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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 0-6032
Compass Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Delaware 63-0593897
(State of Incorporation) (I.R.S. Employer Identification No.)
15 South 20th Street
Birmingham, Alabama 35233
(Address of principal executive offices)
(205) 933-3000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which
None registered
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $2 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
As of January 31, 1999, the aggregate market value of voting stock held by
non-affiliates was $2,692,766,711.
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, 1999
Common Stock, $2 Par Value 75,586,434
Documents Incorporated by Reference Part of 10-K in which incorporated
Proxy Statement for 1999 annual Part III
meeting
except for information referred to
in
Item 402(a)(8) of Regulation S-K
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PART I
ITEM 1 -- BUSINESS
Compass Bancshares, Inc. (the "Company") is a bank holding company with its
principal place of business in Birmingham, Alabama. The Company was organized
in 1970 and commenced business in late 1971 upon the acquisition of Central
Bank & Trust Co. and State National Bank. The Company subsequently acquired
substantially all of the outstanding stock of additional banks located in
Alabama, 11 of which were merged in late 1981 to create Central Bank of the
South, Alabama's first statewide bank. In November 1993, the Company changed
its name from Central Bancshares of the South, Inc. to Compass Bancshares,
Inc. and Central Bank of the South, the Company's lead bank subsidiary,
changed its name to Compass Bank ("Compass Bank"). In February 1987, the
Company acquired First National Bank of Crosby near Houston, Texas, and became
the first out-of-state bank holding company to acquire a bank in Texas. The
Company first expanded into Florida in July 1991, when it acquired Citizens &
Builders Federal Savings, F.S.B., in Pensacola, Florida. In December 1998, the
Company expanded into the state of Arizona with the acquisition of Tucson-
based Arizona Bank.
In addition to Compass Bank, the Company also owns Central Bank of the
South, an Alabama banking corporation headquartered in Anniston, Alabama, and
Arizona Bank, an Arizona state bank headquartered in Tucson, Arizona ("Arizona
Bank"). The bank subsidiaries of the Company are referred to collectively
herein as the "Subsidiary Banks."
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide them with capital and services
of various kinds. The Company derives substantially all of its income from
dividends from its subsidiaries. Such dividends are determined on an
individual basis, generally in relation to each subsidiary's earnings and
capital position.
Subsidiary Banks
Compass Bank conducts a general commercial banking and trust business at 250
bank offices, including 120 in Texas, 88 in Alabama, and 42 in Florida.
Arizona Bank conducts a general commercial banking business from 29 bank
offices in the State of Arizona. The Subsidiary Banks perform banking services
customary for full service banks of similar size and character. Such services
include receiving demand and time deposit accounts, making personal and
commercial loans and furnishing personal and commercial checking accounts. The
Asset Management Division of Compass Bank offers its customers a variety of
fiduciary services, including portfolio management and the administration and
investment of funds of estates, trusts and employee benefit plans. Through
Compass Bancshares Insurance, Inc., a wholly-owned subsidiary of Compass Bank,
the Subsidiary Banks make available to their customers and others, as agent
for a variety of insurance companies, term life insurance, fixed-rate
annuities and other insurance products.
Compass Bank provides correspondent banking services including educational
seminars and operational and investment services to approximately 1,000
financial institutions located throughout the United States. Through the
Correspondent and Investment Services Division of Compass Bank, the Subsidiary
Banks distribute or make available a variety of investment services and
products to institutional and individual investors including institutional
sales, bond accounting, safekeeping and interest rate risk analysis services.
Through Compass Brokerage, Inc., a wholly-owned subsidiary of Compass Bank,
the Subsidiary Banks also provide discount brokerage services, mutual funds
and variable annuities to individuals and businesses. Through Compass Bank's
wholly-owned subsidiary, Compass Financial Corporation, the Subsidiary Banks
provide lease financing services to individuals and businesses.
Nonbanking Subsidiaries
Through wholly-owned subsidiaries, the Company is engaged in providing
insurance products to customers of the Subsidiary Banks and owning real estate
for bank premises. Revenues from operation of these subsidiaries do not
presently constitute a significant portion of the Company's total operating
revenues. The Company may subsequently engage in other activities permissible
for registered bank holding companies when suitable opportunities develop. Any
proposal for such further activities is subject to approval by appropriate
regulatory authorities. Refer to "Supervision and Regulation."
1
Lines of Business
The Company is currently aligned along lines of business. Each line of
business is a strategic unit that serves a particular group of customers that
have certain common characteristics, through various products and services.
The Company's primary operating segments are Corporate Banking, Community
Banking, Retail Banking, Asset Management, and Treasury.
The Corporate Banking segment is responsible for providing a full array of
banking and investment services to business banking, commercial banking, and
other institutional clients in each of the Company's major metropolitan
markets. The Corporate Banking segment also includes a National Industries
unit that is responsible for serving larger national accounts, principally in
targeted industries. In addition to traditional credit and deposit products,
the Corporate Banking segment also supports its customers with capabilities in
treasury management, leasing, accounts receivable purchasing, asset-based
lending, international services, and interest rate protection and investment
products.
The Retail Banking segment serves the Company's consumer customers in each
of its major metropolitan markets through an extensive banking office network
and through the use of alternative delivery channels such as PC banking, the
internet, and telephone banking. The Retail Banking segment provides
individuals with comprehensive products and services, including home
mortgages, credit cards, deposit accounts, mutual funds, and brokerage and
insurance. In addition, Retail Banking also serves the Company's small
business customers.
The Community Banking segment is responsible for serving the Company's
Arizona markets, its Austin, Texas market, and its non-metropolitan markets
and provides the same products and services offered by the Corporate Banking
and Retail Banking segments. The Asset Management segment provides specialized
investment portfolio management, financial counseling, and customized services
to the Company's private clients and foundations as well as investment
management and retirement services to companies and their employees. The Asset
Management segment is also the discretionary investment manager of Expedition
Funds, the Company's family of proprietary mutual funds. The Treasury
segment's primary function is to manage the investment securities portfolio,
public entity deposits, interest rate risk, and liquidity and funding
positions of the Company.
Business Combinations
The Company may seek to combine with other banks and banking offices when
suitable opportunities develop. Discussions are held from time to time with
institutions about their possible affiliation with the Company. It is
impossible to predict accurately whether any discussions will lead to
agreement. Any bid or proposal for the combination of additional banks is
subject to approval by appropriate regulatory authorities. Refer to
"Supervision and Regulation." Since the Company first expanded into Texas in
1987, the Company has combined with 45 financial institutions and engaged in
numerous asset and deposit purchase transactions.
On November 2, 1998, the Company signed a definitive agreement to acquire 15
branches in Arizona from Wells Fargo Bank, N.A. These branches, primarily in
the Phoenix area, will add approximately $412 million in deposits and $127
million in loans. The transaction is expected to close in the second quarter
of 1999 and 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, Arizona, and
adjoining states, and compete for interest bearing funds with other banks,
mutual funds, and many non-bank issuers of commercial paper and other
securities. In substantially all of the markets served by the Subsidiary
Banks, Compass Bank encounters intense competition from other financial
institutions that are substantially larger in terms of assets and deposits.
Competition for the correspondent banking and securities sales business also
exists from commercial and investment banks and brokerage firms. In
2
the case of larger customers, competition exists with financial institutions
in major metropolitan areas in the United States, many of which are larger in
terms of capital, resources, and personnel. Increasingly, in the conduct of
certain aspects of their businesses, the Subsidiary Banks compete with finance
companies, savings and loan associations, credit unions, mutual funds,
factors, insurance companies, and similar financial institutions.
There is significant competition among bank holding companies in most of the
markets served by the Subsidiary Banks. The Company believes that intense
competition for banking business among bank holding companies with operations
in Alabama, Texas, Florida, and Arizona will continue. During 1999 the
competition may further intensify if additional regional bank holding
companies enter such states through the acquisition of local bank holding
companies or savings and loan institutions.
Employees
At December 31, 1998, the Company and its subsidiaries employed
approximately 5,900 persons. The Company and its subsidiaries provide a
variety of benefit programs including retirement and stock ownership plans as
well as group life, health, accident, and other insurance. The Company also
maintains training, educational, and affirmative action programs designed to
prepare employees for positions of increasing responsibility.
Government Monetary Policy
The Company and the Subsidiary Banks are affected by the credit policies of
monetary authorities including the Board of Governors of the Federal Reserve
System ("Federal Reserve"). An important function of the Federal Reserve is to
regulate the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve to implement these objectives are open
market operations in U.S. Government securities, changes in the discount rate,
reserve requirements on member bank deposits, and funds availability
regulations. These instruments are used in varying combinations to influence
the overall growth of bank loans, investments, and deposits and may also
affect interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of financial institutions in the
past and will continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to the future
impact that changes in interest rates, deposit levels, or loan demand may have
on the business and income of the Company and the Subsidiary Banks.
