COMPASS BANCSHARES INC
10-Q, 2000-05-15
NATIONAL COMMERCIAL BANKS
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TABLE OF CONTENTS

FINANCIAL STATEMENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 1 LEGAL PROCEEDINGS
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES

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, 2000 Commission File No. 0-6032

[COMPASS BANCSHARES, INC. LOGO]

(Exact name of registrant as specified in its charter)

     
Delaware 63-0593897
(State of Incorporation) (I.R.S. Employer Identification No.)

15 South 20th Street
Birmingham, Alabama 35233
(Address of principal executive offices)

(205) 933-3000
(Registrant’s telephone number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

     
Title of each class Name of each exchange on which 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, 2000
Common Stock, $2 Par Value 120,646,534

The number of pages of this report is 21.

 

Table of Contents

COMPASS BANCSHARES, INC. AND SUBSIDIARIES

INDEX

             
PART I. FINANCIAL INFORMATION Page
Item 1 Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2 Management’s Discussion and Analysis of Results of Operations and Financial Condition 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
PART II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 6 Exhibits and Reports on Form 8-K 19

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
(Unaudited)

                       
March 31, 2000 December 31, 1999
Assets
Cash and due from banks $ 701,282 $ 700,146
Federal funds sold and securities purchased under agreements to resell 68,672 118,937
Trading account securities 38,416 50,705
Investment securities available for sale 4,483,052 4,218,435
Investment securities (fair value of $1,470,190 and $1,501,320 for 2000 and 1999, respectively) 1,532,829 1,560,379
Loans 10,771,904 10,936,609
Allowance for loan losses (146,100 ) (145,890 )
Net loans 10,625,804 10,790,719
Premises and equipment, net 413,799 405,321
Other assets 602,924 600,880
Total assets $ 18,466,778 $ 18,445,522
Liabilities and Shareholders’ Equity
Deposits:
Noninterest bearing $ 2,859,229 $ 2,711,598
Interest bearing 10,621,494 10,338,001
Total deposits 13,480,723 13,049,599
Federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings 1,166,196 1,515,122
Long-term debt:
FHLB and other borrowings 2,365,173 2,465,127
Guaranteed preferred beneficial interests in Company’s junior subordinated deferrable interest debentures 100,000 100,000
Accrued expenses and other liabilities 103,588 86,449
Total liabilities 17,215,680 17,216,297
Shareholders’ equity:
Preferred stock — —
Common stock of $2 par value:
Authorized—200,000,000 shares; Issued—117,221,272 shares in 2000 and 117,042,020 shares in 1999 234,443 234,084
Surplus 140,546 138,493
Loans to finance stock purchases (1,820 ) (1,715 )
Unearned restricted stock (3,527 ) (2,746 )
Accumulated other comprehensive loss (102,730 ) (93,198 )
Retained earnings 984,186 954,307
Total shareholders’ equity 1,251,098 1,229,225
Total liabilities and shareholders’ equity $ 18,466,778 $ 18,445,522

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands Except Per Share Data)
(Unaudited)

                             
Three Months Ended
March 31
2000 1999
Interest income:
Interest and fees on loans $ 235,502 $ 204,679
Interest on investment securities available for sale 71,263 64,076
Interest on investment securities 26,186 31,680
Interest on federal funds sold, securities purchased under agreements to resell and other earning assets 1,794 2,074
Total interest income 334,745 302,509
Interest expense:
Interest on deposits 113,183 99,954
Interest on federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings 20,593 18,789
Interest on FHLB borrowings and other long-term debt 36,905 26,958
Total interest expense 170,681 145,701
Net interest income 164,064 156,808
Provision for loan losses 9,623 6,555
Net interest income after provision for loan losses 154,441 150,253
Noninterest income:
Service charges on deposit accounts 28,738 22,171
Credit card service charges and fees 5,955 3,903
Retail investment sales 5,335 5,222
Asset management fees 4,733 4,695
Trading account profits and commissions 2,179 3,610
Investment securities gains, net — 2,063
Other 18,987 16,100
Total noninterest income 65,927 57,764
Noninterest expense:
Salaries, benefits and commissions 70,549 67,501
Equipment expense 11,429 10,070
Net occupancy expense 10,457 9,502
Professional services 8,057 8,195
Merger and integration 2,702 1,508
Other 31,582 28,003
Total noninterest expense 134,776 124,779
Net income before income tax expense 85,592 83,238
Income tax expense 29,470 27,859
Net income $ 56,122 $ 55,379
Basic earnings per share $ 0.48 $ 0.46
Basic weighted average shares outstanding 116,905 116,562
Diluted earnings per share $ 0.48 $ 0.46
Diluted weighted average shares outstanding 117,450 117,506
Dividends per share $ 0.22 $ 0.20

