10-Q 1 e10-q.txt THE COLONIAL BANCGROUP, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 1-13508 THE COLONIAL BANCGROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 63-0661573 ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Commerce Street Montgomery, Alabama 36104 ------------------------------------------ (Address of principle executive offices) (334) 240-5000 ----------------------------------- (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at July 31, 2000 ----------------------------- ---------------------------- Common Stock, $2.50 Par Value 113,101,053 2 THE COLONIAL BANCGROUP, INC. INDEX
Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Condition - June 30, 2000, December 31, 1999 and June 30, 1999 1 Consolidated Statements of Income -Six months ended June 30, 2000 and June 30, 1999 and Three months ended 2 June 30, 2000 and June 30, 1999 Consolidated Statements of Comprehensive Income - Six months ended June 30, 2000 and June 30 1999 and Three 3 months ended June 30, 2000 and June 30, 1999 Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and June 30, 1999 4 Notes to Consolidated Financial Statements - June 30, 2000 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 25
3 CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains "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) costs or difficulties related to business reorganizations and the integration of the businesses of BancGroup and acquired institutions are greater than expected; (iv) changes in the interest rate environment which reduce margins (v) changes in mortgage servicing rights prepayment assumptions; (vi) changes which may occur in the regulatory environment; (vii) a significant rate of inflation (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. 4 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (Unaudited) (Dollars in thousands, except per share amounts)
JUNE 30, DECEMBER 31, JUNE 30, 2000 1999 1999 ------------------------------------------------------- ASSETS: Cash and due from banks $ 361,432 $ 338,433 $ 314,332 Interest-bearing deposits in banks and federal funds sold 86,937 30,482 31,670 Securities available for sale 1,586,907 1,489,991 1,656,866 Investment securities 52,046 61,682 141,562 Mortgage loans held for sale 18,377 33,150 376,996 Loans, net of unearned income 8,913,328 8,228,149 7,590,662 Less: Allowance for possible loan losses (101,390) (95,993) (88,069) ------------------------------------------------------- Loans, net 8,811,938 8,132,156 7,502,593 Premises and equipment, net 187,878 190,946 185,312 Excess of cost over tangible and identified intangible Assets acquired, net 76,989 79,468 82,199 Mortgage servicing rights 81,800 238,405 262,348 Other real estate owned 7,011 9,215 7,226 Accrued interest and other assets 348,726 250,171 203,022 ------------------------------------------------------- TOTAL ASSETS $ 11,620,041 $ 10,854,099 $ 10,764,126 ======================================================= LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits $ 8,251,265 $ 7,967,978 $ 7,603,162 FHLB short-term borrowings 525,000 490,000 595,000 Other short-term borrowings 1,354,657 703,429 924,092 Subordinated debt 111,939 112,048 112,464 Trust preferred securities 70,000 70,000 70,000 FHLB long-term debt 372,250 572,549 570,649 Other long-term debt 134,583 134,974 135,341 Other liabilities 104,094 107,942 86,848 ------------------------------------------------------- Total liabilities 10,923,788 10,158,920 10,097,556 ------------------------------------------------------- SHAREHOLDERS' EQUITY: Common Stock, $2.50 par value; 200,000,000 shares authorized; 113,075,283, 112,106,663, and 111,615,532 shares issued at June 30, 2000, December 31, 1999, and June 30, 1999, respectively 282,688 280,267 279,039 Treasury stock (2,882,076 at June 30, 2000) (27,500) -- -- Additional paid in capital 118,824 118,728 116,801 Retained earnings 357,927 326,578 286,649 Unearned compensation (3,421) (1,622) (1,882) Accumulated other comprehensive income (loss), net of taxes (32,264) (28,772) (14,037) ------------------------------------------------------- Total shareholders' equity 696,253 695,179 666,570 ------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,620,041 $ 10,854,099 $ 10,764,126 =======================================================
See Notes to the Unaudited Condensed Consolidated Financial Statements 5 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2000 1999 2000 1999 INTEREST INCOME: Interest and fees on loans $ 376,638 $ 310,080 $ 195,644 $ 158,401 Interest on investments 54,007 49,031 27,322 25,591 Other interest and dividends income 1,255 1,190 753 632 --------- --------- --------- --------- Total interest income 431,900 360,301 223,719 184,624 --------- --------- --------- --------- INTEREST EXPENSE: Interest on deposits 163,858 131,955 86,072 67,290 Interest on short-term borrowings 41,296 22,512 22,612 10,814 Interest on long-term debt 30,099 25,564 15,707 14,115 --------- --------- --------- --------- Total interest expense 235,253 180,031 124,391 92,219 --------- --------- --------- --------- NET INTEREST INCOME 196,647 180,270 99,328 92,405 Provision for possible loan losses 12,961 12,454 7,414 6,436 --------- --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 183,686 167,816 91,914 85,969 --------- --------- --------- --------- NONINTEREST INCOME: Service charges on deposit accounts 18,825 18,921 9,477 9,476 Other charges, fees and commissions 5,167 4,547 2,963 2,187 Securities gains, net of losses (61) 9 (69) -- Other income 12,133 9,545 6,220 4,480 --------- --------- --------- --------- Total noninterest income 36,064 33,022 18,591 16,143 --------- --------- --------- --------- NONINTEREST EXPENSE: Salaries and employee benefits 61,343 56,113 31,498 28,621 Occupancy expense of bank premises, net 14,691 13,676 7,390 6,942 Furniture and equipment expenses 14,244 12,181 7,264 6,238 Other expense 33,928 30,795 16,910 14,317 --------- --------- --------- --------- Total noninterest expense 124,206 112,765 63,062 56,118 --------- --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 95,544 88,073 47,443 45,994 Applicable income taxes 34,888 32,513 17,320 17,051 --------- --------- --------- --------- INCOME FROM CONTINUING OPERATIONS 60,656 55,560 30,123 28,943 ========= ========= ========= ========= DISCONTINUED OPERATIONS: Income/(Loss) from discontinued operations, net of income Taxes of ($128), $1,725, ($35), and $1,210 for the six months ended June 30, 2000 and for the three months ended June 30, 2000 and 1999 (743) 2,851 (151) 1,320 Loss of disposal of discontinued operations (net of income tax benefit of $2,394) (3,956) -- (3,956) -- --------- --------- --------- --------- NET INCOME $ 55,957 $ 58,411 $ 26,016 $ 30,263 ========= ========= ========= ========= EARNINGS PER SHARE: INCOME FROM CONTINUING OPERATIONS: Basic $ 0.55 $ 0.50 $ 0.27 $ 0.26 Diluted $ 0.54 $ 0.49 $ 0.27 $ 0.26 NET INCOME Basic $ 0.50 $ 0.52 $ 0.24 $ 0.27 Diluted $ 0.50 $ 0.52 $ 0.23 $ 0.27