SUPERVISION AND REGULATION
The Company
The Company is a multi-bank holding company within the meaning of the Bank
Holding Company Act ("BHC Act") and is registered as such with the Federal
Reserve. As a bank holding company, the Company is required to file with the
Federal Reserve an annual report and such additional information as the
Federal Reserve may require pursuant to the 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;
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
3
if, after such acquisition, it would own or control, directly or indirectly,
more than five percent of the voting shares of any such bank. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"),
facilitates branching and the establishment of agency relationships across
state lines and permits, commencing one year after enactment, bank holding
companies to acquire banks located in any state without regard to whether the
transaction is prohibited under any state law, subject to certain state
provisions, including the establishment by states of a minimum age of their
local banks subject to interstate acquisition of out-of-state bank holding
companies. The minimum age of local banks subject to interstate acquisition is
limited to a maximum of five years.
The States of Alabama, Texas, Florida, and Arizona, where the Company
currently operates banking offices, each have laws relating specifically to
acquisitions of banks, bank holding companies, and other types of financial
institutions in those states by financial institutions that are based in, and
not based in, those states. In 1995, the State of Alabama enacted an
interstate banking act. In general, the Alabama statute implements the
Interstate Act, specifying five years as the minimum age of banks which may be
acquired and participating in interstate branching beginning May 31, 1997.
Texas, Arizona, and Florida law currently permits out-of-state bank holding
companies to acquire banks in Texas, Arizona, 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 Arizona and two years in Florida.
The Federal Reserve Act generally imposes certain limitations on extensions
of credit and other transactions by and between banks which are members of the
Federal Reserve and other affiliates (which includes any holding company of
which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Banks which are not members of the Federal Reserve 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
4
claim may be entitled to a priority in such bankruptcy proceeding over third
party creditors of the bank holding company.
An insured depository institution may not pay management fees to any person
having control of the institution nor may an institution, except under certain
circumstances and with prior regulatory approval, make any capital
distribution (including the payment of dividends) if, after making such
payment or distribution, the institution would be undercapitalized. FDICIA
also restricts the acceptance of brokered deposits by insured depository
institutions and contains a number of consumer banking provisions, including
disclosure requirements and substantive contractual limitations with respect
to deposit accounts.
At December 31, 1998, the Subsidiary Banks were "well capitalized" and were
not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. The Subsidiary Banks do not
rely upon brokered deposits as a primary source of deposit funding; although,
such deposits are sold through the Correspondent and Investment Services
Division of Compass Bank.
FDICIA contains numerous other provisions, including new reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy. In addition, FDICIA requires the FDIC to establish a system
of risk-based assessments for federal deposit insurance, by which banks that
pose a greater risk of loss to the FDIC (based on their capital levels and the
FDIC's level of supervisory concern) will pay a higher insurance assessment.
The Subsidiary Banks
In general, federal and state banking laws and regulations govern all areas
of the operations of the Subsidiary Banks, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state banking regulatory agencies also
have the general authority to limit the dividends paid by insured banks and
bank holding companies if such payments may be deemed to constitute an unsafe
and unsound practice. Federal and state banking agencies also have authority
to impose penalties, initiate civil and administrative actions and take other
steps intended to prevent banks from engaging in unsafe or unsound practices.
Compass Bank, organized under the laws of the State of Alabama, is a member
of the Federal Reserve. As such, it is supervised, regulated and regularly
examined by the Alabama State Banking Department and the Federal Reserve.
Arizona Bank, which is also a member of the Federal Reserve, is supervised,
regulated and regularly examined by the Arizona State Banking Department and
the Federal Reserve. The Subsidiary Banks are subject to the provisions of the
Federal Deposit Insurance Act and to examination by and regulations of the
FDIC.
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. Arizona Bank is governed by Arizona laws restricting a
bank from paying cash dividends except from capital surplus without the
approval of the state superintendent of banks. As members of the Federal
Reserve, Compass Bank and Arizona Bank are subject to dividend limitations
imposed by the Federal Reserve that are similar to those applicable to
national banks.
Federal law further provides that no insured depository institution may make
any capital distribution, including a cash dividend, if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements. Moreover, the federal bank regulatory agencies also have
the general authority to limit the dividends paid by insured banks if such
payments may be deemed to constitute an unsafe and unsound practice. Insured
banks are prohibited from paying dividends on their capital stock while in
default in the payment of any assessment due to the FDIC except in those cases
where the amount of the assessment is in dispute and the insured bank has
deposited satisfactory security for the payment thereof.
The Community Reinvestment Act of 1977 ("CRA") and the regulations of the
Federal Reserve and the FDIC implementing that act are intended to encourage
regulated financial institutions to help meet the credit
5
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, Florida, and Arizona.
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 Investment Services Division of Compass Bank is treated as a municipal
securities dealer and a government securities dealer for purposes of the
federal securities laws and, therefore, is subject to certain reporting
requirements and/or regulatory controls by the Securities and Exchange
Commission (the "Commission"), the United States Department of the Treasury
and the Federal Reserve. Compass Brokerage, Inc. is a discount brokerage
service registered with the Commission and the National Association of
Securities Dealers, Inc. and is subject to certain reporting requirements and
regulatory control by these agencies. Compass Bancshares Insurance, Inc. is a
licensed insurance agent or broker for various insurance companies and is
subject to reporting and licensing regulations of the Alabama Insurance
Commission.
References to applicable statutes under the heading "Supervision and
Regulation" are brief summaries of portions thereof, do not purport to be
complete and are qualified in their entirety by reference to such statutes.
6
ITEM 1 -- STATISTICAL DISCLOSURE
Page(s)
-------
Consolidated Average Balances and Rate/Volume Variances .............. 28 & 29
Investment Securities and Investment Securities Available for Sale.... 15
Investment Securities and Investment Securities Available for Sale
Maturity Schedule.................................................... 16
Loan Portfolio........................................................ 13
Selected Loan Maturity and Interest Rate Sensitivity.................. 13
Nonperforming Assets.................................................. 34
Summary of Loan Loss Experience....................................... 32
Allocation of Allowance for Loan Losses............................... 33
Maturities of Time Deposits........................................... 18
Return on Equity and Assets........................................... 23
Short-Term Borrowings................................................. 19
Trading Account Composition........................................... 17
Capital Ratios........................................................ 24
Noninterest Income.................................................... 35
Noninterest Expense................................................... 36
ITEM 2 -- PROPERTIES
The Company, through its subsidiaries, owns or leases buildings that are
used in the normal course of business. The principal executive offices of the
Company are located at 15 South 20th Street, Birmingham, Alabama, in a 289,000
square-foot office building. The Subsidiary Banks own or lease various other
offices and facilities in Alabama, Florida, Texas, and Arizona with remaining
lease terms of 1 to 20 years exclusive of renewal options. In addition, the
Company owns a 306,000 square-foot administrative headquarters facility
located in Birmingham, Alabama. The Company also owns the River Oaks Bank
Building in Houston, Texas, a 14-story, 168,000 square-foot office building,
and the Post Oak Building in Houston, Texas, an 8-story, 124,000 square-foot
office building. Compass Bank currently occupies approximately 35 percent of
the River Oaks Bank Building and approximately 30 percent of the Post Oak
Building. The remaining space in both buildings is leased to multiple tenants.
ITEM 3 -- LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants in legal proceedings arising
in the ordinary course of business. Some of these proceedings which relate to
lending, collections, servicing, investment, trust, and other activities seek
substantial sums as damages.
Among the actions which are pending are proceedings filed as class actions
in the State of Alabama. The actions are similar to others that have been
brought in recent years in Alabama against financial institutions in that they
seek substantial compensatory and punitive damages in connection with
transactions involving relatively small amounts of actual damages. In recent
years, juries in certain Alabama state courts have rendered large punitive
damage awards in such cases.
7
It may take a number of years to finally resolve some of these pending legal
proceedings due to their complexity and other reasons. It is difficult to
determine with any certainty at this time the potential exposure from the
proceedings. However, based upon the advice of legal counsel, management is of
the opinion that the ultimate resolution of these legal proceedings will not
have a material adverse effect on the Company's financial condition or results
of operations.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1998.
8
[This Page Intentionally Left Blank]
9
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low closing prices of the common
stock of the Company as reported through the National Association of
Securities Dealers, Inc. Automated Quotation National Market System and the
dividends paid thereon during the periods indicated. 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
---- --- --------
1998:
First quarter......................................... $53 1/4 $41 1/2 $.2625
Second quarter........................................ 49 7/8 42 .2625
Third quarter......................................... 47 1/2 33 .2625
Fourth quarter........................................ 39 3/8 28 7/8 .2625
1997:
First quarter......................................... $32 1/8 $26 $.2367
Second quarter........................................ 37 1/4 29 1/8 .2367
Third quarter......................................... 39 3/4 34 1/2 .2367
Fourth quarter........................................ 46 5/8 37 1/8 .2367
As of January 31, 1999, there were approximately 7,600 shareholders of
record of common stock of which approximately 6,400 were residents of either
Alabama, Texas, Florida, or Arizona.
