of Central
Bank & Trust Co. and State National Bank. The Company subsequently acquired
substantially all of the outstanding stock of additional banks located in
Alabama, 11 of which were merged in late 1981 to create Central Bank of the
South, Alabama's first statewide bank. In February, 1987, the Company acquired
First National Bank of Crosby near Houston, Texas, and became the first out-
of-state holding company to acquire a bank in Texas. The Company first
expanded into Florida in July, 1991, when it acquired Citizens & Builders
Federal Savings, F.S.B., in Pensacola, Florida. In November, 1993, the Company
changed its name from Central Bancshares of the South, Inc. to Compass
Bancshares, Inc. and Central Bank of the South, the Company's lead bank
subsidiary, changed its name to Compass Bank ("Compass Bank").
In addition to Compass Bank, the Company also owns Compass Bank, a Florida
state member bank headquartered in Jacksonville, Florida ("Compass Bank-
Florida"), Central Bank of the South, an Alabama banking corporation
headquartered in Anniston, Alabama, and Compass Banks of Texas, Inc., a
Delaware bank holding company ("Compass of Texas"), which owns Compass Bank-
Houston in Houston, Texas, and Compass Bank-Dallas in Dallas, Texas. The bank
subsidiaries of the Company and Compass of Texas are referred to collectively
herein as the "Subsidiary Banks". Compass of Texas also owns River Oaks Trust
Company with offices in Houston and Dallas, Texas.
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide them with capital and services
of various kinds. The Company derives substantially all of its income from
dividends from its subsidiaries. Such dividends are determined on an
individual basis, generally in relation to each subsidiary's earnings and
capital position.
SUBSIDIARY BANKS
Compass Bank conducts a general commercial banking and trust business at 90
locations in 47 communities in Alabama. Compass Bank-Houston conducts a
general commercial banking business from 38 locations in Houston, Texas and
Compass Bank-Dallas conducts a general commercial banking business from 21
banking offices in Dallas and Collin Counties, Texas. River Oaks Trust Company
offers a full range of trust services to customers in Texas through its
offices in Houston and Dallas. Compass Bank-Florida conducts a general
commercial banking business from 5 locations in Pensacola, Florida, 18
locations in Jacksonville, Florida and 6 locations in Ft. Walton Beach,
Florida. Central Bank of the South primarily provides cash management services
to commercial customers of the Subsidiary Banks.
The Subsidiary Banks perform banking services customary for full service
banks of similar size and character for their customers in Alabama and Florida
and the two largest metropolitan markets in Texas. Such services include
receiving demand and time deposit accounts, making personal and commercial
loans and furnishing personal and commercial checking accounts. The Trust
Division of Compass Bank and River Oaks Trust Company offer customers in
Alabama, Texas, North Carolina, Georgia and Florida a variety of fiduciary
services, including the administration and investment of funds of estates,
trusts and employee benefit plans. Other trust services include custodial and
portfolio management services, and acting as fiscal and paying agent and
trustee under corporate and government trust indentures. Through Compass
Bancshares Insurance, Inc., a wholly-owned subsidiary of Compass Bank, the
Subsidiary Banks make available to their customers and others, as agent for a
variety of insurance companies, term life insurance, fixed-rate annuities and
other insurance products.
The Subsidiary Banks provide correspondent banking services including loan
participations, investment services, and audit services to approximately 1,000
financial institutions located throughout the Southeast and Southwest. Through
the Correspondent and Investment Services Division of Compass Bank, the
Subsidiary Banks distribute or make available a variety of investment services
and products to institutional
1
and individual investors including sales of municipal bonds, U.S. Government
securities and asset/liability services. Through Compass Brokerage, Inc., a
wholly-owned subsidiary of Compass Bank, the Subsidiary Banks also provide
discount brokerage services, mutual funds, and variable-rate annuities to
individuals and businesses. Through Compass Bank's wholly-owned subsidiary,
Compass Financial Corporation, the Subsidiary Banks provide lease financing
services to individuals and businesses. Compass Mortgage Corporation, a
subsidiary of Compass Bank, was organized in 1992 as a full-service mortgage
corporation and currently originates residential mortgage loans in Alabama and
engages in mortgage banking activities in several states, including Texas and
Florida.
NONBANKING SUBSIDIARIES
Through wholly-owned subsidiaries, the Company is engaged in providing
credit-related insurance products to customers of the Subsidiary Banks and
owning real estate for bank premises. Revenues from operation of these
subsidiaries do not presently constitute a significant portion of the Company's
total operating revenues. The Company may subsequently engage in other
activities permissible for registered bank holding companies when suitable
opportunities develop. Any proposal for such further activities is subject to
approval by appropriate regulatory authorities. (See "Supervision and
Regulation".)
ACQUISITIONS
The Company may seek to acquire other banks and banking offices when suitable
opportunities develop. Discussions are held from time to time with institutions
primarily in Texas, Florida and Alabama about their possible affiliation with
the Company. It is impossible to predict accurately whether any discussions
will lead to agreement. Any bid or proposal for the acquisition of additional
banks is subject to approval by appropriate regulatory authorities. (See
"Supervision and Regulation".)
Since the Company first expanded to Texas in 1987 and to Florida in 1991, the
Company has acquired 20 financial institutions and numerous branch offices in
Texas and Florida. Acquisitions have been made on a competitive bid basis from
the Federal Deposit Insurance Corporation ("FDIC") and the Resolution Trust
Corporation ("RTC") and as the result of negotiations with boards of directors
and shareholders of the institutions. A list of the acquisitions completed
during the past three years with their asset size and closing dates follows (in
Thousands):
Assets Method of
Acquisition Date Acquired Accounting
- ----------- -------- -------- ----------
Interstate Bancshares, Inc. 6-18-92 $ 66,000 Pooling
Houston, Texas
City National Bancshares, Inc. 10-28-92 $ 62,000 Pooling
Carrollton, Texas
FWNB Bancshares, Inc. 12-22-92 $161,000 Pooling
Plano, Texas
Cornerstone Bancshares, Inc. 1-19-93 $239,000 Pooling
Dallas, Texas
First Federal Savings Bank of Northwest Florida 10-14-93 $101,000 Purchase
Ft. Walton Beach, Florida
Peoples Holding Company, Inc. 10-21-93 $ 43,000 Purchase
Ft. Walton Beach, Florida
Spring National Bank 11-3-93 $ 75,000 Pooling
Houston, Texas
1st Performance National Bank 1-27-94 $278,000 Purchase
Jacksonville, Florida
Security Bank, N.A. 5-1-94 $ 76,000 Pooling
Houston, Texas
2
On October 1, 1994, the Company completed the acquisition of 22 branches of
First Heights Bank, fsb, of Houston, Texas, with deposits of approximately $870
million and assets of $68 million. Additionally, on May 12, 1994, the Company
acquired three branches of Anchor Savings Bank, F.S.B. in the Jacksonville,
Florida area with deposits of $31 million. Both of these acquisitions were
accounted for as purchases.
PENDING ACQUISITIONS
The Company entered into an agreement on June 16, 1994, to acquire Southwest
Bankers, Inc. ("Southwest"), of San Antonio, Texas, and its bank subsidiary,
The Bank of San Antonio, for 950,000 shares of the Company's common stock. At
December 31, 1994, Southwest had assets of $143 million and equity of $11
million. It is anticipated that the transaction will close in the first quarter
of 1995 and will be accounted for under the pooling-of-interests method of
accounting.
On September 23, 1994, the Company entered into an agreement to acquire The
American Bancorporation of the South ("American"), of Brevard County, Florida,
and its bank subsidiary, American Bank of the South, for up to $15,350,000 in
cash. American had total assets of $183 million and equity of $9 million at
December 31, 1994. The transaction is expected to close during the second
quarter of 1995 and will be accounted for under the purchase method of
accounting.
COMPETITION
The Subsidiary Banks encounter intense competition in their businesses,
generally from other banks located in Alabama, Texas, Florida and adjoining
states and compete for interest bearing funds with other banks, mutual funds
and with many issuers of commercial paper and other securities which are not
banks. Competition also exists for the correspondent banking and securities
sales business, which is particularly important to Compass Bank, from
commercial and investment banks and brokerage firms. In the case of larger
customers, competition exists with financial institutions in Texas and other
major metropolitan areas in the United States, many of which are larger in
terms of capital, resources and personnel. Increasingly, in the conduct of
certain aspects of their businesses, the Subsidiary Banks compete with finance
companies, savings and loan associations, credit unions, mutual funds, factors,
insurance companies and similar financial institutions.
There is significant competition among bank holding companies in most of the
markets served by the Subsidiary Banks. At December 31, 1994, the five largest
bank holding companies in Alabama (including the Company) accounted for
approximately 69 percent of the state's total bank deposits. The Company
believes that intense competition for banking business among bank holding
companies in Alabama, Texas, and Florida will continue and that during 1995 the
competition may further intensify if additional regional bank holding companies
enter such states through the acquisition of local bank holding companies or
savings and loan institutions and with continued consolidation of savings and
loan institutions with and into bank holding companies. Competition among bank
holding companies is also significant in Texas where the Company's Texas
Subsidiary Banks are located in major metropolitan markets having populations
of 4.0 million and 3.7 million people. The Texas Subsidiary Banks are small in
terms of assets and deposits in comparison with the super-regional banks they
compete with in Houston and Dallas. Likewise, in Jacksonville, Pensacola and
Fort Walton Beach, Florida, Compass Bank-Florida encounters intense competition
from other financial institutions that are substantially larger in terms of
assets and deposits.