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

                         
Three Months Ended
March 31
2000 1999
Operating Activities:
Net income $ 56,122 $ 55,379
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization 16,112 13,208
Accretion of discount and loan fees (2,811 ) (3,362 )
Provision for loan losses 9,623 6,555
Net change in trading account securities 12,289 58,061
Gain on sale of securities available for sale — (2,063 )
Loss on sale/writeoff of premises and equipment 473 40
Gain on sale of other real estate owned (808 ) (168 )
Increase in other assets (4,227 ) (10,985 )
Increase in other payables 22,921 4,327
Net cash provided by operating activities 109,694 120,992
Investing Activities:
Proceeds from maturities of investment securities 35,734 166,954
Purchases of investment securities (7,924 ) —
Proceeds from sales of securities available for sale 13,221 291,541
Proceeds from maturities of securities available for sale 178,628 318,703
Purchases of securities available for sale (2,660 ) (520,737 )
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell 50,265 (6,464 )
Net increase in loan portfolio (319,097 ) (216,846 )
Purchases of premises and equipment (16,282 ) (13,249 )
Proceeds from sales of other real estate owned 2,775 1,698
Net cash provided (used) by investing activities (65,340 ) 21,600

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows — Continued
(In Thousands)
(Unaudited)

                             
Three Months Ended
March 31
2000 1999
Financing Activities:
Net increase in demand deposits, NOW accounts and savings accounts 116,312 211,704
Net increase (decrease) in time deposits 314,812 (87,853 )
Net decrease in federal funds purchased and securities sold under agreements to repurchase (400,888 ) (238,540 )
Net increase (decrease) in short-term borrowings 51,962 (352 )
Repayment of FHLB advances and other borrowings (100,037 ) (10,063 )
Redemption of Preferred Stock — (17,768 )
Common and preferred dividends paid (26,227 ) (23,096 )
Repayment of loans to finance stock purchases 414 925
Proceeds from exercise of stock options 434 389
Net cash used by financing activities (43,218 ) (164,654 )
Net increase (decrease) in cash and due from banks 1,136 (22,062 )
Cash and due from banks at beginning of period 700,146 845,959
Cash and due from banks at end of period $ 701,282 $ 823,897
Schedule of noncash investing and financing activities:
Transfers of loans to other real estate owned $ 7,421 $ 2,499
Loans to facilitate the sale of other real estate owned 2,495 287
Assets retained in loan securitization 469,463 516,997
Loans to finance stock purchases 519 577
Change in unrealized gain (loss) on available-for-sale securities (15,314 ) (17,053 )
Issuance of restricted stock, net of cancellations 1,443 1,640
Purchases of securities, not yet settled — 125,799

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)

                       
Three Months Ended
March 31
2000 1999
Net income $ 56,122 $ 55,379
Other comprehensive income (loss), before tax:
Unrealized holding loss on securities available for sale, net (15,314 ) (14,990 )
Less reclassification adjustment for gains on securities available for sale — 2,063
Total other comprehensive loss, before tax (15,314 ) (17,053 )
Income tax expense (benefit) related to other comprehensive income:
Unrealized holding loss on securities available for sale, net (5,782 ) (5,643 )
Less reclassification adjustment for gains on securities available for sale — 775
Total income tax benefit related to other comprehensive loss (5,782 ) (6,418 )
Total other comprehensive loss, net of tax (9,532 ) (10,635 )
Total comprehensive income $ 46,590 $ 44,744

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements

NOTE 1 — General

      The consolidated financial statements of Compass Bancshares, Inc. (the “Company”) 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 of interim periods 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, 1999.

