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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 0-6032
COMPASS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0593897
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
15 SOUTH 20TH STREET
BIRMINGHAM, ALABAMA 35233
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 933-3000
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
None REGISTERED
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $2 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
As of January 31, 1998, the aggregate market value of voting stock held by
non-affiliates was $2,942,194,349.
Indicate the number of shares outstanding of the registrant's class of common
stock, as of the latest practicable date.
CLASS OUTSTANDING AT JANUARY 31, 1998
Common Stock, $2 Par Value 68,027,615
DOCUMENTS INCORPORATED BY REFERENCE PART OF 10-K IN WHICH INCORPORATED
Proxy Statement for 1998 annual Part III
meeting
except for information referred to
in Item 402(a)(8) of Regulation S-K
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PART I
ITEM 1 -- BUSINESS
Compass Bancshares, Inc. (the "Company") is a bank holding company with its
principal place of business in Birmingham, Alabama. The Company was organized
in 1970 and commenced business in late 1971 upon the acquisition of Central
Bank & Trust Co. and State National Bank. The Company subsequently acquired
substantially all of the outstanding stock of additional banks located in
Alabama, 11 of which were merged in late 1981 to create Central Bank of the
South, Alabama's first statewide bank. In February, 1987, the Company acquired
First National Bank of Crosby near Houston, Texas, and became the first out-
of-state bank holding company to acquire a bank in Texas. The Company first
expanded into Florida in July, 1991, when it acquired Citizens & Builders
Federal Savings, F.S.B., in Pensacola, Florida. In November, 1993, the Company
changed its name from Central Bancshares of the South, Inc. to Compass
Bancshares, Inc. and Central Bank of the South, the Company's lead bank
subsidiary, changed its name to Compass Bank ("Compass Bank").
In addition to Compass Bank, the Company also owns Central Bank of the
South, an Alabama banking corporation headquartered in Anniston, Alabama, and
Compass Banks of Texas, Inc., a Delaware bank holding company ("Compass of
Texas"), which owns Compass Bank, a Texas state bank headquartered in Houston,
Texas ("Compass Bank-Texas"). The bank subsidiaries of the Company and Compass
of Texas are referred to collectively herein as the "Subsidiary Banks".
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide them with capital and services
of various kinds. The Company derives substantially all of its income from
dividends from its subsidiaries. Such dividends are determined on an
individual basis, generally in relation to each subsidiary's earnings and
capital position.
SUBSIDIARY BANKS
Compass Bank conducts a general commercial banking and trust business at 88
locations in 45 communities in Alabama and in 34 locations in 14 communities
in Florida. Compass Bank-Texas conducts a general commercial banking business
from 41 banking offices in Houston, 25 banking offices in the Dallas-Ft. Worth
area, 17 banking offices in San Antonio, 8 banking offices in Austin and 10
banking offices in Central and East Texas.
The Subsidiary Banks perform banking services customary for full service
banks of similar size and character. Such services include receiving demand
and time deposit accounts, making personal and commercial loans and furnishing
personal and commercial checking accounts. The Asset Management Division of
Compass Bank offers its customers a variety of fiduciary services, including
portfolio management the administration and investment of funds of estates,
trusts and employee benefit plans. Through Compass Bancshares Insurance, Inc.,
a wholly-owned subsidiary of Compass Bank, the Subsidiary Banks make available
to their customers and others, as agent for a variety of insurance companies,
term life insurance, fixed-rate annuities and other insurance products.
The Subsidiary Banks provide correspondent banking services including audit
services, educational seminars and operational and investment services to
approximately 1,000 financial institutions located throughout the United
States. Through the Correspondent and Investment Services Division of Compass
Bank, the Subsidiary Banks distribute or make available a variety of
investment services and products to institutional and individual investors
including institutional sales, bond accounting, safekeeping and interest rate
risk analysis services. Through Compass Brokerage, Inc., a wholly-owned
subsidiary of Compass Bank, the Subsidiary Banks also provide discount
brokerage services, mutual funds and variable annuities to individuals and
businesses. Through Compass Bank's wholly-owned subsidiary, Compass Financial
Corporation, the Subsidiary Banks provide lease financing services to
individuals and businesses.
1
NONBANKING SUBSIDIARIES
Through wholly-owned subsidiaries, the Company is engaged in providing
insurance products to customers of the Subsidiary Banks and owning real estate
for bank premises. Revenues from operation of these subsidiaries do not
presently constitute a significant portion of the Company's total operating
revenues. The Company may subsequently engage in other activities permissible
for registered bank holding companies when suitable opportunities develop. Any
proposal for such further activities is subject to approval by appropriate
regulatory authorities. (See "Supervision and Regulation".)
ACQUISITIONS
The Company may seek to acquire other banks and banking offices when
suitable opportunities develop. Discussions are held from time to time with
institutions primarily in Texas and Florida about their possible affiliation
with the Company. It is impossible to predict accurately whether any
discussions will lead to agreement. Any bid or proposal for the acquisition of
additional banks is subject to approval by appropriate regulatory authorities.
(See "Supervision and Regulation".)
Since the Company first expanded to Texas in 1987 and to Florida in 1991,
the Company has acquired 40 financial institutions and numerous branch offices
in Texas and Florida. The following is a list of the acquisitions completed
during the past three years with their asset size (in thousands) and closing
dates.
Assets Method of
Acquisition Date Acquired Accounting
- ----------- -------- -------- ----------
Southwest Bankers, Inc. 3-7-95 $142,000 Pooling
San Antonio, Texas
Flower Mound Bancshares, Inc. 2-1-96 $46,000 Pooling
Dallas, Texas
Equitable BankShares, Inc. 4-11-96 $184,000 Pooling
Dallas, Texas
Post Oak Bank 4-22-96 $323,000 Purchase
Houston, Texas
Peoples Bancshares, Inc. 5-21-96 $136,000 Purchase
Belton, Texas
Royall Financial Corporation 7-16-96 $109,000 Pooling
Palestine, Texas
CFB Bancorp, Inc. 8-23-96 $302,000 Purchase
Jacksonville, Florida
Texas American Bank 9-27-96 $65,000 Pooling
San Antonio, Texas
ProBank 10-24-96 $61,000 Purchase
Houston, Texas
Enterprise National Bank 1-15-97 $171,000 Pooling
Jacksonville, Florida
Horizon Bancorp, Inc. 3-12-97 $154,000 Pooling
Austin, Texas
Greater Brazos Valley Bancorp, Inc. 4-17-97 $58,000 Pooling
College Station, Texas
Central Texas Bancorp, Inc. 7-15-97 $207,000 Pooling
Waco, Texas
2
ACQUISITIONS COMPLETED AFTER DECEMBER 31, 1997
On January 13, 1998, the Company completed the acquisition of G.S.B.
Investments, Inc. ("GSB") and its subsidiary, Gainesville State Bank, of
Gainesville, Florida, with the issuance of 1,649,807 shares of the Company's
common stock. At the date of closing, GSB had assets of $213 million and
equity of $22 million. The transaction was accounted for under the pooling-of-
interests method of accounting and, accordingly, all prior period information
will be restated in the first quarter of 1998.
The Company completed the acquisition of First University Corporation
("First University") and its subsidiary, West University Bank, N.A., of
Houston, Texas, on January 29, 1998, with the issuance of approximately
350,000 shares of the Company's common stock. At the date of closing, First
University had assets of $68 million and equity of $4 million. The transaction
was accounted for under the pooling-of-interests method of accounting and,
accordingly, all prior period information will be restated in the first
quarter of 1998.
On February 9, 1998, the Company completed the acquisition of Fidelity
Resources Company ("Fidelity") and its subsidiary, Fidelity Bank, N.A., of
Dallas, Texas, with the issuance of approximately 1,800,000 shares of the
Company's common stock. At the date of closing, Fidelity had assets of $335
million and equity of $20 million. The transaction was accounted for under the
pooling-of-interests method of accounting and, accordingly, all prior period
information will be restated in the first quarter of 1998.
COMPETITION
The Subsidiary Banks encounter intense competition in their businesses,
generally from other banks located in Alabama, Texas, Florida and adjoining
states, and compete for interest bearing funds with other banks, mutual funds
and with many issuers of commercial paper and other securities which are not
banks. Competition also exists for the correspondent banking and securities
sales business from commercial and investment banks and brokerage firms. In
the case of larger customers, competition exists with financial institutions
in Texas and other major metropolitan areas in the United States, many of
which are larger in terms of capital, resources and personnel. Increasingly,
in the conduct of certain aspects of their businesses, the Subsidiary Banks
compete with finance companies, savings and loan associations, credit unions,
mutual funds, factors, insurance companies and similar financial institutions.
There is significant competition among bank holding companies in most of the
markets served by the Subsidiary Banks. The Company believes that intense
competition for banking business among bank holding companies in Alabama,
Texas and Florida will continue and that during 1998 the competition may
further intensify if additional regional bank holding companies enter such
states through the acquisition of local bank holding companies or savings and
loan institutions and with continued consolidation of savings and loan
institutions with and into bank holding companies. Competition among bank
holding companies is also significant in Texas where Compass Bank-Texas is
located in the major metropolitan markets of Dallas/Ft. Worth, Houston, San
Antonio and Austin having populations of approximately 4.6 million, 4.3
million, 1.5 million and 1.0 million people, respectively. Compass Bank-Texas
is small in terms of assets and deposits in comparison with the super-regional
banks it competes with. Likewise, in Jacksonville, Pensacola and Fort Walton
Beach, Florida, Compass Bank encounters intense competition from other
financial institutions that are substantially larger in terms of assets and
deposits.
EMPLOYEES
At December 31, 1997, the Company and its subsidiaries employed
approximately 5,500 persons. The Company and its subsidiaries provide a
variety of benefit programs including group life, health, accident, and other
insurance, retirement and stock ownership plans. The Company also maintains
training, educational and affirmative action programs designed to prepare
employees for positions of increasing responsibility.