EMPLOYEES
At January 31, 1995, the Company and its subsidiaries had approximately 4,000
employees. The Company and its subsidiaries provide a variety of benefit
programs including group life, health, accident, and other insurance,
retirement and stock ownership plans. The Company also maintains training,
educational and affirmative action programs designed to equip employees for
positions of increasing responsibility in both management and operating
positions.
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. An important function of the Federal Reserve System is to regulate the
national supply of bank credit. Among the instruments of monetary policy used
by the Federal Reserve to implement these objectives are: open market
operations in U.S. Government securities, changes in the discount rate, reserve
requirements on member bank deposits and funds availability regulations. These
instruments are used in varying combinations to influence the overall growth of
bank loans, investments and deposits and may also affect interest rates charged
on loans or paid on deposits.
The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of financial institutions in the
past and will continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to the future
impact that changes in interest rates, deposit levels or loan demand may have
on the business and income of the Company and the Subsidiary Banks.
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. Congress enacted and the
President recently signed into law the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act"), which 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, except that states may establish the 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 5 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 1986, the State of Alabama enacted a regional
reciprocal banking act. In general, the Alabama statute permits Alabama banks
and bank holding companies to be acquired by regional bank holding companies
and effectively permits Alabama banks and bank holding companies to acquire
banks located in 14 other designated jurisdictions including Texas and Florida
if such jurisdictions have adopted reciprocal statutes. Texas law currently
permits out-of-state bank holding companies to acquire banks in Texas
regardless of where the acquiror is based, subject to the satisfaction of
various conditions such as agreements with respect to compliance with state law
and evidence as to certain financial matters.
4
Prior to July 1, 1994, Florida's regional reciprocal banking act permitted
acquisitions of banks and bank holding companies in Florida by financial
institutions based in 13 designated jurisdictions other than Florida, including
Alabama, but not including Texas. Because of deposits attributable to the
Company's Texas Subsidiary Banks, the Company did not meet the definition of a
regional bank holding company under Florida law existing prior to July 1, 1994.
Effective July 1, 1994, an amendment to Florida law added Texas among the
jurisdictions which defined the term "region" under Florida's regional
reciprocal banking act. The Company has since met the definition of a regional
bank holding company under Florida law. Prior to this amendment to Florida law,
the Company owned in Florida Compass Bank, N.A., a national bank with its
principal office in Pensacola ("Compass Bank, N.A."), and Compass Bank,
Jacksonville, Florida, a federal savings bank ("Compass FSB"). Effective
December 31, 1994, the Company converted Compass Bank, N.A. into Compass Bank-
Florida and merged Compass FSB with and into Compass Bank-Florida. In addition,
Florida has enacted legislation, to become effective on May 1, 1995, which will
permit out-of-state bank holding companies to acquire banks in Florida
regardless of where such companies are based, subject to various conditions.
Upon the effectiveness of the Interstate Act, the restrictions imposed by
these state laws with respect to acquisitions by out-of-state bank holding
companies will no longer be effective. Accordingly, following the effective
date of the Interstate Act's bank holding company acquisition provisions, the
Company and all other bank holding companies will be permitted to undertake
interstate acquisitions of banks consistent with those provisions,
notwithstanding the limitations currently imposed by the interstate banking
laws of any state.
The Federal Reserve Act generally imposes certain limitations on extensions
of credit and other transactions by and between banks which are members of the
Federal Reserve System and other affiliates (which includes any holding company
of which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Banks which are not members of the Federal Reserve System are
also subject to these limitations. Further, federal law prohibits a bank
holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or the furnishing of services.
In December, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. This act recapitalized the Bank Insurance Fund
("BIF"), of which the Subsidiary Banks are members, and the Savings Association
Insurance Fund ("SAIF"), which insures certain of the Subsidiary Banks'
deposits, substantially revised statutory provisions, including capital
standards, restricted certain powers of state banks, gave regulators the
authority to limit officer and director compensation and required holding
companies to guarantee the capital compliance of their banks in certain
instances. Among other things, FDICIA requires the federal banking agencies to
take "prompt corrective action" with respect to banks that do not meet minimum
capital requirements. FDICIA established five capital tiers: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized", as defined by 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
5
restoration plan is limited to the lesser of 5 percent of an undercapitalized
subsidiary's assets or the amount required to meet regulatory capital
requirements. If the controlling bank holding company fails to fulfill its
obligations under FDICIA and files (or has filed against it) a petition under
the Federal Bankruptcy Code, the FDIC's claim may be entitled to a priority in
such bankruptcy proceeding over third party creditors of the bank holding
company.
An insured depository institution may not pay management fees to any person
having control of the institution nor may an institution, except under certain
circumstances and with prior regulatory approval, make any capital distribution
(including the payment of dividends) if, after making such payment or
distribution, the institution would be undercapitalized. FDICIA also restricts
the acceptance of brokered deposits by insured depository institutions and
contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts.
At December 31, 1994, the Subsidiary Banks were "well capitalized", and were
not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. The Subsidiary Banks do not
rely upon brokered deposits as a primary source of deposit funding, although
such deposits are sold through the Correspondent and Investment Services
Division of Compass Bank.
FDICIA contains numerous other provisions, including new reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy. In addition, FDICIA requires the FDIC to establish a system
of risk-based assessments for federal deposit insurance, by which banks that
pose a greater risk of loss to the FDIC (based on their capital levels and the
FDIC's level of supervisory concern) will pay a higher insurance assessment.
THE SUBSIDIARY BANKS
In general, federal and state banking laws and regulations govern all areas
of the operations of the Subsidiary Banks, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state banking regulatory agencies also
have the general authority to limit the dividends paid by insured banks and
bank holding companies if such payments may be deemed to constitute an unsafe
and unsound practice. Federal and state banking agencies also have authority to
impose penalties, initiate civil and administrative actions and take other
steps intended to prevent banks from engaging in unsafe or unsound practices.
Compass Bank, organized under the laws of the State of Alabama, is a member
of the Federal Reserve System. As such, it is supervised, regulated and
regularly examined by the Alabama State Banking Department and the Federal
Reserve. Compass Bank-Florida is a Florida-chartered bank which is also a
member of the Federal Reserve System. It is supervised, regulated and regularly
examined by the Florida Department of Banking and Finance and the Federal
Reserve. Compass Bank-Houston and Compass Bank-Dallas, both of which are
organized under the laws of the State of Texas, are state banks that are not
members of the Federal Reserve System. The Texas banks are supervised,
regulated and regularly examined by the Department of Banking of the State of
Texas and the FDIC. The Subsidiary Banks, as participants in the BIF and the
SAIF of the FDIC, are subject to the provisions of the Federal Deposit
Insurance Act and to examination by and regulations of the FDIC.
Compass Bank is governed by Alabama laws restricting the declaration and
payment of dividends to 90 percent of annual net income until its surplus funds
equal at least 20 percent of capital stock. Compass Bank has surplus in excess
of this amount. Compass Bank-Houston and Compass Bank-Dallas, governed by the
laws of the State of Texas, are, under certain circumstances, restricted in the
declaration and payment of dividends to the extent that before declaring any
dividends, each of these banks must transfer to its "certified surplus"
accounts an amount not less than 10 percent of the net profits of such bank
earned since the last dividend was declared, except that there is no
requirement for a transfer to certified surplus of a sum which
6
would increase the certified surplus to more than the capital stock of the
respective bank. In addition, Compass Bank-Houston has entered into an
agreement with the Commissioner of the Department of Banking of the State of
Texas that it will not declare dividends in excess of 50 percent of its current
earnings. Compass Bank-Florida, governed by the laws of the State of Florida,
may declare and pay dividends not to exceed the current period's net profits
combined with the net retained profits of the previous two years -- after
charging off bad debts, depreciation, and other worthless assets and after
making provision for reasonably anticipated future losses on loans and other
assets -- and may, with the approval of the Department of Banking and Finance
of the State of Florida, declare quarterly, semiannual, or annual dividends, in
any amounts deemed expedient by the board of directors, from retained net
profits which accrued during the preceding two years; provided that, prior to
declaring any dividend, the bank shall carry 20 percent of its net profits for
such preceding period as is covered by the dividend to its surplus fund until
such surplus fund shall at least equal the amount of the bank's common stock
and any preferred stock then issued and outstanding. Compass Bank-Florida may
not declare any dividend at any time at which its net income from the current
year combined with retained net income for the preceding two years is a loss or
which would cause the capital accounts of the bank to fall below any written
agreement with the Florida Department of Banking and Finance or any federal
regulatory agency. Compass Bank-Florida has no such written agreements with the
Florida Department of Banking and Finance or any federal regulatory agency
concerning its dividends. As members of the Federal Reserve System, Compass
Bank and Compass Bank-Florida are subject to dividend limitations imposed by
the Federal Reserve that are similar to those applicable to national banks. The
approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of net profits for that
year, plus its retained net profits for the preceding two years, less any
required transfers to surplus.
