<PAGE> 1
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, 2000 Commission File No. 0-6032
[LOGO-COMPASS BANCSHARES, INC.]
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, 2000
------------------------------------ ------------------------------------
Common Stock, $2 Par Value 120,919,900
The number of pages of this report is 26.
<PAGE> 2
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
-----------------------------------------------------------------------------------------------------------
<S> <C>
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income for the Three and Nine Months Ended September 30,
2000 and 1999 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 5
1999
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended
September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
-----------------------------------------------------------------------------------------------------------
Item 1 Legal Proceedings 23
Item 6 Exhibits and Reports on Form 8-K 23
</TABLE>
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<PAGE> 3
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------- -------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 672,572 $ 700,146
Federal funds sold and securities purchased
under agreements to resell 56,975 118,937
Trading account securities 42,740 50,705
Investment securities available for sale 4,361,268 4,218,435
Investment securities (fair value of $1,421,623 and
$1,501,320 for 2000 and 1999, respectively) 1,466,103 1,560,379
Loans 11,832,629 10,936,609
Allowance for loan losses (153,828) (145,890)
----------------- ----------------
Net loans 11,678,801 10,790,719
Premises and equipment, net 457,262 405,321
Other assets 673,608 600,880
----------------- ----------------
Total assets $ 19,409,329 $ 18,445,522
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 2,953,114 $ 2,711,598
Interest bearing 10,737,915 10,338,001
----------------- ----------------
Total deposits 13,691,029 13,049,599
Federal funds purchased, securities sold under
agreements to repurchase and other short-term
borrowings 2,063,915 1,515,122
Long-term debt:
FHLB and other borrowings 2,012,640 2,465,127
Guaranteed preferred beneficial interests in
Company's junior subordinated deferrable
interest debentures 112,000 100,000
Accrued expenses and other liabilities 140,198 86,449
----------------- ----------------
Total liabilities 18,019,782 17,216,297
Shareholders' equity:
Preferred stock -- --
Common stock of $2 par value:
Authorized--200,000,000 shares;
Issued--120,920,968 shares in 2000 and
117,042,020 shares in 1999 241,842 234,084
Surplus 150,763 138,493
Loans to finance stock purchases (1,842) (1,715)
Unearned restricted stock (2,523) (2,746)
Accumulated other comprehensive loss (72,660) (93,198)
Retained earnings 1,073,967 954,307
----------------- ----------------
Total shareholders' equity 1,389,547 1,229,225
----------------- ----------------
Total liabilities and shareholders' equity $ 19,409,329 $ 18,445,522
================= ================
</TABLE>
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<PAGE> 4
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------------- -------------------------------------
2000 1999 2000 1999
---------------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 266,317 $ 223,140 $ 753,364 $ 640,653
Interest on investment securities available for sale 74,991 69,321 221,108 200,503
Interest on investment securities 25,210 27,576 77,307 88,500
Interest on federal funds sold, securities purchased
under agreements to resell and other earning assets 1,283 1,964 4,680 6,381
---------- ---------- ---------- ----------
Total interest income 367,801 322,001 1,056,459 936,037
INTEREST EXPENSE:
Interest on deposits 131,857 108,453 370,537 310,750
Interest on federal funds purchased and securities
sold under agreements to repurchase and other
short-term borrowings 27,880 14,280 68,029 54,833
Interest on FHLB borrowings and other
long-term debt 36,774 32,964 110,196 85,339
---------- ---------- ---------- ----------
Total interest expense 196,511 155,697 548,762 450,922
---------- ---------- ---------- ----------
Net interest income 171,290 166,304 507,697 485,115
Provision for loan losses 10,357 8,124 37,163 23,188
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 160,933 158,180 470,534 461,927
NONINTEREST INCOME:
Service charges on deposit accounts 32,355 26,886 92,219 74,648
Credit card service charges and fees 7,851 4,963 20,673 13,485
Asset management fees 5,235 4,480 14,723 13,820
Retail investment sales 4,455 5,726 14,232 16,812
Trading account profits and commissions 1,840 2,156 5,175 8,054
Investment securities gains, net -- -- -- 2,098
Other 23,989 15,330 74,644 47,081
---------- ---------- ---------- ----------
Total noninterest income 75,725 59,541 221,666 175,998
NONINTEREST EXPENSE:
Salaries, benefits and commissions 71,117 68,401 213,682 200,004
Equipment expense 12,721 10,844 35,946 31,511
Net occupancy expense 11,342 10,101 32,712 29,036
Professional services 8,582 9,644 25,271 28,125
Merger and integration 2,683 1,480 7,672 4,606
Other 34,662 32,108 103,212 92,001
---------- ---------- ---------- ----------
Total noninterest expense 141,107 132,578 418,495 385,283
---------- ---------- ---------- ----------
Net income before income tax expense 95,551 85,143 273,705 252,642
Income tax expense 32,542 27,983 93,893 84,391
---------- ---------- ---------- ----------
NET INCOME $ 63,009 $ 57,160 $ 179,812 $ 168,251
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.53 $ 0.49 $ 1.51 $ 1.43
Basic weighted average shares outstanding 120,639 116,722 119,386 116,643
DILUTED EARNINGS PER SHARE $ 0.52 $ 0.48 $ 1.50 $ 1.41
Diluted weighted average shares outstanding 121,398 117,919 120,142 117,780
Dividends per share $ 0.22 $ 0.20 $ 0.66 $ 0.60
</TABLE>
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<PAGE> 5
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------------------------
2000 1999