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five
years. All prior year information has been restated to reflect acquisitions
consummated during 1998 accounted for under the pooling-of-interests method of
accounting.
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in Thousands Except Per Share Data)
Net interest income............... $ 579,387 $ 539,775 $ 487,566 $ 443,901 $ 412,362
Provision for loan losses......... 38,445 32,935 25,987 16,363 7,524
Net income........................ 180,880 166,242 146,334 132,567 118,598
Per common share data:
Basic earnings................... $ 2.40 $ 2.22 $ 1.98 $ 1.80 $ 1.62
Diluted earnings................. 2.35 2.17 1.94 1.76 1.59
Dividends declared............... 1.05 .95 .85 .75 .61
Balance sheet:
Average total equity............. $ 1,135,556 $ 1,006,311 $ 894,522 $ 790,635 $ 689,816
Average assets................... 15,423,162 13,972,411 12,701,623 11,375,547 9,682,858
Period-end FHLB and other
borrowings...................... 2,045,980 1,430,253 734,012 623,192 516,822
Period-end total equity.......... 1,196,141 1,068,019 952,509 873,479 734,629
Period-end assets................ 17,288,908 14,900,748 13,724,190 12,374,866 10,944,505
Performance ratios:
Return on average assets......... 1.17% 1.19% 1.15% 1.17% 1.22%
Return on average common equity.. 16.12 16.77 16.66 16.93 17.31
Return on average equity......... 15.93 16.52 16.36 16.77 17.19
10
CASH BASIS DISCLOSURES
The selected financial data presented in the following table details certain
information highlighting the performance of the Company for each of the three
years ended December 31, 1998, adjusted to exclude the amortization of
goodwill and other intangibles considered nonqualifying in regulatory capital
calculations, and related balances of goodwill and other intangibles resulting
from business combinations recorded by the Company under the purchase method
of accounting. Had these business combinations qualified for accounting under
the pooling of interests method, no intangible assets would have been
recorded. Since the amortization of goodwill and other intangibles does not
result in a cash expense, the economic value to shareholders under either
accounting method is essentially the same. Additionally, such amortization
does not impact the Company's liquidity and funds management activities.
Cash basis financial data is particularly relevant in that it provides an
additional basis for measuring a company's ability to support future growth
and pay dividends. Cash basis financial data, as defined herein, has not been
adjusted to exclude the impact of other noncash items such as depreciation,
provision for loan losses, and merger and integration related expenses except
as noted below. This is the only section of this report in which the Company's
financial results are discussed on a cash basis.
1998 1997 1996
-------- -------- --------
(in Thousands Except Per
Share Data)
Income statement:
Noninterest expense............................. $480,204 $433,639 $393,619
Net income before income tax expense............ 283,238 265,925 238,056
Net income...................................... 189,678 175,158 153,343
Per common share data:
Basic earnings.................................. $ 2.52 $ 2.34 $ 2.07
Diluted earnings................................ 2.46 2.29 2.03
Performance ratios:
Return on average tangible assets............... 1.24% 1.27% 1.22%
Return on average common equity................. 16.92 17.69 17.47
Return on average tangible common equity........ 18.93 20.33 19.76
Return on average equity........................ 16.70 17.41 17.14
Return on average tangible equity............... 18.63 19.92 19.30
Efficiency*..................................... 57.18 58.68 59.77
Goodwill and nonqualifying intangibles:
Goodwill average balance........................ $ 81,130 $ 85,625 $ 60,430
Nonqualifying intangible assets average
balance........................................ 36,280 41,163 39,728
Goodwill amortization (after tax)............... 5,155 4,960 3,453
Nonqualifying intangibles amortization (after
tax)........................................... 3,643 3,956 3,556
- --------
* Excludes merger and integration related expenses.
11
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report. Prior year information has been restated to reflect
1998 acquisitions accounted for using the pooling-of-interests accounting
method. Financial institutions acquired by the Company during the past three
years and accounted for as purchases are reflected in the financial position
and results of operations of the Company since the date of their acquisition.
This report may contain forward-looking statements which are subject to
numerous assumptions, risks, and uncertainties. Statements pertaining to
future periods are subject to uncertainty because of the possibility of
changes in underlying factors and assumptions. Actual results could differ
materially from those contained in or implied by such forward-looking
statements for a variety of factors including: sharp and/or rapid changes in
interest rates; significant changes in the economic scenario from the current
anticipated scenario which could materially change anticipated credit quality
trends and the ability to generate loans; significant delay in or inability to
execute strategic initiatives designed to grow revenues and/or control
expenses; unforeseen business risks related to Year 2000 computer systems
issues; and significant changes in accounting, tax or regulatory practices or
requirements.
Summary
In 1998, the Company reported record net income of $180.9 million, a 9
percent increase over the Company's previous high of $166.2 million in 1997,
which represented a 14 percent increase over 1996. Basic earnings per share
for 1998 was $2.40 per share, also a record, compared with $2.22 per share in
1997 and $1.98 per share in 1996, representing an 8 percent increase in 1998
and a 12 percent increase in 1997. Diluted earnings per share increased to
$2.35 per share in 1998, an 8 percent increase, from $2.17 per share in 1997.
Diluted earnings per share in 1997 increased 12 percent over 1996. Pretax
income for 1998 was up $17.6 million, or 7 percent, over 1997 while income tax
expense increased 3 percent over the same period reflecting a decrease in the
Company's effective tax rate from 34.8 percent in 1997 to 33.6 percent in
1998.
Earning Assets
Average earning assets in 1998 increased 10 percent over 1997 due
principally to a 25 percent increase in average available-for-sale securities,
a 14 percent increase in investment securities, and a 6 percent increase in
loans. These increases were significantly impacted by the Company's
securitization activity for 1998 consisting of the securitization and sale of
approximately $400 million of indirect automobile loans in June and the
securitization and transfer of approximately $500 million in residential
mortgages to available-for-sale securities in September. These securitizations
resulted in a moderate shift in the average earning asset mix in 1998 with
loans at 69 percent, investment securities and investment securities available
for sale at 30 percent, and other earning assets at 1 percent. In 1997, loans
were 71 percent, investment securities and investment securities available for
sale were 27 percent, and other earning assets were 2 percent. The mix of
earning assets is monitored on a continuous basis in order to place the
Company in a position to react to interest rate movements and to maximize the
return on earning assets.
Loans
Average loans increased six percent in 1998 with much of the increase
concentrated in commercial, financial and agricultural loans, real estate
construction loans, and commercial real estate loans. Excluding the impact of
securitizations, average loans increased 12 percent in 1998. Total loans
outstanding at year end increased six percent over previous year-end levels.
Commercial, financial and agricultural loans, which were 31 percent of total
loans, increased 31 percent in 1998 compared to the previous year. Real estate
construction loans increased 49 percent while
12
commercial mortgage loans increased 15 percent from year-end 1997 to year-end
1998. Residential mortgage and consumer installment loans decreased 18 percent
and 10 percent, respectively, compared to 1997 levels due to the Company's
securitization activity. The 10 percent growth in the Company's loan portfolio
from 1996 to 1997 was primarily the result of an increase of 21 percent in
commercial, financial and agricultural loans, a 20 percent increase in real
estate construction loans, and a 15 percent increase in consumer installment
loans.
The Company's loan portfolio continues to reflect the diversity of the
markets served by the Subsidiary Banks. The condition of the economy in states
in which the Subsidiary Banks lend money is further reflected in the loan
portfolio mix. The volume of commercial, financial and agricultural loans, as
a percentage of total loans outstanding, increased significantly during 1998
continuing the trend of prior years. Residential real estate loans represented
26 percent of the total portfolio at December 31, 1998, down from the 33
percent reported in the prior year.
The Loan Portfolio table shows the classifications of loans by major
category at December 31, 1998, and for each of the preceding four years. The
second table shows maturities of certain loan classifications at December 31,
1998, and an analysis of the rate structure for such loans due in over one
year.