3
GOVERNMENT MONETARY POLICY
The Company and the Subsidiary Banks are affected by the credit policies of
monetary authorities, including the Board of Governors of the Federal Reserve
System ("Federal Reserve"). An important function of the Federal Reserve is to
regulate the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve to implement these objectives are: open
market operations in U.S. Government securities, changes in the discount rate,
reserve requirements on member bank deposits and funds availability
regulations. These instruments are used in varying combinations to influence
the overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of financial institutions in the
past and will continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to the future
impact that changes in interest rates, deposit levels or loan demand may have
on the business and income of the Company and the Subsidiary Banks.
SUPERVISION AND REGULATION
THE COMPANY
The Company and Compass of Texas are multi-bank holding companies within the
meaning of the Bank Holding Company Act ("BHC Act") and are registered as such
with the Federal Reserve. As bank holding companies, the Company and Compass
of Texas are required to file with the Federal Reserve an annual report and
such additional information as the Federal Reserve may require pursuant to the
BHC Act. The Federal Reserve may also make examinations of the Company and
each of its subsidiaries. Under the BHC Act, bank holding companies are
prohibited, with certain exceptions, from acquiring direct or indirect
ownership or control of more than five percent of the voting shares of any
company engaging in activities other than banking or managing or controlling
banks or furnishing services to or performing services for their banking
subsidiaries. However, the BHC Act authorizes the Federal Reserve to permit
bank holding companies to engage in, and to acquire or retain shares of
companies that engage in, activities which the Federal Reserve determines to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
The BHC Act requires a bank holding company to obtain the prior approval of
the Federal Reserve before it may acquire substantially all the assets of any
bank or ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than five
percent of the voting shares of any such bank. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Act"), facilitates
branching and the establishment of agency relationships across state lines and
permits, commencing one year after enactment, bank holding companies to
acquire banks located in any state without regard to whether the transaction
is prohibited under any state law, subject to certain state provisions,
including the establishment by states of a minimum age of their local banks
subject to interstate acquisition of out-of-state bank holding companies. The
minimum age of local banks subject to interstate acquisition is limited to a
maximum of five years.
The States of Alabama, Florida and Texas, where the Company currently
operates banking subsidiaries, each have laws relating specifically to
acquisitions of banks, bank holding companies and other types of financial
institutions in those states by financial institutions that are based in, and
not based in, those states. In 1995, the State of Alabama enacted an
interstate banking act. In general, the Alabama statute implements the
Interstate Act, specifying five years as the minimum age of banks which may be
acquired and participating in interstate branching beginning May 31, 1997.
Texas and Florida law currently permits out-of-state bank holding companies to
acquire banks in Texas and Florida regardless of where the acquiror is based,
subject to the satisfaction of various provisions of state law, including the
requirement that the bank to be acquired has been in existence at least five
years in Texas and two years in Florida.
4
The Federal Reserve Act generally imposes certain limitations on extensions
of credit and other transactions by and between banks which are members of the
Federal Reserve and other affiliates (which includes any holding company of
which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Banks which are not members of the Federal Reserve are also
subject to these limitations. Further, federal law prohibits a bank holding
company and its subsidiaries from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or the
furnishing of services.
In December, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. This act recapitalized the Bank Insurance Fund
("BIF"), of which the Subsidiary Banks are members, and the Savings
Association Insurance Fund ("SAIF"), which insures certain of the Subsidiary
Banks' deposits, substantially revised statutory provisions, including capital
standards, restricted certain powers of state banks, gave regulators the
authority to limit officer and director compensation and required holding
companies to guarantee the capital compliance of their banks in certain
instances. Among other things, FDICIA requires the federal banking agencies to
take "prompt corrective action" with respect to banks that do not meet minimum
capital requirements. FDICIA established five capital tiers: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized", as defined by regulations
adopted by the Federal Reserve, the FDIC and the other federal depository
institution regulatory agencies. A depository institution is well capitalized
if it significantly exceeds the minimum level required by regulation for each
relevant capital measure, adequately capitalized if it meets such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in
the regulations. The critical capital level must be a level of tangible equity
capital equal to the greater of 2 percent of total tangible assets or 65
percent of the minimum leverage ratio to be prescribed by regulation. An
institution may be deemed to be in a capitalization category that is lower
than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
If a depository institution fails to meet regulatory capital requirements,
the regulatory agencies can require submission and funding of a capital
restoration plan by the institution, place limits on its activities, require
the raising of additional capital and, ultimately, require the appointment of
a conservator or receiver for the institution. The obligation of a controlling
bank holding company under FDICIA to fund a capital restoration plan is
limited to the lesser of five percent of an undercapitalized subsidiary's
assets or the amount required to meet regulatory capital requirements. If the
controlling bank holding company fails to fulfill its obligations under FDICIA
and files (or has filed against it) a petition under the Federal Bankruptcy
Code, the FDIC's claim may be entitled to a priority in such bankruptcy
proceeding over third party creditors of the bank holding company.
An insured depository institution may not pay management fees to any person
having control of the institution nor may an institution, except under certain
circumstances and with prior regulatory approval, make any capital
distribution (including the payment of dividends) if, after making such
payment or distribution, the institution would be undercapitalized. FDICIA
also restricts the acceptance of brokered deposits by insured depository
institutions and contains a number of consumer banking provisions, including
disclosure requirements and substantive contractual limitations with respect
to deposit accounts.
At December 31, 1997, the Subsidiary Banks were "well capitalized" and were
not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. The Subsidiary Banks do not
rely upon brokered deposits as a primary source of deposit funding; although,
such deposits are sold through the Correspondent and Investment Services
Division of Compass Bank.
FDICIA contains numerous other provisions, including new reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy. In addition, FDICIA requires the FDIC to establish a system
of risk-based assessments for federal deposit insurance, by which banks that
pose a greater risk of loss to the FDIC (based on their capital levels and the
FDIC's level of supervisory concern) will pay a higher insurance assessment.
5
THE SUBSIDIARY BANKS
In general, federal and state banking laws and regulations govern all areas
of the operations of the Subsidiary Banks, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state banking regulatory agencies also
have the general authority to limit the dividends paid by insured banks and
bank holding companies if such payments may be deemed to constitute an unsafe
and unsound practice. Federal and state banking agencies also have authority
to impose penalties, initiate civil and administrative actions and take other
steps intended to prevent banks from engaging in unsafe or unsound practices.
Compass Bank, organized under the laws of the State of Alabama, is a member
of the Federal Reserve. As such, it is supervised, regulated and regularly
examined by the Alabama State Banking Department and the Federal Reserve.
Compass Bank-Texas is supervised, regulated and regularly examined by the
Department of Banking of the State of Texas and the Federal Reserve. The
Subsidiary Banks are subject to the provisions of the Federal Deposit
Insurance Act and to examination by and regulations of the FDIC.
Compass Bank is governed by Alabama laws restricting the declaration and
payment of dividends to 90 percent of annual net income until its surplus
funds equal at least 20 percent of capital stock. Compass Bank has surplus in
excess of this amount. Compass Bank-Texas, governed by the laws of the State
of Texas, is, under certain circumstances, restricted in the declaration and
payment of dividends to the extent that before declaring any dividends, it
must transfer to its "certified surplus" accounts an amount not less than 10
percent of the net profits earned since the last dividend was declared, except
that there is no requirement for a transfer to certified surplus of a sum
which would increase the certified surplus to more than the capital stock of
the bank. As members of the Federal Reserve, Compass Bank and Compass Bank-
Texas are subject to dividend limitations imposed by the Federal Reserve that
are similar to those applicable to national banks.
Federal law further provides that no insured depository institution may make
any capital distribution, including a cash dividend, if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements. Moreover, the federal bank regulatory agencies also have
the general authority to limit the dividends paid by insured banks if such
payments may be deemed to constitute an unsafe and unsound practice. Insured
banks are prohibited from paying dividends on their capital stock while in
default in the payment of any assessment due to the FDIC except in those cases
where the amount of the assessment is in dispute and the insured bank has
deposited satisfactory security for the payment thereof.
The Community Reinvestment Act of 1977 ("CRA") and the regulations of the
Federal Reserve and the FDIC implementing that act are intended to encourage
regulated financial institutions to help meet the credit needs of their local
community or communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of such financial institutions.
The CRA and such regulations provide that the appropriate regulatory authority
will assess the records of regulated financial institutions in satisfying
their continuing and affirmative obligations to help meet the credit needs of
their local communities as part of their regulatory examination of the
institution. The results of such examinations are made public and are taken
into account upon the filing of any application to establish a domestic branch
or to merge or to acquire the assets or assume the liabilities of a bank. In
the case of a bank holding company, the CRA performance record of the banks
involved in the transaction are reviewed in connection with the filing of an
application to acquire ownership or control of shares or assets of a bank or
to merge with any other bank holding company. An unsatisfactory record can
substantially delay or block the transaction.
OTHER
Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are being
considered by the executive branch of the federal government, Congress and
various state governments, including Alabama, Texas and Florida. Certain of
these proposals, if adopted, could significantly change the regulation of
banks and the financial services industry. It cannot be predicted accurately
whether any of these proposals will be adopted or, if adopted, how these
proposals will affect the Company or the Subsidiary Banks.
6
The Investment Services Division of Compass Bank is treated as a municipal
securities dealer and a government securities dealer for purposes of the
federal securities laws and, therefore, is subject to certain reporting
requirements and/or regulatory controls by the Securities and Exchange
Commission (the "Commission"), the United States Department of the Treasury
and the Federal Reserve. Compass Brokerage, Inc. is a discount brokerage
service registered with the Commission and the National Association of
Securities Dealers, Inc. and is subject to certain reporting requirements and
regulatory control by these agencies. Compass Bancshares Insurance, Inc. is a
licensed insurance agent or broker for various insurance companies and is
subject to reporting and licensing regulations of the Alabama Insurance
Commission.
References to applicable statutes under the heading "Supervision and
Regulation" are brief summaries of portions thereof, do not purport to be
complete and are qualified in their entirety by reference to such statutes.