------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 179,812 $ 168,251
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization 52,561 44,243
Accretion of discount and loan fees (12,693) (15,366)
Provision for loan losses 37,163 23,188
Net change in trading account securities 7,965 57,282
Gain on sale of securities available for sale -- (2,098)
(Gain) loss on sale / writeoff of premises and equipment 789 (282)
Gain on sale of other real estate owned (1,180) (531)
Gain on sale of branches (16,700) --
Increase in other assets (6,709) (22,717)
Increase in other payables 41,216 28,555
------------------- ---------------------
Net cash provided by operating activities 282,224 280,525
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 116,213 367,107
Purchases of investment securities (22,294) --
Proceeds from sales of securities available for sale 274,800 324,744
Proceeds from maturities of securities available for sale 571,272 788,881
Purchases of securities available for sale (369,997) (975,704)
Net (increase) decrease in federal funds sold and securities
purchased under agreements to resell 79,662 (33,501)
Net increase in loan portfolio (919,921) (1,140,690)
Net cash received (paid) in business combinations (47,620) 209,664
Net cash paid in sale of branches (137,726) --
Purchases of premises and equipment (55,980) (51,671)
Proceeds from sales of other real estate owned 7,624 5,802
------------------- ---------------------
Net cash used by investing activities (503,967) (505,368)
</TABLE>
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<PAGE> 6
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts
and savings accounts 29,301 158,364
Net increase in time deposits 200,980 199,475
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 485,855 (551,787)
Net increase in short-term borrowings 10,128 25,679
Proceeds from FHLB advances and other borrowings 900,000 1,076,753
Repayment of FHLB advances and other borrowings (1,354,370) (871,696)
Redemption of Preferred Stock -- (17,768)
Common and preferred dividends paid (79,368) (73,766)
Repayment of loans to finance stock purchases 472 2,780
Proceeds from exercise of stock options 1,171 1,587
----------- -----------
Net cash provided (used) by financing activities 194,169 (50,379)
----------- -----------
Net decrease in cash and due from banks (27,574) (275,222)
Cash and due from banks at beginning of period 700,146 845,959
----------- -----------
Cash and due from banks at end of period $ 672,572 $ 570,737
=========== ===========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of loans to other real estate owned $ 14,831 $ 5,725
Loans to facilitate the sale of other real estate owned 2,762 1,096
Assets retained in loan securitization 469,463 1,020,883
Loans to finance stock purchases 599 1,501
Change in unrealized gain (loss) on available-for-sale securities 34,046 (118,942)
Issuance of restricted stock, net of cancellations 1,610 1,640
Business combinations and divestitures:
Common stock issued 35,924 --
Assets acquired 776,075 173,105
Liabilities assumed 692,531 382,769
Liabilities sold 203,118 --
Assets sold 48,644 --
</TABLE>
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<PAGE> 7
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET INCOME $ 63,009 $ 57,160 $ 179,812 $ 168,251
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX:
Unrealized holding gain (loss) on securities
available for sale, net 44,321 (16,708) 34,046 (116,844)
Less reclassification adjustment for gains
on securities available for sale -- -- -- 2,098
--------- --------- --------- ---------
Total other comprehensive income (loss),
before tax 44,321 (16,708) 34,046 (118,942)
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME:
Unrealized holding gain (loss) on securities
available for sale, net 17,191 (5,276) 13,508 (43,066)
Less reclassification adjustment for gains
on securities available for sale -- -- -- 789
--------- --------- --------- ---------
Total income tax expense (benefit) related
to other comprehensive income 17,191 (5,276) 13,508 (43,855)
--------- --------- --------- ---------
Total other comprehensive income (loss),
net of tax 27,130 (11,432) 20,538 (75,087)
--------- --------- --------- ---------
TOTAL COMPREHENSIVE INCOME $ 90,139 $ 45,728 $ 200,350 $ 93,164
========= ========= ========= =========
</TABLE>
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<PAGE> 8
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 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 AND DIVESTITURES
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.
On April 3, 2000, the Company completed the merger with MegaBank Financial
Corporation in Denver, Colorado, with assets in excess of $300 million. The
transaction was accounted for under the pooling-of-interests method of
accounting. Prior-period information has not been restated due to immateriality.
On July 17, 2000, the Company completed the acquisition of Founders Bank
of Arizona ("Founders") in Phoenix, with assets of approximately $400 million.
The Company acquired all of the outstanding shares of Founders in exchange for
approximately $80 million in cash. The transaction was accounted for under the
purchase method of accounting. Intangible assets resulting from the purchase
totaled approximately $70 million.
On September 5, 2000, the Company announced the signing of a definitive
agreement to acquire FirsTier Corporation ("FirsTier"). FirsTier is the parent
of FirsTier Bank, an approximately $800 million asset bank primarily located in
the greater Denver area, and Firstate Bank, an $80 million bank in Nebraska.
Under the terms of the agreement, FirsTier shareholders will receive 6,800,000
shares of Compass common stock in exchange for all of the outstanding shares of
FirsTier. The transaction, pending shareholder and regulatory approval and the
satisfaction of the other conditions set forth in the definitive agreement, is
expected to close in the first quarter of 2001 and be accounted for under the
pooling-of-interests method of accounting.
