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, 1995 COMMISSION FILE NO. 0-6032
COMPASS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0593897
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
15 SOUTH 20TH STREET
BIRMINGHAM, ALABAMA 35233
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 933-3000
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $2 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
As of January 31, 1996, the aggregate market value of voting stock held by
non-affiliates was $1,213,675,976.
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, 1996
----- -------------------------------
Common Stock, $2 Par Value 38,226,015
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
----------------------------------- ----------------------------------
Proxy Statement for 1996 annual meeting Part III
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, Compass Bank-Dallas in Dallas, Texas, and Compass
Bank-San Antonio in San Antonio, 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 88
locations in 47 communities in Alabama. Compass Bank-Houston conducts a
general commercial banking business from 38 locations in Houston, Texas,
Compass Bank-Dallas conducts a general commercial banking business from 21
banking offices in Dallas and Collin Counties, Texas and Compass Bank-San
Antonio conducts a general commercial banking business from 10 banking offices
in San Antonio, 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, 17 locations in Jacksonville, Florida and 6
locations in Ft. Walton Beach, Florida. Central Bank of the South primarily
provides cash management depository 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
Northeastern and Northwestern Florida and the three 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
1
Southwest. Through the Correspondent and Investment Services Division of
Compass Bank, the Subsidiary Banks distribute or make available a variety of
investment services and products to institutional and individual investors
including sales of municipal bonds, U.S. Government securities and
asset/liability services. Through Compass Brokerage, Inc., a wholly-owned
subsidiary of Compass Bank, the Subsidiary Banks also provide discount
brokerage services, mutual funds, and variable annuities to individuals and
businesses. Through Compass Bank's wholly-owned subsidiary, Compass Financial
Corporation, the Subsidiary Banks provide lease financing services to
individuals and businesses.
NONBANKING SUBSIDIARIES
Through wholly-owned subsidiaries, the Company is engaged in providing
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 and Florida about their possible affiliation
with the Company. It is impossible to predict accurately whether any
discussions will lead to agreement. Any bid or proposal for the acquisition of
additional banks is subject to approval by appropriate regulatory authorities.
(See "Supervision and Regulation".)
Since the Company first expanded to Texas in 1987 and to Florida in 1991,
the Company has acquired 21 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
- ----------- -------- -------- ----------
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
Southwest Bankers, Inc. 3-7-95 $142,000 Pooling
San Antonio, Texas
On March 7, 1995, the Company completed the acquisition of Southwest
Bankers, Inc. ("Southwest"), of San Antonio, Texas, and its bank subsidiary,
The Bank of San Antonio, with the issuance of 949,987 shares of the Company's
common stock. At the date of acquisition, Southwest had assets of $142 million
and equity of $9
2
million. The transaction was accounted for under the pooling-of-interests
method of accounting and accordingly all prior period information has been
restated.
On February 1, 1996, the Company completed the acquisition of Flower Mound
Bancshares, Inc. ("Flower Mound"), of Dallas, Texas, and its bank subsidiary,
Security Bank, for 342,930 shares of the Company's common stock. At the date
of acquisition, Flower Mound had assets of $46 million and equity of $4.8
million. The transaction was accounted for under the pooling-of-interests
method of accounting.
PENDING ACQUISITIONS
On October 16, 1995, the Company signed a definitive agreement to acquire
Equitable BankShares, Inc. ("Equitable"), of Ft. Worth, Texas, and its bank
subsidiary, Equitable Bank. At December 31, 1995, Equitable had assets of $202
million and equity of $11.4 million. It is anticipated that the transaction
will close in the second quarter of 1996 and will be accounted for under the
pooling-of-interests method of accounting.
On November 28, 1995, the Company signed a definitive agreement to acquire
Peoples Bancshares, Inc. ("Peoples"), of Belton, Texas, and its bank
subsidiary, Peoples National Bank. At December 31, 1995, Peoples had assets of
$139 million and equity of $11.2 million. It is anticipated that the
transaction will close in the second quarter of 1996 and will be accounted as
a purchase.
The Company signed a definitive agreement on November 30, 1995, to acquire
Post Oak Bank ("Post Oak") of Houston, Texas, in a transaction to be accounted
for as a purchase. At December 31, 1995, Post Oak had assets of $322 million
and equity of $36.9 million. The transaction is expected to close in the
second quarter of 1996.
The Company signed a definitive agreement on December 15, 1995, to acquire
Royall Financial Corporation ("Royall") of Palestine, Texas, and its bank
subsidiary, Royall National Bank of Palestine. At December 31, 1995, Royall
had assets of $106 million and equity of $10.3 million. It is anticipated that
the transaction will close in the second quarter of 1996 and will be accounted
for under the pooling-of-interests method of accounting.
On February 21, 1996, the Company signed a definitive agreement to acquire
CFB Bancorp, Inc. ("CFB"), of Jacksonville, Florida, and its bank subsidiary,
Community First Bank. At December 31, 1995, CFB had assets of $311 million and
equity of $19.9 million. It is anticipated that the transaction will close in
the second quarter of 1996 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, 1995, the five largest
bank holding companies in Alabama (including the Company) accounted for
approximately 58 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 1996
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
3
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 4.2 million, 4.0
million, and 1.4 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, Dallas, and San Antonio. 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 December 31, 1995, the Company and its subsidiaries employed
approximately 4,100 persons. The Company and its subsidiaries provide a
variety of benefit programs including group life, health, accident, and other
insurance, retirement and stock ownership plans. The Company also maintains
training, educational and affirmative action programs designed to prepare
employees for positions of increasing responsibility in both management and
operating positions.
GOVERNMENT MONETARY POLICY
The Company and the Subsidiary Banks are affected by the credit policies of
monetary authorities, including the Board of Governors of the Federal Reserve
System. An important function of the Federal Reserve System is to regulate the
national supply of bank credit. Among the instruments of monetary policy used
by the Federal Reserve to implement these objectives are: open market
operations in U.S. Government securities, changes in the discount rate,
reserve requirements on member bank deposits and funds availability
regulations. These instruments are used in varying combinations to influence
the overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of financial institutions in the
past and will continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to the future
impact that changes in interest rates, deposit levels or loan demand may have
on the business and income of the Company and the Subsidiary Banks.