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. The bank regulatory agencies have announced a proposal
to revise the regulations implementing the CRA. The proposal contemplates
extensive changes to the existing procedures for determining compliance with
the CRA and the full effect of the proposed regulations cannot be determined at
this time.
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
7
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. It cannot be predicted accurately whether any
of these proposals will be adopted or, if adopted, how these proposals will
affect the Company or the Subsidiary Banks.
The Correspondent and Investment Services Division of Compass Bank is treated
as a municipal securities dealer and a government securities dealer for
purposes of the federal securities laws and, therefore, is subject to certain
reporting requirements and/or regulatory controls by the Securities and
Exchange Commission (the "Commission"), the United States Department of the
Treasury and the Federal Reserve. Compass Brokerage, Inc. is a discount
brokerage service registered with the Commission and the National Association
of Securities Dealers, Inc. and is subject to certain reporting requirements
and regulatory control by these agencies. Compass Bancshares Insurance, Inc. is
a licensed insurance agent or broker for various insurance companies and is
subject to reporting and licensing regulations of the Alabama Insurance
Commission.
References to applicable statutes under the heading "Supervision and
Regulation" are brief summaries of portions thereof, do not purport to be
complete and are qualified in their entirety by reference to such statutes.
8
ITEM 1 -- STATISTICAL DISCLOSURE
PAGE(S)
-------
Consolidated Average Balances, Interest Income/Expense and
Yields/Rates.......................................................... 30 & 31
Rate/Volume Variance Analysis.......................................... 32 & 33
Investment Securities and Investment Securities Available for Sale..... 15
Investment Securities and Investment Securities Available for Sale Ma-
turity Schedule....................................................... 16
Loan Portfolio......................................................... 13
Selected Loan Maturity and Interest Rate Sensitivity................... 14
Nonperforming Assets................................................... 37
Summary of Loan Loss Experience........................................ 35
Allocation of Allowance for Loan Losses................................ 36
Maturities of Time Deposits............................................ 18
Return on Equity and Assets............................................ 25
Short-Term Borrowings.................................................. 19
Interest Rate Sensitivity Analysis..................................... 21
Interest Rate Protection Contracts..................................... 22
Assets/Liabilities Associated With Interest Rate Protection Contracts.. 23
Interest Rate Contracts -- Trading Account............................. 23
Trading Account Composition............................................ 17
Leverage Ratio Calculations............................................ 26
Noninterest Income..................................................... 38
Noninterest Expense.................................................... 40
9
ITEM 2 -- PROPERTIES
The Company, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. The principal executive offices of the
Company are located at 15 South 20th Street, Birmingham, Alabama, in a 317,000
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 300,000 square-foot administrative headquarters facility completed in
early 1988 and the River Oaks Bank Building in Houston, Texas, a 14-story,
168,000 square-foot office building. The River Oaks Bank Building is 35 percent
occupied by Compass Bank-Houston and River Oaks Trust Company. The remaining
space is leased to multiple tenants. See "Summary of Significant Accounting
Policies" and "Notes to Consolidated Financial Statements" for information with
respect to the amounts at which bank premises, equipment and other real estate
are carried and information relating to commitments under long-term leases.
ITEM 3 -- LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is presently involved in any
material legal proceedings other than ordinary routine litigation incidental to
its business.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1994.
10
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low closing prices of the common
stock of the Company as reported through the National Association of Securities
Dealers, Inc. Automated Quotation National Market System and the dividends paid
thereon during the periods indicated. The prices shown do not reflect retail
mark-ups, mark-downs, or commissions. All share prices have been rounded to the
nearest 1/8 of one dollar.
High Low Dividend
---- ---- --------
1994:
FIRST QUARTER......................................... $ 24 $ 21 $.23
SECOND QUARTER........................................ 26 3/4 23 .23
THIRD QUARTER......................................... 26 23 .23
FOURTH QUARTER........................................ 23 3/4 21 .23
1993:
First quarter......................................... $ 25 3/4 $22 1/2 $.19
Second quarter........................................ 26 1/2 22 1/2 .19
Third quarter......................................... 26 23 1/2 .19
Fourth quarter........................................ 25 20 3/4 .19
As of January 31, 1995, there were 6,221 shareholders of record of common
stock of which 5,295 were residents of either Alabama, Texas or Florida.
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five
years. All per share information for periods prior to July, 1992, has been
restated to reflect the 3-for-2 stock split with respect to the Company's
common stock, which was effected by a stock dividend paid on July 2, 1992. All
prior year information has been restated to reflect acquisitions consummated
during 1994 accounted for under the pooling-of-interests method of accounting.
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(in Thousands Except Per Share Data)
Net interest income..... $ 331,368 $ 329,013 $ 316,924 $ 257,593 $ 198,976
Provision for loan
losses................. 3,404 36,306 53,175 38,199 24,193
Net income.............. 99,671 89,718 76,003 63,374 52,605
Per common share data:
Net income............. $ 2.68 $ 2.37 $ 2.01 $ 1.74 $ 1.51
Cash dividends
declared.............. .92 .76 .667 .587 .533
Balance sheet:
Average total equity... $ 574,549 $ 538,787 $ 482,047 $ 409,482 $ 346,913
Average assets......... 8,019,343 7,125,744 6,811,121 6,129,106 5,293,948
Period-end FHLB and
other borrowings...... 484,942 325,437 203,913 13,181 11,750
Period-end total
equity................ 600,613 551,337 510,817 453,505 363,090
Period-end assets...... 9,123,253 7,333,594 7,084,441 6,781,121 5,541,716
11
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report. Prior year information has been restated to reflect
1994 and 1993 acquisitions accounted for using the pooling-of-interests
accounting method and prior period per share data has been restated to reflect
a 3-for-2 stock split effected through the issuance of a 50 percent stock
dividend paid in July, 1992. Financial institutions acquired by the Company
during the past three years and accounted for as purchases are reflected in the
financial position and results of operations of the Company since the date of
their acquisition.
SUMMARY
Net income for 1994 was $100 million, an 11 percent increase over the
Company's previous high of $90 million in 1993. Net income for 1993 was 18
percent higher than 1992 net income of $76 million. The increases in net income
per common share for 1994 and 1993 were 13 percent and 18 percent,
respectively. Net income per common share increased 16 percent during 1992.
Pretax income for 1994 was up $13 million or 10 percent over 1993 while income
tax expense increased only 7 percent over the same period due to a decrease in
the effective tax rate in 1994 from 35 percent to 34 percent partially offset
by an increase in the Company's income subject to taxation.
One significant factor in the growth of the Company has been the Company's
acquisitions in Texas, specifically the Houston and Dallas areas, since late
1987. The Texas expansion continued throughout 1994 and is expected to continue
in 1995. On October 1, 1994, the Company completed its largest acquisition to
date with the purchase of 22 branches of First Heights Bank, fsb ("First
Heights") of Houston, Texas with total deposits of $870 million. This
acquisition increased the assets of the Company's Texas operations to
approximately $3 billion and management expects the asset size to continue to
increase. In addition, the Company has been able to expand its operations in
Florida and will seek to continue to increase its presence in that market in
1995. For additional information, see "Acquisitions" and "Pending Acquisitions"
in Part I of this report and the accompanying "Notes to the Consolidated
Financial Statements," Note 10, Mergers and Acquisitions.
EARNING ASSETS
Average earning assets in 1994 increased 13 percent over 1993 due to
increases in both average loans and total investment securities. The average
earning asset mix continued to change during 1994 with loans at 72 percent,
investment securities and investment securities available for sale at 24
percent and other earning assets at 4 percent of the total. In 1993, loans were
74 percent, investment securities and investment securities available for sale
were 22 percent and other earning assets were 4 percent of average earning
assets, up from 68 percent, 29 percent, and 3 percent, respectively, in 1992.
The shift in the mix of earning assets during 1994 is to a large extent due to
the First Heights acquisition in which the assets acquired, principally cash,
were initially invested in investment securities and federal funds sold which
more than offset the positive impact of the growth in loans discussed below.
Management anticipates that it will take several quarters to return the portion
of earning assets represented by loans to desired levels while maintaining the
Company's standards of acceptable credit risk. The mix of earning assets is
monitored on a continuous basis in order to react to interest rate movements
and to maximize return on earning assets.
LOANS
Average loans increased 10 percent in 1994 with much of the increase
concentrated in residential mortgage loans and real estate construction loans.
Total loans outstanding at year end increased 11 percent over previous year-end
levels. The growth in the portfolio resulted from the Company's ongoing efforts
to increase the loan portfolio through the origination of loans, especially
variable rate one-to-four family real
12
estate mortgages. Real estate construction loans increased 46 percent,
residential mortgage loans increased 19 percent, consumer installment loans
increased 3 percent and commercial mortgage loans increased less than 1 percent
from year-end 1993 to year-end 1994. Commercial, financial and agricultural
loans, which were 20 percent of total loans in 1994, increased 4 percent
compared to the previous year. The 11 percent increase in the Company's loan
portfolio from 1992 to 1993 occurred primarily in residential mortgage loans
which increased 30 percent.