NOTE 2 — Business Combinations

      On January 13, 2000, the Company completed the merger with Western Bancshares, Inc. in Albuquerque, New Mexico, with assets in excess of $300 million. The transaction was accounted for under the pooling-of-interests method of accounting. All prior information has been restated.

NOTE 3 – Transactions Pending

      On April 3, 2000, the Company completed the merger with MegaBank Financial Corporation (“MegaBank”) in Denver, Colorado, with assets in excess of $300 million. The transaction will be accounted for under the pooling-of-interests method of accounting.

      On April 18, 2000, the Company announced it signed a definitive agreement to acquire Founders Bank of Arizona in Phoenix. Founders has assets of approximately $400 million. Under the terms of the definitive agreement, the Company will acquire Founders in a cash transaction. The transaction is subject to regulatory approvals. The purchase is expected to close in the third quarter of 2000.

      During March, 2000, the Company entered into a sales agreement for three East Texas branches with deposits in excess of $100 million. The transaction is subject to regulatory approvals. The sale is expected to be completed in the second quarter of 2000.

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 interest debentures of the Company which carry 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.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

      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 and indenture). 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.

Capital Securities of Pending Merger

      In February 1998, MB Capital I, a special-purpose wholly-owned Delaware trust subsidiary of MegaBank, completed an offering of 1,200,000 shares (issue price of $10 per share) totaling $12.0 million of fixed-rate 8.75%Cumulative Trust Preferred Securities (Preferred Securities), which are guaranteed by MegaBank. MB Capital I invested the total proceeds it received in 8.75% Junior Subordinated Deferrable Interest Debentures (Debentures) issued by MegaBank. Interest paid on the Debentures will be distributed to the holders of the Preferred Securities. These Debentures are unsecured and rank junior and are subordinate in right of payment to all senior debt of MegaBank.

      The distribution rate payable on the Preferred Securities is cumulative and payable quarterly in arrears. MegaBank has the right, subject to events of default, to defer payments of interest on the Debentures at any time by extending the interest payment period for a period not exceeding 20 consecutive quarters with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the Debentures. The Preferred Securities are subject to mandatory redemption upon repayment of the Debentures. The Debentures mature on February 9, 2028, which may be shortened to not earlier than February 9, 2003, if certain conditions are met, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of MB Capital I, the Debentures or the Preferred Securities. MegaBank has the right to terminate MB Capital I and cause the Debentures to be distributed to the holders of the Capital Securities in liquidation of such trust.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

NOTE 5 — Earnings Per Share

                   
Three Months Ended
March 31
2000 1999
(In Thousands Except Per Share Data)
(Unaudited)
BASIC EARNINGS PER SHARE:
Net income $ 56,122 $ 55,379
Less: Dividends on non-convertible and convertible preferred stock and redemption premium — 1,213
Net income available to common shareholders $ 56,122 $ 54,166
Weighted average shares outstanding 116,905 116,562
Basic earnings per share $ 0.48 $ 0.46
DILUTED EARNINGS PER SHARE:
Net income $ 56,122 $ 55,379
Less: Dividends on non-convertible preferred stock and redemption premium — 1,213
Net income available to common shareholders and assumed conversions $ 56,122 $ 54,166
Weighted average shares outstanding 116,905 116,562
 
Net effect of the assumed exercise of nonvested restricted stock and stock options — based on the treasury stock method using average market price for the period 545 944
Total weighted average shares and common stock equivalents outstanding 117,450 117,506
Diluted earnings per share $ 0.48 $ 0.46

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements — Continued

NOTE 6 – Segment Information

      The Company’s segment information is presented by line of business. Each line of business is a strategic unit that serves a particular group of customers that have certain common characteristics, through various products and services. The segment results include certain overhead allocations and intercompany transactions. All intercompany transactions have been eliminated to determine the consolidated balances. The Company’s reportable operating segments are Corporate Banking, Community Banking, Retail Banking, Asset Management, and Treasury.