See Notes to the Unaudited Condensed Consolidated Financial Statements 6 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands, except per share amounts)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 NET INCOME $ 55,957 $ 58,411 $ 26,016 $ 30,263 OTHER COMPREHENSIVE INCOME, NET OF TAXES: Unrealized gains (losses) on securities available for sale arising during the period, net of taxes (3,487) (16,369) (1,022) (8,848) Less: reclassification adjustment for net (gains) losses included in net income (5) (5) COMPREHENSIVE INCOME $ 52,465 $ 42,037 $ 24,994 $ 21,415
See Notes to the Unaudited Condensed Consolidated Financial Statements 7 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) (Dollars in thousands, except per share amounts)
SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 164,384 $ 303,228 ------------------------- Cash flows from investing activities: Proceeds from maturities of securities available for sale 99,429 190,004 Proceeds from sales of securities available for sale 41,034 53,277 Purchase of securities available for sale (242,812) (511,822) Proceeds from maturities of investment securities 9,602 29,650 Net increase in loans (705,030) (498,112) Capital expenditures (10,299) (16,533) Proceeds from sale of other real estate owned 6,781 9,541 Other, net 261 1,425 ------------------------- NET CASH USED IN INVESTING ACTIVITIES (801,034) (742,570) ------------------------- Cash flows from financing activities: Net increase in demand, savings, and time deposits 283,287 157,010 Net increase (decrease) in federal funds purchased, repurchase agreements and other short-term borrowings 561,225 (41,594) Proceeds from issuance of long-term debt 50,000 199,975 Repayment of long-term debt (125,688) (8,173) Proceeds from issuance of common stock 4,206 4,220 Purchase of treasury stock (32,317) _ Dividends paid ($0.22 and $0.19 per share for 2000 and 1999, respectively) (24,609) (21,060) ------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 716,104 290,378 ------------------------- Net increase (decrease) in cash and cash equivalents 79,454 (148,964) Cash and cash equivalents at beginning of year 368,915 494,966 ------------------------- Cash and cash equivalents at June 30 $ 448,369 $ 346,002 =========================
See Notes to the Unaudited Condensed Consolidated Financial Statements 8 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: SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ------------------------- Cash paid during the year for: Interest $ 231,993 $ 194,574 Income taxes 36,200 42,823 Non-cash investing activities: Transfer of loans to other real estate $ 4,818 $ 7,139 Origination of loans, for the sale of other real estate $ 3,085 $ -- Non-cash financing activities: Conversion of subordinated debentures $ 109 $ 78 Reissuance of shares of treasury stock, for conversion of stock options -- --
See Notes to the Unaudited Condensed Consolidated Financial Statements. 9 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") have not changed their accounting and reporting policies from those stated in the 1999 annual report on Form 10K other than the election of discontinued operations accounting for its mortgage banking segment. These unaudited interim financial statements should be read in conjunction with the audited financial statements and footnotes included in BancGroup's 1999 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 June 30, 2000 and 1999 and the results of operations and cash flows for the interim periods ended June 30, 2000 and 1999. All 2000 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 - 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 June 30, 2000, will have a materially adverse effect on BancGroup's financial statements. NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS On June 15, 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. 10 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 FASB statement 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. Management is currently evaluating the impact that SFAS No. 133 and SFAS No. 137 will have on BancGroup's financial statements. NOTE D: MORTGAGE SERVICING RIGHTS An analysis of mortgage servicing rights and the related valuation reserve is as follows: (in thousands)
SIX MONTHS ENDED JUNE 30 ------------------------- 2000 1999 ------------------------- MORTGAGE SERVICING RIGHTS Balance, January 1 $ 265,888 $ 221,798 Additions, net 981 46,398 Sales (134,664) -- Scheduled amortization (11,518) (19,060) Hedge losses applied (28,345) 45,748 --------- --------- Balance, June 30 92,342 294,884 --------- --------- VALUATION RESERVE Balance, January 1 27,483 38,329 Reductions (17,241) (6,078) Additions 300 285 --------- --------- Balance, June 30 10,542 32,536 --------- --------- Mortgage Servicing Rights, net $ 81,800 $ 262,348 ========= =========