The Company's loan portfolio continues to reflect the diversity of the
markets served by the Subsidiary Banks. The condition of the economy in states
in which the Subsidiary Banks lend money is further reflected in the loan
portfolio mix. There has been a decline in the volume of commercial, financial
and agricultural loans, as a percentage of total loans outstanding, for the
past five years, reflective of the general state of the economy in the markets
served. With fewer attractive lending opportunities in the commercial lending
area, other lending opportunities were sought and brought about the increases
in the other categories within the portfolio. Specifically, the mortgage
refinancing boom of the past two years resulted in growth in residential real
estate mortgages from 31 percent of the loan portfolio at December 31, 1992, to
39 percent at year-end 1994. Additionally, the Company experienced a three
percent increase in its indirect auto loan portfolio from 1993 to 1994. At
December 31, 1994, the Company's indirect loan portfolio, consisting primarily
of indirect automobile loans, represented 14 percent of total loans
outstanding.
The Company has not invested in loans that would be considered highly
leveraged transactions ("HLT") as defined by the Federal Reserve Board and
other regulatory agencies. The Company had no foreign loans or loans to lesser
developed countries as of December 31, 1994.
The Loan Portfolio table shows the classifications of loans by major category
at December 31, 1994, and for each of the preceding four years. The second
table shows maturities of certain loan classifications at December 31, 1994,
and an analysis of the rate structure for such loans due in over one year.
LOAN PORTFOLIO
December 31
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(in Thousands)
Commercial,
financial and
agricultural $1,179,013 20.4% $1,136,427 21.8% $1,062,509 22.7% $ 977,170 24.5% $ 926,688 26.5%
Real estate --
construction...... 369,331 6.4 253,086 4.9 235,566 5.0 200,733 5.0 298,784 8.6
Real estate --
mortgage:
Residential....... 2,273,771 39.5 1,903,578 36.6 1,467,747 31.3 1,022,715 25.6 794,248 22.7
Commercial........ 732,590 12.7 731,839 14.1 719,957 15.4 713,082 17.9 540,296 15.5
Consumer install-
ment.............. 1,207,995 21.0 1,176,005 22.6 1,199,880 25.6 1,078,670 27.0 933,958 26.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
5,762,700 100.0% 5,200,935 100.0% 4,685,659 100.0% 3,992,370 100.0% 3,493,974 100.0%
===== ===== ===== ===== =====
Less: Unearned in-
come 1,189 3,471 6,600 8,556 9,422
Allowance for loan
losses........... 107,183 110,616 83,859 55,982 42,770
---------- ---------- ---------- ---------- ----------
Total loans........ $5,654,328 $5,086,848 $4,595,200 $3,927,832 $3,441,782
========== ========== ========== ========== ==========
13
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
Rate Structure For Loans
Maturity Maturing Over One Year
----------------------------------------- -------------------------
One Over One Year Over Predetermined Floating or
Year or Through Five Five Interest Adjustable
Less Years Years Total Rate Rate
-------- ------------- ------- ---------- ------------- -----------
(in Thousands)
Commercial, financial
and agricultural....... $807,946 $313,723 $57,344 $1,179,013 $261,434 $109,633
Real estate --
construction.......... 177,847 191,484 -- 369,331 162,421 29,063
-------- -------- ------- ---------- -------- --------
$985,793 $505,207 $57,344 $1,548,344 $423,855 $138,696
======== ======== ======= ========== ======== ========
INVESTMENT SECURITIES
On December 31, 1993, the Company adopted Financial Accounting Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities
("FAS115") which requires that a company's debt and equity securities be
classified based on management's intent to hold the securities into one of
three categories: (i) trading account securities, (ii) held-to-maturity
securities, or (iii) securities available for sale. Securities held in a
trading account are required to be reported at fair value, with unrealized
gains and losses included in earnings. Securities designated to be held to
maturity are reported at amortized cost. Securities classified as available for
sale are required to be reported at fair value with unrealized gains and
losses, net of taxes, excluded from earnings and shown separately as a
component of shareholders' equity. At December 31, 1994, unrealized losses, net
of unrealized gains, in the Company's available-for-sale portfolio totaled
$15.7 million as opposed to net unrealized gains of $10.5 million at December
31, 1993. Under the requirements of FAS115, shareholders' equity at December
31, 1994, has been reduced by $11.5 million to reflect the tax-effected
unrealized loss associated with the available-for-sale 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.
Certain securities that may be sold prior to maturity are reflected as
investment securities available for sale on the Company's balance sheet. The
Company transferred approximately $566 million of investment securities from
its held-to-maturity portfolio to the available-for-sale classification in 1992
and, with the adoption of FAS115 on December 31, 1993, transferred an
additional $64 million of investment securities to its available-for-sale
portfolio. The transfer primarily involved fixed-rate collateralized mortgage
obligations ("CMOs") that could have been required, based on the wording of a
regulatory policy of the Federal Financial Institutions Examination Council
("FFIEC") in place at the time, to be transferred to the available-for-sale
portfolio in the future if sufficiently reduced prepayment speeds were
experienced on the underlying mortgages. During 1994, the FFIEC clarified its
policy language and intent, which enabled CMOs to be carried in the held-to-
maturity portfolio under FAS115. As a result, the Company transferred
approximately $225 million of CMOs from its available-for-sale portfolio to
investment securities held to maturity during 1994.
During 1994 and 1993, sales of held-to-maturity securities were $700,000 and
$48.8 million, respectively, while maturities totaled $297.9 million and $442.4
million, respectively. Sales and maturities of securities available for sale
totaled $239.8 million and $106.7 million, respectively, in 1994 while sales
and maturities in the category in 1993 were $57.3 million and $251.8 million.
Net gains associated with the sales accounted for four percent and one percent
of noninterest income in 1994 and 1993, respectively. Gross unrealized gains
14
in the Company's held-to-maturity portfolio amounted to $6.6 million at year-
end 1994 and gross unrealized losses amounted to $55.5 million.
In recent years, the trend of the Company has been to invest in taxable
securities due to the lack of preferential treatment afforded tax-exempt
securities under the tax laws. Because of their liquidity, credit quality and
yield characteristics, the majority of the purchases of taxable securities have
been in mortgage-backed pass-through securities ("MBS") and CMOs. Total average
investment securities, including those available for sale, increased 25 percent
during 1994 after decreasing 21 percent in 1993. Total investment securities,
including those available for sale, at December 31, 1994, increased 101 percent
from year-end 1993 primarily due to the investment of cash received in
connection with the acquisition of First Heights.
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
---------------------------------
1994 1993 1992
---------- ---------- ----------
(in Thousands)
Investment securities:
U.S. Treasury................................ $ 11,978 $ 2,014 $ 46,672
U.S. Government agencies and corporations.... 85,784 26,704 46,736
Mortgage-backed pass-through securities...... 431,259 280,982 490,203
Collateralized mortgage obligations:
Agency...................................... 618,849 114,399 289,281
Corporate................................... 422,011 23,782 22,697
States and political subdivisions............ 78,472 108,409 152,061
Corporate bonds.............................. 162,306 43,571 51,340
Other........................................ 2,678 4,603 23,836
---------- ---------- ----------
1,813,337 604,464 1,122,826
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 650,121 259,200 292,216
Mortgage-backed pass-through securities...... 756 978 --
Collateralized mortgage obligations:
Agency...................................... 19,196 278,103 177,096
Corporate................................... -- 49,416 71,708
Other........................................ 47,572 47,260 19,536
---------- ---------- ----------
717,645 634,957 560,556
Net unrealized gain (loss).................. (15,705) 10,497 --
---------- ---------- ----------
701,940 645,454 560,556
---------- ---------- ----------
Total....................................... $2,515,277 $1,249,918 $1,683,382
========== ========== ==========
The maturities and weighted average yields of the investment securities and
investment securities available for sale at the end of 1994 are presented in
the following table using primarily the average expected lives including the
effects of prepayments. The amounts and yields disclosed for investment
securities available for sale reflect the amortized cost rather than the net
carrying value, i.e., market value, of these securities. Taxable equivalent
adjustments, using a 35 percent tax rate, have been made in calculating yields
on tax-exempt obligations.
15
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.......... $ 5,986 4.34% $ 5,992 4.43% -- -- -- --
U.S. Government
agencies and
corporations.......... 1,048 7.73 69,085 6.55 $ 15,651 9.30% -- --
Mortgage-backed pass-
through securities.... 162 6.38 288,987 8.18 90,081 7.18 $ 52,029 7.20%
Collateralized mortgage
obligations........... 49,738 7.27 634,050 7.44 184,017 7.68 173,055 7.57
States and political
subdivisions.......... 4,627 9.12 14,801 8.93 13,566 9.12 45,478 9.56
Other.................. 63,983 5.99 82,859 6.53 16,663 9.69 1,479 6.00
-------- ----------- ---------- --------
125,544 6.54 1,095,774 7.51 319,978 7.79 272,041 7.81
-------- ----------- ---------- --------
Investment securities
available for sale--
amortized cost:
U.S. Treasury.......... 292,794 5.04 356,881 5.14 -- -- 446 10.88
Mortgage-backed pass-
through securities.... -- -- -- -- 756 8.58 -- --
Collateralized mortgage
obligations........... -- -- -- -- 9,196 7.95 10,000 6.95
Other.................. 14,287 6.88 33,265 6.25 -- -- 20 7.00
-------- ----------- ---------- --------
307,081 5.13 390,146 5.23 9,952 8.00 10,466 7.12
-------- ----------- ---------- --------
Total.................. $432,625 5.54 $ 1,485,920 6.91 $ 329,930 7.79 $282,507 7.79
======== =========== ========== ========
While the weighted average stated maturities of total MBS and CMOs are 12.3
years and 21.2 years, respectively, the corresponding average expected lives
assumed in the above table are 6.2 years and 5.8 years. During a period of
rising rates, prepayment speeds generally slow on MBS and CMOs with a resulting
extension in average life. Due to the large number of new mortgages generated
during the lengthy refinancing period ending in 1994, and the subsequent
increase in mortgage rates, prepayment speeds at year end are not expected to
slow much further. For example, given a 100 basis point immediate and permanent
increase in mortgage rates, the expected average lives for MBS and CMOs would
be 6.4 and 6.1 years, respectively.