SUPERVISION AND REGULATION
THE COMPANY
The Company and Compass of Texas are multi-bank holding companies within the
meaning of the Bank Holding Company Act ("BHC Act") and are registered as such
with the Federal Reserve. As bank holding companies, the Company and Compass
of Texas are required to file with the Federal Reserve an annual report and
such additional information as the Federal Reserve may require pursuant to the
BHC Act. The Federal Reserve may also make examinations of the Company and
each of its subsidiaries. Under the BHC Act, bank holding companies are
prohibited, with certain exceptions, from acquiring direct or indirect
ownership or control of more than five percent of the voting shares of any
company engaging in activities other than banking or managing or controlling
banks or furnishing services to or performing services for their banking
subsidiaries. However, the BHC Act authorizes the Federal Reserve to permit
bank holding companies to engage in, and to acquire or retain shares of
companies that engage in, activities which the Federal Reserve determines to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
The BHC Act requires a bank holding company to obtain the prior approval of
the Federal Reserve before it may acquire substantially all the assets of any
bank or ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than five
percent of the voting shares of any such bank. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Act"), facilitates
branching and the establishment of agency relationships across state lines and
permits,
4
commencing one year after enactment, bank holding companies to acquire banks
located in any state without regard to whether the transaction is prohibited
under any state law, subject to certain state provisions, including the
establishment by states of a minimum age of their local banks subject to
interstate acquisition of out-of-state bank holding companies. The minimum age
of local banks subject to interstate acquisition is limited to a maximum of
five years.
The States of Alabama, Florida, and Texas, where the Company currently
operates banking subsidiaries, each have laws relating specifically to
acquisitions of banks, bank holding companies, and other types of financial
institutions in those states by financial institutions that are based in, and
not based in, those states. In 1995, the State of Alabama enacted an
interstate banking act. In general, the Alabama statute implements the
Interstate Act, specifying five years as the minimum age of banks which may be
acquired and "opting into" interstate branching on May 31, 1997. Texas and
Florida law currently permits out-of-state bank holding companies to acquire
banks in Texas and Florida regardless of where the acquiror is based, subject
to the satisfaction of various provisions of state law, including the
requirement that the bank to be acquired has been in existence at least five
years in Texas and two years in Florida.
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 restoration plan is
limited to the lesser of five percent of an undercapitalized subsidiary's
assets or the amount required to meet regulatory capital requirements. If the
controlling bank holding company fails to fulfill its obligations under FDICIA
and files (or has filed against it) a petition under the Federal Bankruptcy
Code, the FDIC's claim may be entitled to a priority in such bankruptcy
proceeding over third party creditors of the bank holding company.
An insured depository institution may not pay management fees to any person
having control of the institution nor may an institution, except under certain
circumstances and with prior regulatory approval, make
5
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, 1995, 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.
During 1995, Congress considered various proposals for a one-time special
assessment to be charged on all SAIF deposits to fully capitalize the SAIF at
1.25 percent of insured deposits. The proposed amount of the special
assessment has been as high as $0.85 per $100 of SAIF deposits. Assuming that
a special assessment was applied at the $0.85 rate based upon SAIF insured
deposits at December 31, 1995, the Company would incur additional deposit
insurance premium expense of approximately $8.4 million which would be charged
against current period income. The timing and amount of such an assessment
cannot be accurately predicted at this time.
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, Compass Bank-Dallas, and Compass Bank-
San Antonio are each organized under the laws of the State of Texas and 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, Compass Bank-Dallas, and Compass
Bank-San Antonio, 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
6
of a sum which would increase the certified surplus to more than the capital
stock of the respective bank. 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.
OTHER
Other legislative and regulatory proposals regarding changes in banking, and
the regulation of banks, thrifts and other financial institutions, are being
considered by the executive branch of the federal government, Congress and
various state governments, including Alabama, Texas and Florida. Certain of
these proposals, if adopted, could significantly change the regulation of
banks and the financial services industry. It cannot be predicted accurately
whether any of these proposals will be adopted or, if adopted, how these
proposals will affect the Company or the Subsidiary Banks.
The Correspondent and Investment Services Division of Compass Bank is
treated as a municipal securities dealer and a government securities dealer
for purposes of the federal securities laws and, therefore, is subject to
7
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................... 13
Nonperforming Assets................................................... 37
Impaired Loans......................................................... 38
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..................................... 23
Assets/Liabilities Associated With Interest Rate Protection Contracts.. 23
Trading Account Interest Rate Contracts................................ 24
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 34
percent occupied by Compass Bank-Houston and River Oaks Trust Company. The
remaining space is leased to multiple tenants. See "Summary of Significant
Accounting Policies" and "Notes to Consolidated Financial Statements" for
information with respect to the amounts at which bank premises, equipment and
other real estate are carried and information relating to commitments under
long-term leases.
ITEM 3 -- LEGAL PROCEEDINGS
The Subsidiary Banks are defendants in legal proceedings arising in the
ordinary course of business. Some of these proceedings which relate to
lending, collections, servicing, investment, trust and other activities by
such subsidiaries seek substantial sums as damages.
Among the actions which are pending against the Subsidiary Banks are actions
filed as class actions in the State of Alabama. The actions are similar to
others that have been brought in recent years in Alabama against financial
institutions in that they seek punitive damages in transactions involving
relatively small amounts of actual damages. In recent years, juries in certain
Alabama state courts have rendered large punitive damage awards in such cases.
It may take a number of years to finally resolve some of these pending legal
proceedings due to their complexity and other reasons. It is not possible to
determine with any certainty at this time the potential exposure from the
proceedings. However, based upon the advice of legal counsel, management is of
the opinion that the ultimate resolution of these legal proceedings will not
have a material adverse effect on the Company's financial condition or results
of operations.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1995.
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
----- ---- --------
1995:
FIRST QUARTER......................................... $28 $21 1/2 $.28
SECOND QUARTER........................................ 29 1/4 25 1/2 .28
THIRD QUARTER......................................... 33 3/4 28 1/2 .28
FOURTH QUARTER........................................ 33 1/2 30 1/8 .28
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
As of January 31, 1996, there were 6,204 shareholders of record of common
stock of which 5,250 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 1995 accounted for under the pooling-of-interests method of accounting.
1995 1994 1993 1992 1991
----------- ---------- ---------- ---------- ----------
(in Thousands Except Per Share Data)
Net interest income..... $ 349,655 $ 336,768 $ 334,146 $ 322,774 $ 262,659
Provision for loan loss-
es..................... 10,235 3,404 35,856 53,175 38,751
Net income.............. 110,265 101,246 92,679 77,870 63,009
Per common share data:
Net income............. $ 2.88 $ 2.65 $ 2.39 $ 2.00 $ 1.68
Cash dividends de-
clared................ 1.12 .92 .76 .667 .587
Balance sheet:
Average total equity... $ 651,438 $ 585,078 $ 547,315 $ 488,224 $ 411,642
Average assets......... 9,490,964 8,151,495 7,244,377 6,927,468 6,244,755
Period-end FHLB and
other borrowings...... 584,852 487,916 328,928 207,730 20,336
Period-end total equi-
ty.................... 706,668 611,673 561,587 518,269 455,455
Period-end assets...... 10,262,247 9,265,137 7,453,859 7,210,151 6,898,873
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
1995 acquisitions accounted for using the pooling-of-interests accounting
method. Financial institutions acquired by the Company during the past three
years and accounted for as purchases are reflected in the financial position
and results of operations of the Company since the date of their acquisition.
