-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A2QC7EDrlfwONSyBnLuC/RQPtLZaBRBO+8VTxBdueRiWLR8WjdiM7/FMGPp5XHzz VqxNR6fLXdlbttZgljUi/A== 0000931763-02-000152.txt : 20020414 0000931763-02-000152.hdr.sgml : 20020414 ACCESSION NUMBER: 0000931763-02-000152 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020125 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLONIAL BANCGROUP INC CENTRAL INDEX KEY: 0000092339 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 630661573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13508 FILM NUMBER: 02518077 BUSINESS ADDRESS: STREET 1: ONE COMMERCE ST STE 800 STREET 2: P O BOX 1108 CITY: MONTGOMERY STATE: AL ZIP: 36104 BUSINESS PHONE: 3342405000 MAIL ADDRESS: STREET 1: ONE COMMERCE STREET STE 800 STREET 2: PO BOX 1108 CITY: MONTGOMERY STATE: AL ZIP: 36101 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHLAND BANCORPORATION DATE OF NAME CHANGE: 19820205 8-K 1 d8k.txt CURRENT REPORT FOR PERIOD 1-25-02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 25, 2002 THE COLONIAL BANCGROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 1-13508 63-0661573 - -------------------------------------------------------------------------------- (State or other jurisdiction of (Commission File Number) (I.R.S. Employer incorporation or organization) Identification No.) One Commerce Street Montgomery, Alabama 36104 ------------------------------------------ (Address of principle executive offices) (334) 240-5000 ----------------------------------- (Registrant's telephone number) Item 5. Other Events ------------ BancGroup completed a business combination with Manufacturers Bancshares, Inc. ("Manufacturers") on October 25, 2001. The combination was accounted for as a pooling-of-interests. Accordingly, the accompanying consolidated selected financial data, management's discussion and analysis and consolidated financial statements as of December 31, 2000, and 1999 and for each of the three years in the period ended December 31, 2000 have been restated to give retroactive effect to the combination with Manufacturers and include the combined operations on BancGroup and Manufacturers for all periods presented. Additionally, the accompanying condensed consolidated financial statements and management's discussion and analysis as of September 30, 2001 and 2000 and for the three and nine months ended September 30, 2001 and 2000 have been restated to give retroactive effect to the combination with Manufacturers and include the combined operations of BancGroup and Manufacturers for all periods presented. Item 7. Financial Statements and Exhibits --------------------------------- The following exhibits are furnished as part of this Current Report on Form 8-K: Exhibit No. Exhibit - ----------- ------- 23.1 Consent of Independent Accountants 99.1 Consolidated Selected Financial Data, Management's Discussion and Analysis, Consolidated Financial Statements as of December 31, 2000, and 1999 and for each of the three years in the period ended December 31, 2000. 99.2 Consolidated Selected Financial Data, Management's Discussion and Analysis, as of September 30, 2001, and 2000 and for the three and nine months ended September 30, 2001 and 2000. SIGNATURE 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 hereunto duly authorized. COLONIAL BANCGROUP By: /s/ W. Flake Oakley, IV ---------------------------- W. Flake Oakley, IV its Chief Financial Officer Date: January 25, 2002 EX-23.1 3 dex231.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements of The Colonial BancGroup, Inc. listed below of our report dated February 28, 2001, except for Notes 1 and 2, as to which the date is January 22, 2002, on our audits of the consolidated financial statements of The Colonial BancGroup, Inc. and Subsidiaries, as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000, which report is included in this Form 8-K. Registration Statements on Form S-3 Registration Numbers: 33-5665 333-25463 33-62071 Registration Statements on Form S-4 Registration Numbers: 333-32163 333-59403 Registration Statements on Form S-8 Registration Numbers: 2-89959 33-63347 33-11540 33-78118 33-13376 333-10475 33-41036 333-11255 33-47770 333-71841 333-64978 Post-Effective Amendment No. 2 on Form S-8 to Registration Statements on Form S-4 Registration Numbers: 333-14703 333-16481 333-14883 333-20291 333-39283 333-26537 /s/ PricewaterhouseCoopers LLP ----------------------------- PricewaterhouseCoopers LLP Montgomery, Alabama January 25, 2002 EX-99.1 4 dex991.txt RESTATED FINANCIALS FOR FOR 1999 & 2000 EXHIBIT 99.1 Selected Financial Data The following table sets forth selected financial data for the last five years:
(In thousands, except per share amounts) 2000 1999 1998 1997 1996 -------- -------- -------- --------- --------- Statement of Income Interest Income .......................................... $918,076 $ 766,038 $676,456 $ 581,831 $ 478,359 Interest expense ......................................... 517,754 384,891 339,765 284,925 231,076 -------- --------- -------- --------- --------- Net interest income ...................................... 400,322 381,147 336,691 296,906 247,283 Provision for loan losses ................................ 29,775 29,177 27,511 16,786 14,512 -------- --------- -------- --------- --------- Net interest income after provision for loan losses ........................................... 370,547 351,970 309,180 280,120 232,771 Noninterest income ....................................... 77,885 75,341 60,243 50,291 41,838 Noninterest expense ...................................... 258,691 238,048 237,905 197,904 173,951 SAIF special assessment(1) ............................... -- -- -- -- 4,754 Acquisition, restructuring and Y2K expenses (2) .......... -- 1,867 26,152 6,895 11,918 -------- --------- -------- --------- --------- Income from continuing operations before income taxes .................................................. 189,741 187,396 105,366 125,612 83,986 Applicable income taxes .................................. 69,556 69,360 38,527 45,300 28,993 -------- --------- -------- -------- -------- Income from continuing operations ........................ 120,185 118,036 66,839 80,312 54,993 -------- --------- -------- -------- -------- Discontinued Operations: (3) Income/(Loss) from discontinued operations, net of income taxes of ($450), $2,134, ($6,384), $6,698, and $4,834 for the year ended December 31, 2000, 1999, 1998, 1997, and 1996, respectively ................................. (743) 3,527 (10,448) 11,138 8,105 Loss on disposal of discontinued operations (net of income tax benefit of $2,616) .......................... (4,322) -- -- -- -- -------- --------- -------- -------- -------- Net Income ............................................... $115,120 $ 121,563 $ 56,391 $ 91,450 $ 63,098 ======== ========= ======== ========= ======== Income from continuing operations excluding merger related expenses and other non-recurring items (1)(2)(3)(4) ..................................... $120,185 $ 112,872 $ 84,358 $ 85,751 $ 67,618 Earnings Per Common Share: (5) Basic .................................................. $ 1.05 $ 0.98 $ 0.74 $ 0.79 $ 0.68 Diluted ................................................ 1.04 0.96 0.73 0.77 0.65 Income from continuing operations: Basic .................................................. $ 1.05 $ 1.02 $ 0.59 $ 0.74 $ 0.55 Diluted ................................................ $ 1.04 1.01 0.58 0.72 0.53 Average shares outstanding: Basic .................................................. 114,760 115,579 113,905 108,189 100,129 Diluted ................................................ 115,653 117,393 116,547 111,575 104,011 Cash dividends per common share: ......................... $ 0.44 $ 0.38 $ 0.34 $ 0.30 $ 0.27
________________ (1) Legislation approving a one-time assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $4,754,000 in expenses before income taxes and $3,091,000 net of applicable income taxes in 1996. (2) Acquisition expenses reflect costs associated with the business combinations discussed in Note 2 to the Consolidated Financial Statements. Restructuring charges are discussed in Note 19 to the Consolidated Financial Statements. (3) In December 2000, the company exited the mortgage servicing business. The financial results for this line of business have been separately reported as Discontinued Operations in all periods presented. (4) Gain on the sale of certain branches and other one time miscellaneous income of $10,167,000 before tax and $6,405,000 after tax have been excluded from 1999. (5) Restated to reflect the impact of two-for-one stock splits effected in the form of stock dividends paid February 11, 1997 and August 14, 1998. Note: All amounts have been restated to reflect the October 25, 2001 merger with Manufacturers Bancshares, accounted for as a pooling-of-interests. 7
(In thousands, except per share amounts) 2000 1999 1998 1997 1996 -------------- -------------- -------------- ------------- ------------- Statement of Condition Data at year end: Total assets ............................... $ 11,999,621 $ 11,097,823 $ 10,621,238 $ 8,201,195 $ 6,730,020 Loans, net of unearned income .............. 9,642,954 8,419,225 7,235,057 6,041,025 4,899,071 Mortgage loans held for sale ............... 9,866 33,150 692,042 238,540 167,993 Deposits ................................... 8,355,849 8,172,810 7,585,991 6,450,479 5,226,071 Long-term debt ............................. 862,247 911,071 746,447 315,281 39,092 Shareholders' equity ....................... 775,100 711,625 653,552 602,567 491,130 Average balances: Total assets ............................... 11,591,168 10,788,691 9,347,401 7,572,165 6,231,749 Interest-earning assets .................... 10,723,803 9,793,524 8,442,520 6,912,786 5,693,727 Loans, net of unearned income .............. 9,030,529 7,771,884 6,561,770 5,587,695 4,551,820 Mortgage loans held for sale ............... 14,711 341,692 407,672 158,966 135,135 Deposits ................................... 8,252,352 7,747,414 6,879,821 6,022,626 4,883,918 Shareholders' equity ....................... 727,495 688,474 655,304 560,436 466,221 Book value per share ......................... 6.93 6.26 5.82 5.59 4.96 Tangible book value per share ................ 7.59 6.96 6.57 6.22 5.26 Income from continuing operations excluding merger related expenses and other non-recurring items (1)(2)(3)(4) Average Assets ..................................... 1.04% 1.05% 0.90% 1.13% 1.09% Average shareholders' equity ............... 16.52 16.39 12.87 15.30 14.50 Income from continuing operations: Average assets ............................. 1.04 1.09 0.72 1.06 0.88 Average shareholders' equity ............... 16.52 17.14 10.20 14.33 11.80 Efficiency ratio from continuing operations excluding merger related expenses and other nonrecurring items (1)(2)(3)(4) ...... 54.10 52.92 53.35 55.01 54.40 Efficiency ratio from continuing operations .. 54.10 52.15 59.94 57.00 60.17 Dividend payout ratio ........................ 44.00 36.19 68.00 35.29 42.86 Average equity to average total assets ....... 6.28 6.38 7.01 7.40 7.48 Total nonperforming assets to net loans, other real estate and repossessions(5) ..... 0.53 0.54 0.59 0.73 0.80 Net charge-offs to average loans ............. 0.21 0.22 0.26 0.23 0.16 Allowance for loan losses to total loans (net of unearned income) ............. 1.14 1.18 1.18 1.21 1.27 Allowance for loan losses to nonperforming loans(5) ................................... 258% 275% 248% 250% 235%
___________ (1) Legislation approving a one-time assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $4,754,000 in expenses before income taxes and $3,091,000 net of applicable income taxes in 1996. (2) Acquisition expenses reflect costs associated with the business combinations discussed in Note 2 to the Consolidated Financial Statements. Restructuring charges are discussed in Note 19 to the Consolidated Financial Statements. (3) Gain on the sale of certain branches and other one time miscellaneous income of $10,167,000 before tax and $6,405,000 after tax have been excluded from 1999. (4) In December 2000, the company exited the mortgage servicing business. The financial results for this line of business have been separately reported as Discontinued Operations in all periods presented. (5) Nonperforming loans and nonperforming assets are shown as defined in Management's Discussion and Analysis of Financial condition and Results of Operations -- Nonperforming Assets. 8 Selected Quarterly Financial Data 2000-1999 (In thousands, except per share amounts)
2000 1999 ------------------------------------------ ------------------------------------------ Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 ------- -------- ------- -------- ------- -------- ------- -------- Interest income ................... $ 240,858 $ 235,599 $ 228,627 $ 212,992 $ 202,955 $ 196,242 $ 188,041 $ 178,800 Interest expense .................. 141,106 136,814 126,693 113,141 103,419 98,695 93,648 89,129 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income ............... 99,752 98,785 101,934 99,851 99,536 97,547 94,393 89,671 Provision for loan losses ......... 7,857 8,886 7,464 5,568 9,304 7,169 6,571 6,133 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income after provision for loan loss ................... 91,895 89,899 94,470 94,283 90,232 90,378 87,822 83,538 Income from continuing operations . 29,277 29,103 30,724 31,081 27,715 33,858 29,434 27,029 Discontinued operations (1) ....... (366) -- (4,107) (592) 3,603 (2,927) 1,320 1,531 --------- --------- --------- --------- --------- --------- --------- --------- Net Income (loss) ................. $ 28,911 $ 29,103 $ 26,617 $ 30,489 $ 31,318 $ 30,931 $ 30,754 $ 28,560 ========= ========= ========= ========= ========= ========= ========= ========= Earnings Per Share: Income from continuing operations (net of income taxes) (1): Basic ........................... $ .26 $ .25 $ .27 $ .27 $ 0.24 $ 0.29 $ 0.26 $ 0.23 Diluted ......................... $ .26 $ .25 $ .27 $ .27 $ 0.24 $ 0.29 $ 0.25 $ 0.23 Net income (loss): Basic ........................... $ .25 $ .25 $ .23 $ .27 $ 0.27 $ 0.27 $ 0.26 $ 0.25 Diluted ......................... $ .25 $ .25 $ .23 $ .26 $ 0.27 $ 0.27 $ 0.26 $ 0.24
___________ (1) In December 2000, the company exited the mortgage servicing business. The financial results for this line of business have been separately reported as Discontinued Operations in all periods presented. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Management's Discussion and Analysis of Financial Condition and Results of Operations is presented on the following pages. The principal purpose of this review is to provide the reader of the attached financial statements and accompanying footnotes with a detailed analysis of the financial results of The Colonial BancGroup, Inc. and subsidiaries (for the purposes of this Item 7, "BancGroup" or the "Company"). Among other things, this discussion provides commentary on BancGroup's history, operating philosophies, the components of net interest margin and balance sheet strength as measured by the quality of assets, the composition of the loan portfolio and capital adequacy. The following discussion reflects the effect of the pooling-of-interests business combination with Manufacturers Bancshares, which occurred on October 25, 2001. See Notes 1 and 2 to the Consolidated Financial Statements. STRATEGY BancGroup was reorganized in 1981 as a holding company with one bank and $166 million in assets. Through the acquisition of 58 community banks and strong internal growth, BancGroup has grown to a $12.0 billion multi-state bank holding company whose bank subsidiary, Colonial Bank, operates 243 branch sales offices through 11 operating regions in six states. These operating regions are sometimes referred to in this discussion as "regional banks". The foundation of BancGroup is built upon a community banking philosophy that allows local responsibility for customer relationships. This operating philosophy has been important in making acquisitions, retaining skilled and highly motivated local management teams and developing a strong customer base, particularly with respect to lending relationships. The expertise in each local market is supported by consolidated operations and a centralized credit review function, which allows the local banking officers to concentrate on the customer. Through this structure of local customer relationship responsibility and consolidated operations, the local banks have decision making capability while at the same time having an effective operational structure at their disposal to service the customer in the most cost effective and efficient manner. There will continue to be considerable competition in all of BancGroup's markets. Now that the previous objectives of expanding our geographic footprint through acquisitions and streamlining operations have been substantially achieved, BancGroup has positioned itself to continue its success by focusing inward, employing internal growth strategies and fully utilizing its corporate synergies and efficiencies. These internal growth strategies include quality loan growth through its management expertise in each regional market, generating deposit growth through the development of customer relationships and competitive product offerings, continued development of its presence in the Company's higher growth markets, growth in noninterest income through continued expansion of its fee based products and services and the ongoing development of its sales oriented business culture with an emphasis on customer service. 9 Loan and Deposit Growth From 1996 through 1998, BancGroup's acquisitions established operations in some of the highest growth markets in the country such as Atlanta, Orlando, Miami, Southwest Florida, Dallas and Las Vegas. Due to the success of these efforts BancGroup's concentration of loans and deposits has significantly changed. From 1996 to 2000, the Company's loans in Alabama as a percent of total loans have declined from 81% to 44% while during the same time loans in Florida as a percentage of total loans have increased from 5% in 1996 to 40% in 2000. We expect our presence in all of these new markets to provide BancGroup the basis for future earnings growth. The following table illustrates the change in BancGroup's regional composition of loans and deposits (years prior to 2000 are as originally reported, prior to restatement for pooling of interests). % to Total At December 31, 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Loans: Alabama ............ 44% 49% 51% 63% 81% Florida ............ 40 34 33 27 5 Georgia ............ 10 10 10 9 12 Other .............. 6 7 6 1 2 ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% ==== ==== ==== ==== ==== Deposits: Alabama ............ 42% 46% 47% 59% 80% Florida ............ 43 37 35 30 8 Georgia ............ 7 9 9 9 9 Other .............. 8 8 9 2 3 ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% ==== ==== ==== ==== ==== Loan and deposit growth is emphasized in each market area through the Company's regional banks. BancGroup has been successful in competing for loans against other larger institutions, due primarily to the Company's local lending strategy which includes direct involvement by local management and directors. Because markets and communities differ widely, customers require different answers and solutions to their financial needs. Customers appreciate the knowledge of their business needs and the local environment that local banking officers can provide. BancGroup's goal is to meet the financial needs of retail and commercial banking customers. BancGroup expects to continue its successful growth by building on these local relationships. Internal loan growth was 15% and 16% for 2000 and 1999, respectively, while average retail deposits grew 9% for both 2000 and 1999. The following table illustrates the contribution of each state and reflects the significant impact of the high growth markets on consolidated loan and deposit growth. 10
% of Total at December 31 ------------------------- Contribution to internal loan growth: 2000 1999 ---- ----- Alabama ............................... 16% 33% Florida ............................... 56 42 Georgia ............................... 23 15 Other ................................. 5 10 --------- --------- 100% 100% ========= ========= Contribution to retail deposit growth: Alabama ............................... 27% 40% Florida ............................... 71 57 Georgia ............................... 5 14 Other ................................. (3) (11) --------- -------- 100% 100% ========= =========
Not only is it important to continue our growth but to also maintain our consistent strength in asset quality. Loan portfolio strength is sustained through establishing customer relationships, maintaining variety in the real estate loan portfolio and maintaining geographic diversity while continuing our conservative underwriting standards and credit review process. Eighty percent of the loan portfolio is secured by real estate. There are no major concentrations in any particular type of real estate loan. The loan portfolio reflects geographic diversity from Alabama to Atlanta then south to Central, Southwest and South Florida and westward in Dallas and Nevada. Each of these markets has a unique business environment which reacts quite differently to various economic conditions. Atlanta is considered the financial hub of the Southeast, a distribution center and light-manufacturing center while central Georgia is more rural with agricultural emphasis. In addition to the many retirement communities throughout Florida, there is also significant development in other business sectors. Central Florida is considered a travel and entertainment destination, and is a growing area for service and support businesses. South Florida is considered a "gateway to Latin America and South America" which provides for an opportunity to expand international banking activities. Dallas is a financial hub in the Southwest and is the home of numerous corporate headquarters, which generate significant growth in infrastructure and support services. Las Vegas and Reno are both travel and entertainment destinations and are fast becoming retiree destinations as well. Consequently, the Company believes that this overall geographic diversity will allow the loan portfolio to fare well during challenging national economic conditions. The local expertise with established customer relationships combined with independent oversight of credit decisions and conservative underwriting standards are key to the maintenance of high asset quality. The senior credit administration function provides the primary oversight of the credit review process. This administration function reviews larger credits prior to approval and also provides an independent review of credits on a continual basis. In addition, the Company has established regional bank loan committees made up of local officers and directors that approve loans up to certain levels. These committees provide local business and market expertise while BancGroup's senior management provides independent oversight through their participation in the state loan committees. As previously stated establishing local customer relationships, maintaining variety in the real estate loan portfolio, maintaining geographic diversity, continuing conservative underwriting standards and utilizing local expertise with independent oversight in credit decisions are all factors that allow BancGroup to maintain high asset quality, which is at the forefront of the Company's strategy. BancGroup's asset quality is demonstrated by its charge-off history and nonperforming asset levels, which for the past ten years have been among the lowest of our southeastern peers. Nonperforming assets as a percentage of loans and other real estate was 0.53% at December 31, 2000, its lowest year end level in ten years. Net charge-offs were 0.21% of average loans in 2000 and 0.22% in 1999 which also compare favorably to national averages. 11 Deposit growth is a primary focus of the Company's sales efforts. Management has established several initiatives to accomplish its deposit growth goals. In January 2000, BancGroup established a branch incentive program in which one of the key goals is for employees to achieve a quarterly deposit growth rate in their branches. In order to provide branch sales personnel with the necessary tools to accomplish their goals, they receive an on-going series of training programs in relationship-based selling, which develops their sales skills. The Company is in the process of enhancing its customer information system in order to facilitate the further development of existing customer relationships. This enhanced system will allow sales personnel to more effectively sell products and services to its customers by providing information related to the customer's product or service needs. Management has also contracted with a marketing consultant to target specific products and markets for future deposit campaigns in order to more cost effectively increase and retain its deposit base. Each of these initiatives is designed to provide a solid foundation for achieving the Company's deposit growth objectives. The regional banks have additional growth opportunities through the development of customer relationships by cross selling a variety of bank products and services. These products and services include various deposit products as well as other services such as wealth management, cash management, electronic banking, credit card and merchant services. As market demographics change, products and services are structured to meet the needs of a particular region or customer. Strong regional bank management supported by BancGroup's asset/liability and product and services management teams provide the Company with the resources to remain competitive in its deposit markets through on-going efforts to identify and implement products and services with attractive pricing that meet customer needs. The Company has established a strategy to grow and retain its deposit base while remaining competitive in deposit pricing and meeting the Company's funding and liquidity goals through the monitoring of our markets and customer needs and the expansion of sales efforts in the local branch sales office network. Growth Market Expansion As noted above, BancGroup, through acquisitions has established operations in some of the highest growth markets in the country such as Atlanta, Orlando, Miami, Southwest Florida, Dallas and Las Vegas. As evidenced by the previous charts, this strategy has contributed significantly to the Company's growth. BancGroup plans to continue its expansion in these high growth areas by selectively filling in these markets. This expansion will come primarily through the strategic placement of new branch locations that will expand our market presence and provide additional customer service in these areas. BancGroup's subsidiary bank acquired two additional branches in Nevada in January 2001 and has plans to establish approximately 11 new branches in the high growth markets listed above in the next two years. Noninterest Income Growth Customer needs are constantly changing and BancGroup continues to investigate methods of improving customer service through new services, product enhancements and technological advancements. Our current objective is to grow income from noninterest income sources by concentrating on wealth management products and services, cash management services, international banking services and electronic banking services. Noninterest income from continuing operations excluding nonrecurring income from the gain on sale of certain branches and other miscellaneous items increased 20% in 2000 and 8% in 1999. Because of our markets and the customers we serve, the Company expects wealth management products and services to play a major role in future growth. Through BancGroup's current investment services, the Company offers discount brokerage, investment sales, asset management, trust services and insurance including term, universal, whole life and long-term care. In 2001, the Company expects to complete the establishment of Colonial Brokerage, Inc. as a member of the NASD which will allow the Company to perform additional broker/dealer activities in order to better service its customers. Income from wealth management services has increased 131% in the last two years. Growth rates are expected to continue upward with the implementation of a financial planning department and the expanded services of Colonial Brokerage, Inc. BancGroup offers a complete package of cash management services, which include lock box services, sweep accounts, zero balance accounts, electronic data interchange, automated clearinghouse, and Business Banker Plus (TM), an online tool for bank account reporting services. Revenue from cash management services increased 133% in the last two years. BancGroup expects to continue growth in cash management services by expanding these services to existing customers through cross sell opportunities and enhanced sales efforts in our growth markets. The Company has in place strong local management with expertise in international banking. Through the efforts of this management team, international banking revenues have increased 308% in the last two years. The Company provides letters of credit 12 to top-tier banks, pre-export financing, import financing, funds transfer and check clearing services, trade syndication, merchant banking services and other miscellaneous services through the International Banking Department. The Company also services international customers through its private and executive banking group in Miami. BancGroup expects revenue from these services to grow through the increase in international customers and the need for these services. To meet customer's demands for banking when and where they want it, BancGroup continues to expand its electronic banking services. The Company has plans to offer additional services through the Internet and to introduce a Visa Business Check Card. The Company added 26 new ATMs to its network in 2000 and will continue to install ATMs in the most convenient and high traffic locations in order to provide better customer service and complement BancGroup's retail branch sales office network. Revenue generated by electronic banking services has increased 42% in the last two years. The Company plans to continue to expand resources to assure all products and services are among the most competitive in our markets. BancGroup has established a Product Review Team to perform an in-depth study of all products and services and recommend future product enhancement strategies by mid-2001. Sales Relationships, Customer Service and Profits BancGroup recognizes the need to continue its focus on a sales oriented culture. The Company has taken several steps to promote a more sales focused environment. These initiatives include converting branches to sales offices by reducing operational tasks to allow sales office personnel to focus on selling customer services, implementation of sales training for employees and the establishment of a sales incentive program designed to reward employees based on their sales office's achievement of specific objectives. The Company also incorporated into the incentive plan a customer service rating through the use of an independent company to "shop" the sales offices to test their level of product knowledge and customer service. Loan officers also participate in production oriented incentive compensation programs. The Company began an effort in 2000 to assign customers to a particular bank officer or branch sales representative. This assignment of customers will make one banker responsible for each customer relationship which will enhance customer relationships through better anticipation of the customer's financial needs. We believe that all of these efforts have contributed to the previously discussed growth experienced in loans, deposits and noninterest income as well as the effective containment of noninterest expenses. In addition these efforts are expected to enhance cross selling of products and services and expand customer relationships to include additional services. BancGroup cannot guarantee its success in implementing the initiatives or reaching the goals outlined in this discussion. The following analysis of financial condition and results of operations provides details with respect to this summary material and identifies trends concerning the initiatives taken in 2000. BUSINESS COMBINATIONS The acquisition of Manufacturers Bancshares, Inc. ("Manufacturers") was consummated on October 25, 2001. Manufacturers operated four branches in the Tampa, Florida area and had $297.4 million in total assets, $253.7 million in total loans, and $212.9 million in total deposits at the date of consummation. BancGroup issued 4,458,437 shares of its common stock to shareholders of Manufacturers, including shares issued pursuant to the exercise of Manufacturers stock options. This transaction was accounted for as a pooling of interests and all periods have been restated to include results on a combined basis. BancGroup's growth strategy has been to merge other financial institutions into BancGroup in order to increase the Company's market share in existing markets, expand into other growth markets, more efficiently absorb the Company's overhead and add profitable new lines of business. BancGroup has completed the following business combinations with other financial institutions. These business combinations have been reflected in the financial statements at December 31, 2000. The balances reflected below are as of the date of consummation.