The weighted average market prices as a percentage of par value for MBS and
CMOs at December 31, 1994, were 98.63 percent and 94.22 percent, respectively.
The market prices for MBS and CMOs generally decline in a rising rate
environment due to the resulting increase in average life as well as the (i)
decreased market yield on fixed rate securities and (ii) impact of annual and
life rate caps on adjustable-rate securities. The opposite is generally true
during a period of falling rates. At December 31, 1994, fixed-rate MBS and CMOs
totaled $347.9 million and $823.2 million, respectively, with corresponding
weighted average expected lives of 4.1 and 3.4 years. Adjustable rate MBS and
CMOs totaled $84.1 million and $236.9 million, respectively, with corresponding
weighted average expected lives of 14.7 and 13.6 years. Substantially all
adjustable-rate MBS and CMOs are subject to life rate caps, and MBS are also
subject to a 2 percent annual cap. The weighted average life caps at year end
are 12.52 percent and 9.90 percent for MBS and CMOs, respectively, and the
corresponding weighted average coupon rates at year end were 6.86 percent and
7.00 percent. Given a 100 basis point immediate and permanent increase in
mortgage rates, the estimated market prices as a percentage of par value for
MBS and CMOs would be 95.90 and 91.82, respectively.
TRADING ACCOUNT SECURITIES AND OTHER EARNING ASSETS
Securities carried in the trading account, while interest bearing, are
primarily held for sale. The volume of activity is directly related to general
market conditions and reactions to the changing interest rate environment. The
average balance in the trading account portfolio for 1994 decreased by 24
percent following a 74 percent increase in 1993. The composition of the
Company's trading account at December 31, 1994 and 1993, is detailed below:
16
TRADING ACCOUNT COMPOSITION
DECEMBER 31, 1994 December 31, 1993
----------------- -----------------
(in Thousands)
U.S. Treasury and Government agency......... $26,599 $ 45,158
States and political subdivisions........... 9,046 10,984
Mortgage-backed pass-through securities..... 15,567 10,651
Other debt securities....................... 201 6,321
Derivative securities:
Collateralized mortgage obligations:
Fixed and floating...................... 5,344 129,652
Inverse floaters........................ -- 31,306
Interest rate floors and caps............. 1,178 5,131
Other options............................. 77 288
------- --------
$58,012 $239,491
======= ========
The overall level of the trading account decreased from December 31, 1993, as
a result of the Company's decisions during the second quarter of 1994 to sell
its position in inverse floaters and to substantially limit its proprietary
trading efforts (as distinguished from the retail trading necessary to
facilitate customer transactions) in response to the rising interest rate
environment.
Average federal funds sold and securities purchased under agreements to
resell increased 51 percent in 1994 compared to a 23 percent increase in 1993.
The average balance of interest bearing deposits in other banks decreased 44
percent during 1994 from 1993 levels after decreasing 18 percent from 1992 to
1993. There were no foreign time deposits as of December 31, 1994 or 1993.
DEPOSITS AND BORROWED FUNDS
Changes in the Company's markets and the economy in general, as well as the
First Heights acquisition, not only impacted the Company's asset mix in 1994,
but the Company's liability mix as well. Primarily as a result of the First
Heights acquisition, deposits increased by 26 percent from year-end 1993 to
year-end 1994. At the same time, the portion of average interest bearing
liabilities represented by interest bearing deposits, the primary source of
funding for the Company, increased from 79 percent in 1993 and 1992 to 81
percent in 1994 due to the fact that interest bearing deposits were the only
interest bearing liabilities assumed in connection with the acquisition of
First Heights. Falling interest rates during 1992 and 1993 allowed the Company
to restructure the mix of deposits toward more consumer-oriented, lower-cost
sources of funds. Conversely, the rise in the general level of interest rates
during 1994 resulted in a shift toward higher-cost time deposits. This factor,
coupled with the fact that time deposits represented 73 percent of total
deposits assumed in the First Heights acquisition, resulted in an increase in
the percentage of average total deposits represented by average time deposits
from 37 percent in 1993 to 40 percent in 1994.
During 1994, the average balance of demand deposits and savings accounts
increased by $229.1 million while the average balance of certificates of
deposit and other time deposits grew by $486.3 million. The largest dollar
increase in average interest bearing deposits was in certificates of deposits
and other time deposits less than $100,000, increasing $337.4 million or 22
percent from 1993. Average noninterest bearing demand deposits increased $75.7
million, or 7 percent, after increasing 11 percent during 1993 and 21 percent
in 1992. The increase in deposits in 1994 was due principally to the
acquisition of 22 branches of First Heights and the related deposits totaling
$870 million as well as the acquisition of 1st Performance National Bank ("1st
Performance") of Jacksonville, Florida in January, 1994. The increase during
1993 was due primarily to internally generated growth with a portion of the
increase due to the Company's Florida acquisitions, while the increase in 1992
was due solely to internally generated growth. Savings deposits, interest
bearing demand deposits, and noninterest bearing demand deposits accounted for
60 percent of total average deposits during
17
1994, down from 63 percent in 1993 and 61 percent in 1992. Total average time
deposits, including certificates of deposit over $100,000, were approximately
$2.5 billion in 1994 and $2.0 billion in 1993 with the large certificates of
deposit representing 25 percent of the total during 1994 and 24 percent during
1993. The maturities of certificates of deposit of $100,000 or more and other
time deposits of $100,000 or more outstanding at December 31, 1994, are
summarized in the following table:
MATURITIES OF TIME DEPOSITS
Certificates Other Time
of Deposit Deposits
Over Over
$100,000 $100,000 Total
------------ ---------- --------
(in Thousands)
Three months or less.......................... $281,277 $18,287 $299,564
Over three through six months................. 110,585 -- 110,585
Over six through twelve months................ 105,769 10,000 115,769
Over twelve months............................ 200,096 -- 200,096
-------- ------- --------
$697,727 $28,287 $726,014
======== ======= ========
Borrowed funds consist of FHLB and other borrowings as well as short-term
borrowings, primarily in the form of federal funds purchased, securities sold
under agreements to repurchase, and other short-term borrowings. Average
federal funds purchased declined seven percent during 1994 and average
securities sold under agreements to repurchase increased one percent. Average
other short-term borrowings, which include parent company commercial paper and
trading account short sales, increased eight percent. During 1994, the average
balance of FHLB and other borrowings increased $75 million, or 27 percent, as a
result of the issuance of $50 million in subordinated debentures in the third
quarter of the year and additional FHLB advances of $110 million incurred in
the fourth quarter. The average balance of FHLB and other borrowings increased
during 1993 due to additional borrowings of $75 million in subordinated
debentures and $48 million in FHLB advances. 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."
The Short-Term Borrowings table on the following page 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.
18
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)
1994
FEDERAL FUNDS PURCHASED...... $ 484,189 $ 380,160 4.54% $484,189 5.69%
SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE.... 348,235 243,109 3.54 348,235 4.74
SHORT SALES.................. 43,352 21,470 5.54 16,756 6.33
COMMERCIAL PAPER............. 106,591 92,748 3.94 45,330 5.10
OTHER SHORT-TERM BORROWINGS.. 269,519 110,909 4.66 42,512 5.44
---------- ---------- --------
$1,251,886 $ 848,396 $937,022
========== ========== ========
1993
Federal funds purchased...... $ 499,390 $ 409,072 3.05% $414,704 2.99%
Securities sold under
agreements to repurchase.... 269,873 240,474 2.80 208,739 2.56
Short sales.................. 34,660 23,546 4.28 25,656 4.10
Commercial paper............. 118,073 80,126 3.15 62,858 3.05
Other short-term borrowings.. 203,569 104,403 3.24 82,500 3.26
---------- ---------- --------
$1,125,565 $ 857,621 $794,457
========== ========== ========
1992
Federal funds purchased...... $ 875,685 $ 617,697 3.53% $545,605 2.98%
Securities sold under
agreements to repurchase.... 345,645 269,980 3.36 234,670 2.92
Short sales.................. 63,115 29,309 5.75 23,970 5.22
Commercial paper............. 88,910 70,332 3.62 34,302 3.26
Other short-term borrowings.. 160,810 91,927 3.80 74,059 3.21
---------- ---------- --------
$1,534,165 $1,079,245 $912,606
========== ========== ========
LIQUIDITY MANAGEMENT
Liquidity is the ability of a bank to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the
Company's ability to meet the day-to-day cash flow requirements of the
Subsidiary Banks' customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Subsidiary Banks would not be able to perform the
primary function of a financial intermediary and would, therefore, not be able
to meet the needs of the communities they serve.