On October 23, 2000 the Company signed a definitive agreement to acquire
Texas Insurance Agency, one of the largest independent insurance agencies in
Texas. Headquartered in San Antonio, Texas Insurance Agency specializes in
providing property and casualty insurance, personal insurance, employee benefit
plans and financial planning for businesses and private banking customers as
well as home and automobile insurance for retail customers. Under the terms of
the agreement, the Company will acquire Texas Insurance in a cash transaction.
The transaction is subject to regulatory approvals. The purchase is expected to
close in the fourth quarter.
During 2000, the Company completed the sale of eight non-strategic
branches in Texas with deposits of approximately $205 million. Gains of $11.8
million and $4.9 million were realized on the sales and included in other income
on the income statement in the second and third quarters of 2000, respectively.
-8-
<PAGE> 9
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 - CAPITAL AND PREFERRED SECURITIES
Compass Trust I
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.
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.
MB Capital I
In February 1998, MB Capital I, formerly a subsidiary of MegaBank, a
special-purpose wholly-owned Delaware trust subsidiary of the Company, completed
an offering of 1,200,000 shares (issue price of $10 per share) totaling $12.0
million of fixed-rate 8.75 percent Cumulative Trust Preferred Securities
(Preferred Securities), which are guaranteed by the Company. MB Capital I
invested the total proceeds it received in 8.75 percent Junior Subordinated
Deferrable Interest Debentures (Debentures) issued by the Company. 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 the Company. The Debentures and
related income statement effects are eliminated in the Company's financial
statements.
The distribution rate payable on the Preferred Securities is cumulative
and payable quarterly in arrears. The Company 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. The Company has the right to terminate MB Capital I and
cause the Debentures to be distributed to the holders of the Preferred
Securities in liquidation of such trust.
-9-
<PAGE> 10
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In Thousands Except Per Share Data)
(Unaudited)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 63,009 $ 57,160 $179,812 $168,251
Less: Dividends on non-convertible and
convertible preferred stock and redemption
premium -- 340 -- 1,892
-------- -------- -------- --------
Net income available to common shareholders $ 63,009 $ 56,820 $179,812 $166,359
======== ======== ======== ========
Weighted average shares outstanding 120,639 116,722 119,386 116,643
======== ======== ======== ========
Basic earnings per share $ 0.53 $ 0.49 $ 1.51 $ 1.43
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income $ 63,009 $ 57,160 $179,812 $168,251
Less: Dividends on non-convertible preferred
stock and redemption premium -- 340 -- 1,892
-------- -------- -------- --------
Net income available to common shareholders
and assumed conversions $ 63,009 $ 56,820 $179,812 $166,359
======== ======== ======== ========
Weighted average shares outstanding 120,639 116,722 119,386 116,643
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 759 1,197 756 1,137
-------- -------- -------- --------
Total weighted average shares and
common stock equivalents outstanding 121,398 117,919 120,142 117,780
======== ======== ======== ========
Diluted earnings per share $ 0.52 $ 0.48 $ 1.50 $ 1.41
======== ======== ======== ========
</TABLE>
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<PAGE> 11
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 - 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, Retail Banking, Asset Management, and Treasury.
Prior to September 30, 2000, the Company viewed the indirect automobile
portfolio as part of Corporate Support and Other. This portfolio is now viewed
as a component of Retail Banking. Prior to June 30, 2000, the Company reported
Community Banking as a separate operating segment. This segment is no longer
viewed by the Company as a separate operating segment but instead is viewed as a
component of Retail Banking. As a result of the changes, all corresponding
financial information for earlier periods has been restated.
The Corporate Banking segment is responsible for providing a full array of
banking and investment services to business banking, commercial banking, and
other institutional clients in each of the Company's major metropolitan markets.
The Corporate Banking segment also includes a National Industries unit that is
responsible for serving larger national accounts, principally in targeted
industries. In addition to traditional credit and deposit products, the
Corporate Banking segment also supports its customers with capabilities in
treasury management, leasing, accounts receivable purchasing, asset-based
lending, international services, and interest rate protection and investment
products.
The Retail Banking segment serves the Company's consumer customers through
an extensive banking office network and through the use of alternative delivery
channels such as personal computer 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, is responsible for the indirect automobile
portfolio and provides the Company's non-metropolitan markets with the same
products and services offered by the Corporate Banking and Asset Management
segments.
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(R), 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 the 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. and the elimination of intercompany transactions.
The following tables present the segment information for the Company's
segments as of and for the nine and three month periods ended September 30, 2000
and 1999.