      The Corporate Banking segment is responsible for providing a full array of banking and investment services to business banking, commercial banking, and other institutional clients in each of the Company’s major metropolitan markets. The Corporate Banking segment also includes a National Industries unit that is responsible for serving larger national accounts, principally in targeted industries. In addition to traditional credit and deposit products, the Corporate Banking segment also supports its customers with capabilities in treasury management, leasing, accounts receivable purchasing, asset-based lending, international services, and interest rate protection and investment products.

      The Community Banking segment is responsible for serving the Company’s non-metropolitan markets and provides the same products and services offered by the Corporate Banking, Retail Banking, and Asset Management segments.

      The Retail Banking segment serves the Company’s consumer customers in each of its major metropolitan markets through an extensive banking office network and through the use of alternative delivery channels such as PC Banking, the internet, and telephone banking. The Retail Banking segment provides individuals with comprehensive products and services, including home mortgages, credit cards, deposit accounts, mutual funds, and brokerage and insurance. In addition, Retail Banking also serves the Company’s small business customers.

      The Asset Management segment provides specialized investment portfolio management, traditional credit products, financial counseling, and customized services to the Company’s private clients and foundations as well as investment management and retirement services to companies and their employees. The Asset Management segment is also the discretionary investment manager of Expedition Funds, the Company’s family of proprietary mutual funds.

      The Treasury segment’s primary function is to manage the investment securities portfolio, certain residential real estate loans, public entity deposits, and liquidity and funding positions of the Company.

      Corporate Support and Other includes activities that are not directly attributable to the reportable segments. Included in this category are the activities of the parent company and support functions, i.e., accounting, loan review, etc., along with the Company’s indirect automobile portfolio and the elimination of intercompany transactions.

      The following tables present the segment information for the Company’s segments as of and for the periods ended March 31, 2000 and 1999. There have been changes to the structure of the reportable segments; the corresponding information for earlier periods has been restated.

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For the Three Months ended March 31, 2000
(in Thousands)
Corporate
Corporate Community Retail Asset Support and
Banking Banking Banking Management Treasury Other Consolidated
Income Statement
Net interest income $ 53,453 $ 22,525 $ 55,169 $ 9,726 $ 18,115 $ 5,076 $ 164,064
Noninterest income 8,698 9,596 37,096 5,993 3,025 1,519 65,927
Noninterest expense 18,869 13,338 47,829 7,086 1,271 46,383 134,776
Segment net income 42,282 18,783 44,436 8,633 19,869 (39,788 ) 95,215
Provision for loan losses 9,623
Net income before income tax expense 85,592
Income tax expense 29,470
Net income $ 56,122
Balance Sheet
Average assets $ 5,567,045 $ 1,298,232 $ 1,614,083 $ 602,070 $ 7,190,086 $ 2,135,285 $ 18,406,801
Average loans 5,454,108 1,246,660 1,444,222 592,546 1,108,546 1,090,198 10,936,280
Average deposits 2,292,335 2,984,588 6,406,051 892,206 417,286 46,153 13,038,619
Period-end assets $ 5,725,526 $ 1,335,985 $ 1,526,556 $ 589,066 $ 7,155,962 $ 2,133,683 $ 18,466,778
Period-end loans 5,612,491 1,284,637 1,382,458 580,164 805,178 1,106,976 10,771,904
Period-end deposits 2,525,746 3,017,745 6,520,133 925,946 447,537 43,616 13,480,723
                                                           