Additionally, the parent holding company requires cash for various operating
needs including dividends to shareholders, business combinations, capital
injections into 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, 1994,
the Company's Subsidiary Banks could have paid additional dividends to the
parent holding company in the amount of $99.8 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 subordinated debentures in 1993 and 1994 and the issuance of
common stock in a private placement in 1991. The parent holding company does
not anticipate any liquidity requirements that it cannot meet in the near
future.
Asset and liability management functions not only to assure adequate
liquidity in order for the Subsidiary Banks to meet the needs of their
customers, but also to maintain an appropriate balance between interest-
sensitive assets and interest-sensitive liabilities so that the Company can
also meet the investment requirements of its shareholders. Daily monitoring of
the sources and uses of funds is necessary to maintain
19
an acceptable cash position that meets both requirements. In a banking
environment, both assets and liabilities are considered sources of liquidity
funding and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a
lesser extent, sales of investment securities available for sale and trading
account securities. Real estate construction and commercial, financial and
agricultural loans that mature in one year or less amounted to $986 million or
17 percent of the total loan portfolio at December 31, 1994. Other short-term
investments such as federal funds sold, securities purchased under agreements
to resell and maturing interest bearing deposits with other banks are
additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and noninterest bearing deposit accounts.
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings are additional sources of liquidity and basically
represent the Company's incremental borrowing capacity. These sources of
liquidity are short-term in nature and are used as necessary to fund asset
growth and meet short-term liquidity needs.
As disclosed in the Company's "Consolidated Statements of Cash Flows," net
cash provided by operating activities increased to $322.0 million primarily
due to the decrease in trading account securities. Net cash used in investing
activities of $691.6 million consisted primarily of net loans originated of
$441.6 million and held-to-maturity securities and available-for-sale
securities purchased of $1.3 billion and $654.4 million, respectively, funded
by cash received in the First Heights branch purchase as well as maturities
and paydowns of investment securities held to maturity and investment
securities available for sale of $297.9 million and $106.7 million,
respectively, and sales of investment securities available for sale of $239.8
million. This overall increase in the Company's investment securities
portfolios was due to the initial investment of cash received in connection
with the First Heights branch purchase. Net cash provided by financing
activities provided the remainder of funding sources for 1994. The $569.0
million of net cash provided consisted primarily of a $306.5 million net
increase in deposits, a net increase of $159.4 million in FHLB and other
borrowings, and a $201.9 million increase in federal funds purchased and
securities sold under agreements to repurchase offset partially by a reduction
of $66.5 million in other short-term borrowings. The increase in FHLB and
other borrowings in 1994 consisted of $50 million of subordinated debentures
issued by the Company during the third quarter of the year and additional FHLB
advances of $110 million during the fourth quarter of 1994.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest bearing assets
and liabilities are subject to change in interest rates either at replacement,
repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on repricing relationships of assets and
liabilities during periods of changes in market interest rates. Effective
interest rate sensitivity management seeks to ensure that both assets and
liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net
interest income. Interest rate sensitivity is measured as the difference
between the volumes of assets and liabilities in the Company's current
portfolio that are subject to repricing at various time horizons: immediate, 1
to 3 months, 4 to 12 months, 1 to 5 years and over 5 years. The differences
are known as interest sensitivity gaps. The following table shows interest
sensitivity gaps for these different intervals as of December 31, 1994 and
1993, including the effect of interest rate swaps, interest rate floors,
futures and other hedging instruments.
20
INTEREST RATE SENSITIVITY ANALYSIS
December 31
-----------------------------------------------------------------------
One- Four- One- Over
Three Twelve Five Five
Immediate Months Months Years Years Total
---------- ----------- ---------- ---------- ---------- ----------
(in Thousands)
1994
EARNING ASSETS:
LOANS, NET OF UNEARNED
INCOME................ $1,371,127 $ 370,828 $1,580,713 $ 967,365 $1,471,478 $5,761,511
TAXABLE INVESTMENT
SECURITIES............ -- 342,668 297,948 817,618 265,789 1,724,023
TAX-EXEMPT INVESTMENT
SECURITIES............ -- 270 3,552 14,324 71,168 89,314
INVESTMENT SECURITIES
AVAILABLE FOR SALE.... -- 92,925 260,427 345,952 2,636 701,940
TRADING ACCOUNT
SECURITIES............ 58,012 -- -- -- -- 58,012
FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED
UNDER AGREEMENTS TO
RESELL................ 46,535 -- -- -- -- 46,535
INTEREST BEARING
DEPOSITS WITH OTHER
BANKS................. -- -- -- -- 99 99
---------- ----------- ---------- ---------- ---------- ----------
TOTAL EARNING ASSETS... 1,475,674 806,691 2,142,640 2,145,259 1,811,170 8,381,434
INTEREST BEARING
LIABILITIES:
DEMAND DEPOSITS........ -- 825,170 -- -- -- 825,170
SAVINGS DEPOSITS....... -- -- 1,389,781 -- 394,123 1,783,904
CERTIFICATES OF DEPOSIT
LESS THAN $100,000 AND
OTHER TIME DEPOSITS... -- 561,562 803,406 1,005,241 20,597 2,390,806
CERTIFICATES OF DEPOSIT
OF $100,000 OR MORE... -- 281,277 216,354 195,701 4,395 697,727
FEDERAL FUNDS PURCHASED
AND SECURITIES SOLD
UNDER AGREEMENTS TO
REPURCHASE............ 828,924 -- -- -- 3,500 832,424
OTHER SHORT-TERM
BORROWINGS............ 104,598 -- -- -- -- 104,598
FHLB AND OTHER
BORROWINGS............ -- 246,043 136 110,901 127,862 484,942
---------- ----------- ---------- ---------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES........... 933,522 1,914,052 2,409,677 1,311,843 550,477 7,119,571
EFFECT OF INTEREST RATE
SWAPS.................. (20,000) 26,000 -- 2,000 (8,000) --
---------- ----------- ---------- ---------- ---------- ----------
INTEREST SENSITIVITY
GAP.................... 522,152 (1,081,361) (267,037) 835,416 1,252,693 $1,261,863
---------- ----------- ---------- ---------- ---------- ==========
CUMULATIVE INTEREST
SENSITIVITY GAP........ $ 522,152 $ (559,209) $ (826,246) $ 9,170 $1,261,863
========== =========== ========== ========== ==========
1993
Earning assets:
Loans, net of unearned
income................. $1,280,348 $ 462,943 $1,180,864 $1,236,016 $1,037,293 $5,197,464
Taxable investment
securities............. -- 82,923 206,664 155,001 49,614 494,202
Tax-exempt investment
securities............. -- 719 1,808 93,855 13,880 110,262
Investment securities
available for sale..... -- 370,880 30,261 220,066 24,247 645,454
Trading account
securities............. 239,491 -- -- -- -- 239,491
Federal funds sold and
securities purchased
under agreements to
resell................. 144,764 -- -- -- -- 144,764
Interest bearing
deposits with other
banks.................. -- 376 9,999 -- 99 10,474
---------- ----------- ---------- ---------- ---------- ----------
Total earning assets... 1,664,603 917,841 1,429,596 1,704,938 1,125,133 6,842,111
Interest bearing
liabilities:
Demand deposits......... -- 730,587 -- -- -- 730,587
Savings deposits........ -- -- 1,367,356 -- 253,689 1,621,045
Certificates of deposit
less than $100,000 and
other time deposits.... -- 403,217 465,257 663,847 9,018 1,541,339
Certificates of deposit
of $100,000 or more.... -- 326,033 111,505 136,075 2,474 576,087
Federal funds purchased
and securities sold
under agreements to
repurchase............. 602,443 -- -- -- 21,000 623,443
Other short-term
borrowings............. 171,014 -- -- -- -- 171,014
FHLB and other
borrowings............. -- 246,039 123 813 78,462 325,437
---------- ----------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities........... 773,457 1,705,876 1,944,241 800,735 364,643 5,588,952
Effect of interest rate
swaps.................. (20,000) 151,000 (25,000) (98,000) (8,000) --
---------- ----------- ---------- ---------- ---------- ----------
Interest sensitivity
gap.................... 871,146 (637,035) (539,645) 806,203 752,490 $1,253,159
---------- ----------- ---------- ---------- ---------- ==========
Cumulative interest
sensitivity gap........ $ 871,146 $ 234,111 $ (305,534) $ 500,669 $1,253,159
========== =========== ========== ========== ==========
21
In the preceding tables, MBS and CMOs are presented based on market median
prepayment speeds for the weighted average coupon of the underlying collateral
pools as of December 31, 1994. For all other interest earning assets and
interest bearing liabilities, variable rate assets and liabilities are
reflected in the time interval of the asset's or liability's earliest repricing
date. Fixed rate assets and liabilities have been allocated to various time
intervals based on contractual repayment and/or maturity.