Accounting Date BancGroup Total Total Total Financial Institutions Treatment Consummated Shares Assets Loans Deposits ---------------------- ------------- -------------- ------------ ---------- ---------- --------- (Dollars in thousands) 1998 United American Holding Corp. (FL) ...... Pooling 02/02/98 4,226,412 $ 275,263 $ 197,623 $ 236,773 ASB Bancshares, Inc. (AL) ............... Purchase 02/05/98 934,514 158,656 110,093 135,940 First Central Bank (FL) ................. Pooling 02/11/98 1,377,368 62,897 40,451 52,048 South Florida Banking Corp. (FL) ........ Pooling 02/12/98 3,864,458 255,769 172,992 226,999 Commercial Bank of Nevada (NV) .......... Pooling 06/15/98 1,684,314 129,577 86,251 117,749 CNB Holding Corporation (FL) ............ Pooling 08/12/98 1,767,562 89,893 58,456 81,445 FirstBank (TX) .......................... Pooling 08/31/98 2,782,038 187,445 59,664 163,254 First Macon Bank & Trust (GA) ........... Pooling 10/01/98 4,643,025 199,525 135,651 174,774 Prime Bank of Central Florida (FL) ...... Pooling 10/06/98 1,173,019 74,502 42,547 66,955 InterWest Bancorp (NV) .................. Pooling 10/15/98 1,748,338 131,590 83,689 114,516 TB&T, Inc. (TX) ......................... Purchase 12/01/98 1,248,499 110,986 42,689 101,335
The 1998 combinations with United American, First Central, South Florida, Commercial Bank of Nevada, FirstBank, First Macon, Prime Bank and InterWest were accounted for using the pooling-of-interests method. Accordingly, all financial statement amounts 13 have been restated to reflect the financial condition and results of operations as if the combinations had occurred at the beginning of the earliest period presented. The 1998 combination with CNB Holding was accounted for using the pooling-of-interests method; however, due to immateriality, the prior year financial statements were not restated. The remaining business combinations were accounted for as purchases, and the operations and income of the combined institutions are included in the income of BancGroup from the date of purchase. The 1998 combination with TB&T, Inc. included shares previously re-purchased by the company as treasury shares. Each of the combined institutions that were accounted for as purchases was merged into BancGroup or one of its subsidiaries as of the listed dates, and the income and expenses have not been separately accounted for since the respective mergers. For this reason and due to the fact that significant changes have been made to the cost structure of each combined institution, a separate determination of the impact after combination on the earnings of BancGroup for 1998 cannot reasonably be determined. 14 REVIEW OF RESULTS OF OPERATIONS Overview BancGroup's primary line of business is commercial banking through its wholly owned subsidiary Colonial Bank. The following summary of BancGroup's results of operations discusses the related impact of this line of business on the earnings of the Company. Line of Business Results
Discontinued Continuing Operations Operations Commercial Corporate/ Mortgage Consolidated Banking Other* Total Banking (1) BancGroup -------- -------- ------- ----------- --------- (Dollars in thousands) Year Ended December 31, 2000 Net interest income ................................ $407,343 $ (7,021) $400,322 $400,322 Provision for loan losses .......................... 29,775 -- 29,775 29,775 Noninterest income ................................. 77,849 36 77,885 77,885 Amortization and depreciation ...................... 31,483 (418) 31,065 31,065 Noninterest expense ................................ 223,325 4,301 227,626 227,626 -------- -------- -------- -------- -------- Income from continuing operations before income taxes ..................................... 200,609 (10,868) 189,741 189,741 Income taxes ....................................... 72,420 (2,864) 69,556 69,556 -------- -------- -------- -------- -------- Income from continuing operations .................. 128,189 (8,004) 120,185 120,185 Income (loss) from discontinued operations and Loss on disposal (net of taxes) .................. -- -- -- (5,065) (5,065) -------- -------- -------- -------- -------- Net Income (loss) ........................ $128,189 $ (8,004) $120,185 $ (5,065) $115,120 ======== ======== ======== ======== ======== Year Ended December 31, 1999 Net interest income ................................ $388,412 $ (7,265) $381,147 $381,147 Provision for loan losses .......................... 29,177 -- 29,177 29,177 Noninterest income ................................. 75,128 213 75,341 75,341 Amortization and depreciation ...................... 27,928 (408) 27,520 27,520 Noninterest expense ................................ 209,041 3,354 212,395 212,395 -------- -------- -------- -------- -------- Income from continuing operations before income taxes ..................................... 197,394 (9,998) 187,396 187,396 Income taxes ....................................... 73,041 (3,681) 69,360 69,360 -------- -------- -------- -------- -------- Income from continuing operations .................. 124,353 (6,317) 118,036 118,036 Income (loss) from discontinued operations (net of taxes).......................................... -- -- -- 3,527 3,527 -------- -------- -------- -------- -------- Net Income (loss) ........................ $124,353 $ (6,317) $118,036 $ 3,527 $121,563 ======== ======== ======== ======== ======== Year Ended December 31, 1998 Net interest income ................................ $343,460 $ (6,769) $336,691 $336,691 Provision for loan losses .......................... 27,511 -- 27,511 27,511 Noninterest income ................................. 61,346 (1,103) 60,243 60,243 Amortization and depreciation ...................... 25,414 (283) 25,131 25,131 Noninterest expense ................................ 236,475 2,451 238,926 238,926 -------- -------- -------- -------- -------- Income from continuing operations before income taxes ..................................... 115,406 (10,040) 105,366 105,366 Income taxes ....................................... 41,497 (2,970) 38,527 38,527 -------- -------- -------- -------- -------- Income from continuing operations .................. 73,909 (7,070) 66,839 66,839 Income (loss) from discontinued operations (net of taxes).......................................... -- -- -- (10,448) (10,448) -------- -------- -------- -------- -------- Net Income (loss) ......................... $ 73,909 $ (7,070) $ 66,839 $(10,448) $ 56,391 ======== ======== ======== ======== ========
___________ * Includes elimination of certain intercompany transactions. (1) In December 2000, the Company exited the mortgage servicing business. The financial results for this line of business have been separately reported as Discontinued Operations in all periods presented. The most significant factors affecting income for 2000, 1999 and 1998 are highlighted below and discussed in greater detail in subsequent sections. All results discussed are in reference to continuing operations, unless otherwise noted. . An increase of 9.5% in average earning assets in 2000. This follows an increase of 16.0% in 1999 and 22.1% in 1998. 15 . In 2000, the Company exited the mortgage servicing business. The financial results for this line of business have been separately reported as Discontinued Operations. . Net interest margin decreased to 3.76% in 2000 from 3.98% in 1999. . An increase of $12.7 million (20%) and $4.9 million (8%) in noninterest income in 2000 and 1999, respectively, (excluding gain on sale of certain branches and other one time miscellaneous income from 1999). . Internal loan growth of 15.0% from December 31, 1999 to December 31, 2000, following an increase of 16.0% from December 31, 1998 to December 31, 1999. . Maintenance of high asset quality and reserve coverage ratios. Net charge-offs were $18.7 million or 0.21% of average net loans in 2000 and $17.2 million or 0.22% of average net loans in 1999. . Noninterest expense, excluding acquisition and restructuring costs, and Y2K expenses, is 2.23% of average assets in 2000 compared to 2.21% in 1999. Noninterest expense for 1998 included $37.0 million in impairment of mortgage servicing rights. . Completion of the sale of the Dalton, Georgia branches and five supermarket branches resulting in an after-tax gain of $4.4 million in 1999. Net Interest Income Net interest income is the difference between interest and fees earned on loans, securities and other interest earning assets (interest income) and interest paid on deposits and borrowed funds (interest expense). Three-year comparisons of net interest income in dollars and the yields on a tax equivalent basis are reflected on the following schedule. This schedule is presented on a consolidated basis, which includes the mortgage operations. The net yield on interest-earning assets was 3.76% in 2000 compared to 3.98% in 1999 and 4.18% in 1998. Over this period net interest income on a tax-equivalent basis increased to $403 million for 2000 from $390 million for 1999 and $353 million for 1998. The principal factors affecting the Company's yields and net interest income are discussed on the following pages. Levels of Interest Rates In mid 1998, the Federal Reserve began raising their target for the fed funds rate from 4.75% to 6.50% up a total of 175 basis points by May 2000. The average fed funds rate target for 2000 was 6.37%, 116 basis points above the 1999 average of 5.21%. This large and rapid increase in market rates contributed to the decline in BancGroup's net interest margin. The funding mix also contributed to the decline, as deposit growth was concentrated in higher cost CD's and a new higher rate money market account launched in early 2000. These changes in funding mix were primarily the result of competitive pressure and the customers' desire for higher rate deposits in each of the Company's markets. Additionally short term and therefore rate sensitive borrowings rose $228 million. Altogether the rate on interest bearing liabilities rose 77 basis points from 4.71% in 1999 to 5.48% in 2000. The yield on earning assets was not able to keep pace rising just 49 basis points from 8.11% in 1999 to 8.60% in 2000. Additionally, we estimate that BancGroup's exit from the mortgage servicing business accounted for 1 basis point of the decline in margin. This is due to the average decline for 2000 of $327 million in mortgage loans held for sale, the $98 million in mortgage servicing rights and the $127 million in non-interest bearing custodial deposits. The outlook for rates in 2001 is much different. The economy appears to have slowed dramatically and the Federal Reserve has reacted quickly with two 50 basis points declines in their target fed funds rate in January 2001 alone. The market has expectations for additional declines as well. As discussed in the Liquidity and Interest Rate Sensitivity section, BancGroup's net interest income and margin should benefit from the rate decline in 2001. . Growth in Earning Assets One of the most significant factors in the Company's increase in income has been the 9.5%, 16.0% and 22.1% increase in average interest-earning assets in 2000, 1999, and 1998, respectively. In addition, and equally significant, average net loans increased $1.3 billion (16.2%) from December 31, 1999 to December 31, 2000. Earning assets as a percentage of total average assets were 16 92.5%, 90.8% and 90.3% in 2000, 1999 and 1998 respectively. However, the impact on net interest income from the growth in average loans was over shadowed by the compression in the net interest margin as previously discussed. . Mortgage Loans Held for Sale Mortgage loans held for sale represent single family residential mortgage loans originated or acquired then packaged and sold. The level and direction of long-term interest rates have a dramatic impact on the volume of mortgage loan originations from new construction and refinancings. In October 1999, the Company sold the wholesale production unit of the mortgage banking division. As a result of decreased activity due to the aforementioned sale and increasing mortgage interest rates, average mortgage loans held for sale decreased to $14.7 million in 2000 from $341.7 million in 1999 and $407.7 million in 1998. Also as a result of the sale of the wholesale production unit, the Company has entered into a third party correspondent relationship for the sale of its retail production of fixed rate mortgage loans, which substantially eliminates the need to hedge interest rate risk associated with new production. . Loan Mix At December 31, 2000, the Company's mix of loans reflected an increase in construction loans and commercial real estate loans to 17.6% and 33.3% of the total portfolio from 17.1% and 30.2%, respectively, at December 31, 1999. Residential real estate loans decreased to 28.0% of the total portfolio at December 31, 2000, from 31.6% at December 31, 1999. The increase in the construction and commercial real estate loans is primarily the result of loan growth in the Georgia, Florida, Nevada and Texas regions. The residential real estate loans are predominantly adjustable rate first mortgages that have a low level of credit risk and accordingly have lower yields than other types of loans. . Noninterest earning assets The decline in average noninterest-earning assets of $128 million from 1999 to 2000 is primarily due to the sale of the mortgage servicing rights as a result of the Company's exit from that line of business and more efficient cash management. Average cash balances declined by $27 million in 2000 and $18 million in 1999, as a result of specific programs aimed at improving the Company's cash management efficiency. . Cost of Funds The average cost of funds increased to 5.48% in 2000, compared to 4.71% in 1999 and 4.93% in 1998. The higher average cost of funds is primarily the result of the previously discussed increase in interest rates that began July 1999 and continued into 2000. BancGroup funds loans primarily with customer deposits. Competitive pressures on new time deposits and variable interest deposits remained strong. Due to these pressures, the Company's funding mix has shifted during the past two years to a higher concentration of borrowings, primarily through credit facilities with the Federal Home Loan Bank. The percentage of average total borrowings to total funding sources is 23% for 2000 and 1999 and 19% for 1998. These borrowings are an excellent funding source since they are at rates lower than or comparable to what the market rates are for new time deposit funds. In addition to these sources, the Company has initiated strategies to increase deposits through its retail branch network. As discussed under Liquidity and Interest Sensitivity, BancGroup's management considers these sources of funds to be adequate to fund future loan growth. . Noninterest-Bearing Deposits Noninterest-bearing deposits decreased by $124 million from 1999 to 2000 as a result of the transfer of custodial deposits linked to the mortgage servicing rights sold during late 1999 and 2000 as part of the Company's decision to exit the mortgage servicing business. 17 Average Volume and Rates
2000 1999 1998 ------------------------------- ----------------------------- ----------------------------- Average Average Average Average Average Average (In thousands) Volume Interest Rate Volume Interest Rate Volume Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: Interest-earning assets: Loans, net of unearned income(1) ............................ $ 9,030,529 $ 807,541 8.94% $ 7,771,884 $ 663,619 8.54% $6,561,770 $585,927 8.93% Mortgage loans held for sale ........... 14,711 1,168 7.94% 341,692 25,229 7.38% 407,672 29,585 7.26% Investment securities and securities available for sale: Taxable ............................ 1,443,077 95,540 6.62% 1,438,193 89,814 6.24% 1,158,131 74,165 6.40% Nontaxable(2) ...................... 110,639 8,221 7.43% 92,335 6,729 7.29% 93,721 6,981 7.45% Equity securities .................. 77,960 5,647 7.24% 83,709 5,670 6.77% 88,920 4,775 5.37% ------------ --------- ----------- --------- ---------- -------- Total securities ............... 1,631,676 109,408 6.71% 1,614,237 102,213 6.33% 1,340,772 85,921 6.41% Federal funds sold and securities purchased under resale agreements and other short-term investments ..... 46,887 3,657 7.80% 65,711 3,252 4.95% 132,306 7,039 5.32% ------------ --------- ----------- --------- ---------- -------- Total interest-earning assets .......... 10,723,803 921,774 8.60% 9,793,524 794,313 8.11% 8,442,520 708,472 8.39% ------------ --------- ----------- --------- ---------- -------- Allowance for loan losses .............. (104,824) (91,783) (78,016) Cash and due from banks ................ 292,287 319,290 336,996 Premises and equipment, net ............ 196,211 194,317 180,336 Other assets ........................... 483,691 573,343 465,565 ------------ ----------- ---------- Total Assets ........................... $ 11,591,168 $10,788,691 $9,347,401 ============ =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing demand deposits ..... $ 1,737,129 $ 59,785 3.44% $ 1,619,018 $ 44,345 2.74% $1,520,557 $ 45,229 2.97% Savings deposits ..................... 515,728 17,329 3.36% 582,402 17,668 3.03% 541,386 17,179 3.17% Time deposits ........................ 4,705,950 282,346 6.00% 4,128,030 217,153 5.26% 3,498,225 198,858 5.68% Short-term borrowings ................ 1,534,283 97,002 6.32% 1,306,255 66,765 5.11% 1,008,139 55,171 5.47% Long-term debt ....................... 972,426 62,259 6.40% 954,848 58,545 6.13% 647,148 39,324 6.08% ------------ --------- ----------- --------- ---------- -------- Total interest-bearing liabilities ... 9,465,516 518,721 5.48% 8,590,553 404,476 4.71% 7,215,455 355,761 4.93% ------------ --------- ----------- --------- ---------- -------- Noninterest-bearing demand deposits .. 1,293,545 1,417,964 1,319,653 Other liabilities .................... 104,612 91,700 156,989 ------------ ----------- ---------- Total liabilities .................... 10,863,673 10,100,217 8,692,097 Shareholders' equity ................. 727,495 688,474 655,304 ------------ ----------- ---------- Total Liabilities and shareholders' equity ................. $ 11,591,168 $10,788,691 $9,347,401 ============ =========== ========== Rate differential ...................... 3.12% 3.40% 3.46% Net interest income and net yield on interest-earning assets(3) ............................ $ 403,053 3.76% $ 389,837 3.98% $352,711 4.18% ========= ========= ========
__________ (1) Loans classified as nonaccruing are included in the average volume calculation. Interest earned and average rates on non-taxable loans are reflected on a tax equivalent basis. This interest is included in the total interest earned for loans. Tax equivalent interest earned is actual interest earned times 145%. (2) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is actual interest earned times 145%. Tax equivalent average rate is tax equivalent interest earned divided by average volume. (3) Net interest income divided by average total interest-earning assets. 18 An Analysis of Interest Increases (Decreases)
2000 Change From 1999 1999 Change From 1998 ------------------------------- ------------------------------- Attributed To (1) Attributed To (1) Amount Volume Rate Amount Volume Rate -------- -------- -------- -------- -------- -------- (In thousands) - --------------------------------------------- Interest income: Taxable securities .......................... $ 5,726 $ 306 $ 5,420 $ 15,649 $ 17,531 $ (1,882) Nontaxable securities(2) .................... 1,492 1,358 134 (252) (102) (150) Equity securities ........................... (23) (402) 379 895 (293) 1,188 -------- -------- -------- -------- -------- -------- Total securities ............................ 7,195 1,262 5,933 16,292 17,136 (844) Total loans (net of unearned Income) ........ 143,922 111,404 32,518 77,692 104,235 (26,543) Mortgage loans held for sale ................ (24,061) (25,828) 1,767 (4,356) (4,864) 508 Federal funds sold and Securities purchased under resale agreements and other short-term investments .............. 405 (1,110) 1,515 (3,787) (3,317) (470) -------- -------- -------- -------- -------- -------- Total ............................... 127,461 85,728 41,733 85,841 113,190 (27,349) -------- -------- -------- -------- -------- -------- Interest expense: Interest-bearing demand Deposits .................................... 15,440 3,419 12,021 (884) 2,824 (3,708) Savings deposits ............................ (339) (2,135) 1,796 489 1,265 (776) Time deposits ............................... 65,193 32,533 32,660 18,295 33,914 (15,619) Short-term borrowings ....................... 30,237 12,827 17,410 11,594 15,311 (3,717) Long-term debt .............................. 3,714 1,092 2,622 19,221 18,941 280 -------- -------- -------- -------- -------- -------- Total ............................... 114,245 47,736 66,509 48,715 72,255 (23,540) -------- -------- -------- -------- -------- -------- Net interest income ................. $ 13,216 $ 37,992 $(24,776) $ 37,126 $ 40,935 $ (3,809) ======== ======== ======== ======== ======== ========
__________ (1) Increases (decreases) are attributed to volume changes and rate changes on the following basis: Volume Change = change in volume times old rate. Rate Change = change in rate times old volume. The Rate/Volume change = change in volume times change in rate, and it is allocated between Volume Change and Rate Change at the ratio that the absolute value of each of those components bear to the absolute value of their total. (2) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is: actual interest earned times 145%. Tax equivalent average rate is: tax equivalent interest earned divided by average volume. Noninterest Income One of BancGroup's primary strategies has been to expand its noninterest income. The Company continues to emphasize growth in wealth management services, international banking, electronic banking services and cash management services. These services provide a broader base of revenue generation capabilities. Noninterest income increased $2.5 million or 3% from 1999 to 2000 and $15.0 million or 25% from 1998 to 1999. Noninterest income from continued operations excluding nonrecurring income from the gain on sale of certain branches and other miscellaneous items increased 20% in 2000 and 8% in 1999.
Increase (Decrease) ---------------------------------- 2000 1999 Years Ended December 31, Compared Compared ----------------------------- 2000 1999 1998 to 1999 % to 1998 % -------- -------- -------- --------- ----- --------- ----- (In thousands) Noninterest income (from continuing operations): Service charges on deposit accounts ................ 38,596 39,305 38,024 (709) (2) 1,281 3 Other charges, fees, and commissions ............... 12,198 8,434 7,634 3,764 45 800 10 Other income ....................................... 26,383 26,332 13,358 51 - 12,974 97 -------- -------- -------- --------- -------- Subtotal ............................................. 77,177 74,071 59,016 3,106 4 15,055 26 Other noninterest income items: Securities gains, net .............................. 538 497 1,449 41 (952) Gain (loss) on disposal of other real estate and repossessions ................... 170 773 (222) (603) 995 -------- -------- -------- --------- -------- Total noninterest income ................... $ 77,885 $ 75,341 $ 60,243 $ 2,544 3% $ 15,098 25% ======== ======== ======== ========= ========
Noninterest income from deposit accounts is significantly affected by competitive pricing on these services and the volume of noninterest-bearing accounts. Average noninterest bearing retail deposits remained flat in 2000 while service charges declined 2%. 19 Competitive pressures and increasing rates resulting in a shift to other deposit products are the primary reason for the decline in service charges in 2000. The increase in 1999 of 3% is primarily the result of increases in volume, increases in service fee rates, and the acquisitions completed in 1998. Other income of $10 million was recorded in 1999 as a result of gains on the sales of the five supermarket branches and the Company's Dalton, Georgia branches as well as other one-time miscellaneous income. Excluding these one time gain items from 1999, other income increased $10.2 million or 63% in 2000 and $2.8 million or 21% in 1999. The increase in other service charges and fees and other income are primarily the result of additional fees generated by wealth management, electronic banking, and international banking services. Income from wealth management services was $8.2 million in 2000 as compared to $5.5 million in 1999, a 48% increase. Wealth management services include asset management, investment sales, trust services and annuity sales. Electronic banking fees which include ATM surcharges and check card fees has increased by $984,000 or 21% in 2000 as compared to 1999. The international banking department located in the Miami region generated $1.6 million of income in 2000 compared to $1.4 million in 1999, an 18% increase. As shown in the table above, securities gains in each of the three years were $538,000, $497,000 and $1,449,000, respectively. While a substantial portion of the securities portfolio is considered available for sale, BancGroup currently intends to hold substantially its entire securities portfolio for investment purposes. Noninterest Expense Noninterest expense to average assets was 2.23%, 2.21%, and 2.55% in 2000, 1999, and 1998, respectively (from continuing operations excluding acquisition and restructuring costs, and Y2K expenses.) The Company completed the conversion of banks acquired in Texas in the first quarter of 2000, and conversions of banks acquired in Nevada in the second quarter of 2000. The Company completed the sale of five supermarket branches in the first quarter of 1999, closed several unprofitable branches in the second quarter of 1999, completed the sale of its Dalton, Georgia branches in the third quarter of 1999 and sold the wholesale mortgage production unit in the fourth quarter of 1999. In July 2000, the Company announced definitive plans to exit the mortgage servicing business. As of December 31, 2000 all sales of servicing rights and transfers of underlying loans were completed. As a result of the sale, the 13 retail mortgage offices were merged into the regional bank structure of Colonial Bank. The expenses related to discontinued operations are not reflected in the following table. Each of these initiatives resulted in a reduction in operating expenses after its completion.
Increase (Decrease) -------------------------------------- 2000 1999 Years Ended December 31, Compared Compared ------------------------------- 2000 1999 1998 to 1999 % to 1998 % -------- -------- -------- --------- ----- --------- ----- (In thousands) Noninterest expense (From continuing operations): Salaries and employee benefits ........... $129,254 $117,815 $116,137 $ 11,439 10% $ 1,678 1% Occupancy expense, net ................... 31,572 29,484 30,371 2,088 7 (887) (3) Furniture and equipment expenses ......... 29,493 25,633 22,881 3,860 15 2,752 12 Amortization of intangible assets ........ 5,226 5,241 4,927 (15) -- 314 6 Acquisition and restructuring expense ................................ -- 1,307 21,535 (1,307) (100) (20,228) (94) Y2K expense .............................. -- 560 4,617 (560) (100) (4,057) (88) FDIC and state assessments ............... 2,005 1,677 2,259 328 20 (582) (26) Advertising and public relations ......... 7,908 7,863 9,226 45 1 (1,363) (15) Stationery, printing and supplies ........ 4,974 5,730 5,982 (756) (13) (252) (4) Telephone ................................ 6,554 6,221 5,701 333 5 520 9 Legal fees ............................... 4,707 4,634 5,360 73 2 (726) (14) Postage and courier ...................... 6,867 6,795 6,058 72 1 737 12 Insurance ................................ 1,451 1,507 1,616 (56) (4) (109) (7) Professional services .................... 6,309 7,058 9,796 (749) (11) (2,738) (28) Travel ................................... 3,575 3,636 4,722 (61) (2) (1,086) (23) Other .................................... 18,796 14,754 12,869 4,042 27 1,885 15 -------- -------- -------- --------- ----- --------- ----- Total noninterest expense ......... $258,691 $239,915 $264,057 $ 18,776 8% $ (24,142) (9)% ======== ======== ======== ========= ===== ========= ===== Noninterest expense from continuing operations excluding, acquisition, restructuring and Y2K expenses to average assets ............. 2.23% 2.21% 2.55%
20 Salaries and benefits increased by $11.4 million in 2000 and $1.7 million in 1999. The increase in 2000 is due to normal salary rate increases and increases in commissions and incentives. The Company implemented a branch incentive program in 2000 in an effort to create a more "sales" and "team oriented" approach to servicing customers. The increase in 1999 is primarily due to normal salary rate increases offset by a reduction in personnel resulting from branch sales and closings. As discussed in Note 1 to BancGroup's Consolidated Financial Statements, BancGroup defers certain salary and benefit costs associated with loan originations and amortizes these costs as yield adjustments over the life of the related loans. Net occupancy expense increases are primarily due to new branch construction, improvements to existing branch locations and the relocation of certain branches and regional headquarters for better market presence. Furniture and equipment expense increases are due to the previously mentioned branch initiatives as well as improvements to the Company's computer and communications technology. These improvements give the Company the ability to expand its customer base and continue to improve customer service and back-office efficiencies. In 1999 these increases were offset by reductions in costs related to the sale of certain branches. A waiver of the state assessment in the first and second quarters of 1999 caused the decrease in the FDIC and state assessments in 1999 of $582,000. Decreases in supplies are primarily due to operating efficiencies gained through technological advancements specifically related to the imaging of internal reports. The decrease in 2000 of professional services and travel and the remaining decreases in 1999 are primarily the result of the completion of the conversion process in 2000 and 1999 of two and seven acquired banks, respectively. The increases in other expenses are due to normal expenses resulting from the Company's growth. Acquisition Expense and Restructuring Charges The results for 2000 and 1999, reflect the continued implementation of the Company's plan to de-emphasize acquisitions, complete system conversions, streamline operations and eliminate less profitable operations. As a result of this focus, the Company recognized acquisition and conversion related expenses of $0, $1.3 million, and $12.5 million for the years ended December 31, 2000, 1999, and 1998, respectively. These expenses related primarily to transaction costs such as legal and accounting fees and incremental charges related to the integration of acquired banks, such as system conversion (including contract buy-outs and write-offs of equipment) and employee severance. As of December 31, 2000, two lease obligations remain outstanding from the Florida Region restructuring. These lease obligations will expire in mid 2001. Year 2000 Disclosure BancGroup aggressively addressed the challenges that Year 2000 presented to its operations. The transition into Year 2000 went according to plan with all functions doing business as usual. BancGroup incurred expenditures of approximately $12,500,000 in expenditures on the Year 2000 project, with $0 in 2000, $1,076,000 during 1999, and $11,000,000 in 1998. Year 2000 project costs of approximately $560,000 were expensed during 1999 while $4,617,000 was expensed during 1998. Income Taxes The provision for income taxes is as follows:
2000 1999 1998 ---- ---- ---- Continuing operations ........... $ 69,556 $ 69,360 $ 38,527 Discontinued operations ......... (3,066) 2,134 (6,384) --------- --------- --------- Total ....................... $ 66,490 $ 71,494 $ 32,143
BancGroup is subject to federal and state taxes at combined rates of approximately 36.5% for regular tax purposes and 23% for alternative minimum tax purposes. These rates are reduced or increased for certain nontaxable income or nondeductible expenses, primarily consisting of tax exempt interest income, partially taxable dividend income, nondeductible amortization of goodwill, and certain nondeductible acquisition expenses. Discontinued Operations 21 In July 2000, BancGroup announced its definitive plans to exit the mortgage servicing business. BancGroup recorded a loss on disposal of the discontinued operations of $4.3 million after tax. The results of the mortgage servicing business have been classified as discontinued operations. The effects of this decision are the elimination of risk associated with mortgage servicing rights and the related volatility in earnings. It also allows the Company to reallocate approximately $40 million of capital for more profitable purposes. REVIEW OF FINANCIAL CONDITION Overview Changes in ending asset balances of the company's segments and changes in selected components of the Company's balance sheet from December 31, 1999 to December 31, 2000 are as follows:
Increase (Decrease) Amount % ----------- -------- (In thousands) Assets: Commercial Banking .......................................... $ 1,207,950 11.2 % Mortgage Banking(1) ......................................... (306,360) (89.7) Corporate/Other(2) .......................................... 208 1.7 ----------- Total Assets $ 901,798 8.1 % =========== Other Balance Sheet Components: Securities available for sale and investment securities ..... $ (57,390) (3.6)% Mortgage loans held for sale ................................ (23,284) (70.2) Loans, net of unearned income ............................... 1,223,729 14.5 Mortgage servicing rights (1) ............................... (238,405) (100.0) Deposits .................................................... 183,039 2.2 Short-term borrowings ....................................... 703,709 58.9 Long-term debt .............................................. (48,824) (5.4)
- ---------- (1) The mortgage banking segment was discontinued in 2000. (2) Includes eliminations of certain intercompany transactions. Management continually monitors the financial condition of BancGroup in order to protect depositors, increase shareholder value and protect current and future earnings. The most significant factors affecting BancGroup's financial condition from 1999 through 2000 have been: . Internal loan growth of 15.0% in 2000 following 16.0% growth in 1999. . Loan mix changed to reflect a decrease in residential real estate loans to 28.0% of the total loan portfolio from 31.6% in 1999. . Maintenance of high asset quality and reserve coverage of nonperforming assets. Nonperforming assets were 0.53% and 0.54% of related assets at December 31, 2000 and 1999, respectively. Net charge-offs were 0.21% of average loans during 2000 and 0.22% in 1999. The allowance for loan losses was 1.14% of loans at December 31, 2000, providing a 258% coverage of nonperforming loans (nonaccrual and renegotiated). . A loan to deposit ratio of 115.4% and 103.1% at December 31, 2000 and 1999, respectively. Federal Home Loan Bank borrowings, correspondent fed funds lines and brokered CD's continue to be a source of funding allowing the Company funding flexibility. . Decrease of $23 million in mortgage loans held for sale during 2000 due primarily to the sale of the wholesale mortgage production unit in October 1999 as well as a decrease in refinancing activities. . The exiting of the mortgage servicing business through the sales of servicing rights and transfers of the underlying loans resulting in no mortgage servicing rights at December 31, 2000 compared to $238 million at December 31, 1999. This initiative also resulted in the transfer of $220 million in noninterest-bearing custodial deposits. . Issuance of $100 million 8% subordinated notes in 1999 which qualifies as Tier II Capital. . Repurchase of 3,382,200 shares of the Company's common stock. . These items, as well as a more detailed analysis of BancGroup's financial condition, are discussed in the following sections. Loans Growth in loans and maintenance of a high quality loan portfolio are the principal ingredients for improved earnings. Management's emphasis, within all of BancGroup's banking regions, is on loan growth in accordance with local market demands and in reliance upon the lending experience and expertise in the regional banks. Management believes that its strategy of meeting local demands and utilizing local lending expertise has proved successful. This success is evident in internal loan growth of 15.0% in 2000, 16.0% in 1999, 15.1% in 1998 and 9.8% in 1997, excluding acquisitions. Internal loan growth continues to be a major factor in BancGroup's increasing earnings. This local customer relationship responsibility combined with independent oversight of credit decisions and conservative underwriting standards are key to the maintenance of the Company's high asset quality. Management believes that any existing concentrations of loans, whether geographically, by industry, or by borrower, do not expose BancGroup to unacceptable levels of risk. The current concentration of loans remains diverse in location, size, and collateral function. These differences, in addition to our emphasis on quality underwriting, serve to reduce the risk of losses. BancGroup has a significant concentration of commercial real estate and construction loans representing 33.3% and 17.6% of total loans, respectively. BancGroup's commercial real estate and construction loans are spread geographically throughout Alabama and Florida and other areas including metropolitan Atlanta, Georgia, Dallas, Texas and Reno and Las Vegas, Nevada with no more than 18% of these loans in any one geographic region. The Alabama economy experiences a generally slow but steady rate of growth, while Georgia, Florida, Texas and Nevada are experiencing higher rates of growth. Real estate in BancGroup's lending areas has not experienced significantly inflated values due to excessive speculation or inflationary pressures. The collateral held in the commercial real estate and construction portfolios consists of various property types with no one property type constituting a concentration. For BancGroup, these property types are primarily multi-family housing, hotels, office buildings, warehouses, shopping centers, amusement/recreational facilities, one-to-four family residential housing developments, and health service facilities. BancGroup has diversified its portfolio of commercial real estate loans with less than 10% of its loan portfolio concentrated in any of the previously mentioned in producing activities. Risk is further reduced by the relatively small average loan size and the application of conservative underwriting guidelines. BancGroup's commercial real estate and construction loans continue to perform at acceptable levels. Net charge-offs to average loans for the commercial real estate portfolio were .09% and 0.11% for 2000 and 1999, respectively. Net charge-offs to average loans for the construction portfolio were .03% and .10% for 2000 and 1999, respectively. BancGroup also continues to have a significant concentration of residential real estate loans as they represent 28.0% of total loans. Substantially all of these loans are adjustable rate first mortgages on single-family, owner-occupied properties, and therefore, have minimal credit risk and lower interest rate sensitivity. A portion of these loans was acquired through bank acquisitions. BancGroup has a history of successfully lending in the residential real estate market and its quality ratios remain favorable in this portfolio segment. Loans classified as commercial, financial, and agricultural, representing 13.1% of total loans, consist of secured and unsecured credit lines and equipment loans for various industrial, agricultural, commercial, financial retail, or service businesses. The risk associated with loans in the category are generally related to earnings capacity of, and the cash flows generated from, the individual business activities of the borrowers. Consumer loans, representing 2.9% of total loans, are loans to individuals for various purposes. Automobile loans and unsecured loans makeup the majority of these loans. The principle source of repayment is the earning capacity of the individual borrower, as well as the value of the collateral for secured loans. BancGroup's international banking department, located in the Miami region, engages in confirming letters of credit, primarily with top-tier banks in Latin America. Loans outstanding to Latin American banks at December 2000 totaled approximately $125 million. However, due to the immaterial balance of these loans in relation to total loans, these amounts will not be reported separately. BancGroup established a mortgage warehouse lending department in the third quarter of 1998. This department provides lines of credit collateralized by residential mortgage loans to top tier mortgage companies predominantly in the Southeast. Loans outstanding 23 at December 31, 2000 and 1999 were $377 million and $173 million, respectively, with unfunded commitments of $213 million and $257 million at December 31, 2000 and 1999, respectively. These loans are categorized as other loans in the following schedule. BancGroup does not have a syndicated lending department; however, the Company has fourteen credits with commitments (funded and unfunded) of $193 million that fall within the bank regulatory definition of a "Shared National Credit" (generally defined as a total loan commitment in excess of $20 million that is shared by three or more lenders). The largest outstanding amount to any single borrower is under $30 million, with the smallest credit being approximately $190,000. Although by definition these are considered Shared National Credits, BancGroup's loan officers have established long-term relationships with each of these borrowers. These commitments are comprised of the following: . 51% - commercial real estate projects located within existing markets . 16% - international credits which are comprised of unfunded short-term commitments to tier one correspondent banks . 18% - mortgage warehouse lines to two large institutions (the mortgage warehouse lending department conducts its own audits of these borrowers) . 15% - operating facilities to two large national corporations headquartered in the Florida markets BancGroup participates heavily in the management of each of the 14 relationships. Management believes that these are sound participations involving credits that fit within Colonial's lending philosophy and meet it's conservative underwriting guidelines. Furthermore, none of these credits was adversely classified in the last federal bank regulatory examination of "Shared National Credits," and these loans are currently in full compliance with all terms and agreements. As discussed more fully in subsequent sections, management has established policies and procedures to ensure maintenance of adequate liquidity and liquidity sources. BancGroup has arranged funding sources in addition to customer deposits that provide the company the capability to exceed a 100% loan to deposit ratio and maintain adequate liquidity. Gross Loans by Category