The estimated fair value of mortgage servicing rights closely approximated the amounts reflected in the financial statements at June 30, 2000 and 1999. As of June 30, 2000, the Mortgage Banking Division services or subservices approximately $13.84 billion of loans for third parties. Included in the loans 11 serviced at June 30, 2000 were loans being serviced under subservicing agreements with total principal balances of $9 billion. On March 31, 2000, BancGroup sold MSR's relating to loans with approximately $9 billion of principal balance from its loan servicing portfolio. BancGroup will continue to subservice these loans for a contractually specified period of time. NOTE E: 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)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30, ------------------------------------ ----------------------------------- PER SHARE PER SHARE 2000 INCOME SHARES AMOUNT INCOME SHARES AMOUNT -------- -------- --------- -------- -------- ---------- Basic EPS Net Income $ 55,957 111,249 $ 0.50 26,016 110,551 $ 0.24 Effect of dilutive securities: Options 165 128 Convertible debentures 95 601 50 595 ------------------------------------------------------------------------------- ----------------------------------- Diluted EPS $ 56,052 112,015 $ 0.50 $26,066 111,274 $ 0.23 ------------------------------------------------------------------------------- ----------------------------------- 1999 Basic EPS Net income $ 58,411 111,460 $ 0.52 $30,263 111,590 $ 0.27 Effect of dilutive securities Options 991 998 Convertible debentures 110 673 55 670 ------------------------------------------------------------------------------- ----------------------------------- Diluted EPS $ 58,521 113,124 $ 0.52 $30,318 113,258 $ 0.27 ------------------------------------------------------------------------------- -----------------------------------
NOTE F: SEGMENT INFORMATION Through its wholly owned subsidiary Colonial Bank, BancGroup segments its operations into two distinct lines of business: Commercial Banking and Mortgage Banking. Colonial Bank operates 235 branches throughout 6 states. 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 12 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 revenues, expense, and assets for the quarters June 30 and six months ended June 30, for each segment: (in thousands)
DISCONTINUED CONTINUING OPERATIONS OPERATIONS -------------------------------------- ------------ SIX MONTHS ENDED JUNE 30, 2000 COMMERCIAL CORPORATE MORTGAGE CONSOLIDATED BANKING OTHER* TOTAL BANKING BANCGROUP ----------------------------------------------------------------------- Net interest income $ 200,076 $ (3,429) $196,647 $ -- $ 196,647 Provision for possible loan losses 12,961 -- 12,961 -- 12,961 Noninterest income 36,080 (16) 36,064 -- 36,064 Depreciation and Amortization 15,485 (205) 15,280 -- 15,280 Noninterest expense 106,803 2,123 108,926 -- 108,926 ----------------------------------------------------------------------- Income from continuing Operations before Income Taxes 100,907 (5,363) 95,544 -- 95,544 Applicable income taxes 36,338 (1,450) 34,888 -- 34,888 ----------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS $ 64,569 $ (3,913) $ 60,656 $ -- $ 60,656 ----------------------------------------------------------------------- Income (Loss) from Discontinued Operations and Loss on Disposal (Net of Taxes) -- -- -- (4,699) (4,699) ----------------------------------------------------------------------- NET INCOME $ 64,569 $ (3,913) $ 60,656 $ (4,699) $ 55,957
DISCONTINUED CONTINUING OPERATIONS OPERATIONS -------------------------------------- ------------ SIX MONTHS ENDED JUNE 30, 1999 COMMERCIAL CORPORATE MORTGAGE CONSOLIDATED BANKING OTHER* TOTAL BANKING BANCGROUP ----------------------------------------------------------------------- Net interest income $ 184,305 $ (4,035) $180,270 $ -- $ 180,270 Provision for possible loan losses 12,454 -- 12,454 -- 12,454 Noninterest income 32,838 184 33,022 -- 33,022 Depreciation and Amortization 13,579 (19) 13,560 -- 13,560 Noninterest expense 97,869 1,336 99,205 -- 99,205 ----------------------------------------------------------------------- Income from continuing Operations before Income Taxes 93,241 (5,168) 88,073 -- 88,073 Applicable income taxes 34,152 (1,639) 32,513 -- 32,513 ----------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS $ 59,089 $ (3,529) $ 55,560 -- $ 55,560 Income (Loss) from Discontinued Operations and Loss on Disposal (Net of Taxes) -- -- -- 2,851 2,851 ----------------------------------------------------------------------- NET INCOME $ 59,089 $ (3,529) $ 55,560 $ 2,851 $ 58,411
* Includes elimination's of certain intercompany transactions. 13
DISCONTINUED CONTINUING OPERATIONS OPERATIONS -------------------------------- ------------ COMMERCIAL CORPORATE MORTGAGE CONSOLIDATED BANKING OTHER* TOTALS BANKING BANCGROUP QUARTER ENDED JUNE 30, 2000 ---------- --------- ------- ------------ ------------ Net interest income $101,089 $(1,761) $99,328 $ -- $99,328 Provision for possible loan losses 7,414 -- 7,414 -- 7,414 Noninterest income 18,599 (8) 18,591 -- 18,591 Depreciation and Amortization 7,476 (103) 7,373 -- 7,373 Noninterest expense 54,647 1,042 55,689 -- 55,689 -------- ------- ------- ------- ------- Income from continuing Operations before Income Taxes 50,151 (2,708) 47,443 -- 47,443 Applicable income taxes 18,055 (735) 17,320 -- 17,320 -------- ------- ------- ------- ------- INCOME FROM CONTINUING OPERATIONS $ 32,096 $(1,973) 30,123 $ -- $30,123 -------- ------- ------- ------- ------- Income (Loss) from Discontinued Operations and Loss on Disposal (Net of Taxes) -- -- -- (4,107) (4,107) -------- ------- ------- ------- ------- NET INCOME $ 32,096 $(1,973) $30,123 $(4,107) $26,016
DISCONTINUED CONTINUING OPERATIONS OPERATIONS -------------------------------- ------------ COMMERCIAL CORPORATE MORTGAGE CONSOLIDATED BANKING OTHER* TOTAL BANKING BANCGROUP QUARTER ENDED JUNE 30, 1999 ---------- --------- ------- ------------ ------------ Net interest income $ 94,342 $(1,937) $92,405 $ -- $92,405 Provision for possible loan losses 6,436 -- 6,436 -- 6,436 Noninterest income 16,151 (8) 16,143 -- 16,143 Depreciation and Amortization 6,973 (102) 6,871 -- 6,871 Noninterest expense 48,725 522 49,247 -- 49,247 -------- ------- ------- ------- ------- Income from continuing Operations before Income Taxes 48,359 (2,365) 45,994 -- 45,994 Applicable income taxes 17,962 (911) 17,051 -- 17,051 -------- ------- ------- ------- ------- INCOME FROM CONTINUING OPERATIONS $ 30,397 $(1,454) $28,943 $ -- $28,943 Income (Loss) from Discontinued Operations and Loss on Disposal (Net of Taxes) -- -- -- 1,320 1,320 -------- ------- ------- ------- ------- NET INCOME $ 30,397 $(1,454) $28,943 $ 1,320 $30,263
* Includes eliminations of certain intercompany transactions. Note G: 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. With the completion of this transaction, along with previously discussed sales of mortgage servicing, BancGroup will exit the mortgage servicing business. BancGroup recorded a loss on the disposal of the discontinued operations of $4.0 million after tax. The results of the mortgage servicing business have been classified as a discontinued operation in the accompanying financial statements. Income/(Loss) from discontinued operations, net of income taxes, for the six months ended June 30, 2000 and 1999 were ($743,000) and $2.9 million, respectively and ($151,000) and $1.3 million for the three months ended June 30, 2000 and 1999, respectively. 14 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 six months and twelve months ended June 30, 2000, respectively, as follows (in thousands):