SUMMARY
Net income for 1995 was $110.3 million, a 9 percent increase over the
Company's previous high of $101.2 million in 1994. Net income for 1994 was 9
percent higher than 1993 net income of $92.7 million. The increases in net
income per common share for 1995 and 1994 were 9 percent and 11 percent,
respectively. Net income per common share increased 20 percent during 1993.
Pretax income for 1995 was up $17.8 million or 12 percent over 1994 while
income tax expense increased 17 percent over the same period due to an
increase in the effective tax rate in 1995 from 34 percent to 36 percent.
One significant factor in the growth of the Company has been the Company's
acquisitions in Texas, specifically the Houston and Dallas areas, since early
1987. The Texas expansion continued in 1995 and is expected to continue in
1996. 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. With the
acquisition of Southwest Bankers, Inc., in March, 1995, the size of the
Company's Texas operations has grown to $3.5 billion at December 31, 1995. 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 1996. 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 1995 increased 17 percent over 1994 due to
increases in both average loans and total investment securities. The average
earning asset mix continued to change during 1995 with loans at 69 percent,
investment securities and investment securities available for sale at 30
percent and other earning assets at 1 percent of total earning assets. In
1994, loans were 72 percent, investment securities and investment securities
available for sale were 24 percent and other earning assets were 4 percent of
average earning assets, changing modestly from 74 percent, 22 percent, and 4
percent, respectively, in 1993. The shift in the mix of average earning assets
during 1995 and 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 remains
committed to returning 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
place the Company in a position to react to interest rate movements and to
maximize the return on earning assets.
LOANS
Average loans increased 12 percent in 1995 with much of the increase
concentrated in residential mortgage, real estate construction, and
commercial, financial and agricultural loans. Total loans outstanding at year
end increased nine percent over previous year-end levels. The growth in the
loan portfolio resulted from the Company's ongoing efforts to increase the
loan portfolio through the origination of loans, especially one-to-four family
real estate mortgages. Real estate construction loans increased 13 percent,
residential mortgage loans increased 9 percent, consumer installment loans
increased 9 percent and commercial mortgage loans increased 6 percent from
year-end 1994 to year-end 1995. Commercial, financial and agricultural loans,
which were 21
12
percent of total loans in 1995, increased 11 percent compared to the previous
year. The 11 percent increase in the Company's loan portfolio from 1993 to
1994 occurred primarily in residential mortgage loans which increased 19
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. The volume of commercial, financial and agricultural loans, as
a percentage of total loans outstanding, increased slightly during 1995
reversing the declining trend of the prior five years, reflective of the
stabilization of the economy in the markets served. Residential real estate
loans represented 40 percent of the total portfolio at December 31, 1995,
unchanged from the prior year, as the mortgage refinancing boom of 1993 and
1994 subsided. Additionally, the Company experienced a 10 percent increase in
its indirect auto loan portfolio from 1994 to 1995. At December 31, 1995, 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, 1995.
The Loan Portfolio table shows the classifications of loans by major
category at December 31, 1995, and for each of the preceding four years. The
second table shows maturities of certain loan classifications at December 31,
1995, and an analysis of the rate structure for such loans due in over one
year.
LOAN PORTFOLIO
December 31
---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- ------------------- ------------------- ------------------- -------------------
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..... $1,315,746 20.7% $1,187,594 20.4% $1,143,017 21.7% $1,068,099 22.5% $ 983,791 24.3%
Real estate --
construction.... 426,207 6.7 378,121 6.5 262,700 5.0 240,087 5.1 205,081 5.0
Real estate --
mortgage:
Residential...... 2,519,816 39.6 2,310,520 39.6 1,936,516 36.8 1,500,729 31.6 1,058,095 26.1
Commercial....... 783,273 12.3 742,278 12.7 740,270 14.1 731,129 15.4 724,024 17.9
Consumer install-
ment............. 1,316,316 20.7 1,211,021 20.8 1,179,359 22.4 1,203,063 25.4 1,081,966 26.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
6,361,358 100.0% 5,829,534 100.0% 5,261,862 100.0% 4,743,107 100.0% 4,052,957 100.0%
===== ===== ===== ===== =====
Less: Unearned in-
come............. 311 1,226 3,548 6,768 8,824
Allowance for
loan losses.... 108,337 108,337 111,744 85,434 57,528
---------- ---------- ---------- ---------- ----------
Total loans....... $6,252,710 $5,719,971 $5,146,570 $4,650,905 $3,986,605
========== ========== ========== ========== ==========
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
Rate Structure For Loans
Maturity Maturing Over One Year
-------------------------------------------- -------------------------
One Over One Year Over Predetermined Floating or
Year or Through Five Five Interest Adjustable
Less Years Years Total Rate Rate
---------- ------------- -------- ---------- ------------- -----------
(in Thousands)
Commercial, financial
and agricultural....... $ 774,288 $447,431 $ 94,027 $1,315,746 $280,938 $260,520
Real estate -- con-
struction.............. 273,487 132,690 20,030 426,207 64,739 87,981
---------- -------- -------- ---------- -------- --------
$1,047,775 $580,121 $114,057 $1,741,953 $345,677 $348,501
========== ======== ======== ========== ======== ========
13
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. On December 31, 1995, the Company adopted
the Financial Accounting Standards Board's Special Report, A Guide to
----------
Implementation of Statement 115 on Accounting for Certain Investments in Debt
- -----------------------------------------------------------------------------
and Equity Securities ("Special Report"). The Special Report allowed a company
- ---------------------
the one-time opportunity to reassess the appropriateness of its investment
securities classifications and to transfer securities from the held-to-
maturity portfolio to the available-for-sale portfolio without calling into
question the company's intent to hold other debt securities to maturity. Upon
adoption, the Company transferred held-to-maturity investment securities
totaling $828 million to its available-for-sale portfolio, and $33 million of
available-for-sale securities to its held-to-maturity portfolio. Generally,
individual holdings with greater than $10 million par value were transferred
to the available-for-sale portfolio in order to increase liquidity and
portfolio management capabilities, with smaller positions transferred to the
held-to-maturity portfolio.
At December 31, 1995, unrealized gains, net of unrealized losses, in the
Company's available-for-sale portfolio totaled $20.3 million as opposed to net
unrealized losses of $16.0 million at December 31, 1994. Under the
requirements of FAS115, shareholders' equity at December 31, 1995, has been
increased by $11.8 million to reflect the tax-effected unrealized gain
associated with the available-for-sale portfolio. At December 31, 1994, the
tax-effected unrealized loss of $11.7 million was reflected as a reduction of
shareholders' equity.