December 31, ----------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ----------- ---------- (In thousands) Commercial, financial and agricultural .. $1,264,281 $1,171,157 $1,049,397 $ 839,944 $ 701,301 Real estate-- commercial ................ 3,208,911 2,543,532 2,300,483 1,945,768 1,309,422 Real estate-- construction .............. 1,700,281 1,435,783 1,273,751 1,111,868 642,450 Real estate-- residential ............... 2,697,934 2,658,922 2,149,456 1,746,357 1,951,872 Installment and consumer ................ 278,739 306,593 275,015 253,796 196,168 Other ................................... 493,156 303,648 189,122 145,026 102,988 ---------- ---------- ---------- ----------- ---------- Total loans ................... $9,643,302 $8,419,635 $7,237,224 $ 6,042,759 $4,904,201 ========== ========== ========== =========== ==========
24 Allocation of Allowance for Loan Losses Allocations of the allowance for loan losses are made on an individual loan basis for all identified potential problem loans with a percentage allocation for the remaining portfolio. The allocation of the remaining allowance represents an approximation of the reserves for each category of loans based on management's evaluation of the respective historical charge-off experience and risk within each loan type. Allocation of the Allowance for Loan Losses
December 31, --------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------- ------------------- Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- (In thousands) Balance at end of period Applicable to: Commercial, financial, and agricultural.......... $ 28,411 13.1% $ 23,629 13.9% $ 19,357 14.5% $ 14,134 13.9% $ 13,044 14.3% Real estate commercial..... 45,017 33.3% 35,961 30.2% 30,998 31.8% 26,361 32.2% 20,031 26.7% Real estate construction... 16,089 17.6% 17,096 17.1% 14,775 17.6% 13,913 18.4% 10,923 13.1% Real estate residential.... 13,705 28.0% 13,577 31.6% 12,659 29.7% 12,202 28.9% 11,484 39.8% Installment and consumer... 3,021 2.9% 4,091 3.6% 4,979 3.8% 5,110 4.2% 4,692 4.0% Other...................... 3,812 5.1% 4,673 3.6% 2,311 2.6% 1,327 2.4% 2,145 2.1% -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total.................... $110,055 100.0% $ 99,027 100.0% $ 85,079 100.0% $ 73,047 100.0% $ 62,319 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Loan Maturity/Rate Sensitivity As discussed in a subsequent section, BancGroup seeks to maintain adequate liquidity and minimize exposure to interest rate volatility. The goals of BancGroup with respect to loan maturities and rate sensitivity continue to focus on shorter-term maturities and floating or adjustable rate loans. At December 31, 2000, approximately 50.1% of loans were floating rate loans. Contractual maturities may vary significantly from actual maturities due to loan extensions, early payoffs due to refinancing and other factors. Fluctuations in interest rates are also a major factor in early loan pay-offs. The uncertainties of future events, particularly with respect to interest rates, make it difficult to predict the actual maturities. The following table represents the contractual maturity at December 31, 2000. Loan Maturity/Rate Sensitivity
December 31, 2000 ------------------------------------------------------------------------------------ Rate Sensitivity, Loans Maturing Maturing Rate Sensitivity Over 1 Year --------------------------------- ----------------------- ---------------------- Within Over 5 1 Year 1-5 Years Years Fixed Floating Fixed Floating --------- ----------- ---------- ---------- ---------- --------- ---------- (In thousands) Commercial, financial, and agricultural........... 578,422 $ 176,378 $ 509,481 $ 562,813 $ 701,468 $ 388,118 $ 297,741 Real estate-- commercial..... 571,162 917,902 1,719,847 2,254,504 954,407 2,046,147 591,602 Real estate-- construction... 910,899 117,671 671,711 389,606 1,310,675 148,246 641,136 Real estate-- residential.... 308,815 714,068 1,675,051 1,293,741 1,404,193 1,111,004 1,278,115 Installment and consumer..... 96,010 20,825 161,904 254,561 24,178 173,520 9,209 Other ....................... 403,769 34,673 54,714 76,334 416,822 49,294 40,093 --------- ----------- ---------- ---------- ---------- --------- ---------- 2,869,077 $ 1,981,517 $4,792,708 $4,831,559 $4,811,743 $3,916,329 $2,857,896 ========= =========== ========== ========== ========== ========== ==========
Loan Quality A major key to long-term earnings growth is maintenance of a high quality loan portfolio. BancGroup's directive in this regard is carried out through its policies and procedures for the underwriting and ongoing review of loans and through a company wide senior credit administration function. This function reviews larger credits prior to approval and also provides an independent review of credits on a continued basis. In addition, the Company has established regional bank loan committees made up of local officers and 25 directors that approve loans up to certain levels. These committees provide local business and market expertise while BancGroup's senior management provides independent oversight by participating in the state loan committees. BancGroup has standard policies and procedures for the evaluation of new credits, including debt service evaluations and collateral guidelines. Collateral guidelines vary with the credit worthiness of the borrower, but generally require maximum loan-to-value ratios of 85% for commercial real estate and 90% for residential real estate. Commercial non-real estate, financial and agricultural loans are generally collateralized by business inventory, accounts receivables or new business equipment at 50%, 80% and 90% of estimated value, respectively. Installment and consumer loan collateral, where required, is based on 90% or lower loan to value ratios. Collateral values referenced above are monitored and estimated by loan officers through inspections, reference to broad measures of market values, and current experience with similar properties or collateral. Loans with loan-to-value ratios in excess of 80% have potentially higher risks which are offset by other factors including the borrowers or guarantors' credit worthiness, the borrowers other banking relationships, the bank's lending experience with the borrower, and any other potential sources of repayment. Based on the credit review process and loan grading system, BancGroup determines its allowance for loan losses and the amount of provision for loan losses. The allowance for loan losses is maintained at a level which, in management's opinion, is adequate to absorb potential losses on loans present in the loan portfolio. The amount of the allowance is affected by: (1) loan charge-offs, which decrease the allowance; (2) recoveries on loans previously charged-off, which increase the allowance; (3) the provision for loan losses charged to income, which increases the allowance, and (4) the allowance for loan losses of acquired banks. In determining the provision for loan losses, it is necessary for management to monitor fluctuations in the allowance resulting from actual charge-offs and recoveries and to periodically review the size and composition of the loan portfolio in light of historical loss experience and current economic conditions. The overall goal and result of these policies and procedures is to provide a sound basis for new credit extensions and an early recognition of problem assets to allow increased flexibility in their timely disposition. Loan Loss Experience The ratio of net charge-offs to average loans was 0.21%, 0.22%, and 0.26% in 2000, 1999, and 1998, respectively. As a result of the Company's localized lending strategies and early identification of potential problem loans, BancGroup's net charge-offs have been consistently low. In addition, the current concentration of residential real estate loans has had a favorable impact on net charge-offs. The following schedule reflects greater than 100% coverage of nonperforming loans (nonaccrual and renegotiated) by the allowance for loan losses. Management has not targeted any specific coverage ratio in excess of 100%, and the coverage ratio may fluctuate significantly as larger loans are placed into or removed from nonperforming status. Management's focus has been on establishing reserves related to an early identification of potential problem loans. Management is committed to maintaining adequate reserve levels to absorb losses present in the loan portfolio. Summary of Loan Loss Experience
Years Ended December 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- (In thousands) Allowance for loan losses-- January 1 ....................... $99,027 $85,079 $73,047 $62,319 $54,403 Charge-offs: Commercial, financial and agricultural .................... 10,650 10,162 6,543 5,632 3,702 Real estate -- commercial ................................. 3,399 3,348 3,355 2,994 2,421 Real estate -- construction ............................... 529 1,190 1,744 436 1,808 Real estate -- residential ................................ 3,260 2,673 3,443 1,782 935 Installment and consumer .................................. 4,492 5,351 6,882 5,728 3,499 Other ..................................................... 1,117 1,711 1,468 695 239 ------- ------- ------- ------- ------- Total charge-offs .................................. 23,447 24,435 23,435 17,267 12,604 ------- ------- ------- ------- ------- Recoveries: Commercial, financial and agricultural .................... 1,272 2,519 1,278 1,016 1,462 Real estate -- commercial ................................. 745 633 1,456 1,026 1,546 Real estate -- construction ............................... 62 59 52 91 3 Real estate -- residential ................................ 440 873 589 246 707 Installment and consumer .................................. 1,898 2,702 1,953 1,820 1,591 Other ..................................................... 283 385 788 137 82 ------- ------- ------- ------- ------- Total recoveries .................................. 4,700 7,171 6,116 4,336 5,391 ------- ------- ------- ------- ------- Net charge-offs ............................................. 18,747 17,264 17,319 12,931 7,213 Addition to allowance charged to operating expense .......... 29,775 29,177 27,511 16,786 14,512 Allowance added from bank acquisitions ...................... -- 2,035 1,840 6,873 617 ------- ------- ------- ------- -------
26 Allowance for loan losses--December 31 ...................... $ 110,055 $ 99,027 $ 85,079 $ 73,047 $ 62,319 ========== ========== ========== ========== ========== Loans (net of unearned income) December 31 .................. $9,642,954 $8,419,225 $7,235,057 $6,041,025 $4,899,071 Ratio of ending allowance to ending loans (net of unearned income)..................................................... 1.14% 1.18% 1.18% 1.21% 1.27% Average loans (net of unearned income) ...................... $9,030,529 $7,771,884 $6,561,770 $5,587,695 $4,551,820 Ratio of net charge-offs to average loans (net of unearned income)..................................................... 0.21% 0.22% 0.26% 0.23% 0.16% Allowance for loan losses as a percent of nonperforming loans (nonaccrual and renegotiated) ............................. 258% 275% 248% 250% 235%
Nonperforming Assets BancGroup classifies problem loans into four categories: nonaccrual, past due, renegotiated and other potential problems. When management determines that a loan no longer meets the criteria for a performing loan and collection of interest appears doubtful, the loan is placed on nonaccrual status. Loans are generally placed on nonaccrual if full collection of principal and interest becomes unlikely (even if all payments are current) or if the loan is delinquent in principal or interest payments for 90 days or more, unless the loan is well secured and in the process of collection. BancGroup's policy is also to charge off consumer installment loans 120 days past due unless they are in the process of foreclosure and are adequately collateralized. Management closely monitors all loans that are contractually 90 days past due, renegotiated or nonaccrual. These loans are summarized as follows: Nonperforming Assets
December 31, ------------------------------------------------------ 2000 1999 1998 1997 1996 --------- -------- -------- -------- -------- (In thousands) Aggregate loans for which interest is not being accrued ................................ $ 41,419 $ 34,765 $ 32,911 $ 28,209 $ 24,780 Aggregate loans renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower ........................... $ 1,161 1,265 1,334 1,014 1,683 -------- -------- -------- -------- -------- Total nonperforming loans* ............................ 42,580 36,030 34,245 29,223 26,463 Other real estate and in-substance foreclosure ........ 8,680 9,009 8,164 14,345 12,557 Repossessions ......................................... 298 206 564 796 338 -------- -------- -------- -------- -------- Total nonperforming assets* ........................... $ 51,558 $ 45,245 $ 42,973 $ 44,364 $ 39,358 -------- -------- -------- -------- -------- Aggregate loans contractually past due 90 days for which interest is being accrued ............ $ 9,842 $ 11,204 $ 9,015 $ 7,346 $ 7,860 Total nonperforming loans as a percent of net loans ........................................ 0.44% 0.43% 0.47% 0.48% 0.54% Total nonperforming assets as a percent of Net loans, other real estate and repossessions ....................................... 0.53% 0.54% 0.59% 0.73% 0.80% Total nonperforming loans and 90 day past due Loans for which interest is being accrued as a percent of total loans .............................. 0.58% 0.61% 0.66% 0.65% 0.75% Allowance for loan loss as a percent of nonperforming loans (nonaccrual and renegotiated) ................................... 258% 275% 248% 250% 235%
___________ * Total does not include loans contractually past due 90 days or more which are still accruing interest Fluctuations from year to year in the balances of nonperforming assets are attributable to several factors including changing economic conditions in various markets, nonperforming assets obtained in various acquisitions and the disproportionate impact of larger (over $500,000) individual credits. Management, through its loan officers, internal credit review staff and external examinations by regulatory agencies, has identified approximately $193 million of potential problem loans not included above. The status of these loans is reviewed at least quarterly by loan officers and annually by BancGroup's centralized credit review function and by regulatory agencies. In connection with such reviews, collateral values are updated where considered necessary. If collateral values are judged insufficient or other sources of repayment inadequate, the loans are reduced to estimated recoverable amounts through increases in reserves allocated to the loans or charge-offs. As of December 31, 2000, substantially all of these loans are current with their existing repayment terms. Management believes that classification of such loans as potential problem loans well in advance of their reaching a delinquent status allows the Company the greatest flexibility in correcting problems and providing adequate reserves. Given the reserves and the ability of the borrowers to comply with the existing repayment terms, management believes any exposure from these potential problem loans has been adequately addressed at the present time. 27 The above nonperforming loans and potential problem loans represent all material credits for which management has serious doubts as to the ability of the borrowers to comply with the loan repayment terms. Management also expects that the resolution of these problem credits as well as other performing loans will not materially impact future operating results, liquidity or capital resources. Interest income recognized and interest income foregone on nonaccrual loans was not significant for the years ended December 31, 2000, 1999, 1998, 1997, and 1996. The recorded investment in impaired loans at December 31, 2000 and 1999 was $29.5 million and $23.3 million, respectively and these loans had a corresponding valuation allowance of $14.5 million and $13.8 million, respectively. The average investment in impaired loans during 2000 and 1999 totaled $29.1 million and $21.2 million, respectively. Securities On a daily basis, BancGroup determines the funds available for short-term investment. Funds available for long-term investment are projected based upon anticipated loan and deposit growth, liquidity needs, pledging requirements and maturities of securities, as well as other factors. Based on these factors and management's interest rate and income tax forecasts, an investment strategy is determined. Significant elements of this strategy as of December 31, 2000 include: . BancGroup's investment in U.S. Treasury securities and obligations of U.S. government agencies including mortgage backed securties are substantially all pledged against public funds deposits or used as collateral for repurchase agreements. . BancGroup is required to carry Federal Home Loan Bank (FHLB) Stock in connection with its borrowings from the FHLB. BancGroup is also required to carry Federal Reserve Stock since its subsidiary bank is a member bank of the Federal Reserve System. . Investment alternatives that maximize the after-tax net yield are considered. . Management has also attempted to increase the investment portfolio's overall yield by investing funds in excess of pledging requirements in high-grade corporate notes and mortgage-backed securities. . The maturities of investment alternatives are determined in consideration of the yield curve, liquidity needs and the Company's asset/liability gap position. . The risk elements associated with the various types of securities are also considered in determining investment strategies. U.S. Treasury and non-callable U.S. government agency obligations are considered to contain virtually no default or prepayment risk. Mortgage-backed securities have varying degrees of risk of impairment of principal. Impairment risk is primarily associated with changes in interest rates and accelerated prepayments, particularly with respect to longer maturities purchased at a premium and interest-only strip securities. BancGroup's mortgage-backed security portfolio as of December 31, 2000 does not include any interest-only strip securities and the amount of unamortized premium on mortgage-backed securities is approximately $1,854,000. . Obligations of state and political subdivisions, as well as other securities, have varying degrees of credit risk associated with the individual borrowers. The credit ratings and the credit worthiness of these securities are reviewed periodically and appropriate reserves are established when necessary. Investment securities are those securities which management has the ability and intent to hold until maturity. The decline in investment securities is due to maturities and calls in the portfolio. Securities available for sale represent those securities that BancGroup intends to hold for an indefinite period of time or that may be sold in response to changes in interest rates, prepayment risk and other similar factors. These securities are recorded at market value with unrealized gains or losses, net of any tax effect, added or deducted from shareholders' equity. The balance in securities available for sale were $1.5 billion at December 31, 1999 and December 31, 2000. At December 31, 2000, there was no single issuer, with the exception of the U.S. government and U.S. government agencies, where the aggregate book value of these securities exceeded 10% of shareholders' equity ($77.5 million). 28 The changes noted above are reflected on the following table. Securities by Category
Carrying Value at December 31, ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- (In thousands) Investment securities: U.S. Treasury securities and obligations of U.S. Government Agencies ........... $ 3,138 $ 4,153 $ 85,927 Mortgage-backed securities ..................................................... 15,132 24,833 45,037 Obligations of state and political subdivisions ................................ 27,143 33,620 41,185 Other .......................................................................... 1,635 1,648 1,410 ---------- ---------- ---------- Total .................................................................. $ 47,048 $ 64,254 $ 173,559 ========== ========== ========== Securities available for sale: U.S. Treasury securities and obligations of U.S. Government Agencies ........... $ 244,974 $ 183,189 $ 152,162 Mortgage-backed securities ..................................................... 902,204 1,091,364 1,048,954 Obligations of state and political subdivisions ................................ 93,435 71,652 58,316 Other .......................................................................... 229,071 163,663 174,874 ---------- ---------- ---------- Total .................................................................. $1,469,684 $1,509,868 $1,434,306 ========== ========== ==========
The carrying value of securities at December 31, 2000 mature as follows: Maturity Distribution of Securities (3)
Within 1 Year 1-5 Years 5-10 Years Over 10 Years ------------------------ ----------------- ----------------- ------------------- Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate ---------- -------- --------- ------ -------- ------- -------- ------- (In thousands) Investment securities: U.S. Treasury securities ........ $ -- --% $ -- --% $ -- --% $ 3,138 7.25% Obligations of U.S. Government Agencies and mortgage backed securities ..................... 5,157 7.11% 3,800 6.76% 2,475 6.77% 3,700 7.71% Obligations of State and Political subdivisions(1) ...... 3,518 7.49% 16,135 7.58% 4,982 7.55% 2,508 7.99% Other ........................... 310 7.90% 1,325 6.90% -- --% -- --% ---------- ---- -------- ---- ------- ---- -------- ---- Total ........................... $ 8,985 7.28% $ 21,260 7.39% $ 7,457 7.29% $ 9,346 7.75% ========== ==== ======== ==== ======= ==== ======== ==== Securities available for sale(2): U.S. Treasury securities and Obligations of U.S. Government Agencies......................... $ 244,974 6.18% Mortgage-backed securities ....... 902,204 6.47% Obligations of State and Political subdivisions(1) ....... 93,435 7.18% Other ............................ 149,045 7.05% ---------- ---- Total ........................ $1,389,658 6.52% ========== ====
- ---------- (1) The weighted average yields are calculated on the basis of the cost and effective yield weighted for the scheduled maturity of each security. The weighted average yields on tax exempt obligations have been computed on a fully taxable equivalent basis using a tax rate of 38%. The taxable equivalent adjustment represents the annual amounts of income from tax exempt obligations multiplied by 145%. (2) Securities available for sale are shown as maturing within one year although BancGroup intends to hold these securities for an indefinite period of time. (See Contractual Maturities in Note 3 to the consolidated financial statements.) This category excludes all corporate common and preferred stock since these instruments have no maturity date. (3) Expected and actual maturities could differ from contractual maturities because borrowers may have the right to call or pre-pay obligations without call or pre-payment penalties. Mortgage Servicing Rights and Servicing Hedge In July 2000, the Company announced definitive plans to exit the mortgage servicing business. As of December 31, 2000, all sales of servicing rights and transfers of underlying loans were completed. For this reason, MSR's were $0 at December 31, 2000 compared to $238 million at December 31, 1999. (See Note 6 to the Consolidated Financial Statements for details on discontinued operations) 29 As a result of the previously discussed plans to exit the mortgage servicing business, all hedges related to MSR's were liquidated during the third quarter of 2000. At December 31, 1999, the Company had hedged approximately 58% of the MSR asset primarily through the use of floors and principal-only strips. The hedge positions were monitored daily and adjusted as necessary for changes in the market and projected interest rate movement. The objective of this strategy was to achieve a high degree of correlation between changes in value associated with the hedged asset (the servicing portfolio and the related servicing rights) and the servicing hedge. The servicing hedge was designed to rise in value when interest rates fell and decline in value when interest rates rose, in contrast to the expected movements in value of the servicing asset, therefore reducing earnings volatility caused by interest rate movements. Deposits BancGroup's deposit structure consists of the following:
December 31, % of Total ------------------------- ------------------- 2000 1999 2000 1999 ----------- ----------- --------- ------- (In thousands) Noninterest-bearing demand deposits ............ $1,217,711 $1,366,377 14.6% 16.7% Interest-bearing demand deposits ............... 1,883,509 1,747,840 22.5 21.4 Savings deposits ............................... 464,489 584,155 5.6 7.1 Certificates of deposits less than $100,000 .... 2,976,997 2,915,770 35.6 35.7 Certificates of deposits more than $100,000 .... 1,442,978 1,198,530 17.3 14.7 IRA's .......................................... 318,479 309,562 3.8 3.8 Open time deposits ............................. 51,686 50,576 0.6 0.6 ---------- ---------- ----- ----- Total deposits ....................... $8,355,849 $8,172,810 100.0% 100.0% ========== ========== ===== =====
BancGroup, through its acquisitions and branch expansion programs, has increased its market presence into high growth markets in the country. Prior to 1998, the expansion was concentrated in Florida and the Atlanta metropolitan area. In 1998, Colonial continued its efforts by moving west into Dallas, Texas and Reno and Las Vegas, Nevada. The principal goal is to provide the Company's retail customer base with convenient access to branch locations while enhancing the Company's potential for future increases in profitability. The growth of deposits continues to be a primary strategic initiative of BancGroup, although competition for deposits remains strong within the banking industry as well as increased competition from other business sectors. BancGroup is continuing initiatives to grow deposits throughout its market. The high growth areas of Florida are a primary focus due to the lower cost of funds in that market. Average retail deposits (excluding mortgage custodial and brokered deposits) increased $625 million in 2000 which represents a 9% growth over 1999's average. BancGroup's retail deposit base is currently 45% in Alabama, 40% in Florida, 9% in Georgia, 3% in Texas, and 3% in Nevada. As market demographics change, products and services are structured to meet the needs of a particular region or customer base. Strong regional bank management supported by BancGroup's asset/liability and product and services management teams provide the Company with resources to remain competitive in its deposit markets. In January 2000, a branch incentative plan was implemented in which a key goal is for employees to obtain an established deposit growth rate in their branches. The Company began a process to enhance its customer information system, which will allow more effective marking of deposit products. Management also contracted with a marketing consultant to target specific markets and products for future campaigns. Each of these initiatives should provide a solid foundation for achieving BancGroup's deposit objectives. The growth in retail deposits in 2000 provided funds which allowed for the reduction in the brokered deposits of $357 million as well as off-setting the reduction in mortgage custodial deposits of $220 million. The reduction in mortgage custodial deposits is a result of the Company's exit from the mortgage servicing business as discussed previously. The Company's brokered Certificate of Deposit (CD) program offers CD's in increments of $1,000 to $99,000 to out of market customers at competitive rates and maturities. At December 31, 2000 and 1999, $425 million and $609 million, respectively were outstanding under this program. The Company has a brokered money market program that attracts deposits from out-of-market customers. At December 31, 2000 and 1999, $66 million and $239 million were outstanding, respectively. Short-Term Borrowings Short-term borrowings were comprised of the following at December 31, 2000, 1999 and 1998: 30
2000 1999 1998 ---- ---- ---- (In thousands) FHLB borrowings .................................................. $ 425,000 $ 490,000 $ 769,987 Federal Funds purchased and securities sold under repurchase agreements ...................................................... 1,154,417 452,532 482,007 Reverse repurchase agreements .................................... 89,144 150,571 184,834 Current maturities FHLB Advances ................................. 225,527 100,521 50,840 Other short-term borrowings ...................................... 3,470 225 25,299 ---------- ---------- ---------- Total .................................................. $1,897,558 $1,193,849 $1,512,967 ========== ========== ==========
To assist in funding loan growth, BancGroup has credit facilities with the FHLB. At December 31, 2000 and 1999, BancGroup had borrowings of $1,225,000 and $1,182,000 outstanding of which $574 million and $592 million, respectively, are included in long-term debt with the remaining portion included in short-term borrowings, leaving credit availability at December 31, 2000 of $157 million based on current collateral. This credit facility is collateralized by the Company's residential real estate loans. Correspondent banks and customers provide a consistent base of short-term funds with $1,154 million and $453 million outstanding at December 31, 2000 and 1999, respectively, in Fed Funds purchased and repurchase agreements. Short-term borrowings, including FHLB borrowings, have been used to fund short-term assets, primarily mortgage loans held for sale and loans. As discussed more fully in the "Liquidity and Interest Rate Sensitivity" section of this report, the line of credit with FHLB is considered a primary source of funding for the Company's asset growth. Recent changes in the FHLB collateral policy will allow BancGroup to pledge commercial real estate loans in addition to residential real estate loans. Given BancGroup's commercial real estate portfolio this will provide additional borrowing capacity. BancGroup entered into reverse repurchase arrangements under which it purchased mortgage backed securities. These securities are collateral for the $89 million in short-term debt as well as the $102 million in long-term debt. During 1999, BancGroup entered into a revolving credit facility with an unaffiliated financial institution totaling $25 million of which $3 million was outstanding at December 31, 2000. Also included in short-term borrowings is a demand line of credit for $500,000 of which $470,000 was outstanding at December 31, 2000. Liquidity and Interest Rate Sensitivity BancGroup has addressed its liquidity and interest rate sensitivity through its policies and structure for asset/liability management. It has created the Asset/Liability Management Committee ("ALMCO"), the objective of which is to optimize the net interest margin while assuming reasonable business risks. ALMCO annually establishes operating constraints for critical elements of BancGroup's business, such as liquidity and interest rate sensitivity. ALMCO constantly monitors performance and takes action in order to meet its objectives. Of primary concern to ALMCO, is maintaining adequate liquidity. Liquidity is the ability of an organization to meet its financial commitments and obligations on a timely basis. These commitments and obligations include credit needs of customers, withdrawals by depositors, repayment of debt when due and payment of operating expenses and dividends. The consolidated statement of cash flows identifies the three major sources and uses of cash (liquidity) as operating, investing and financing activities. Operating activities reflect cash generated from operations. Management views cash flow from operations as a major source of liquidity. Investing activities represent a primary usage of cash with the major net increase being attributed to loan growth. When securities mature they are generally reinvested in new securities or assets held for sale. Financing activities generally provide funding for the growth in loans and securities with increased deposits. Short-term borrowings are used to provide funding for temporary gaps in the funding of long-term assets and deposits, as well as to provide funding for mortgage loans held for sale and loan growth. BancGroup has the ability to tap other markets for certificates of deposits and to utilize established lines for Federal funds purchased and FHLB advances. BancGroup maintains and builds diversified funding sources in order to provide flexibility in meeting its requirements. From 1998 through 2000, the significant changes in BancGroup's cash flows have centered around loan growth and fluctuations in mortgage loans held for sale. Loan growth of $1.2 billion in both 2000 and 1999 has been one of the principal uses of cash in both years. Mortgage loans held for sale decreased in 2000 providing $23 million in funds compared to $659 million provided in 1999. The increase in deposits of $183 million in 2000 and $587 million in 1999 provided the primary source of funding for internal loan growth. Short-term borrowings increased $579 million in 2000 due to the funding of internal loan growth and decreased $369 million in 1999 as a result of year end decline in mortgage loans held for sale. 31 BancGroup had $2.7 billion of residential real estate loans at both December 31, 2000 and 1999. These loans provide collateral for the current $2.0 billion credit facility at the FHLB. As discussed above, additional borrowing capacity will be available in the future. At December 31, 2000, the FHLB unused line of credit was $220 million of which $157 million was available based on current collateral. This line provides the Company significant flexibility in asset/liability management, liquidity and deposit pricing. On March 16, 1999, Colonial Bank issued $100 million in 8% Subordinated Notes due March 15, 2009. These notes are not subject to redemption prior to maturity and pay interest semiannually on March 15 and September 15. This subordinated debt qualifies as Tier II capital. In July 1999, the Company entered into a revolving credit facility with an unaffiliated financial institution totaling $25 million of which $3 million was outstanding at December 31, 2000. This facility bears interest at a rate of 0.85% above LIBOR and expires in July 2000. The Company also entered into a $500,000 demand line of credit of which $470,000 was outstanding at December 31, 2000. In 1998, BancGroup entered into reverse repurchase arrangements under which it purchased mortgage backed securities. At December 31, 2000 these securities are collateral for the $89 million in short-term debt as well as the $102 million in long-term debt. During 1998, and in connection with the acquisition of ASB Bancshares, Inc., BancGroup issued $7.73 million of variable rate subordinated debentures. The debentures bear interest equal to the New York Prime Rate minus 1% (but not less than 7%). BancGroup had an outstanding term note with an unaffiliated financial institution in the amount of $25 million at December 31, 1998 which was paid in full upon maturity. In January 1997, BancGroup issued $70 million in Trust Preferred Securities. These securities qualify as Tier I Capital and carry an 8.92% interest rate. A portion of the proceeds of the offering was utilized to pay off a term note and revolving debt outstanding. The remainder of the proceeds was used for acquisitions and other business purposes. During 1999, Manufacturers BancShares, Inc., prior to being merged in BancGroup, issued 250 shares of variable rate cumulative trust preferred securities through a special purpose trust, pursuant to a trust agreement dated December 10, 1999. The preferred securities were sold at a price of $10,000 per share. An additional 50 shares of preferred securities were sold during 2000. Distribution on each preferred security is payable at the annual rate of 8.75% through March 31, 2000 and LIBOR plus 2.5% after March 31, 2000. The preferred securities are subject to redemption by BancGroup, in whole or in part at any time on or after December 10, 2004 until maturity. BancGroup has outstanding, $66.7 million and $33.4 million of Bank-Owned Life Insurance ("BOLI") at December 31, 2000 and 1999, respectively. This long-term asset represents life insurance purchased from highly rated insurance companies on certain employees with BancGroup named as the beneficiary. The Company considers these funds available for the future payment of benefits due the employee's beneficiaries from group benefit plans. Management believes its liquidity sources and funding strategies are adequate given the nature of its asset base and current loan demand. The primary uses of funds as reflected in the holding company only statement of cash flows (Note 25) were $7.6 million for the payment of interest on debt, $31.9 million for the purchase of treasury stock, and $50.1 million for the payment of dividends. The holding company's primary sources of funds were $64.9 million in dividends received from its subsidiaries, $4.2 million in short term borrowings, and cash. Dividends payable by national and state banks in any year, without prior approval of the appropriate regulatory authorities, are limited to the bank's net profits (as defined) for that year combined with its retained net profits for the preceding two years. Under these limitations, approximately $135 million of retained earnings plus certain 2001 earnings would be available for distribution to BancGroup, from its subsidiaries, as dividends in 2001 without prior approval from the respective regulatory authorities. The holding company anticipates that the cash flow needs of the holding company will be less than the regulatory dividend restrictions of its subsidiary bank. At December 31, 2000, BancGroup's liquidity position was adequate with loan maturities of $2.9 billion, or 30% of the total loan portfolio, due within one year. Securities totaling $1.5 billion or 97.5% of the total portfolio also had maturities within one year or have been classified as available for sale. As of December 31, 2000, there were, however, no current plans to dispose of any significant portion of these securities. In addition BancGroup has $157 million in additional borrowing capacity at the FHLB, $474 million from Fed Fund lines and $22 million from a revolving credit facility with an unaffiliated financial institution. 32 BancGroup's asset/liability management policy has also established targets for interest rate sensitivity. Changes in interest rates will necessarily lead to changes in the net interest margin. It is ALMCO's goal to minimize volatility in the net interest margin by taking an active role in managing the level, mix and maturities of assets and liabilities and by analyzing and taking action to manage mismatch and basis risk. BancGroup's profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest earning assets and interest bearing liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company's exposure to differential changes in interest rates between assets and liabilities is shown in the Company's Maturity and Rate Sensitivity Analysis. The following table represents the output from the Company's simulation model and measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of interest-sensitive assets, interest-sensitive liabilities, and off-balance-sheet contracts. Following are the estimated impacts of immediate changes in interest rates at the specified levels at December 31, 2000. Percentage Change in -------------------- Basis Points Net Interest Income(1) Net Portfolio Value(2) ------------ ---------------------- ---------------------- +200 (3)% (5)% +100 (2) (2) -100 1 0 -200 1 (4) _________ (1) The percentage change in this column represents variance in net interest income for 12 months in a stable interest rate environment versus the net interest income in the various scenarios. The stable environment was as of December 31, 2000 when the federal funds rate was 6.50%. (2) The percentage change in this column represents net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in the various rate scenarios. The results of our simulation model reflect that BancGroup's net interest income will benefit from a decline in rates versus rates as of year end 2000, while the current risk exposure is to rising rates. The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions BancGroup could undertake in response to changes in interest rates. The following table summarizes BancGroup's interest rate sensitivity at December 31, 2000.
