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 March 31, 1998 Commission File No. 0-6032
COMPASS BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0593897
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
15 South 20th Street
Birmingham, Alabama 35233
----------------------------------------
(Address of principal executive offices)
(205) 933-3000
-------------------------------
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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 April 30, 1998
-------------------------- -----------------------------
Common Stock, $2 Par Value 70,099,325
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 March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 5
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
PART II. OTHER INFORMATION
- ----------------------------------------------------------------------
Item 1 Legal Proceedings 17
Item 6 Exhibits and Reports on Form 8-K 17
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
(Unaudited)
<CAPTION>
March 31 December 31
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 692,252 $ 739,263
Federal funds sold and securities purchased
under agreements to resell 353,223 133,802
Interest bearing deposits with other banks 1,001 1,008
Investment securities (market value of
$958,753 and $1,114,415 for 1998 and
1997, respectively) 941,348 1,095,804
Investment securities available for sale 2,756,968 2,421,622
Trading account securities 101,901 112,460
Loans, net of unearned income 9,016,427 8,944,323
Allowance for loan losses (126,483) (126,506)
------------ ------------
Net loans 8,889,944 8,817,817
Premises and equipment, net 317,682 311,560
Other assets 450,580 439,115
------------ ------------
Total assets $14,504,899 $14,072,451
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing $ 2,184,975 $ 2,179,822
Interest bearing 8,308,137 8,002,072
------------ ------------
Total deposits 10,493,112 10,181,894
Federal funds purchased and securities
sold under agreements to repurchase 1,057,052 1,171,666
Other short-term borrowings 153,445 183,153
Accrued expenses and other liabilities 375,825 135,473
FHLB and other borrowings 1,287,086 1,294,653
Guaranteed preferred beneficial interests
in Company's junior subordinated
deferrable interest debentures (Note 4) 100,000 100,000
------------ ------------
Total liabilities 13,466,520 13,066,839
Shareholders' equity:
Common stock of $2 par value:
Authorized--100,000,000 shares;
Issued--70,023,069 shares in 1998 and
69,790,630 shares in 1997 140,046 139,581
Surplus 111,096 104,334
Loans to finance stock purchases (1,973) (5,224)
Unearned restricted stock (5,332) (2,775)
Accumulated other comprehensive income --
net unrealized holding gain on
available-for-sale securities 1,602 745
Retained earnings 792,940 768,951
------------ ------------
Total shareholders' equity 1,038,379 1,005,612
------------ ------------
Total liabilities and shareholders'
equity $14,504,899 $14,072,451
============ =============
</TABLE>
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands Except Per Share Data)
(Unaudited)
<CAPTION>
Three Months Ended
March 31
----------------------
1998 1997
---------- ----------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $192,205 $176,840
Interest and dividends on
investment securities 18,005 22,625
Interest on investment
securities available
for sale 39,788 34,011
Interest on trading account
securities 1,606 1,565
Interest on federal funds
sold and securities
purchased under agreements
to resell 1,198 1,777
Interest on interest bearing
deposits with other banks 15 23
---------- ----------
Total interest income 252,817 236,841
INTEREST EXPENSE:
Interest on deposits 90,217 89,307
Interest on federal funds
purchased and securities
sold under agreements to
repurchase 12,863 9,815
Interest on other short
-term borrowings 2,073 2,224
Interest on FHLB and other
borrowings 17,917 11,498
Interest on guaranteed preferred
beneficial interests in
Company's junior subordinated
deferrable interest debentures 2,058 1,623
---------- ----------
Total interest expense 125,128 114,467
---------- ----------
Net interest income 127,689 122,374
Provision for loan losses 6,811 5,605
---------- ----------
Net interest income
after provision for
loan losses 120,878 116,769
NONINTEREST INCOME:
Service charges on deposit
accounts 19,498 18,235
Trust fees 4,796 4,091
Trading account profits and
commissions 4,309 4,135
Investment securities
gains (losses), net 2,017 (80)
Retail investment sales 4,195 4,045
Other 17,850 11,995
---------- ----------
Total noninterest income 52,665 42,421
NONINTEREST EXPENSE:
Salaries and benefits 57,163 54,771
Net occupancy expense 8,292 7,907
Equipment expense 8,405 6,984
Professional services 8,612 7,143
Other 26,008 22,279
---------- ----------
Total noninterest expense 108,480 99,084
---------- ----------
Net income before income
tax expense 65,063 60,106
Income tax expense 22,114 21,847
---------- ----------
NET INCOME $ 42,949 $ 38,259
========== ==========
BASIC EARNINGS PER SHARE $0.62 $0.55