The composition of the Company's total investment securities portfolio
reflects the Company's investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the Company's investment strategy are to maintain an appropriate level of
liquidity and provide a tool to assist in controlling the Company's interest
rate position while at the same time producing adequate levels of interest
income. For securities classified as held to maturity, the Company has the
ability, and it is management's intention, to hold such securities to
maturity. Management of the maturity of the portfolio is necessary to provide
liquidity and control interest rate risk. Certain securities that may be sold
prior to maturity are reflected as investment securities available for sale on
the Company's balance sheet. 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. As discussed earlier, the Company transferred
securities, primarily CMOs and U.S. Government agencies, between its held-to-
maturity and available-for-sale portfolios at December 31, 1995, upon adoption
of the Special Report.
There were no sales of held-to-maturity securities during 1995 while sales
of held-to-maturity securities in 1994 totaled less than $1 million.
Maturities of held-to-maturity securities in 1995 and 1994 were $361 million
and $302 million, respectively. During 1995, gross gains of $1.2 million were
realized on $32 million of mortgage-backed securities in the held-to-maturity
portfolio, which were classified as maturities in accordance with FAS115.
Sales and maturities of securities available for sale totaled $686 million and
$150 million, respectively, in 1995 while sales and maturities in the category
in 1994 were $240 million and $111 million. Net
14
gains realized during the year accounted for 2 percent and 4 percent of
noninterest income in 1995 and 1994, respectively. Gross unrealized gains in
the Company's held-to-maturity portfolio at year-end 1995 totaled $17.6
million and gross unrealized losses totaled $3.6 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
42 percent during 1995 after increasing 26 percent in 1994.
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
---------------------------------
1995 1994 1993
---------- ---------- ----------
(in Thousands)
Investment securities:
U.S. Treasury................................ $ -- $ 16,053 $ 3,021
U.S. Government agencies and corporations.... 525 98,116 29,828
Mortgage-backed pass-through securities...... 335,591 466,733 305,012
Collateralized mortgage obligations:
Agency...................................... 132,485 618,849 114,399
Corporate................................... 114,914 422,011 23,782
States and political subdivisions............ 70,710 78,472 108,409
Corporate bonds.............................. 67,179 162,306 43,571
Other........................................ 1,235 2,678 3,003
---------- ---------- ----------
722,639 1,865,218 631,025
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 331,138 651,117 259,200
U.S. Government agencies and corporations.... 95,788 2,998 6,003
Mortgage-backed pass-through securities...... 230,305 6,769 8,032
Collateralized mortgage obligations:
Agency...................................... 542,212 19,196 278,103
Corporate................................... 627,766 -- 49,416
Corporate bonds.............................. 130,543 -- --
Other........................................ 39,739 47,572 47,260
---------- ---------- ----------
1,997,491 727,652 648,014
Net unrealized gain (loss).................. 20,292 (15,972) 10,833
---------- ---------- ----------
2,017,783 711,680 658,847
---------- ---------- ----------
Total....................................... $2,740,422 $2,576,898 $1,289,872
========== ========== ==========
The maturities and weighted average yields of the investment securities and
investment securities available for sale at the end of 1995 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
------------------------------------------------------------------
After Five But
Within After One But Within After
One Year Within Five Years Ten Years Ten Years
-------------- ---------------------------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ----------- ---------------- ----- -------- -----
(in Thousands)
Investment securities:
U.S. Government agen-
cies and corporations. $ -- -- % $ 30 8.87% $ 68 7.38% $ 427 6.84%
Mortgage-backed pass-
through securities.... 5,656 7.08 222,653 7.68 94,386 7.57 12,896 7.51
Collateralized mortgage
obligations........... 64,160 7.63 125,400 7.22 14,756 7.53 43,083 6.74
States and political
subdivisions.......... 1,402 8.80 14,172 8.49 23,920 9.33 31,216 9.52
Other.................. 37,895 5.94 25,099 6.98 5,420 7.69 -- --
-------- ----------- -------- --------
109,113 7.03 387,354 7.52 138,550 7.86 87,622 7.79
-------- ----------- -------- --------
Investment securities
available for sale --
amortized cost:
U.S. Treasury.......... 144,627 4.88 186,501 5.79 10 8.76 -- --
U.S. Government agen-
cies and corporations. 3,906 6.86 85,331 6.94 6,551 9.42 -- --
Mortgage-backed pass-
through securities.... -- -- 16,073 7.03 214,232 6.89 -- --
Collateralized mortgage
obligations........... 400,002 7.53 625,158 7.09 10,000 6.83 134,818 7.09
Other.................. 35,774 5.75 131,392 6.41 -- -- 3,116 6.01
-------- ----------- -------- --------
584,309 6.76 1,044,455 6.76 230,793 7.01 137,934 7.06
-------- ----------- -------- --------
Total................. $693,422 6.81 $ 1,431,809 6.96 $369,343 7.33 $225,556 7.35
======== =========== ======== ========
While the weighted average stated maturities of total MBS and CMOs are 17.6
years and 19.7 years, respectively, the corresponding average expected lives
assumed in the above table are 5.0 years and 3.6 years. During a period of
rising rates, prepayment speeds generally slow on MBS and CMOs with a
resulting extension in average life, and vice versa. Given a 100 basis point
immediate and permanent parallel increase in rates, the expected average lives
for MBS and CMOs would be 5.4 and 4.2 years, respectively. By the same token,
a 100 basis point immediate and permanent parallel decrease in rates, the
expected average lives for MBS and CMOs would be 4.0 and 2.8 years,
respectively.
The weighted average market prices as a percentage of par value for MBS and
CMOs at December 31, 1995, were 101.8 percent and 99.8 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, 1995, fixed-rate MBS and
CMOs totaled $278 million and $1,118 million, respectively, with corresponding
weighted average expected lives of 3.8 and 1.7 years. Adjustable rate MBS and
CMOs totaled $288 million and $300 million, respectively, with corresponding
weighted average expected lives of 6.1 and 10.4 years. Substantially all
adjustable-rate MBS and CMOs are subject to life rate caps, and MBS are also
generally subject to a two percent annual cap. The weighted average life caps
at year end were 11.42 percent and 9.63 percent for MBS and CMOs,
respectively, and the corresponding weighted average coupon rates at year end
were 7.05 percent and 6.96 percent. Given a 100 basis point immediate and
permanent parallel increase in rates, the estimated market prices for MBS and
CMOs would be 101.35 and 98.09, respectively. Given a 100 basis point
immediate and permanent parallel decrease in rates, the estimated market
prices for MBS and CMOs would be 104.14 and 100.48, 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 1995 decreased by 46
percent following a 24 percent
16
decrease in 1994. The composition of the Company's trading account at December
31, 1995 and 1994, is detailed below:
TRADING ACCOUNT COMPOSITION
DECEMBER 31, 1995 December 31, 1994
----------------- -----------------
(in Thousands)
U.S. Treasury and Govern-
ment agency............. $ 54,318 $26,599
States and political sub-
divisions............... 19,583 9,046
Mortgage-backed pass-
through securities...... 16,471 15,567
Other debt securities.... 396 201
Derivative securities:
Collateralized mortgage
obligations............ 8,472 5,344
Interest rate floors and
caps................... 2,676 1,178
Other options........... -- 77
-------- -------
$101,916 $58,012
======== =======
The balance in the trading account at December 31, 1995, increased from
year-end 1994 due to the need to carry more securities in inventory in order
to support increased customer demand. 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 collateralized
mortgage obligation inverse floaters ("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 decreased 59 percent in 1995 compared to a 49 percent increase in 1994.