7
ITEM 1 -- STATISTICAL DISCLOSURE
Page(s)
-------
Consolidated Average Balances, Interest Income/Expense and
Yields/Rates......................................................... 28 & 29
Rate/Volume Variance Analysis......................................... 30 & 31
Investment Securities and Investment Securities Available for Sale ... 14
Investment Securities and Investment Securities Available for Sale
Maturity Schedule ................................................... 15
Loan Portfolio ....................................................... 12
Selected Loan Maturity and Interest Rate Sensitivity ................. 12
Nonperforming Assets ................................................. 35
Summary of Loan Loss Experience ...................................... 33
Allocation of Allowance for Loan Losses .............................. 34
Maturities of Time Deposits .......................................... 17
Return on Equity and Assets .......................................... 23
Short-Term Borrowings ................................................ 18
Interest Rate Protection Contracts ................................... 21
Assets/Liabilities Associated With Interest Rate Protection Contracts
..................................................................... 21
Trading Account Interest Rate Contracts .............................. 22
Trading Account Composition .......................................... 16
Capital Ratios ....................................................... 24
Noninterest Income ................................................... 36
Noninterest Expense .................................................. 37
8
ITEM 2 -- PROPERTIES
The Company, through its subsidiaries, owns or leases buildings that are
used in the normal course of business. The principal executive offices of the
Company are located at 15 South 20th Street, Birmingham, Alabama, in a 289,000
square-foot office building. The Subsidiary Banks own or lease various other
offices and facilities in Alabama, Florida and Texas with remaining lease
terms of 1 to 20 years exclusive of renewal options. In addition, the Company
owns a 306,000 square-foot administrative headquarters facility located in
Birmingham, Alabama. The Company also owns the River Oaks Bank Building in
Houston, Texas, a 14-story, 168,000 square-foot office building, and the Post
Oak Building in Houston, Texas, an 8-story, 124,000 square-foot office
building. Compass Bank-Texas currently occupies approximately 35 percent of
the River Oaks Bank Building and approximately 30 percent of the Post Oak
Building. The remaining space in both buildings is leased to multiple tenants.
See "Summary of Significant Accounting Policies" and "Notes to Consolidated
Financial Statements" for information with respect to the amounts at which
bank premises, equipment and other real estate are carried and information
relating to commitments under long-term leases.
ITEM 3 -- LEGAL PROCEEDINGS
The Subsidiary Banks are defendants in legal proceedings arising in the
ordinary course of business. Some of these proceedings which relate to
lending, collections, servicing, investment, trust and other activities by
such subsidiaries seek substantial sums as damages.
Among the actions which are pending against the Subsidiary Banks are actions
filed as class actions in the State of Alabama. The actions are similar to
others that have been brought in recent years in Alabama against financial
institutions in that they seek substantial compensatory and punitive damages
in connection with transactions involving relatively small amounts of actual
damages. In recent years, juries in certain Alabama state courts have rendered
large punitive damage awards in such cases.
It may take a number of years to finally resolve some of these pending legal
proceedings due to their complexity and other reasons. It is difficult to
determine with any certainty at this time the potential exposure from the
proceedings. However, based upon the advice of legal counsel, management is of
the opinion that the ultimate resolution of these legal proceedings will not
have a material adverse effect on the Company's financial condition or results
of operations.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of
proxies or otherwise during the fourth quarter of 1997.
9
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low closing prices of the common
stock of the Company as reported through the National Association of
Securities Dealers, Inc. Automated Quotation National Market System and the
dividends paid thereon during the periods indicated. All per share information
for periods prior to April, 1997, has been restated to reflect the 3-for-2
stock split with respect to the Company's common stock, which was effected by
a stock dividend paid on April 2, 1997. The prices shown do not reflect retail
mark-ups, mark-downs, or commissions. All share prices have been rounded to
the nearest 1/8 of one dollar.
High Low Dividend
---- ---- --------
1997:
FIRST QUARTER......................................... $32 1/8 $26 $.237
SECOND QUARTER........................................ 37 1/4 29 1/8 .237
THIRD QUARTER......................................... 39 3/4 34 1/2 .237
FOURTH QUARTER........................................ 46 5/8 37 1/8 .237
1996:
First quarter......................................... $23 1/8 $20 1/2 $.213
Second quarter........................................ 23 1/2 21 5/8 .213
Third quarter......................................... 23 1/8 21 .213
Fourth quarter........................................ 26 1/2 23 .213
As of January 31, 1998, there were approximately 7,000 shareholders of
record of common stock of which approximately 5,800 were residents of either
Alabama, Texas or Florida.
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five
years. All per share information for periods prior to April, 1997, has been
restated to reflect the 3-for-2 stock split with respect to the Company's
common stock, which was effected by a stock dividend paid on April 2, 1997.
All prior year information has been restated to reflect acquisitions
consummated during 1997 accounted for under the pooling-of-interests method of
accounting.
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
(in Thousands Except Per Share Data)
Net interest income..... $ 475,165 $ 431,172 $ 394,559 $ 375,410 $ 366,609
Provision for loan
losses................. 22,412 20,215 11,664 4,357 36,365
Net income.............. 155,563 132,444 119,750 110,614 102,182
Per share data:
Basic earnings......... $ 2.37 $ 2.04 $ 1.84 $ 1.70 $ 1.55
Diluted earnings....... 2.34 2.03 1.83 1.69 1.54
Cash dividends
declared.............. .947 .853 .747 .613 .507
Balance sheet:
Average total equity... $ 898,719 $ 798,052 $ 719,134 $ 640,841 $ 598,838
Average assets......... 12,602,235 11,501,586 10,381,940 8,959,342 7,960,137
Period-end FHLB and
other borrowings...... 1,387,121 702,771 591,344 496,629 335,817
Period-end total
equity................ 960,008 849,089 780,144 672,062 615,197
Period-end assets...... 13,459,555 12,432,223 11,252,438 10,120,321 8,229,027
10
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report. Prior year information has been restated to reflect
1997 acquisitions accounted for using the pooling-of-interests accounting
method. Financial institutions acquired by the Company during the past three
years and accounted for as purchases are reflected in the financial position
and results of operations of the Company since the date of their acquisition.
This report may contain forward-looking statements which are subject to
numerous assumptions, risks and uncertainties. Statements pertaining to future
periods are subject to uncertainty because of the possibility of changes in
underlying factors and assumptions. Actual results could differ materially
from those contained in or implied by such forward-looking statements for a
variety of factors including: sharp and/or rapid changes in interest rates;
significant changes in the economic scenario from the current anticipated
scenario which could materially change anticipated credit quality trends and
the ability to generate loans; significant delay in or inability to execute
strategic initiatives designed to grow revenues and/or control expenses; and
significant changes in accounting, tax or regulatory practices or
requirements.
SUMMARY
In 1997, the Company reported record net income of $155.6 million, a 17
percent increase over the Company's previous high of $132.4 million in 1996.
Net income for 1996 increased 11 percent over 1995 net income. Basic earnings
per share for 1997 was $2.37, also a record, compared with $2.04 in 1996 and
$1.84 in 1995, representing a 16 percent increase in 1997 and an 11 percent
increase in 1996. Diluted earnings per share increased to $2.34 in 1997, a 15
percent increase, from $2.03 in 1996. Diluted earnings per share in 1996
increased 11 percent over 1995. Pretax income for 1997 was up $30.4 million,
or 15 percent, over 1996 while income tax expense increased 10 percent over
the same period reflecting a decrease in the Company's effective tax rate from
36.3 percent in 1996 to 34.8 percent in 1997.
One significant factor in the growth of the Company has been the Company's
acquisitions in Texas since early 1987, specifically the Houston, Dallas, San
Antonio and Austin areas. The Texas expansion continued in 1997 and is
expected to continue in 1998. With the acquisition of three financial
institutions in 1997, the assets of the Company's Texas operations has grown
to $5.5 billion at December 31, 1997. In addition, the Company expanded its
Florida operations with the acquisition of Enterprise National Bank of
Jacksonville, Florida and has continued to increase its presence in Florida in
1998. For additional information, see "Acquisitions" and "Acquisitions
Completed After December 31, 1997" in Part I of this report and the
accompanying "Notes to the Consolidated Financial Statements," Note 11,
Business Combinations.
EARNING ASSETS
Average earning assets in 1997 increased 9 percent over 1996 due principally
to a 13 percent increase in average total loans. The average earning asset mix
shifted moderately in 1997 with loans at 71 percent, investment securities and
investment securities available for sale at 27 percent and other earning
assets at 2 percent. In 1996, loans were 69 percent, investment securities and
investment securities available for sale were 29 percent and other earning
assets were 2 percent, unchanged from 1995 levels. The mix of earning assets
is monitored on a continuous basis in order to place the Company in a position
to react to interest rate movements and to maximize the return on earning
assets.
LOANS
Average loans increased 13 percent in 1997 with much of the increase
concentrated in commercial, financial and agricultural loans, real estate
construction loans and consumer installment loans. Total loans outstanding at
11
year end increased 10 percent over previous year-end levels. Commercial,
financial and agricultural loans, which were 25 percent of total loans,
increased 20 percent in 1997 compared to the previous year. Real estate
construction loans increased 20 percent while consumer installment loans
increased 16 percent from year-end 1996 to year-end 1997. Residential mortgage
and commercial mortgage loans each increased one percent compared to 1996
levels. The 13 percent increase in the Company's loan portfolio from 1995 to
1996 was primarily the result of an increase of 26 percent in commercial,
financial and agricultural loans and a 12 percent increase in residential
mortgage loans.
The Company's loan portfolio continues to reflect the diversity of the
markets served by the Subsidiary Banks. The condition of the economy in states
in which the Subsidiary Banks lend money is further reflected in the loan
portfolio mix. The volume of commercial, financial and agricultural loans, as
a percentage of total loans outstanding, increased significantly during 1997
continuing the trend of prior years. Residential real estate loans represented
34 percent of the total portfolio at December 31, 1997, down from the 37
percent reported in the prior year.
The Company has not invested in loans that would be considered highly
leveraged transactions as defined by the Federal Reserve and other regulatory
agencies. The Company had no foreign loans or loans to lesser developed
countries as of December 31, 1997.
The Loan Portfolio table shows the classifications of loans by major
category at December 31, 1997, and for each of the preceding four years. The
second table shows maturities of certain loan classifications at December 31,
1997, and an analysis of the rate structure for such loans due in over one
year.