For the Three Months ended March 31, 1999
(in Thousands)
Corporate
Corporate Community Retail Asset Support and
Banking Banking Banking Management Treasury Other Consolidated
Income Statement
Net interest income $ 45,976 $ 20,388 $ 45,301 $ 8,535 $ 26,056 $ 10,552 $ 156,808
Noninterest income 9,867 8,882 28,694 5,665 4,040 616 57,764
Noninterest expense 18,472 13,884 41,380 6,215 1,084 43,744 124,779
Segment net income 37,371 15,386 32,615 7,985 29,012 (32,576 ) 89,793
Provision for loan losses 6,555
Net income before income tax expense 83,238
Income tax expense 27,859
Net income $ 55,379
Balance Sheet
Average assets $ 4,754,131 $ 1,207,146 $ 1,277,401 $ 501,279 $ 7,935,773 $ 1,592,271 $ 17,268,001
Average loans 4,612,648 1,108,814 1,130,723 492,616 1,343,634 1,249,885 9,938,320
Average deposits 1,847,740 2,917,817 6,139,941 866,416 404,572 10,183 12,186,669
Period-end assets $ 4,802,413 $ 1,219,648 $ 1,270,292 $ 466,059 $ 8,170,589 $ 1,648,943 $ 17,577,944
Period-end loans 4,671,796 1,077,939 1,138,195 458,539 1,298,070 1,290,459 9,934,998
Period-end deposits 1,936,677 2,942,138 6,246,712 890,857 344,939 12,377 12,373,700

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Results of Operations

Forward-Looking Information

      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 reasons 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.

Overview

      Net income for the quarter ended March 31, 2000, increased to $56.1 million while diluted earnings per share increased four percent to $0.48 per share. Net interest income increased five percent to $164.1 million from the first quarter of 1999. Noninterest income increased 14 percent to $65.9 million while noninterest expense increased 8 percent to $134.8 million.

Net Interest Income

      Net interest income for the quarter ended March 31, 2000, increased $7.3 million over the first quarter of 1999 to $164.1 million with interest income and interest expense increasing $32.2 million and $25.0 million, respectively. The increase in interest income was primarily due to an increase in average earning assets of $1.1 billion, or seven percent, and a 20 basis point increase in the average yield on earning assets from 7.73 percent to 7.93 percent. Average loans, excluding the impact of branch and bank purchases and securitizations, grew 18 percent from the first quarter of 1999. On a reported basis, average loans increased 10 percent from the first quarter of 1999. The average balance of investment securities available for sale increased 13 percent, or $497.3 million, due principally to retained securitized loans. The 17 percent increase in interest expense during the quarter was a result of a $931.1 million increase in average interest bearing liabilities, primarily savings accounts and FHLB and other borrowings, and a 38 basis point increase in the rate paid on interest bearing liabilities.

      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 2000, the net interest margin, on a tax-equivalent basis, was 3.90 percent compared to 4.02 percent for the same period in 1999. This decrease resulted from the changes in rates and volumes of earning assets and the corresponding funding sources noted previously.

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During the first quarter of 2000, the Company’s net interest margin was not significantly impacted by the Company’s use of interest rate contracts. The first quarter of 1999 was positively impacted by the Company’s use of interest rate contracts, increasing net interest income by 11 basis points, or $4.5 million.

      The following table details 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, 2000, as compared to March 31, 1999 (in thousands):

                                     
Three Months Ended
March 31, 2000
Change
1999 Attributed to
to
2000 Volume Rate Mix
Interest income:
Loans $ 30,757 $ 20,565 $ 9,262 $ 930
Investment securities (5,582 ) (5,823 ) 294 (53 )
Investment securities available for sale 7,377 8,142 (679 ) (86 )
Trading account securities (520 ) (660 ) 274 (134 )
Fed funds and resale agreements 236 99 121 16
Increase in interest income $ 32,268 $ 22,323 $ 9,272 $ 673
Interest expense:
Deposits $ 13,229 $ 6,354 $ 6,397 $ 478
Fed funds purchased and repos (636 ) (3,545 ) 3,670 (761 )
Other short-term borrowings 2,440 1,643 404 393
FHLB and other borrowings* 9,947 6,657 2,638 652
Increase in interest expense $ 24,980 $ 11,109 $ 13,109 $ 762

*   Includes Capital Securities.

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Noninterest Income and Noninterest Expense

      During the first quarter of 2000, noninterest income increased $8.2 million, or 14 percent, to $65.9 million, due primarily to a $6.6 million increase in service charges on deposit accounts, a $2.1 million increase in credit card service charges and fees and a $2.9 million increase in other noninterest income. These increases were partially offset by a $1.4 million decrease in trading account profits and commissions and a $2.1 million decrease in securities gains. The increase in service charges on deposit accounts was primarily due to the increase in deposits, the increase in service charges and fees on credit cards was partially due to increased interchange income and the increase in other noninterest income was due in large part to increased other miscellaneous fees.