December 31, 1999 June 30, 1999 to June 30, 2000 to June 30, 2000 Increase (Decrease) Increase (Decrease) ------------------------------------------------------ Amount % Amount % ------------------------------------------------------ Assets: Bank $ 889,334 8.5% $1,323,557 13.2% Mortgage Banking (123,588) -36.2% (468,036) -68.2% Other 196 1.6% 394 3.2% ------------------------------------------------------ Total Assets 765,942 7.1% 855,915 8.0% Securities 87,280 5.6% (159,475) -8.9% Mortgage loans held for sale (14,773) -44.6% (358,619) -95.1% Loans, net of unearned income 685,179 8.3% 1,322,666 17.4% Mortgage servicing rights (156,605) -65.7% (180,548) -68.8% Deposits 283,287 3.6% 648,103 8.5% Long term debt (75,796) -7.7% (74,716) -7.6%
Assets: BancGroup's assets have increased 8.0% and 7.1% since June 30, 1999 and December 31, 1999, respectively. This growth resulted primarily from internal loan growth throughout BancGroup's banking regions. Securities: Investment securities and securities available for sale have decreased $159 million (9%) and increased $87 million (6%) from June 30, 1999 and December 31, 1999, respectively. These fluctuations were due to normal business activities. Loans and Mortgage Loans Held for Sale: Loans, net of unearned income, have increased $1.3 billion (17%) and $685 million (8%) from June 30, 1999 and December 31, 1999, respectively. This increase is primarily due to 17% internal loan growth from June 30, 1999 and from December 31, 1999 on an annualized basis. For the first six months of 2000, loan growth was concentrated in the Florida, Alabama, and Georgia markets which represented 52%, 22%, and 16% of the growth, respectively. Mortgage loans held for sale are funded on a short-term basis (less than 90 days) while they are being packaged for sale in the secondary market. In October 1999, BancGroup sold the wholesale production 15 unit of the mortgage banking division. As a result of decreased activity due to this sale and increasing mortgage rates, mortgage loans held for sale decreased $359 million from June 30, 1999. Mortgage loans held for sale decreased $14 million (45%) from December 31, 1999 due to a decline in retail mortgage production which was a result of higher mortgage rates.
GROSS LOANS BY CATEGORY June 30, Dec. 31, June 30, (In thousands) 2000 1999 1999 ----------------------------------------------- Commercial, financial, and agricultural $ 1,164,636 $ 1,126,191 $ 1,197,762 Real estate-commercial 2,829,400 2,538,304 2,399,864 Real estate-construction 1,634,039 1,435,004 1,101,493 Real estate-residential 2,585,238 2,528,413 2,385,685 Installment and consumer 290,594 297,555 311,509 Other 409,421 302,682 194,349 ----------------------------------------------- Total Loans $ 8,913,328 $ 8,228,149 $ 7,590,662 ===============================================
The majority of the $685 million in loan growth for the six months ended June 30, 2000 has been in commercial loans collateralized by real estate and construction loans which increased approximately $291 million and $199 million, respectively from December 31, 1999. The increase of $1.3 billion from June 30, 1999 consisted primarily of commercial real estate loans of $430 million and construction loans of $533 million. Residential real estate loans, increased $57 million and $200 million from December 31, 1999 and June 30, 1999, respectively. Residential real estate loans consist primarily of adjustable rate first mortgage loans. BancGroup generally sells fixed rate loans in the secondary markets. BancGroup's loans are concentrated in various areas in Alabama, the metropolitan Atlanta market in Georgia as well as BancGroup's markets in Florida. Allocations of the allowance for possible loan losses are made on an individual loan basis for all identified potential problem loans with a percentage allocation for the remaining portfolio. The allocations of the total allowance represent an approximation of the reserves for each category of loans based on management's evaluation of risk within each loan type. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
Percent of Percent of Percent of June 30, Loans to Dec. 31, Loans to June 30, Loans to (In thousands) 2000 Total Loans 1999 Total Loans 1999 Total Loans --------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 28,194 13.1% $23,051 13.7% $21,351 15.8% Real estate-commercial 36,192 31.7% 34,729 30.8% 32,855 31.6% Real estate-construction 17,182 18.3% 16,907 17.4% 14,852 14.5% Real estate-mortgage 12,926 29.0% 12,642 30.7% 11,919 31.4% Installment and consumer 3,345 3.3% 3,992 3.6% 4,574 4.1% Other 3,551 4.6% 4,672 3.8% 2,518 2.6% --------------------------------------------------------------------------------------------- TOTAL $101,390 100.0% $95,993 100.0% $88,069 100.0% =============================================================================================
16 SUMMARY OF LOAN LOSS EXPERIENCE
June 30, Dec. 31, June 30, (In thousands) 2000 1999 1999 ------------------------------------------- Allowance for possible loan losses - January 1 $95,993 $83,562 $83,562 Charge-offs: Commercial, financial, and agricultural 4,671 9,627 4,621 Real estate-commercial 980 3,226 1,391 Real estate-construction 66 1,171 242 Real estate-residential 1,485 2,579 1,057 Installment and consumer 2,160 5,044 2,505 Other 549 1,711 870 ------------------------------------------- Total charge-offs 9,911 23,358 10,686 ------------------------------------------- Recoveries: Commercial, financial, and agricultural 866 2,516 686 Real estate-commercial 176 601 158 Real estate-construction 8 54 36 Real estate-residential 237 849 379 Installment and consumer 881 2,678 1,351 Other 179 384 129 ------------------------------------------- Total recoveries 2,347 7,082 2,739 ------------------------------------------- Net charge-offs 7,564 16,276 7,947 Addition to allowance charged to operating expense 12,961 28,707 12,454 ------------------------------------------- Allowance for possible loan losses-end of period $101,390 $95,993 $88,069 ===========================================