LOAN PORTFOLIO
December 31
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT Percent Percent Percent Percent
AMOUNT OF TOTAL Amount of Total Amount of Total Amount of Total Amount of Total
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(in Thousands)
Commercial,
financial and
agricultural..... $2,209,396 25.5% $1,844,764 23.4% $1,465,063 21.1% $1,310,568 20.6% $1,245,496 21.8%
Real estate --
construction.... 718,462 8.3 599,473 7.6 485,408 7.0 432,656 6.8 311,693 5.5
Real estate --
mortgage:
Residential...... 2,987,745 34.4 2,944,237 37.3 2,634,544 37.9 2,421,233 38.1 2,029,508 35.5
Commercial....... 1,008,596 11.6 992,735 12.6 893,671 12.8 843,191 13.3 826,563 14.4
Consumer
installment...... 1,752,767 20.2 1,504,800 19.1 1,474,025 21.2 1,350,277 21.2 1,304,356 22.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
8,676,966 100.0% 7,886,009 100.0% 6,952,711 100.0% 6,357,925 100.0% 5,717,616 100.0%
===== ===== ===== ===== =====
Less: Unearned
income........... 5,410 9,337 9,848 8,903 11,319
Allowance for loan
losses........... 122,011 122,115 113,805 113,363 116,527
---------- ---------- ---------- ---------- ----------
Total loans....... $8,549,545 $7,754,557 $6,829,058 $6,235,659 $5,589,770
========== ========== ========== ========== ==========
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
Rate Structure For Loans
Maturity Maturing Over One Year
-------------------------------------------- -------------------------
One Over One Year Over Predetermined Floating or
Year or Through Five Five Interest Adjustable
Less Years Years Total Rate Rate
---------- ------------- -------- ---------- ------------- -----------
(in Thousands)
Commercial, financial
and agricultural....... $1,144,713 $ 918,209 $146,474 $2,209,397 $461,114 $603,569
Real estate --
construction.......... 442,517 248,538 27,407 718,462 47,097 228,848
---------- ---------- -------- ---------- -------- --------
$1,587,230 $1,166,747 $173,881 $2,927,859 $508,211 $832,417
========== ========== ======== ========== ======== ========
12
INVESTMENT SECURITIES
The Company's investment securities are classified into one of three
categories based on management's intent to hold the securities: (i) trading
account securities, (ii) held-to-maturity securities or (iii) securities
available for sale. Securities held in a trading account are required to be
reported at fair value, with unrealized gains and losses included in earnings.
Securities designated to be held to maturity are reported at amortized cost.
Securities classified as available for sale are required to be reported at
fair value with unrealized gains and losses, net of taxes, excluded from
earnings and shown separately as a component of shareholders' equity. On
December 31, 1995, the Company adopted the Financial Accounting Standards
Board's Special Report, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities ("Special
Report"). The Special Report allowed a company the one-time opportunity to
reassess the appropriateness of its investment securities classifications and
to transfer securities from the held-to-maturity portfolio to the available-
for-sale portfolio without calling into question the company's intent to hold
other debt securities to maturity. Upon adoption, the Company transferred
held-to-maturity investment securities totaling $828 million to its available-
for-sale portfolio and $33 million of available-for-sale securities to its
held-to-maturity portfolio. Generally, individual holdings with greater than
$10 million par value were transferred to the available-for-sale portfolio in
order to increase liquidity and portfolio management capabilities, with
smaller positions transferred to the held-to-maturity portfolio.
The composition of the Company's total investment securities portfolio
reflects the Company's investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the Company's investment strategy are to maintain an appropriate level of
liquidity and provide a tool to assist in controlling the Company's interest
rate position while at the same time producing adequate levels of interest
income. For securities classified as held to maturity, the Company has the
ability, and it is management's intention, to hold such securities to
maturity. Management of the maturity of the portfolio is necessary to provide
liquidity and control interest rate risk. Certain securities that may be sold
prior to maturity are reflected as investment securities available for sale on
the Company's balance sheet.
Maturities of held-to-maturity securities in 1997, 1996 and 1995 were $371
million, $233 million and $466 million, respectively. During 1995, gross gains
of $1.2 million were realized on $32 million of mortgage-backed securities
("MBS") in the held-to-maturity portfolio, which were classified as maturities
in accordance with generally accepted accounting principles. Sales and
maturities of securities available for sale totaled $966 million and $552
million, respectively, in 1997 while sales and maturities in the portfolio in
1996 were $812 million and $497 million. Net gains realized during the year
accounted for four percent, six percent and two percent of noninterest income
in 1997, 1996 and 1995, respectively. Gross unrealized gains in the Company's
held-to-maturity portfolio at year-end 1997 totaled $19.2 million and gross
unrealized losses totaled $1.3 million.
In recent years, the trend of the Company has been to invest in taxable
securities due to the lack of preferential treatment afforded tax-exempt
securities under the tax laws. Because of their liquidity, credit quality and
yield characteristics, the majority of the purchases of taxable securities
have been in collateralized mortgage obligations ("CMOs"). Total average
investment securities, including those available for sale, was relatively
unchanged during 1997 after increasing 10 percent in 1996.
13
The following table contains the carrying amount of the investment
securities portfolio at the end of each of the last three years.
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
December 31
---------------------------------
1997 1996 1995
---------- ---------- ----------
(in Thousands)
Investment securities:
U.S. Treasury................................ $ 11,736 $ 16,990 $ --
U.S. Government agencies and corporations.... 24,348 40,767 1,975
Mortgage-backed pass-through securities...... 233,908 296,798 340,615
Collateralized mortgage obligations:
Agency...................................... 317,863 343,125 132,485
Corporate................................... 311,003 295,838 114,957
States and political subdivisions............ 74,161 86,467 71,159
Corporate bonds.............................. 27,604 40,389 67,678
Other........................................ 855 1,270 1,235
---------- ---------- ----------
1,001,478 1,121,644 730,104
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 127,993 144,625 395,880
U.S. Government agencies and corporations.... 66,952 72,010 151,860
Mortgage-backed pass-through securities...... 130,489 300,220 284,922
Collateralized mortgage obligations:
Agency...................................... 1,025,678 525,280 555,428
Corporate................................... 773,224 904,368 628,450
States and political subdivisions............ 827 6,271 18,120
Corporate bonds.............................. 90,329 116,592 131,874
Other........................................ 92,180 54,092 47,761
---------- ---------- ----------
2,307,672 2,123,458 2,214,295
Net unrealized gain (loss).................. 2,038 (2,784) 20,743
---------- ---------- ----------
2,309,710 2,120,674 2,235,038
---------- ---------- ----------
Total....................................... $3,311,188 $3,242,318 $2,965,142
========== ========== ==========
14
The maturities and weighted average yields of the investment securities and
investment securities available for sale portfolios at the end of 1997 are
presented in the following table using primarily the average expected lives
including the effects of prepayments. The amounts and yields disclosed for
investment securities available for sale reflect the amortized cost rather
than the net carrying value, i.e., fair value, of these securities. Taxable
equivalent adjustments, using a 35 percent tax rate, have been made in
calculating yields on tax-exempt obligations.
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE MATURITY
SCHEDULE
Maturing
----------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
-------------- ------------------- ------------------ --------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ----------- ------- ---------- ------- -------- -----
(in Thousands)
Investment securities:
U.S. Treasury.......... $ 11,736 5.70% -- -- -- -- -- --
U.S. Government
agencies and
corporations.......... 5,342 6.03 $ 17,884 6.66% $ 1,122 6.50% -- --
Mortgage-backed pass-
through securities.... 8,954 5.61 184,916 7.55 40,038 7.00 -- --
Collateralized mortgage
obligations........... 82,303 6.97 449,786 7.42 40,562 6.69 $ 56,215 7.02%
States and political
subdivisions.......... 4,581 7.64 16,802 7.87 40,539 9.18 12,239 9.55
Corporate bonds and
other................. 11,792 6.13 7,624 8.73 4,050 7.11 4,993 7.81
-------- ----------- ---------- --------
124,708 6.66 677,012 7.46 126,311 7.57 73,447 7.47
-------- ----------- ---------- --------
Investment securities available
for sale -- amortized cost:
U.S. Treasury.......... 1,000 5.67 126,993 6.06 -- -- -- --
U.S. Government
agencies and
corporations.......... -- -- 66,952 6.83 -- -- -- --
Mortgage-backed pass-
through securities.... -- -- -- -- 130,489 6.58 -- --
Collateralized mortgage
obligations........... 302,097 6.64 1,353,720 6.76 122,885 6.95 20,200 7.17
States and political
subdivisions.......... 664 10.14 163 11.51 -- -- -- --
Corporate bonds and
other................. 45,672 6.14 75,998 6.92 45,958 6.79 14,881 5.91
-------- ----------- ---------- --------
349,433 6.58 1,623,826 6.72 299,332 6.76 35,081 6.63
-------- ----------- ---------- --------
Total.................. $474,141 6.60 $2,300,838 6.94 $ 425,643 7.01 $108,528 7.21
======== =========== ========== ========
While the weighted average stated maturities of total MBS and CMOs are 15.3
years and 23.0 years, respectively, the corresponding weighted average
expected lives assumed in the above table are 4.5 years and 3.0 years. During
a period of rising rates, prepayment speeds generally slow on MBS and CMOs
with a resulting extension in average life, and vice versa. Given a 100 basis
point immediate and permanent parallel increase in rates, the expected average
lives for MBS and CMOs would be 5.2 and 4.3 years, respectively. Similarly,
given a 100 basis point immediate and permanent parallel decrease in rates,
the expected average lives for MBS and CMOs would be 3.2 and 1.4 years,
respectively.
The weighted average market prices as a percentage of par value for MBS and
CMOs at December 31, 1997, were 101.9 percent and 99.9 percent, respectively.