      Noninterest expense increased $10.0 million, or 8 percent, during the first quarter, primarily due to a 5 percent increase in salaries, benefits and commissions expense, a 14 percent increase in equipment expense, and a 13 percent increase in other noninterest expense. These increases are due in large part to the Company’s branch acquisition in April 1999, Hartland Bank acquisition in October 1999, increased computer equipment depreciation and software amortization, and normal internal growth.

Income Taxes

      Income tax expense increased by $1.6 million, or six percent, during the first three months of 2000 compared to the same period in 1999 as pretax income increased three percent. The effective tax rate for the first three months of 2000 was 34.4 percent, compared to 33.5 percent for the same period in 1999.

Provision and Allowance for Loan Losses

      The provision for loan losses for the three months ended March 31, 2000, increased $3.1 million from the same period in 1999. Net loan charge-offs expressed as an annualized percentage of average loans for the first three months of 2000 were 0.35 percent, up from 0.26 percent for the first three months of 1999. 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, 2000, was $146.1 million. The ratio of the allowance for loan losses to loans outstanding was 1.36 percent at March 31, 2000, up from 1.33 percent at December 31, 1999.

Nonperforming Assets and Past Due Loans

      Nonperforming assets, comprised of nonaccrual loans, renegotiated loans and other real estate owned, totaled $81.3 million at March 31, 2000, a slight decrease from December 31, 1999, as nonaccrual loans decreased $3.8 million, or five percent and other real estate increased $3.2 million. At March 31, 2000, the allowance for loan losses as a percentage of nonperforming loans was 206 percent, up from 195 percent at December 31, 1999. The allowance for loan losses as a percentage of nonperforming assets also increased slightly from 178 percent at December 31, 1999, to 180 percent at March 31, 2000.

      Nonperforming assets as a percentage of total loans and other real estate owned remained unchanged at 0.75 percent at March 31, 2000 and December 31, 1999. The amount recorded in other repossessed assets at March 31, 2000, was $1.5 million, down 13 percent from $1.7 million at December 31, 1999. Loans past due ninety days or more but still accruing interest increased seven percent from $13.3 million at December 31, 1999, to $14.2 million at March 31, 2000. The increase in the level of loans past due ninety days or more was concentrated in the commercial portfolio.

      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.

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Financial Condition

Overview

      Total assets at March 31, 2000, were $18.5 billion, relatively unchanged from December 31, 1999. During the quarter, the Company completed the merger with Western Bancshares, Inc. in Albuquerque, New Mexico, with assets in excess of $300 million. The transaction was accounted for under the pooling-of-interests method of accounting. All prior information has been restated.

Assets and Funding

      At March 31, 2000, earning assets totaled $16.9 billion, unchanged from December 31, 1999. The mix of earning assets shifted moderately toward investment securities with total investment securities comprising 36 percent of total earning assets at March 31, 2000, up from 34 percent at December 31, 1999. This increase was primarily due to assets retained in a mortgage loan securitization completed in the first quarter of 2000, totaling approximately $470 million. Increases in noninterest and interest bearing deposits were partially offset by decreases in short-term borrowings. At March 31, 2000, deposits accounted for 79 percent of the Company’s funding, up from 76 percent at year-end.

Liquidity and Capital Resources

      Net cash provided by operating activities totaled $110 million for the three months ended March 31, 2000. Net cash used by investing activities of $65 million consisted primarily of a $319 million increase in loans outstanding offset by proceeds from maturities of investment securities of $36 million, and proceeds from maturities of securities available for sale of $179 million. Net cash used by financing activities of $43 million consisted of a $431 million increase in deposits reduced by a $401 million decrease in federal funds purchased and securities sold under agreements to repurchase, by a decrease in FHLB and other borrowings of $100 million, and the payment of $26 million in common stock dividends.