Loan Portfolio
December 31
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------- -------------------
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..... $3,087,861 30.6% $2,365,347 24.7% $1,950,227 22.5% $1,553,902 20.5% $1,359,323 19.9%
Real estate --
construction..... 1,186,533 11.7 794,816 8.3 661,391 7.6 524,341 6.9 477,944 7.0
Real estate --
mortgage:
Residential...... 2,599,841 25.7 3,160,490 33.0 3,121,381 36.0 2,790,745 36.7 2,530,951 37.1
Commercial....... 1,364,878 13.5 1,184,408 12.4 1,143,342 13.2 995,787 13.1 927,068 13.6
Consumer
installment...... 1,864,046 18.5 2,064,692 21.6 1,788,424 20.7 1,733,591 22.8 1,531,949 22.4
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
10,103,159 100.0% 9,569,753 100.0% 8,664,765 100.0% 7,598,366 100.0% 6,827,235 100.0%
===== ===== ===== ===== =====
Less: Unearned
income........... 1,874 6,040 10,080 11,499 9,678
Allowance for loan
losses........... 136,677 135,225 130,753 121,180 118,702
---------- ---------- ---------- ---------- ----------
Net loans......... $9,964,608 $9,428,488 $8,523,932 $7,465,687 $6,698,855
========== ========== ========== ========== ==========
Selected Loan Maturity and Interest Rate Sensitivity
Rate Structure For Loans
Maturity Maturing Over One Year
-------------------------------------------- ------------------------
Floating
One Over One Year Over Predetermined or
Year or Through Five Five Interest Adjustable
Less Years Years Total Rate Rate
---------- ------------- -------- ---------- ------------- ----------
(in Thousands)
Commercial, financial
and agricultural....... $1,655,454 $1,199,067 $233,340 $3,087,861 $705,204 $ 727,203
Real estate --
construction........... 699,892 425,265 61,376 1,186,533 94,555 392,086
---------- ---------- -------- ---------- -------- ----------
$2,355,346 $1,624,332 $294,716 $4,274,394 $799,759 $1,119,289
========== ========== ======== ========== ======== ==========
13
Investment Securities
The composition of the Company's total investment securities portfolio
reflects the Company's investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the Company's investment strategy are to maintain an appropriate level of
liquidity and provide a tool to assist in controlling the Company's interest
rate position while at the same time producing adequate levels of interest
income. The Company's investment securities are classified into one of three
categories based on management's intent to hold the securities: (i) trading
account securities, (ii) investment securities or (iii) investment securities
available for sale. Securities held in a trading account are required to be
reported at fair value, with unrealized gains and losses included in earnings.
Investment securities designated to be held to maturity are reported at
amortized cost. Securities classified as available for sale are required to be
reported at fair value with unrealized gains and losses, net of taxes,
excluded from earnings and shown separately as a component of accumulated
other comprehensive income. For securities classified as held to maturity, the
Company has the 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.
Maturities of investment securities in 1998, 1997, and 1996 were $657
million, $379 million, and $283 million, respectively. Sales and maturities of
investment securities available for sale totaled $716 million and $1.1
billion, respectively, in 1998 while sales and maturities in the portfolio in
1997 were $995 million and $552 million. Net gains realized during the year
accounted for two percent, four percent and six percent of noninterest income
in 1998, 1997, and 1996, respectively. Gross unrealized gains in the Company's
investment securities portfolio at year-end 1998 totaled $29.7 million and
gross unrealized losses totaled $1.8 million.
In recent years, the trend of the Company has been to invest in taxable
securities due to the lack of preferential treatment afforded tax-exempt
securities under the tax laws. Because of their liquidity, credit quality and
yield characteristics, the majority of the purchases of taxable securities
have been in collateralized mortgage obligations ("CMOs"). Total average
investment securities, including those available for sale, increased 21
percent during 1998 after remaining relatively unchanged in 1997, due in part
to the securitization and transfer of approximately $500 million in real
estate mortgages to securities available for sale in September 1998.
14
The following table reflects the carrying amount of the investment
securities portfolio at the end of each of the last three years.
Investment Securities and Investment Securities Available for Sale
December 31
--------------------------------
1998 1997 1996
---------- ---------- ----------
(in Thousands)
Investment securities:
U.S. Treasury................................ $ 4,724 $ 13,466 $ 17,980
U.S. Government agencies and corporations.... 8,263 63,930 87,809
Mortgage-backed pass-through securities...... 188,850 266,781 326,837
Collateralized mortgage obligations:
Agency...................................... 317,404 319,291 343,125
Corporate................................... 1,291,089 311,003 295,838
States and political subdivisions............ 79,909 97,529 100,533
Corporate bonds.............................. 4,970 27,604 40,389
Other........................................ 830 855 1,270
---------- ---------- ----------
1,896,039 1,100,459 1,213,781
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 132,861 150,575 163,424
U.S. Government agencies and corporations.... 112,173 187,706 148,538
Mortgage-backed pass-through securities...... 279,195 166,107 343,102
Collateralized mortgage obligations:
Agency...................................... 918,532 1,029,025 527,411
Corporate................................... 1,924,564 773,224 904,368
States and political subdivisions............ 38,082 27,173 48,490
Corporate bonds.............................. 113,073 90,329 116,592
Other........................................ 110,053 100,836 59,109
---------- ---------- ----------
3,628,533 2,524,975 2,311,034
Net unrealized gain (loss).................. 17,228 2,819 (3,322)
---------- ---------- ----------
3,645,761 2,527,794 2,307,712
---------- ---------- ----------
Total....................................... $5,541,800 $3,628,253 $3,521,493
========== ========== ==========
The maturities and weighted average yields of the investment securities and
investment securities available for sale portfolios at the end of 1998 are
presented in the following table using primarily the average expected lives
including the effects of prepayments. The amounts and yields disclosed for
investment securities available for sale reflect the amortized cost rather
than the net carrying value, i.e., fair value, of these securities. Taxable
equivalent adjustments, using a 35 percent tax rate, have been made in
calculating yields on tax-exempt obligations.
15
Investment Securities and Investment Securities Available for Sale Maturity
Schedule
Maturing
--------------------------------------------------------------------
After One But
Within Within Five After Five But After
One Year Years Within Ten Years Ten Years
-------------- ---------------- ------------------ --------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ---------- ----- ---------- ------- -------- -----
(in thousands)
Investment securities:
U.S. Treasury.......... $ 4,724 3.90% -- -- -- -- -- --
U.S. Government
agencies and
corporations.......... 4,171 6.30 $ 4,092 6.49% -- -- -- --
Mortgage-backed pass-
through securities.... 32,328 6.76 131,039 7.28 $ 10,788 6.72% $ 14,695 6.80%
Collateralized mortgage
obligations........... 239,849 6.98 943,237 6.91 352,010 6.64 73,397 6.66
States and political
subdivisions.......... 5,328 7.87 28,680 8.00 40,319 9.26 5,582 8.42
Corporate bonds and
other................. 25 8.01 5,275 8.70 500 7.61 -- --
-------- ---------- ---------- --------
286,425 6.91 1,112,323 6.99 403,617 6.91 93,674 6.79
-------- ---------- ---------- --------
Investment securities
available for sale --
amortized cost:
U.S. Treasury.......... 1,998 6.05 128,720 5.64 -- -- 2,143 5.03
U.S. Government
agencies and
corporations.......... 499 2.86 9,469 5.86 58,968 6.06 43,237 6.78
Mortgage-backed pass-
through securities.... 5,759 6.09 160,668 6.46 102,906 6.17 9,862 6.15
Collateralized mortgage
obligations........... 450,067 6.70 1,526,079 6.82 281,041 6.25 585,909 6.76
States and political
subdivisions.......... 2,686 7.68 13,003 7.26 10,792 7.07 11,601 7.27
Corporate bonds and
other................. 10,347 5.50 176,093 7.25 20,741 6.24 15,945 5.89
-------- ---------- ---------- --------
471,356 6.67 2,014,032 6.75 474,448 6.23 668,697 6.73
-------- ---------- ---------- --------
Total................. $757,781 6.76 $3,126,355 6.84 $ 878,065 6.54 $762,371 6.74
======== ========== ========== ========
While the weighted average stated maturities of total MBS and CMOs are 15.9
years and 26.8 years, respectively, the corresponding weighted average
expected lives assumed in the above table are 4.2 years and 4.5 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 4.8 and 6.6 years, respectively. Similarly,
given a 100 basis point immediate and permanent parallel decrease in rates,
the expected average lives for MBS and CMOs would be 2.4 and 1.4 years,
respectively.
The weighted average market prices as a percentage of par value for MBS and
CMOs at December 31, 1998, were 101.4 percent and 100.2 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
increased market yield on fixed rate securities and impact of annual and life
rate caps on adjustable-rate securities. The opposite is generally true during
a period of falling rates. At December 31, 1998, fixed-rate MBS and CMOs
totaled $385.4 million and $3.9 billion, respectively, with corresponding
weighted average expected lives of 4.2 and 4.7 years. Adjustable-rate MBS and
CMOs totaled $176.3 million and $560.1 million, respectively, with
corresponding weighted average expected lives of 4.27 and 3.32 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 11.49 percent and 9.36 percent for MBS and
CMOs, respectively, and the corresponding weighted average coupon rates at
year end were 6.94 percent and 6.42 percent. Given a 100 basis point immediate
and permanent parallel increase in rates, the estimated market prices for MBS
and CMOs would be 99.7 and 97.8, respectively. Given a 100 basis point
immediate and permanent parallel decrease in rates, the estimated market
prices for MBS and CMOs would be 102.5 and 101.2, respectively.