DILUTED EARNINGS PER SHARE 0.61 0.55
Basic weighted average shares
outstanding 69,779 69,375
Diluted weighted average shares
outstanding 70,837 70,121
Dividends per common share $0.2625 $0.2367
</TABLE>
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating Activities:
Net income $ 42,949 $ 38,259
Adjustments to reconcile net income to
cash provided by operations:
Depreciation and amortization 11,556 10,678
Accretion of discount and loan fees (3,032) (2,961)
Provision for loan losses 6,811 5,605
Net change in trading account securities 10,559 (2,630)
Net change in mortgage loans available
for sale (21,547) 10,627
(Gain) loss on sale of investment securities (2,017) 80
(Gain) loss on sale of premises and equipment 21 (62)
Gain on sale of other real estate owned (210) (21)
Provision for losses on other real estate
owned - 75
Increase in interest receivable (389) (3,378)
(Increase) decrease in other assets (12,205) 2,101
Decrease in interest payable (2,869) (3,190)
Increase in taxes payable 11,699 24,562
Increase (decrease) in other payables 230,354 (23,403)
------------ ------------
Net cash provided by operating activities 271,680 56,342
Investing Activities:
Proceeds from maturities/calls of investment
securities 204,508 84,215
Purchases of investment securities (49,748) (16,155)
Proceeds from sales of securities
available for sale 467,959 47,344
Proceeds from maturities/calls of
securities available for sale 194,533 114,665
Purchases of securities available for sale (994,652) (206,299)
Net (increase) decrease in federal funds
sold and securities purchased
under agreements to resell (219,421) 26,437
Net increase in loan portfolio (57,670) (243,078)
Purchase of branches - 22,216
Purchases of premises and equipment (13,116) (19,413)
Net (increase) decrease in interest
bearing deposits with other banks 7 (37)
Proceeds from sales of other
real estate owned 1,513 1,551
------------ ------------
Net cash used by investing activities (466,087) (188,554)
</TABLE>
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31
------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Financing Activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts $ 296,956 $(125,824)
Net increase (decrease) in time deposits 14,262 (177,100)
Net increase (decrease) in federal funds
purchased (316,295) 25,781
Net increase in securities sold
under agreements to repurchase 201,680 17,915
Net decrease in short-term
borrowings (29,708) (23,792)
Issuance of FHLB advances and
other borrowings - 200,000
Repayment of long-term debt (7,589) (102,278)
Issuance of guaranteed preferred beneficial
interests in Company's junior subordinated
deferrable interest debentures - 100,000
Common dividends paid (18,374) (15,124)
Exercise of stock options of acquired
entities prior to acquisition 599 6,474
Repayment of loans to finance stock
purchases 3,772 1,605
Proceeds from exercise of stock options 2,093 693
------------ ------------
Net cash provided (used) by
financing activities 147,396 (91,650)
------------ ------------
Net decrease in cash and due from banks (47,011) (223,862)
Cash and due from banks at beginning of period 739,263 754,416
------------ ------------
Cash and due from banks at end of period $ 692,252 $ 530,554
============ ============
Schedule of noncash investing and
financing activities:
Transfers of loans to other real estate owned $ 1,855 $ 2,577
Loans to facilitate the sale of
other real estate owned 63 239
Loans to finance stock purchases 521 525
Tax benefit realized upon exercise
of stock options 414 178
Issuance of restricted stock 3,015 2,706
Change in unrealized gain/loss on available
for sale securities 1,271 (15,507)
Transfer of securities available for
sale to held-to-maturity securities - 98,658
Receipt of treasury stock upon exercise
of stock options 997 52
Issuance of treasury stock upon exercise
of stock options 997 52
Acquisition of branches:
Liabilities assumed $ 25,661
Assets acquired 3,445
------------
Net liabilities assumed $ 22,216
============
</TABLE>
<PAGE>
<TABLE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
Net income $ 42,949 $ 38,259
Other comprehensive income, before tax:
Unrealized holding gain (loss) on
available for sale securities 3,509 (14,375)
Less reclassification adjustment for gains
(losses) on securities available for sale 2,017 (80)
---------- ----------
Total other comprehensive income, before tax 1,492 (14,295)
Income tax expense (benefit) related to other
comprehensive income:
Unrealized holding gain (loss) on
available for sale securities 1,355 (5,318)
Less reclassification adjustment for gains
(losses) on securities available for sale 720 (30)
---------- ----------
Total income tax expense (benefit) related
to other comprehensive income 635 (5,288)
---------- ----------
Total other comprehensive income, net of tax 857 (9,007)
---------- ----------
Total comprehensive income $ 43,806 $ 29,252
========== ==========
<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 notes included in the Company's
annual report on Form 10-K for the year ended December 31, 1997.
