SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 1995 Commission File No. 0-6032
COMPASS BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0593897
------------------------ -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
15 South 20th Street
Birmingham, Alabama 35233
----------------------------------------
(Address of principal executive offices)
(205) 933-3000
-------------------------------
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $2 par value
--------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1995
-------------------------- -------------------------------
Common Stock, $2 Par Value 38,136,063
The number of pages of this report is 20.
<PAGE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 1995 and
December 31, 1994 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1995 and 1994 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
PART II. OTHER INFORMATION
- ---------------------------
Item 6 Exhibits and Reports on Form 8-K 17
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<CAPTION>
September 30 December 31
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 441,010 $ 490,494
Federal funds sold and securities purchased
under agreements to resell 50,186 46,535
Interest bearing deposits with other banks 99 99
Investment securities (market value of
$1,656,149 and $1,813,671 for 1995 and
1994, respectively) 1,631,368 1,865,218
Investment securities available for sale 1,235,611 711,680
Trading account securities 85,823 58,012
Loans, net of unearned income 6,263,959 5,828,308
Allowance for loan losses (108,337) (108,337)
------------- -------------
Net loans 6,155,622 5,719,971
Premises and equipment, net 214,729 206,477
Other assets 174,397 166,651
------------- -------------
Total assets $ 9,988,845 $ 9,265,137
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 1,274,305 $ 1,405,377
Interest bearing 6,148,788 5,783,536
------------- -------------
Total deposits 7,423,093 7,188,913
Federal funds purchased and securities
sold under agreements to repurchase 979,143 832,608
Other short-term borrowings 196,437 104,598
Accrued expenses and other liabilities 58,361 39,429
FHLB and other borrowings 659,876 487,916
------------- -------------
Total liabilities 9,316,910 8,653,464
Shareholders' equity:
Common stock of $2 par value:
Authorized--100,000,000 shares;
Issued--38,133,630 shares in 1995 and
37,922,435 shares in 1994 76,267 75,845
Surplus 43,938 41,547
Loans to finance stock purchases (5,765) (5,914)
Net unrealized holding loss on
available-for-sale securities (3,466) (11,686)
Retained earnings 560,961 511,881
------------- -------------
Total shareholders' equity 671,935 611,673
------------- -------------
Total liabilities and shareholders'
equity $ 9,988,845 $ 9,265,137
============= =============
</TABLE>
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands Except Per Share Data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $138,057 $112,688 $398,321 $326,130
Interest and dividends on
investment securities 31,370 21,695 99,052 48,964
Interest on investment
securities available
for sale 14,603 8,918 33,641 31,925
Interest on trading account
securities 1,270 1,217 3,470 8,847
Interest on federal funds
sold and securities
purchased under agreements
to resell 638 1,249 2,724 4,003
Interest on interest bearing
deposits with other banks 2 75 6 506
---------- ---------- ---------- ----------
Total interest income 185,940 145,842 537,214 420,375
INTEREST EXPENSE:
Interest on deposits 71,968 48,199 207,716 134,860
Interest on federal funds
purchased and securities
sold under agreements to
repurchase 12,266 7,051 33,097 18,182
Interest on other short-
term borrowings 3,680 3,904 8,446 7,682
Interest on FHLB and other
borrowings 10,116 4,243 27,292 11,491
---------- ---------- ---------- ----------
Total interest expense 98,030 63,397 276,551 172,215
---------- ---------- ---------- ----------
Net interest income 87,910 82,445 260,663 248,160
Provision for loan losses 4,480 1,099 7,900 3,404
---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 83,430 81,346 252,763 244,756
NONINTEREST INCOME:
Service charges on deposit
accounts 13,294 11,552 38,357 33,025
Trust fees 4,098 4,335 11,867 13,157
Trading account profits
(losses) and commissions 3,401 1,642 7,575 (4,623)
Investment securities
gains, net (109) 138 2,773 3,297
Loss on purchase of
securities from common
trust fund - - - (8,222)
Other 10,041 8,968 28,754 25,952
---------- ---------- ---------- ----------
Total noninterest income 30,725 26,635 89,326 62,586
NONINTEREST EXPENSE:
Salaries and benefits 36,786 35,590 110,658 100,265
Net occupancy expense 5,256 5,638 16,088 16,820
Equipment expense 5,311 4,915 15,456 14,672
FDIC insurance premium 336 3,401 8,241 10,176
Other 21,312 19,363 65,773 53,131
---------- ---------- ---------- ----------
Total noninterest expense 69,001 68,907 216,216 195,064
---------- ---------- ---------- ----------
Net income before income
tax expense 45,154 39,074 125,873 112,278
Income tax expense 16,220 13,689 44,791 38,018
---------- ---------- ---------- ----------
NET INCOME $ 28,934 $ 25,385 $ 81,082 $ 74,260
========== ========== ========== ==========
NET INCOME PER COMMON SHARE $ 0.76 $ 0.67 $ 2.12 $ 1.95
Weighted average shares
outstanding 38,440 38,198 38,301 38,170
Dividends per common share $ 0.28 $ 0.23 $ 0.84 $ 0.69
</TABLE>
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Operating Activities:
Net income $ 81,082 $ 74,260
Adjustments to reconcile net income to
cash provided by operations:
Depreciation and amortization 22,059 22,393
Accretion of discount and loan fees (12,635) (8,447)
Provision for loan losses 7,900 3,404
Net change in trading account securities (27,811) 191,782
Net change in mortgage loans available