Asset quality as measured by nonperforming assets remains strong at 0.52% of net loans and other real estate at June 30, 2000. Nonperforming assets have increased $1.6 million from December 31, 1999. The increase in nonperforming assets primarily resulted from a $3.9 million increase in nonaccrual loans partially offset by a $2.2 million decrease in other real estate. The reduction in other real estate is primarily from the sale of one property in Alabama. Management continuously monitors and evaluates recoverability of problem assets and adjusts loan loss reserves accordingly. Loan loss reserve is 1.14% of loans at June 30, 2000 and 1.17% at December 31, 1999 compared to 1.16% at June 30, 1999. 17 NONPERFORMING ASSETS ARE SUMMARIZED BELOW
June 30, Dec. 31, June 30, (In thousands) 2000 1999 1999 ------------------------------------------ Nonaccrual loans $ 38,380 $ 34,461 $ 29,259 Restructured loans 1,185 1,265 1,279 ------------------------------------------ Total nonperforming loans * 39,565 35,726 30,538 Other real estate owned and in substance foreclosures 7,011 9,215 7,226 ------------------------------------------ Total nonperforming assets * $ 46,576 $ 44,941 $ 37,764 ========================================== Aggregate loans contractually past due 90 days for which interest is being accrued $ 6,227 $ 11,184 $ 7,051 Net charge-offs quarter-to-date $ 4,119 $ 4,998 $ 4,523 Net charge-offs year-to-date $ 7,564 $ 16,276 $ 7,942 RATIOS PERIOD END: Total nonperforming assets as a percent of net loans and other real estate 0.52% 0.55% 0.50% Allowance as a percent of net loans 1.14% 1.17% 1.16% Allowance as a percent of nonperforming assets * 218% 214% 233% Allowance as a percent of nonperforming loans * 256% 269% 288% FOR THE PERIOD ENDED: Net charge-offs as a percent of average net loans - (annualized basis) Quarter to date 0.19% 0.25% 0.24% Year to date 0.18% 0.21% 0.22%
* Total does not include loans contractually past due 90 days or more which are still accruing interest. Management, through its loan officers, internal loan review staff, and external examinations by regulatory agencies has identified approximately $187 million of potential problem loans not included above. The status of these loans is reviewed at least quarterly by loan officers and loan administration and annually by regulatory agencies. In connection with such reviews, collateral values are updated where considered necessary. If collateral values are judged insufficient and 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 June 30, 2000, substantially all of these loans are current with their existing repayment terms. 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. The above nonperforming loans and potential problem loans represent all material credits for which management has doubts as to the ability of the borrowers to comply with the loan repayment terms. The 18 recorded investment in impaired loans at June 30, 2000 was $29 million and these loans had a corresponding valuation allowance of $15.5 million. MORTGAGE SERVICING RIGHTS (MSRs): The balances of Mortgage Servicing Rights were $82 million and $262 million at June 30, 2000 and 1999, respectively. The decrease is primarily due to the sale in March 2000 of MSRs related to approximately $9 billion of principal balances from the loan servicing portfolio. BancGroup has signed a letter of intent with Homeside Lending, Inc. to sell the rights to service approximately $5.0 billion of mortgage loans serviced by BancGroup. With the completion of this transaction scheduled for the fourth quarter 2000, along with the previously discussed sale of mortgage servicing, BancGroup will exit from the mortgage servicing business. BancGroup, with the assistance of a third party advisor, developed a strategy to hedge MSRs against future volatility in interest rates. At June 30, 2000, BancGroup had hedged approximately 44% of the mortgage servicing rights asset primarily through the use of floors and principal-only strips. The hedge positions are monitored daily and adjusted as necessary for changes in the market and projected interest rate movement. The objective of this strategy is 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 is designed to rise in value when interest rates fall and decline in value when interest rates rise, in contrast to the expected movements in value of the servicing asset, therefore reducing earnings volatility caused by interest rate movements. These risk-management activities do not eliminate interest-rate risk in the Mortgage Servicing Rights. Treasury rates, LIBOR rates and the Constant Maturity Swap index, to which the majority of the mortgage servicing right hedges are indexed, may not move in tandem with mortgage interest rates. As mortgage interest rates change, actual prepayments may not respond exactly as anticipated. Other pricing factors, such as the volatility of the market yields, may affect the value of the hedges without similarly impacting the mortgage servicing rights. As a result of the previously discussed plan to exit the mortgage servicing business, all hedges related to the MSRs were liquidated subsequent to June 30, 2000. LIQUIDITY: The maintenance of adequate liquidity position and the monitoring of rate sensitivity are the responsibility of BancGroup's asset/liability management committee. BancGroup's governing policy provides for daily and longer term monitoring of both sources and uses of funds to properly maintain the cash position. The policy also establishes the criteria for monitoring the short and long term impact of interest rate fluctuations on these funds. BancGroup has credit facilities at the FHLB, excluding funds available through short and long term federal funds lines. This credit facility is collateralized by BancGroup's residential real estate loans. At June 30, 2000, BancGroup had FHLB borrowings of $1,123 million outstanding leaving credit availability of $453 million based on current collateral. In addition to FHLB borrowings, correspondent banks and customers provide a consistent base of short-term funds with $982 million in Fed Funds purchased and repurchase agreements outstanding at June 30, 2000. BancGroup entered into reverse repurchase arrangements under which it purchased mortgage backed securities. These securities are collateral for the $277 million in debt. During 