With regard to quantitative and qualitative disclosures regarding the
Company's market risk, refer to Management's Discussion and Analysis and
consolidated financial statements and notes included in the Company's annual
report on Form 10-K for the year ended December 31, 1997. Based on current
market risk analysis, management believes that the change from December 31,
1997, to March 31, 1998, in the Company's net interest income sensitivity
over a one-year horizon is not material to the Company's results of
operations.
NOTE 2 - Business Combinations
Completed Acquisitions
Summarized below are acquisitions completed by the Company during the first
three months of 1998. All of the acquisitions completed during the period were
accounted for under the pooling-of-interests method of accounting and
accordingly all prior period information has been restated.
</TABLE>
<TABLE>
<CAPTION>
Common
Shares
dollars in millions Location Date Assets Equity Issued
- ------------------- -------------------- ------- ------ ------ ----------
<S> <C> <C> <C> <C> <C>
G.S.B. Investments Gainesville, Florida 1/13/98 $213 $22 1,649,807
First University
Corporation Houston, Texas 1/29/98 68 4 349,874
Fidelity Resources
Company Dallas, Texas 2/9/98 335 20 1,800,077
</TABLE>
Pending Acquisition
The Company signed a definitive agreement on April 23, 1998, to acquire Hill
Country Bank ("Hill Country") of Austin, Texas. At March 31, 1998, Hill Country
had assets of $108 million and equity of $11 million. It is anticipated that
the transaction will close in the third quarter of 1998 and will be accounted
for under the pooling-of-interests method of accounting.
NOTE 3 - Impaired Loans
At March 31, 1998, the recorded investment in loans that are considered
impaired under generally accepted accounting principles was $25.1 million, of
which $10.8 million were on nonaccrual status. Included in this amount is $24.9
million of impaired loans for which the related allowance for loan losses was
$4.0 million and $203,000 of loans which are carried at estimated fair value
without a specifically allocated allowance for loan losses. At December 31,
1997, impaired loans totaled $23.8 million.
<PAGE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements - Continued
NOTE 4 - Capital Securities
In January, 1997, the Company formed a wholly owned Delaware statutory
business trust, Compass Trust I, which issued $100 million of guaranteed
preferred beneficial interests in the Company's junior subordinated deferrable
interest debentures ("Capital Securities") that qualify as Tier I capital under
Federal Reserve Board guidelines. All of the common securities of Compass Trust
I are owned by the Company. The proceeds from the issuance of the Capital
Securities ($100 million) and common securities ($3.1 million) were used by
Compass Trust I to purchase $103.1 million of junior subordinated deferrable
interests debentures of the Company which carries an interest rate of 8.23
percent. The debentures represent the sole asset of Compass Trust I. The
debentures and related income statement effects are eliminated in the Company's
financial statements.