-11-
<PAGE> 12
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
For the Nine Months ended September 30, 2000
(in Thousands)
<TABLE>
<CAPTION>
Corporate
Corporate Retail Asset Support and
Banking Banking Management Treasury Other Consolidated
------------- -------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $ 181,347 $ 268,341 $ 31,199 $ 55,988 $ (29,178) $ 507,697
Noninterest income 27,693 149,538 18,810 7,559 18,066 221,666
Noninterest expense 63,951 197,449 19,259 3,260 134,576 418,495
------------- -------------- ------------- -------------- ------------- -------------
Segment net income 145,089 220,430 30,750 60,287 (145,688) 310,868
Provision for loan losses 37,163
------------
Net income before income
tax expense 273,705
Income tax expense 93,893
----------
Net income $ 179,812
==========
BALANCE SHEET
Average assets $ 5,896,047 $ 4,465,509 $ 626,336 $ 6,939,525 $ 863,637 $18,791,054
Average loans 5,795,162 3,904,708 616,487 929,833 3,949 11,250,139
Average deposits 2,439,341 9,758,878 927,434 446,686 (46,317) 13,526,022
Period-end assets $ 6,286,127 $ 4,581,462 $ 707,113 $ 6,763,174 $ 1,071,453 $19,409,329
Period-end loans 6,173,260 4,053,550 694,745 896,963 14,111 11,832,629
Period-end deposits 2,550,928 9,706,042 1,078,961 412,661 (57,563) 13,691,029
</TABLE>
For the Nine Months ended September 30, 1999
(in Thousands)
<TABLE>
<CAPTION>
Corporate
Corporate Retail Asset Support and
Banking Banking Management Treasury Other Consolidated
------------- -------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $ 147,869 $ 230,867 $ 26,772 $ 76,976 $ 2,631 $ 485,115
Noninterest income 25,505 123,507 17,076 7,448 2,462 175,998
Noninterest expense 58,321 183,083 17,095 4,056 122,728 385,283
----------- ----------- ----------- ----------- ----------- -----------
Segment net income 115,053 171,291 26,753 80,368 (117,635) 275,830
Provision for loan losses 23,188
-----------
Net income before income
tax expense 252,642
Income tax expense 84,391
-----------
Net income $ 168,251
===========
BALANCE SHEET
Average assets $ 4,977,160 $ 3,936,221 $ 542,434 $ 7,547,278 $ 680,296 $17,683,389
Average loans 4,844,388 3,624,745 534,278 1,264,282 14,621 10,282,314
Average deposits 1,915,058 9,330,066 904,117 517,094 (23,214) 12,643,121
Period-end assets $ 5,213,164 $ 4,193,195 $ 585,576 $ 7,332,057 $ 661,711 $17,985,703
Period-end loans 5,080,973 3,425,620 579,375 1,332,558 15,516 10,434,042
Period-end deposits 2,059,855 9,392,646 915,920 665,895 (43,974) 12,990,342
</TABLE>
-12-
<PAGE> 13
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
For the Three Months ended September 30, 2000
(in Thousands)
<TABLE>
<CAPTION>
Corporate
Corporate Retail Asset Support and
Banking Banking Management Treasury Other Consolidated
------------- -------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $ 64,553 $ 91,998 $ 11,468 $ 16,644 $ (13,373) $ 171,290
Noninterest income 9,763 51,817 6,615 2,470 5,060 75,725
Noninterest expense 22,432 67,246 6,930 1,034 43,465 141,107
------------- -------------- ------------- -------------- ------------- --------------
Segment net income 51,884 76,569 11,153 18,080 (51,778) 105,908
Provision for loan losses 10,357
--------------
Net income before income
tax expense 95,551
Income tax expense 32,542
--------------
Net income $ 63,009
==============
BALANCE SHEET
Average assets $6,144,079 $4,495,065 $ 668,499 $6,905,740 $ 996,583 $19,209,966
Average loans 6,051,722 4,021,797 657,293 869,564 6,274 11,606,650
Average deposits 2,538,373 9,872,458 988,815 467,113 (49,759) 13,817,000
Period-end assets $6,286,127 $4,581,462 $ 707,113 $6,763,174 $1,071,453 $19,409,329
Period-end loans 6,173,260 4,053,550 694,745 896,963 14,111 11,832,629
Period-end deposits 2,550,928 9,706,042 1,078,961 412,661 (57,563) 13,691,029
</TABLE>
For the Three Months ended September 30, 1999
(in Thousands)
<TABLE>
<CAPTION>
Corporate
Corporate Retail Asset Support and
Banking Banking Management Treasury Other Consolidated
------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income $ 49,879 $ 81,090 $ 9,383 $ 24,854 $ 1,098 $ 166,304
Noninterest income 7,648 43,554 5,675 2,062 602 59,541
Noninterest expense 19,209 64,198 5,805 1,633 41,733 132,578
------------- -------------- ------------- -------------- ------------- --------------
Segment net income 38,318 60,446 9,253 25,283 (40,033) 93,267
Provision for loan losses 8,124
--------------
Net income before income
tax expense 85,143
Income tax expense 27,983
--------------
Net income $ 57,160
==============
BALANCE SHEET
Average assets $5,079,690 $4,109,548 $ 588,034 $7,468,890 $ 713,127 $17,959,289
Average loans 4,970,627 3,690,970 579,486 1,296,656 15,955 10,553,694
Average deposits 1,994,222 9,469,370 915,612 691,625 (21,334) 13,049,495
Period-end assets $5,213,164 $4,193,195 $ 585,576 $7,332,057 $ 661,711 $17,985,703
Period-end loans 5,080,973 3,425,620 579,375 1,332,558 15,516 10,434,042
Period-end deposits 2,059,855 9,392,646 915,920 665,895 (43,974) 12,990,342
</TABLE>
-13-
<PAGE> 14
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following presents the composition of the loan portfolio at September
30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ----------------
(in Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 3,804,144 $ 3,492,882
Real estate construction 1,985,911 1,697,674
Real estate - commercial 1,895,043 1,632,565
Real estate - residential 2,566,075 2,491,257
Consumer - credit cards 387,342 358,039
Consumer - installment 1,194,114 1,264,192
--------------- ----------------
$11,832,629 $ 10,936,609
=============== ================
</TABLE>
A summary of the activity in the allowance for loan losses for the nine
months ended September 30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
2000 1999
--------------- -----------------
(in Thousands)
<S> <C> <C>
Balance at beginning of year $ 145,890 $ 139,423
Add: Provision charged to income 37,163 23,188
Allowance for loans acquired 7,560 1,296
Net charge-offs (recoveries)
Commercial, financial and agricultural 15,199 4,697
Real estate construction 56 (1)
Real estate - commercial (190) (172)
Real estate - residential 932 509
Consumer - credit cards 11,297 9,757
Consumer - installment 9,491 6,322
--------------- -----------------