The market prices for MBS and CMOs generally decline in a rising rate
environment due to the resulting increase in average life as well as the
decreased market yield on fixed rate securities and impact of annual and life
rate caps on adjustable-rate securities. The opposite is generally true during
a period of falling rates. At December 31, 1997, fixed-rate MBS and CMOs
totaled $184 million and $2.3 billion, respectively, with corresponding
weighted average expected lives of 2.5 and 2.7 years. Adjustable-rate MBS and
CMOs totaled $180 million and $126 million, respectively, with corresponding
weighted average expected lives of 6.6 and 8.8 years. Substantially all
adjustable-rate MBS and CMOs are subject to life rate caps, and MBS are also
generally subject to a two percent annual cap. The weighted average life caps
at year end were 11.22 percent and 9.20 percent for MBS and CMOs,
respectively, and the corresponding weighted average coupon rates at year end
were 7.04 percent and 6.73 percent. Given a 100 basis point immediate and
permanent parallel increase in rates, the estimated market prices for MBS and
CMOs would be 100.8 and 97.1, respectively.
15
Given a 100 basis point immediate and permanent parallel decrease in rates,
the estimated market prices for MBS and CMOs would be 102.4 and 101.0,
respectively.
TRADING ACCOUNT SECURITIES AND OTHER EARNING ASSETS
Securities carried in the trading account, while interest bearing, are
primarily held for sale. The volume of activity is directly related to general
market conditions and reactions to the changing interest rate environment. The
average balance in the trading account securities portfolio for 1997 increased
by 17 percent following a 38 percent increase in 1996, as a result of
increased retail sales demand and a larger, more experienced sales force. The
following table details the composition of the Company's trading account at
December 31, 1997, 1996 and 1995.
TRADING ACCOUNT COMPOSITION
December 31
-------------------------
1997 1996 1995
-------- ------- --------
(in Thousands)
U.S. Treasury and Government agency.................. $ 55,487 $44,798 $ 54,318
States and political subdivisions.................... 8,135 9,738 19,583
Mortgage-backed pass-through securities.............. 34,282 24,371 16,471
Other debt securities................................ 281 727 396
Derivative securities:
Collateralized mortgage obligations................ 13,906 10,972 8,472
Interest rate floors and caps...................... 305 787 2,676
Other options...................................... 64 60 --
-------- ------- --------
$112,460 $91,453 $101,916
======== ======= ========
Average federal funds sold and securities purchased under agreements to
resell decreased 28 percent in 1997 compared to a 36 percent increase in 1996.
The average balance of interest bearing deposits in other banks decreased 61
percent during 1997 from 1996 levels after decreasing 70 percent from 1995 to
1996.
DEPOSITS AND BORROWED FUNDS
Changes in the Company's markets and the economy in general were also
reflected in the liability mix during 1997. Average interest bearing deposits,
the primary source of funding for the Company, made up 79 percent of total
average interest bearing liabilities in 1997, down from 83 percent in 1996 and
81 percent in 1995. Contributing to the overall decrease in average interest
bearing deposits relative to the prior year was the impact of investment
alternatives pursued by customers in response to the continued strength of the
stock and bond markets. In addition, the mix of average interest bearing
deposits in 1997 shifted from demand deposits to savings due primarily to a
program initiated by the Company during 1996. Under this program, deposit
balances in certain NOW accounts above a certain threshold are transferred to
savings accounts, thereby reducing the level of deposit reserves required to
be maintained with the Federal Reserve. See Note 1, Cash and Due From Banks,
in the "Notes to Consolidated Financial Statements" for a further discussion
of reserve requirements maintained with the Federal Reserve. As a result of
this program, during 1997 and 1996 NOW account balances averaging $626.4
million and $44.9 million, respectively, were transferred to the savings
category. Contributing to the change in the mix of interest bearing
liabilities in 1997 was a three percent decrease in average certificates of
deposit less than $100,000 and other time deposits, offset in part by a one
percent increase in average certificates of deposit of $100,000 or more.
During 1996, the increase in average interest bearing deposits as a
percentage of total interest bearing liabilities from the prior year was the
result of increases in all interest bearing deposit categories. Savings
deposits and certificates of deposit of $100,000 or more increased 33 percent
and 10 percent, respectively, while
16
demand deposits and certificates of deposit less than $100,000 and other time
deposits showed more modest increases of 5 percent and 4 percent,
respectively. The increases during 1996 were due primarily to internally
generated growth with a portion of the increase due to merger and acquisition
related activity.
The following table summarizes the maturities of certificates of deposit of
$100,000 or more and other time deposits of $100,000 or more outstanding at
December 31, 1997.
MATURITIES OF TIME DEPOSITS
Certificates Other Time
of Deposit Over Deposits Over
$100,000 $100,000 Total
--------------- ------------- ----------
(in Thousands)
Three months or less.................. $364,008 $28,287 $ 392,295
Over three through six months......... 128,285 2,000 130,285
Over six through twelve months........ 265,743 -- 265,743
Over twelve months.................... 229,976 -- 229,976
-------- ------- ----------
$988,012 $30,287 $1,018,299
======== ======= ==========
In order to support earning asset growth of nine percent in 1997 and as a
result of consumers choosing alternative investments other than deposits, the
Company relied more heavily on borrowed funds in 1997. Borrowed funds consist
of Federal Home Loan Bank ("FHLB") advances and other short-term borrowings,
primarily in the form of federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowings. Included in other
short-term borrowings are trading account short sales and the parent company's
commercial paper. Average federal funds purchased increased $205 million, or
45 percent, and other short-term borrowings increased $30 million, or 17
percent, while average securities sold under agreements to repurchase showed a
slight decrease of 3 percent during 1997. During 1997, the average balance of
FHLB and other borrowings increased $372 million, or 59 percent, primarily as
a result of additional FHLB advances of $1.2 billion, partially offset by
repayments of $573 million. For a discussion of interest rates and maturities
of FHLB and other borrowings, refer to Note 5, FHLB and Other Borrowings, in
the "Notes to Consolidated Financial Statements."
During the first quarter of 1997, the Company supplemented its funding
sources through the formation of a statutory business trust ("Compass Trust
I") which issued capital securities ("Capital Securities") to institutional
investors in the amount of $100 million. The proceeds from the issuance of the
Capital Securities and the issuance of $3.1 million of common securities were
concurrently used by Compass Trust I to purchase $103.1 million of guaranteed
preferred beneficial interests in Company's junior subordinated deferrable
interest debentures. The average balance of the Capital Securities is included
in FHLB and other borrowings in the tables on pages 28 and 29. For a further
discussion of Capital Securities, refer to Note 6, Capital Securities, in the
"Notes to Consolidated Financial Statements."
17
The Short-Term Borrowings table below shows the distribution of the
Company's short-term borrowed funds and the weighted average interest rates
thereon at the end of each of the last three years. Also provided are the
maximum outstanding amounts of borrowings, the average amounts of borrowings
and the average interest rates at year end for the last three years.
SHORT-TERM BORROWINGS
Year Ended December 31
------------------------------------------
Maximum Average
Outstanding Average Interest
At Any Average Interest Ending Rate At
Month End Balance Rate Balance Year End
----------- ---------- -------- ---------- --------
(in Thousands)
1997
FEDERAL FUNDS PURCHASED... $1,124,246 $ 665,956 5.44% $ 927,795 5.48%
SECURITIES SOLD UNDER
AGREEMENTS TO
REPURCHASE............... 364,682 243,040 5.11 241,372 5.12
SHORT SALES............... 96,372 57,991 6.00 52,080 5.83
COMMERCIAL PAPER.......... 92,516 61,006 5.08 52,410 5.03
OTHER SHORT-TERM
BORROWINGS............... 234,320 89,284 5.69 76,040 5.96
---------- ---------- ----------
$1,912,136 $1,117,277 $1,349,697
========== ========== ==========
1996
Federal funds purchased... $ 658,925 $ 460,648 5.27% $ 606,414 5.27%
Securities sold under
agreements to
repurchase............... 302,818 250,637 4.69 205,053 5.02
Short sales............... 61,907 35,024 5.84 36,703 6.06
Commercial paper.......... 114,060 73,822 5.02 47,896 4.88
Other short-term
borrowings............... 142,537 69,775 5.66 117,302 6.02
---------- ---------- ----------
$1,280,247 $ 889,906 $1,013,368
========== ========== ==========
1995
Federal funds purchased... $ 850,603 $ 560,213 5.75% $ 779,258 5.51%
Securities sold under
agreements to
repurchase............... 317,315 271,788 4.97 295,391 4.90
Short sales............... 38,096 25,090 5.85 24,245 5.13
Commercial paper.......... 188,677 125,891 5.85 57,312 5.38
Other short-term
borrowings............... 133,628 40,625 5.49 34,719 5.74
---------- ---------- ----------
$1,528,319 $1,023,607 $1,190,925
========== ========== ==========
LIQUIDITY MANAGEMENT
Liquidity is the ability of the Company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the
Company's ability to meet the day-to-day cash flow requirements of the
Subsidiary Banks' customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Subsidiary Banks would not be able to perform the
primary function of a financial intermediary and would, therefore, not be able
to meet the needs of the communities they serve. Additionally, the parent
holding company requires cash for various operating needs including dividends
to shareholders, business combinations, capital injections to the Subsidiary
Banks, the servicing of debt and the payment of general corporate expenses.
The primary source of liquidity for the parent holding company is dividends
from the Subsidiary Banks. At December 31, 1997, the Company's Subsidiary
Banks could have paid additional dividends to the parent holding company in
the amount of $139.3 million while continuing to meet the capital requirements
for "well-capitalized" banks. Also, the parent holding company has access to
various capital markets as evidenced by the issuance of the Capital Securities
during the first quarter of 1997 and the
18
issuance of subordinated debentures in 1994 and 1993. The parent holding
company does not anticipate any liquidity requirements in the near future that
it will not be able to meet.
Asset and liability management functions not only to assure adequate
liquidity in order for the Subsidiary Banks to meet the needs of their
customers, but also to maintain an appropriate balance between interest-
sensitive assets and interest-sensitive liabilities so that the Company can
earn a return that meets the investment requirements of its shareholders.
Daily monitoring of the sources and uses of funds is necessary to maintain an
acceptable cash position that meets both requirements. In a banking
environment, both assets and liabilities are considered sources of liquidity
funding and are monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a
lesser extent, sales of investment securities available for sale and trading
account securities. Other short-term investments such as federal funds sold,
securities purchased under agreements to resell and maturing interest bearing
deposits with other banks are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and noninterest bearing deposit accounts.
Federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings are additional sources of liquidity and,
basically, represent the Company's incremental borrowing capacity. These
sources of liquidity are short-term in nature and are used as necessary to
fund asset growth and meet short-term liquidity needs.
As disclosed in the Company's "Consolidated Statements of Cash Flows," net
cash provided by operating activities decreased to $45 million primarily due
to the increase in other assets offset by an increase in net income and
trading account securities. Net cash used in investing activities of $859
million consisted primarily of net loans originated of $812 million and
available-for-sale securities purchased of $1.8 billion, largely funded by
maturities of investment securities held to maturity of $371 million, as well
as sales and maturities of investment securities available for sale of $966
million and $552 million, respectively. Net cash provided by financing
activities provided the remainder of funding sources for 1997. The $794
million of net cash provided by financing activities consisted primarily of a
net increase of $584 million in FHLB advances and other borrowings, a $321
million increase in federal funds purchased, an increase of $36 million in
securities sold under agreements to repurchase and the issuance of $100
million in Capital Securities offset partially by a reduction of $177 million
in deposits and the payment of $62 million in dividends.
INTEREST RATE SENSITIVITY MANAGEMENT
The Company's net interest income, and the fair value of its financial
instruments, are influenced by changes in the level of interest rates. The
Company manages its exposure to fluctuations in interest rates through
policies established by its Asset/Liability Management Committee ("ALCO"). The
ALCO meets at least monthly and has responsibility for approving
asset/liability management policies, formulating and implementing strategies
to improve balance sheet positioning and/or earnings and reviewing the
interest rate sensitivity of the Company and the Subsidiary Banks.
Management utilizes an interest rate simulation model to estimate the
sensitivity of the Company's net interest income to changes in interest rates.
Such estimates are based upon a number of assumptions for each scenario,
including the level of balance sheet growth, deposit repricing characteristics
and the rate of prepayments.
19
The estimated impact on the Company's net interest income sensitivity over a
one-year time horizon is shown below. Such analysis assumes an immediate and
sustained parallel shift in interest rates, no balance sheet growth and the
Company's estimate of how interest-bearing transaction accounts will reprice
in each scenario.
Percentage Increase (Decrease)
Principal/Notional in Interest Income/Expense
Amount of Earning Given Immediate and Sustained
Assets, Interest Parallel Interest Rate Shifts
Bearing Liabilities ------------------------------------
and Swaps at Down 100 Up 100
December 31, 1997 Basis Points Basis Points
------------------- --------------- ---------------
(in Thousands)
Assets which reprice in:
One year or less...... $ 4,916,412 (9.02)% 10.20%
Over one year......... 7,248,264 (3.20) 2.36
------------
$ 12,164,676 (5.67) 5.69
============
Liabilities which
reprice in:
One year or less...... $ 7,744,763 (12.63) 16.86
Over one year......... 2,614,615 (4.58) 3.45
------------
$ 10,359,378 (10.06) 12.58
============
Non-trading swaps....... $ 1,561,303 (27.72) (75.80)
============
Total net interest
income sensitivity... (1.60) (2.60)
The ALCO policy, with which the Company complies, is based on the same
assumptions as the above table and provides that a 100 basis point increase or
decrease in interest rates should not reduce net interest income by more than
five percent. Certain financial instruments have been excluded from the above
analysis because of the no-growth assumption, including letters of credit and
commitments to extend credit. Trading account interest rate contracts and
options and non-trading caps purchased have also been excluded because they
have no material impact on net interest income.
The Company enters into various interest rate contracts not held in the
trading account ("interest rate protection products") to help manage the
Company's interest sensitivity. Such contracts generally have a fixed notional
principal amount and include interest rate swaps where the Company typically
receives or pays a fixed rate and a counterparty pays or receives a floating
rate based on a specified index, generally prime rate or the London Interbank
Offered Rate ("LIBOR") and interest rate caps and floors purchased or written
where the Company receives or pays, respectively, interest if the specified
index falls below the floor rate or rises above the cap rate. The interest
rate risk factor in these contracts is considered in the overall interest
management strategy and the Company's interest risk management program. The
income or expense associated with interest rate swaps, caps and floors and
gains or losses in futures contracts classified as hedges are ultimately
reflected as adjustments to interest income or expense. Changes in the
estimated fair value of interest rate protection contracts are not reflected
in the financial statements until realized. A discussion of interest rate
risks, credit risks and concentrations in off-balance sheet financial
instruments is included in Note 7, Derivative Financial Instruments, of the
"Notes to Consolidated Financial Statements." The following table details
various information regarding interest rate protection contracts as of
December 31, 1997.
20
INTEREST RATE PROTECTION CONTRACTS
Weighted Weighted
Weighted Average Average
Average Rate* Expected Repricing
Notional Carrying Estimated ------------- Maturity Frequency
Amount Value Fair Value Received Paid (Years) (Days)
---------- -------- ---------- -------- ---- -------- ---------
(in Thousands)
Non-trading interest
rate contracts:
Swaps:
Pay fixed versus 3-
month LIBOR.......... $ 408,000 $ 25 $ (492) 5.81% 5.85% 1.23 90
Receive fixed versus
3-month LIBOR........ 950,000 1,836 6,551 6.77 5.87 4.08 90
Receive fixed versus
6-month LIBOR........ 25,000 22 94 6.23 5.81 1.21 180
Basis swaps+.......... 178,303 858 196 6.45 6.56 5.65 65
Caps purchased......... 60,000 89 -- -- * 0.36 90
---------- ------ ------
$1,621,303 $2,830 $6,349
========== ====== ======
- --------
+ On $128.3 million of a total notional amount of $178.3 million, the Company
receives interest based on three-month LIBOR plus 84 basis points and pays
interest based on the one-year Constant Maturity Treasury plus 150 basis
points. On the remaining $50 million notional, the Company receives interest
based on Prime minus 273.5 basis points and pays interest based on the
three-month LIBOR.
* Weighted average rates received/paid are shown only for swaps, caps and
floors for which net interest amounts were receivable or payable at December
31, 1997.
The net interest amount received or paid on an interest rate protection
contract represents an adjustment of the yield or rate on the respective asset
or liability with which such contract is associated. The gain or loss on a
terminated interest rate protection contract is deferred and amortized over
the remaining term of the original contract as an adjustment of yield or rate
on the asset or liability with which the original contract was associated. At
year-end 1997, there were no deferred gains and $84,000 of deferred losses on
terminated interest rate protection contracts, which will be recorded as net
interest expense through 1999. The following table indicates the asset or
liability category with which the non-trading interest rate protection
contracts were associated at December 31, 1997.
ASSETS/LIABILITIES ASSOCIATED WITH INTEREST RATE PROTECTION CONTRACTS
Notional Principal Associated With
Total --------------------------------------------------------------------
Notional Investment Certificates Federal Funds FHLB Subordinated
Principal Securities Loans of Deposit Purchased Advances Debentures
---------- ---------- -------- ------------ ------------- -------- ------------
(in Thousands)
Swaps:
Pay fixed.............. $ 408,000 $ -- $ 8,000 $ -- $100,000 $300,000 $ --
Receive fixed.......... 975,000 -- 700,000 150,000 -- -- 125,000
Basis swaps............ 178,303 128,303 -- 50,000 -- -- --
Caps purchased.......... 60,000 -- 60,000 -- -- -- --
---------- -------- -------- -------- -------- -------- --------
$1,621,303 $128,303 $768,000 $200,000 $100,000 $300,000 $125,000
========== ======== ======== ======== ======== ======== ========
In addition to interest rate protection contracts used to manage overall
interest sensitivity, the Company also enters into interest rate contracts for
the trading account. The primary purposes for using interest rate protection
contracts in the trading account are to facilitate customer transactions and
to protect cash market positions in the trading account against interest rate
movement. Changes in the estimated fair value of contracts in the trading
account are recorded in other noninterest income as trading account profits
and commissions. Net interest
21
amounts received or paid on interest rate contracts in the trading account are
recorded as an adjustment of interest on trading account securities. The
following table summarizes interest rate contracts held in the trading account
at December 31, 1997.
TRADING ACCOUNT INTEREST RATE CONTRACTS
Weighted
Weighted Weighted Average
Average Rate* Average Repricing
Notional Carrying Estimated ------------- Years to Frequency
Amount Value++ Fair Value Received Paid Expiration (Days)
-------- -------- ---------- -------- ---- ---------- ---------
(in Thousands)
Trading interest rate
contracts:
Swaps:
Receive fixed versus:
1-month LIBOR........ $ 5,000 $ 77 $ 77 6.23% 6.00% 2.02 30
3-month LIBOR........ 3,000 (11) (11) 5.90 6.05 3.96 90
Prime................ 260 (2) (2) 6.80 8.50 0.71 30
Receive variable
versus:
1-month LIBOR........ 5,000 (77) (77) 6.00 6.23 2.02 30
Caps:
Purchased............. 61,000 50 50 -- * 1.45 71
Written............... 49,400 (45) (45) * -- 1.26 56
Floors:
Purchased............. 71,000 264 264 0.06 * 2.01 70
Written............... 100,000 (353) (353) * 0.10 1.65 70
-------- ----- -----
Total............... $294,660 $ (97) $ (97)
======== ===== =====
- --------
* Weighted average rates received/paid are shown only for swaps, caps and
floors for which net interest amounts were receivable or payable at December
31, 1997. For caps and floors, the rate shown represents the weighted
average net interest differential between the index rate and the cap or
floor rate.
++Positive carrying values represent assets of the Company while negative
amounts represent liabilities.
In addition to the interest rate contracts shown above, the Company uses
other options and futures in the trading account. At December 31, 1997, the
trading account contained other options purchased and written having weighted
average expiration dates shorter than three months, with a notional balance of
$10.5 million for purchased options and a notional balance of $5.0 million for
written options and estimated fair values of $65,000 and $(31,000),
respectively. Changes in the estimated fair value of these instruments are
recorded in other noninterest income as trading account profits and
commissions. The position of purchased options was taken in order to protect
the market value of the trading account against rising short-term interest
rates while maintaining limited risk to declining rates. At December 31, 1997,
futures contracts having a notional principal of $69 million were also used to
reduce the price sensitivity of the trading account.