Trading Account Securities and Other Earning Assets
Securities carried in the trading account, while interest bearing, are
primarily held for sale to institutional customers for their investment
portfolio and generally are sold within thirty days of purchase. The volume of
activity is directly related to general market conditions and reactions to the
changing interest rate environment. The average balance in the trading account
securities portfolio for 1998 decreased by 17 percent following a
16
15 percent increase in 1997. The following table details the composition of
the Company's trading account at December 31, 1998, 1997 and 1996.
Trading Account Composition
December 31
-------------------------
1998 1997 1996
-------- -------- -------
(in Thousands)
U.S. Treasury and Government agency.................. $ 44,605 $ 55,487 $48,785
States and political subdivisions.................... 20,400 8,135 9,738
Mortgage-backed pass-through securities.............. 50,379 34,282 25,281
Other debt securities................................ 3,000 281 727
Derivative securities:
Collateralized mortgage obligations................ 8,750 13,906 10,972
Interest rate floors and caps...................... 537 305 787
Other options...................................... -- 64 60
-------- -------- -------
$127,671 $112,460 $96,350
======== ======== =======
Average federal funds sold and securities purchased under agreements to
resell decreased 43 percent in 1998 compared to a 28 percent decrease in 1997.
The average balance of interest bearing deposits in other banks decreased 64
percent during 1998 from 1997 levels after decreasing 34 percent from 1996 to
1997.
Deposits and Borrowed Funds
Changes in the Company's markets and the economy in general were also
reflected in the liability mix during 1998. Average interest bearing deposits,
the primary source of funding for the Company, made up 76 percent of total
average interest bearing liabilities in 1998, down from 80 percent in 1997 and
84 percent in 1996. Contributing to the overall decrease in the proportion of
average interest bearing liabilities represented by average interest bearing
deposits relative to 1997 was the impact of investment alternatives pursued by
customers in response to the low level of interest rates. In addition, the mix
of average interest bearing deposits in 1998 and 1997 shifted from demand
deposits to savings due primarily to a program initiated by the Company during
1996. Under this program, deposit balances in certain NOW accounts above a
certain threshold are transferred to savings accounts, thereby reducing the
level of deposit reserves required to be maintained with the Federal Reserve.
Refer to Note 10, Regulatory Matters and Dividends from Subsidiaries, in the
"Notes to Consolidated Financial Statements" for a further discussion of
reserve requirements maintained with the Federal Reserve. As a result of this
program, during 1998 and 1997 NOW account balances averaging $858 million and
$626 million, respectively, were transferred to the savings category.
Contributing to the change in the mix of interest bearing liabilities in 1998
was a 9 percent decrease in average certificates of deposit less than $100,000
and other time deposits, offset in part by a 10 percent increase in average
certificates of deposit of $100,000 or more. During 1997, average certificates
of deposit less than $100,000 declined three percent while average
certificates of deposit of $100,000 or more increased by two percent.
17
The following table summarizes the maturities of certificates of deposit of
$100,000 or more and other time deposits of $100,000 or more outstanding at
December 31, 1998.
Maturities of Time Deposits
Certificates
of Deposit Other Time
Over Deposits Over
$100,000 $100,000 Total
------------ ------------- ----------
(in Thousands)
Three months or less..................... $ 733,960 $37,287 $ 771,247
Over three through six months............ 300,993 -- 300,993
Over six through twelve months........... 240,930 -- 240,930
Over twelve months....................... 172,455 -- 172,455
---------- ------- ----------
$1,448,338 $37,287 $1,485,625
========== ======= ==========
In order to support earning asset growth of 10 percent in 1998 and as a
result of consumers choosing investments other than deposits, the Company
relied more heavily on borrowed funds in 1998 continuing a trend that began in
1997. Borrowed funds consist of Federal Home Loan Bank ("FHLB") advances,
guaranteed preferred beneficial interests in the Company's junior subordinated
deferrable interest debentures ("Capital Securities") and other short-term
borrowings, primarily in the form of federal funds purchased, securities sold
under agreements to repurchase and other short-term borrowings. Included in
other short-term borrowings are trading account short sales and the commercial
paper of Compass Bancshares, Inc. Average federal funds purchased increased
$285 million, or 43 percent, and the average balance of FHLB and other
borrowings, including the Capital Securities, increased $506 million, or 49
percent, primarily as a result of additional FHLB advances of $829 million,
partially offset by repayments of $213 million. For a discussion of interest
rates and maturities of FHLB and other borrowings, refer to Note 5, FHLB and
Other Borrowings, and Note 6, Capital Securities and Preferred Stock, 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)
1998
Federal funds purchased... $1,696,945 $ 951,267 5.26% $1,447,495 4.67%
Securities sold under
agreements to
repurchase............... 445,552 244,505 4.94 288,571 4.30
Short sales............... 41,590 28,362 5.39 21,547 4.39
Commercial paper.......... 108,627 76,732 5.14 79,456 4.74
Other short-term
borrowings............... 110,898 65,374 5.57 58,401 4.48
---------- ---------- ----------
$2,403,612 $1,366,240 $1,895,470
========== ========== ==========
1997
Federal funds purchased... $1,124,246 $ 666,097 5.44% $ 927,795 5.48%
Securities sold under
agreements to
repurchase............... 366,682 244,560 5.11 243,871 5.13
Short sales............... 96,372 57,991 6.00 52,080 5.83
Commercial paper.......... 92,516 61,006 5.08 52,410 5.03
Other short-term
borrowings............... 237,207 92,474 5.80 79,063 6.29
---------- ---------- ----------
$1,917,023 $1,122,128 $1,355,219
========== ========== ==========
1996
Federal funds purchased... $ 658,925 $ 460,809 5.27% $ 606,414 5.27%
Securities sold under
agreements to
repurchase............... 311,758 256,424 4.71 206,053 5.00
Short sales............... 61,907 35,024 5.84 36,703 6.06
Commercial paper.......... 114,060 73,822 5.02 47,896 4.88
Other short-term
borrowings............... 144,302 71,610 5.72 119,014 6.05
---------- ---------- ----------
$1,290,952 $ 897,689 $1,016,080
========== ========== ==========
Liquidity Management
Liquidity is the ability of the Company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the
Company's ability to meet the day-to-day cash flow requirements of its
customers, whether they are depositors wishing to withdraw funds or borrowers
requiring funds to meet their credit needs. Without proper liquidity
management, the Company would not be able to perform the primary function of a
financial intermediary and would, therefore, not be able to meet the needs of
the communities they serve. Additionally, the parent holding company requires
cash for various operating needs including dividends to shareholders, business
combinations, capital injections to its subsidiaries, the servicing of debt
and the payment of general corporate expenses. The primary source of liquidity
for the parent holding company is dividends from the Subsidiary Banks. At
December 31, 1998, the Company's Subsidiary Banks could have paid additional
dividends to the parent holding company in the amount of $37.6 million while
continuing to meet the capital requirements for "well-capitalized" banks.
Also, the parent holding company has access to various capital markets as
evidenced by the issuance of the Capital Securities during the first quarter
of 1997. The parent holding company does not anticipate any liquidity
requirements in the near future that it will not be able to meet.
19
Asset and liability management functions not only to assure adequate
liquidity in order to meet the needs of the Company's customers, but also to
maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities so that the Company can earn a return that
meets the investment requirements of its shareholders. Daily monitoring of the
sources and uses of funds is necessary to maintain an acceptable cash position
that meets both requirements. In a banking environment, both assets and
liabilities are considered sources of liquidity funding and are monitored on a
daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a
lesser extent, sales of investment securities available for sale and trading
account securities. Other short-term investments such as federal funds sold,
securities purchased under agreements to resell and maturing interest bearing
deposits with other banks are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and noninterest bearing deposit accounts.
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings are additional sources of liquidity and,
basically, represent the Company's incremental borrowing capacity. These
sources of liquidity are short-term in nature and are used as necessary to
fund asset growth and meet short-term liquidity needs.
During 1997 and 1998, the Company has funded the growth in interest earning
assets through its increased reliance on borrowed funds as a direct result of
consumers choosing investments other than deposits as the general level of
interest rates has continued to decline and the stock market has remained
strong. FHLB and other borrowings increased by $596 million in 1997 and $616
million in 1998. For more information on the composition of the Company's
long-term borrowings, refer to Note 5, FHLB and Other Borrowings, in the
"Notes to Consolidated Financial Statements."