The average balance of interest bearing deposits in other banks decreased 98
percent during 1995 from 1994 levels after decreasing 44 percent from 1993 to
1994. There were no foreign time deposits as of December 31, 1995 or 1994.
DEPOSITS AND BORROWED FUNDS
The Company's growth in assets during 1995 was funded primarily by deposit
growth, representing 54 percent of the $997 million increase in total
liabilities and shareholders' equity at December 31, 1995. A nine percent
increase in interest bearing deposits accounted for all of this increase as
noninterest bearing deposits remained unchanged. Growth in other liabilities
and in shareholders' equity represented 36 percent and 10 percent,
respectively, of the increase in total liabilities and shareholders' equity.
The $362 million increase in other liabilities consisted principally of a $292
million, or 60 percent, increase in Federal funds purchased and a $97 million,
or 20 percent, increase in FHLB and other borrowings, partially offset by a 20
percent decrease in securities sold under agreements to repurchase.
During 1994, 80 percent of the increase in total liabilities and
shareholders' equity was due to deposit growth as total deposits grew by $1.4
billion, the majority of which was attributable to the $865 million in
deposits acquired in the First Heights transaction. Noninterest bearing
deposits increased by $220 million, or 19 percent, while interest bearing
deposits increased by $1.2 billion, or 27 percent. A $140 million increase in
securities sold under agreements to repurchase along with a $159 million
increase in FHLB and other borrowings accounted for the majority of the $306
million, or 26 percent, increase in liabilities other than deposits.
Changes in the Company's markets and the economy in general, as well as the
First Heights acquisition, continued to impact the Company's liability mix
during 1995. While the portion of average interest bearing liabilities
represented by interest bearing deposits, the primary source of funding for
the Company, declined slightly from 81 percent in 1994 to 80 percent in 1995,
the average balance of certificates of deposits less than
17
$100,000 and other time deposits increased from 30 percent to 33 percent of
total interest bearing liabilities. Certificates of deposits less than
$100,000 and other time deposits represented 34 percent of average total
deposits in 1995, up from 29 percent in 1994. For the year, the average
balance of certificates of deposit less than $100,000 and other time deposits
increased 33 percent while certificates of deposit of $100,000 or more grew by
24 percent. Interest bearing demand deposits and savings accounts experienced
only modest increases of two percent and six percent, respectively.
The portion of average interest bearing liabilities represented by interest
bearing deposits increased from 79 percent in 1993 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
36 percent in 1993 to 39 percent in 1994.
During 1994, the average balance of demand deposits, savings accounts and
noninterest bearing deposits represented 61 percent of average total deposits,
down from 64 percent in 1993. This decline was a function of a 22 percent
increase in the average balance of certificates of deposit less than $100,000
and other time deposits and a 31 percent increase in the average balance of
certificates of deposits of $100,000 or more. This shift in the mix of
deposits was due principally to the acquisition of 22 branches of First
Heights in which time deposits constituted 73 percent of the $865 million of
total deposits assumed.
The maturities of certificates of deposit of $100,000 or more and other time
deposits of $100,000 or more outstanding at December 31, 1995, 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....................... $315,400 $25,887 $341,287
Over three through six months.............. 90,374 3,400 93,774
Over six through twelve months............. 146,213 -- 146,213
Over twelve months......................... 222,100 -- 222,100
-------- ------- --------
$774,087 $29,287 $803,374
======== ======= ========
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 increased 46 percent during 1995 and average
securities sold under agreements to repurchase increased 5 percent. Average
other short-term borrowings, which include parent company commercial paper and
trading account short sales, decreased 17 percent. During 1995, the average
balance of FHLB and other borrowings increased $187 million, or 53 percent, as
a result of additional FHLB advances of $175 million incurred in the third
quarter, partially offset by fourth quarter repayments of $75 million. The
average balance of FHLB and other borrowings increased 27 percent during 1994
due to additional borrowings of $50 million in subordinated debentures and
$110 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."
18
The Short-Term Borrowings table below shows the distribution of the
Company's short-term borrowed funds and the weighted average interest rates
thereon at the end of each of the last three years. Also provided are the
maximum outstanding amounts of borrowings, the average amounts of borrowings
and the average interest rates at year end for the last three years.
SHORT-TERM BORROWINGS
Year Ended December 31
-------------------------------------------------
Maximum Average
Outstanding Average Interest
At Any Average Interest Ending Rate At
Month End Balance Rate Balance Year End
----------- -------- -------- ---------- --------
(in Thousands)
1995
FEDERAL FUNDS PURCHASED...... $ 848,078 $553,023 5.75% $ 776,308 5.53%
SECURITIES SOLD UNDER AGREE-
MENTS TO REPURCHASE......... 304,676 256,303 5.00 279,725 4.92
SHORT SALES.................. 38,096 25,090 5.85 24,245 5.13
COMMERCIAL PAPER............. 188,677 125,891 5.85 57,312 5.38
OTHER SHORT-TERM BORROWINGS.. 125,757 36,870 5.75 34,171 5.69
---------- -------- ----------
$1,505,284 $997,177 $1,171,761
========== ======== ==========
1994
Federal funds purchased...... $ 484,190 $377,907 4.56% $ 484,190 5.70%
Securities sold under agree-
ments to repurchase......... 348,418 243,227 3.54 348,418 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
---------- -------- ----------
$1,252,070 $846,261 $ 937,206
========== ======== ==========
1993
Federal funds purchased...... $ 496,390 $406,855 3.06% $ 411,704 3.01%
Securities sold under agree-
ments 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
---------- -------- ----------
$1,122,565 $855,404 $ 791,457
========== ======== ==========
LIQUIDITY MANAGEMENT
Liquidity is the ability of the Company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the
Company's ability to meet the day-to-day cash flow requirements of the
Subsidiary Banks' customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Subsidiary Banks would not be able to perform the
primary function of a financial intermediary and would, therefore, not be able
to meet the needs of the communities they serve. Additionally, the parent
holding company requires cash for various operating needs including dividends
to shareholders, business combinations, capital injections to the Subsidiary
Banks, the servicing of debt and the payment of general corporate expenses.