CAPITAL RESOURCES
Shareholders' equity increased 13 percent in 1997 after increasing 9 percent
in 1996. Exclusive of the net change in unrealized holding gains (losses) on
securities available for sale in both 1997 and 1996, net income after
dividends accounted for substantially all of the increase in shareholders'
equity.
Dividends of $61.6 million were declared on the Company's common stock in
1997, representing a 22 percent increase over 1996. The 1997 annual dividend
rate per common share, after adjusting for a three-for-two stock split
effected in the form of a 50 percent stock dividend paid in April, 1997, was
$0.947, an 11 percent increase over 1996. The dividend payout ratio for 1997
was 40 percent compared to 38 percent for 1996 and 36
22
percent for 1995. The Company intends to continue a dividend payout ratio that
is competitive in the banking industry while maintaining an adequate level of
retained earnings to support continued growth. On February 16, 1998, the
Company's Board of Directors approved an 11 percent increase in the annual
dividend rate, raising it to $1.05 per common share for 1998. This marked the
seventeenth consecutive year the Company has increased its dividend.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The Company has
satisfied its capital requirements principally through the retention of
earnings. The Company's five-year compound growth rate in shareholders' equity
of 11 percent was achieved primarily through reinvested earnings.
Average shareholders' equity as a percentage of total average assets is one
measure used to determine capital strength. Overall, the Company's capital
position remains strong as the ratio of average shareholders' equity to
average assets for 1997 was 7.13 percent compared to 6.94 percent in 1996 and
6.93 percent in 1995. As noted above, exclusive of the net change in
unrealized holding gains (losses) on securities available for sale, the
increase in shareholders' equity in 1997 and 1996 is due almost exclusively to
the retention of earnings. In order to maintain this ratio at appropriate
levels with continued growth in total average assets, a corresponding level of
capital growth must be achieved. The table below summarizes these and other
key ratios for the Company for each of the last three years.
RETURN ON EQUITY AND ASSETS
December 31
-------------------
1997 1996 1995
----- ----- -----
Return on average assets................................... 1.23% 1.15% 1.15%
Return on average equity................................... 17.31 16.60 16.65
Dividend payout ratio...................................... 39.57 38.09 35.64
Average equity to average assets ratio..................... 7.13 6.94 6.93
In addition to the capital ratios mentioned above, banking industry
regulators have defined minimum regulatory capital ratios that the Company and
the Subsidiary Banks are required to maintain. These risk-based capital
guidelines take into consideration risk factors, as defined by the regulators,
associated with various categories of assets, both on and off of the balance
sheet. Under the guidelines, capital strength is measured in two tiers which
are used in conjunction with risk-adjusted assets to determine the risk-based
capital ratios. Tier I Capital is defined as common shareholders' equity,
excluding the net unrealized holding gain (loss) on available-for-sale
securities (except for net unrealized losses on marketable equity securities),
plus the Capital Securities, minus goodwill and other disallowed intangible
assets. Other disallowed intangibles represent intangible assets, other than
goodwill, recorded after February 19, 1992. Total Qualifying Capital is
defined as Tier I Capital plus Tier II capital components, which include such
items as qualifying allowance for loan losses and qualifying subordinated
debt.
At December 31, 1997, the Company's Tier I Capital and Total Qualifying
Capital totaled $961 million and $1.2 billion, respectively. The percentage
ratios, as calculated under the guidelines, were 9.84 percent and 12.36
percent for Tier I and Total Qualifying Capital, respectively, at year-end
1997, up from 8.70 percent and 11.41 percent at year-end 1996. These ratios
are well within the minimum requirements of four percent for Tier I Capital
and eight percent for Total Qualifying Capital. Tier I Capital increased in
1997 primarily as a result of the issuance of the Capital Securities in
January, 1997, and the $94 million in earnings retained by the Company, net of
dividends. While shareholders' equity increased 9 percent from December 31,
1995, to December 31, 1996, the increases in Tier I and Total Qualifying
Capital were significantly less due to the addition of $70 million in
intangibles resulting from the Company's purchase business combinations in
1996.
23
Two other important indicators of capital adequacy in the banking industry
are the leverage ratio and the tangible leverage ratio. The leverage ratio is
defined as Tier I Capital divided by total adjusted quarterly average assets.
Average quarterly assets are adjusted by subtracting the average unrealized
gain (loss) on available-for-sale securities (except for net unrealized losses
on marketable equity securities), period-end goodwill and other disallowed
intangibles. The tangible leverage ratio is defined similarly, except, by
definition, all other intangible assets not previously excluded are removed
from both the numerator and denominator. Even though core deposit intangibles
and goodwill increased due to purchase business combinations completed during
1996 and 1994, the leverage ratio remained well within regulatory guidelines:
7.45 percent at year-end 1997; 6.19 percent at year-end 1996 and 6.78 percent
at year-end 1995. The tangible leverage ratio was 7.33 percent at year-end
1997; 6.05 percent at year-end 1996 and 6.61 percent at year-end 1995. The
increase in both the leverage ratio and the tangible leverage ratio in 1997
was due primarily to the issuance of the Capital Securities in January, 1997,
while the decrease in 1996 of these ratios was due primarily to the
substantial increase in intangibles resulting from the purchase business
combinations completed by the Company in 1996.
The following table shows the calculation of capital ratios for the Company
for the last three years.
CAPITAL RATIOS
December 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(in Thousands)
Risk-based capital:
Tier I Capital........................ $ 960,580 $ 745,334 $ 732,426
Tangible Tier I Capital............... 944,304 727,023 711,930
Total Qualifying Capital.............. 1,207,049 977,217 948,789
Assets:
Net risk-adjusted assets.............. $ 9,761,989 $ 8,565,672 $ 7,303,259
Adjusted quarterly average assets..... 12,900,597 12,038,823 10,798,877
Adjusted tangible quarterly average
assets............................... 12,884,321 12,020,512 10,778,381
Ratios:
Tier I Capital........................ 9.84% 8.70% 10.03%
Total Qualifying Capital.............. 12.36 11.41 12.99
Leverage.............................. 7.45 6.19 6.78
Tangible leverage..................... 7.33 6.05 6.61
The regulatory capital ratios of the Company's Subsidiary Banks currently
exceed the minimum ratios of 5 percent leverage capital, 6 percent Tier I
Capital and 10 percent Total Qualifying Capital required in 1997 for "well-
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to assure that the Subsidiary Banks exceed the
guidelines. For further information regarding the regulatory capital ratios of
the Company and the Subsidiary Banks, see Note 10, Regulatory Matters and
Dividends from Subsidiaries, in the "Notes to Consolidated Financial
Statements".
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially
impact net interest income. The following discussion of net interest income is
presented on a taxable equivalent basis, unless otherwise noted, to facilitate
performance comparisons among various taxable and tax-exempt assets.
Net interest income for 1997 increased 10 percent over 1996 while increasing
9 percent in 1996 over 1995. A nine percent increase in the volume of average
earning assets, primarily total loans, coupled with a three basis
24
point increase in the net yield were responsible for the increase in 1997. In
1996, an 11 percent increase in the volume of earning assets, primarily as a
result of a 10 percent increase in both total investment securities and total
loans, more than offset a 6 basis point decline in the net yield. The schedule
on pages 30 and 31 provides the detail of changes in interest income, interest
expense and net interest income due to changes in volumes and rates.
Interest income increased 10 percent in 1997 and 9 percent in 1996 after
increasing 24 percent in 1995. Interest income in 1997 grew as a result of a
nine percent increase in the volume of average earning assets coupled with a
three basis point increase in the average interest rate earned. A 13 percent
increase in the volume of average loans and a 6 basis point decrease in yield
accounted for the 12 percent increase in interest income on loans. Interest
income on investment securities, including securities available for sale,
increased two percent from 1996 to 1997. This increase resulted from a one
percent increase in the average balance of total investment securities and a
seven basis point increase in yield. Interest income on trading account
securities increased 10 percent as a result of a 17 percent increase in the
average balance.
Total interest expense increased by nine percent in 1997 due to a nine
percent increase in the average volume of interest bearing liabilities offset
partially by a one basis point decrease in the rate paid on interest bearing
liabilities. Interest expense on interest bearing deposits increased by one
percent as the result of a three percent increase in the average volume and a
nine basis point decrease in rate. The 40 percent increase in average borrowed
funds, which includes interest bearing liabilities that are not classified as
deposits, combined with a 4 basis point increase in rate resulted in a 40
percent increase in interest expense for this category. A 59 percent increase
in the average balance of FHLB advances and other borrowings, which includes
$100 million of Capital Securities, and a 45 percent increase in federal funds
purchased were primarily responsible for the increase in averaged borrowed
funds in comparison with the prior year.
From 1995 to 1996, interest income increased 9 percent as a result of an 11
percent increase in the volume of average earning assets and a 15 basis point
decrease in the yield on average earning assets. Interest income on loans rose
9 percent as a result of a 10 percent increase in average volume and a 13
basis point decrease in yield. Interest income on investment securities,
including securities available for sale, increased 8 percent from 1995 to 1996
as a result of a 10 percent increase in average volume and an 11 basis point
decrease in the yield on investment securities. A 38 percent increase in the
average balance offset by a 70 basis point decrease in yield increased
interest income on trading account securities by 26 percent in 1996.
A 12 basis point decrease in the rate paid on interest bearing liabilities
combined with an 11 percent increase in average volume resulted in an 8
percent increase in interest expense on interest bearing liabilities in 1996.
A substantial portion of the increase in total interest expense was due to a
13 percent increase in interest expense on interest bearing deposits,
resulting from a 14 percent increase in the average volume offset, in part, by
a 5 basis point decrease in rate. A 25 basis point decrease in the rate paid
on average borrowed funds, along with a 4 percent increase in average volume,
resulted in a 7 percent decrease in interest expense for this category.