As disclosed in the Company's "Consolidated Statements of Cash Flows," net
cash provided by operating activities totaled $181 million primarily due to
net income. Net cash used in investing activities of $2.3 billion consisted
primarily of net loans originated of $1.4 billion, available-for-sale
securities purchased of $2.4 billion, and purchases of investment securities
of $1.5 billion, largely funded by maturities of investment securities of $657
million, proceeds from the sale of securitized indirect automobile loans of
$360 million, as well as sales and maturities of investment securities
available for sale of $716 million and $1.1 billion, respectively. Net cash
provided by financing activities provided the remainder of funding sources for
1998. The $2.2 billion of net cash provided by financing activities consisted
primarily of a net increase of $616 million in FHLB advances and other
borrowings, a $564 million increase in federal funds purchased and securities
sold under agreements to repurchase, and an increase of $1.1 billion in
deposits offset partially by the payment of $78 million in dividends.
Interest Rate Sensitivity Management
The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. The
Company manages its exposure to fluctuations in interest rates through
policies established by its Asset/Liability Management Committee ("ALCO"). The
ALCO meets at least monthly and has responsibility for approving
asset/liability management policies, formulating and implementing strategies
to improve balance sheet positioning and/or earnings and reviewing the
interest rate sensitivity of the Company.
Management utilizes an interest rate simulation model to estimate the
sensitivity of the Company's net interest income to changes in interest rates.
Such estimates are based upon a number of assumptions for each scenario,
including the level of balance sheet growth, deposit repricing characteristics
and the rate of prepayments.
The estimated impact on the Company's net interest income sensitivity over a
one-year time horizon at December 31, 1998 is shown in the following table
along with comparable prior year information. Such analysis
20
assumes an immediate and sustained parallel shift in interest rates, no
balance sheet growth, and the Company's estimate of how interest-bearing
transaction accounts will reprice in each scenario.
Percentage Increase (Decrease)
Principal/Notional in Interest Income /Expense
Amount of Earning Given Immediate and Sustained
Assets, Interest Parallel Interest Rate Shifts
Bearing ------------------------------------
Liabilities and Down 100 Up 100
Swaps Basis Points Basis Points
------------------ --------------- ---------------
(in Thousands)
December 31, 1998:
Assets which reprice in:
One year or less....... $ 5,670,836 (10.97)% 10.71%
Over one year.......... 10,127,706 (5.88) 2.87
-----------
$15,798,542 (7.73) 5.72
===========
Liabilities which
reprice in:
One year or less....... $ 9,967,789 (14.09) 17.44
Over one year.......... 3,435,149 (4.84) 9.23
-----------
$13,402,938 (11.08) 14.77
===========
Non-trading swaps....... $ 1,577,714 33.20 (37.13)
===========
Total net interest
income sensitivity.... (4.34) (3.03)
December 31, 1997:
Assets which reprice in:
One year or less....... $ 5,440,151 (9.02)% 10.20%
Over one year.......... 8,018,907 (3.20) 2.36
-----------
$13,459,058 (5.67) 5.69
===========
Liabilities which
reprice in:
One year or less....... $ 8,516,796 (12.63) 16.86
Over one year.......... 2,875,387 (4.58) 3.45
-----------
$11,392,183 (10.06) 12.58
===========
Non-trading swaps....... $ 1,561,303 (27.72) (75.80)
===========
Total net interest
income sensitivity.... (1.60) (2.60)
As shown in the table, net interest income sensitivity increased from
December 31, 1997, to December 31, 1998. In the down-rate scenario, the
sensitivity increased due in large part to the decrease in the general level
of interest rates during 1998. This decrease in interest rates resulted in
increased estimated prepayment speeds for mortgage loans and mortgage-backed
securities, including CMOs. Increased prepayments in a down-rate environment
result in reinvestment of cash flows at lower rates, thus increasing interest
rate sensitivity. The increase in sensitivity was also a function of the use
of less aggressive deposit repricing assumptions in the December 31, 1998
scenario due to the current low interest rate environment. In the up-rate
scenario, the slight increase in sensitivity is primarily due to an increase
in callable FHLB advances that, in the up-rate scenario, are expected to be
called requiring replacement of this funding at higher costs.
The ALCO policy, with which the Company complies, is based on the same
assumptions as the above table and provides that a 100 basis point increase or
decrease in interest rates should not reduce net interest income by more than
six percent. Certain financial instruments have been excluded from the above
analysis because of the no-growth assumption, including letters of credit and
commitments to extend credit. Trading account interest rate contracts and
options have also been excluded because they have no material impact on net
interest income.
21
The Company enters into various interest rate contracts not held in the
trading account ("interest rate protection products") to help manage the
Company's interest sensitivity. Such contracts generally have a fixed notional
principal amount and include interest rate swaps and interest rate caps and
floors. Interest rate swaps are contracts 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"). Interest rate caps and floors purchased or written are
contracts where the Company receives or pays, respectively, interest if the
specified index falls below the floor rate or rises above the cap rate. The
interest rate risk factor in these contracts is considered in the overall
interest management strategy and the Company's interest risk management
program. The income or expense associated with interest rate swaps, caps and
floors is ultimately reflected as an adjustment 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. Refer to Note 7,
Off-Balance Sheet Instruments, of "Notes to Consolidated Financial Statements"
for the composition of the Company's interest rate protection contracts as
well as a discussion of interest rate risks, credit risks and concentrations
in off-balance sheet financial instruments.
The net interest amount received or paid on an interest rate protection
contract represents an adjustment of the yield or rate on the respective asset
or liability with which such contract is associated. The gain or loss on a
terminated interest rate protection contract is deferred and amortized over
the remaining term of the original contract as an adjustment of yield or rate
on the asset or liability with which the original contract was associated. At
year-end 1998, there were no deferred gains and there were $40,000 of deferred
losses on terminated interest rate protection contracts, which will be
recorded as net interest expense through 1999. See Note 7, Off-Balance Sheet
Instruments, of "Notes to Consolidated Financial Statements" for details
regarding the asset or liability category with which the Company's non-trading
interest protection contracts were associated at December 31, 1998.
In addition to interest rate protection contracts used to manage overall
interest sensitivity, the Company also enters into interest rate contracts for
the trading account. The primary purposes for using interest rate contracts in
the trading account are to facilitate customer transactions and to protect
cash market positions in the trading account against interest rate movement.
Changes in the estimated fair value of contracts in the trading account are
recorded in other noninterest income as trading account profits and
commissions. Net interest amounts received or paid on interest rate contracts
in the trading account are recorded as an adjustment of interest on trading
account securities. See Note 7, Off-Balance Sheet Instruments, of "Notes to
Consolidated Financial Statements" for a summary of interest rate contracts
held in the trading account at December 31, 1998.
Capital Resources
Shareholders' equity increased 12 percent in both 1998 and 1997. Exclusive
of the change in accumulated other comprehensive income in both 1998 and 1997,
net income after dividends accounted for substantially all of the increase in
shareholders' equity.
Dividends of $75.2 million were declared on the Company's common stock in
1998, representing a 22 percent increase over 1997. The 1998 annual dividend
rate was $1.05 per common share, an 11 percent increase over 1997. The
dividend payout ratio for 1998 was 42 percent compared to 38 percent for 1997
and 35 percent for 1996. The Company intends to continue a dividend payout
ratio that is competitive in the banking industry while maintaining an
adequate level of retained earnings to support continued growth. On
February 15, 1999, the Company's Board of Directors approved a 14 percent
increase in the annual dividend rate, raising it to $1.20 per common share for
1999. This marked the eighteenth consecutive year the Company has increased
its dividend.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The Company has
satisfied its capital requirements principally through the retention of
earnings. The Company's five-year compound growth rate in shareholders' equity
of 13 percent was achieved primarily through reinvested earnings.
22
Average common shareholders' equity as a percentage of total average assets
is one measure used to determine capital strength. Overall, the Company's
capital position remains strong as the ratio of average common shareholders'
equity to average assets for 1998 was 7.16 percent compared to 6.97 percent in
1997 and 6.79 percent in 1996. As noted above, exclusive of the change in
accumulated other comprehensive income, the increase in shareholders' equity
in 1998 and 1997 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
-------------------
1998 1997 1996
----- ----- -----
Return on average assets................................. 1.17% 1.19% 1.13%
Return on average common equity.......................... 16.12 16.77 16.66
Dividend payout ratio.................................... 42.25 37.66 35.11
Average common shareholders' equity to average assets
ratio................................................... 7.16 6.97 6.79
In addition to the capital ratios mentioned above, banking industry
regulators have defined minimum regulatory capital ratios that the Company and
the Subsidiary Banks are required to maintain. These risk-based capital
guidelines take into consideration risk factors, as defined by the regulators,
associated with various categories of assets, both on and off of the balance
sheet. Under the guidelines, capital strength is measured in two tiers which
are used in conjunction with risk-adjusted assets to determine the risk-based
capital ratios. Tier I Capital is defined as common shareholders' equity,
excluding the net unrealized holding gain (loss) on available-for-sale
securities (except for net unrealized losses on marketable equity securities),
plus perpetual preferred stock and the Capital Securities, minus goodwill and
other disallowed intangible assets. Other disallowed intangibles represent
intangible assets, other than goodwill, recorded after February 19, 1992.