1999, BancGroup entered 19 into a revolving credit facility with an unaffiliated financial institution totaling $25 million of which $3 million was outstanding at June 30, 2000. BancGroup also has an established brokered Certificate of Deposit (CD) program to offer CD's in increments of $1,000 to $99,000 to out of market customers at competitive rates and maturities. At June 30, 2000, $531 million was outstanding under this program. BancGroup has a brokered money market program that attracts deposits from out-of-market customers. At June 30, 2000, $61 million was outstanding in this program. In addition to these external sources of funds, BancGroup through its acquisitions and branch expansion programs has increased its market presence into high growth markets in the country. The expansion was concentrated in Florida with additional growth in the Atlanta metropolitan area, Dallas, Texas and Reno and Las Vegas, Nevada. The principal goal is to provide BancGroup's retail customer base with convenient access to branch locations while enhancing BancGroup's potential for future increases in profitability. In the fourth quarter of 1999, BancGroup initiated and continues several campaigns to grow its deposit base. The high growth areas of Florida were a primary target due to lower cost funds in that market. Retail deposits increased $496 million in the six month period ending June 30, 2000. This increase represents 15% internal growth on an annualized basis. The growth of deposits continues to be a primary strategic initiative of BancGroup although competition for deposits remain strong within the banking industry as well as increased competition from other business sectors. In January 2000, a branch incentive plan was implemented in which a key goal is for employees to obtain an established deposit growth rate in their branches. Management has contracted with a consultant to target specific products and markets for future deposit campaigns in order to more cost effectively grow deposits. Each of these initiatives should provide a solid foundation for achieving BancGroup's deposit growth objectives. CAPITAL RESOURCES: Management continuously monitors BancGroup's capital adequacy and potential for future growth. BancGroup has access to equity capital markets through both public and private issuance. Management considers these sources and related return in addition to internally generated capital in evaluating future capital resources. The Federal Reserve has issued guidelines identifying Tier I and Tier II capital components as well as minimum Tier I leverage ratios relative to total assets and minimum capital ratios relative to risk-adjusted assets. BancGroup issued $70 million in Trust Preferred Securities in 1997 that qualifies as Tier I capital and Colonial Bank issued $100 million in 8% Subordinated Notes in March 1999 that qualifies as Tier II capital. As a result of BancGroup's share repurchase plan 2,882,976 of treasury shares were outstanding on June 30, 2000. The capital related to these treasury shares is reflected as a reduction in Tier One Capital. BancGroup's actual capital ratios and the components of capital and risk adjusted asset information (subject to regulatory review) as of June 30, 2000 are stated below: Capital (in thousands): Tier I Capital: Shareholders' equity (as adjusted for unrealized loss on securities available for sale, less intangibles and disallowed mortgage servicing rights plus Trust Preferred Securities) $ 716,219
20 Tier II Capital: Allowable loan loss reserve 101,390 Subordinated debt 111,939 ----------- Total Capital $ 929,548 =========== Risk Adjusted Assets (in thousands) $ 8,864,176
June 30 December 31, 2000 1999 --------------------------- Tier I leverage ratio (minimum 3%) 6.32% 6.58% Risk Adjusted Capital Ratios: Tier I Capital Ratio (minimum 4%) 8.08% 8.71% Total Capital Ratio (minimum 8%) 10.49% 11.31%
Management believes that capital levels are sufficient to support future internally generated growth and fund the quarterly dividend rates that are currently $0.11 per share each quarter. YEAR 2000 READINESS DISCLOSURE: Until recently, many computer software programs and processing systems, including some of those used by BancGroup and its subsidiaries in their operations, were not designed to accommodate entries beyond the year 1999 in date fields. Failure to address the anticipated consequences of this design deficiency could have had material adverse effects on the business and operations of any business, including BancGroup, that relies on computers and associated technologies. 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 approximately $12,500,000 in expenditures on the Year 2000 project. Year 2000 project costs of approximately $560,000 were expensed during 1999 of which $200,000 was expensed during the six months ended June 30, 1999. 21 AVERAGE VOLUME AND RATE (UNAUDITED)
(Dollars in thousands) THREE MONTHS ENDED JUNE 30, --------------------------------------------------------------------- 2000 1999 --------------------------------- ------------------------------- AVERAGE AVERAGE VOLUME INTEREST RATE VOLUME INTEREST RATE --------------------------------- -------------------------------- ASSETS Loans, net $ 8,765,295 $ 195,438 8.96% $ 7,465,919 158,680 8.52% Mortgage loans held for sale 19,895 424 8.52% 448,078 8,033 7.17% Investment securities and securities available For sale and other interest-earning assets 1,690,215 28,699 6.79% 1,733,992 26,788 6.20% ------------------------ ----------------------- Total interest-earning assets(1) 10,475,405 224,561 8.61% 9,647,989 193,501 8.04% --------- -------- Nonearning assets 905,494 1,002,903 ----------- ----------- Total assets $11,380,899 $10,650,892 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $ 6,805,097 86,072 5.09% $ 6,191,701 67,290 4.36% Short-term borrowings 1,451,161 22,733 6.30% 1,326,773 16,243 4.91% Long-term debt 955,996 15,182 6.39% 954,583 14,644 6.15% ------------------------ ----------------------- Total interest-bearing liabilities 9,212,254 123,987 5.41% 8,473,057 98,177 4.65% ------------------------ ----------------------- Noninterest-bearing demand deposits 1,365,427 1,423,856 Other liabilities 108,913 83,811 ----------- ----------- Total liabilities 10,686,594 9,980,724 Shareholders' equity 694,305 670,168 ----------- ----------- Total liabilities and shareholders' equity $11,380,899 $10,650,892 =========== =========== RATE DIFFERENTIAL 3.20% 3.39% NET YIELD ON INTEREST-EARNING ASSETS $ 100,574 3.85% $ 95,324 3.96% ========= ========