Net interest income is commonly evaluated in terms of average rates using
the net yield and the interest rate spread. The net yield on earning assets is
computed by dividing fully taxable equivalent net interest income by average
total earning assets. This ratio represents the difference between the average
yield returned on average earning assets and the average rate paid for all
funds used to support those earning assets, including both interest bearing
and noninterest bearing sources of funds. The net yield increased three basis
points to 4.11 percent in 1997 after decreasing three basis points to 4.08
percent in 1996. The moderate increase in net yield in 1997 was a function of
the downward repricing of interest bearing deposits and FHLB and other
borrowings which outpaced the downward repricing of loans and total investment
securities. This is evidenced by the fact the yield on interest earning assets
increased three basis points while the rate paid on interest bearing
liabilities decreased by one basis point. At the same time, the portion of
interest earning assets funded by interest bearing liabilities in 1997 was 85
percent, unchanged from 1996.
25
During 1997, the net yield on interest earning assets was minimally impacted
by the Company's use of interest rate contracts, primarily interest rate swaps
and interest rate floors, increasing the taxable equivalent net yield on
interest earning assets by three basis points. The greatest impact from the
use of interest rate contracts was on the yield and interest income on loans
where the net yield was increased by five basis points and interest income was
increased by $4.3 million. At the same time, the impact of interest rate
contracts on interest bearing liabilities was less significant, decreasing
interest expense by less than $1 million. The impact of the use of interest
rate contracts in 1997 was greater than in 1996 when the positive impact on
the net yield on interest earning assets was one basis point. It is the
Company's intention to continue to use interest rate contracts to manage its
exposure to the changing interest rate environment in the future, although
there can be no assurance that the impact of interest rate contracts on the
earnings of future periods will be positive.
The interest rate spread measures the difference between the average yield
on earning assets and the average rate paid on interest bearing liabilities.
The interest rate spread eliminates the impact of noninterest bearing funds
and gives a direct perspective on the effect of market interest rate
movements. During 1997, the net interest rate spread increased four basis
points to 3.37 percent from the 1996 spread of 3.33 percent as the cost of
interest bearing liabilities declined slightly while the yields earned on
earning assets increased by three basis points. The decrease in 1996 was three
basis points from 3.36 percent in 1995. See the accompanying tables entitled
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" and
"Rate/Volume Variance Analysis" for more information.
The following table presents certain interest rates without modification for
tax equivalency. The table on pages 28 and 29 contains these same percentages
on a taxable equivalent basis. Tax-exempt earning assets continue to make up a
smaller percentage of total earning assets. As a result, the difference
between these interest rates with and without modification for tax equivalency
continues to narrow.
December 31
----------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Rate earned on interest earning assets............ 8.15% 8.11% 8.25% 7.75% 7.93%
Rate paid on interest bearing liabilities......... 4.81 4.82 4.94 3.89 3.60
Interest rate spread.............................. 3.34 3.29 3.31 3.86 4.33
Net yield on earning assets....................... 4.08 4.04 4.09 4.54 4.99
Interest income, as reported in the "Consolidated Statements of Income", on
a nominal yield basis increased in 1997 by $83.6 million while net interest
income increased by $44.0 million. The two basis point increase in the net
yield in 1997 was a result of an increase in the yields in the Company's
interest earning assets and a slight decrease in the cost of interest bearing
liabilities, as discussed earlier.
26
(INTENTIONALLY LEFT BLANK PAGE)
27
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
Year Ended December 31
---------------------------------------------------------
1997 1996
---------------------------- ----------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
----------- -------- ------ ----------- -------- ------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $ 8,277,033 $724,162 8.75% $ 7,316,748 $644,260 8.81%
Investment securities:
Taxable................ 1,025,158 74,045 7.22 794,661 57,806 7.27
Tax-exempt............. 84,930 7,319 8.62 88,410 7,976 9.02
----------- -------- ----------- --------
Total investment
securities........... 1,110,088 81,364 7.33 883,071 65,782 7.45
Investment securities
available for sale.... 2,045,412 134,976 6.60 2,233,594 145,872 6.53
Trading account
securities............ 109,462 7,031 6.42 93,604 6,419 6.86
Federal funds sold and
securities purchased
under agreements to
resell................ 99,829 5,252 5.26 138,010 7,244 5.25
Interest bearing
deposits with other
banks................. 456 29 6.36 1,167 71 6.08
----------- -------- ----------- --------
Total earning assets.. 11,642,280 952,814 8.18 10,666,194 869,648 8.15
Allowance for loan
losses................. (122,033) (117,274)
Unrealized gain (loss)
on investment
securities available
for sale............... (3,245) (3,216)
Cash and due from
banks.................. 482,294 489,934
Other assets............ 602,939 465,948
----------- -----------
Total assets.......... $12,602,235 $11,501,586
=========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Demand................. $ 466,184 10,857 2.33 $ 978,155 22,742 2.32
Savings................ 3,628,003 132,532 3.65 2,803,360 111,695 3.98
Certificates of deposit
less than $100,000 and
other time deposits... 2,675,472 151,538 5.66 2,767,833 157,635 5.70
Certificates of deposit
of $100,000 or more... 966,556 55,716 5.76 953,276 54,442 5.71
----------- -------- ----------- --------
Total interest bearing
deposits............. 7,736,215 350,643 4.53 7,502,624 346,514 4.62
Federal funds
purchased............. 665,956 36,213 5.44 460,648 24,255 5.27
Securities sold under
agreements to
repurchase............ 243,040 12,411 5.11 250,637 11,759 4.69
Other short-term
borrowings............ 208,281 11,666 5.60 178,621 9,703 5.43
FHLB and other
borrowings............ 997,347 62,936 6.31 625,722 42,002 6.71
----------- -------- ----------- --------
Total interest bearing
liabilities.......... 9,850,839 473,869 4.81 9,018,252 434,233 4.82
---- ----
Noninterest bearing
demand deposits........ 1,757,761 1,614,488
Accrued expenses and
other liabilities...... 94,916 70,794
Shareholders' equity.... 898,719 798,052
----------- -----------
Total liabilities and
shareholders'
equity............... $12,602,235 $11,501,586
=========== ===========
Net interest income/net
interest spread........ 478,945 3.37% 435,415 3.33%
==== ====
Net yield on earning
assets................. 4.11% 4.08%
==== ====
Taxable equivalent
adjustment:
Loans.................. 787 884
Investment securities.. 2,670 2,956
Investment securities
available for sale.... 230 334
Trading account
securities............ 93 69
-------- --------
Total taxable
equivalent
adjustment........... 3,780 4,243
-------- --------
Net interest income..... $475,165 $431,172
======== ========
- --------
* Loans on nonaccrual status have been included in the computation of average
balances.
28
GROWTH RATE
Year Ended December 31 AVERAGE BALANCES
------------------------------------------------------------------------------------ -------------------
1995 1994 1993
---------------------------- --------------------------- --------------------------- ONE YEAR FIVE YEAR
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ 1996 - COMPOUNDED
Balance Expense Rate Balance Expense Rate Balance Expense Rate 1997 1992-1997
----------- -------- ------ ---------- -------- ------ ---------- -------- ------ -------- ----------
(in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $ 6,630,916 $593,023 8.94% $5,896,098 $492,494 8.35% $5,352,301 $456,484 8.53% 13.12% 12.20%
Investment securities:
Taxable................ 1,725,045 129,240 7.49 1,074,309 80,957 7.54 953,115 69,903 7.33 29.01 (10.53)
Tax-exempt............. 96,388 8,710 9.04 108,431 10,145 9.36 152,687 13,813 9.05 (3.94) (13.72)
----------- -------- ---------- -------- ---------- --------
Total investment
securities........... 1,821,433 137,950 7.57 1,182,740 91,102 7.70 1,105,802 83,716 7.57 25.71 (10.80)
Investment securities
available for sale.... 1,022,153 58,144 5.69 882,502 45,509 5.16 556,701 34,200 6.14 (8.43) 105.64
Trading account
securities............ 67,591 5,112 7.56 125,805 9,996 7.95 164,756 9,885 6.00 16.94 2.96
Federal funds sold and
securities purchased
under agreements to
resell................ 101,135 6,163 6.09 169,766 7,045 4.15 136,880 3,970 2.90 (27.67) (3.33)
Interest bearing
deposits with other
banks................. 3,876 233 6.01 16,342 942 5.76 26,692 1,574 5.90 (60.93) (55.75)
----------- -------- ---------- -------- ---------- --------
Total earning assets.. 9,647,104 800,625 8.30 8,273,253 647,088 7.82 7,343,132 589,829 8.03 9.15 10.98
Allowance for loan
losses................. (112,139) (117,177) (105,951) 4.06 10.68
Unrealized gain (loss)
on investment
securities available
for sale............... (6,702) (4,535) 30 0.90 --
Cash and due from
banks.................. 441,593 411,888 365,487 (1.56) 7.53
Other assets............ 412,084 395,913 357,439 29.40 11.07
----------- ---------- ----------
Total assets.......... $10,381,940 $8,959,342 $7,960,137 9.57 10.84
=========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Demand................. $ 927,271 23,370 2.52 $ 906,941 20,957 2.31 $ 758,855 17,861 2.35 (52.34) (5.91)
Savings................ 2,110,294 80,825 3.83 2,009,700 62,068 3.09 1,890,270 53,914 2.85 29.42 15.37
Certificates of deposit
less than $100,000 and
other time deposits... 2,650,037 150,947 5.70 2,011,246 96,398 4.79 1,666,442 82,589 4.96 (3.34) 9.44
Certificates of deposit
of $100,000 or more... 868,531 51,335 5.91 689,426 31,377 4.55 536,207 23,319 4.35 1.39 12.09
----------- -------- ---------- -------- ---------- --------
Total interest bearing
deposits............. 6,556,133 306,477 4.67 5,617,313 210,800 3.75 4,851,774 177,683 3.66 3.11 10.68
Federal funds
purchased............. 560,213 32,222 5.75 378,938 17,288 4.56 409,227 12,480 3.05 44.57 1.48
Securities sold under
agreements to
repurchase............ 271,788 13,509 4.97 253,867 8,955 3.53 244,989 6,885 2.81 (3.03) (2.32)
Other short-term
borrowings............ 191,606 11,057 5.77 233,769 10,140 4.34 213,055 7,025 3.30 16.6