The Capital Securities accrue and pay distributions semiannually at a rate
of 8.23 percent per annum of the stated liquidation value of $1,000 per capital
security. The Company has entered into contractual arrangements which, taken
collectively, fully and unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the Capital Securities; (ii) the
redemption price with respect to any capital securities called for redemption
by Compass Trust I; and (iii) payments due upon a voluntary or involuntary
liquidation, winding-up or termination of Compass Trust I.
The Capital Securities are mandatorily redeemable upon the maturity of the
debentures on January 15, 2027, or upon earlier redemption as provided in the
indenture. The Company has the right to redeem the debentures purchased by
Compass Trust I: (i) in whole or in part, on or after January 15, 2007, and
(ii) in whole (but not in part) at any time within 90 days following the
occurrence and during the continuation of a tax event or capital treatment
event (as defined in the offering circular). As specified in the indenture, if
the debentures are redeemed prior to maturity, the redemption price will be the
principal amount, any accrued but unpaid interest, plus a premium ranging from
4.12 percent in 2007 to 0.41 percent in 2016.
<PAGE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements - Continued
NOTE 5 - Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------
1998 1997
--------- ----------
(In Thousands Except
Per Share Data)
(Unaudited)
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Weighted average shares outstanding 69,779 69,375
========== ==========
Net income $ 42,949 $38,259
========== ==========
Basic earnings per share $ 0.62 $ 0.55
========== ==========
DILUTED EARNINGS PER SHARE:
Weighted average shares outstanding 69,779 69,375
Net effect of the assumed exercise of
stock options and nonvested restricted
stock - based on the treasury stock method
using average market price for the year 1,058 746
---------- ----------
Total weighted average shares and common stock
equivalents outstanding 70,837 70,121
========== ==========
Net income $ 42,949 $38,259
========== ==========
Diluted earnings per share $ 0.61 $ 0.55
========== ==========
</TABLE>
NOTE 6 - Recently Issued Accounting Standards
In June, 1997, the FASB issued Financial Accounting Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information,
("FAS131"). FAS131 requires that financial and descriptive information be
disclosed for each reportable operating segment based on the management
approach. The management approach focuses on financial information that an
enterprise's decision makers use to assess performance and make decisions about
resource allocation. The statement also prescribes the enterprise-wide
disclosures to be made about products, services, geographic areas and major
customers. FAS131 is effective for annual financial statements issued for
periods beginning after December 15, 1997, and for interim financial statements
in the second year of application. The Company adopted FAS131 as of January 1,
1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Overview
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.
Net income for the quarter ended March 31, 1998, increased 12 percent to
$42.9 million while basic earnings per share increased 13 percent to $0.62 from
the first quarter of 1997. Diluted earnings per share increased 11 percent to
$0.61. Net interest income increased 4 percent to $127.7 million from the first
quarter of 1997 while the provision for loan losses increased 22 percent to
$6.8 million. Noninterest income increased 24 percent to $52.7 million during
the first quarter of 1998 while noninterest expense increased 9 percent to
$108.5 million.
All acquisitions completed in 1998 were accounted for under the pooling-of-
interests method of accounting and, accordingly, the financial statements have
been restated for all periods to reflect the acquisitions. Acquisitions
completed in 1998 and pending acquisitions are detailed in Note 2 - Business
Combinations in the Notes to the Consolidated Financial Statements and
acquisitions completed prior to 1998 are included in "Acquisitions" under Item
1 - Business in the Company's 1997 Form 10-K.
Net Interest Income
Net interest income for the quarter ended March 31, 1998, increased $5.3
million over the first quarter of 1997 to $127.7 million. On a tax-equivalent
basis, net interest income increased $5.1 million, or 4 percent, as a result of
a $15.8 million, or 7 percent, increase in interest income on a tax-equivalent
basis offset, in part, by a $10.7 million, or 9 percent, increase in interest
expense. The increase in interest income was primarily due to an increase in
average earning assets of $814 million, or 7 percent, partially offset by a 2
basis point decrease in the average yield on earning assets from 8.19 percent
to 8.17 percent. The largest portion of the increase in average earning assets
from the first quarter of 1997 to the first quarter of 1998 occurred in the
average balance of loans, which increased 9 percent, or $771 million, with
funding provided primarily by increases in the average balance of federal funds
purchased and securities sold under agreements to repurchase and FHLB and other
borrowings.