for sale 7,898 12,655
Gain on sale of investment securities (2,773) (3,297)
Loss on purchase of securities from common
trust fund - 8,222
Gain on sale of premises and
equipment (7) (46)
Gain on sale of other real estate
owned (234) (60)
Provision for losses on other real
estate owned 301 (507)
Increase (decrease) in interest receivable (528) 831
Increase in other assets (13,642) (4,989)
Increase in interest payable 18,635 4,678
Increase(decrease) in taxes payable (901) 1,376
Decrease in other payables (3,634) (6,766)
----------- -----------
Net cash provided by operating
activities 75,710 295,489
----------- -----------
Investing Activities:
Proceeds from sales of investment securities
permitted by FAS115 31,051 698
Proceeds from maturities/calls of investment
securities 211,754 242,475
Purchases of investment securities (3,773) (735,536)
Proceeds from sales of securities available
for sale 586,918 239,407
Proceeds from maturities/calls of securities
available for sale 93,974 104,251
Purchases of securities available for sale (1,188,508) (497,437)
Net (increase) decrease in federal funds
sold and securities purchased under
agreements to resell (3,651) 189,070
Net increase in loan portfolio (452,055) (198,383)
Acquisitions, net of cash acquired - 6,132
Purchases of premises and equipment (21,563) (19,775)
Proceeds from sales of premises
and equipment 674 639
Net decrease in interest bearing deposits
with other banks - 10,376
Proceeds from sales of other real estate
owned 2,856 5,188
----------- -----------
Net cash used by investing activities (742,323) (652,895)
----------- -----------
</TABLE>
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Financing Activities:
Net increase in demand deposits,
NOW accounts and savings accounts 3,828 71,677
Net increase in time deposits 230,352 128,360
Net increase in federal funds purchased 202,296 35,298
Net increase (decrease) in securities sold
under agreements to repurchase (55,761) 82,943
Net increase in short-term borrowings 91,839 122,103
Issuance of FHLB advances and other borrowings 175,000 49,619
Repayment of long-term debt (3,109) (136)
Purchase of treasury shares - (14)
Common dividends paid (32,002) (25,396)
Repayment of loans to finance stock purchases 1,990 747
Proceeds from exercise of stock options 2,696 700
----------- -----------
Net cash provided by financing activities 617,129 465,901
----------- -----------
Net increase (decrease) in cash and due
from banks (49,484) 108,495
Cash and due from banks at beginning of period 490,494 291,520
----------- -----------
Cash and due from banks at end of period $ 441,010 $ 400,015
=========== ===========
Schedule of noncash investing and financing
activities:
Transfers of loans to other real estate owned $ 6,134 $ 2,152
Loans to facilitate the sale of other real
estate owned 1,455 10,777
Loans to finance stock purchases 1,779 -
Tax benefit realized upon exercise of
stock options 117 -
Acquisition of banks:
Fair value of assets acquired $ 309,037
Liabilities assumed 273,725
-----------
Cash received $ 35,312
===========
</TABLE>
<PAGE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 1 - General
The consolidated financial statements in this report have not been audited.
In the opinion of management, all adjustments necessary to present fairly the
financial position and the results of operations for the interim periods have
been made. All such adjustments are of a normal recurring nature. The results
of operations are not necessarily indicative of the results of operations for
the full year or any other interim periods. For further information, refer to
the consolidated financial statements and footnotes included in the Company's
annual report on Form 10-K for the year ended December 31, 1994.
NOTE 2 - Business Combinations
On January 27, 1994, the Company acquired 1st Performance National Bank
("1st Performance"), of Jacksonville, Florida, in a cash transaction. The
acquisition was accounted for as a purchase. At the date of acquisition, 1st
Performance had assets of $278 million and equity of $35 million.
The Company completed the acquisition of Security Bank, N.A. ("Security") of
Houston, Texas on May 1, 1994, with the issuance of 465,297 shares of the
Company's common stock. At the date of acquisition, Security had assets of $76
million and equity of $6 million. The transaction was accounted for under the
pooling-of-interests method of accounting and accordingly all prior period
information has been restated.
On May 12, 1994, the Company acquired three branches of Anchor Savings Bank
in the Jacksonville, Florida area with deposits of $31 million and assets of $1
million, with the balance received in cash. The deposit assumption and branch
acquisition were accounted for as a purchase.
On October 1, 1994, the Company completed the acquisition of 22 branches of
First Heights Bank, fsb, of Houston, Texas, with deposits of approximately $870
million and assets of $68 million, with the balance received in cash. The
deposit assumption and branch acquisition were accounted for as a purchase.
The Company completed the acquisition of Southwest Bankers, Inc.
("Southwest"), of San Antonio, Texas, and its bank subsidiary, The Bank of San
Antonio, on March 7, 1995, with the issuance of 949,987 shares of the Company's
common stock. At the date of acquisition, Southwest had assets of $142 million
and equity of $9 million. The transaction was accounted for under the pooling-
of-interests method of accounting and accordingly all prior period information
has been restated.
On August 29, 1995, the Company signed a definitive agreement to acquire
Flower Mound Bancshares, Inc. ("Flower Mound"), of Dallas, Texas, and its bank
subsidiary, Security Bank, for 340,000 shares of the Company's common stock.