Total Qualifying Capital is defined as Tier I Capital plus Tier II capital
components, which include such items as qualifying allowance for loan losses
and qualifying subordinated debt.
At December 31, 1998, the Company's Tier I Capital and Total Qualifying
Capital totaled $1.2 billion and $1.4 billion, respectively. The percentage
ratios, as calculated under the guidelines, were 8.81 percent and 10.71
percent for Tier I and Total Qualifying Capital, respectively, at year-end
1998, down from 9.87 percent and 12.38 percent at year-end 1997. These ratios
are well within the minimum requirements of four percent for Tier I Capital
and eight percent for Total Qualifying Capital. Tier I Capital increased by
$128 million, or 12 percent, in 1998 primarily as a result of earnings
retained by the Company, net of dividends, while risk-adjusted assets
increased by $2.8 billion, or 26 percent. This significantly greater growth in
risk-adjusted assets resulted in the decline in percentage ratios from 1997 to
1998.
Two other important indicators of capital adequacy in the banking industry
are the leverage ratio and the tangible leverage ratio. The leverage ratio is
defined as Tier I Capital divided by total adjusted quarterly average assets.
Average quarterly assets are adjusted by subtracting the average unrealized
gain (loss) on available-for-sale securities (except for net unrealized losses
on marketable equity securities), period-end goodwill and other disallowed
intangibles. The tangible leverage ratio is defined similarly, except, by
definition, all other intangible assets not previously excluded are removed
from both the numerator and denominator. The Company's leverage ratio was 7.26
percent at year-end 1998 and 7.41 percent at year-end 1997 while its tangible
leverage ratio was 7.16 percent at year-end 1998 and 7.30 percent at year-end
1997.
23
The following table shows the calculation of capital ratios for the Company
for the last two years.
Capital Ratios
December 31
------------------------
1998 1997
----------- -----------
(in Thousands)
Risk-based capital:
Tier I Capital...................................... $ 1,188,851 $ 1,060,482
Tangible Tier I capital............................. 1,172,053 1,044,206
Total Qualifying Capital............................ 1,445,132 1,329,208
Assets:
Net risk-adjusted assets............................ $13,490,712 $10,740,437
Adjusted quarterly average assets................... 16,386,203 14,311,832
Adjusted tangible quarterly average assets.......... 16,369,405 14,295,556
Ratios:
Tier I Capital...................................... 8.81% 9.87%
Total Qualifying Capital............................ 10.71 12.38
Leverage............................................ 7.26 7.41
Tangible leverage................................... 7.16 7.30
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 1998 for "well-
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to ensure that the Subsidiary Banks exceed the
guidelines. For further information regarding the regulatory capital ratios of
the Company and the Subsidiary Banks, see Note 10, Regulatory Matters and
Dividends from Subsidiaries, in the "Notes to Consolidated Financial
Statements".
Results of Operations
Net Interest Income
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially
impact net interest income. The following discussion of net interest income is
presented on a taxable equivalent basis, unless otherwise noted, to facilitate
performance comparisons among various taxable and tax-exempt assets.
Net interest income for 1998 increased 7 percent over 1997 after increasing
11 percent in 1997 over 1996. A 10 percent increase in the volume of average
earning assets partially offset by a 10 basis point decrease in the net yield
was responsible for the increase in 1998. The increase in 1997 was a function
of a 10 percent increase in the volume of earning assets, primarily a 14
percent increase in total loans, coupled with a 4 basis point increase in the
net yield. The schedule on page 29 provides the detail of changes in interest
income, interest expense and net interest income due to changes in volumes and
rates.
Interest income increased 7 percent in 1998 as a result of a 10 percent
increase in the volume of average earning assets and an 18 basis point
decrease in the average interest rate earned. The decline in the yield on
average earning assets was due to decreases in yield in all significant
categories of earning assets including a 16 basis point decline in the yield
on loans, which was attributable in part to declines in the prime rate, and a
27 basis point decrease in the yield on investment securities. The decline in
the yield on loans was due in part to the Company's securitization and sale of
$400 million of indirect automobile loans with a weighted average yield to the
Company of 8.66 percent in June 1998. Conversely, the Company experienced only
a two basis point decline in the yield on investment securities available for
sale partly as a result of the Company's transfer of $500 million
24
in residential mortgages with a weighted average yield of 7.85 percent to the
investment securities available for sale portfolio in September 1998.
Total interest expense increased by eight percent in 1998 due to a nine
percent increase in the average volume of interest bearing liabilities offset
partially by a nine basis point decrease in the rate paid on interest bearing
liabilities. Interest expense on interest bearing deposits increased by two
percent as the result of a three percent increase in the average volume and a
seven basis point decrease in rate. For borrowed funds, which represents
interest bearing liabilities that are not classified as deposits, a 34 percent
increase in interest expense on FHLB advances and other borrowings was a
result of a 49 percent increase in the average balance coupled with a 66 basis
point decline in the rate paid. Similarly, a 43 percent increase in the
average balance of federal funds purchased offset by an 18 basis point
decrease in the rate paid resulted in a 38 percent increase in interest
expense in this category.
From 1996 to 1997, interest income increased 10 percent as a result of a 10
percent increase in the volume of average earning assets and a 3 basis point
increase in the yield on average earning assets. Interest income on loans rose
13 percent as a result of a 14 percent increase in average volume and a 6
basis point decrease in yield. Interest income on investment securities
increased 21 percent from 1996 to 1997 as a result of a 23 percent increase in
average volume and a 16 basis point decrease in the yield. For securities
available for sale, a six percent decrease in the average balance combined
with a seven basis point increase in yield resulted in a five percent decrease
in interest income.
A basis point decrease in the rate paid on interest bearing liabilities
combined with a 10 percent increase in average volume resulted in a 9 percent
increase in interest expense on interest bearing liabilities in 1997. This
increase was due to a 49 percent increase in interest expense on Federal funds
purchased and a 45 percent increase in interest expense on FHLB and other
borrowings. Both increases were primarily a function of increases in the
average balance of each category of 45 percent and 53 percent, respectively.
Interest expense on interest bearing deposits increased three percent as a
result of a four percent increase in average balance and an eight basis point
decline in the rate paid.
Net interest income is commonly evaluated in terms of average rates using
the net yield and the interest rate spread. The net yield on earning assets is
computed by dividing fully taxable equivalent net interest income by average
total earning assets. This ratio represents the difference between the average
yield returned on average earning assets and the average rate paid for all
funds used to support those earning assets, including both interest bearing
and noninterest bearing sources of funds. The net yield decreased 10 basis
points to 4.13 percent in 1998 after increasing 4 basis points to 4.23 percent
in 1997. The decline in 1998 was due to the 18 basis point decrease in the
yield on average interest earning assets which was only partially offset by a
9 basis point decline in the rate paid on interest bearing liabilities. The
moderate increase in net yield in 1997 was a function of the downward
repricing of interest bearing deposits and FHLB and other borrowings which
outpaced the downward repricing of loans and total investment securities. This
is evidenced by the fact the yield on interest earning assets increased three
basis points while the rate paid on interest bearing liabilities decreased by
one basis point.
During 1998, the net yield on interest earning assets was favorably impacted
by the Company's use of interest rate contracts, primarily interest rate
swaps, increasing the taxable equivalent net yield on interest earning assets
by eight basis points. The greatest impact from the use of interest rate
contracts was on the yield and interest income on loans where the net yield
was increased by nine basis points and interest income was increased by $9.1
million. At the same time, the impact of interest rate contracts on interest
bearing liabilities was less significant, decreasing interest expense by less
than $3 million. The impact of the use of interest rate contracts was
significantly less in 1997 when the positive impact on the net yield on
interest earning assets was four basis points. It is the Company's intention
to continue to use interest rate contracts to manage its exposure to the
changing interest rate environment in the future, although there can be no
assurance that the impact of interest rate contracts on the earnings of future
periods will be positive.
The interest rate spread measures the difference between the average yield
on earning assets and the average rate paid on interest bearing liabilities.
The interest rate spread eliminates the impact of noninterest bearing funds
25
and gives a direct perspective on the effect of market interest rate
movements. During 1998, the net interest rate spread decreased nine basis
points to 3.39 percent from the 1997 spread of 3.48 percent. The increase in
1997 was four basis points from 3.44 percent in 1996. See the accompanying
table entitled "Consolidated Average Balances and Rate/Volume Variances" for
more information.
The following table presents certain interest rates without modification for
tax equivalency. The table on pages 28 and 29 contains these same percentages
on a taxable equivalent basis. Tax-exempt earning assets continue to make up a
smaller percentage of total earning assets. As a result, the difference
between these interest rates with and without modification for tax equivalency
continues to narrow.
