Proxy challenges are not unknown in the banking industry. Fights similar to the one at Compass Bancshares occurred in recent years at Baltimore Bancorp and Princeton, N.J.-based UJB Financial Corp.

What seems to make the Compass situation unique is that the bank's embattled management cannot be accused of incompetence. Compass closed 1994 with $99.7 million in earnings, its seventh consecutive record year.

So financial performance isn't an issue - or is it?

Director Harry B. Brock Jr., who launched the proxy challenge at Compass, is reluctant to publicly criticize the bank he founded in 1963.

But he will say that Compass, like most banks, received "a lot of help from the Fed" between 1991 and 1993, when low interest rates allowed financial institutions to fatten the spreads between what they paid for deposits and received from loans.

"If I was going to pass out kudos for our performance, I would have to put Mr. (Fed Chairman Alan) Greenspan at the head of the list," Mr. Brock says. "But hey, that was a reward for us staying clean during the '80s."

Good credit quality has always been a Compass strength. At the end of last year, nonperforming assets amounted to only 0.33% of total loans, below peer levels.

This credit quality came to Compass' rescue in 1994, when a lower loan- loss provision allowed the bank to report record earnings in the face of declining revenues.

The reduction in the provision, to $3.4 million from $36.3 million in 1993, led to charges that Compass had managed its earnings to look good in the face of the Brock challenge.

And it's probably no accident that the bank took no provision at all in the fourth quarter, when Mr. Brock began agitating for a sale of the bank.

On the other hand, Compass had no particular incentive to report a higher provision last year because its reserve coverage of nonperforming loans, 873%, is higher than peers and more than adequate by any standard.

The lower provision "is probably justifiable, given the profile of risk" at Compass, said Dean Witter analyst Anthony R. Davis.

Compass chief financial officer Garrett R. "Gary" Hegel argues that Compass' revenue problems in 1994 can be blamed almost entirely on rising interest rates, which particularly hurt its trust and correspondent banking operations.

He said he expects rates to stabilize in the second half, which should allow Compass to improve its net interest margins as the recent growth in earning assets falls through to the bottom line.

If Mr. Hegel is correct, and Compass' revenues do improve this year, then Mr. Brock's criticisms may lose some of their sting.

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