At September 30, 1995, Flower Mound had assets of $49 million and equity of $4
million. It is anticipated that the transaction will close in the first
quarter of 1996 and will be accounted for under the pooling-of-interests method
of accounting.
On October 16, 1995, the Company signed a definitive agreement to acquire
Equitable BankShares, Inc. ("Equitable"), of Dallas, Texas, and its bank
subsidiary, Equitable Bank. At September 30, 1995, Equitable had assets of
$190 million and equity of $11 million. It is anticipated that the transaction
will close in the first quarter of 1996 and will be accounted for under the
pooling-of-interests method of accounting.
<PAGE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
NOTE 3 - Recently Issued Accounting Standards
During the second quarter of 1993, the Financial Accounting Standards Board
("FASB") issued FASB Statement No. 114, Accounting by Creditors for Impairment
of a Loan, as amended by FASB Statement No. 118, Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures, ("FAS114"). FAS114
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, which is
the contractual interest rate adjusted for any deferred loan fees or costs,
premium, or discount existing at the inception or acquisition of the loan. As
a practical alternative, a company may base the measurement of impairment on a
loan's observable market price, or the fair value of the collateral if the
repayment of the loan is expected to be provided solely by the collateral
(i.e., the loan is collateral dependent). FAS114 is effective for fiscal years
beginning after December 15, 1994.
The Company adopted the provisions of FAS114 during the first quarter of
1995. At September 30, 1995, the recorded investment in loans that are
considered impaired under FAS114 was $48.7 million, of which $9.5 million were
on nonaccrual status. Included in this amount is $48.5 million of impaired
loans for which the related allowance for loan losses was $11.1 million and
$208,000 of loans that have no related allowance for loan losses. The adoption
of FAS114 did not have a material impact on the Company's results of
operations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Overview
Net income for the quarter ended September 30, 1995, increased 14 percent to
$28.9 million while net income for the first nine months of 1995 increased 9
percent to $81.1 million from the comparable prior year periods. Net income
per common share for the third quarter increased 13 percent to $0.76 compared
to the same period in 1994 while net income per common share for the first nine
months of 1995 increased 9 percent to $2.12. Net interest income increased by
$5.5 million, or 7 percent, during the third quarter of 1995 and $12.5 million,
or 5 percent, during the first nine months of the year. Noninterest income
increased 15 percent in the third quarter of 1995 while noninterest expense
increased less than one percent. For the first nine months of 1995, noninterest
income and noninterest expense increased 43 percent and 11 percent,
respectively.
In March of 1995, the Company completed the acquisition of Southwest
Bankers, Inc. ("Southwest"), of San Antonio, Texas, and its bank subsidiary,
The Bank of San Antonio, for 949,987 shares of the Company's common stock. The
acquisition of Southwest was accounted for under the pooling-of-interests
method of accounting and accordingly the financial statements have been
restated for all periods to reflect the acquisition. During the fourth quarter
of 1994, the Company completed the acquisition of 22 branches of First Heights
Bank, fsb, ("First Heights"), of Houston, Texas, with deposits of approximately
$870 million and assets of $68 million. A complete list of acquisitions is
included in "Acquisitions" and "Pending Acquisitions" under Item 1 - Business
in the Company's 1994 Form 10-K.
Net Interest Income
Net interest income for the three months ended September 30, 1995, increased
$5.5 million over the third quarter of 1994 to $87.9 million. On a tax-
equivalent basis, net interest income increased $5.4 million or 6 percent.
This increase was a result of a $40.0 million, or 27 percent, increase in
interest income on a tax-equivalent basis and a $34.6 million, or 55 percent,
increase in interest expense. The increase in interest income was due to an
increase in the average yield on earning assets from 7.83 percent to 8.26
percent coupled with an increase in average earning assets of $1.5 billion.
The largest portion of the increase in earning assets occurred in the average
balances of investment securities and loans, specifically real estate mortgages
and commercial loans, with a decline in the average balances of all other
categories of earning assets. This increase in the average balance of loans
and investment securities was funded by cash received in the acquisition of
First Heights as well as growth in all categories of deposits and an increase
in FHLB and other borrowings.
Interest expense for the three months ended September 30, 1995, increased by
$34.6 million, or 55 percent, from the prior year, due principally to a 20
percent increase in average interest bearing deposits and a 94 basis point
increase in the average rate paid on deposits. The increase in the average
balance of deposits was primarily due to the assumption of approximately $870
million in deposits in the First Heights acquisition. Additionally, the
average balances of federal funds purchased and securities sold under
agreements to repurchase increased 45 percent while the average balance of FHLB
advances and other borrowings increased by $256.6 million, as $50 million of
subordinated debentures issued by the Company in the third quarter of 1994 and
additional FHLB advances of $110 million in the fourth quarter of 1994 and $175
million in the third quarter of 1995 were used to fund asset growth and reduce
other short-term borrowings.
For the nine months ended September 30, 1995, net interest income increased
$12.5 million, or 5 percent, over the prior year period to $260.7 million. On
a tax-equivalent basis, net interest income increased $12.1 million, or 5
percent. An increase in the average yield on earning assets from 7.78 percent
to 8.30 percent along with an increase in average earning assets of $1.4
billion resulted in a $116.4 million, or 27 percent, increase in interest
income. As noted above, growth in the average balance of deposits and FHLB and
other borrowings and the investment of cash received in the First Heights
acquisition funded the increase in loans and investment securities.