Net charge-offs 36,785 21,112
--------------- -----------------
Balance at end of period $ 153,828 $ 142,795
=============== ================
</TABLE>
Nonperforming assets at September 30, 2000 and December 31, 1999 are
detailed in the following table.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ------------------
(in Thousands)
<S> <C> <C>
Nonaccrual loans:
Commercial, financial and agricultural $ 57,807 $ 39,315
Real estate construction 4,415 619
Real estate - commercial 2,532 20,832
Real estate - residential 10,288 10,452
Consumer 2,203 3,387
--------------- ----------------
Total nonaccrual loans 77,245 74,605
Renegotiated loans 91 239
Other real estate 12,518 7,250
--------------- ----------------
Total nonperforming assets $ 89,854 $ 82,094
=============== ================
</TABLE>
-14-
<PAGE> 15
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. In June 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities --Deferral
of the Effective Date of FASB Statement No. 133, which delays the original
effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which amends SFAS No. 133. SFAS No.
138 addresses a limited number of issues related to the implementation of SFAS
No. 133. Substantially all of the current derivative portfolio will qualify
under SFAS No. 133 for cash flow or fair value hedge accounting treatment. The
implementation of SFAS No. 133, as amended, is not expected to have a material
effect on Compass' consolidated financial position or consolidated results of
operations.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
supersedes SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. SFAS No. 140 is effective for
transfers occurring after March 31, 2001, its disclosure requirements relating
to securitization transactions and collateral are effective for fiscal years
ending after December 15, 2000. The implementation of SFAS No. 140 is not
expected to have a material effect on Compass' consolidated financial position
or consolidated results of operations.
-15-
<PAGE> 16
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; unanticipated
issues during the integration of acquisitions; and significant changes in
accounting, tax, or regulatory practices or requirements.
OVERVIEW
Net income for the quarter ended September 30, 2000, increased 10 percent
to $63.0 million while diluted earnings per share increased 8 percent to $0.52
per share. Net interest income increased three percent to $171.3 million from
the third quarter of 1999. Noninterest income increased 27 percent to $75.7
million while noninterest expense increased six percent to $141.1 million.
For the first nine months of 2000, net income increased seven percent to
$179.8 million and diluted earnings per share increased six percent to $1.50 per
share. Net interest income for the nine months grew $22.6 million, an increase
of 5 percent, while noninterest income and noninterest expense increased 26
percent and 9 percent, respectively.
CASH BASIS RESULTS
Cash basis results exclude the amortization of goodwill and other
intangibles considered nonqualifying in regulatory capital calculations
resulting from business combinations recorded by the company under the purchase
method of accounting. Had these business combinations qualified for accounting
under the pooling-of-interests method, no intangible asset would have been
recorded. Since the amortization of goodwill and other intangibles does not
result in a cash expense, the economic value to shareholders under either
accounting method is essentially the same. Additionally, such amortization does
not impact the Company's liquidity and funds management activities.
On a cash basis, net income for the quarter ended September 30, 2000, was
$67.8 million, a 12 percent increase over the $60.7 million for the same quarter
last year. Similarly, diluted earnings per share were $0.56 in the third quarter
of 2000, an eight percent increase compared to $0.52 in the prior year quarter.
For the nine months ended September 30, 2000, net income was $193.3 million, a
nine percent increase compared to $177 million for the first nine months of
1999. Diluted earnings per share increased eight percent to $1.61 compared to
$1.49 for comparable period a year ago. Amortization of goodwill and other
intangibles, before income tax effect, was $6.1 and $4.4 for the quarter ended
September 30, 2000 and 1999, respectively, and was $16.8 and $11.0 for the nine
months ended September 30, 2000 and 1999, respectively.
NET INTEREST INCOME
Net interest income is the principal component of a financial
institution's income stream and represents the difference or spread between
interest and fee income generated from earning assets and the interest expense
paid on deposits and borrowed funds. Fluctuations in interest rates as well as
changes in the volume and mix of earning assets and interest bearing liabilities
can materially impact net interest income. The following discussion of net
interest income is presented on a taxable equivalent basis, unless otherwise
noted, to facilitate performance comparisons among various taxable and
tax-exempt assets.
-16-
<PAGE> 17
Net interest income for the quarter ended September 30, 2000, increased
$4.9 million over the third quarter of 1999 to $172.5 million with interest
income and interest expense increasing $45.7 million and $40.8 million,
respectively. The increase in interest income was due to an increase in average
earning assets of $1.1 billion, or seven percent, and by a 57 basis point
increase in the average yield on earning assets from 7.71 percent to 8.28
percent. The largest portion of the increase in average earning assets from the
third quarter of 1999 occurred in the average balance of loans, which increased
ten percent, or $1.1 billion, due principally to internal loan growth, the
acquisition of Hartland Bank, in October 1999, the merger with MegaBank
Financial Corporation, in April 2000, and the purchase of Founders Bank of
Arizona (collectively the "Business Combinations") partially offset by the
securitization of approximately $970 million of loans and their transfer to
investment securities available for sale ($470 million in real estate mortgage
loans in March 2000 and $500 million in indirect auto loans in September 1999).