At December 31, 2000 -------------------- Interest Sensitive Within ------------------------- Total 0-90 91-180 181-365 1-5 Over Balance Days Days Days Years 5 Years ------- ---- ---- ---- ----- ------- (In thousands) Rate Sensitive Assets: Federal Funds sold and resale Agreements ... $ 24,339 $ 24,114 $ -- $ -- $ 225 $ -- Investment securities ...................... 47,048 966 1,364 6,656 18,634 19,428 Securities available for sale .............. 1,469,684 123,711 86,613 73,991 412,943 772,426 Mortgage loans held for sale ............... 9,866 9,866 -- -- -- -- Loans, net of unearned income .............. 9,642,954 4,291,362 483,912 817,707 3,488,230 561,743 Allowances for possible loan losses ........ (110,055) (48,899) (5,526) (9,331) (39,816) (6,483) ------------ ----------- ----------- ----------- ---------- ---------- Net loans .................................... 9,532,899 4,242,463 478,386 808,376 3,448,414 555,260 Nonearning assets ............................ 915,785 -- 915,785 ------------ ----------- ----------- ----------- ---------- ---------- Total Assets ........................ $ 11,999,621 $ 4,401,120 $ 566,363 $ 889,023 $3,880,216 $2,262,899 ============ =========== =========== =========== ========== ========== Rate Sensitive Liabilities: Interest-bearing demand deposits ........... $ 1,883,509 $ 549,895 $ 365,081 $ -- $ 949,528 $ 19,005 Savings deposits ........................... 464,489 165,056 90,815 -- 190,519 18,099 Certificates of deposits less than $100,000 ................................. 2,976,997 785,253 765,131 1,141,269 285,175 169 Certificates of deposits more than $100,000 ................................. 1,442,978 423,902 347,179 525,559 146,338 -- IRAs 318,479 68,419 65,042 96,198 88,691 129 Open time deposits ......................... 51,686 51,686 -- -- -- -- Short-term borrowings ...................... 1,897,558 1,613,328 184,230 100,000 -- -- Long-term debt ............................. 862,247 10,013 -- 486 421,246 430,502 Noncosting liabilities & equity .............. 2,101,678 -- -- -- -- 2,101,678 ------------ ----------- ----------- ----------- ----------- ---------- Total Liabilities & Equity .......... $ 11,999,621 $ 3,667,552 $ 1,817,478 $ 1,863,512 $2,081,497 $2,569,582 ============ =========== =========== =========== ========== ========== Gap .......................................... $ -- $ 733,568 $(1,251,115) $ (974,489) $1,798,719 $ (306,683) ============ =========== =========== ============ ========== ==========
33 Cumulative Gap ........... $ -- $ 733,568 $ (517,547) $(1,492,036) $ 306,683 $ -- ============ =========== ============ ============ ========== ==========
The last two lines of the preceding table represents interest rate sensitivity gap which is the difference between rate sensitive assets and rate sensitive liabilities. The interest sensitivity schedule reflects a 12.43% negative gap at 12 months; therefore, as of December 31, 2000 BancGroup generally has a greater exposure to net income if interest rates increase. In reviewing the table, it should be noted that the balances are shown for a specific point in time and, because the interest sensitivity position is dynamic, it can change significantly over time. For all interest earning assets and interest bearing liabilities, variable rate assets and liabilities are reflected in the time interval of the assets or liabilities' earliest repricing date. Fixed rate assets and liabilities have been allocated to various time intervals based on contractual repayment. Furthermore, the balances reflect contractual repricing of the deposits and management's position on repricing certain deposits where management discretion is permitted. Prepayment assumptions are applied at a constant rate based on the Company's historical experience. Certain demand deposit accounts and regular savings accounts have been classified as repricing beyond one year in accordance with regulatory guidelines. While these accounts are subject to immediate withdrawal, experience and analysis have shown them to be relatively rate insensitive. If these accounts were included in the 0-90 day category, the gap in that time frame would be a negative $484 million with a corresponding cumulative gap at one year of negative $2.7 billion. Capital Adequacy and Resources Management is committed to maintaining capital at a level sufficient to protect stockholders and depositors, provide for reasonable growth and fully comply with all regulatory requirements. Management's strategy to achieve these goals is to retain sufficient earnings while providing a reasonable return to shareholders in the form of dividends and return on equity. The Company's dividend payout ratio target range is 30-45%. Dividend rates are determined by the Board of Directors in consideration of several factors including current and projected capital ratios, liquidity and income levels and other bank dividend yields and payment ratios. The amount of a cash dividend, if any, rests with the discretion of the Board of Directors of BancGroup as well as upon applicable statutory constraints such as the Delaware law requirement that dividends may be paid only out of capital surplus or net profits for the fiscal year in which the dividend is declared or the preceding fiscal year. BancGroup also has access to equity capital markets through both public and private issuances. Management considers these sources and related return in addition to internally generated capital in evaluating future expansion or acquisition opportunities. The Federal Reserve Board has issued guidelines identifying minimum Tier I leverage ratios relative to total assets and minimum capital ratios relative to risk-adjusted assets. The minimum leverage ratio is 3% but is increased from 100 to 200 basis points based on a review of individual banks by the Federal Reserve. The minimum risk adjusted capital ratios established by the Federal Reserve are 4% for Tier I and 8% for total capital. BancGroup's actual capital ratios and the components of capital and risk adjusted asset information (subject to regulatory review) as of December 31, 2000 are stated below: Capital (thousands) Tier I Capital: Shareholders' equity (excluding unrealized gain on securities available for sale, disallowed MSRs and intangibles plus Trust Preferred Securities) ............ $ 779,199 Tier II Capital: Allowable loan loss reserve ................................. 110,055 Subordinated debt ........................................... 111,900 ----------- Total Capital ....................................... $ 1,001,154 Risk Adjusted Assets (thousands) .............................. $ 9,455,355 Total Assets (thousands) ............................ $11,999,621
2000 1999 ------- ------- Tier I leverage ratio ......................................... 6.66% 6.62% Risk Adjusted Capital Ratios: Tier I Capital Ratio ..................................... 8.24% 8.74% Total Capital Ratio ...................................... 10.59% 11.31%
34 BancGroup has increased capital gradually through normal earnings retention as well as through stock registrations to capitalize acquisitions. The decreases in the risk adjusted ratios shown above are primarily due to asset growth and the repurchase of $32 million in BancGoup stock. Asset growth was partially funded by approximately $40 million in capital available as a result of exiting the mortgage servicing business. Regulatory Restrictions As noted previously, dividends payable by national and state banks in any year, without prior approval of the appropriate regulatory authorities, are limited. Colonial Bank is also required by law to maintain noninterest-bearing deposits with the Federal Reserve Bank to meet regulatory reserve requirements. At December 31, 2000, these deposits were not material to BancGroup's funding requirements. Financial Accounting Standards Board Releases In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. On September 23, 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," an amendment to delay the effective date of SFAS No. 133. The effective date for this statement will be delayed from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. Due to the fact BancGroup doesn't have significant derivatives exposure, management has determined that the impact from implementing SFAS No. 133 and SFAS No. 137 will not have a material effect on BancGroup's financial statements. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required by Regulation S-X and by Item 302 of Regulation S-K are set forth in the pages listed below.
Page ---- Report of Independent Accountants ........................ F-1 Consolidated Statements of Condition as of December 31, 2000 and 1999 .......................................... F-2 Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998 ...................... F-3 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, 1999, 1998 .............. F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999, and 1998 .......... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 ................ F-6 Notes to Consolidated Financial Statements ............... F-7 Quarterly Results (Unaudited) ............................ 11
35 REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Shareholders The Colonial BancGroup, Inc. In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of The Colonial BancGroup, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The consolidated financial statements give retroactive effect of the merger of The Colonial BancGroup, Inc. with Manufacturers Bancshares, Inc. This combination occurred on October 25, 2001 and has been accounted for as a pooling-of-interests as described in Notes 1 and 2 to the consolidated financial statements. /s/ PricewaterhouseCoopers LLP Montgomery, Alabama February 28, 2001, except for Notes 1 and 2, as to which the date is January 22, 2002. 36 The Colonial BancGroup, Inc. Consolidated Statements of Condition
December 31, ---------------------------- 2000 1999 ------------ ------------ (Dollars in thousands) ASSETS Cash and due from banks ............................................................ $ 353,217 $ 351,828 Interest-bearing deposits in banks and federal funds sold .......................... 24,339 38,905 Securities available for sale ...................................................... 1,469,684 1,509,868 Investment securities (market value: 2000, $47,871, 1999, $64,472) ................. 47,048 64,254 Mortgage loans held for sale ....................................................... 9,866 33,150 Loans, net of unearned income ...................................................... 9,642,954 8,419,225 Less: Allowance for loan losses ........................................................ (110,055) (99,027) ------------ ------------ Loans, net ................................................................ 9,532,899 8,320,198 Premises and equipment, net ........................................................ 192,344 197,422 Excess of cost over tangible and identified intangible assets acquired, net......... 74,708 79,667 Mortgage servicing rights .......................................................... -- 238,405 Other real estate owned ............................................................ 8,978 9,215 Accrued interest and other assets .................................................. 286,538 254,911 ------------ ------------ Total ..................................................................... $ 11,999,621 $ 11,097,823 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing demand ....................................................... $ 1,217,711 $ 1,366,377 Interest-bearing demand .......................................................... 1,883,509 1,747,840 Savings .......................................................................... 464,489 584,155 Time ............................................................................. 4,790,140 4,474,438 ------------ ------------ Total deposits ............................................................ 8,355,849 8,172,810 FHLB short-term borrowings ......................................................... 425,000 490,000 Other short-term borrowings ........................................................ 1,472,558 703,849 Subordinated debt .................................................................. 111,900 112,048 Trust preferred securities ......................................................... 73,000 72,500 FHLB long-term debt ................................................................ 574,022 591,549 Other long-term debt ............................................................... 103,325 134,974 Other liabilities .................................................................. 108,867 108,468 ------------ ------------ Total liabilities ......................................................... 11,224,521 10,386,198 Commitments and contingencies (Notes 8, 14, 17) Shareholders' equity Common Stock, $2.50 par value; 200,000,000 shares authorized; 114,668,279 and 113,672,464 shares issued at December 31, 2000 and December 31, 1999, respectively .................................................. 286,671 284,182 Treasury Stock (2,773,782 shares at December 31, 2000) ............................ (26,467) -- Additional paid in capital ........................................................ 123,272 123,378 Retained earnings ................................................................. 399,972 334,666 Unearned compensation ............................................................. (2,541) (1,622) Accumulated other comprehensive loss, net of taxes ................................ (5,807) (28,979) ------------ ------------ Total shareholders' equity ................................................ 775,100 711,625 ------------ ------------ Total ..................................................................... $ 11,999,621 $ 11,097,823 ============ ============
See Notes to Consolidated Financial Statements 37 The Colonial BancGroup, Inc. Consolidated Statements of Income
Year ended December 31, --------------------------------- 2000 1999 1998 ---------- ---------- --------- (In thousands, except per share Amounts) Interest Income: Interest and fees on loans ............................... $ 807,598 $ 662,749 $ 585,673 Interest and dividends on securities: Taxable ................................................ 95,540 89,814 74,165 Nontaxable ............................................. 5,669 4,631 4,815 Dividends .............................................. 5,647 5,670 4,764 Interest on federal funds sold and securities purchased under resale agreements ................................ 2,891 2,464 6,060 Other interest ........................................... 731 710 979 --------- --------- --------- Total interest income .......................... 918,076 766,038 676,456 --------- --------- --------- Interest Expense: Interest on deposits ..................................... 359,460 279,166 261,266 Interest on short-term borrowings ........................ 97,002 51,386 40,414 Interest on long-term debt ............................... 61,292 54,339 38,085 --------- --------- --------- Total interest expense ......................... 517,754 384,891 339,765 --------- --------- --------- Net Interest Income ...................................... 400,322 381,147 336,691 Provision for loan losses ................................ 29,775 29,177 27,511 --------- --------- --------- Net Interest Income After Provision for Possible Loan Losses ......................... 370,547 351,970 309,180 --------- --------- --------- Noninterest Income: Service charges on deposit accounts ...................... 38,596 39,305 38,024 Securities gains, net .................................... 538 497 1,449 Other charges, fees and commissions ...................... 12,198 8,434 7,634 Other income ............................................. 26,553 27,105 13,136 --------- --------- --------- Total noninterest income ....................... 77,885 75,341 60,243 --------- --------- --------- Noninterest Expense: Salaries and employee benefits ........................... 129,254 117,815 116,137 Occupancy expense of bank premises, net .................. 31,572 29,484 30,371 Furniture and equipment expenses ......................... 29,493 25,633 22,881 Amortization of intangible assets ........................ 5,226 5,241 4,927 Year 2000 expense ........................................ -- 560 4,617 Acquisition and restructuring expense .................... -- 1,307 21,535 Other expense ............................................ 63,146 59,875 63,589 --------- --------- --------- Total noninterest expense ...................... 258,691 239,915 264,057 --------- --------- --------- Income from continuing operations before income taxes .... 189,741 187,396 105,366 Applicable income taxes .................................. 69,556 69,360 38,527 --------- --------- --------- Income from Continuing Operations ........................ 120,185 118,036 66,839 --------- ---------- --------- Discontinued Operations: (Note 6) Income/(Loss) from discontinued operations, net of income taxes of $(450), $2,134, and ($6,384) for the year ended December 31, 2000, 1999, and 1998, respectively ..................................... (743) 3,527 (10,448) Loss on disposal of discontinued operations, net of income tax benefit of ($2,616) ......................... (4,322) --- --- --------- --------- --------- Net Income ............................................... $ 115,120 $ 121,563 $ 56,391 ========= ========= ========= Earnings per share - Income from continuing operations: Basic ............................................... $ 1.05 $ 1.02 $ 0.59 Diluted ............................................. 1.04 1.01 0.58 Earnings per share - Net Income: Basic ............................................... $ 1.00 $ 1.05 $ 0.50 Diluted ............................................. 1.00 1.04 0.48 Average number of shares outstanding: Basic ............................................... 114,760 115,579 113,905 Diluted ............................................. 115,653 117,393 116,547
See Notes to Consolidated Financial Statements. 38 The Colonial BancGroup, Inc. Consolidated Statements of Comprehensive Income
Year Ended December 31, ------------------------------- 2000 1999 1998 -------- -------- -------- Net income .................................................... $115,120 $121,563 $ 56,391 Other comprehensive income, net of taxes: Unrealized gains (losses) on securities available for sale arising during the period, net of taxes .................. 23,190 (30,994) 1,880 Less: reclassification adjustment for net (gains) losses included in net income, net of taxes ..................... (18) (323) (1,784) -------- -------- -------- Comprehensive income .......................................... $138,292 $ 90,246 $ 56,487 ======== ======== ========
See Notes to Consolidated Financial Statements 39 The Colonial Bancgroup, Inc. Consolidated Statements of Changes in Shareholders' Equity For the years ended December 31, 2000, 1999, and 1998 (In thousands, except per share amounts)
Accumulated Common Stock Additional Other Total --------------------- Paid In Treasury Retained Unearned Comprehensive Shareholders' Shares Amount Capital Stock Earnings Compensation Income Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 ............ 107,713,256 $269,283 $101,121 $ -- $231,690 $(1,750) $2,223 $ 602,567 - ---------------------------------------------------------------------------------------------------------------------------------- Issuance of shares for immaterial Poolings: CNB Holding Company .................. 1,767,562 4,419 (4,125) 7,965 19 8,278 Shares issued under: Directors Plan ....................... 79,092 198 621 819 Stock Option Plans ................... 1,513,701 3,784 794 4,578 Stock Bonus Plan ..................... 94,080 235 1,506 (598) 1,143 Employee Stock Purchase Plan ......... 47,221 118 571 689 Issuance of common stock by pooled banks prior to merger ................ 88,714 222 5,341 (4,000) 1,563 Purchase of treasury stock for issuance in business combination ..... (1,275,000) (3,188) (13,912) (17,100) Issuance of shares for business combinations ......................... 2,183,013 5,458 10,628 13,557 29,643 Net income ............................ 56,391 56,391 Cash dividends ($.34 per share) ....... (35,869) (35,869) Cash dividends by pooled banks prior to merger ............................ (508) (508) Conversion of 7 1/2% convertible debt . 181,007 453 809 1,262 Change in unrealized gain on securities available for sale, net of taxes ..... 96 96 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 ............ 112,392,646 280,982 117,266 (355) 255,669 (2,348) 2,338 653,552 - ---------------------------------------------------------------------------------------------------------------------------------- Shares issued under: Directors Plan ....................... 60,435 151 860 1,011 Stock Option Plans ................... 774,878 1,937 1,791 355 4,083 Stock Bonus Plan ..................... (380) (1) 20 726 745 Employee Stock Purchase Plan ......... 57,519 144 551 695 401k Plan ............................ 118,359 296 1,137 1,433 Dividend Reinvestment Plan ........... 62,923 158 582 740 Issuance of common stock by pooled banks prior to merger ........ 135,520 339 853 1,192 Net income ............................ 121,563 121,563 Cash dividends ($.38 per share) ....... (42,316) (42,316) Cash dividends by pooled banks prior to merger ............................... (250) (250) Conversion of 7 1/2% convertible debt . 70,564 176 318 494 Change in unrealized gain (loss) on Securities available for sale, net of taxes ................................ (31,317) (31,317) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 ............ 113,672,464 284,182 123,378 -- 334,666 (1,622) (28,979) 711,625 - ---------------------------------------------------------------------------------------------------------------------------------- Shares issued under: Directors Plan ....................... 88,643 222 838 19 1,079 Stock Option Plans ................... 760,755 1,902 (1,810) 5,192 5,284 Stock Bonus Plan ..................... 75,400 188 543 19 (919) (169) Employee Stock Purchase Plan ......... 28,601 71 206 237 514 Issuance of common stock by pooled banks prior to merger ......... 21,280 53 22 75 Purchase of treasury stock for issuance in stock plans .............. (31,934) (31,934) Net income ............................ 115,120 115,120 Cash dividends ($.44 per share) ....... (48,867) (48,867) Cash dividends by pooled banks prior to merger ............................ (947) (947) Conversion of 7 1/2% convertible debt . 21,136 53 95 148 Change in unrealized gain (loss) on securities available for sale, net of taxes ......................... 23,172 23,172 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31,.2000 ............ 114,668,279 $286,671 $123,272 $(26,467) $399,972 $(2,541) $ (5,807) $775,100 - ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 40 The Colonial Bancgroup, Inc. Consolidated Statements of Cash Flows
Year Ended December 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (In thousands) Cash flows from operating activities: Net income ...................................................... $ 115,120 $ 121,563 $ 56,391 Adjustments to reconcile net income: Loss on disposal of discontinued operations, net of taxes.......... 4,322 -- -- Depreciation, amortization and accretion .......................... 29,495 29,816 28,610 Amortization and impairment of mortgage servicing rights........... 13,432 34,478 62,909 Provision for loan loss ........................................... 29,775 29,177 27,511 Deferred taxes ................................................... (4,128) 2,010 (17,646) Gain on sale of securities, net ................................... (538) (497) (1,449) (Gain) loss on sale and disposal of other assets .................. (1,492) (1,107) 11,087 Decrease (increase) in mortgage servicing rights, net ............. 224,973 (89,413) (104,338) Net decrease (increase) in mortgage loans held for sale ........... 23,284 658,892 (453,502) Increase in interest receivable ................................... (15,522) (19,999) (22,288) Decrease (Increase) in prepaids and other receivables ............. 1,765 (6,234) (12,604) Decrease in accrued expenses & accounts payable ................... (7,354) (9,011) 73 (Decrease) increase in accrued income taxes ....................... (23) (4,550) 5,009 Increase in interest payable ...................................... 7,805 11,241 7,541 Other, net ........................................................ (537) (7,321) 6,398 ----------- ----------- ----------- Total adjustments ................................................ 305,257 627,482 (462,689) ----------- ----------- ----------- Net cash provided by (used in) operating activities ............... 420,377 749,045 (406,298) ----------- ----------- ----------- Cash flows from investing activities: Proceeds from maturities of securities available for sale ......... 214,235 332,641 243,325 Proceeds from sales of securities available for sale .............. 209,429 201,051 716,574 Purchase of securities available for sale ......................... (346,384) (657,166) (1,667,591) Proceeds from maturities of investment securities ................. 17,333 109,795 207,136 Purchase of investment securities ................................. -- (742) (75,781) Net increase in loans ............................................. (1,248,350) (1,197,909) (1,010,435) Purchase of bank owned life insurance ............................. (33,218) (1,660) (1,684) Cash received in bank acquisitions ................................ -- 2,667 80,682 Capital expenditures .............................................. (22,077) (41,343) (48,902) Proceeds from sale of other real estate owned ..................... 10,951 16,878 16,864 Other, net ........................................................ 2,153 7,277 1,404 ----------- ----------- ----------- Net cash used in investing activities ............................. (1,195,928) (1,228,511) (1,538,408) ----------- ----------- ----------- Cash flows from financing activities: Net increase in demand, savings, and time deposits ................ 183,039 557,005 814,571 Net increase (decrease) in federal funds purchased, repurchase agreements and other short-term borrowings ............. 578,703 (368,799) 646,397 Proceeds from issuance of long-term debt .......................... 259,000 414,976 569,232 Repayment of long-term debt ....................................... (183,171) (211,675) (2,307) Purchase of treasury stock for issuance in a business combination ....................................................... -- -- (17,100) Purchase of treasury stock ........................................ (31,934) Proceeds from issuance of common stock ............................ 6,084 7,629 6,830 Dividends paid .................................................... (49,347) (41,257) (36,377) ----------- ----------- ----------- Net cash provided by financing activities ......................... 762,374 357,879 1,981,246 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents .............. (13,177) (121,587) 36,540 Cash and cash equivalents at beginning of year .................... 390,733 512,320 475,780 ----------- ----------- ----------- Cash and cash equivalents at December 31 .......................... $ 377,556 $ 390,733 $ 512,320 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest .......................................................... $ 510,341 $ 386,798 $ 348,017 Income taxes ...................................................... 71,728 75,296 38,755 Non-cash investing activities: Transfer of loans to other real estate ............................ $ 10,959 $ 17,249 $ 11,166 Origination of loans from the sale of other real estate ........... -- -- 399 Non-cash financing activities: Conversion of subordinated debentures to common stock ............. $ 148 $ 494 $ 1,262 Assets acquired in business combinations .......................... -- -- 277,810 Liabilities assumed in business combinations ...................... -- -- 247,464 Reissuance of treasury stock for business combinations............. -- -- 16,745 Reissuance of treasury stock for stock plans ...................... 5,448 -- --
See Notes to Consolidated Financial Statements 41 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting and Reporting Policies The Colonial BancGroup, Inc. ("BancGroup" or the "Company") and its subsidiaries operate predominantly in the domestic commercial banking industry. The accounting and reporting policies of BancGroup and its subsidiaries conform to generally accepted accounting principles in the United States of America and to general practice within the banking industry. The following summarizes the most significant of these policies. Basis of Presentation. The consolidated financial statement of The Colonial BancGroup, Inc. and subsidiaries have been prepared to give retroactive effect to the pooling-of-interests method business combination with Manufacturers Bancshares, Inc. ("Manufacturers") on October 25, 2001. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they became the historical consolidated financial statements of The Colonial BancGroup, Inc. and subsidiaries after post merger results covering the date of consummation of the business combinations were issued. The consolidated financial statements and notes to consolidated financial statements include the accounts of BancGroup and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated. Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents. BancGroup considers cash and highly liquid investments with maturities of three months or less when purchased as cash and cash equivalents. Cash and cash equivalents consist primarily of cash and due from banks, interest-bearing deposits in banks and Federal funds sold. Investment Securities and Securities Available for Sale. Securities are classified as either held to maturity, available for sale or trading. Held to maturity or investment securities are securities for which management has the ability and intent to hold on a long-term basis or until maturity. These securities are carried at amortized cost, adjusted for amortization of premiums, and accretion of discount to the earlier of the maturity or call date. Securities available for sale represent those securities intended to be held for an indefinite period of time, including securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar factors. Securities available for sale are recorded at market value with unrealized gains and losses net of any tax effect, added or deducted directly from shareholders' equity. Securities carried in trading accounts are carried at market value with unrealized gains and losses reflected in income. Realized and unrealized gains and losses are based on the specific identification method. Mortgage Loans Held For Sale. Mortgage loans held for sale are carried at the lower of aggregate cost or market. The cost of mortgage loans held for sale is the mortgage note amount plus certain net origination costs less discounts collected. Gains and losses resulting from changes in the market value of the inventory are netted. Any net gain that results is deferred; any net loss that results is recognized when incurred. The aggregate cost of mortgage loans held for sale at December 31, 2000 and 1999 is less than their aggregate net realizable value. Gains or losses on the sale of mortgage loans held for sale are included in other income. Loans. Loans are stated at face value, net of unearned income. Interest income on loans is recognized under the "interest" method except for certain installment loans where interest income is recognized under the "Rule of 78's" (sum-of-the-months digits) method, which does not produce results significantly different from the "interest" method. Nonrefundable fees and costs associated with originating or acquiring loans are recognized under the interest method as a yield adjustment over the life of the corresponding loan. Allowance for Loan Losses. A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Smaller balance homogeneous loans that consist of residential mortgages and consumer loans are evaluated collectively and reserves are established based on historical loss experience. 42 The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, and an analysis of current economic conditions. While management believes that it has established the allowance in accordance with generally accepted accounting principles and has taken into account the views of its regulators and the current economic environment, there can be no assurance that in the future the Bank's regulators or its economic environment will not require further increases in the allowance. Income Recognition on Impaired and Nonaccrual Loans. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well collateralized and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms of interest and principal. While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge offs have been fully recovered. Interest income recognized on a cash basis was immaterial for the years ended December 31, 2000, 1999 and 1998. Premises and Equipment. Bank premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed generally using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Estimated useful lives range from five to forty years for bank buildings and leasehold improvements and three to ten years for furniture and equipment. Expenditures for maintenance and repairs are charged against earnings as incurred. Costs of major additions and improvements are capitalized. Upon disposition or retirement of property, the asset account is relieved of the cost of the item and the allowance for depreciation is charged with accumulated depreciation. Any resulting gain or loss is reflected in current income. Other Real Estate Owned. Other real estate owned includes real estate acquired through foreclosure or deed taken in lieu of foreclosure. These amounts are recorded at the lower of the loan balance prior to foreclosure, plus certain costs incurred for improvements to the property ("cost") or market value less estimated costs to sell the property. Any write-down from the cost to market value required at the time of foreclosure is charged to the allowance for loan losses. Subsequent write-downs and gains or losses recognized on the sale of these properties are included in noninterest income or expense. Intangible Assets. Intangible assets acquired in acquisitions of banks are stated at cost, net of accumulated amortization. Amortization is provided over a period up to twenty-five years for the excess of cost over tangible and identified intangible assets acquired using the straight-line method or an accelerated method, as applicable, and ten years for deposit core base intangibles using an accelerated method. The recoverability of intangible assets is reviewed periodically based on the current earnings of acquired entities. If warranted, analyses, including undiscounted income projections, are made to determine if adjustments to carrying value or amortization periods are necessary. 43 Mortgage Servicing Rights, Amortization and Impairment. Prior to the discontinuation of mortgage servicing activities in 2000, BancGroup recognized as separate assets the rights to service mortgage loans for others, whether the servicing rights are acquired through a separate purchase or through loan origination activities. The total cost of mortgage loans held for sale were allocated to mortgage loans held for sale and mortgage servicing rights, based on their relative fair values at date of sale. Amortization of mortgage servicing rights ("MSR") was based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the MSR. Projected net servicing income was based on the estimated remaining life of the underlying mortgage loan portfolio, which declined over time from prepayments and scheduled loan amortization. The Company estimated future prepayment rates based on current interest rate levels, other economic conditions and market forecasts, as well as relevant characteristics of the servicing portfolio, such as loan types, interest rate stratification and recent prepayment experience. The carrying value of MSR was evaluated for impairment, which was recognized in the statement of income during the period in which impairment occured as an adjustment to a valuation allowance. For purposes of performing its impairment evaluation, the Company stratified its portfolio on the basis of certain risk characteristics including loan type (fixed or adjustable) and note rate and determined the fair value of MSR based on market prices for similar MSR and estimates of future net servicing income, considering market consensus loan prepayment predictions, interest rates, service costs and other economic factors. Hedging of MSR. Prior to the discontinuation of mortgage servicing activities in 2000, BancGroup utilized derivative contracts that were expected to change in value inversely to the movement of interest rates ("Servicing Hedges"). These derivatives included Treasury options, futures, CMT floors, CMS floors, PO strips and interest rate swaps. The Servicing Hedges were designed to protect the value of the hedged MSR from the effects of increased prepayment activity that generally resulted from declining interest rates. The value of the hedging instruments and options was derived from underlying instruments; however, the notional or contractual amount was not recognized in the balance sheet. The carrying value of the MSR was adjusted for realized and unrealized gains and losses in the derivative financial instruments that qualify for hedge accounting. As of December 31, 1999, the unrealized loss on the Servicing Hedges was $53,672,000 and was included in the carrying value of MSR. To qualify for hedge accounting, changes in net value of the Servicing Hedges were expected to be highly correlated with changes in the value of the hedged MSR throughout the hedge period, and the Servicing Hedges were designated to a specific portion of the MSR asset, 58% at December 31, 1999. The Company measured initial and ongoing correlation by statistical analysis and dollar value offset comparison of the relative movements of the Servicing Hedges and related MSR. If correlation were to cease on the derivatives hedging MSR, they would then be accounted for as trading instruments. If a derivative contract hedging MSR was terminated, the gain or loss was treated as an adjustment to the carrying value of the hedged MSR and amortized over its remaining life. Mortgage servicing fees were deducted from the monthly payments on mortgage loans and were recorded as income when earned. Fees from investors for servicing their portfolios of residential loans generally ranged from 1/4 of 1% to 1/2 of 1% per year on the outstanding principal balance. Long Lived Assets. BancGroup reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amounts of the asset, an impairment loss is recognized. Long-lived assets and certain intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Income Taxes. BancGroup uses the asset and liability method of accounting for income taxes (See Note 21). Under the asset and liability method, deferred tax assets and liabilities are recorded at currently enacted tax rates applicable to the period in which assets or liabilities are expected to be realized or settled. Deferred tax assets and liabilities are adjusted to reflect changes in statutory tax rates resulting in income adjustments in the period such changes are enacted. Stock-Based Compensation. SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value based method of accounting for an employee stock option or similar equity instrument. However, SFAS No. 123 allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. BancGroup has elected to continue to measure compensation cost for its stock option plans under the provisions in APB Opinion 25. 44 Advertising Costs. Advertising costs are expensed as incurred. Reclassifications. Certain reclassifications have been made to the 1999 financial statements to conform to the 2000 presentations. Recently Issued Accounting Standards. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. On September 23, 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," an amendment to delay the effective date of SFAS No. 133. The effective date for this statement will be delayed from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. Management has determined that the implementation of SFAS No. 133 and SFAS No. 137 will not have a material impact on BancGroup's financial statements due to BancGroup not having any significant derivative exposure. 2. Business Combinations The acquisition of Manufacturers Bancshares, Inc. ("Manufacturers") was consummated on October 25, 2001. Manufacturers operated four branches in the Tampa, Florida area and had $297.4 million in total assets, $253.7 million in total loans, and $212.9 million in total deposits at the date of consummation. BancGroup issued 4,458,437 shares of its common stock to shareholders of Manufacturers, including shares issued pursuant to the exercise of Manufacturers stock options. This transaction was accounted for as a pooling of interests and all periods have been restated to include results on a combined basis. During the year ended December 31, 1998, BancGroup completed the following business combinations with other financial institutions. These business combinations have been reflected in the financial statements. The balances reflected are as of the date of consummation.