Interest expense for the nine months ended September 30, 1995, increased by
$104.3 million, or 61 percent, from the prior year as the average balance of
interest bearing liabilities, primarily interest bearing deposits, increased by
22 percent and the average rate paid on liabilities rose by 119 basis points.
The increase in the average rate paid on interest bearing liabilities resulted
from a 101 basis point increase in the rate paid on deposits and more than a
160 basis point increase in the rate paid on all other categories of
borrowings. The average balances of federal funds purchased and securities
sold under agreements to repurchase increased 27 percent while the average
balance of FHLB advances and other borrowings increased by 58 percent as a
result of the additional borrowings discussed above.
Net Interest Margin
Net interest margin, stated as a percentage, is the yield on average earning
assets obtained by dividing the difference between the overall interest income
on earning assets and the interest expense paid on all funding sources by
average earning assets. For the first nine months of 1995, the net interest
margin, on a tax-equivalent basis, was 4.06 percent compared to 4.63 percent
for the same period in 1994. This 57 basis point decrease resulted from the
changes in rates and volumes of earning assets and the corresponding funding
sources noted previously. While the yield on interest earning assets increased
52 basis points, including a 66 basis point increase in the yield on loans, the
rate paid on all categories of interest bearing liabilities also increased,
ranging from a 101 basis point increase in the rate paid on interest bearing
deposits to a 235 basis point increase in the rate paid on FHLB and other
borrowings. The impact of this decline on net interest margin was partially
mitigated by a four percent increase in the average balance of noninterest
bearing demand deposits. During the first nine months of 1995, the positive
impact of the Company's use of interest rate contracts continued to decline.
While the use of interest rate contracts increased the Company's net interest
margin by 14 basis points during the nine months ended September 30, 1994, the
use of interest rate contracts increased the Company's net interest margin by
only 3 basis points during the same period in 1995.
For the third quarter of 1995, the net interest margin, on a tax-equivalent
basis, was 3.93 percent compared to 4.46 percent for the same period in 1994.
An increase in the rates paid on deposits from 3.86 percent to 4.80 percent was
the major contributor to the decline in the net interest margin. The impact of
a 103 basis point increase in rate paid on interest bearing liabilities was
partially offset by a 43 basis point increase in the average rate earned on
interest earning assets from 7.83 percent to 8.26 percent. During the third
quarter of 1995, the Company's net interest margin was positively impacted by
the Company's use of interest rate contracts, increasing taxable equivalent net
interest margin by 2 basis points as compared to a positive impact of 11 basis
points for the same period in 1994. Due to the fact that the Company continues
to be liability sensitive at September 30, 1995, it is anticipated that the
Company's net interest margin will continue to be impacted by the more frequent
repricing of interest bearing liabilities in the current interest rate
environment.
The tables on the following page detail the components of the changes in net
interest income (on a tax-equivalent basis) by major category of interest
earning assets and interest bearing liabilities for the nine months and three
months ended September 30, 1995, as compared to comparable periods of 1994 (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1995
--------------------------------------------
Change
1995 Attributed to
to --------------------------------
1994 Volume Rate Mix
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 72,184 $ 42,281 $ 26,484 $ 3,419
Investment securities 49,815 52,889 (1,517) (1,557)
Investment securities available
for sale 1,563 669 874 20
Trading account securities (5,378) (5,279) (244) 145
Fed funds and resale agreements (1,279) (2,327) 2,504 (1,456)
Time deposits in other banks (500) (500) (12) 12
--------- --------- --------- --------
Increase in interest income $116,405 $ 87,733 $ 28,089 $ 583
========= ========= ========= ========
Interest expense:
Deposits $ 72,856 $ 35,105 $ 30,322 $ 7,429
Fed funds purchased and repos 14,915 4,943 7,841 2,131
Other short-term borrowings 764 (1,553) 2,903 (586)
FHLB and other borrowings 15,801 6,653 5,794 3,354
--------- --------- --------- --------
Increase in interest expense $104,336 $ 45,148 $ 46,860 $12,328
========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1995
--------------------------------------------
Change
1995 Attributed to
to --------------------------------
1994 Volume Rate Mix
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 25,327 $ 16,890 $ 7,342 $ 1,095
Investment securities 9,633 9,054 413 166
Investment securities available
for sale 5,659 4,171 1,015 473
Trading account securities 56 (94) 163 (13)
Fed funds and resale agreements (611) (776) 435 (270)
Time deposits in other banks (73) (73) (3) 3
---------- --------- --------- --------
Increase in interest income $ 39,991 $ 29,172 $ 9,365 $ 1,454
========== ========= ========= ========
Interest expense:
Deposits $ 23,769 $ 11,406 $ 9,706 $ 2,657
Fed funds purchased and repos 5,215 3,179 1,403 633
Other short-term borrowings (224) (897) 874 (201)
FHLB and other borrowings 5,873 3,297 1,450 1,126
---------- --------- --------- --------
Increase in interest expense $ 34,633 $ 16,985 $ 13,433 $ 4,215
========== ========= ========= ========
</TABLE>
Noninterest Income and Noninterest Expense
For the nine months ended September 30, 1995, noninterest income increased
$26.7 million, or 43 percent, to $89.3 million. Noninterest income for the
third quarter of 1995 increased $4.1 million, or 15 percent, over the same
period in 1994. Service charges on deposit accounts increased $1.7 million, or
15 percent, while trading account profits (losses) and commissions increased
$1.8 million during the third quarter of 1995. During the first nine months of
the year, service charges on deposit accounts increased $5.3 million, or 16
percent, and trading account profits (losses) and commissions increased $12.2
million. The increase in service charges resulted from the increase in
deposits. The increase in trading account profits and commissions on bond
sales and trading activities was due chiefly to the absence of losses incurred
during the first and second quarters of 1994 on collateralized mortgage
obligation inverse floaters ("inverse floaters") held in the Company's trading
account. All of the inverse floaters previously held in the trading account
were sold in the first and second quarters of 1994. It should be noted that
changes in the trading account profits (losses) and commissions in future
quarters cannot be predicted accurately because of the uncertainty of changes
in market conditions. There can be no assurance that such amounts will or will
not continue at their current levels. For the nine months of 1995, trading
account profits related specifically to derivative securities were
approximately $472,000, consisting of $1.1 million of profits related to
collateralized mortgage obligations ("CMOs") held in the trading account offset
by $669,000 of losses on non-CMO derivative securities, specifically options
and interest rate swaps, caps, and floors.