December 31
----------------
1998 1997 1996
---- ---- ----
Rate earned on interest earning assets........................ 8.03% 8.20% 8.16%
Rate paid on interest bearing liabilities..................... 4.67 4.76 4.77
Interest rate spread.......................................... 3.36 3.44 3.39
Net yield on earning assets................................... 4.10 4.19 4.15
26
[This Page Intentionally Left Blank]
27
Consolidated Average Balance Sheets and Rate/Volume Variances
Taxable Equivalent Basis
Year Ended December 31
-------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
YIELD/RATE ANALYSIS ----------- ---------- ------ ----------- ---------- ------
Assets
Earning assets:
Loans, net of unearned
income*............... $ 9,711,614 $ 844,290 8.69% $ 9,121,879 $ 807,105 8.85%
Investment securities:
Taxable................ 1,296,731 90,339 6.97 1,111,675 80,249 7.22
Tax-exempt............. 90,487 7,638 8.44 105,091 8,950 8.52
----------- ---------- ----------- ----------
Total investment
securities........... 1,387,218 97,977 7.06 1,216,766 89,199 7.33
Investment securities
available for sale.... 2,836,701 185,563 6.54 2,273,843 149,252 6.56
Trading account
securities............ 94,674 5,939 6.27 113,456 7,316 6.45
Federal funds sold and
securities purchased
under agreements to
resell................ 90,439 4,847 5.36 158,329 8,381 5.29
Interest bearing
deposits with other
banks................. 807 51 6.32 2,214 137 6.19
----------- ---------- ----------- ----------
Total earning assets.. 14,121,453 1,138,667 8.06 12,886,487 1,061,390 8.24
Allowance for loan
losses................. (133,677) (132,220)
Unrealized gain (loss)
on investment
securities available
for sale............... 11,893 (3,763)
Cash and due from
banks.................. 641,291 560,218
Other assets............ 782,202 661,689
----------- -----------
Total assets.......... $15,423,162 $13,972,411
=========== ===========
Liabilities and
Shareholders' Equity
Interest bearing
liabilities:
Interest bearing demand
deposits.............. $ 551,944 12,608 2.28 $ 710,934 16,929 2.38
Savings deposits....... 4,534,614 165,981 3.66 3,950,934 144,443 3.66
Certificates of deposit
less than $100,000 and
other time deposits... 2,738,738 152,404 5.56 2,995,433 169,078 5.64
Certificates of deposit
of $100,000 or more... 1,157,666 65,714 5.68 1,048,859 60,065 5.73
----------- ---------- ----------- ----------
Total interest bearing
deposits............. 8,982,962 396,707 4.42 8,706,160 390,515 4.49
Federal funds
purchased............. 951,267 50,080 5.26 666,097 36,221 5.44
Securities sold under
agreement to
repurchase............ 244,505 12,081 4.94 244,560 12,492 5.11
Other short-term
borrowings............ 170,468 9,113 5.35 211,471 11,944 5.65
FHLB and other
borrowings............ 1,534,761 87,176 5.68 1,028,778 65,241 6.34
----------- ---------- ----------- ----------
Total interest bearing
liabilities.......... 11,883,963 555,157 4.67 10,857,066 516,413 4.76
---------- ---- ---------- ----
Net interest income/net
interest spread........ 583,510 3.39% 544,977 3.48%
==== ====
Noninterest bearing
demand deposits........ 2,263,473 2,007,749
Accrued expenses and
other liabilities...... 140,170 101,285
Shareholders' equity.... 1,135,556 1,006,311
----------- -----------
Total liabilities and
shareholders'
equity............... $15,423,162 $13,972,411
=========== ===========
Net yield on earning
assets................. 4.13% 4.23%
==== ====
Taxable equivalent
adjustment:
Loans.................. 508 786
Investment securities.. 2,662 3,160
Investment securities
available for sale.... 868 1,161
Trading account
securities............ 85 95
---------- ----------
Total taxable
equivalent
adjustment........... 4,123 5,202
---------- ----------
Net interest income..... $ 579,387 $ 539,775
========== ==========
- --------
* Includes nonaccrual loans.
28
Year Ended December 31
----------------------------
1996 Change in Interest Income/Expense Attributable to
---------------------------- ------------------------------------------------------
1998 1997
Average Income/ Yield/ -------------------------- --------------------------
Balance Expense Rate Volume Rate Mix Volume Rate Mix
YIELD/RATE ANALYSIS ----------- -------- ------ -------- -------- ------ -------- ------- -------
Assets
Earning assets:
Loans, net of unearned
income*............... $ 8,030,043 $715,466 8.91% $ 52,192 $(14,595) $ (412) $ 97,283 $(4,818) $ (826)
Investment securities:
Taxable................ 885,748 64,751 7.31 13,361 (2,779) (492) 16,515 (797) (220)
Tax-exempt............. 101,138 9,142 9.04 (1,244) (84) 16 357 (526) (23)
----------- -------- -------- -------- ------ -------- ------- -------
Total investment
securities........... 986,886 73,893 7.49 12,117 (2,863) (476) 16,872 (1,323) (243)
Investment securities
available for sale.... 2,422,574 157,140 6.49 36,923 (455) (157) (9,653) 1,696 69
Trading account
securities............ 98,618 6,742 6.84 (1,211) (204) 38 1,015 (385) (56)
Federal funds sold and
securities purchased 218,900 11,552 5.28 (3,591) 111 (54) (3,198) 22 5
under agreements to
resell................
Interest bearing
deposits with other 3,338 196 5.87 (87) 3 (2) (66) 11 (4)
banks................. ----------- -------- -------- -------- ------ -------- ------- -------
Total earning assets.. 11,760,359 964,989 8.21 96,343 (18,003) (1,063) 102,253 (4,797) (1,055)
Allowance for loan
losses................. (125,181)
Unrealized gain (loss)
on investment
securities available
for sale............... (3,922)
Cash and due from
banks.................. 549,846
Other assets............ 520,521
-----------
Total assets.......... $12,701,623
===========
Liabilities and
Shareholders' Equity
Interest bearing
liabilities:
Interest bearing demand
deposits.............. $ 1,183,927 27,842 2.35 (3,784) (711) 174 (11,115) 355 (153)
Savings deposits....... 3,048,870 119,906 3.93 21,363 -- 175 35,451 (8,232) (2,682)
Certificates of deposit
less than $100,000 and
other time deposits... 3,075,885 174,540 5.67 (14,478) (2,396) 200 (4,562) (923) 23
Certificates of deposit
of $100,000 or more... 1,025,169 58,347 5.69 6,235 (524) (62) 1,348 410 (40)
----------- -------- -------- -------- ------ -------- ------- -------
Total interest bearing
deposits............. 8,333,851 380,635 4.57 9,336 (3,631) 487 21,122 (8,390) (2,852)
Federal funds
purchased............. 460,809 24,266 5.27 15,513 (1,199) (455) 10,819 783 353
Securities sold under
agreement to
repurchase............ 256,424 12,065 4.71 (3) (416) 8 (559) 1,026 (40)
Other short-term
borrowings............ 180,456 9,851 5.46 (2,317) (634) 120 1,693 343 57
FHLB and other
borrowings............ 671,682 45,129 6.72 32,079 (6,790) (3,354) 23,997 (2,552) (1,333)
----------- -------- -------- -------- ------ -------- ------- -------
Total interest bearing
liabilities.......... 9,903,222 471,946 4.77 54,608 (12,670) (3,194) 57,072 (8,790) (3,815)
-------- ---- -------- -------- ------ -------- ------- -------
Net interest income/net
interest spread........ 493,043 3.44% $ 41,735 $ (5,333) $2,131 $ 45,181 $ 3,993 $ 2,760
==== ======== ======== ====== ======== ======= =======
Noninterest bearing
demand deposits........ 1,826,323
Accrued expenses and
other liabilities...... 77,556
Shareholders' equity.... 894,522
-----------
Total liabilities and
shareholders'
equity............... $12,701,623
===========
Net yield on earning
assets................. 4.19%
====
Taxable equivalent
adjustment:
Loans.................. 891
Investment securities.. 3,310
Investment securities
available for sale.... 1,206
Trading account
securities............ 70
--------
Total taxable
equivalent
adjustment........... 5,477
--------
Net interest income..... $487,566
========
29
Provision for Loan Losses, Net Charge-Offs and Allowance for Loan Losses
The provision for loan losses is the annual cost of providing an allowance
or reserve for estimated losses on loans. The amount for each year is
dependent upon many factors including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment
of loan portfolio quality, the value of collateral and general economic
factors.
The economic outlook for the states in which the Company does business is
optimistic in the midst of a stable economy overall. On a regional basis,
however, any economic slowdown in the Company's markets could have an effect
on most regional bank holding companies and could impact overall asset
quality. Such an economic slowdown would probably also have a negative impact
on real estate l