(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. Dividends earned and average rates for preferred stocks are reflected on a tax equivalent basis. Tax equivalent dividends are equal to actual dividends times 137.7%. 22 AVERAGE VOLUME AND RATE (UNAUDITED)
(Dollars in thousands) SIX MONTHS ENDED JUNE 30, --------------------------------------------------------------------- 2000 1999 --------------------------------- ------------------------------- AVERAGE AVERAGE VOLUME INTEREST RATE VOLUME INTEREST RATE --------------------------------- -------------------------------- ASSETS Loans, net $ 8,559,695 $376,082 8.83% $ 7,336,078 310,600 8.52% Mortgage loans held for sale 22,815 953 8.35% 530,279 18,999 7.17% Investment securities and securities available For sale and other interest-earning assets 1,673,225 56,586 6.77% 1,656,876 51,330 6.20% ------------------------ ----------------------- Total interest-earning assets(1) 10,255,735 433,621 8.49% 9,523,233 380,929 8.04% ------------------------ ----------------------- Nonearning assets 935,704 984,664 ----------- ----------- Total assets $11,191,439 $10,507,897 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $ 6,699,492 163,858 4.92% $ 6,052,929 131,955 4.40% Short-term borrowings 1,385,345 41,505 6.02% 1,425,882 35,340 5.00% Long-term debt 972,958 30,736 6.35% 881,482 26,542 6.07% ------------------------ ----------------------- Total interest-bearing liabilities 9,057,795 236,099 5.24% 8,360,293 193,837 4.68% ------------------------ ----------------------- Noninterest-bearing demand deposits 1,328,169 1,396,891 Other liabilities 110,321 89,453 ----------- ----------- Total liabilities 10,496,285 9,846,637 Shareholders' equity 695,154 661,260 ----------- ----------- Total liabilities and shareholders' equity $11,191,439 $10,507,897 =========== =========== RATE DIFFERENTIAL 3.25% 3.36% NET YIELD ON INTEREST-EARNING ASSETS $ 197,522 3.86% $187,092 3.94% =========== ========
(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. Dividends earned and average rates for preferred stocks are reflected on a tax equivalent basis. Tax equivalent dividends are equal to actual dividends times 137.7%. 23 ANALYSIS OF INTEREST INCREASES (DECREASES) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 2000 (Dollars in thousands) CHANGE FROM 1999 ATTRIBUTED TO (1) TOTAL VOLUME RATE MIX -------- -------- -------- -------- INTEREST INCOME: Total loans, net $ 36,758 $ 27,542 $ 8,466 $ 750 Mortgage loans held for sale (7,609) (7,667) 1,499 (1,441) Investment securities and securities for sale and other interest-earning assets 1,911 (694) 2,662 (57) -------- -------- -------- -------- Total interest income(2) 31,060 19,181 12,627 (748) -------- -------- -------- -------- INTEREST EXPENSE: Interest-bearing deposits $ 18,782 $ 6,644 $ 11,125 1,013 Short-term borrowings 6,490 1,605 4,817 68 Long-term debt 538 50 546 (58) -------- -------- -------- -------- Total interest expense 25,810 8,299 16,488 1,023 -------- -------- -------- -------- Net interest income $ 5,250 $ 10,882 $ (3,861) $ (1,771) ======== ======== ======== ========
SIX MONTHS ENDED JUNE 30, 2000 CHANGE FROM 1999 ATTRIBUTED TO (1) TOTAL VOLUME RATE MIX -------- -------- -------- -------- INTEREST INCOME: Total loans, net $ 65,482 $ 51,983 $ 11,340 $ 2,159 Mortgage loans held for sale (18,046) (18,143) 3,120 (3,023) Investment securities and securities for sale and other interest-earning assets 5,256 506 4,709 41 -------- -------- -------- -------- Total interest income(2) 52,692 34,346 19,169 (823) -------- -------- -------- -------- INTEREST EXPENSE: Interest-bearing deposits $ 31,903 $ 14,185 $ 15,694 $ 2,024 Short-term borrowings 6,165 (1,011) 7,252 (76) Long-term debt 4,194 2,769 1,231 194 -------- -------- -------- -------- Total interest expense 42,262 15,943 24,177 2,142 -------- -------- -------- -------- Net interest income $ 10,430 $ 18,403 $ (5,008) $ (2,965) ======== ======== -------- ========
(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 Mix change = change in volume times change in rate. (2) Interest earned on obligations of state and political subdivisions is reflected on a tax equivalent basis. Tax equivalent interest earned is: actual interest earned times 145%. The taxable equivalent adjustment has given effect to the disallowance of interest, for federal income tax purposes, related to certain tax-free assets. Dividends earned on preferred stock are reflected on a tax equivalent basis. Tax equivalent dividends earned are: actual dividends times 137.7%. Tax equivalent average rate is tax equivalent interest or dividends earned divided by average volume. 24 Analysis of Continuing Operations NET INTEREST INCOME Net interest income on a tax equivalent basis increased $5.3 million to $100.6 million for the quarter ended June 30, 2000 from $95.3 million for the quarter ended June 30, 1999. The net yield on interest earning assets decreased from 3.96% to 3.85% for the three months ended June 30, 1999 and 2000, respectively. For the six months ended June 30, 2000, net interest income on a tax equivalent basis increased $10.4 million to $197.5 million as compared to $187.1 million for the same period in 1999. The net yield on interest earning assets decreased from 3.94% to 3.86% for the six months ended June 30, 1999 compared to the same period in 2000. As reflected on the previous tables, the increase in net interest income for the three and six months was primarily attributable to loan growth, which was partially offset by higher funding rates. During the first six months of 1999 the prime rate was 7.75% compared to a weighted average of 8.91% for the first six months of 2000. The increase in rates and increased use of wholesale funding are the primary reason for the decline in net interest margin. LOAN LOSS PROVISION: The provision for possible loan losses for the six months ended June 30, 2000 was $12,961,000 compared to $12,454,000 for the same period in 1999. While asset quality remains good, strong loan growth in 2000 has required an increased loan loss provision. The current allowance for possible loan losses provides 256% coverage of nonperforming loans compared to 269% at December 31, 1999 and 288% at June 30, 1999. See management's discussion