The components of trading account assets at September 30, 1995, and December
31, 1994, are presented in the following table.
<TABLE>
<CAPTION>
September 30 December 31
1995 1994
---------- ----------
(in Thousands)
<S> <C> <C>
U.S. Treasury and Government agency $ 46,203 $ 26,599
State and political subdivisions 5,119 9,046
Mortgage-backed pass through securities 18,338 15,567
Other securities 1,777 201
Derivative securities:
Collateralized mortgage obligations 12,442 5,344
Interest rate floors and caps 1,894 1,178
Other options 50 77
---------- ----------
$ 85,823 $ 58,012
========== ==========
</TABLE>
The $8.2 million loss on purchase of securities from a common trust fund in
1994 resulted from the purchase of inverse floaters by the Company during the
second quarter of 1994 from a common trust fund managed by the trust division
of the Company's lead bank. Due to the increase in the general level of
interest rates, the common trust fund customers faced significant losses on
inverse floaters held in the portfolio. In evaluating the suitability of these
investments for the common trust fund subsequent to the decline in market
value, the Company determined that it would be in the best interests of the
Company, its lead bank, and its trust customers to purchase these securities at
book value from the common trust fund. As a result of this decision, the
Company purchased inverse floaters with a fair value of $27.0 million from the
common trust fund at the fund's cost of $35.2 million with the difference
between purchase price and fair value reflected in the Company's Statement of
Income as a separate component of noninterest income. The securities purchased
by the Company are reflected at its amortized cost of $26.2 million in its held
- -to-maturity investment securities portfolio at September 30, 1995. Losses on
the sale of investment securities during the third quarter of 1995 totaled
$109,000 with gains of $2.8 million for the first nine months of the year.
During the second quarter of 1995, investment securities held to maturity
totaling $30 million were sold prior to maturity either within three months of
maturity or only after at least 85 percent of the principal outstanding had
been collected, as permitted by FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("FAS115"). Gains on these sales
during the second quarter totaled $1.2 million.
Noninterest expense increased less than one percent during the third quarter
of 1995 over the same period in 1994. For the nine months ended September 30,
1995, noninterest expense increased by 11 percent to $216.2 million. Salaries
increased $2.2 million, or 7 percent, for the third quarter while employee
benefits decreased $1.0 million, or 17 percent. During the first nine months
of 1995, salaries increased by $9.2 million, or 11 percent, while employee
benefits increased $1.2 million, or 8 percent. The increase in salaries over
1994 levels was the result of the addition of personnel in connection with the
acquisition of 22 branches of First Heights, normal business growth, and
regular merit increases. The decrease in employee benefits during the third
quarter was due primarily to reduced pension expense while the increase in
employee benefits for the nine months was due to increased payroll tax expense
and other employee benefits associated with the First Heights acquisition. Net
occupancy expense decreased 7 percent in the third quarter of 1995 and declined
4 percent in the first nine months of the year due to increased rental income
related to the Company's headquarters partially offset by additional occupancy
expenses resulting from the acquisition of First Heights branches. FDIC
insurance premiums decreased 90 percent in the third quarter of 1995 and
decreased 19 percent in the first nine months of 1995 from the prior year. The
decrease is due to a $3.6 million refund of deposit insurance premiums received
during the third quarter of 1995 and a decrease in the premium rates effective
June 1, 1995. During the first nine months of 1995, other noninterest expense
increased $12.6 million, or 24 percent, due to increases in legal and other
professional services expenses associated with acquisition activities and with
a proxy contest initiated by three directors of the Company during the first
quarter of 1995. For the third quarter of the year, noninterest expense
increased 10 percent to $21.3 million.