The 26 percent increase in interest expense during the quarter was a result of a
$811.7 million increase in average interest bearing liabilities and a 87 basis
point increase in the rate paid on interest bearing liabilities. The increase in
interest bearing liabilities was primarily due to increases in both federal
funds purchased and securities sold under agreements to repurchase and time
deposits, which were partially offset by a decrease in FHLB and other
borrowings.
For the first nine months of 2000, net interest income increased five
percent, or $22.5 million, to $511.2 million consisting of a $120.4 million
increase in interest income and a $97.8 million increase in interest expense.
The increase in interest income was due to a seven percent increase in average
earning assets and a 45 basis points increase in the yield on earning assets to
8.14 percent from 7.69 percent. The average balance of loans for the first nine
months of 2000 increased $968 million over the comparable 1999 period due to the
factors discussed previously. An $816 million increase in average interest
bearing liabilities combined with a 65 basis point increase in the rate paid on
interest bearing liabilities resulted in a 22 percent increase in interest
expense.
Net interest margin, stated as a percentage, is the yield 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.
The following discussion of net interest margin is presented on a taxable
equivalent basis.
For the third quarter of 2000, the net interest margin was 3.87 percent
compared to 4.00 percent for the same period in 1999. For the nine months ended
September 30, 2000, the net interest margin decreased seven basis points from
4.00 percent in the prior year to 3.93 percent. These changes 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 third
quarter increased 57 basis points, including a 74 basis point increase in the
yield on loans, while the cost of interest bearing liabilities increased 87
basis points. Similarly, a 62 basis point increase in the yield on loans
contributed to a 45 basis point increase in the yield on interest earning assets
for the first nine months of 2000 while the cost of interest bearing liabilities
increased 65 basis points.
During the third quarter of 2000, the Company's net interest margin was
impacted by the Company's use of interest rate contracts, decreasing taxable
equivalent net interest margin by seven basis points as compared to a nine basis
point positive impact for the same period in 1999. For the nine months ended
September 30, 2000, the Company's use of interest rate contracts decreased the
Company's net interest margin by three basis points as compared to a nine basis
point positive impact for the first nine months of 1999.
-17-
<PAGE> 18
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 nine month and three month periods
ended September 30, 2000, as compared to the comparable periods of 1999 (in
thousands):
<TABLE>
<CAPTION>
Nine Months Months Ended
September 30, 2000
----------------------------------------------------------------------
Change
1999 Attributed to
to ---------------------------------------------------
2000 Volume Rate Mix
------------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 112,516 $ 60,332 $ 47,695 $ 4,489
Investment securities (11,239) (12,080) 971 (130)
Investment securities available for sale 20,783 19,019 1,612 152
Trading account securities (1,819) (2,061) 577 (335)
Fed funds and resale agreements 109 (546) 808 (153)
------------------ ---------------- ---------------- ----------------
Increase in interest income $ 120,350 $ 64,664 $ 51,663 $ 4,023
================== ================ ================ ================
Interest expense:
Deposits $ 59,787 $ 23,984 $ 33,385 $ 2,418
Fed funds purchased and repos 9,807 (3,965) 14,988 (1,216)
Other short-term borrowings 3,389 1,549 1,462 378
FHLB and other borrowings* 24,857 9,792 13,514 1,551
------------------ ---------------- ---------------- ----------------
Increase in interest expense $ 97,840 $ 31,360 $ 63,349 $ 3,131
================== ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 2000
----------------------------------------------------------------------
Change
1999 Attributed to
to ---------------------------------------------------
2000 Volume Rate Mix
------------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 43,110 $ 22,272 $ 18,947 $ 1,891
Investment securities (2,340) (2,594) 280 (26)
Investment securities available for sale 5,654 4,280 1,295 79
Trading account securities (455) (497) 98 (56)
Fed funds and resale agreements (232) (450) 367 (149)
------------------ ---------------- ---------------- ----------------
Increase in interest income $ 45,737 $ 23,011 $ 20,987 $ 1,739
================== ================ ================ ================
Interest expense:
Deposits $ 23,404 $ 6,728 $ 15,823 $ 853
Fed funds purchased and repos 13,070 6,919 3,932 2,219
Other short-term borrowings 530 (54) 600 (16)
FHLB and other borrowings* 3,810 (3,410) 8,053 (833)
------------------ ---------------- ---------------- ----------------
Increase in interest expense $ 40,814 $ 10,183 $ 28,408 $ 2,223
================== ================ ================ ================
</TABLE>
* Includes Capital and Preferred Securities.