(In thousands) Accounting Date BancGroup Total Total Total Financial Institutions Treatment Consummated Shares Assets Loans Deposits - ---------------------- ---------- ----------- ---------- --------- --------- --------- 1998* United American Holding Corp. (FL) .... Pooling 02/02/98 4,226,412 $ 275,263 $197,623 $ 236,773 ASB Bancshares, Inc. (AL) ............. Purchase 02/05/98 934,514 158,656 110,093 135,940 First Central Bank (FL) ............... Pooling 02/11/98 1,377,368 62,897 40,451 52,048 South Florida Banking Corp. (FL) ...... Pooling 02/12/98 3,864,458 255,769 172,992 226,999 Commercial Bank of Nevada (NV) ........ Pooling 06/15/98 1,684,314 129,577 86,251 117,749 CNB Holding Corporation (FL) .......... Pooling(1) 08/12/98 1,767,562 89,893 58,456 81,445 FirstBank (TX) ........................ Pooling 08/31/98 2,782,038 187,445 59,664 163,254 First Macon Bank & Trust (GA) ......... Pooling 10/01/98 4,643,025 199,525 135,651 174,774 Prime Bank of Central Florida (FL) .... Pooling 10/06/98 1,173,019 74,502 42,547 66,955 InterWest Bancorp (NV) ................ Pooling 10/15/98 1,748,338 131,590 83,689 114,516 TB&T, Inc. (TX) ....................... Purchase(2) 12/01/98 1,248,499 110,986 42,689 101,335
- ---------- * On June 18, 1998, BancGroup purchased certain assets totaling $8,168,000 and assumed certain liabilities primarily deposits, totaling $8,871,000 of the Wade Green branch of Premier Bank in Atlanta, Georgia. (1) Due to the immaterial impact on BancGroup's financial Statements, prior years have not been restated to include these poolings of interest. (2) Shares issued included shares previously re-purchased by the Company as treasury shares. The 1998 combinations with United American, South Florida, First Central, Commercial Bank, FirstBank, First Macon, Prime, and InterWest Bancorp were accounted for using the pooling-of-interests method. Accordingly, all financial statement amounts were restated to reflect the financial condition and results of operations as if these combinations had occurred at the beginning of the earliest period presented. For the purchase method business combinations, the operations and income of the combined institutions are included in the income of BancGroup from the date of purchase. The following is a summary operating information for BancGroup showing the effect of the business combination described in the preceding paragraphs (years prior to consummation). As Originally Effect of Currently (in thousands) Reported Poolings Reported ------------- ---------- --------- 2000: Net interest income $389,891 $10,431 $400,322 Noninterest income 75,299 2,586 77,885 Net Income 112,731 2,389 115,120 1999: Net interest income $372,422 $ 8,725 $381,147 Noninterest income 74,087 1,254 75,341 Net Income 119,597 1,966 121,563 1998: Net interest income $330,201 $ 6,490 $336,691 Noninterest income 58,952 1,291 60,243 Net Income 55,196 1,195 56,391 45 3. Securities The carrying and market values of investment securities are summarized as follows: Investment Securities
2000 1999 -------------------------------------------- --------------------------------------------- Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- (In thousands) U.S. Treasury securities and obligations of U.S. Government agencies ........... $ 3,138 $ 122 $ - $ 3,260 $ 4,153 $ 22 $ (33) $ 4,142 Mortgage-backed securities ....... 15,132 147 (26) 15,253 24,833 145 (176) 24,802 Obligations of state and political subdivisions .... 27,143 587 (2) 27,728 33,620 440 (178) 33,882 Other ............................ 1,635 -- (5) 1,630 1,648 -- (2) 1,646 -------- ----- ------ -------- -------- ----- ------ -------- Total .................. $ 47,048 $ 856 $ (33) $ 47,871 $ 64,254 $ 607 $ (389) $ 64,472 ======== ===== ====== ======== ======== ===== ====== ========
The carrying and market values of securities available for sale are summarized as follows: Securities Available For Sale
2000 1999 ---------------------------------------------- ----------------------------------------------- Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- (In thousands) U.S. Treasury securities and obligations of U.S. government agencies .......... $ 241,411 $ 3,957 $ (394) $ 244,974 $ 185,295 $ 7 $ (2,113) $ 183,189 Mortgage-backed securities ...... 909,223 2,672 (9,691) 902,204 1,128,413 692 (37,741) 1,091,364 Obligations of state and political subdivisions .. 91,929 1,675 (169) 93,435 72,040 517 (905) 71,652 Other ........................... 236,096 3 (7,028) 229,071 167,566 21 (3,924) 163,663 ----------- ------- -------- ---------- ----------- ------- -------- ---------- Total .................. $ 1,478,659 $ 8,307 $(17,282) $1,469,684 $ 1,553,314 $ 1,237 $(44,683) $1,509,868 =========== ======= ======== ========== =========== ======= ======== ==========
The majority of the above securities are traded on national exchanges and as such, the market values are based upon quotes from those exchanges. The market values of certain obligations of states and political subdivisions were established with the assistance of an independent pricing service. They were based on available market data reflecting transactions of relatively small size and not necessarily indicative of the prices at which large amounts of particular issues could be readily sold or purchased. Included within securities available for sale is $76,020,500 and $72,322,000 in Federal Home Loan Bank stock at December 31, 2000 and 1999, respectively. Securities with a carrying value of approximately $1,204,804,000 and $1,166,348,000 at December 31, 2000 and 1999 respectively, were pledged for various purposes as required or permitted by law. Gross gains of $606,000, $595,000 and $2,961,000 and gross losses of $68,000, $98,000 and $1,512,000 were realized on sales of securities for 2000, 1999, and 1998, respectively. The amortized cost and market value of debt securities at December 31, 2000, by contractual maturity, are as follows. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Investment Securities Securities Available For Sale ---------------------- ------------------------------ Amortized Market Amortized Market Cost Value Cost Value --------- -------- ---------- ---------- (In thousands) Due in one year or less ............ $ 3,828 $ 4,338 $ 99,083 $ 98,857 Due after one year through five years .............................. 17,460 19,751 157,723 160,743 Due after five years through ten years .............................. 4,982 5,341 68,654 70,730 Due after ten years ................ 5,646 3,188 160,263 153,437 ------- ------- ---------- ---------- Total .................... 31,916 32,618 485,723 483,767 ------- ------- ---------- ---------- Mortgage-backed securities ......... 15,132 15,253 909,223 902,204
46 Equity securities ....... -- -- 83,713 83,713 ------- ------- ---------- ---------- Total ......... $47,048 $47,871 $1,478,659 $1,469,684 ======= ======= ========== ========== 4. Loans A summary of loans follows: 2000 1999 ----------- ----------- (In thousands) Commercial, financial and agricultural ............... $ 1,264,281 $ 1,171,157 Real estate-commercial ...... 3,208,911 2,543,532 Real estate-construction .... 1,700,281 1,435,783 Real estate-residential ..... 2,697,934 2,658,922 Installment and consumer .... 278,739 306,593 Other ....................... 493,156 303,648 ----------- ----------- Subtotal .................. 9,643,302 8,419,635 Unearned income ............. (348) (410) ----------- ----------- Total ............. $ 9,642,954 $ 8,419,225 =========== =========== BancGroup's lending is concentrated throughout Alabama, Georgia, Florida, Texas and Nevada and repayment of these loans is in part dependent upon the economic conditions in the respective regions of these states. Management does not believe the loan portfolio contains concentrations of credits either geographically or by borrower, which would expose BancGroup to unacceptable amounts of risk. Management continually evaluates the potential risk in all segments of the portfolio in determining the adequacy of the allowance for loan losses. Other than concentrations of credit risk in commercial real estate and residential real estate loans in general, management is not aware of any significant concentrations. Loans classified as commercial real estate loans are loans which are collateralized by real estate and substantially dependent upon cash flow from income-producing improvements attached to the real estate. For BancGroup, these primarily consist of apartments, hotels, office buildings, warehouses, shopping centers, amusement/recreational facilities, one-to-four family residential housing developments, and health service facilities. Commercial Real Estate loans are underwritten based on projected cash flows and loan-to-appraised-value ratios of 80% or less. The risks associated with commercial real estate loans primarily relate to real estate values in local market areas, the equity investments of borrowers, and the borrowers' experience and expertise. BancGroup has diversified its portfolio of commercial real estate loans with less than 10% of its total loan portfolio concentrated in any of the above-mentioned income producing activities. Residential Real Estate loans consist of loans made to finance one-to-four family residences and home equity loans on residences. BancGroup may loan up to 90 to 95% of appraised value on these loans without other collateral or security. The principal risks associated with one-to-four family residential loans are the borrowers' debt coverage ratios and real estate values. Real Estate construction loans include loans to finance single family and multi-family residential as well as nonresidential real estate. Loan-to-value ratios for these loans do not exceed 80% to 85%. The principal risks associated with these loans are related to the borrowers' ability to complete the project, local market demand, the sales market, presales or preleasing, and permanent loan commitments. BancGroup evaluates presale requirements, preleasing rates, permanent loan take-out commitments, as well as other factors in underwriting construction loans. BancGroup evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by BancGroup upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, residential houses and income-producing commercial properties. No additional credit risk exposure, relating to outstanding loan balances, exists beyond the amounts shown in the consolidated statement of condition at December 31, 2000. In the normal course of business, loans are made to officers, directors, principal shareholders and to companies in which they own a significant interest. Loan activity to such parties with an aggregate loan balance of more than $60,000 during the year ended December 31, 2000 are summarized as follows: 47 Balance Balance 1/1/00 Additions Reductions 12/31/00 -------- --------- ---------- -------- (In thousands) $ 19,289 $ 14,802 $ 13,601 $ 20,490 At December 31, 2000 and 1999, the recorded investment in loans for which impairment has been recognized totaled approximately $29,455,000 and $23,337,000, respectively, and these loans had a corresponding valuation allowance of $14,501,000 and $13,787,000, respectively. The impaired loans were measured for impairment based primarily on the value of underlying collateral. For the years ended December 31, 2000 and 1999, the average recorded investment in impaired loans was approximately $29,144,000 and $21,176,000. The amount of interest recognized on impaired loans during the portion of the year that they were impaired was not significant for either 2000 or 1999. BancGroup uses several factors in determining if a loan is impaired. Generally, nonaccrual loans as well as loans classified by internal loan review are reviewed for impairment. The internal asset classification procedures include a thorough review of significant loans and lending relationships, and include the accumulation of related data. This data includes loan payment status, borrower's financial data, collateral value and borrower's operating factors such as cash flows, operating income or loss, etc. BancGroup's international banking department engages in confirming letters of credit with top-tier banks in Latin America and direct disbursements to those banks from U.S. customers. Loans outstanding at December 31, 2000 and 1999, totaled approximately $125 million and $99 million, respectively. However, due to the immaterial balance of these loans in relation to total loans, these amounts will not be disclosed in the table(s) separately. BancGroup established a mortgage warehouse lending department in the third quarter of 1998. This department provides lines of credit collateralized by residential mortgage loans to top tier mortgage companies, predominately in the Southeast. Loans outstanding at December 31, 2000 and 1999 were $377 million and $173 million, respectively. These loans are categorized as "Other" on the loan summary chart above. 5. Allowance for Loan Losses An analysis of the allowance for loan losses is as follows: 2000 1999 1998 --------- --------- --------- (In thousands) Balance, January 1 ................ $ 99,027 $ 85,079 $ 73,047 Addition due to acquisitions ...... -- 2,035 1,840 Provision charged to income ....... 29,775 29,177 27,511 Loans charged off ................. (23,447) (24,435) (23,435) Recoveries ........................ 4,700 7,171 6,116 --------- --------- --------- Balance, December 31 .............. $ 110,055 $ 99,027 $ 85,079 ========= ========= ========= 6. Discontinued Operations On July 17, 2000, the Board of Directors of BancGroup approved a letter of intent with a third party to sell the rights to service approximately $5 billion of mortgage loans serviced by Colonial Bank. This sale was completed on August 28, 2000. Final transfer of servicing was completed in the fourth quarter of 2000. With the completion of this transaction, along with previous sales of mortgage servicing related to loans with outstanding balances of $9 billion and $3 billion at March 31, 2000 and December 31, 1999, respectively, BancGroup exited the mortgage servicing business. These non-recourse sales agreements provide for BancGroup to subservice (generally for up to 90 days) the loans for a fee designed to cover BancGroup's cost of servicing. As of December 31, 2000, BancGroup has completed the transfer of all servicing and subservicing to the purchasers thereof. As of December 31, 2000 and 1999, $17 million and $27 million, respectively, of amounts due from the aforementioned purchasers is included in Other Assets. BancGroup recorded a loss on disposal of the discontinued operations of $4.3 million after tax. The results of the mortgage servicing business have been classified as discontinued operations in the accompanying financial statements. Loss from discontinued operations, net of income taxes, for the year ended December 31, 2000 was approximately $743,000. 48 7. Mortgage Servicing Rights An analysis of mortgage servicing rights and the related valuation reserve is as follows: 2000 1999 ---------- ---------- (In thousands) Mortgage Servicing Rights Balance, January 1 .............. $ 265,888 $ 221,798 Additions ....................... 981 90,078 Scheduled amortization .......... (13,432) (34,478) Hedge losses applied, net ....... (49,725) 53,672 Sales ........................... (203,712) (65,182) --------- --------- Balance, December 31 ............ $ 0 $ 265,888 ========= ========= Valuation Reserve Balance, January 1 .............. $ 27,483 $ 38,329 Additions/(Reductions), net ..... (27,483) (10,846) --------- --------- Balance, December 31 ............ 0 27,483 --------- --------- Mortgage Servicing Rights, Net .. $ 0 $ 238,405 ========= ========= As of December 31, 1999, BancGroup serviced or subserviced approximately $15.2 billion of loans for third parties. The estimated fair value of MSR closely approximated the amounts reflected in the financial statements. As a result of the previously discussed plan to exit the mortgage servicing business, all hedges related to MSR were liquidated during the third quarter of 2000. 8. Financial Instruments with Off-Balance-Sheet Risk BancGroup is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers and to manage interest rate risk. These financial instruments include loan commitments, standby letters of credit, obligations to deliver and sell mortgage loans, options on interest rate futures, interest rate floors and principal only strips. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. BancGroup's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and obligations to deliver and sell mortgage loans is represented by the contractual amount of those instruments. BancGroup uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. BancGroup has no significant concentrations of credit risk with any individual counterparty to originate loans. The total amounts of financial instruments with off-balance sheet risk as of December 31, 2000 and 1999 are as follows:
Contract Amount ----------------------- 2000 1999 ----------- ---------- (In thousands) Financial instruments whose contract amounts represent Credit risk: Loan commitments ........................................... $1,964,816 $2,313,293 Standby letters of credit .................................. 258,962 184,787
Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit and funding loan commitments is essentially the same as that involved in extending loan facilities to customers. BancGroup has entered into third party correspondent relationships for the sale of its retail production of fixed rate mortgage loans which substantially reduces the need to hedge the interest rate risk associated with the production and sale of such loans. The correlation between the price of the inventory of mortgage loans held for sale and the related sales agreements is high due to the similarity of the asset and the related arrangements. For the financial contracts listed below, BancGroup's exposure to interest rate risk is mitigated by the expected inverse relationship these instruments have with mortgage servicing rights. The following summarizes the notional amounts of BancGroup's derivative contracts: 49
Interest Call Put CMT Rate PO Options Options Futures Floors Strips Strips CMS Floors ---------- ---------- ---------- ----------- ---------- -------- ---------- (In thousands) Balance, January 1, 1998 ... $ -- $ -- $ -- $ -- $ -- $ -- $ -- Additions .................. 369,000 426,000 648,000 -- -- -- -- Dispositions/Expirations ... (170,500) (123,000) (305,000) -- -- -- -- ---------- ---------- ---------- ----------- ---------- -------- -------- Balance, December 31, 1998 ..................... 198,500 303,000 343,000 -- -- -- -- Additions .................. -- -- -- 1,730,000 176,000 75,000 293,000 Dispositions/Expirations ... (198,500) (303,000) (343,000) (1,275,000) (176,000) (3,697) -- ---------- ---------- ---------- ----------- ---------- -------- -------- Balance, December 31, 1999 ..................... -- -- -- 455,000 -- 71,303 293,000 Dispositions/Expirations ... -- -- -- (455,000) -- (71,303) (293,000) ---------- ---------- ---------- ----------- ---------- -------- -------- Balance, December 31, 2000 ....................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- ========== ========== ========== =========== ========== ======== ========
Prior to the discontinuation of mortgage servicing activities, these instruments were used by BancGroup to protect the value of its investment in mortgage servicing rights from the effects of increased prepayment activity that generally results from declining rates. 9. Premises and Equipment Premises and equipment are summarized as follows:
2000 1999 ----------- ---------- (In thousands) Land ................................................ $ 42,611 $ 41,820 Bank premises ....................................... 117,314 116,631 Equipment ........................................... 105,591 108,058 Leasehold improvements .............................. 27,397 25,047 Construction in progress ............................ 6,350 4,646 Automobiles and airplane ............................ 18,248 18,310 ---------- ---------- Total ..................................... 317,511 314,512 Less accumulated depreciation and amortization ...... (125,167) (117,090) ---------- ---------- Premises and equipment, net ......................... $ 192,344 $ 197,422 ========== ==========
10. Short-Term Borrowings Short-term borrowings are summarized as follows:
2000 1999 1998 ----------- --------- --------- (In thousands) FHLB borrowings ..................................... $ 425,000 $ 490,000 $ 769,987 Federal funds purchased and securities sold under repurchase Agreements .............................. 1,154,417 452,532 482,007 Reverse Repurchase Agreements ....................... 89,144 150,571 184,834 Current maturities of FHLB advances ................. 225,527 100,521 50,840 Other short-term borrowings ......................... 3,470 225 25,299 ----------- ---------- --------- Total ................................. $ 1,897,558 $1,193,849 $1,512,967 =========== ========== ==========
At December 31, 2000 and 1999, BancGroup had reverse repurchase agreements outstanding in the amount of $89 million and $151 million, respectively (Note 11). This debt corresponds to securities purchased under resale agreements with other financial institutions. BancGroup is a member of the Federal Home Loan Bank ("FHLB"). At both December 31, 2000 and 1999, BancGroup had FHLB borrowings of $1.2 billion outstanding of which $574 million and $592 million, respectively, (Note 11) are included in long-term debt with the remaining portion included in short-term borrowings, leaving credit availability at December 31, 2000 of $157 million based on current collateral. FHLB has a blanket lien on BancGroup's 1-4 family mortgage loans in the amount of the outstanding debt. During 1999, BancGroup entered into a revolving credit facility with an unaffiliated financial institution totaling $25 million of which $3 million was outstanding at December 31, 2000. This facility bears interest at 0.85% above LIBOR and expires in July 2001. At December 31, 1998, BancGroup had an outstanding term note with an unaffiliated financial institution in the amount of $25 million. This term note was paid in full upon maturity on June 30, 1999, and bore interest at a rate of 1% above LIBOR. Other short- 50 term borrowings also includes a $500,000 line of credit with an unaffiliated financial institution, of which $470,000 and $225,000, respectively were outstanding at December 31, 2000 and 1999. Additional details regarding short-term borrowings (excluding current maturities of long-term debt) are shown below:
Maximum Average Outstanding Average Interest At Any Average Interest Rate At Month End Balance Rate Year End ------------ ----------- --------- ---------- (In thousands) 2000 FHLB borrowings ....................... $ 1,102,521 $ 834,524 6.52% 6.86% Other short-term borrowings ........... 1,357,858 1,139,843 6.25 6.49 ----------- ----------- ---- ---- $ 2,460,379 $ 1,974,367 6.32% 6.57% =========== =========== ==== ==== 1999 FHLB borrowings ....................... $1,374,892 $ 530,685 5.27% 5.87% Other short-term borrowings ........... 830,056 775,570 5.00 5.30 ----------- ----------- ---- ---- $ 2,204,948 $ 1,306,255 5.11% 5.54% =========== =========== ==== ==== 1998 FHLB borrowings ....................... $ 901,149 $ 554,629 5.62% 5.29% Other short-term borrowings ........... 603,884 453,510 5.27 4.96 ----------- ----------- ---- ---- $ 1,505,033 $ 1,008,139 5.47% 5.15% =========== =========== ==== ====
11. Long-Term Debt Long-term debt is summarized as follows: 2000 1999 --------- --------- (In thousands) 7 1/2% Convertible Subordinated Debentures ...... $ 3,030 $ 3,178 7% Convertible Subordinated Debentures .......... 1,145 1,145 Variable Rate Subordinated Debentures ........... 7,725 7,725 Subordinated Notes .............................. 100,000 100,000 Trust Preferred Securities ...................... 73,000 72,500 FHLB Advances ................................... 574,022 591,549 Reverse Repurchase Agreements ................... 102,325 132,325 REMIC Bonds -- 2,649 Promissory Note ................................. 1,000 -- --------- --------- Total ........................................... $ 862,247 $ 911,071 ========= ========= The 7 1/2% Convertible Subordinated Debentures due March 31, 2011 ("1986 Debentures") issued in 1986 are convertible at any time into shares of BancGroup Common Stock, at the conversion price of $7.00 principal amount of 1986 Debentures, subject to adjustment upon the occurrence of certain events, for each share of stock received. The 1986 Debentures are redeemable at the option of BancGroup at the face amount plus accrued interest. In the event all of the remaining 1986 Debentures are converted into shares of BancGroup Common Stock in accordance with the 1986 Indenture, approximately 433,000 shares of such Common Stock would be issued. The 7% Convertible Subordinated Debentures due December 31, 2004 ("1994 Debentures"), were issued by D/W Bankshares prior to being merged into BancGroup. The 1994 Debentures are convertible into BancGroup Common Stock, at the conversion price of $7.58 principal amount of the 1994 Debentures, subject to adjustment upon occurrence of certain events, for each share of stock received. In the event all of the remaining 1994 Debentures are converted into shares of BancGroup Common Stock in accordance with the 1994 Indenture, approximately 151,000 shares of such Common Stock would be issued. In connection with the ASB Bancshares, Inc. acquisition, on February 5, 1998, BancGroup issued $7,725,000 of variable rate subordinated debentures due February 5, 2008 ("1998 Debentures"). These variable rate subordinated debentures bear interest equal to the New York Prime Rate minus 1% (but in no event less than 7% per annum). On March 15, 1999, BancGroup issued $100 million of subordinated notes, due March 15, 2009. The notes bears interest at 8.00% and are not subject to redemption prior to maturity. On January 29, 1997, BancGroup issued, through a special purpose trust, $70 million of Trust Preferred Securities. The securities bear interest at 8.92% and are subject to redemption by BancGroup, in whole or in part at any time after January 29, 2007 until maturity in January 2017. Circumstances are remote that redemption will occur prior to maturity. 51 During 1999, Manufacturers BancShares, Inc., prior to being merged in BancGroup, issued 250 shares of variable rate cumulative trust preferred securities through a special purpose trust, pursuant to a trust agreement dated December 10, 1999. The preferred securities were sold at a price of $10,000 per share. An additional 50 shares of preferred securities were sold during 2000. Distribution on each preferred security is payable at the annual rate of 8.75% through March 31, 2000 and LIBOR plus 2.5% after March 31, 2000. The preferred securities are subject to redemption by BancGroup, in whole or in part at any time on or after December 10, 2004 until maturity. The subordinated debentures, notes and Trust Preferred Securities described above are subordinate to substantially all remaining liabilities of BancGroup. BancGroup had long-term FHLB Advances (Note 10) outstanding of $574,022,000 and $591,549,000 at December 31, 2000 and 1999, respectively. These advances bear interest rates of 4.00% to 7.53% and mature from 2001 to 2013. BancGroup has received funds under reverse repurchase agreements with Morgan Stanley, Salomon Brothers and First Boston. At December 31, 2000, BancGroup had long-term reverse repurchase agreements outstanding of $102 million. These agreements, which are collateralized by mortgage-backed securities, bear interest rates of 5.80% to 6.03% and mature from 2001 to 2003. Manufacturers BancShares, Inc., prior to being merged into BancGroup had an outstanding promissory note of $1,000,000 secured by a branch location. The note is interest only for one year beginning June 16,2000, with the principal and interest payments due quarterly and a final balloon payment due at maturity on June 16, 2011. Interest on the note is payable at LIBOR plus 1.5% and is adjusted quarterly. At December 31, 2000, long-term debt, including the current portion, is scheduled to mature as follows: Consolidated Parent Only BancGroup ----------- ------------- (In thousands) 2001 ....................... $ -- $ 255,527 2002 ....................... 31 14,293 2003 ....................... 23 119,462 2004 ....................... 1,170 226,240 2005 ....................... 27 111,357 Thereafter ................. 81,649 390,895 -------- ---------- Total ................. $ 82,900 $1,117,774 ======== ========== 12. Capital Stock On July 15, 1998, BancGroup's Board of Directors declared a two-for-one stock split which was effected in the form of a 100 percent stock dividend distributed on August 14, 1998. The stated par value was not changed from $2.50 per share. Accordingly, all prior period information has been restated to reflect the reclassification from additional paid in capital to common stock. Additionally, all share and per share amounts in earnings per share calculations have been restated to retroactively reflect the stock split. The Board of Directors is authorized to issue shares of the preference stock in one or more series, and in connection with such issuance, to establish the relative rights, preferences, and limitations of each such series. Stockholders of BancGroup may not act by written consent or call special meetings. 13. Regulatory Matters and Restrictions Dividends payable by national and state banks in any year, without prior approval of the appropriate regulatory authorities, are limited to the bank's net profits (as defined) for that year combined with its retained net profits for the preceding two years. Under these limitations, approximately $135 million of retained earnings plus certain 2001 earnings would be available for distribution to BancGroup, from its subsidiaries, as dividends in 2001 without prior approval from the respective regulatory authorities. Colonial Bank is required by law to maintain noninterest-bearing deposits with the Federal Reserve Bank to meet regulatory reserve requirements. At December 31, 2000, these deposits were not material to BancGroup's funding requirements. 52 BancGroup and Colonial Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on BancGroup's financial position. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, BancGroup and Colonial Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. BancGroup's and Colonial Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require BancGroup and Colonial Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000 and 1999, that BancGroup and Colonial Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2000, the most recent notification from the Federal Deposit Insurance Corporation categorized Colonial Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized BancGroup and Colonial Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed BancGroup's category. Actual capital amounts and ratios for BancGroup and Colonial Bank are also presented in the following table:
To Be Well For Capitalized Capital Under Prompt Adequacy Corrective Actual Purposes Action Provisions -------------------- -------- -------- ---------------------- Amount Ratio* Amount Ratio Amount Ratio --------- -------- -------- -------- ---------- -------- (In thousands) As of December 31, 2000 Total Capital (to risk weighted assets) Consolidated .................................. $1,001,154 10.59% $ 756,428 >/=8.0% $945,536 >/=10.0% Colonial Bank ................................. 1,001,906 10.60 756,024 >/=8.0 945,030 >/=10.0 Tier I Capital (to risk weighted assets) Consolidated ................................. 779,199 8.24 378,214 >/=4.0 567,321 >/=6.0 Colonial Bank ................................. 791,852 8.37 378,012 >/=4.0 579,272 >/=6.0 Tier I Capital (to average assets) Consolidated ............................... 779,199 6.66 464,022 >/=4.0 580,028 >/=5.0 Colonial Bank ................................. 791,852 6.77 463,417 >/=4.0 579,272 >/=5.0 As of December 31, 1999 Total Capital (to risk weighted assets) Consolidated .................................. $ 929,123 11.31% $ 657,472 >/=8.0% $821,841 >/=10.0% Colonial Bank ................................. 911,634 11.10 657,140 >/=8.0 821,426 >/=10.0 Tier I Capital (to risk weighted assets) Consolidated .................................. 718,048 8.74 328,737 >/=4.0 493,105 >/=6.0 Colonial Bank ................................. 713,185 8.68 328,570 >/=4.0 542,667 >/=6.0 Tier I Capital (to average assets) Consolidated .................................. 718,048 6.62 434,248 >/=4.0 542,809 >/=5.0 Colonial Bank ................................. 713,185 6.57 434,134 >/=4.0 542,667 >/=5.0