The primary source of liquidity for the parent holding company is dividends
from the Subsidiary Banks. At December 31, 1995, the Company's Subsidiary
Banks could have paid additional dividends to the parent holding company in
the amount of $104.4 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.
19
Asset and liability management functions not only to assure adequate
liquidity in order for the Subsidiary Banks to meet the needs of their
customers, but also to maintain an appropriate balance between interest-
sensitive assets and interest-sensitive liabilities so that the Company can
also meet the investment requirements of its shareholders. Daily monitoring of
the sources and uses of funds is necessary to maintain an acceptable cash
position that meets both requirements. In a banking environment, both assets
and liabilities are considered sources of liquidity funding and both are,
therefore, monitored on a daily basis.
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 $1.0 billion,
or 16 percent, of the total loan portfolio at December 31, 1995. Other short-
term investments such as federal funds sold, securities purchased under
agreements to resell and maturing interest bearing deposits with other banks
are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and noninterest bearing deposit accounts.
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings are additional sources of liquidity and basically
represent the Company's incremental borrowing capacity. These sources of
liquidity are short-term in nature and are used as necessary to fund asset
growth and meet short-term liquidity needs.
As disclosed in the Company's "Consolidated Statements of Cash Flows," net
cash provided by operating activities decreased to $98 million primarily due
to the increase in trading account securities. Net cash used in investing
activities of $890 million consisted primarily of net loans originated of $546
million and available-for-sale securities purchased of $1.3 billion, largely
funded by maturities of investment securities held to maturity of $361
million, as well as sales and maturities of investment securities available
for sale of $686 million and $150 million, respectively. Net cash provided by
financing activities provided the remainder of funding sources for 1995. The
$832 million of net cash provided by financing activities consisted primarily
of a $540 million increase in deposits, a net increase of $97 million in FHLB
and other borrowings, and a $292 million increase in federal funds purchased
offset partially by a reduction of $69 million in securities sold under
agreements to repurchase. The increase in FHLB and other borrowings in 1995
consisted of additional FHLB advances of $175 million and repayments of $78
million.
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. The Company measures interest rate sensitivity 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,
1995 and 1994, 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)
1995
EARNING ASSETS:
LOANS, NET OF UNEARNED
INCOME................ $1,719,619 $ 471,594 $ 658,443 $1,356,725 $2,154,666 $6,361,047
TAXABLE INVESTMENT SE-
CURITIES.............. -- 149,554 96,255 325,552 71,091 642,452
TAX-EXEMPT INVESTMENT
SECURITIES............ -- 450 951 21,165 57,621 80,187
INVESTMENT SECURITIES
AVAILABLE FOR SALE.... -- 580,218 494,337 935,128 8,100 2,017,783
TRADING ACCOUNT SECURI-
TIES.................. 101,916 -- -- -- -- 101,916
FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED
UNDER AGREEMENTS TO
RESELL ............... 250,039 -- -- -- -- 250,039
INTEREST BEARING DEPOS-
ITS WITH OTHER BANKS.. -- -- -- -- 99 99
---------- --------- ----------- ---------- ---------- ----------
TOTAL EARNING ASSETS.. 2,071,574 1,201,816 1,249,986 2,638,570 2,291,577 9,453,523
INTEREST BEARING LIABIL-
ITIES:
DEMAND DEPOSITS........ -- 861,530 -- -- -- 861,530
SAVINGS DEPOSITS....... -- -- 1,364,371 -- 795,941 2,160,312
CERTIFICATES OF DEPOSIT
LESS THAN $100,000 AND
OTHER TIME DEPOSITS... 57,819 546,978 980,762 941,460 5,345 2,532,364
CERTIFICATES OF DEPOSIT
OF $100,000 OR MORE... 28,609 287,458 236,361 220,126 1,533 774,087
FEDERAL FUNDS PURCHASED
AND SECURITIES SOLD
UNDER AGREEMENTS TO
REPURCHASE............ 1,051,239 -- -- -- 4,794 1,056,033
OTHER SHORT-TERM
BORROWINGS............ 115,728 -- -- -- -- 115,728
FHLB AND OTHER
BORROWINGS............ -- 346,048 149 110,984 127,671 584,852
---------- --------- ----------- ---------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES.......... 1,253,395 2,042,014 2,581,643 1,272,570 935,284 8,084,906
EFFECT OF INTEREST RATE
SWAPS.................. 130,000 196,667 (188,667) (130,000) (8,000) --
---------- --------- ----------- ---------- ---------- ----------
INTEREST SENSITIVITY
GAP.................... 948,179 (643,531) (1,520,324) 1,236,000 1,348,293 $1,368,617
---------- --------- ----------- ---------- ---------- ==========
CUMULATIVE INTEREST SEN-
SITIVITY GAP........... $ 948,179 $ 304,648 $(1,215,676) $ 20,324 $1,368,617
========== ========= =========== ========== ==========
1994
Earning assets:
Loans, net of unearned
income ............... $1,387,021 $ 375,127 $ 1,599,037 $ 978,580 $1,488,543 $5,828,308
Taxable investment se-
curities.............. -- 352,980 306,914 842,223 273,787 1,775,904
Tax-exempt investment
securities............ -- 270 3,552 14,324 71,168 89,314
Investment securities
available for sale.... -- 94,214 264,041 350,752 2,673 711,680
Trading account securi-
ties.................. 58,012 -- -- -- -- 58,012
Federal funds sold and
securities purchased
under agreements to
resell ............... 46,535 -- -- -- -- 46,535
Interest bearing depos-
its with other banks.. -- -- -- -- 99 99
---------- --------- ----------- ---------- ---------- ----------
Total earning assets.. 1,491,568 822,591 2,173,544 2,185,879 1,836,270 8,509,852
Interest bearing liabil-
ities:
Demand deposits........ -- 844,335 -- -- -- 844,335
Savings deposits....... -- -- 1,427,119 -- 404,712 1,831,831
Certificates of deposit
less than $100,000 and
other time deposits... -- 564,301 807,325 1,010,144 20,697 2,402,467
Certificates of deposit
of $100,000 or more... -- 284,170 218,579 197,713 4,441 704,903
Federal funds purchased
and securities sold
under agreements to
repurchase............ 829,107 -- -- -- 3,501 832,608
Other short-term
borrowings............ 104,598 -- -- -- -- 104,598
FHLB and other
borrowings............ -- 247,552 137 111,581 128,646 487,916
---------- --------- ----------- ---------- ---------- ----------
Total interest bearing
liabilities........... 933,705 1,940,358 2,453,160 1,319,438 561,997 7,208,658
Effect of interest rate
swaps.................. (20,000) 226,000 (200,000) 2,000 (8,000) --
---------- --------- ----------- ---------- ---------- ----------
Interest sensitivity
gap.................... 537,863 (891,767) (479,616) 868,441 1,266,273 $1,301,194
---------- --------- ----------- ---------- ---------- ==========
Cumulative interest sen-
sitivity gap........... $ 537,863 $(353,904) $(833,520) $ 34,921 $1,301,194
========== ========= =========== ========== ==========
21
In the preceding tables, fixed-rate 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, 1995. For all other interest
earning assets and interest bearing liabilities, variable rate assets and
liabilities are reflected in the time interval of the asset 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, 1995, for the first year,
73 percent of earning asset funding sources will reprice compared to 48
percent of all interest earning assets. Changes in the mix of earning assets
or supporting liabilities can either increase or decrease the net interest
margin without affecting interest rate sensitivity. In addition, the interest
rate spread between an asset and its supporting liability can vary
significantly while the timing of repricing for both the asset and the
liability remains the same, thus impacting net interest income. This
characteristic is referred to as basis risk and relates to the possibility
that the repricing characteristics of assets tied to the Company's prime
lending rate are different from those of funding sources such as certificates
of deposit.
