BIRMINGHAM, Ala. - D. Paul Jones Jr., chairman and CEO of Compass Bancshares Inc., eases stress by listening to classical music in his office.
But as relaxing as it may be, neither Mr. Jones nor his bank is about to be lulled into a false sense of security at a time when shrinking net interest margins and weak loan demand threaten future profits for many banks.
Compass, which has $7.1 billion in assets, faces those same challenges but may be better positioned than most to weather them. Consider that:
* Mr. Jones has been expanding Compass' footholds in Texas and Florida, putting a fourth of the company's assets in markets that are growing faster than Alabama.
* With an overhead ratio already lower than those of most of its peers, Compass offers competitive pricing on its products and services.
* Compass' $700 million indirect auto portfolio, which services 800 dealers in 14 states, is expected to provide steady net interest income in the face of a sluggish economy.
"As the margins come in at banks, that's going to separate the sheep from the goats - people who can't grow earning assets are going to have trouble," Mr. Jones said. "We began early working on the volume. It's now a matter of sustaining momentum."
Analysts who follow Compass - known as Central Bancshares of the South Inc. until Nov. 8 - believe the momentum is sustainable.
"Even though the margin is going to contract, I think the bank will still do real well," said Michael K. Diana, a bank analyst at Prudential Securities, New York.
Compass' net interest margin hit its peak, 5.30% in the first quarter, and has since shrunk 32 basis points. But third-quarter earnings of $22 million were up 18% from the year-ago quarter, largely driven by 13% growth in loan outstandings, tight expense controls, and improved credit quality.
Four Mergers Pending
Return on assets hit an annualized 1.27% in the third quarter, and return on equity 16.83%, despite recent acquisitions. Compass expects to close four community bank acquisitions by yearend, adding some $489 million in assets.
All of those acquisitions are in Florida or Texas, where Compass has focused largely on three areas: the Florida panhandle, Dallas, and Houston. The one exception is Jacksonville-based First Performance Bank which will give Compass a small, 16-branch outpost on Florida's east coast.
"We don't have any compulsion to go anywhere other than Texas or Florida," Mr. Jones said. "Both of them are very large markets with room to grow."
Big Growth Area
Compass' Texas franchise is expected to provide the biggest boost to future earnings. In a recent research report, First Manhattan Co. estimated the Texas operations could, over the next three years, tack on an additional 5% to the historical 10% annual growth rate of Compass' core Alabama bank.
Harry B. Brock Jr., Mr. Jones' predecessor, began building the Texas bank in 1987, when the Lone Star State's economy was virtually prostrate from the collapse of oil prices and real estate. In that year, he leapfrogged Mississippi and Louisiana to purchase an insolvent community bank from federal regulators.
"They went in for the right reason - growth - at the right time, meaning it was cheap," said Prudential's Mr. Diana.
Limits on Deposit Share
Ever since, Compass has been quietly building a Texas bank that now holds $1.8 billion of assets. But the subsequent entry into Texas of a host of mega-regionals ensures that Compass will never enjoy a top-ranked deposit share there.
"Over the long term, I don't know how that's going to work - being a $2 billion bank competing with some of the largest banks in the country," said Frank Anderson, analyst at Stephens Inc., Little Rock, Ark.
Compass executives respond that they don't have to be one of the top three in a market to operate a cost-effective branch system.
"Ultimately, pricing is the key," Mr. Jones said. "You're not going to move business unless you can offer an attractive price, and you can't offer an attractive price without low overhead.
Compass has long prided itself on being the low-cost producer in Alabama. Its efficiency ratio is 59.12%, the lowest among the top four Alabama holding companies.
Compass' strategy in Texas is essentially to bring the efficiency ratio of its Texas bank, 66% in the third quarter, closer to the 56.6% level enjoyed by its Alabama banks. At the same time, it focuses its lending efforts on the small-business and consumer niches.
Competitors say the formula has worked in Alabama. "They offer some loan prices that are tough to compete against, no question about it," said J. Stanley Mackin, chairman and CEO of First Alabama Bancshares Inc., Birmingham. "But it's not so much out of kilter that it can skew our thoughts about what we ought to be doing."
Compass does need to grow a bit more in Texas. To achieve enough critical mass to afford advertising and other costs, Mr. Jones estimates the company needs about 35 branches and $1 billion in assets in both Dallas and Houston.
The current total is $946 million and 17 branches in Dallas, $830 million and 11 branches in Houston.
Indirect auto lending has been another source of growth. By Sept. 30, the $708 million portfolio had increased 11% from the previous nine months, second only to residential mortgages in providing the company's loan growth this year.
Compass' approach has produced one of the best shareholder returns in the banking industry, with 216% growth in the last five years. Even with a healthy 160% market-to-book price, some analysts say the company is undervalued.
With insider ownership approaching 40%, counting employees and directors of affiliate banks, Compass controls its own destiny - which Mr. Jones says includes no plans for a sale.
"All they have to do, really, if they don't want to be taken over, is look at their numbers and say, we can do fine for our shareholders on our own,"' said Mr. Diana of Prudential.