- ---------- * These ratios are subject to regulatory review 14. Leases BancGroup and its subsidiaries have entered into certain noncancellable leases for premises and equipment used in connection with its operations. The majority of these noncancellable lease agreements contain renewal options for varying periods at the same or renegotiated rentals, and several contain purchase options at fair value. Future minimum lease payments under all noncancellable operating leases with initial or remaining terms (exclusive of renewal options) of one year or more at December 31, 2000 were as follows: 53 (In thousands) 2001 ............................................... $ 15,459 2002 ............................................... 12,534 2003 ............................................... 18,023 2004 ............................................... 9,350 2005 ............................................... 10,267 Thereafter ......................................... 36,195 -------- Total .................................... $101,828 ======== Rent expense for all leases amounted to $16,982,000 in 2000, $14,828,000 in 1999 and $16,437,000 in 1998, respectively. 15. Employee Benefit Plans BancGroup and subsidiaries are participants in a pension plan that covers most employees who have met certain age and length of service requirements. BancGroup's policy is to contribute annually an amount that can be deducted for federal income tax purposes using the frozen entry age actuarial method. Actuarial computations for financial reporting purposes are based on the projected unit credit method. Employee pension benefit plan status at December 31:
2000 1999 -------- -------- Change in benefit obligation: Benefit obligation at January 1 ......................... $ 24,769 $ 21,541 Service cost ............................................ 2,932 2,951 Interest cost ........................................... 2,039 1,712 Actuarial gain (loss) ................................... 655 (342) Benefits paid ........................................... (1,126) (1,093) -------- -------- Benefit obligation at December 31 ....................... 29,269 24,769 -------- -------- Change in plan assets: Fair value of plan assets at January 1 .................. 22,927 20,655 Actual return on plan assets ............................ (2,279) 3,365 Employer contributions .................................. 1,608 -- Benefits paid ........................................... (1,126) (1,093) -------- -------- Fair value of plan assets at December 31 ................ 21,130 22,927 -------- -------- Funded status at December 31 ............................ (8,139) (1,842) Unrecognized net actuarial loss (gain) .................. 2,413 (2,603) Unrecognized prior service cost ......................... 20 19 -------- -------- Accrued benefit cost at December 31 ..................... $ (5,706) $ (4,426) ======== ========
2000 1999 1998 ---- ---- ---- Weighted-average assumptions as of December 31: Discount Rate ............................................... 7.25% 7.25% 6.75% Expected return on plan assets .............................. 9.00 9.00 9.00 Rate of compensation increase ............................... 4.50 4.50 4.00
2000 1999 1998 -------- -------- -------- Components of net periodic benefit cost for the year ended December 31: Service cost ....................................................... $ 2,932 $ 2,951 $ 2,095 Interest cost ...................................................... 2,039 1,712 1,370 Expected return on plan assets ..................................... (2,081) (1,957) (1,691) Actuarial gain ..................................................... (1) (1) (163) --------- -------- -------- Net annual benefit cost ............................................ $ 2,889 $ 2,705 $ 1,611 ======== ======== ========
At both December 31, 2000 and 1999, the pension plan assets included investments of 164,520 shares of BancGroup Common Stock representing 8% and 7% of pension plan assets, respectively. At December 31, 2000, BancGroup Common Stock included in pension plan assets had a cost and market value of approximately $616,429 and $1,768,590, respectively. Pension plan assets are distributed with approximately 12% in Cash and Cash Equivalents, 10% in U.S. Government and agency issues, 18% in Corporate bonds, 52% in equity securities (including BancGroup Common Stock) and 8% in mutual funds. BancGroup also has an incentive savings plan (the "Savings Plan") for all of the employees of BancGroup and its subsidiaries. The Savings Plan provides certain retirement, death, disability and employment benefits to all eligible employees and qualifies as a deferred arrangement under Section 401(k) of the Internal Revenue Code. Participants in the Savings Plan make basic contributions and may make supplemental contributions to increase benefits. BancGroup contributes a minimum of 50% of the basic contributions made by the employees and may make an additional contribution from profits on an annual basis. An employee's interest in 54 BancGroup's contributions becomes 100% vested after five years of participation in the Savings Plan. Participants have options as to the investment of their Savings Plan funds, one of which includes purchase of Common Stock of BancGroup. Charges to operations for this plan and similar plans of combined banks amounted to approximately $2,023,000, $2,200,000 and $1,794,000 for 2000, 1999 and 1998, respectively. 16. Stock Plans The 1992 Incentive Stock Option Plan ("the 1992 Plan") provides an incentive to certain officers and key management employees of BancGroup and its subsidiaries. Options granted under the 1992 Plan must be at a price not less than the fair market value of the shares at the date of grant. All options expire no more than ten years from the date of grant, or three months after an employee's termination. On April 19, 2000, management proposed, and shareholders approved an increase in the number of shares eligible to be issued under the 1992 ISO Plan from 4.2 million to 5.7 million. At December 31, 2000 and 1999, approximately 3,258,000 and 601,000, respectively, remained available for the granting of options under the 1992 Plan. The 1992 Nonqualified Stock Option Plan ("the 1992 Nonqualified Plan") provides an incentive to directors, officers and employees of BancGroup and its subsidiaries. Options granted under the 1992 Nonqualified Plan must be at a price not less than 85% of the fair market value of the shares at the date of grant. All options expire no more than ten years after the date of grant, or three months after an employee's termination. An aggregate of 3,200,000 shares of Common Stock is reserved for issuance under the 1992 Nonqualified Plan. At December 31, 2000 and 1999, approximately 2,269,000 and 2,432,000 shares, respectively remained available for the granting of options under the 1992 Nonqualified Plan. Prior to 1992, BancGroup had both a qualified incentive stock option plan ("Plan") under which options were granted at a price not less than fair market value and a nonqualified stock option plan ("Nonqualified Plan") under which options were granted at a price not less than 85% of fair market value. All options under the plans expire ten years from the date of grant, or three months after the employee's termination. Although options previously granted under these plans may be exercised, no further options may be granted. Pursuant to the various business combinations, BancGroup assumed qualified stock options and non-qualified stock options according to the respective exchange ratios. Certain options issued during 2000 and 1999 under the 1992 Nonqualified Plan and the 1992 Plan have vesting requirements. In order to fully vest in the options granted, the option recipients are required to remain in the employment of BancGroup (subject to certain exemptions) for periods of between one and five years (These options become exercisable on a pro-rata basis over a period of one to five years) or attain certain performance criteria. Following is a summary of the transactions in Common Stock under these plans for the years ended December 31, 2000, 1999 and 1998.
Qualified Plans(1) Nonqualified Plans(1) ------------------------------ ------------------------------ Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ---------- ---------------- ---------- ----------------- Outstanding at December 31, 1997 ..................... 963,298 $ 8.181 2,770,901 $ 3.801 Assumed in business combinations (at $2.378-- $5.9758 per share) .................... 920,179 4.519 226,700 4.419 Granted (at $7.585-- $18.20315 per share) ............. 1,695,000 13.821 132,000 12.366 Exercised (at $1.54-- $12.125 per share) .............. (567,459) 4.913 (946,242) 3.426 Cancelled (at $8.578-- $17.1875 per share) ............ (105,280) 13.778 (30,000) 9.995 ---------- -------- ---------- -------- Outstanding at December 31, 1998 ...................... 2,905,738 10.747 2,153,359 4.469 Granted (at $10.50-- $14.5625 per share) .............. 1,209,500 12.385 200,000 11.016 Exercised (at $1.54-- $12.125 per share) .............. (458,295) 4.979 (430,418) 4.076 Cancelled (at $2.378-- $18.2032 per share)............. (163,811) 12.863 (82,319) 8.184 ---------- -------- ---------- -------- Outstanding at December 31, 1999 ..................... 3,493,132 11.762 1,840,622 5.220 Granted (at $8.3438 -- $11.03 per share) 480,225 10.055 276,024 9.757 Exercised (at $1.54 -- $10.50 per share) .............. (109,325) 5.499 (1,153,291) 3.318 Cancelled (at $5.00 -- $18.2032 per share)............. (1,615,167) 14.290 (185,192) 8.994 ---------- -------- ---------- -------- Outstanding at December 31, 2000 ...................... 2,248,865 $ 9.865 778,163 $ 8.766 ========== ======== ========== ========
- ---------- (1) This table includes those plans assumed pursuant to various business combinations according to the respective exchange ratios. At December 31, 2000, the total shares outstanding and exercisable under these option plans were as follows: 55
Options Outstanding Options Exercisable -------------------------------------------------- ----------------------------------- Weighted Average Weighted Number Number Remaining Average Aggregate Exercisable Average Aggregate Range of Outstanding Life Exercise Option At Exercise Option Exercise Prices At 12/31/00 (in years) Price Price 12/31/00 Price Price --------------- ------------ ---------- ----------- ------------ ---------- ---------- ----------- $3.03-- $4.34 ............ 162,698 1.58 $ 4.2725 $ 695,127 111,626 $ 4.2256 $ 471,687 $4.625-- $7.358 .......... 442,074 3.36 5.6340 2,490,641 236,970 6.1684 1,461,732 $8.3438-- $10.50 ......... 1,501,306 4.53 10.0037 15,018,602 386,528 9.6348 3,748,197 $11.0313-- $12.25 ........ 871,750 7.90 11.4929 10,018,945 293,300 11.5927 3,469,681 $12.2813-- $18.1560 ...... 49,200 7.17 15.9146 783,000 25,800 16.2776 419,963 -------- ---- ---------- ------------ --------- --------- ----------- Total ........... 3,027,028 5.21 $ 9.5824 $ 29,006,315 1,054,224 $ 9.0790 $ 9,571,260 ========= ==== ========== ============ ========= ========= ===========
As permitted by Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 23), BancGroup has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its Plans. Accordingly, no compensation cost has been recognized for options granted under the Incentive Plan. For the Nonqualified Plan, compensation expense is recognized for the difference between exercise price and market price at grant date of the shares as the shares become exercisable. Had compensation cost for BancGroup's Plans been determined based on the fair value at the grant dates for awards under the Plan, BancGroup's net income and net income per share would have been reduced to the pro forma amounts indicated below: As Pro Reported Forma ---------- ------- 2000 Net income ............................... $115,120 $ 113,720 Earnings per share (basic) ............... 1.00 0.99 1999 Net income ............................... $121,563 $ 118,754 Earnings per share (basic) ............... 1.05 1.03 1998 Net income ............................... $ 56,391 $ 54,936 Earnings per share (basic) ............... 0.50 0.48 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield of 3.16%, 3.13%, and 2.50%; expected volatility of 42%, 32%, and 25% for 2000, 1999, and 1998; risk-free interest rates of 5.82%, 5.43%, and 5.06% for 2000, 1999, and 1998, respectively; and expected lives of ten years. The weighted average fair values of options granted during 2000, 1999, and 1998 were $3.52, $3.89, and $3.66, respectively. In 1987, BancGroup adopted the Restricted Stock Plan for Directors ("Directors Plan") whereby directors of BancGroup and its subsidiary banks may receive Common Stock in lieu of cash director fees. The election to participate in the Directors Plan is made at the inception of the director's term except for BancGroup directors who make their election annually. Shares earned under the plan for regular fees are issued quarterly while supplemental fees are issued annually. All shares become vested at the expiration of the director's term. During 2000, 1999, and 1998, respectively, 90,603, 60,435, and 79,092 shares of Common Stock were issued under the Directors Plan, representing approximately $1,079,000, $724,000, and $819,000 in directors' fees for 2000, 1999, and 1998, respectively. In 1992, BancGroup adopted the Stock Bonus and Retention Plan to promote the long-term interests of BancGroup and its shareholders by providing a means for attracting and retaining officers, employees and directors by awarding Restricted Stock which shall vest either over a stated time period or based upon performance criteria. A total of $1,099,000, $745,000, and $1,123,000 in compensation expense was charged to operations under this plan for the years ended December 31, 2000, 1999, and 1998, respectively. During 2000, 1999, and 1998 the Company awarded 251,000, 20,100, and 123,960 shares, respectively, under the Stock Bonus and Retention Plan having weighted average market value at grant date of $10.50, $13.60, and $17.19, respectively. An aggregate of 3,000,000 shares has been reserved for issuance under this Plan. There were 288,405 shares outstanding under this plan at December 31, 2000. In 1994, BancGroup adopted the Employee Stock Purchase Plan which provides employees of BancGroup, who work in excess of 29 hours per week, with a convenient way to become shareholders of BancGroup. The participant authorizes a regular payroll deduction of not less than $10 or not more than 10% of salary. The participant may also contribute whole dollar amounts of not less than $100 or not more than $1,000 each month toward the purchase of the stock at market price. There are 600,000 shares authorized for issuance under this Plan from authorized but unissued shares. An additional 400,000 may be acquired from time to time on the open market for issuance under the Plan. There were 211,617 shares issued and outstanding under this Plan at December 31, 2000. 56 On November 30, 2000, the subcommittee approved a proposal to offer employees of BancGroup and its subsidiaries the opportunity to cancel certain options and be granted replacement options at least six months after the cancellation of the original options (the "Exchange Program"). Participation in the Exchange Program was at the sole discretion of the employee. The subcommittee included all employees with option exercise prices greater than $13.00. At December 31, 2000, there were approximately 866,000 shares that fell under the Exchange Program guidelines. As of March 1, 2001, 864,000 shares have been surrendered under this program. The subcommittee approved the Exchange Program with the goals of retaining valuable employees and reinstating some value to a portion of BancGroup's compensation and incentive strategy. 17. Contingencies BancGroup and its subsidiaries are from time to time defendants in legal actions from normal business activities. Management does not anticipate that the ultimate liability arising from litigation outstanding at December 31, 2000 will have a materially adverse effect on BancGroup's financial statements. 18. Related Parties BancGroup and Colonial Bank lease premises, including their principal corporate offices, from companies partly owned by a principal shareholder of BancGroup. Amounts paid under these leases and agreements approximated $2,271,000, $2,925,000 and $3,717,000 in 2000, 1999 and 1998, respectively. During 2000, 1999 and 1998, BancGroup and its subsidiaries paid or accrued fees of approximately $1,416,000, $1,196,000 and $1,198,000, respectively, for legal services required of law firms in which a partner of the firm serves on the Board of Directors. 19. Acquisition Expense & Restructuring Charges In the first quarter of 1998, BancGroup reorganized executive management of its Florida regions. The reorganization resulted in a restructuring charge of $2.5 million. During the fourth quarter of 1998, the Company developed a plan to: . Close certain unprofitable branches . Sell five super-market branches . Relocate and upgrade two other branches . Move the headquarters of the South Florida Region to downtown Miami and to consolidate the trust department into the South Florida headquarters to better serve its customer base. As a result of these actions BancGroup recognized a fourth quarter of 1998 restructuring charge of $6.3 million, which is net of $902,000 in reversals of unused reserves. The following is a summary of restructuring charges and activity for the years ended December 31, 2000, 1999, and 1998:
Lease Accrued Reduction of Termination Severance Asset Values Liabilities & Other Total -------------- ------------- --------- --------- (In thousands) January 1, 1998 ............................... $ -- $ -- $ -- $ -- Additions (expense) ........................... 4,395 3,240 2,052 9,687 Reversal of unused reserves ................... -- (362) (540) (902) ------- -------- ------ -------- Net expense ................................... 4,395 2,878 1,512 8,785 Write-off of assets ........................... (4,395) -- -- (4,395) Reductions (payments) ......................... -- -- (914) (914) ------- -------- ------ -------- Balance at December 31, 1998 .................. -- 2,878 598 3,476 ------- -------- ------ -------- Reductions (payments) ......................... -- (1,327) (598) (1,925) ------- -------- ------ -------- Balance at December 31, 1999 .................. $ -- $ 1,551 $ -- $ 1,551 ======= ======== ====== ======== Reductions (payments) ......................... -- (1,063) -- (1,063) ------- -------- ------ -------- Balance at December 31, 2000 .................. $ -- $ 488 $ -- $ 488 ======= ======== ====== ========
57 Additionally, the Company has recognized acquisition related expenses totaling $0, $1,307,000 and $12,750,000 for each of the years ended December 31, 2000, 1999 and 1998, respectively. These expenses relate primarily to transaction costs such as legal and accounting fees and incremental charges related to the integration of acquired banks, such as system conversion (including contract buy-outs and write off of equipment) and employee severance. 20. Other Expense The following amounts were included in Other Expense:
2000 1999 1998 -------- -------- ------- (In thousands) FDIC and state assessments..... $ 2,005 $ 1,677 $ 2,259 Advertising and public relations ..................... 7,908 7,863 9,226 Stationery, printing, and supplies ...................... 4,974 5,730 5,982 Telephone ..................... 6,554 6,221 5,701 Legal ......................... 4,707 4,634 5,360 Postage and courier ........... 6,867 6,795 6,058 Insurance ..................... 1,451 1,507 1,616 Professional services ......... 6,309 7,058 9,796 Travel ........................ 3,575 3,636 4,722 Other ......................... 18,796 14,754 12,869 -------- -------- ------- Total ............... $ 63,146 $ 59,875 $63,589 ======== ======== =======
21. Income Taxes The components of the provision for income taxes were as follows: 2000 1999 1998 -------- -------- --------- (In thousands) Currently payable Federal............... $69,308 $67,139 $ 45,717 State ................ 1,309 2,345 4,072 Deferred ............. (4,127) 2,010 (17,646) ------- ------- --------- Total ...... $66,490 $71,494 $ 32,143 ======= ======= ========= The provision for income taxes is presented in the income statement as follows:
2000 1999 1998 --------- --------- --------- Continuing operations...... $ 69,556 $ 69,360 $ 38,527 Discontinued operations .... (3,066) 2,134 (6,384) --------- --------- --------- Total .................... $ 66,490 $ 71,494 $ 32,143 ========= ========= =========
The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:
2000 1999 1998 -------- -------- -------- (In thousands) Tax at statutory rate on pre-tax income.............. $63,791 $67,510 $30,979 Add: State income taxes, net of federal tax benefit .... 805 1,754 1,328 Amortization of net purchase accounting adjustments ...................................... 1,724 1,705 1,681 Other ............................................. 4,256 3,097 367 ------- ------- ------- Total ..................................... 70,576 74,066 34,355 ------- ------- ------- Deduct: Nontaxable interest income ........................ 2,759 1,991 1,622 Other ............................................. 1,327 581 590 ------- ------- ------- Total ..................................... 4,086 2,572 2,212 ------- ------- ------- Total income taxes ................................ $66,490 $71,494 $32,143 ======= ======= =======
The components of BancGroup's net deferred tax asset as of December 31, 2000 and 1999, were as follows:
2000 1999 ------ ------- (In thousands) Deferred tax assets: Allowance for loan losses..................... $40,032 $ 36,696 Pension accrual in excess of contributions ... 2,205 2,227
58 Accumulated amortization and valuation reserve for mortgage servicing rights ....... - 1,881 Other real estate owned write-downs .......... 390 519 Other liabilities and reserves ............... 4,634 4,985 Differences between financial reporting and tax basis of net assets acquired......... 944 190 Accelerated tax depreciation ................. 758 1,520 Unrealized loss on securities available for sale .................................... 3,305 16,045 Other ........................................ 1,438 535 ------- -------- Total deferred tax asset ............... $53,706 $ 64,598 ======= ======== Deferred tax liabilities: Cumulative accretion/discount on bonds ....... $ 1,253 $ 620 Loan loss reserve recapture .................. 703 2,772 Other ........................................ 1,510 2,354 ------- -------- Total deferred tax liability ........... 3,466 5,746 ------- -------- Net deferred tax asset ................. $50,240 $ 58,852 ======= ========
The net deferred tax asset is included as a component of accrued interest and other assets in the Consolidated Statement of Condition. BancGroup did not establish a valuation allowance related to the net deferred tax asset due to taxes paid within the carryback period being sufficient to offset future deductions resulting from the reversal of these temporary differences. 22. Earnings Per Share The following table reflects a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation:
Per Share Income Shares Amount ----------- ---------- ------------- (Dollars in thousands, except per share amounts) 2000 Basic EPS Income from continuing operations..................... $ 120,185 114,760 $ 1.05 Effect of dilutive securities Options ...................... 296 Convertible debentures ....... 192 597 --------- ------- ------- Diluted EPS .................... $ 120,377 115,653 $ 1.04 ========= ======= ======= 1999 Basic EPS Income from continuing operations .................... $ 118,036 115,579 $ 1.02 Effect of dilutive securities Options ...................... 1,147 Convertible debentures ....... 219 667 --------- ------- ------- Diluted EPS ..................... $ 118,255 117,393 $ 1.01 ========= ======= ======= 1998 Basic EPS Income from continuing operations .................... $ 66,839 113,905 $ 0.59 Effect of dilutive securities Options ...................... 1,913 Convertible debentures ....... 238 729 --------- ------- ------- Diluted EPS ..................... $ 67,077 116,547 $ 0.58 ========= ======= =======
23. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents -- For these short-term instruments, the carrying amount is a reasonable estimate of fair value. 59 Investment securities and securities available for sale -- For debt securities and marketable equity securities held either for investment purposes or for sale, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Mortgage loans held for sale -- For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Derivatives -- Fair value is defined as the amount that the company would receive or pay to terminate the contracts at the reporting date. Market or dealer quotes were used to value the instruments. Loans -- For loans, the fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits -- The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at December 31, 2000 and 1999. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Short-term borrowings -- Rates currently available to BancGroup for borrowings with similar terms and remaining maturities are used to estimate fair value of existing borrowings. Long-term debt -- Rates currently available to BancGroup for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Commitments to extend credit and standby letters of credit -- The value of the unrecognized financial instruments is estimated based on the related fee income associated with the commitments, which is not material to BancGroup's financial statements at December 31, 2000 and 1999. The estimated fair values of BancGroup's financial instruments at December 31, 2000 and 1999 are as follows:
2000 1999 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------------ ---------- ------------ ---------- (In thousands) Financial assets: Cash and short-term investments ........ $ 377,556 $ 377,556 $ 390,733 $ 390,733 Securities available for sale .......... 1,469,684 1,469,684 1,509,868 1,509,868 Investment securities .................. 47,048 47,871 64,254 64,472 Mortgage loans held for sale ........... 9,866 9,866 33,150 33,150 Loans .................................. 9,642,954 8,419,225 Less: allowances for loan losses ....... (110,055) (99,027) ------------ ----------- ----------- ----------- Loans, net ............................. 9,532,899 9,554,572 8,320,198 8,107,328 ------------ ----------- ----------- ----------- Total .......................... $ 11,437,053 $11,459,549 $10,318,203 $10,105,551 ============ =========== =========== =========== Financial liabilities: Deposits ............................... $ 8,355,849 $ 8,366,425 $ 8,172,810 $ 8,161,079 Short-term borrowings .................. 1,897,558 1,898,669 1,193,849 1,179,940 Long-term debt ......................... 862,247 851,543 911,071 876,949 ------------ ----------- ----------- ----------- Total .......................... $ 11,115,654 $11,116,637 $10,277,730 $10,217,968 ============ =========== =========== =========== Derivatives: CMT Floors ............................. $ -- $ -- $ 3,114 $ 3,114 PO Strips .............................. -- -- 167 167 CMS Floors ............................. -- -- 3,046 3,046 ------------ ----------- ----------- ----------- $ -- $ -- $ 6,327 $ 6,327 ============ =========== =========== ===========
24. Segment Information Through its wholly owned subsidiary, Colonial Bank, BancGroup had previously segmented its operations into two distinct lines of business: Commercial Banking and Mortgage Banking. In July 2000, the Company announced definitive plans to exit the mortgage banking business. As of December 31, 2000, all sales of mortgage servicing rights and transfers of underlying loans have been completed. Colonial Bank provides general banking services in 243 branches throughout 6 states. 60 Operating results and asset levels of the two segments reflect those which are specifically identifiable or which are based on an internal allocation method. The two segments are designed around BancGroup's organizational and management structure, and while the assignments and allocations have been consistently applied for all periods presented, the results are not necessarily comparable to similar information published by other financial institutions. The following table reflects the approximate amounts of consolidated revenue, expense, and assets for the years ended December 31, for each segment: Segment Data
Discontinued Continuing Operations Operations Commercial Corporate/ Mortgage Consolidated Banking Other* Total Banking BancGroup ---------- --------- ----- ----------- ------------ (Dollars in thousands) Year Ended December 31, 2000 Interest income ..................................... $ 918,076 $ -- $ 918,076 $ 918,076 Interest expense .................................... 510,733 7,021 517,754 517,754 Provision for loan losses ........................... 29,775 -- 29,775 29,775 Noninterest income .................................. 77,849 36 77,885 77,885 Amortization and depreciation ....................... 31,483 (418) 31,065 31,065 Noninterest expense ................................. 223,325 4,301 227,626 227,626 ------------ -------- ------------ --------- ----------- Income from continuing operations before income taxes .............................. 200,609 (10,868) 189,741 189,741 Income taxes ........................................ 72,420 (2,864) 69,556 69,556 ------------ -------- ------------ --------- ----------- Income from continuing operations.................... 128,189 (8,004) 120,185 120,185 Income (loss) from discontinued operations and loss on disposal (net of taxes)................... -- -- -- (5,065) (5,065) ------------ -------- ------------ --------- ----------- Net Income (loss) ......................... $ 128,189 $ (8,004) $ 120,185 $ (5,065) $ 115,120 ============ ======== ============ ========= =========== Identifiable Assets ................................. $ 11,951,864 $ 12,701 $ 11,964,565 $ 35,056 $11,999,621 Capital Expenditures ................................ $ 22,077 $ 0 $ 22,077 $ 0 $ 22,077 Year Ended December 31, 1999 Interest income ..................................... $ 766,038 $ -- $ 766,038 $ 766,038 Interest expense .................................... 377,626 7,265 384,891 384,891 Provision for loan losses ........................... 29,177 -- 29,177 29,177 Noninterest income .................................. 75,128 213 75,341 75,341 Amortization and depreciation ....................... 27,928 (408) 27,520 27,520 Noninterest expense ................................. 209,041 3,354 212,395 212,395 ------------ -------- ------------ --------- ----------- Income from continuing operations before income taxes ...................................... 197,394 (9,998) 187,396 187,396 Income taxes ........................................ 73,041 (3,681) 69,360 69,360 ------------ -------- ------------ --------- ----------- Income from continuing operations.................... 124,353 (6,317) 118,036 118,036 Income (loss) from discontinued operations and loss on disposal (net of taxes)................... -- -- -- 3,527 3,527 ------------ -------- ------------ --------- ----------- Net Income (loss) ......................... $ 124,353 $ (6,317) $ 118,036 $ 3,527 $ 121,563 ============ ======== ============ ========= =========== Identifiable Assets ................................. $ 10,743,914 $ 12,493 $ 10,756,407 $ 341,416 $11,097,823 Capital Expenditures ................................ $ 40,858 $ 34 $ 40,892 451 $ 41,343 Year Ended December 31, 1998 Interest income ..................................... $ 676,475 $ (19) $ 676,456 $ 676,456 Interest expense .................................... 333,015 6,750 339,765 339,765 Provision for loan losses ........................... 27,511 -- 27,511 27,511 Noninterest income .................................. 61,346 (1,103) 60,243 60,243 Amortization and depreciation ....................... 25,414 (283) 25,131 25,131 Noninterest expense ................................. 236,475 2,451 238,926 238,926 ------------ -------- ------------ --------- ----------- Income from continuing operations before income taxes .............................. 115,406 (10,040) 105,366 105,366 Income taxes ........................................ 41,497 (2,970) 38,527 38,527 ------------ -------- ------------ --------- ----------- Income from continuing operations.................... 73,909 (7,070) 66,839 66,839 Income (loss) from discontinued operations and loss on disposal (net of taxes)................... -- -- -- (10,448) (10,448) ------------ -------- ------------ --------- ----------- Net Income (loss) ......................... $ 73,909 $ (7,070) $ 66,839 $ (10,448) 56,391 ============ ======== ============ ========= =========== Identifiable Assets ................................. $ 9,672,516 $ 12,160 $ 9,684,676 $ 936,562 $10,621,238 Capital Expenditures ................................ $ 47,171 $ 95 $ 47,266 $ 1,636 $ 48,902