As seen in the preceding table as of December 31, 1994, for the first year,
74 percent of earning asset funding sources will reprice compared to 53 percent
of all interest earning assets. Changes in the mix of earning assets or
supporting liabilities can either increase or decrease the net interest margin
without affecting interest rate sensitivity. In addition, the interest rate
spread between an asset and its supporting liability can vary significantly
while the timing of repricing for both the asset and the liability remains the
same, thus impacting net interest income. Varying interest rate environments
can create unexpected changes in prepayment levels of assets and repricing of
liabilities which are not reflected in the interest sensitivity analysis
report. These prepayments may have significant effects on the Company's net
interest margin.
In addition to the ongoing monitoring of interest-sensitive assets and
liabilities, the Company enters into various interest rate contracts not held
in the trading account ("interest rate protection contracts") to help manage
the Company's interest sensitivity. Such contracts generally have a fixed
notional principal amount and include (i) interest rate swaps where the Company
typically receives or pays a fixed rate and a counterparty pays or receives a
floating rate based on a specified index, generally the prime rate or the
London Interbank Offered Rate ("LIBOR"), (ii) interest rate caps and floors
purchased or written where the Company receives or pays, respectively, interest
if the specified index falls below the floor rate or rises above the cap rate,
and (iii) interest rate futures where the Company agrees to deliver or receive
securities at a designated future date and at a specified price or yield. The
interest rate risk factor in these contracts is considered in the overall
interest management strategy and the Company's interest risk management
program. The income or expense associated with interest rate swaps, caps and
floors and gains or losses in futures contracts classified as hedges are
ultimately reflected as adjustments to interest income or expense. Changes in
the estimated fair value of interest rate protection contracts are not
reflected in the financial statements until realized. A discussion of interest
rate risks, credit risks and concentrations in off-balance sheet financial
instruments is included in Note 6, Derivative Financial Instruments, of "Notes
to Consolidated Financial Statements." The following table details various
information regarding interest rate protection contracts as of December 31,
1994.
INTEREST RATE PROTECTION CONTRACTS
Weighted
Weighted Average Weighted Average
Rate* Average Repricing
Notional Carrying Estimated -------------------- Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
---------- -------- ---------- ---------- -------- ---------- ---------
(in Thousands)
Non-trading interest rate contracts:
Swaps:
Pay fixed versus:
Prime..................................... $ 18,000 $ (1) $ 16 8.50% 8.61% 0.21 1
3 mon. LIBOR.............................. 108,000 61 7,702 6.02 5.46 3.21 90
Receive fixed versus 3 mon. LIBOR.......... 120,000 139 (3,595) 6.64 5.92 2.71 90
Basis swaps+............................... 200,000 (21) 60 5.72 5.88 1.13 90
Cap corridor**............................. 400,000 (156) (45) 0.80 0.99 1.56 1
Floors purchased........................... 650,000 191 92 -- * 2.46 76
---------- ----- -------
$1,496,000 $ 213 $ 4,230
========== ===== =======
- --------
+ The Company receives interest based on the federal funds rate and pays
interest based on 3-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, 1994. For caps and floors, the rate shown represents the weighted average
net interest differential between the index rate and the cap or floor rate.
** The cap corridor represents a single transaction with a counterparty in
which the Company both purchased a $400 million notional cap (at 4.5 percent
based on federal funds rate) and sold a $400 million notional cap (at 7.25
percent based on prime), in order to keep funding costs at 275 basis points
below prime.
22
The net interest amount received or paid on an interest rate protection
contract represents an adjustment of the yield or rate on the respective asset
or liability with which such contract is associated. A gain or loss on a
terminated interest rate protection contract is deferred and amortized over the
remaining term of the original contract as an adjustment of yield or rate on
the asset or liability with which the original contract was associated. At
year-end 1994, there were $1,769,000 of deferred gains and $535,000 of deferred
losses on terminated interest rate protection contracts, which will be recorded
as net interest income/(expense) of $931,000 in 1995, $432,000 in 1996 and
$(129,000) thereafter. The following table indicates the asset or liability
category with which the interest protection contracts were associated at
December 31, 1994.
ASSETS/LIABILITIES ASSOCIATED WITH INTEREST RATE PROTECTION CONTRACTS
Notional Principal Associated With
---------------------------------------------------------
Total Fed Funds
Notional Adjustable-Rate Adjustable-Rate CDs Less Purchased
Principal Loans Investments Than $100,000 and Repos++
---------- --------------- --------------- ------------- -----------
(in Thousands)
Swaps:
Pay
fixed.. $ 126,000 $ 8,000 $ -- $ 18,000 $100,000
Receive
fixed.. 120,000 20,000 100,000 -- --
Basis
swaps.. 200,000 -- -- -- 200,000
Floors.... 650,000 650,000 -- -- --
Cap
corridor. 400,000 -- -- -- 400,000
---------- --------- --------- -------- --------
$1,496,000 $ 678,000 $ 100,000 $ 18,000 $700,000
========== ========= ========= ======== ========
- --------
++ Consists of federal funds purchased and securities sold under agreements to
repurchase.
In addition to interest rate protection contracts used to help manage overall
interest sensitivity, the Company also enters into interest rate contracts for
the trading account. The primary purposes for using interest rate contracts in
the trading account are to facilitate customer transactions and to help protect
cash market positions in the trading account against interest rate movement.
Changes in the estimated fair value of contracts in the trading account are
recorded in other noninterest income as trading profits (losses) 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, 1994:
TRADING ACCOUNT INTEREST RATE CONTRACTS
Weighted
Weighted Average Weighted 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:
Pay fixed versus:
1 mon. LIBOR......... $ 19,223 $ 1,664 $ 1,664 6.10% 5.46% 3.52 30
3 mon. LIBOR......... 20,000 880 880 5.64 4.38 1.34 90
Receive fixed versus:
3 mon. LIBOR......... 23,000 (767) (767) 6.10 5.74 2.07 90
6 mon. LIBOR......... 1,000 (1) (1) 7.16 5.75 0.76 180
Prime................ 8,673 (265) (265) 6.32 8.50 1.15 1
Caps:
Purchased............. 22,500 829 829 1.46 * 1.22 60
Written............... 96,400 (1,213) (1,213) * 0.30 1.69 74
Floors:
Purchased............. 240,000 349 349 0.12 * 3.20 90
Written............... 187,500 (314) (314) * 0.12 3.07 60
-------- ------- -------
Total................ $618,296 $ 1,162 $ 1,162
======== ======= =======
- --------
* 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, 1994. 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.
23
In addition to the interest rate contracts shown above, the Company also uses
other options and futures in the trading account. At December 31, 1994, the
trading account contained other options purchased and written, having weighted
average expiration dates shorter than two months, with a notional principal
balance of $182 million for purchased options and a notional principal balance
of $2 million for written options and estimated fair values of $78,000 and
$(15,000), respectively. The notional principal amounts indicated are
substantially larger than the related credit or interest rate risks. The net
purchased position in other options was taken at December 31, 1994, in order to
help protect the market value of the trading account against rising short-term
interest rates while maintaining limited risk to declining rates. At December
31, 1994, futures contracts having a notional principal of $158 million were
also used to help reduce the price sensitivity of the trading account.
During 1994, the Company implemented Financial Accounting Statement No. 119,
Disclosure about Derivative Financial Instruments ("FAS119"), which requires
expanded 1994 disclosures for derivative financial instruments held for both
trading and other than trading purposes. Under FAS119, derivative financial
instruments include off-balance sheet instruments such as futures, forwards,
swap or option contracts, or other financial instruments with similar
characteristics. See "Summary of Significant Accounting Policies" and Note 6,
Derivative Financial Instruments, of "Notes to Consolidated Financial
Statements" for FAS119 disclosures.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December, 1991, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 107, Disclosures about Fair Value of Financial
Instruments ("FAS107"). FAS107 requires the Company to disclose the fair value
of substantially all financial instruments, both assets and liabilities,
including those recognized and those not recognized in the Company's balance
sheet. There has been no impact to the Company's financial statements as a
result of the recognition, measurement or classification of financial
instruments. See "Notes to Consolidated Financial Statements," Note 15, Fair
Value of Financial Instruments, for a discussion of the Company's accounting
policies and methodologies.
These disclosures should not be considered a surrogate of the liquidation
value of the Company or its Subsidiary Banks, but rather represent a good-faith
estimate of the increase or decrease in value of financial instruments held by
the Company since purchase, origination, or issuance. It should also be noted
that the Company has not valued any intangibles associated with the Company's
core deposits as is allowed by the provisions of FAS107.
CAPITAL RESOURCES
Shareholders' equity at December 31, 1994, increased nine percent after
increasing eight percent in 1993. Exclusive of the reduction in total
shareholders' equity due to the redemption of the Company's preferred stock in
1993 and the net change in unrealized holding gains/(losses) on securities
available-for-sale in both 1993 and 1994, net income after dividends accounted
for 98 percent of the increase in shareholders' equity in 1994 and for all of
the increase in 1993.
Dividends of $34 million were declared on the Company's common stock in 1994,
representing a 23 percent increase over 1993. The 1994 annual dividend rate per
common share was $.92, a 21 percent increase over 1993. The dividend payout
ratio for 1994 was 34 percent compared to 32 percent for 1993 and 33 percent
for 1992. The Company intends to continue a dividend payout ratio that is
competitive in the banking industry while maintaining an adequate level of
retained earnings to support continued growth.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The Company has
satisfied its capital requirements principally through the retention of
earnings. The Company's five-year compound growth rate in shareholders' equity
of 13 percent was achieved primarily through reinvested earnings.