Varying interest rate environments can create unexpected changes in the
prepayments of assets and repricing of liabilities which are not reflected in
the Interest Rate Sensitivity Analysis. These changing prepayments may have
significant effects on the Company's net interest margin. Because of these
factors, an interest sensitivity gap report will not provide a comprehensive
assessment of the Company's exposure to changes in interest rates. Management
utilizes computerized interest rate simulation analysis to determine the
Company's expected sensitivity to changes in interest rates. Unique cash flows
for various interest rate environments can be used in the simulation model to
provide a better quality of predictive information to manage net interest
margin. The ability to change cash flows in the simulation model allows
management to see the impact that a variety of cash flow and interest rate
scenarios have on the net interest margin.
The simulation model is used to develop a better understanding of risks
other than prepayment and repricing of liabilities that may exist in the
structure of the balance sheet. The simulation model allows the Company to
test a variety of magnitudes to examine the impact of basis risk on interest
rate margin. Using a simulation model provides insight into how a change in
the slope of the yield curve will impact the interest margin. A change in the
shape of the yield curve impacts the dynamics of repricings and cash flows and
therefore the net interest margin. The model simulation tests the impact that
the timing of a change in interest rates may have on net interest margin.
Rates falling at different relativity over a time horizon will impact net
interest margin differently in each scenario. Interest rate simulation
modeling assists management in identifying risks to net interest margin thus
allowing management to reduce the volatility of the net interest margin as
appropriate. The Company's current simulation model, which includes December
31, 1995 balances and projected 1996 growth, indicated a decrease in net
interest income of less than two percent with an immediate and permanent 100
basis point increase or decrease in the general level of interest rates.
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 or money market instruments at a designated future date
and at a specified price or yield. The interest rate risk factor in these
contracts is considered in the overall interest management strategy and the
Company's interest risk management program. The income or expense associated
with interest rate swaps, caps and floors and gains or losses in futures
contracts classified as hedges are ultimately reflected as adjustments to
interest income or expense. Changes in the estimated fair value of interest
rate protection contracts are not reflected in the financial statements until
realized. A discussion of interest rate risks, credit risks and concentrations
in off-balance sheet financial instruments is included in Note 6, Derivative
Financial Instruments, of "Notes to Consolidated Financial Statements." The
following table details various information regarding interest rate protection
contracts as of December 31, 1995:
22
INTEREST RATE PROTECTION CONTRACTS
Weighted
Weighted Weighted Average
Average Rate* Average Repricing
Notional Carrying Estimated ------------- Years to Frequency
Amount Value Fair Value Received Paid Expiration (Days)
---------- -------- ---------- -------- ---- ---------- ---------
(in Thousands)
Non-trading interest rate con-
tracts:
Swaps:
Pay fixed versus 3
mon. LIBOR........... $ 308,000 $ (68) $(3,993) 5.89% 6.19% 2.06 90
Receive fixed versus 3
mon. LIBOR........... 20,000 (9) (96) 4.74 5.81 0.96 90
Basis swaps+.......... 388,668 1,283 (1,728) 6.37 6.43 4.75 90
Caps purchased......... 260,000 1,261 165 -- * 1.57 90
Floors purchased....... 650,000 95 2,428 0.11 * 1.46 76
---------- ------ -------
$1,626,668 $2,562 $(3,224)
========== ====== =======
- --------
+ On $200 million notional, the Company receives interest based on the federal
funds rate and pays interest based on 3-month LIBOR. For the remainder, the
Company receives interest based on 3-month LIBOR plus 84 basis points and
pays interest based on the 1-year Constant Maturity Treasury plus 150 basis
points.
* Weighted average rates received/paid are shown only for swaps, caps and
floors for which net interest amounts were receivable or payable at December
31, 1995. 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 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 1995, there were $486,000 of deferred gains and $183,000 of deferred
losses on terminated interest rate protection contracts, which will be
recorded as net interest income (expense) of $432,000 in 1996, $(44,000) in
1997 and $(85,000) thereafter. The following table indicates the asset or
liability category with which the non-trading interest protection contracts
were associated at December 31, 1995:
ASSETS/LIABILITIES ASSOCIATED WITH INTEREST RATE PROTECTION CONTRACTS
Notional Principal Associated With
---------------------------------------------
Total
Notional FHLB Federal Funds
Principal Loans Investments++ Advances Purchased++
---------- -------- ------------- -------- -------------
(in Thousands)
Swaps:
Pay fixed........... $ 308,000 $ 8,000 $ -- $200,000 $100,000
Receive fixed....... 20,000 20,000 -- -- --
Basis swaps++....... 388,668 -- 188,668 -- 200,000
Caps.................. 260,000 260,000 -- -- --
Floors................ 650,000 650,000 -- -- --
---------- -------- -------- -------- --------
$1,626,668 $938,000 $188,668 $200,000 $300,000
========== ======== ======== ======== ========
- --------
++ Based on the nature of basis swaps, the levels of interest rate protection
provided by such contracts are substantially lower than indicated by their
notional principal amounts. Accordingly, the level of notional principal
shown cannot be directly compared to the related account balances.