During 1995, it has been proposed by Congress that a one-time special
assessment be charged on all Savings Association Insurance Fund ("SAIF")
deposits to fully capitalize the SAIF immediately. The estimates of
the amount of the special assessment have ranged as high as $0.85 per $100 of
SAIF deposits. Assuming that the special assessment is applied at the $0.85
rate, the Company will incur additional deposit insurance premium expense of
approximately $9.6 million which will be charged against current period
income. The timing of such an assessment is expected to be in the fourth
quarter of 1995 or the first quarter of 1996 while the amount cannot be
accurately predicted at this time.
Income Taxes
Income tax expense increased by $2.5 million, or 18 percent, during the
third quarter of 1995 compared to the same period in 1994 and increased $6.8
million, or 18 percent, during the first nine months of the year. The
effective tax rate for the first nine months of 1995 was 36 percent, up from
the 34 percent effective tax rate for the same period in 1994. The lower
effective tax rate in 1994 was due to reversal of prior period income tax
accruals upon receipt of the preliminary findings of an IRS audit.
Provision and Allowance for Loan Losses
The provision for loan losses for the three months ended September 30, 1995,
increased to $4.5 million from the $1.1 million reported for the same period in
1994. For the nine months ended September 30, 1995, the provision for loan
losses increased $4.5 million to $7.9 million. This increase resulted from a
$2.3 million increase in net charge-offs during the first nine months of 1995
as compared to the prior year period. Net loan charge-offs expressed as an
annualized percentage of average loans for the first three quarters of 1995
were 0.18 percent compared with 0.14 percent for the first nine months of 1994.
Management considers changes in the size and character of the loan portfolio,
changes in nonperforming and past due loans, historical loan loss experience,
the existing risk of individual loans, concentrations of loans to specific
borrowers or industries and existing and prospective economic conditions when
determining the adequacy of the loan loss allowance. The allowance for loan
losses at September 30, 1995, was $108.3 million, unchanged from December 31,
1994. The ratio of the allowance for loan losses to loans outstanding was 1.73
percent at September 30, 1995, down from 1.86 percent at December 31, 1994.
Nonperforming Assets and Past Due Loans
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans and
other real estate owned, totaled $22.2 million at September 30, 1995, compared
to $19.7 million at December 31, 1994, an increase of 13 percent. At September
30, 1995, the allowance for loan losses as a percentage of nonperforming loans
was 819 percent as compared to 852 percent at December 31, 1994. The allowance
for loan losses as a percentage of nonperforming loans and accruing loans
ninety days or more past due decreased from 658 percent at December 31, 1994,
to 628 percent at September 30, 1995.
Nonperforming assets as a percentage of total loans and other real estate
owned increased to 0.35 percent at September 30, 1995, from 0.34 percent at
December 31, 1994. The amount recorded in other repossessed assets at
September 30, 1995, was $287,000, up from $235,000 at December 31, 1994. Loans
past due ninety days or more but still accruing interest increased 8 percent
from $3.7 million at December 31, 1994, to $4.0 million at September 30, 1995,
representing 0.06 percent of total loans and other real estate owned.
The Company regularly monitors selected accruing loans for which general
economic conditions or changes within a particular industry could cause the
borrowers financial difficulties. This continuous monitoring of the loan
portfolio and the related identification of loans with a high degree of credit
risk are essential parts of the Company's credit management. Management
continues to emphasize maintaining a low level of nonperforming assets and
returning current nonperforming assets to an earning status.
Financial Condition
Overview
Total assets at September 30, 1995, were $10.0 billion, up 8 percent from
December 31, 1994. This increase was due principally to an 8 percent increase
in loans and an 11 percent increase in total investment securities. Retained
earnings remained the primary source of growth for the Company's capital base.
Assets and Funding
At September 30, 1995, earning assets totaled $9.3 billion, an increase of 9
percent from December 31, 1994. The mix of earning assets shifted moderately
toward investment securities in the first nine months of 1995 with an increase
of $290.1 million, or 11 percent, in total investment securities. Loans
comprised 68 percent of total earning assets at September 30, 1995, unchanged
from December 31, 1994, while the percentage of earning assets represented by
total investment securities increased from 30 percent to 31 percent. Trading
account securities increased $27.8 million, or 48 percent, and federal funds
sold and securities purchased under agreements to resell increased $3.7
million.
A $365.3 million increase in interest bearing deposits during the first nine
months of 1995 was partially offset by a $131.1 million decrease in noninterest
bearing deposits. During the first nine months of 1995, federal funds
purchased and securities sold under agreements to repurchase increased $146.5
million, or 18 percent, while FHLB and other borrowings increased $172.0
million, or 35 percent. At September 30, 1995, deposits accounted for 74
percent of the Company's funding, down from 78 percent at year end.
Liquidity and Capital Resources
Net cash provided by operating activities totaled $75.7 million for the nine
months ended September 30, 1995. For the first nine months of 1995, net cash
used by investing activities of $742.3 million consisted of proceeds from
maturities of investment securities of $211.8 million, proceeds from maturities
of securities available for sale of $94.0 million, and proceeds from sales of
securities available for sale of $586.9 million with cash outflows of $1.2
billion in purchases of investment securities available for sale and a $452.1
million increase in loans outstanding. Also included in investing cash inflows
were $31.1 million in proceeds from the sale of held-to-maturity investment
securities that are permitted under FAS115. FAS115 allows such sales if the
sale of securities occurs near enough to the maturity date that interest rate
risk is substantially eliminated or the sale of securities occurs after a
substantial portion of the principal outstanding at acquisition has been
received. Net cash provided by financing activities of $617.1 million
consisted of the payment of $32.0 million in common stock dividends as well as
decreases in securities sold under agreements to repurchase funded in part by
additional FHLB advances of $175.0 million as well as increases in time
deposits, federal funds purchased, and other short-term borrowings.