      Total shareholders’ equity at March 31, 2000, was 6.77 percent of total assets compared to 6.66 percent at December 31, 1999 due to a $30 million increase in retained earnings, partially offset by a $10 million increase in accumulated other comprehensive loss. 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 6.68 percent at March 31, 2000 and 6.52 percent at December 31, 1999. 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, was 6.61 percent at March 31, 2000 compared to 6.45 percent at December 31, 1999.

      Tier I capital and total qualifying capital (Tier I capital plus Tier II capital), as defined by regulatory agencies, as of March 31, 2000, exceeded the target ratios for well capitalized of 6.00 percent and 10.00 percent, respectively, under current regulations. The Tier I and total qualifying capital ratios at March 31, 2000, were 8.34 percent and 11.78 percent, respectively, compared to 8.19 percent and 11.65 percent at December 31, 1999. 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.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Allowance for Loan Losses/Nonperforming Assets
(In Thousands)
(Unaudited)

                     
Three Months Ended
March 31
2000 1999
Allowance for Loan Losses
Balance at beginning of period $ 145,890 $ 139,423
Add: Provision charged to earnings 9,623 6,555
Deduct: Loans charged off 11,894 9,110
 Loan recoveries (2,481 ) (2,813 )
Net charge-offs 9,413 6,297
Balance at end of period $ 146,100 $ 139,681
Net charge-offs as a percentage of average loans (annualized) 0.35 % 0.26 %
Recoveries as a percentage of charge-offs 20.86 % 30.88 %
                   
March 31, December 31,
2000 1999
Nonperforming Assets
Nonaccrual loans $ 70,787 $ 74,605
Renegotiated loans 102 239
Total nonperforming loans 70,889 74,844
Other real estate 10,429 7,250
Total nonperforming assets $ 81,318 $ 82,094
 
Accruing loans ninety days or more past due $ 14,236 $ 13,325
Other repossessed assets 1,457 1,678
Allowance for loan losses 146,100 145,890
 
Allowance as a percentage of loans 1.36 % 1.33 %
Total nonperforming loans as a percentage of loans 0.66 % 0.68 %
Total nonperforming assets as a percentage of loans and ORE 0.75 % 0.75 %
Accruing loans ninety days or more past due as a percentage of loans 0.13 % 0.12 %
Allowance for loan losses as a percentage of nonperforming loans 206.10 % 194.93 %
Allowance for loan losses as a percentage of nonperforming assets 179.67 % 177.71 %

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES
Quantitative and Qualitative Disclosures About Market Risk
(In thousands)
(Unaudited)

      The Company’s interest rate risk management policies and practices, along with the assumptions used in the net interest income sensitivity analysis, are described on pages 17 through 19 of its December 31, 1999 Form 10-K. Net interest income sensitivities over a one-year time horizon as of March 31, 2000 and December 31, 1999 are shown below.

                                           
Percentage Increase
(Decrease) in Interest
Income/Expense Given
Principal/Notional Immediate and
Amount of Earning Sustained Parallel
Assets, Interest
Bearing Liabilities Down 100 Up 100
And Swaps Basis Points Basis Points
March 31, 2000:
Assets which reprice in:
One year or less $ 6,302,701 (7.80 %) 7.72 %
Over one year 10,592,172 (1.82 ) 1.78
$ 16,894,873 (4.22 ) 4.17
Liabilities which reprice in:
One year or less $ 10,545,113 (14.99 ) 14.69
Over one year 3,707,750 (4.56 ) 4.66
$ 14,252,863 (11.61 ) 11.44
Total net interest income sensitivity 3.81 (3.74 )
 
December 31, 1999:
Assets which reprice in:
One year or less $ 6,628,301 (7.66 %) 7.73 %
Over one year 10,256,764 (1.74 ) 1.70
$ 16,885,065 (4.19 ) 4.19
Liabilities which reprice in:
One year or less $ 10,816,883 (14.75 ) 16.35
Over one year 3,601,367 (3.22 ) 3.85
$ 14,418,250 (11.10 ) 12.39
Total net interest income sensitivity 2.92 (4.25 )

      As shown in the table above, from December 31, 1999 to March 31, 2000 net interest income sensitivity improved in both the down-rate and up-rate scenarios. Sensitivity improved in the up-rate scenario both because of a shift in the funding mix away from wholesale funds to deposits and because of an extension in the maturity of time deposits. Sensitivity improved in the down-rate scenario due to a change in the callability of FHLB advances as a result of changes in market interest rates.