_________ * Includes eliminations of certain intercompany transactions. 61 25. Condensed Financial Information of the Colonial BancGroup, Inc. (Parent Company Only) Statement of Condition
December 31, ------------------- 2000 1999 ------- -------- (In thousands) Assets: Cash* ..................................................................... $ 7,522 $ 18,319 Investment in subsidiaries* ............................................... 856,932 777,026 Intangible assets ......................................................... 3,965 4,399 Other assets .............................................................. 5,108 4,466 -------- -------- Total assets .................................................... $873,527 $804,210 ======== ======== Liabilities and Shareholders' Equity: Short-term borrowings ..................................................... $ 3,200 $ 200 Subordinated debt ......................................................... 82,900 82,048 Other liabilities ......................................................... 12,327 10,337 Shareholders' equity ...................................................... 775,100 711,625 -------- -------- Total liabilities and shareholders' equity ...................... $873,527 $804,210 ======== ========
- ---------- * Eliminated in consolidation. Statement of Operations
Year Ended December 31, ------------------------------ 2000 1999 1998 ---------- ---------- -------- (In thousands) Income: Cash dividends from subsidiaries* ......................................... $ 64,866 $ 79,344 $ 49,532 Interest and dividends on short-term investments* ......................... 372 677 480 Other income .............................................................. 2,849 2,490 2,418 -------- -------- -------- Total income .................................................... 68,087 82,511 52,430 -------- -------- -------- Expenses: Interest .................................................................. 7,394 7,942 7,249 Salaries and employee benefits ............................................ 1,696 1,263 1,492 Occupancy expense ......................................................... 507 414 311 Furniture and equipment expense ........................................... 100 137 108 Amortization of intangible assets ......................................... 434 432 432 Other expenses ............................................................ 2,262 1,816 4,286 -------- -------- -------- Total expenses .................................................. 12,393 12,004 13,878 -------- -------- -------- Income before income taxes and equity in undistributed net income of subsidiaries .............................................................. 55,694 70,507 38,552 Income tax benefit ........................................................ 3,314 3,278 3,875 -------- -------- -------- Income before equity in undistributed net income of subsidiaries .......... 59,008 73,785 42,427 Equity in undistributed net income of subsidiaries* ....................... 56,112 47,778 13,964 -------- -------- -------- Net income ...................................................... $115,120 $121,563 $ 56,391 ======== ======== ========
- ---------- * Eliminated in consolidation. Statement of Cash Flows
Year Ended December 31, --------------------------------- 2000 1999 1998 ---------- ---------- -------- (In thousands) Cash flows from operating activities ...................................... $ 62,000 $ 77,788 $ 46,927 --------- --------- --------- Cash flows from investing activities Capital expenditures ...................................................... (1,004) (34) (95) Increase (decrease) in loans............................................... (374) -- -- Proceeds from sale of premises and equipment .............................. -- -- 2,389 Net investment in subsidiaries* ........................................... (426) (2,700) (25,000) --------- --------- --------- Net cash provided (used) in investing activities .......................... (1,804) (2,734) (22,706) --------- --------- --------- Cash flows from financing activities: Increase (decrease) in short-term borrowings .............................. 4,245 (24,811) 11,860 Increase (decrease) in sale of trust preferred securities ................. 500 2,500 -- Proceeds from issuance of common stock .................................... 6,266 6,437 6,830 Purchase of treasury stock ................................................ (31,934) -- (17,100) Dividends paid ............................................................ (50,070) (42,565) (36,377) --------- --------- --------- Net cash used in financing activities ..................................... (70,993) (58,439) (34,787) --------- --------- --------- Net (decrease) increase in cash and cash equivalents ...................... (10,797) 16,615 (10,566)
62 Cash and cash equivalents at beginning of year ......................... 18,319 1,704 12,270 --------- --------- --------- Cash and cash equivalents at end of year* .............................. $ 7,522 $ 18,319 $ 1,704 ========= ========= ========= Supplemental Disclosure of cash flow information: Cash paid (received) during the year for: Interest ............................................................. $ 7,638 $ 7,690 $ 7,350 Income taxes ......................................................... (1,440) (4,023) (3,565)
- ---------- * Eliminated in consolidation 63 EX-99.2 5 dex992.txt RESTATED FINANCIALS FOR PERIOD ENDED 9-30-01 EXHIBIT 99.2 THE COLONIAL BANCGROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2001 AND 2000
Page Number Financial Statements (Unaudited) Consolidated Statements of Condition - September 30, 2001, December 31, 2000 and September 30, 2000 3 Consolidated Statements of Income -Nine months ended September 30, 2001 and September 30, 2000 and Three months ended September 30, 2001 and September 30, 2000 4 Consolidated Statements of Comprehensive Income - Nine months ended September 30, 2001 and September 30 2000 and Three months ended September 30, 2001 and September 30, 2000 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and September 30, 2000 6-7 Notes to Consolidated Financial Statements - September 30, 2001 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 14
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: These financial statements contain "forward-looking statements" within the meaning of the federal securities laws. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among other things, the following possibilities: (i) deposit attrition, customer loss, or revenue loss in the ordinary course of business; (ii) increases in competitive pressure in the banking industry; (iii) changes in the interest rate environment which reduce margins; (iv) costs or difficulties related to the integration of the institutions and businesses recently acquired or to be acquired by BancGroup are greater than expected, (v) general economic conditions, either nationally or regionally, that are less favorable then expected, resulting in, among other things, a deterioration in credit quality, (vi) changes which may occur in the regulatory environment; (vii) a significant rate of inflation or deflation; and (viii) changes in the securities markets. When used in this Report, the words "believes," "estimates," "plans," "expects," "should," "may," "might," "outlook," and "anticipates," and similar expressions as they relate to BancGroup (including its subsidiaries), or its management are intended to identify forward-looking statements. 2 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (Unaudited) (Dollars in thousands, except per share amounts)
September 30, December 31, September 30, 2001 2000 2000 --------------------------------------------------------------- ASSETS: Cash and due from banks $ 306,603 $ 353,217 $ 288,588 Interest-bearing deposits in banks and federal funds sold 72,497 24,339 69,682 Securities available for sale 1,905,705 1,469,684 1,502,850 Investment securities 32,675 47,048 50,675 Mortgage loans held for sale 24,668 9,866 9,940 Loans, net of unearned income 9,979,118 9,642,954 9,317,973 Less: Allowance for loan losses (115,344) (110,055) (106,913) -------------------------------------------------------- Loans, net 9,863,774 9,532,899 9,211,060 Premises and equipment, net 190,444 192,344 193,816 Excess of cost over tangible and identified intangible assets acquired, net 89,778 74,708 76,013 Other real estate owned 12,805 8,978 6,631 Accrued interest and other assets 287,456 286,538 325,905 -------------------------------------------------------- TOTAL ASSETS: $ 12,786,405 $ 11,999,621 $ 11,735,160 ======================================================== LIABILITIES AND SHAREHOLDERS EQUITY: Deposits $ 8,261,121 $ 8,355,849 $ 8,242,545 FHLB short-term borrowings 50,000 425,000 475,000 Other short-term borrowings 1,837,072 1,472,558 1,489,980 Subordinated debt 274,047 111,900 111,929 Trust preferred securities 73,000 73,000 73,000 FHLB long-term debt 1,241,053 574,022 371,136 Other long-term debt 89,059 103,325 135,475 Other liabilities 101,438 108,867 94,772 -------------------------------------------------------- Total liabilities 11,926,790 11,224,521 10,993,837 -------------------------------------------------------- SHAREHOLDERS' EQUITY: Common Stock, $2.50 par value; 200,000,000 shares authorized; 114,888,150, 114,668,279, and 114,671,039 shares issued at September 30, 2001, December 31, 2000, and September 30, 2000, respectively 287,221 286,671 286,678 Treasury stock (2,423,512, 2,773,782, and 2,788,420 at September 30, 2001, December 31, 2000, and September 30, 2000, respectively) (25,506) (26,467) (26,607) Additional paid in capital 127,568 123,272 123,322 Retained earnings 449,529 399,972 383,567 Unearned compensation (3,661) (2,541) (2,942) Accumulated other comprehensive income (loss), net of taxes 24,464 (5,807) (22,695) -------------------------------------------------------- Total shareholders' equity 859,615 775,100 741,323 -------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,786,405 $ 11,999,621 $ 11,735,160 ========================================================
Note: The financial results have been restated to reflect the October 25, 2001 merger with manufacturers Bancshares accounted for as a pooling of interests. See Notes Band D. See Notes to the Unaudited Condensed Consolidated Financial Statements 3 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts)
Nine Months Ended Three Months Ended September 30, September 30, -------------------------------------------------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- INTEREST INCOME: Interest and fees on loans $ 615,077 $ 592,187 $ 193,202 $ 207,105 Interest on investments 76,863 82,312 27,346 27,609 Other interest and dividends income 2,291 2,719 493 885 ------------ -------------- -------------- --------------- Total interest income 694,231 677,218 221,041 235,599 ------------ -------------- -------------- --------------- INTEREST EXPENSE: Interest on deposits 260,177 262,066 77,486 94,617 Interest on short-term borrowings 55,925 68,906 13,102 27,079 Interest on long-term debt 65,540 45,675 25,384 15,118 ------------ -------------- -------------- --------------- Total interest expense 381,642 376,647 115,972 136,814 ------------ -------------- -------------- --------------- NET INTEREST INCOME 312,589 300,571 105,069 98,785 Provision for loan losses 24,843 21,917 7,901 8,886 ------------ -------------- -------------- --------------- Net Interest Income After Provision for Loan Losses 287,746 278,654 97,168 89,899 ------------ -------------- -------------- --------------- NONINTEREST INCOME: Service charges on deposit accounts 30,890 28,990 10,706 9,873 Wealth management 6,499 6,842 1,975 1,900 Electronic banking 4,861 4,152 1,661 1,415 Mortgage origination 5,414 4,516 1,896 2,106 Securities gains (losses), net 1,945 (40) - 21 Other income 14,189 14,216 4,517 5,640 ------------ -------------- -------------- --------------- Total noninterest income 63,798 58,676 20,755 20,955 ------------ -------------- -------------- --------------- NONINTEREST EXPENSE: Salaries and employee benefits 107,163 97,362 35,567 33,167 Occupancy expense of bank premises, net 25,891 23,079 8,796 7,987 Furniture and equipment expenses 21,984 22,019 7,310 7,437 Amortization of intangibles 5,390 3,919 2,102 1,306 Other expense 49,094 47,431 15,557 15,035 ------------ -------------- -------------- --------------- Total noninterest expense 209,522 193,810 69,332 64,932 ------------ -------------- -------------- --------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 142,022 143,520 48,591 45,922 Applicable income taxes 51,226 52,611 17,524 16,819 ------------ -------------- -------------- --------------- INCOME FROM CONTINUING OPERATIONS 90,796 90,909 31,067 29,103 Discontinued Operations: Net loss from discontinued operations and loss on disposal, net of income taxes of ($371), ($2,844), ($371), and $0 for the nine months ended and for the three months ended September 30, 2001 and 2000, respectively (613) (4,699) (613) - ------------ -------------- -------------- --------------- NET INCOME $ 90,183 $ 86,210 $ 30,454 $ 29,103 ============ ============== ============== =============== EARNINGS PER SHARE: INCOME FROM CONTINUING OPERATIONS: Basic $ 0.79 $ 0.79 $ 0.27 $ 0.25 Diluted $ 0.78 $ 0.78 $ 0.27 $ 0.25 NET INCOME Basic $ 0.79 $ 0.75 $ 0.27 $ 0.25 Diluted $ 0.78 $ 0.75 $ 0.26 $ 0.25
See Notes to the Unaudited Condensed Consolidated Financial Statements 4 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands, except per share amounts)
Nine Months Ended Three Months Ended September 30, September 30, ------------------------------- --------------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- NET INCOME $ 90,183 $ 86,210 $ 30,454 $ 29,103 OTHER COMPREHENSIVE INCOME, NET OF TAXES: Unrealized gains on securities available for sale arising during the period, net of taxes 31,516 6,096 16,786 9,804 Less: reclassification adjustment for net (gains) included in net income (1,245) (18) - (13) ------------- -------------- -------------- --------------- COMPREHENSIVE INCOME $ 120,454 $ 92,288 $ 47,240 $ 38,894 ============= ============== ============== ===============
See Notes to the Unaudited Condensed Consolidated Financial Statements 5 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) (Dollars in thousands, except per share amounts)
Nine Months Ended September 30, ------------------------------------- 2001 2000 ------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 34,831 $ 297,945 ------------------------------------- Cash flows from investing activities: Proceeds from maturities and calls of securities available for sale 368,710 147,171 Proceeds from sales of securities available for sale 55,998 178,835 Purchase of securities available for sale (740,595) (308,162) Proceeds from maturities of investment securities 14,174 13,541 Net increase in loans (312,709) (912,018) Cash received in bank acquisitions 33,298 - Capital expenditures (20,616) (18,144) Proceeds from sale of other real estate owned 6,648 9,009 Other, net 3,666 2,102 ------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (591,426) (887,666) ------------------------------------- Cash flows from financing activities: Net (decrease) increase in demand, savings, and time deposits (197,742) 69,722 Net increase in federal funds purchased, repurchase agreements and other short-term borrowings 194,509 646,126 Proceeds from issuance of long-term debt 667,447 56,500 Repayment of long-term debt (219,677) (150,908) Proceeds from issuance of subordinated debt 150,000 - Proceeds from issuance of common stock 5,620 5,441 Proceeds from sale of treasury stock 7,380 - Purchase of treasury stock (8,772) (32,317) Dividends paid ($0.24 and $0.22 per share for 2001 and 2000, respectively) (40,626) (37,306) ------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 558,139 557,258 ------------------------------------- Net increase (decrease) in cash and cash equivalents 1,544 (32,463) Cash and cash equivalents at beginning of year 377,556 390,733 ------------------------------------- Cash and cash equivalents at September 30 $ 379,100 $ 358,270 =====================================
See Notes to the Unaudited Condensed Consolidated Financial Statements 6 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) (Dollars in thousands, except per share amounts)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Nine Months Ended September 30, ------------------------------------- 2001 2000 ------------------------------------- Cash paid during the year for: Interest $ 391,744 $ 381,410 Income taxes 51,226 52,611 Non-cash investing activities: Transfer of loans to other real estate $ 8,399 $ 6,931 Securitization of residential mortgage loans 307,523 - Origination of loans for the sale of other real estate 169 3,085 Non-cash financing activities: Conversion of subordinated debentures $ 643 $ 119
See Notes to the Unaudited Condensed Consolidated Financial Statements. 7 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A: ACCOUNTING POLICIES The Colonial BancGroup, Inc. and its subsidiaries ("BancGroup" or the "Company") have not changed their accounting and reporting policies from those stated in the 2000 annual report on Form 10-K. These unaudited interim financial statements should be read in conjunction with the audited financial statements and footnotes included in BancGroup's 2000 annual report on Form 10-K. In the opinion of BancGroup, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of September 30, 2001 and 2000 and the results of operations and cash flows for the interim periods ended September 30, 2001 and 2000. All 2001 interim amounts are subject to year-end audit, and the results of operations for the interim period herein are not necessarily indicative of the results of operations to be expected for the year. NOTE B: BASIS OF PRESENTATION The consolidated financial statement of The Colonial BancGroup, Inc. and subsidiaries have been prepared to give retroactive effect to the pooling of interests method business combination with Manufacturers Bancshares, Inc. ("Manufacturers") on October 25, 2001. Generally Accepted Accounting Principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they became the historical consolidated financial statements of The Colonial BancGroup, Inc. and subsidiaries after post merger results covering the date of consummation of the business combinations were issued. NOTE C: COMMITMENTS AND CONTINGENCIES BancGroup and its subsidiaries are from time to time defendants in legal actions arising from normal business activities. Management does not anticipate that the ultimate liability arising from litigation outstanding at September 30, 2001 will have a materially adverse effect on BancGroup's financial statements. NOTE D: BUSINESS COMBINATIONS AND ACQUISITIONS On January 13, 2001, Colonial Bank acquired two branches in Nevada from First Security Bank in a branch divestiture resulting from its merger with Wells Fargo. Through this acquisition, the Company purchased $49.5 million in loans and assumed $102.9 million in deposits. The previously announced acquisition of Manufacturers Bancshares, Inc. ("Manufacturers") and its wholly owned subsidiary, Manufacturers Bank of Florida ("Manufacturers Bank") was consummated on October 25, 2001. Manufacturers Bank operated four branches in the Tampa area and had $297.4 million in assets as of September 30, 2001. BancGroup issued 4,458,437 shares of its common stock to shareholders of Manufacturers, including shares issued pursuant to the exercise of Manufacturers stock options. This transaction was accounted for as a pooling of interests and all prior periods have been restated to include results on a combined basis. 8 The previously announced branch purchase and assumption agreement with Union Planters Corporation to acquire 13 Union Planters offices was completed on October 11, 2001. This transaction was accounted for as a purchase with approximately $21 million in intangible assets. The following is summary operating information for BancGroup showing the effect of the business combination described in the preceding paragraphs (years prior to consummation). As originally Effect of Currently (In thousands) Reported Poolings Reported - -------------- ------------- --------- --------- Quarters ended: September 30, 2001 Net interest income $102,094 $2,975 $105,069 Noninterest income 20,416 339 20,755 Net Income 30,143 311 30,454 September 30, 2000 Net interest income 96,166 2,619 98,785 Noninterest income 20,649 306 20,955 Net Income 28,561 542 29,103 NOTE E: RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. On September 23, 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," an amendment to delay the effective date of SFAS No. 133. The effective date for this statement was delayed from fiscal years beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. BancGroup adopted SFAS No. 133 and SFAS No. 137 on January 1, 2001 and as of the date of these financial statements, all of BancGroup's hedging relationships qualified for hedge accounting treatment per these statements. The effect of these statements is immaterial to the financial statements presented. On September 29, 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement of 9 FASB Statement No. 125." This statement is effective for transfers after April 1, 2001. The implementation of SFAS No. 140 did not have a material impact on BancGroup's financial statements. On June 29, 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations". The effective date for this statement is effective for all business combinations initiated after June 30, 2001. This statement supercedes Accounting Principles Board Opinion No. 16, "Business Combinations". SFAS No. 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001, establishes specific criteria for the recognition of intangible assets separately from goodwill, and requires unallocated negative goodwill to be written off immediately as an extraordinary gain instead of being deferred and amortized. On June 29, 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Intangible Assets". The effective date for this statement is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires that goodwill and indefinite lived intangible assets no longer be amortized, that goodwill will be tested for impairment at least annually, that intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and that amortization period of intangible assets with finite lives will no longer be limited to forty years. Management is currently evaluating the impact that SFAS No. 142 will have on BancGroup's financials. In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations". The effective date for this statement is January 1, 2003, with early adoption permitted. SFAS No. 143 addresses the recognition and measurement of obligations associated with the retirement of tangible long-lived assets resulting from acquisition, construction, development, or the normal operation of a long-lived asset. SFAS No. 143 requires that the fair value of an asset retirement obligation be recognized as a liability in the period in which it is incurred. The asset retirement obligation is to be capitalized as part of the carrying amount of the long-lived asset and the expense is to be recognized over the useful life of the long-lived asset. Management is currently evaluating the impact that SFAS No. 143 will have on BancGroup's financials. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The effective date for this statement is January 1, 2002 and supersedes SFAS No. 121. SFAS No. 144 carries forward from SFAS No. 121 the fundamental guidance related to the recognition and measurement of an impairment loss related to assets to be held and used and provides guidance related to the disposal of long-lived assets to be abandoned or disposal by sale. Management is currently evaluating the impact that SFAS No. 144 will have on BancGroup's financials. 10 NOTE F: DISCONTINUED OPERATIONS As noted in prior quarters, in July 2000 the Company decided to exit the mortgage servicing business and discontinue the operations of mortgage servicing as a separate business unit. As of December 31, 2000, all loan transfers were completed and the mortgage servicing rights removed from the Company's balance sheet. In addition, the escrow and custodial deposits related to those servicing rights have been transferred out of Colonial Bank resulting in a $209 million reduction in average noninterest bearing deposits from September 30, 2000 to September 30, 2001. At September 30, 2001, the balance sheet of the Company includes approximately $5.4 million in receivables and other advances related to the various transfers of servicing. These receivable and advance balances represent the expected recoverable amounts once all documentation supporting the transferred loans is provided to the new servicer. The anticipated costs of providing the necessary documents have been accrued. However, due to the volume of loans transferred and the costs and complexity in providing certain documentation, the Company revised its estimate of the cost to complete the disposition of this business resulting in a $613,000 after-tax expense in the third quarter of 2001. Current estimate of recoverable amounts or costs may be revised for future periods. 11 NOTE G: MORTGAGE SERVICING RIGHTS An analysis of mortgage servicing rights and the related valuation reserve is as follows: (in thousands)
Nine Months Ended September 30 -------------------------------- 2001 2000 -------------------------------- MORTGAGE SERVICING RIGHTS Balance, January 1 $ - $ 265,888 Additions, net - 981 Sales - (203,712) Scheduled amortization - (13,432) Hedge losses applied - (49,725) -------------- --------------- Balance, September 30 - - -------------- --------------- VALUATION RESERVE Balance, January 1 - 27,483 Reductions - (27,783) Additions - 300 -------------- --------------- Balance, September 30 - - -------------- --------------- Mortgage Servicing Rights, net $ - $ - ============== ===============
As a result of the exit of the mortgage servicing business, all hedges related to MSR's were liquidated during the third quarter of 2000. 12 NOTE H: EARNINGS PER SHARE The following table reflects a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation: (Dollars in thousands, except per share amounts)
Nine Months Ended September 30, Three Months Ended September 30, ------------------------------------- ---------------------------------- Per Share Per Share 2001 Income Shares Amount Income Shares Amount ----------- -------- --------- -------- ---------- --------- Basic EPS Net Income $90,183 114,697 $ 0.79 $30,454 114,892 $ 0.27 Effect of dilutive securities: Options 637 803 Convertible debentures 136 552 39 504 - -------------------------------------------------------------------------------------------------------------------- Diluted EPS $90,319 115,886 $ 0.78 $30,493 116,199 $ 0.26 - -------------------------------------------------------------------------------------------------------------------- 2000 Basic EPS Net income $86,210 114,915 $ 0.75 $29,103 114,262 $ 0.25 Effect of dilutive securities Options 323 307 Convertible debentures 143 598 48 593 - -------------------------------------------------------------------------------------------------------------------- Diluted EPS $86,353 115,836 $ 0.75 $29,151 115,162 $ 0.25 - --------------------------------------------------------------------------------------------------------------------
NOTE I: SEGMENT INFORMATION Through its wholly owned subsidiary Colonial Bank, BancGroup has previously segmented its operations into two distinct lines of business: Commercial Banking and Mortgage Banking. Mortgage Banking was discontinued as a line of business in 2000 (See Note F to the Consolidated Financial Statements). Colonial Bank operates 259 branches throughout 6 states. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION: Ending balances of total assets, securities, mortgage loans held for sale, net loans, mortgage servicing rights, deposits, and long term debt changed for the nine months and twelve months ended September 30, 2001, respectively, as follows (Dollars in thousands):
December 31, 2000 September 30, 2000 to September 30, 2001 To September 30, 2001 Increase (Decrease) Increase (Decrease) ---------------------------------------------------------- Amount % Amount % ---------------------------------------------------------- Assets: Bank $ 813,910 6.8% $ 1,139,031 9.8% Mortgage Banking (27,489) -78.4% (88,539) -92.1% Other 363 2.6% 753 5.5% ---------------------------------------------------------- Total Assets 786,784 6.6% 1,051,245 9.0% Securities 421,648 27.8% 384,855 24.8% Loans, net of unearned income 336,164 3.5% 661,145 7.1% Deposits: Bank (82,451) -1.0% 137,089 1.7% Mortgage Banking (12,277) -98.7% (118,513) -99.9% ---------------------------------------------------------- Total Deposits (94,728) -1.1% 18,576 0.2% Short-term debt (10,486) -0.5% (77,908) -4.0% Long-term debt 814,912 94.5% 985,619 142.5%
Assets: BancGroup's assets have increased 9.0% and 6.6% since September 30, 2000 and December 31, 2000, respectively. This growth resulted primarily from increases in investment securities and internal loan growth throughout BancGroup's banking regions partially offset by the decline in mortgage banking assets due to the discontinuance of this line of business, as discussed in Note F to the consolidated financial statements. Securities: Investment securities and securities available for sale have increased $384.9 million (24.8%) and $421.6 million (27.8%) from September 30, 2000 and December 31, 2000, respectively. In addition to normal business activities, in June 2001, BancGroup securitized and retained as investments $307 million of single-family real estate loans. BancGroup retained substantially all of the securitized assets which are reflected as mortgage backed securities in the investment portfolio. 14 Loans and Mortgage Loans Held for Sale: Loans, net of unearned income, have increased $661.1 million (7.1%) and $336.2 million (3.5%) from September 30, 2000 and December 31, 2000, respectively. Loan growth was partially offset by the securitization of $307 million of single-family real estate loans which were transferred to securities in the investment portfolio as mortgage backed securities during the second quarter of 2001. The Mortgage Warehouse Lending unit, which provides lines of credit secured by single-family residential loans in the process of being sold, contributed $550.2 million and $470.5 million of this growth from September 30, 2000 and December 31, 2000, respectively. In addition to internal growth, $49.5 million of the increase in loans was the result of the acquisition of two branches in Nevada, as discussed in Note D of the consolidated financial statements.