on loan quality and the allowance for possible loan losses presented in the Financial Condition section of this report. NONINTEREST INCOME: Noninterest income increased $3.0 million for the six months ended June 30, 2000 compared to the same period in 1999 and $2.4 million for the three months ended June 30, 2000 over the three months ended June 30, 1999. These increases are primarily attributable to additional fee income related to wealth management, and electronic banking activities as well as retail mortgage production in the banking regions. BancGroup is continuing to expand its services through increased efforts in private banking and wealth management services, which include asset management services, trust services and sales of mutual funds and annuities. Wealth management services contributed $4.9 million to non-interest income for the six months ended June 30, 2000 compared to $3.1 million for the same period last year. International banking activities resulted in $904,000 in non-interest income for the six months ended June 30, 2000 compared to $590,000 for the same period last year. BancGroup also continues to expand electronic banking services through its ATM network, check card services, and internet banking. Non-interest income for electronic banking services increased approximately 29% for the six months ended June 30, 2000 compared to the same period in 1999 while income from traditional banking services such as service charges remained level. 25 NONINTEREST EXPENSES: BancGroup's net overhead (total noninterest expense less noninterest income, excluding security gains) was $44.5 million and $88.2 million for the three and six months ended June 30, 2000, respectively compared to $39.9 million and $79.7 million for the three and six months ended June 30, 1999. BancGroup's efficiency ratio was 52.97% and 52.46% for the six months ended June 30, 2000 and 1999, respectively. Noninterest expense increased $11.4 million and $6.9 million for the six and three months ended June 30, 2000, compared to the same periods in 1999. The increase in noninterest expenses is primarily due to an increase of approximately $5.2 million and $2.9 million, for the six and three months ended June 30, 2000 over the same period in 1999 in salaries and employee benefits. These salary increases are due to normal wage increases, increased commission expense related to investment sales activities, and increased compensation for the 2000 Branch Incentive Program. Occupancy and equipment expense increased $3.0 million and $1.5 million for the six months and three months ended June 30, 2000, respectively. These increases are due to improvements and expansions of bank facilities as well as improved technology equipment and software. The remaining increase of $3.2 million and $2.5 million is primarily the result of other miscellaneous expenses related to normal business operations. PROVISION FOR INCOME TAXES: BancGroup's provision for income taxes is based on an approximately 36.5% and 36.8%, estimated annual effective tax rate for the years 2000 and 1999, respectively. The provision for income taxes for the six months ended June 30, 2000 and 1999 was $34,888,000 and $32,513,000, respectively. ANALYSIS OF DISCONTINUED OPERATIONS: BancGroup estimates that the cost of disposing of its mortgage servicing, net of the operating profit (loss) from June 30, 2000 until final disposition of discontinued mortgage operations will be approximately $4.0 million after tax. Refer to Note G in the Consolidated Financial Statements for additional information related to discontinued operations. Part II Other Information ITEM 1: Legal Proceedings - See Note C - COMMITMENTS AND CONTINGENCIES AT PART 1 ITEM 2: Changes in Securities - N/A ITEM 3: Defaults Upon Senior Securities - N/A ITEM 4: Submission of Matters to a Vote of Security Holders As previously reported, on April 19, 2000 the annual meeting of the shareholders of Colonial BancGroup was held. The following are the results of the votes cast by shareholders present at such meeting, by proxy or in person, for such proposals. 26 1) Election of the following directors: Term Expiring 2003.
For Withhold ------------------------------ Lewis Beville 86,560,630 2,019,374 Jerry J. Chesser 86,597,383 2,012,621 John Ed Mathison 86,572,653 2,037,351 Joe D. Mussafer 86,588,769 2,021,235 Frances E. Roper 86,542,305 2,067,699 Edward V. Welch 86,580,039 2,029,965
To elect the nominee named in the Proxy Statement as director to serve the term of two (2) years. Term Expiring in 2002 William E. Powell III 86,599,414 2,010,590 In addition to the foregoing the following directors will continue to serve:
Term Expires 2001 Term Expires 2002 ----------------- ----------------- Augustus K. Clements III William Britton Robert S. Craft Patrick F. Dye Clinton O. Holdbrooks Milton E. McGregor Harold D. King Simual Sippial Robert E. Lowder John C. H. Miller, Jr. James Rane
For Against Abstain 2) To amend the 1992 Incentive Stock Option Plan of The Colonial BancGroup, Inc. (the ISO Plan) to increase the number of shares of Common Stock eligible to be issued under the ISO 83,098,023 4,700,683 811,298 Plan from 4,200,000 shares to 5,700,000 shares 3) To adopt the Management Incentive Plan (the MIP). 81,993,422 4,345,793 2,070,789 4) To amend the 1992 Non-Qualified Stock Option Plan to provide that the maximum number of shares of Common Stock, with respect to which options may be granted to any eligible 81,405,732 6,237,840 966,432 employee under the NQSO Plan during any Plan Year, shall not exceed 200,000. 5) To amend the Stock Bonus and Retention Plan (the Stock Plan) to (a) provide that during any Plan Year no participant shall receive more than 150,000 shares of Common Stock under the 83,836,042 3,908,713 865,249 Stock Plan and (b) allow performance-based goals pursuant to Section 162(m) of the Internal Revenue Code to be used in making awards.
ITEM 5: Other Events - N/A 27 ITEM 6: (a) Form 8-K - Was filed on July 18, 2000 in regard to a letter of intent for the sale of approximately $5.0 billion of principal value of the mortgage servicing portfolio to a third party. (b) Exhibit 27 - Financial Data Schedule (for SEC use only) SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE COLONIAL BANCGROUP, INC. Date: August 14, 2000 By: /s/ W. Flake Oakley, IV --------------------------- W. Flake Oakley, IV its Chief Financial Officer