Interest expense for the quarter ended March 31, 1998, increased by $10.7
million, or 9 percent, from the first quarter of 1997, due principally to a 7
percent increase in total interest bearing liabilities coupled with a 9 basis
point increase in the rate paid on liabilities. The increase in interest
bearing liabilities was principally due to a $588 million increase in FHLB and
other borrowings. The increase in the rate paid on interest bearing liabilities
was primarily a function of a 7 basis point increase in the rate paid on total
deposits which reflected at 15 basis point increase in the rate paid on savings
accounts.
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 quarter of 1998, the net interest margin,
on a tax-equivalent basis, was 4.14 percent compared to 4.25 percent for the
same period in 1997. This change resulted from the changes in rates and volumes
of earning assets and the corresponding funding sources noted previously. The
yield on interest earning assets for the first quarter decreased two basis
points, including a six basis point decrease in the yield on loans, while the
yield on interest bearing liabilities increased nine basis points. The impact
of the increase in the yield on interest bearing liabilities on net interest
margin was partially offset by a 13 percent increase in the average balance of
noninterest bearing demand deposits during the first quarter of 1998.
During the first quarter of 1998, 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 six basis points as compared to a two
basis point impact for the same period in 1997.
The following tables 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 three month period ended March 31,
1998, as compared to the comparable period of 1997 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------------------------
Change
1997 Attributed to
to --------------------------------
1998 Volume Rate Mix
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans $15,281 $16,766 $(1,357) $ (128)
Investment securities (4,701) (4,580) (151) 30
Investment securities available
for sale 5,756 5,523 201 32
Trading account securities 50 55 (5) -
Fed funds and resale agreements (579) (644) 102 (37)
Time deposits in other banks (8) (8) (1) 1
-------- -------- -------- --------
Increase in interest income $15,799 $17,112 $(1,211) $ (102)
======== ======== ======== ========
Interest expense:
Deposits $ 910 $(1,481) $ 2,408 $ (17)
Fed funds purchased and repos 3,048 2,590 362 96
Other short-term borrowings (151) (157) 7 (1)
FHLB and other borrowings* 6,854 9,599 (1,585) (1,160)
-------- -------- -------- --------
Increase in interest expense $10,661 $10,551 $ 1,192 $(1,082)
======== ======== ======== ========
<FN>
* Includes Capital Securities.
</FN>
</TABLE>
Noninterest Income and Noninterest Expense
During the first quarter of 1998, noninterest income increased $10.2
million, or 24 percent, to $52.7 million, due primarily to a $5.9 million
increase in other income, a $1.3 million increase in service charges on deposit
accounts and a $2.1 million increase in investment securities gains. Increases
in service charges on deposit accounts were due to the increase in deposits
while the increase in other income was due to increased mortgage banking income
and increased income from tax-advantaged assets. Trading account profits and
commissions increased 4 percent to $4.3 million in the first quarter of 1998.
Trading account profits for the first three months of 1998 related specifically
to derivative securities were approximately $316,000, all of which related to
collateralized mortgage obligations ("CMOs") held in the trading account.
The components of trading account assets at March 31, 1998, and December 31,
1997, are presented in the following table (in thousands):
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------------ -----------
<S> <C> <C>
U.S. Treasury and Government agency $ 29,052 $ 55,487
State and political subdivisions 9,709 8,135
Mortgage-backed pass through securities 50,234 34,282
Other securities 2,917 281
Derivative securities:
Collateralized mortgage obligations 9,665 13,906
Interest rate floors and caps 279 305
Other options 45 64
----------- -----------
$ 101,901 $ 112,460
=========== ===========
</TABLE>
Noninterest expense increased $9.4 million, or 9 percent, during the first
quarter of 1998 primarily due to increased salaries and benefits, equipment
expense, professional services expense and other expense. Salaries increased
$1.7 million, or 4 percent, for the first quarter while employee benefits
increased $719,000, or 7 percent. The increase in salaries over 1997 levels
was the result of regular merit increases. The increase in employee benefits
for the first quarter of 1998 was due to increased payroll taxes and employee
insurance expense partially offset by decreased pension and ESOP expense.