24
Average shareholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average shareholders'
equity to average assets for 1994 was 7.16 percent compared to 7.56 percent in
1993 and 7.08 percent in 1992. 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
-------------------
1994 1993 1992
----- ----- -----
Return on average assets................................... 1.24% 1.26% 1.12%
Return on average common equity............................ 17.35 16.90 16.11
Common stock dividend payout ratio......................... 34.33 32.07 33.18
Average equity to average assets ratio..................... 7.16 7.56 7.08
Two important indicators of capital adequacy in the banking industry are the
leverage ratio and the tangible leverage ratio. The leverage ratio is defined
as common shareholders' equity, minus goodwill, other intangibles disallowed
by the Subsidiary Bank's regulators and the unrealized gain (loss) on
available-for-sale securities, divided by total quarterly average assets minus
goodwill, other disallowed intangibles and the unrealized loss on available-
for-sale securities. In 1993, the unrealized gain on available-for-sale
securities was not excluded from the computation of total quarterly average
assets. In 1994, the federal regulators clarified the definition of total
quarterly average assets to exclude the impact of the unrealized gain (loss)
on available-for-sale securities effective for 1994 and subsequent years. The
tangible leverage ratio is defined as common shareholders' equity, minus all
intangibles and the unrealized gain (loss) on available-for-sale securities,
divided by total quarterly average assets minus all intangibles. Even though
core deposit intangibles and goodwill increased from acquisitions during 1994
and 1993, the leverage ratio remained well within regulatory guidelines: 6.60
percent at year-end 1994; 7.30 percent at year-end 1993; and 6.86 percent at
year-end 1992. For the same periods, the tangible leverage ratio was 6.35
percent at year-end 1994; 6.96 percent at year-end 1993; and 6.55 percent at
year-end 1992. The detail for the computation of these ratios is provided in
the following table. Other disallowed intangibles represent intangible assets,
other than goodwill, recorded after February 19, 1992, that are excluded from
regulatory capital. Other intangibles recorded before that date continue to be
included in regulatory capital under the "grandfather" provision of Federal
Reserve regulations. The $11.5 million decrease in shareholders' equity at
December 31, 1994, resulting from the decline in the fair value of the
Company's available-for-sale investment securities portfolio is not required
to be deducted from the Company's equity in the calculation of regulatory
capital by the Federal regulators.
25
LEVERAGE RATIO CALCULATIONS
December 31
----------------------------------
1994 1993 1992
---------- ---------- ----------
(in Thousands)
Total fourth quarter average assets....... $8,790,243 $7,321,192 $7,014,390
Add: Unrealized holding loss on
available-for-sale securities*.......... 8,478 -- --
Less: Goodwill........................... 20,606 9,241 7,350
Other disallowed intangibles........... 13,333 1,716 --
---------- ---------- ----------
Tangible average assets before deduction
of other intangibles..................... 8,764,782 7,310,235 7,007,040
Less: Other intangibles.................. 23,027 27,275 23,239
---------- ---------- ----------
Tangible average assets................. $8,741,755 $7,282,960 $6,983,801
========== ========== ==========
Total period-end common shareholders'
equity................................... $ 600,613 $ 551,337 $ 487,707
Less: Goodwill........................... 20,606 9,241 7,350
Other disallowed intangibles........... 13,333 1,716 --
Net unrealized holding gain (loss) on
available-for-sale securities......... (11,509) 6,545 --
---------- ---------- ----------
Total common shareholders' equity before
deduction of other intangibles........... 578,183 533,835 480,357
Less: Other intangibles.................. 23,027 27,275 23,239
---------- ---------- ----------
Tangible period-end common shareholders'
equity................................. $ 555,156 $ 506,560 $ 457,118
========== ========== ==========
Leverage ratio......................... 6.60% 7.30% 6.86%
Tangible leverage ratio................ 6.35 6.96 6.55
- --------
* Applicable only for the year ended December 31, 1994.
Risk-based capital guidelines take into consideration risk factors, as
defined by regulators, associated with various categories of assets, both on
and off of the balance sheet. Under the guidelines, capital strength is
measured in two tiers which are used in conjunction with risk-adjusted assets
to determine the risk-based capital ratios. The Company's Tier I capital, which
consists of common equity less goodwill and other disallowed intangibles,
amounted to $578.2 million at December 31, 1994. Tier II capital components
include supplemental capital components such as qualifying allowance for loan
losses and qualifying subordinated debt. Tier I capital plus the Tier II
capital components is referred to as Total Qualifying Capital and was $778.7
million at year-end 1994. The percentage ratios, as calculated under the
guidelines, were 9.52 percent and 12.82 percent for Tier I and Total Qualifying
Capital, respectively, at year-end 1994. The $75 million of subordinated debt
issued by the Company in the second quarter of 1993 and the $50 million of
subordinated debt issued by the Company in the third quarter of 1994
represented Tier II capital and favorably impacted the Company's Total
Qualifying Capital. The decrease in Tier I and Total Qualifying Capital ratios
in 1994 was due to the addition of higher-risk weighted assets, primarily loans
and investment securities, and additional goodwill and other intangibles
resulting from the 1st Performance and First Heights acquisitions.
December 31
-------------------
1994 1993 1992
----- ----- -----
Risk-based Capital Ratios:
Tier I Capital Ratio...................................... 9.52% 10.48% 9.85%
Total Qualifying Capital Ratio............................ 12.82 13.21 11.59
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 1994 for "well-
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to assure that the Subsidiary Banks exceed the
guidelines.
26
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially
impact net interest income. The discussion of net interest income is presented
on a taxable equivalent basis, unless otherwise noted, to facilitate
performance comparisons among various taxable and tax-exempt assets.
Net interest income for 1994 increased less than one percent over 1993 while
increasing three percent in 1993 over 1992. Increased volumes of earning assets
and a historically high interest rate spread generated the 1993 increase while
in 1994 net interest income grew at a slower rate due to a 57 basis point
decline in net yield on earning assets. The schedule on pages 32 and 33
provides the detail of changes in interest income, interest expense and net
interest income due to changes in volumes and rates.
Interest income increased nine percent in 1994 after decreasing three percent
in 1993 and one percent in 1992. Interest income in 1994 grew as a result of a
13 percent increase in the volume of average earning assets partially offset by
a 27 basis point decline in the average interest rate earned. A 10 percent
increase in the volume of average loans accounted for the 7 percent increase in
fully taxable equivalent interest income on loans as rates declined 22 basis
points. The decrease in yield on loans resulted from reduced loans fees, the
reduced positive impact of interest rate contracts, and growth in fixed rate
loans. Additionally, a significant portion of the Company's real estate
mortgages are adjustable rate one-to-four family mortgages which generally have
caps which limit the amount by which interest rates can be increased in any one
year. For this reason, the increases in interest rates on many of these
mortgages have not paralleled the substantial increase in the general level of
interest rates that occurred during 1994. Interest income on investment
securities, including securities available for sale, increased 16 percent from
1993 to 1994. This increase resulted from a 26 percent increase in the average
balance of total investment securities reduced by a 55 basis point decrease in
yield which resulted as higher-yielding fixed rate securities matured with the
funds reinvested at lower rates. Interest income on trading securities
increased by 1 percent as a result of a 195 basis point increase in yield
offset by a 24 percent decrease in the average balance.
Total interest expense increased by 24 percent in 1994 due to a 30 basis
point increase in the rate paid on interest bearing liabilities combined with a
14 percent increase in volume. Interest expense on interest bearing deposits
increased 19 percent as the result of an 8 basis point increase in rate and a
17 percent increase in the average volume. The 6 percent increase in average
borrowed funds, which includes interest bearing liabilities that are not
classified as deposits, coupled with a 118 basis point increase in rate
resulted in a 44 percent increase in interest expense for this category. The
issuance of additional long-term borrowings at fixed rates during the third and
fourth quarter of 1994 contributed to the increase in interest expense on
average borrowed funds for the year.
From 1992 to 1993, interest income declined as a result of a 71 basis point
decline in the average interest rate in spite of a 5 percent increase in the
volume of average earning assets. Fully taxable equivalent interest income on
loans rose 4 percent as a 14 percent increase in volume more than offset an 84
basis point decline in yield. Interest income on investment securities,
including securities available for sale, decreased 27 percent from 1992 to 1993
as a result of an 83 basis point decrease in the yield on investment securities
available for sale offset by increases in the yield on taxable and tax-exempt
securities held-to-maturity of 18 and 12 basis points, respectively. A 74
percent increase in average balance offset by a 101 basis point decline in
yield increased interest income on trading securities by 49 percent in 1993.
27
A 66 basis point decline in the rate paid on interest bearing liabilities
more than offset a 3 percent increase in volume as total interest expense
declined by 13 percent in 1993. A substantial portion of the decrease in total
interest expense was due to a 14 percent decrease in interest expense on
interest bearing deposits, resulting from a 76 basis point decrease in rate and
a 3 percent increase in the average volume. The one percent increase in average
borrowed funds was more than offset by the lower rates paid, resulting in an
eight percent decrease in interest expense for this category.
The trend in net interest income is commonly