Total shareholders' equity at September 30, 1995, was 6.73 percent of total
assets compared to 6.60 percent at December 31, 1994. The increase since year-
end 1994 reflects the 10 percent increase in shareholders' equity in contrast
to the 8 percent increase in total assets. The growth in shareholders' equity
consisted of earnings retained after payment of dividends on common stock
coupled with the decrease in the net unrealized holding loss on available-for-
sale securities. The change in the unrealized holding loss in the Company's
available-for-sale portfolio from December 31, 1994, to September 30, 1995, of
$8.2 million has been reflected as additional shareholders' equity.
The leverage ratio, defined as period-end common equity adjusted for
goodwill divided by average quarterly assets adjusted for goodwill, was 6.69
percent at September 30, 1995, and 6.62 percent at December 31, 1994.
Similarly, the Company's tangible leverage ratio, defined as period-end common
equity adjusted for all intangibles divided by average quarterly assets
adjusted for all intangibles, increased from 6.37 at December 31, 1994, to 6.49
at September 30, 1995.
Tier I capital and total qualifying capital (Tier I capital plus Tier II
capital), as defined by regulatory agencies, as of September 30, 1995, exceeded
the target ratios of 6.00 percent and 10.00 percent, respectively, under
current regulations. The Tier I and total qualifying capital ratios at
September 30, 1995, were 9.70 percent and 12.83 percent, respectively. Tier II
capital includes supplemental capital components such as qualifying allowances
for loan losses, certain qualifying classes of preferred stock and qualifying
subordinated debt. Increased regulatory activity in the financial industry as
a whole will continue to impact the structure of the industry; however,
management does not anticipate any negative impact on the capital resources or
operations of the Company.
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Allowance for Loan Losses/Nonperforming Assets
(In Thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 108,337 $ 111,744
Add: Provision charged to earnings 7,900 3,404
Balance due to acquisition - 810
Deduct: Loans charged off 12,461 11,552
Loan recoveries (4,561) (5,965)
----------- -----------
Net charge-offs 7,900 5,587
----------- -----------
Balance at end of period $ 108,337 $ 110,371
=========== ===========
Net charge-offs as a percentage of
average loans (annualized) 0.18% 0.14%
Recoveries as a percentage of charge-offs 36.60% 51.64%
</TABLE>
<TABLE>
<CAPTION>
September 30 December 31
1995 1994
----------- -----------
<S> <C> <C>
NONPERFORMING ASSETS
Nonaccrual loans $ 12,040 $ 11,283
Renegotiated loans 1,180 1,428
----------- -----------
Total nonperforming loans 13,220 12,711
Other real estate 8,997 6,980
----------- -----------
Total nonperforming assets $ 22,217 $ 19,691
=========== ===========
Accruing loans ninety days past due $ 4,032 $ 3,745
=========== ===========
Other repossessed assets $ 287 $ 235
=========== ===========
Allowance for loan losses $ 108,337 $ 108,337
=========== ===========
Allowance as a percentage of loans 1.73% 1.86%
Total nonperforming loans as a percentage
of loans and ORE 0.21% 0.22%
Total nonperforming assets as a percentage
of loans and ORE 0.35% 0.34%
Accruing loans ninety days past due as a
percentage of loans and ORE 0.06% 0.06%
Allowance for loan losses as a percentage
of nonperforming loans 819.49% 852.31%
Allowance for loan losses as a percentage
of nonperforming assets 487.63% 550.19%
</TABLE>
<PAGE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION Page
- --------------------------- ----
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
(10)(a) Compass Bancshares, Inc., 1982 Long Term Incentive Plan
(incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form S-8 filed June 15, 1983, with
the Securities and Exchange Commission)
(10)(b) Compass Bancshares, Inc., 1989 Long Term Incentive Plan
(incorporated by reference to Exhibit 28 to the Company's
Registration Statement on Form S-8 filed February 21, 1991,
with the Securities and Exchange Commission)
(10)(c) Supplemental Retirement Agreement, dated as of March 18, 1991,
between Compass Bank and Harry B. Brock, Jr. (incorporated by
reference to Exhibit 10(c) to the Company's Form 10-K for the
year ended December 31, 1991, filed March 26, 1992, with the
Securities and Exchange Commission)
(10)(d) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and D. Paul Jones, Jr. (incorporated by
reference to Exhibit 10(d) to the Company's Form 10-K for
the year ended December 31, 1994, filed February 27, 1995,
with the Securities and Exchange Commission)
(10)(e) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Jerry W. Powell (incorporated by reference
to Exhibit 10(e) to the Company's Form 10-K for the year ended
December 31, 1994, filed February 27, 1995, with the Securities
and Exchange Commission)
(10)(f) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Garrett R. Hegel (incorporated by
reference to Exhibit 10(f) to the Company's Form 10-K for