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COMPASS BANCSHARES, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

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
(3) Articles of Incorporation and By-Laws of Compass Bancshares, Inc.
(a) Restated Certificate of Incorporation of Compass Bancshares, Inc., dated May 17, 1982 (incorporated by reference to Exhibit 3(a) to the December 31, 1997 Form 10-K filed with the Commission)
(b) Certificate of Amendment, dated May 20, 1986, to Restated Certificate of Incorporation of Compass Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-4, Registration No. 33-46086 filed with the Commission)
(c) Certificate of Amendment, dated May 15, 1987, to Restated Certificate of Incorporation of Compass Bancshares, Inc. (incorporated by reference to Exhibit 3.1.2 to the Company’s Post-Effective Amendment No. 1 to Registration Statement on Form S-4, Registration No. 33-10797 filed with the Commission)
(d) Certificate of Amendment, dated September 19, 1994, to Restated Certificate of Incorporation of Compass Bancshares, Inc. (incorporated by reference to Exhibit 3.5(1) to the Company’s Registration Statement on Form S-4, Registration No. 33-55899 filed with the Commission)
(e) Certificate of Amendment, dated November 8, 1993 to Restated Certificate of Incorporation of Compass Bancshares, Inc. (incorporated by reference to Exhibit 3(d) to the Company’s Registration Statement on Form S-4, Registration No. 33-51919 filed with the Commission)
(f) Bylaws of Compass Bancshares, Inc. (Amended and Restated as of March 15, 1982) (incorporated by reference to Exhibit 3(f) to the December 31, 1997 Form 10-K filed with the Commission)
(10) Material Contracts
(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 Commission)
(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 Commission)
(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 Commission)

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(a) Exhibits (continued)
(d) Compass Bancshares, Inc., 1999 Omnibus Incentive Compensation Plan (incorporated by reference to Exhibit 10(a) to the Company’s Registration Statement on Form S-8, Registration No. 333-86455, filed September 2, 1999, with the Commission)
(e) Employment Agreement, dated December 14, 1994, between Compass Bancshares, Inc. and D. Paul Jones, Jr.
(f) Employment Agreement, dated December 14, 1994, between Compass Bancshares, Inc. and Jerry W. Powell
(g) Employment Agreement, dated December 14, 1994, between Compass Bancshares, Inc. and Garrett R. Hegel
(h) Employment Agreement, dated December 14, 1994, between Compass Bancshares, Inc. and Charles E. McMahen
(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-8, Registration No. 333-15373, filed November 1, 1996, with the Commission)
(j) Employment Agreement, dated November 24, 1997, between Compass Bancshares, Inc. and James D. Barri
(k) Compass Bancshares, Inc., Employee Stock Ownership Benefit Restoration Plan, date as of May 1, 1997 (incorporated by reference to Exhibit 10(j) to the December 31, 1999 Form 10-K filed with the Commission)
(l) Compass Bancshares, Inc., Supplemental Retirement Plan, dated as of May 1, 1997 (incorporated by reference to Exhibit 10(k) to the December 31, 1999 Form 10-K filed with the Commission)
(m) Deferred Compensation Plan for Compass Bancshares, Inc., dated as of February 1, 1996. (Amended and Restated as of May 1, 1998) (incorporated by reference to Exhibit 10(l) to the December 31, 1999 Form 10-K filed with the Commission)
(n) Compass Bancshares, Inc. Special Supplemental Retirement Plan, dated as of May 1, 1997. (Amended and Restated as of February 27, 2000)
(12) Statement Re: Computation of Ratios
(27) Financial Data Schedule

Certain financial statement schedules and exhibits have been omitted because they are not applicable.

(b) Reports on Form 8-K

None

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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 12, 2000 /s/GARRETT R. HEGEL
Date By Garrett R. Hegel, as its
Chief Financial Officer

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