-18-
<PAGE> 19
NONINTEREST INCOME AND NONINTEREST EXPENSE
During the third quarter of 2000, noninterest income increased $16.2
million, or 27 percent, to $75.7 million, due primarily to a $5.5 million
increase in service charges on deposit accounts, a $4.9 million gain on the sale
of branches included in other noninterest income, and a $2.9 million increase in
credit card service charges and fees. Noninterest income for the first nine
months of 2000 increased $45.7 million, or 26 percent, to $221.7 million as a
result of a $17.6 million increase in service charges on deposit accounts, the
gain on sale of branches of $16.7 million, and a $7.2 million increase in credit
card service charges and fees, which was partially offset by decreases in
trading account profits and commissions of $2.9 million and retail investment
sales of $2.6 million. The increase in service charges on deposit accounts was
primarily due to the increase in deposits. The increase in credit card service
charges and fees was due to both increased merchant processing fees resulting
from an increase in the number of merchants as well as service charges and fees
from increased cardholders and receivables. The decreases in trading account
profits and commissions and retail investment sales were primarily the result of
unfavorable market conditions during the first nine months of 2000.
Noninterest expense increased $8.5 million, or six percent, during the
third quarter and $33.2 million, or 9 percent, during the first nine months of
2000. The growth in each caption of noninterest expense, excluding professional
services, can be attributed primarily to the Business Combinations, discussed
earlier and the reinvestment of funds to support future growth. The decrease in
professional services, and reduced growth in the other captions, is attributed
to the Company's continued focus on efficiency. The successful focus on
efficiency is evidenced by a reduction in the cash basis efficiency ratio to
54.4% and 55.0% for the three and nine month periods ended September 30, 2000,
respectively, compared to 55.8% for both the three and nine month periods ended
September 30, 1999.
INCOME TAXES
Income tax expense during the three and nine month periods ended September
30, 2000, increased by $4.6 million and $9.5 million, respectively, compared to
the same periods in 1999. The increases are primarily the result of increases in
pretax income.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses for the three and nine months ended
September 30, 2000, increased $2.2 million and $14.0 million from the same
periods in 1999, respectively. The allowance for loan losses, and the resulting
provision for loan losses, was based on 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. The allowance for loan losses at September 30, 2000, was $153.8
million. The ratio of the allowance for loan losses to loans outstanding was
1.30 percent at September 30, 2000, down slightly from 1.33 percent December 31,
1999. Management believes that the allowance for loan losses at September 30,
2000 is adequate.
NONPERFORMING ASSETS AND PAST DUE LOANS
Nonperforming assets, comprised of nonaccrual loans, renegotiated loans
and other real estate owned, totaled $89.9 million at September 30, 2000,
compared to $82.1 million at December 31, 1999. Other real estate owned
increased $5.3 million during this period, primarily as a result of two credits.
The $2.6 million increase in nonaccrual loans was associated with three
unrelated commercial credits offset, in part, by continued efforts by management
to work-out nonperforming loans resulting in paydowns or a return to performing
status and the charge-off of a commercial credit in the second quarter of 2000.
The Company's exposure to Shared National Credits represented approximately 3.6
percent of total loans outstanding, of which less than $2 million was classified
as doubtful and approximately $7 million was classified as substandard at
September 30, 2000. At September 30, 2000, the allowance for loan losses as a
percentage of nonperforming loans was 199 percent as compared to 195 percent at
December 31, 1999. The allowance for loan losses as a percentage of
nonperforming loans and accruing loans ninety days or more past due decreased
from 165 percent at December 31, 1999, to 153 percent at September 30, 2000.
Nonperforming assets as a percentage of total loans and other real estate
owned increased slightly to 0.76 percent at September 30, 2000, from 0.75
percent at December 31, 1999. The amount recorded in other repossessed assets at
September 30, 2000, was $1.1 million, down from $1.7 million at December 31,
1999. Loans past due ninety days or more but still accruing interest increased
from $13.3 million at December 31, 1999, to $23.0 million at September 30, 2000,
due in part to acquisition activity.
-19-
<PAGE> 20
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, 2000, were $19.4 billion, up from $18.4
billion at December 31, 1999. The increase in assets was primarily due to
internal loan growth, and certain Business Combinations.
ASSETS AND FUNDING
At September 30, 2000, earning assets totaled $17.8 billion, up from $16.9
billion at December 31, 1999. The mix of earning assets remained relatively
unchanged with total investment securities and loans comprising 33 percent and
67 percent, respectively, of total earning assets at September 30, 2000. The
largest component of the growth in earning assets was concentrated in net loans.
Net loans increased by $888 million due to internal loan growth and the Business
Combinations, which was partially offset by the securitization of approximately
$500 million in mortgage loans, during the first quarter, and the transfer of
the resulting securities to the investment securities available for sale
portfolio. Total liabilities increased by $803 million due to the increase in
total deposits of $641 million and increase in federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings
of $549 million, which was partially offset by a $452 million reduction in FHLB
and other borrowings. The deposit growth, which included a $242 million, or nine
percent, increase in noninterest bearing deposits, was due to strong internal
growth and the Business Combinations partially offset by the sale of
non-strategic branches. At September 30, 2000, the deposit to loan ratio was 116
percent.
LIQUIDITY AND CAPITAL RESOURCES
The following is a discussion of cash flows; these amounts are based on
cash flows which exclude changes resulting from merger activity. Net cash
provided by operating activities totaled $282 million for the nine months ended
September 30, 2000. Net cash used by investing activities of $504 million
primarily consisted of a $920 million increase in loans outstanding offset by
proceeds from maturities of investment securities of $116 million, proceeds from
maturities of securities available for sale of $571 million, and proceeds from
sales of securities available for sale of $275 million. Net cash provided by
financing activities of $194 million primarily consisted of a $230 million
increase in deposits reduced by a $454 million net decrease in FHLB and other
borrowings.