the year ended December 31, 1994, filed February 27, 1995,
with the Securities and Exchange Commission)
(10)(g) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Byrd Williams (incorporated by reference
to Exhibit 10(g) to the Company's Form 10-K for the year ended
December 31, 1994, filed February 27, 1995, with the Securities
and Exchange Commission)
(10)(h) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Charles E. McMahen (incorporated by
reference to Exhibit 10(h) to the Company's Form 10-K for
the year ended December 31, 1994, filed February 27, 1995,
with the Securities and Exchange Commission)
(11) Computation of Per Share Earnings 19
(12) Ratio of Earnings to Fixed Charges 20
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
November 10, 1995 /s/ GARRETT R. HEGEL
----------------- ---------------------------
Date By Garrett R. Hegel, as its
Chief Financial Officer
<TABLE>
Exhibit (11)
Compass Bancshares, Inc. and Subsidiaries
Computation of Earnings Per Share
Three and Nine Months Ended September 30, 1995 and 1994
<CAPTION>
Three Months Ended Nine Month Ended
September 30 September 30
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
(in Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding 38,120 37,902 38,049 37,891
Net effect of the assumed exercise
of stock options - based on the
treasury stock method using
average market price 320 296 252 279
--------- --------- --------- ---------
Total weighted average shares
and common stock equivalents
outstanding 38,440 38,198 38,301 38,170
========= ========= ========= =========
Net income available to common
shareholders $ 28,934 $ 25,385 $ 81,082 $ 74,260
========= ========= ========= =========
Net income per common share $ 0.76 $ 0.67 $ 2.12 $ 1.95
========= ========= ========= =========
FULLY DILUTED:
Weighted average shares outstanding 38,120 37,902 38,049 37,891
Net effect of the assumed exercise
of stock options - based on the
treasury stock method using
average market price or period-
end market price, whichever
is higher 328 296 328 279
--------- --------- --------- ---------
Total weighted average shares and
common stock equivalents
outstanding 38,448 38,198 38,377 38,170
========= ========= ========= =========
Net income $ 28,934 $ 25,385 $ 81,082 $ 74,260
========= ========= ========= =========
Net income per common share $0.75 $0.67 $2.11 $1.95
========= ========= ========= =========
</TABLE>
<TABLE>
Exhibit (12)
Compass Bancshares, Inc. and Subsidiaries
Ratio of Earnings to Fixed Charges
Nine Months Ended September 30, 1995 and 1994
<CAPTION>
Nine Months Ended
September 30
------------------------------
1995 1994
---------- ----------
(in Thousands)
<S> <C> <C>
Pretax income $ 125,873 $ 112,278
Add fixed charges:
Interest on deposits 207,716 134,860
Interest on borrowings 68,835 37,355
Portion of rental expense representing
interest expense 2,516 2,112
---------- ----------
Total fixed charges 279,067 174,327
---------- ----------
Income before fixed charges $ 404,940 $ 286,605
========== ==========
Pretax income $ 125,873 $ 112,278
Add fixed charges (excluding interest on
deposits):
Interest on borrowings 68,835 37,355
Portion of rental expense representing
interest expense 2,516 2,112
---------- ----------
Total fixed charges 71,351 39,467
---------- ----------
Income before fixed charges
(excluding interest on deposits) $ 197,224 $ 151,745
========== ==========
Ratio of Earnings to Fixed Charges:
Including interest on deposits 1.45x 1.64x
Excluding interest on deposits 2.76x 3.84x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND RELATED SUPPLEMENTAL
SCHEDULES OF COMPASS BANCSHARES, INC. AS OF AND FOR THE PERIOD ENDED SEPTEMBER
30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND RELATED SUPPLEMENTAL SCHEDULES.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> $ 441,010
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 50,186
<TRADING-ASSETS> 85,823
<INVESTMENTS-HELD-FOR-SALE> 1,235,611
<INVESTMENTS-CARRYING> 1,631,368
<INVESTMENTS-MARKET> 1,656,149
<LOANS> 6,263,959
<ALLOWANCE> 108,337
<TOTAL-ASSETS> 9,988,845
<DEPOSITS> 7,423,093
<SHORT-TERM> 1,175,580
<LIABILITIES-OTHER> 58,361
<LONG-TERM> 659,876
<COMMON> 76,267
0
0
<OTHER-SE> 595,668
<TOTAL-LIABILITIES-AND-EQUITY> 9,988,845
<INTEREST-LOAN> $ 398,321
<INTEREST-INVEST> 132,693
<INTEREST-OTHER> 6,200
<INTEREST-TOTAL> 537,214
<INTEREST-DEPOSIT> 207,716
<INTEREST-EXPENSE> 276,551
<INTEREST-INCOME-NET> 260,663
<LOAN-LOSSES> 7,900
<SECURITIES-GAINS> 2,773
<EXPENSE-OTHER> 216,216
<INCOME-PRETAX> 125,873
<INCOME-PRE-EXTRAORDINARY> 125,873
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,082
<EPS-PRIMARY> 2.12
<EPS-DILUTED> 2.11
<YIELD-ACTUAL> 4.06
<LOANS-NON> 12,040
<LOANS-PAST> 4,032
<LOANS-TROUBLED> 1,180
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 108,337
<CHARGE-OFFS> 12,461
<RECOVERIES> 4,561
<ALLOWANCE-CLOSE> 108,337
<ALLOWANCE-DOMESTIC> 108,337
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1>Information is not required to be disclosed in interim filings with the
Commission.
</FN>
</TABLE>