GROSS LOANS BY CATEGORY September 30, December 31, September 30, (Dollars in thousands) 2001 2000 2000 ------------------------------------------------ Commercial, financial, and agricultural $ 1,184,310 $ 1,264,281 $ 1,208,078 Real estate-commercial 3,449,252 3,208,911 3,063,666 Real estate-construction 2,138,990 1,700,281 1,717,987 Real estate-residential 2,065,662 2,697,934 2,594,241 Installment and consumer 251,958 278,739 291,795 Mortgage warehouse lending 847,448 376,995 297,297 Other 41,852 116,161 145,259 --------------------------------------------------- Total Loans $ 9,979,472 $ 9,643,302 $ 9,318,323 ===================================================
Commercial loans collaterialized by real estate and construction loans increased approximately $240.3 million and $438.7 million, respectively from December 31, 2000 and $385.6 million and $421.0 million, respectively, from September 30, 2000. Mortgage Warehouse Lending's loan growth was due primarily to declines in mortgage interest rates which significantly increased the volume of mortgage loan applications for new and refinanced borrowing. The decrease in Residential Real Estate is primarily due to the second quarter securitization previously discussed. The remaining decrease in Residential Real Estate is due to a shift from portfolio adjustable rate products to fixed rate products which are sold in the secondary market. BancGroup's loans are concentrated in various areas of Alabama, the metropolitan Atlanta market in Georgia as well as its markets in Florida, Nevada, and Texas. BancGroup does not have a syndicated lending department; however, the Company has commitments (including unfunded amounts) that fall within the regulatory definition of a "shared national credit". These commitments total approximately $552 million, up from $193 million at December 31, 2000. Substantially all of this increase was attributed to the growth within our Mortgage Warehouse Lending unit. 15 Management believes that any existing distribution of loans, whether geographically, by industry, or by borrower, does not expose BancGroup to unacceptable levels of risk. The current distribution of loans remains diverse in location, size, and collateral function. These differences, in addition to our emphasis on quality underwriting, serve to reduce the risk of losses. The following chart reflects the geographic diversity and industry distribution of Construction and Commercial Real Estate loans as of September 30, 2001. 16 CONSTRUCTION & COMMERCIAL REAL ESTATE GEOGRAPHIC DIVERSITY AND INDUSTRY DISTRIBUTION SEPTEMBER 30, 2001
(Dollars in thousands) Construction Commercial Real Estate -------------------- ----------------------------- Average Loan Size $ 416 $ 487 Geographic Diversity Alabama $ 348,475 $ 851,795 Georgia 388,523 473,195 Florida 1,006,305 1,566,001 Texas 179,476 120,986 Nevada 121,495 136,189 Other 94,716 301,086 -------------------- ----------------------- Total $ 2,138,990 $ 3,449,252 - -----------------------------------------------------------------------------------------------------------------------------
Industry Distribution % of Industry Distribution to % of Industry Distribution to ------------------------------- ------------------------------------ Construction Total Commercial Real Total Portfolio Portfolio Estate Portfolio Portfolio --------------- ------------- ---------------- ----------- 1-4 Family Residential 26% 6% Retail 18% 6% Developments 20% 4% Office 17% 6% Land Only 17% 4% Multi-Family 13% 4% Multi-Family 8% 2% Lodging 11% 4% Retail 6% 1% Nursing Home 6% 2% Condominium 6% 1% Warehouse 5% 2% Other (13 types) 17% 4% Other (11 types) 30% 10% -------- --------- -------- --------- Total Commercial Total Construction 100% 22% Real Estate 100% 34% -------- -------- -------- --------- - ------------------------------------------------------------------------------------------------------------------------ Characteristics of the 75 Largest Loans Construction Commercial Real Estate ------------ ---------------------- 75 Largest Loans Total $ 758,195 $ 745,322 % of 75 largest loans to category total 35.6% 22.6% Average Loan to Value Ratio (75 largest loans) 70% 70% Debt Coverage Ratio (75 largest loans) N/A 1.33x - ------------------------------------------------------------------------------------------------------------------------
Substantially all Construction and Commercial Real Estate loans have personal guarantees of the principals involved. Owner occupied Commercial Real Estate portfolio totals represented 30% of the total Commercial Real Estate portfolio at September 30, 2001. 17 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES Allocations of the allowance for loan losses are made on an individual loan basis for all identified potential problem loans with a percentage allocation for the remaining portfolio. The allocation of the remaining allowance represents an approximation of the reserves for each category of loans based on management's evaluation of the respective historical charge-off experience and risk within each loan type.
Percent of Percent of Percent of September 30, Loans to December 31, Loans to September 30, Loans to (Dollars in thousands) 2001 Total Loans 2000 Total Loans 2000 Total Loans ----------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 36,307 11.9% $ 28,411 13.1% $ 28,578 13.0% Real estate-commercial 43,907 34.6% 45,017 33.9% 40,963 32.9% Real estate-construction 16,086 21.4% 16,089 17.7% 17,221 18.4% Real estate-mortgage 10,328 20.7% 13,705 27.3% 12,971 27.8% Installment and consumer 2,544 2.5% 3,021 2.9% 3,272 3.1% Mortgage warehouse lending 2,119 8.5% 942 4.0% 743 3.3% Other 4,053 0.4% 2,870 1.1% 3,165 1.5% -------------------------------------------------------------------------------------------- TOTAL $ 115,344 100.0% $ 110,055 100.0% $ 106,913 100.0% ============================================================================================
SUMMARY OF LOAN LOSS EXPERIENCE September 30, December 31, September 30, (Dollars in thousands) 2001 2000 2000 ---------------------------------------------------- Allowance for loan losses - January 1 $ 110,055 $ 99,027 $ 99,027 Charge-offs: Commercial, financial, and agricultural 9,343 10,650 8,568 Real estate-commercial 8,268 3,399 2,705 Real estate-construction 45 529 117 Real estate-residential 2,275 3,260 2,208 Installment and consumer 2,480 4,492 3,248 Other 627 1,118 882 ---------------------------------------------------- Total charge-offs 23,038 23,448 17,728 ---------------------------------------------------- Recoveries: Commercial, financial, and agricultural 566 1,272 1,115 Real estate-commercial 310 745 494 Real estate-construction 8 62 61 Real estate-residential 326 440 397 Installment and consumer 1,559 1,898 1,374 Other 149 284 256 ---------------------------------------------------- Total recoveries 2,918 4,701 3,697 ----------------------------------------------------
18
September 30, December 31, September 30, 2001 2000 2000 ------------------------------------------------- Net charge-offs 20,120 18,747 14,031 Addition to allowance for branch acquisition 566 - - Addition to allowance charged to operating expense 24,843 29,775 21,917 ------------------------------------------------- Allowance for loan losses-end of period $ 115,344 $ 110,055 $ 106,913 =================================================
Based on softening economic conditions, nonperforming assets increased to 0.72% of net loans and other real estate at September 30, 2001. Nonperforming assets have increased $20.8 million from December 31, 2000. Most of this increase was from one loan relationship. Annualized net charge-offs remained relatively low at .27% of loans year to date. Management continuously monitors and evaluates recoverability of problem assets and adjusts loan loss reserves accordingly. Loan loss reserve was 1.16% of loans at September 30, 2001 compared to 1.14% at December 31, 2000 and 1.15% at September 30, 2000. NONPERFORMING ASSETS ARE SUMMARIZED BELOW
September 30, December 31, September 30, (Dollars in thousands) 2001 2000 2000 ------------------------------------------------- Nonaccrual loans $ 58,441 $ 41,418 $ 43,787 Restructured loans 1,125 1,161 1,174 ------------------------------------------------- Total nonperforming loans * 59,566 42,579 44,961 Other real estate owned and in substance foreclosures 12,805 8,978 6,631 ------------------------------------------------- Total nonperforming assets * $ 72,371 $ 51,557 $ 51,592 ================================================= Aggregate loans contractually past due 90 days for which interest is being accrued $ 21,095 $ 9,842 $ 10,536 Net charge-offs quarter-to-date $ 9,199 $ 4,710 $ 6,420 Net charge-offs year-to-date $ 20,120 $ 18,747 $ 14,031 RATIOS PERIOD END: Total nonperforming assets as a percent of net loans and other real estate 0.72% 0.53% 0.55% Allowance as a percent of net loans 1.16% 1.14% 1.15% Allowance as a percent of nonperforming assets * 159% 213% 207% Allowance as a percent of nonperforming loans * 194% 258% 238% FOR THE PERIOD ENDED: Net charge-offs as a percent of average net loans - (annualized basis): Quarter to date 0.37% 0.20% 0.28% Year to date 0.27% 0.21% 0.21%
* Does not include loans contractually past due 90 days or more which are still accruing interest. 19 In addition to the monitoring of the nonperforming assets identified above, management, through its loan officers, internal credit review staff and external examinations by regulatory agencies, regularly monitors selected accruing loans for which general economic conditions or changes within a particular industry could cause the borrower 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 BancGroup's credit management. In connection with such reviews, collateral values are updated where considered necessary. If collateral values are judged insufficient or other sources of repayment inadequate, the loans are reduced to estimated recoverable amounts through increases in reserves allocated to the loans or charge-offs. Nonperforming loans and selected potential problem loans represent all material credits for which management has serious doubts as to the ability of the borrowers to comply with the loan repayment terms. Management also expects that the resolution of these problem credits as well as other performing loans will not materially impact future operating results, liquidity or capital resources. The recorded investment in impaired loans at September 30, 2001 was $59.6 million and these loans had a corresponding valuation allowance of $24.0 million. LIQUIDITY: BancGroup has addressed its liquidity and interest rate sensitivity through its policies and structure for asset/liability management. It has created the Asset/Liability Management Committee ("ALMCO"), the objective of which is to optimize the net interest margin while assuming reasonable business risks. ALMCO annually establishes operating constraints for critical elements of BancGroup's business, such as liquidity and interest rate sensitivity. ALMCO constantly monitors performance and takes action in order to meet its objectives. A prominent focus of ALMCO is maintaining adequate liquidity. Liquidity is the ability of an organization to meet its financial commitments and obligations on a timely basis. These commitments and obligations include credit needs of customers, withdrawals by depositors, repayment of debt when due and payment of operating expenses and dividends. Core deposit growth is a primary focus of BancGroup's funding and liquidity strategy. Average retail deposits excluding broker and time deposits grew at an annualized rate of 9% for the nine months ended September 30, 2001. Core deposit growth continues to be a primary strategic objective of the Company. In addition to funding growth through core deposits, BancGroup has worked to expand the availability of long and short term wholesale funding sources. As of September 30, 2001 the Bank utilized just 49% of the total wholesale funding sources estimated to be available to them. Management believes its liquidity sources and funding strategies are adequate given the nature of its asset base and current loan demand. 20 INTEREST RATE SENSITIVITY: The Federal Reserve has lowered the target fed funds rate 10 times this year, a total of 450 basis points, to 2.00% its lowest level in over 40 years. Such a series of rate cuts by the Federal Reserve has not been observed since the last recession of 1991. ALMCO's goal is to minimize volatility in the net interest margin from changes in interest rates by taking an active role in managing the level, mix, repricing characteristics and maturities of assets and liabilities and by analyzing and taking action to manage mismatch and basis risk. ALMCO monitors the impact of changes in interest rates on net interest income using several tools, including static rate sensitivity reports, or Gap reports, and income simulations modeling under multiple rate scenarios. The following table represents the output from the Company's most recent simulation model, when the Fed Funds Rate was 2.50%, and measures the impact on net interest income of an immediate and sustained change in interest rates in 100 basis point increments for the 12 calendar months following the date of the change. This twelve month projection of Net Interest Income under these scenarios is compared to both the twelve month Net Interest Income projection with rates unchanged and third quarter 2001 net interest income annualized.
Percentage Change in 12 Month Projected (1): ------------------------------------------------------------------------ 3rd Qtr 2001 Net Interest Income Annualized Versus Net Interest Fed Funds Rate Net Interest Income Income ---------------- ------------------- -------------------------------- Basis Points change - ------------------- +200 ...................................... 4.50 2% 11% +100 ...................................... 3.50 1 11 No Change 2.50 - 10 - -100 ...................................... 1.50 (2) 8 - -200 ...................................... 0.50 (4) 5 - -----------------------------------------------------------------------------------------------------------------------
(1) The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions BancGroup could undertake in response to changes in interest rates. This table shows that under all rate shock scenarios, net interest income is expected to improve versus recent results, although the expected benefit is less if rates continue to decline. The improvement in margin is due largely to the downward repricing of the CD portfolio. As of September 30, 2001, $2.5 billion of BancGroup's CD portfolio will mature and reprice within the next six months at rates that are 21 expected to be approximately 2.50% below their current cost. The benefit is reduced if rates continue to decline due to compression, as many deposit products are nearing natural floors. The following table summarizes BancGroup's Maturity / Rate Sensitivity or Gap at September 30, 2001. (Dollars in millions) 0-90 days 0-365 days --------- ---------- Rate Sensitive Assets (RSA) $5,972 $7,894 Rate Sensitive Liabilities (RSL) 4,114 6,927 Cumulative Gap (RSA-RSL) 1,858 967 Cumulative Gap Ratio (Cum. Gap / Total Assets) 15% 8% The last two lines of the proceeding table represents interest rate sensitivity gap which is the difference between rate sensitive assets and rate sensitive liabilities. In reviewing the table, it should be noted that the balances are shown for a specific point in time and, because the interest sensitivity position is dynamic, it can change significantly over time. For all interest earning assets and interest bearing liabilities, variable rate assets and liabilities are reflected in the time interval of the assets or liabilities' earliest repricing date. Fixed rate assets and liabilities have been allocated to various time intervals based on contractual repayment and prepayment assumptions. Furthermore, the balances reflect contractual repricing of the deposits and management's position on repricing certain deposits where management discretion is permitted. Certain demand deposit accounts and regular savings accounts have been classified as repricing beyond one year in accordance with regulatory guidelines. While these accounts are subject to immediate withdrawal, experience and analysis have shown them to be relatively rate insensitive. CAPITAL RESOURCES: Management is committed to maintaining capital at a level sufficient to protect shareholders and depositors, provide for reasonable growth and fully comply with all regulatory requirements. Management's strategy to achieve these goals is to retain sufficient earnings while providing a reasonable return to shareholders in the form of dividends and return on equity. The Company's dividend payout ratio target range is 30-45%. Dividend rates are determined by the Board of Directors in consideration of several factors including current and projected capital ratios, liquidity and income levels and other bank dividend yields and payment ratios. 22 The amount of a cash dividend, if any, rests with the discretion of the Board of Directors of BancGroup as well as upon applicable statutory constraints such as the Delaware law requirement that dividends may be paid only out of capital surplus or net profits for the fiscal year in which the dividend is declared or the preceding fiscal year. BancGroup also has access to equity capital markets through both public and private issuances. Management considers these sources and related return in addition to internally generated capital in evaluating future expansion or acquisition opportunities. The Federal Reserve Board has issued guidelines identifying minimum Tier I leverage ratios relative to total assets and minimum capital ratios relative to risk-adjusted assets. The minimum leverage ratio is 3% but is increased from 100 to 200 basis points based on a review of individual banks by the Federal Reserve. The minimum risk adjusted capital ratios established by the Federal Reserve are 4% for Tier I and 8% for total capital. BancGroup's actual capital ratios and the components of capital and risk adjusted asset information (subject to regulatory review) as of September 30, 2001 are stated below: Capital (in thousands): Tier I Capital $ 818,373 Tier II Capital 376,867 -------------- Total Capital $ 1,195,240 ============== Risk Adjusted Assets (in thousands) $ 10,485,372 Capital Ratios: September 30, 2001 December 31, 2000 ------------------ ---------------- Tier I leverage ratio (minimum 3%) 6.57% 6.66% Risk Adjusted Capital Ratios: Tier I Capital Ratio (minimum 4%) 7.81% 8.24% Total Capital Ratio (minimum 8%) 11.40% 10.59% BancGroup has increased capital gradually through normal earnings retention as well as through stock registrations to capitalize acquisitions. The decrease in the Tier I Capital Ratio is primarily due to asset growth and a change in the mix of assets. The increase in the Total Capital Ratio is due to the issuance on May 23, 2001 of $150 million in subordinated debt by Colonial Bank that qualifies as Tier II Capital. Management continuously monitors its capital levels in order to ensure it is taking the necessary steps to support future internally generated growth and fund the quarterly dividend rates that are currently $0.12 per share each quarter. 23 AVERAGE VOLUME AND RATE (UNAUDITED)
(Dollars in thousands) Three Months Ended September 30, -------------------------------- 2001 2000 ------------------------------------ ------------------------------------ Average Average Volume Interest Rate Volume Interest Rate ------------------------------------ ------------------------------------ ASSETS Loans, net $10,013,262 $ 193,064 7.66% $ 9,157,607 $ 206,901 9.01% Mortgage loans held for sale 22,733 357 6.28% 7,820 169 8.64% Investment securities and securities available for sale and other interest-earning assets 1,810,740 28,461 6.29% 1,701,418 29,145 6.85% --------------------------- -------------------------- Total interest-earning assets(1) 11,846,735 221,882 7.44% 10,866,845 236,215 8.67% ------------- ------------ Nonearning assets 683,969 836,380 -------------- -------------- Total assets $12,530,704 $11,703,225 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $ 7,132,760 77,487 4.31% $ 7,031,652 94,618 5.35% Short-term borrowings 1,496,364 13,104 3.47% 1,640,684 27,079 6.56% Long-term debt 1,708,905 25,478 5.92% 923,727 15,074 6.47% --------------------------- -------------------------- Total interest-bearing liabilities 10,338,029 116,069 4.45% 9,596,063 136,771 5.67% --------------------------- -------------------------- Noninterest-bearing demand deposits 1,257,231 1,280,650 Other liabilities 96,308 95,987 -------------- -------------- Total liabilities 11,691,568 10,972,700 Shareholders' equity 839,136 730,525 -------------- -------------- Total liabilities and shareholders' equity $12,530,704 $11,703,225 ============== ============== RATE DIFFERENTIAL 2.99% 3.00% NET YIELD ON INTEREST-EARNING ASSETS $ 105,813 3.56% $ 99,444 3.67% ============= ============
(1) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is equal to actual interest earned times 145%. The taxable equivalent adjustment has given effect to the disallowance of interest expense deductions, for federal income tax purposes, related to certain tax-free assets. 24 AVERAGE VOLUME AND RATE (UNAUDITED)
(Dollars in thousands) Nine Months Ended September 30, ------------------------------- 2001 2000 ------------------------------------ ------------------------------------ Average Average Volume Interest Rate Volume Interest Rate ------------------------------------ ------------------------------------ ASSETS Loans, net $10,088,151 $ 614,698 8.14% $ 8,890,094 $ 592,082 8.89% Mortgage loans held for sale 19,209 933 6.48% 16,753 1,005 8.00% Investment securities and securities available for sale and other interest-earning assets 1,672,076 81,049 6.46% 1,715,625 87,008 6.76% --------------------------- -------------------------- Total interest-earning assets(1) 11,779,436 696,680 7.90% 10,622,472 680,095 8.55% ------------- ------------ Nonearning assets 668,101 908,190 -------------- -------------- Total assets $12,447,537 $11,530,662 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $ 7,246,644 260,177 4.80% $ 6,923,144 262,066 5.06% Short-term borrowings 1,617,382 55,927 4.62% 1,479,478 68,907 6.22% Long-term debt 1,469,713 65,937 5.99% 971,211 46,477 6.39% --------------------------- -------------------------- Total interest-bearing liabilities 10,333,739 382,041 4.94% 9,373,833 377,450 5.38% --------------------------- -------------------------- Noninterest-bearing demand deposits 1,199,493 1,332,427 Other liabilities 101,365 106,029 -------------- -------------- Total liabilities 11,634,597 10,812,289 Shareholders' equity 812,940 718,373 -------------- -------------- Total liabilities and shareholders' equity $12,447,537 $11,530,662 ============== ============== RATE DIFFERENTIAL 2.96% 3.17% NET YIELD ON INTEREST-EARNING ASSETS $ 314,639 3.57% $ 302,645 3.80% ============= ============
(1) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is equal to actual interest earned times 145%. The taxable equivalent adjustment has given effect to the disallowance of interest expense deductions, for federal income tax purposes, related to certain tax-free assets. 25 ANALYSIS OF INTEREST INCREASES / (DECREASES) (UNAUDITED)
Three Months Ended September 30, 2001 (Dollars in thousands) Change from 2000 Attributed to (1) Total Volume Rate -------- -------- -------- INTEREST INCOME: Total loans, net $(13,837) $ 18,591 $(32,428) Mortgage loans held for sale 188 246 (58) Investment securities and securities for sale and other interest-earning assets (684) 2,259 (2,943) -------- -------- -------- Total interest income(2) (14,333) 21,096 (35,429) -------- -------- -------- INTEREST EXPENSE: Interest-bearing deposits $ 18,971 $ (1,229) $ 20,200 Short-term borrowings 14,092 2,212 11,880 Long-term debt (9,787) (11,223) 1,436 -------- -------- -------- Total interest expense 23,276 (10,240) 33,516 -------- -------- -------- Net interest income $ 8,943 $ 10,856 $ (1,913) ======== ======== ========
(1) Increases (decreases) are attributed to volume changes and rate changes on the following basis: Volume Change = change in volume times old rate. Rate Change = change in rate times old volume. The Rate/Volume Change = change in volume times change in rate, and it is allocated between Volume Change and Rate Change at the ratio that the absolute value of each of those components bear to the absolute value of their total. (2) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is: actual interest earned times 145%. Tax equivalent average rate is: tax equivalent interest earned divided by average volume. 26 ANALYSIS OF INTEREST INCREASES / (DECREASES) (UNAUDITED)
Nine Months Ended September 30, 2001 (Dollars in thousands) Change from 2000 Attributed to (1) Total Volume Rate -------- -------- -------- INTEREST INCOME: Total loans, net $ 22,616 $ 75,275 $(52,659) Mortgage loans held for sale (72) 135 (207) Investment securities and securities for sale and other interest-earning assets (5,959) (2,170) (3,789) -------- -------- -------- Total interest income(2) 16,585 73,240 (56,655) -------- -------- -------- INTEREST EXPENSE: Interest-bearing deposits $ 1,889 $(11,930) $ 13,819 Short-term borrowings 12,980 (5,970) 18,950 Long-term debt (19,460) (22,527) 3,067 -------- -------- -------- Total interest expense (4,591) (40,427) 35,836 -------- -------- -------- Net interest income $ 11,994 $ 32,813 $(20,819) ======== ======== ========
(1) Increases (decreases) are attributed to volume changes and rate changes on the following basis: Volume Change = change in volume times old rate. Rate Change = change in rate times old volume. The Rate/Volume Change = change in volume times change in rate, and it is allocated between Volume Change and Rate Change at the ratio that the absolute value of each of those components bear to the absolute value of their total. (2) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is: actual interest earned times 145%. Tax equivalent average rate is: tax equivalent interest earned divided by average volume. NET INTEREST INCOME: Net interest income from continuing operations on a tax equivalent basis increased $6.4 million to $105.8 million for the quarter ended September 30, 2001 from $99.4 million for the quarter ended September 30, 2000. For the nine months ended September 30, 2001, net interest income from continuing operations on a tax equivalent basis increased $12.0 million to $314.6 as compared to $302.6 million for the same period in 2000. Net interest margins remained constant at 3.55% for the third quarter of 2001 compared to 3.55% for the second quarter of 2001, and 3.67% for the third quarter of 2000. Net interest margins decreased from 3.80% to 3.57% for the nine months ended September 30, 2000 compared to the same period in 2001. The average rate on loans was 7.66% for the third quarter of 2001 compared to 8.06% for the second quarter 2001 and 9.01% for the third quarter of 2000, respectively. During this same time, the rate on 27 average interest bearing deposits was 4.31% for the third quarter of 2001 compared to 4.78% and 5.35% for the second quarter of 2001 and third quarter of 2000, respectively. Although rates on deposits have declined, they reprice more slowly than loan rates primarily due to market competition and the natural lag in the repricing of the CD's portfolio. Although Certificates of Deposits represent approximately 59% of interest bearing deposits as of September 30, 2001, $2.5 billion will mature and reprice within the next six months at rates that are expected to be approximately 2.5% below their current cost. LOAN LOSS PROVISION: The provision for loan losses for the third quarter ended September 30, 2001 was $7,901,000 compared to $8,886,000 for the same period in 2000. The Company continues to focus its efforts on relationship based lending to known customers in its local market areas. The current allowance for loan losses provides a 194% coverage of nonperforming loans compared to 258% at December 31, 2000 and 239% at September 30, 2000. See management's discussion on loan quality and the allowance for loan losses presented in the Financial Condition section of this report. NONINTEREST INCOME: Noninterest income increased $5.1 million (8.8%) for the nine months ended September 30, 2001 compared to the same period in 2000 and decreased $200,000 (0.9%) for the three months ended September 30, 2001 over the three months ended September 30, 2000. The year to date increase is primarily attributable to service charges on deposit accounts, cash management services, mortgage origination income, electronic banking fees and securities gains. Mortgage origination fees increased $898,000 (19.9%) for the nine months ended September 30, 2001 compared to the same period in 2000 and decreased $210,000 (10.0%) for the three months ended September 30, 2001 over the three months ended September 30, 2000. The year-to-date increase is the result of additional production of one-to-four family mortgage loans sold in the secondary market. The increase in production is directly related to the decrease in mortgage rates throughout 2001. Management believes that the decrease in production for the quarter is due to uncertainty in the economy. BancGroup continues to expand electronic banking services through its ATM network, check card services, and internet banking. Noninterest income from electronic banking services increased 17.1% for the nine months ended September 30, 2001 and 17.4% for the three months ended September 30, 2001 compared to the same periods in 2000. Service charges on deposit accounts increased $1.9 million (6.6%) for the nine months ended September 30, 2001 over the same period in 2000 and $833,000 (8.4%) for the three months ended September 30, 28 2001 when compared to the three months ended September 30, 2000. This increase is the result of normal deposit account related fees and an increase in cash management fees of approximately $585,000 (36.1%) and $185,000 (31.3%) for the nine months and three months ended September 30, 2001, respectively. Wealth management experienced a $343,000 decrease in fee income from security sales for the nine months ended September 30, 2001 over the same period in 2000, but increased $75,000 in the third quarter of 2001 when compared to the third quarter of 2000. Management believes that the nine month decrease is due to the volatility in the equity market and the overall outlook on the economy by investors. NONINTEREST EXPENSES: In support of the Company's sales culture, BancGroup continues to make strategic investments in its product and service offerings, technology systems, incentives and branch network to enhance the Company's competitive presence in existing markets. BancGroup's philosophy is to make strategic investments in the tools employees need to optimize its customers' financial success. Accordingly, noninterest expense increased 6.8% for the quarter ended September 30, 2001 as compared to the same period last year. As a result of slowing loan demand, the company took initiatives in the third quarter to reduce noninterest expenses. Accordingly, total noninterest expense excluding amortization of intangibles and approximately $437,000 in merger related expense has decreased $3.4 million (4.8%) as compared to the second quarter of 2001. BancGroup's net overhead (total noninterest expense less noninterest income, excluding security gains) was $147.7 million for the nine months ended September 30, 2001 and $48.6 million for the three months ended September 30, 2001 compared to $135.1 million and $44.0 million for the nine months and three months ended September 30, 2000, respectively. Noninterest expense increased $15.7 million for the first nine months of 2001 compared to 2000 and $4.4 million for the third quarter of 2001 compared to the third quarter of 2000. Noninterest expense to average assets remained constant at 2.24% for the nine months ended September 30, 2001 and 2000. The increase in bank related expenses is primarily due to an increase of approximately $9.8 million and $2.4 million for the nine months and three months ended September 30, 2001 over the same periods in 2000, respectively, in salaries and employee benefits. These salary increases are due to additional branches operating, normal salary increases, additional incentive related compensation, and increased pension costs. 29 In order to improve the Company's market presence, three of its regional headquarters were relocated in 2001. The Company also opened ten new branches and two loan production offices since September 2000. Occupancy and equipment expense for the nine months and third quarter of 2001 increased $2.8 million and $809,000, respectively, when compared to the same periods in 2000. This increase is also due to increased rent expense, higher utility cost, and improvements and expansions of bank facilities. In addition to the changes in branch structure, the Company continues to invest in improved technology equipment and software. Intangible asset amortization increased $1.5 million and $796,000 for the nine months and three months ended September 30, 2001, respectively, over the same periods in 2000 due to the purchase of two branches in Nevada in January of 2001 (See Note D to the Consolidated Financial Statements). PROVISION FOR INCOME TAXES: BancGroup's provision for income taxes is based on an approximate 36.0% and 36.5%, estimated annual effective tax rate for the years 2001 and 2000, respectively. The provision for income taxes for the nine months ended September 30, 2001 and 2000 was $51,226,000 and $52,611,000, respectively. 30 -----END PRIVACY-ENHANCED MESSAGE-----