Total shareholders' equity at September 30, 2000, was 7.16 percent of
total assets compared to 6.66 percent at December 31, 1999 primarily due to an
$120 million increase in retained earnings. 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 6.74 percent at
September 30, 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 6.68 percent at September 30, 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 September 30, 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 September 30, 2000, were 8.38 percent and 11.55 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.
-20-
<PAGE> 21
COMPASS BANCSHARES, INC. AND SUBSIDIARIES
ALLOWANCE FOR LOAN LOSSES/NONPERFORMING ASSETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------------------------------
2000 1999
------------------ --------------------
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 145,890 $ 139,423
Add: Provision charged to earnings 37,163 23,188
Allowance for loans acquired 7,560 1,296
Deduct: Loans charged off 46,236 29,452
Loan recoveries (9,451) (8,340)
------------------ --------------------
Net charge-offs 36,785 21,112
------------------ --------------------
Balance at end of period $ 153,828 $ 142,795
================== ====================
Net charge-offs as a percentage of
average loans (annualized) 0.44% 0.27%
Recoveries as a percentage of charge-offs 20.44% 28.32%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------- ---------------------
<S> <C> <C>
NONPERFORMING ASSETS
Nonaccrual loans $ 77,245 $ 74,605
Renegotiated loans 91 239
------------------ --------------------
Total nonperforming loans 77,336 74,844
Other real estate 12,518 7,250
------------------ --------------------
Total nonperforming assets $ 89,854 $ 82,094
================== ====================
Accruing loans ninety days or more past due $ 23,036 $ 13,325
Other repossessed assets 1,129 1,678
Allowance for loan losses 153,828 145,890
Allowance as a percentage of loans 1.30% 1.33%
Total nonperforming loans as a percentage
of loans 0.65% 0.68%
Total nonperforming assets as a percentage
of loans and ORE 0.76% 0.75%
Accruing loans ninety days or more past due as a
percentage of loans 0.19% 0.12%
Allowance for loan losses as a percentage of
nonperforming loans 198.91% 194.93%
Allowance for loan losses as a percentage of
nonperforming assets 171.20% 177.71%
</TABLE>
-21-
<PAGE> 22
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 September 30,
2000 and December 31, 1999 are shown below.
<TABLE>
<CAPTION>
Percentage
Increase/(Decrease)
in Interest Income/
Expense Given
Immediate and
Principal/Notional Sustained Parallel
Amount of Earning Interest Rates Shifts
Assets, Interest ------------------------------------
Bearing Liabilities Down 100 Up 100
and Swaps Basis Points Basis Points
---------------------- ---------------- ----------------
<S> <C> <C> <C>
SEPTEMBER 30, 2000:
Assets which reprice in:
One year or less $ 6,892,201 (7.47%) 7.46%
Over one year 10,867,316 (1.79) 1.86
----------------------
$ 17,759,517 (4.23) 4.26
======================
Liabilities which reprice in:
One year or less $ 11,361,916 (13.74) 12.86
Over one year 3,564,554 (2.16) 2.35
----------------------
$ 14,926,470 (10.32) 9.76
======================
Total net interest income sensitivity
2.99 (2.24)
DECEMBER 31, 1999:
Assets which reprice in:
One year or less $ 6,628,301 (7.66%) 7.73%
Over one year 10,256,467 (1.74) 1.70
----------------------
$ 16,884,768 (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)
</TABLE>
As shown in the table above, from December 31, 1999 to September 30, 2000,
net interest income sensitivity improved in both the up-rate and down-rate
scenarios. Sensitivity improved in the up-rate scenario due to both an extension
in the maturity of time deposits and the employment of targeted up-rate
protection instruments on a portion of the wholesale liability portfolio. A
decrease in the size of the callable wholesale liability portfolio helped
improve rate sensitivity in both the up and down rate scenarios.
-22-
<PAGE> 23
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)
-23-
<PAGE> 24
(a) EXHIBITS (CONTINUED)
(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)
(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. (incorporated by
reference to Exhibit 10(e) to the March 31, 2000 Form 10-Q
filed with the Commission)
(f) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Jerry W. Powell (incorporated by
reference to Exhibit 10(f) to the March 31, 2000 Form 10-Q
filed with the Commission)
(g) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Garrett R. Hegel (incorporated by
reference to Exhibit 10(g) to the March 31, 2000 Form 10-Q
filed with the Commission)
(h) Employment Agreement, dated December 14, 1994, between Compass
Bancshares, Inc. and Charles E. McMahen (incorporated by
reference to Exhibit 10(h) to the March 31, 2000 Form 10-Q
filed with the Commission)
(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 (incorporated by reference
to Exhibit 10(j) to the March 31, 2000 Form 10-Q filed with
the Commission)
(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)
-24-
<PAGE> 25
(a) EXHIBITS (CONTINUED)
(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) (incorporated by reference to Exhibit 10(n) to the
March 31, 2000 Form 10-Q filed with the Commission)
(27) Financial Data Schedule (filed electronically only)
Certain financial statement schedules and exhibits have been omitted because
they are not applicable.
(b) Reports on Form 8-K
None
-25-
<PAGE> 26
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 13, 2000 /s/ GARRETT R. HEGEL
------------------------- --------------------------------
Date By Garrett R. Hegel, as its
Chief Financial Officer
-26-