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
23
contracts in the trading account are to facilitate customer transactions and
to help protect cash market positions in the trading account against interest
rate movement. Changes in the estimated fair value of contracts in the trading
account are recorded in other noninterest income as trading profits and
commissions. Net interest amounts received or paid on interest rate contracts
in the trading account are recorded as an adjustment of interest on trading
account securities. The following table summarizes interest rate contracts
held in the trading account at December 31, 1995:
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 3
mon. LIBOR........... $ 20,000 $ 216 $ 216 6.02% 4.38% 0.34 90
Receive fixed versus:
3 mon. LIBOR......... 23,000 78 78 6.10 5.92 1.07 90
Prime................ 890 (15) (15) 6.80 8.57 2.71 1
Caps:
Purchased............. 87,500 107 107 0.36 * 0.83 76
Written............... 124,400 (189) (189) * -- 1.48 78
Floors:
Purchased............. 230,000 2,774 2,774 0.39 * 2.13 86
Written............... 167,500 (1,970) (1,970) * 0.30 2.23 57
-------- ------- -------
Total............... $653,290 $ 1,001 $ 1,001
======== ======= =======
- --------
* 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, 1995. For caps and floors, the rate shown represents the weighted average
net interest differential between the index rate and the cap or floor rate.
++ Positive carrying values represent assets of the Company while negative
amounts represent liabilities.
In addition to the interest rate contracts shown above, the Company uses
other options and futures in the trading account. At December 31, 1995, the
trading account did not contain any other options, but did contain futures
contracts having a notional principal of $467 million. Such futures contracts
were used to help reduce the price sensitivity of the trading account.
During 1994, the Company implemented Financial 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
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.
24
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, 1995, increased 16 percent after
increasing 9 percent in 1994. Exclusive of the net change in unrealized
holding gains (losses) on securities available for sale in both 1994 and 1995,
net income after dividends accounted for 95 percent of the increase in
shareholders' equity in 1995 and for 98 percent of the increase in 1994.
Dividends of $43 million were declared on the Company's common stock in
1995, representing a 26 percent increase over 1994. The 1995 annual dividend
rate per common share was $1.12, a 22 percent increase over 1994. The dividend
payout ratio for 1995 was 39 percent compared to 35 percent for 1994 and 32
percent for 1993. 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 14 percent was achieved primarily through reinvested earnings.
Average shareholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average shareholders'
equity to average assets for 1995 was 6.86 percent compared to 7.18 percent in
1994 and 7.56 percent in 1993. The decrease in 1995 was due primarily to the
impact of the October, 1994 acquisition of First Heights on the Company's
average assets. As noted above, exclusive of the change in unrealized holding
gains (losses) on securities available for sale, the increase in shareholders'
equity in 1995 and 1994 is due almost exclusively to the retention of
earnings. In order to maintain this ratio at appropriate levels with continued
growth in total average assets, a corresponding level of capital growth must
be achieved. The table below summarizes these and other key ratios for the
Company for each of the last three years.
RETURN ON EQUITY AND ASSETS
December 31
-------------------
1995 1994 1993
----- ----- -----
Return on average assets................................... 1.16% 1.24% 1.28%
Return on average common equity............................ 16.93 17.30 17.19
Common stock dividend payout ratio......................... 38.89 34.72 31.80
Average equity to average assets ratio..................... 6.86 7.18 7.56
Two important indicators of capital adequacy in the banking industry are the
leverage ratio and the tangible leverage ratio. The leverage ratio is defined
as common shareholders' equity, minus goodwill and other intangibles
disallowed by the Subsidiary Bank's regulators, divided by total quarterly
average assets minus goodwill, other disallowed intangibles, and the
unrealized gain (loss) on available-for-sale securities. The tangible leverage
ratio is defined as common shareholders' equity, minus all intangibles,
divided by total quarterly average assets minus all intangibles. Even though
core deposit intangibles and goodwill increased from
25
acquisitions during 1994 and 1993, the leverage ratio remained well within
regulatory guidelines: 6.73 percent at year-end 1995; 6.62 percent at year-end
1994; and 7.32 percent at year-end 1993. For the same periods, the tangible
leverage ratio was 6.53 percent at year-end 1995; 6.37 percent at year-end
1994; and 6.98 percent at year-end 1993. 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 $11.7 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. By the
same token, the $11.8 million increase in shareholders' equity at December 31,
1995, has not been included as a component of equity in computing the leverage
ratios.
LEVERAGE RATIO CALCULATIONS
December 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
(in Thousands)
Total fourth quarter average assets........ $9,893,164 $8,930,749 $7,441,420
Add: Unrealized holding (gain) loss on
available-for-sale securities............ 1,732 8,671 (118)
Less:Goodwill............................. 19,889 20,788 9,224
Other disallowed intangibles............ 11,356 13,333 1,716
---------- ---------- ----------
Tangible average assets before deduction of
other intangibles......................... 9,863,651 8,905,299 7,430,362
Less:Other intangibles.................... 20,496 23,027 27,482
---------- ---------- ----------
Tangible average assets................. $9,843,155 $8,882,272 $7,402,880
========== ========== ==========
Total period-end common shareholders' equi-
ty........................................ $ 706,668 $ 611,673 $ 561,587
Less: Goodwill............................ 19,889 20,788 9,224
Other disallowed intangibles............ 11,356 13,333 1,716
Net unrealized holding gain (loss) on
available-for-sale
securities............................ 11,812 (11,686) 6,767
---------- ---------- ----------
Total common shareholders' equity before
deduction of other
intangibles............................... 663,611 589,238 543,880
Less: Other intangibles................... 20,496 23,027 27,482
---------- ---------- ----------
Tangible period-end common shareholders'
equity.................................. $ 643,115 $ 566,211 $ 516,398
========== ========== ==========
Leverage ratio.......................... 6.73% 6.62% 7.32%
Tangible leverage ratio ................ 6.53 6.37 6.98
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 $664 million at December 31, 1995. 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 $872 million at year-end 1995. The percentage ratios, as calculated
under the guidelines, were 9.88 percent and 12.98 percent for Tier I and Total
Qualifying Capital, respectively, at year-end 1995. 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. Tier I capital increased in 1995 as a result of $68
million in earnings, net of dividends retained by the Company,
26
$3 million received from the exercise of stock options, and a $3 million
decrease in disallowed intangibles. This increase in Tier I capital more than
offset the increase in total risk-adjusted assets, resulting in the increase
in the Tier I capital ratio. However, Tier II Capital increased only $8
million during the year and, as a result, the Total Qualifying Capital ratio
decreased slightly in 1995. The decrease in Tier I and Total Qualifying
Capital ratios 1994 was due to the addition of higher-risk weighted assets,
primarily loans and investment securities, and goodwill and other intangibles
resulting from acquisitions.
December 31
-------------------
1995 1994 1993
----- ----- -----
Risk-based Capital Ratios:
Tier I Capital Ratio...................................... 9.88% 9.75% 10.55%
Total Qualifying Capital Ratio............................ 12.98 13.06 13.26
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 1995 for "well
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to assure that the Subsidiary Banks exceed the
guidelines.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
cha