Equipment expense increased 20 percent in the first quarter of 1998 due to
increased computer equipment depreciation and rental expense. Professional
services expense increased $1.5 million, or 21 percent, due to increased
consulting expenses associated with an internal service quality initiative.
Other noninterest expense increased $3.7 million, or 17 percent, during the
first three months of 1998 primarily due to increased advertising expense
associated with the Company's new branding campaign.
Income Taxes
Income tax expense increased by $276,000, or 1 percent, during the first
three months of 1998 compared to the same period in 1997 while pretax income
increased 8 percent. The effective tax rate for the first three months of 1998
was 34.0 percent, down significantly from the 36.3 percent effective tax rate
for the same period in 1997. The decrease in the effective tax rate was
primarily attributable to investment in tax-advantaged assets.
Provision and Allowance for Loan Losses
The provision for loan losses for the three months ended March 31, 1998,
increased $1.2 million, or 22 percent, from the same period in 1997 due to a 26
percent increase in net loan charge-offs during the period. Net loan charge-
offs expressed as an annualized percentage of average loans for the first three
months of 1998 were 0.31 percent, up from 0.27 percent for the first three
months of 1997. 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 March 31, 1998, was $126 million, unchanged from
December 31, 1997. The ratio of the allowance for loan losses to loans
outstanding was 1.40 percent at March 31, 1998, relatively unchanged from 1.41
percent at December 31, 1997.
Nonperforming Assets and Past Due Loans
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans and
other real estate owned, totaled $36.9 million at March 31, 1998, decreasing 1
percent from December 31, 1997, as nonaccrual loans decreased $774,000 and
other real estate increased by 6 percent. At March 31, 1998, the allowance for
loan losses as a percentage of nonperforming loans was 423 percent as compared
to 412 percent at December 31, 1997. The allowance for loan losses as a
percentage of nonperforming loans and accruing loans ninety days or more past
due decreased from 287 percent at December 31, 1997, to 270 percent at March
31, 1998.
Nonperforming assets as a percentage of total loans and other real estate
owned decreased slightly to 0.41 percent at March 31, 1998, from 0.42 percent
at December 31, 1997. The amount recorded in other repossessed assets at March
31, 1998, was $489,000, relatively unchanged from $472,000 at December 31,
1997. Loans past due ninety days or more but still accruing interest increased
26 percent from $13.4 million at December 31, 1997, to $17.0 million at March
31, 1998, representing 0.19 percent of total loans.
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 March 31, 1998, were $14.5 billion, up 3 percent from
December 31, 1997, as an increase in earning assets more than offset a decrease
in cash and due from banks. Retained earnings remained the primary source of
growth for the Company's capital base.
Assets and Funding
At March 31, 1998, earning assets totaled $13.2 billion, up from $12.7
billion at December 31, 1997, an increase of 4 percent. The mix of earning
assets shifted moderately toward investment securities in the first three
months of 1998 with total investment securities comprising 28 percent of total
earning assets at March 31, 1998, unchanged from December 31, 1997, while the
percentage of earning assets represented by loans decreased to 68 percent from
70 percent.
A $311 million increase in total deposits and a $240 million increase in
accrued expenses and other liabilities during the first three months of 1997
was partially offset by a $115 million decrease in federal funds purchased and
securities sold under agreements to repurchase. The increase in accrued
expenses and other liabilities was principally due to investment securities
purchases with trade dates prior to March 31, 1998, that did not settle until
April. At March 31, 1998, deposits accounted for 72 percent of the Company's
funding, unchanged from year end.
Liquidity and Capital Resources
Net cash provided by operating activities totaled $272 million for the three
months ended March 31, 1998. Net cash used by investing activities of $466
million consisted of proceeds from maturities/calls of investment securities of
$205 million, proceeds from maturities/calls of securities available for sale
of $195 million and proceeds from sales of securities available for sale of
$468 million. Cash outflows consisted of $995 million in purchases of
investment securities available for sale, $50 million in purchases of
investment securities, a $58 million increase in loans outstanding, and an
increase in federal funds sold and securities purchased under agreements to
resell of $219 million. Net cash provided by financing activities of $147
million consisted of a $311 million increase in deposits and an increase in
securities sold under agreements to repurchase of $202 million, reduced by
decreases in federal funds purchased and short-term borrowings of $316 million
and $30 million, respectively, and the payment of $18 million in common stock
dividends.
