DBRS Rates Compass Bancshares, Inc. at “A”

Dominion Bond Rating Service (DBRS) has today assigned ratings to Compass Bancshares, Inc. and Compass Bank (collectively, CBSS or the Company) as listed above. The trend for all ratings is Stable.

The ratings recognize CBSS’s strong operating performance and relatively low risk profile maintained over an extended period. Revenues and earnings have increased at a stable 10% and 11% compound average growth rate, respectively, over the past ten years, while fees and commissions – as a percentage of net revenues – rose from about 21% to 41% during the same period. The footprint includes some of the highest-growth metropolitan statistical areas in the southwestern and southeastern United States, which, together with a successful business model that achieves high cross-sales, underpins the Company’s capacity to sustain solid growth in loans, deposits and non-interest income.

Although the quality of the loan portfolio is high and sufficiently diversified geographically, construction and other commercial real estate (CRE) loans represent an elevated concentration risk at about 41% of loans and 500% of tangible common equity (TCE) (at March 31, 2006). CBSS has an excellent track record in managing its CRE business based on low non-performing loan and charge-off rates over various real estate and economic cycles. Nonetheless, this level of concentration renders the Company vulnerable to material loan losses in case of a severe market correction. As well, the rapid loan growth, particularly in some of the Company’s newer markets, could mask potential asset quality problems as these portfolios are not yet sufficiently seasoned. DBRS said that the current level of CRE exposure constrains CBSS’s ratings, and a further material increase in its relative size could result in negative rating pressure.

Profitability metrics have consistently been good and in line with those of banks similarly rated by DBRS. A sufficiently large and low-cost core deposit base, of which nearly 40% consists of non-interest-bearing deposit, low loan loss provisions, ample non-interest income and an efficient operating platform, collectively account for CBSS’s good profitability. The deposit base and a relatively large securities portfolio – about 20% of assets – provide the bank ample liquidity.

Capitalization levels have traditionally lagged the respective medians for similarly rated bank peers, particularly those related to TCE. The acquisition of TexasBanc Holding Company in March 2006 further weakened the TCE ratios. Nonetheless, even at lower levels, capitalization is considered satisfactory in view of the Company’s demonstrated strong earnings record, excellent asset quality, relatively low dividend payments and modest stock repurchases.

DBRS sees the key challenge for CBSS being the attainment of a material banking business and deposit market shares in its newer markets where its presence currently is small and highly vulnerable to competitive pressures, and to do so without weakening asset quality and profitability. DBRS also sees maintaining the high organic loan and deposit growth rates as a significant challenge in light of rising interest rates, a cooling residential real estate market and fierce competition.

The holding company’s stand-alone fundamentals are satisfactory. Double-leverage at about 110% (at March 31, 2006) is generally in line with that of peers, and there is a sufficient amount of liquid assets to meet operating and debt service obligations for up to one year without relying on dividend income form the regulated bank subsidiary.

Compass Bancshares, Inc., a bank holding company with headquarters in Birmingham, Alabama, reported $33.6 billion in assets at June 30, 2006.

The A (high) Deposits & Senior Debt rating of Compass Bank is equivalent to DBRS’s intrinsic assessment (IA) of the Bank’s SA-3 support assessment (SA). For more detail on the IA and SA methodology, please see the related DBRS press release issued on June 1, 2006. At the date of this publication, DBRS is in the process of adjusting its existing bank ratings to this new IA and SA methodology.

Notes:
These ratings are based on public information.
The Trust Preferred Securities of Compass Trust I and Compass Trust III contain certain unique covenants that give them some equity-like characteristics.
All figures in U.S. dollars unless otherwise noted.