Compass Bancshares Inc. has become the 31st-largest bank in the United States over the past decade in large part by acquiring banks in the Southwest.
But now, like many other large banks, it is expanding further by building rather than buying.
The Birmingham, Ala., bank is nearly two-thirds of the way through a project to build 60 branches in its fastest-growing markets, from Texas to Colorado.
The $26 billion-asset Compass first reached beyond Alabama in 1987, when it bought a bank in Texas. It later made deals in Florida in 1991 and Arizona in 1998. It also entered New Mexico and Colorado through acquisitions in 2000, but it has not done a deal since then.
D. Paul Jones, its chairman and chief executive, says bank acquisitions are not out of the question for the future, but they are not an option right now.
"In a lot of the markets we're in, there really just aren't any banks to buy," he told investors last month at a New York conference sponsored by Merrill Lynch & Co. "Arizona is almost totally consolidated. There are banks left in Texas and Colorado that we'd like to acquire, but given the prices or just the simple fact these folks don't want to sell, we'd rather go ahead and build.
"We'll do whatever makes the most economic sense at the time, and right now building these offices is the better choice," he said.
Though its roots and headquarters are in Alabama, Compass has made most of its recent investments outside the state. In 1990 just 10% of its deposits were outside Alabama, but that percentage has swelled to 70% as the company has grown.
Today, as Mr. Jones is fond of telling investors, Compass' "center of gravity" lies in the Southwest. "We have the same number of offices in Alabama today as we did in 1989," he said at the Merrill conference. "Our reinvestment has all been in larger states with better growth prospects."
Nearly half of its $15 billion of deposits are in Texas, where Compass has 132 of its 367 branches. It also has 68 branches in Arizona, 42 in Florida, 26 in Colorado, and 10 in New Mexico.
Since announcing the branch-building plan early last year, Compass has built 37 branches, including 11 in the Dallas/Fort Worth area, 9 in Phoenix, and four in Houston. Among the 23 remaining to be built, six will be in Phoenix and seven in Denver.
Ed Najarian, an analyst at Merrill, said the fast growth of its territory should help Compass grow faster than many other regional banks.
"We expect Compass' position in high-growth markets in Texas, north Florida, Arizona, New Mexico, and Colorado to provide an inherent long-term revenue growth advantage," he wrote in a Nov. 21 research note.
Mr. Jones said that Compass has a small deposit share in most of the cities where it operates but has a chance to gain, because of the new branches as well as increased advertising and good customer service.
However, having a bigger market share is less important to him than having a good "market presence," which he defined as having "enough banking offices in a given area to make the marketing efficient."
Compass advertises heavily in the Dallas market, for example, but those ads also reach people in Fort Worth, because the two cities form a single media market. Until a year ago Compass had branches only in Dallas, but now it is building in Fort Worth, to take better advantage of its marketing efforts.
The campaign for internal growth appears to be succeeding, at least by one measure: new checking accounts. Mr. Jones said that Compass has added a net total of 107,800 so far this year to go with the more than 100,000 it added last year. Four years ago it added just 27,000 accounts.
Despite that and other areas of growth in its businesses, many sell-side analysts rate Compass' shares "hold," in part because it is less likely than many other regional banks to benefit from an anticipated increase in interest rates sometime next year or from an improving economy.
Analysts say its earnings growth could slow, because it has become liability-sensitive, and because the interest rate swaps it had been using to hedge against declining cash flow are maturing and will no longer boost net interest income.
"Unlike most other banks, Compass should continue to experience net interest margin pressure over the next two quarters as beneficial interest rate swap contracts continue to mature," wrote Mr. Najarian, who rates Compass "neutral." He says its earnings per share next year will grow about 7%, which will "modestly lag" the 9% average growth among the midsize regional banks he follows.
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, initiated coverage of Compass on Nov. 7 with a "hold" rating. He cited the likelihood of margin compression and "a business mix that does not appear overly leveraged to a recovering economy."
Compass "is a name that I do like long-term," he said in an interview. "Traditionally it has been a bank that has been able to grow earnings faster than its peers. It has made its franchise incrementally more attractive by moving into the Southwest, but in the near to medium term, they're facing more severe margin compression than peers.
"The other thing that plagues them a little is they are not at the top of the list when it comes to [being] leveraged to a recovery," Mr. Fitzsimmons said. Compass is mainly a traditional bank, and despite some growth in insurance and other fee-related businesses in recent years, "there are not a lot of market-sensitive revenues like capital markets" to boost earnings.