Total shareholders' equity at March 31, 1998, was 7.16 percent of total
assets compared to 7.15 percent at December 31, 1997. During the first quarter
of 1998, 1997 and 1996, the Company issued restricted stock to certain
executive officers that vests ratably over periods ranging from three to five
years. Due to the fact that the restricted stock is considered issued and
outstanding and is reflected in common stock and surplus, shareholders' equity
has been reduced by the unvested portion of the stock granted, as required by
generally accepted accounting principles.
The leverage ratio, defined as period-end common equity and the Capital
Securities adjusted for goodwill divided by average quarterly assets adjusted
for goodwill, was 7.54 percent at March 31, 1998 and 7.40 percent at December
31, 1997. Similarly, the Company's tangible leverage ratio, defined as period-
end common equity and the Capital Securities adjusted for all intangibles
divided by average quarterly assets adjusted for all intangibles, increased
from 7.29 percent at December 31, 1997 to 7.44 percent at March 31, 1998.
Tier I capital and total qualifying capital (Tier I capital plus Tier II
capital), as defined by regulatory agencies, as of March 31, 1998, 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 March 31, 1998,
were 9.95 percent and 12.37 percent, respectively, compared to 9.91 percent and
12.39 percent at December 31, 1997. 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 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>
Three Months Ended
March 31
----------------------------
1998 1997
------------- -----------
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 126,506 $ 123,924
Add: Provision charged to earnings 6,811 5,605
Deduct: Loans charged off 8,529 7,095
Loan recoveries (1,695) (1,659)
---------- ----------
Net charge-offs 6,834 5,436
---------- ----------
Balance at end of period $ 126,483 $ 124,093
========== ==========
Net charge-offs as a percentage of
average loans (annualized) 0.31% 0.27%
Recoveries as a percentage of charge-offs 19.87% 23.38%
</TABLE>
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------------ -----------
<S> <C> <C>
NONPERFORMING ASSETS
Nonaccrual loans $ 27,595 $ 28,369
Renegotiated loans 2,315 2,334
---------- ----------
Total nonperforming loans 29,910 30,703
Other real estate 7,002 6,581
---------- ----------
Total nonperforming assets $ 36,912 $ 37,284
========== ==========
Accruing loans ninety days past due $ 16,986 $ 13,428
Other repossessed assets 489 472
Allowance for loan losses 126,483 126,506
Allowance as a percentage of loans 1.40% 1.41%
Total nonperforming loans as a percentage
of loans 0.33% 0.34%
Total nonperforming assets as a percentage
of loans and ORE 0.41% 0.42%
Accruing loans ninety days past due as a
percentage of loans 0.19% 0.15%
Allowance for loan losses as a percentage of
nonperforming loans 422.88% 412.03%
Allowance for loan losses as a percentage of
nonperforming assets 342.66% 339.30%
</TABLE>
<PAGE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION Page
- -------------------------------------------------------------------- ----
Item 1 Legal Proceedings
During the ordinary course of business, the Company is subject
to legal proceedings which involve claims for substantial
monetary relief. However, based upon the advice of legal counsel,
management is of the opinion that any legal proceedings,
individually or in the aggregate, will not have a material
adverse effect on the Company's financial condition or results of
operations.
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) Compass Bancshares, Inc. 1996 Long Term Incentive
Plan (incorporated by reference to Exhibit 4(g) to the
Company's Registration Statement on Form S-8,
Registration No. 333-15117, filed October 30, 1996,
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)
(10)(i) Employment Agreement, dated December 14, 1994,
between Compass Bancshares, Inc. and G. Ray Stone
(incorporated by reference to Exhibit 10(i) to the
Company's Registration Statement on Form S-4,
Registration No. 333-15373, filed November 1, 1996,
with the Securities and Exchange Commission)
<PAGE>
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION Page
- -------------------------------------------------------------------- ----
Item 6 Exhibits and Reports on Form 8-K (continued)
(10)(j) Compass Bancshares, Inc., Employee Stock Ownership
Benefit Restoration Plan, dated as of May 1, 1997
(incorporated by reference to Exhibit 10(j) to the
December 31, 1997 Form 10-K filed with the Commission)
(10)(k) Compass Bancshares, Inc., Supplemental Retirement
Plan, dated as of May 1, 1997 (incorporated by
reference to Exhibit 10(k) to the December 31, 1997
Form 10-K filed with the Commission)
(10)(l) Deferred Compensation Plan for Compass Bancshares,
Inc., dated as of February 1, 1996 (incorporated by
reference to Exhibit 10(l) to the December 31, 1997
Form 10-K filed with the Commission)
(12) Ratio of Earnings to Fixed Charges 20
(27) Financial Data Schedule (Filed electronically only)
(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.
May 14, 1998 /s/ GARRETT R. HEGEL
- ------------ ---------------------------
Date By Garrett R. Hegel, as its
Chief Financial Officer
<TABLE>
Exhibit (12)
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Ratio of Earnings to Fixed Charges
(in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Pretax income $ 65,063 $ 60,106
Add fixed charges:
Interest on deposits 90,217 89,307
Interest on borrowings 34,911 25,160
Portion of rental expense
representing interest expense 1,369 1,162
---------- ----------
Total fixed charges 126,497 115,629
---------- ----------
Income before fixed charges $ 191,560 $ 175,735
========== ==========
Pretax income $ 65,063 $ 60,106
Add fixed charges (excluding
interest on deposits):
Interest on borrowings 34,911 25,160
Portion of rental expense
representing interest expense 1,369 1,162
---------- ----------
Total fixed charges 36,280 26,322
---------- ----------
Income before fixed charges
(excluding interest on deposits) $ 101,343 $ 86,428
========== ==========
RATIO OF EARNINGS TO FIXED CHARGES:
Including interest on deposits 1.51x 1.52x
Excluding interest on deposits 2.79x 3.28x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND RELATED SUPPLEMENTAL
SCHEDULES OF COMPASS BANCSHARES, INC. AS OF AND FOR THE PERIOD ENDED MARCH 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
AND RELATED SUPPLEMENTAL SCHEDULES.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 692,252
<INT-BEARING-DEPOSITS> 1,001
<FED-FUNDS-SOLD> 353,223
<TRADING-ASSETS> 101,901
<INVESTMENTS-HELD-FOR-SALE> 2,756,968
<INVESTMENTS-CARRYING> 941,348
<INVESTMENTS-MARKET> 1,114,415
<LOANS> 9,016,427
<ALLOWANCE> 126,483
<TOTAL-ASSETS> 14,504,899
<DEPOSITS> 10,493,112
<SHORT-TERM> 1,210,497
<LIABILITIES-OTHER> 375,825
<LONG-TERM> 1,387,086
0
0
<COMMON> 140,046
<OTHER-SE> 898,333
<TOTAL-LIABILITIES-AND-EQUITY> 14,504,899
<INTEREST-LOAN> 192,205
<INTEREST-INVEST> 57,793
<INTEREST-OTHER> 2,819
<INTEREST-TOTAL> 252,817
<INTEREST-DEPOSIT> 90,217
<INTEREST-EXPENSE> 125,128
<INTEREST-INCOME-NET> 127,689
<LOAN-LOSSES> 6,811
<SECURITIES-GAINS> 2,017
<EXPENSE-OTHER> 108,480
<INCOME-PRETAX> 65,063
<INCOME-PRE-EXTRAORDINARY> 42,949
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,949
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.61
<YIELD-ACTUAL> 4.14
<LOANS-NON> 27,595
<LOANS-PAST> 16,986
<LOANS-TROUBLED> 2,315
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 126,506
<CHARGE-OFFS> 8,529
<RECOVERIES> 1,695
<ALLOWANCE-CLOSE> 126,483
<ALLOWANCE-DOMESTIC> 126,483
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
