-----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, FikaAeS4xt6yZFcTDjj9L8UmolKEGHdWpKtLmJ/GsQh4XAbaWHELqt/+x2PGpjAf CKFS716XZx7Skao7W+Qi5w== 0000950144-97-004167.txt : 19970416 0000950144-97-004167.hdr.sgml : 19970416 ACCESSION NUMBER: 0000950144-97-004167 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970103 ITEM INFORMATION: Other events FILED AS OF DATE: 19970415 SROS: NYSE 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: 000-07945 FILM NUMBER: 97580398 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 COLONIAL BANCGROUP INC 1 ================================================================================ 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 3, 1997 THE COLONIAL BANCGROUP, INC (Exact name of registrant as specified in its charter) DELAWARE 1-13508 63-0661573 (State of Incorporation) (Commission File No.) (IRS Employer I.D. No.) ONE COMMERCE STREET, MONTGOMERY, ALABAMA 36104 (Address of Principal Executive Office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 334-240-5000 ================================================================================ 2 ITEM 5. OTHER EVENTS BancGroup completed a business combination with Jefferson Bancorp, Inc. (JBC), on January 3, 1997. Also, on January 31, 1997, BancGroup completed a business combination with D/W Bankshares, Inc. (Bankshares). The combinations were accounted for as poolings of interests. Accordingly, the accompanying consolidated selected financial data, management's discussion and analysis and consolidated financial statements as of December 31, 1996, 1995, and 1994 and for each of the three years in the period ended December 31, 1996 have been restated to give retroactive effect to the combination with JBC and Bankshares and include the combined operations of BancGroup, JBC and Bankshares for all periods presented. On January 15, 1997, BancGroup's Board of Directors declared a two-for-one stock split effected in the form of a 100 percent stock dividend distributed February 11, 1997. Accordingly, the accompanying financial statements, management's discussion and analysis and selected financial data have been restated to give retroactive effect to the stock split. EXHIBIT NO. DESCRIPTION - ------- ----------- [S] [C] [C] 23 -- Consent of Coopers & Lybrand L.L.P. 27 -- Financial Data Schedule (for SEC use only) 3 SIGNATURES 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. By: /S/ W. FLAKE OAKLEY, IV ------------------------------- W. Flake Oakley, IV Its Chief Financial Officer On: April 15, 1997 4 COLONIAL BANCGROUP, INC AND SUBSIDIARIES INDEX TO RESTATED FINANCIAL STATEMENTS
PAGE NUMBER ------ Financial Statements: Selected Financial Data.................................... Management's Discussion and Analysis of Financial Condition and Results of Operations..................... Report of Independent Accountants.......................... Consolidated Financial Statements.......................... Notes to Consolidated Financial Statements................. Supplemental Information: (Restatement) Selected Financial Data.................................... Management's Discussion and Analysis of Financial Condition and Results of Operations..................... Report of Independent Accountants.......................... Supplemental Consolidated Financial Statements............. Notes to Supplemental Consolidated Financial Statements....
5 SELECTED FINANCIAL DATA
For the years ended December 31, 1996, 1995, 1994, 1993 and 1992 (In thousands, except per share amounts) 1996 1995* 1994* 1993* 1992* - ---------------------------------------------------------------------------------------------------------------------------- STATEMENT OF INCOME Interest income $ 348,978 $ 287,314 $ 211,903 $ 160,829 $ 146,486 Interest expense 179,300 146,960 90,902 66,357 67,389 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 169,678 140,354 121,001 94,472 79,097 Provision for possible loan losses 9,121 7,350 7,506 8,850 8,956 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 160,557 133,004 113,495 85,622 70,141 Noninterest income 65,982 53,993 47,752 43,445 37,027 Noninterest expense 139,651 122,204 115,677 98,501 85,636 SAIF special assessment(1) 3,817 -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes 83,071 64,793 45,570 30,566 21,532 Applicable income taxes 29,463 23,240 15,829 9,780 5,742 - ---------------------------------------------------------------------------------------------------------------------------- Income before extraordinary items and the cumulative effect of a change in accounting for income taxes 53,608 41,553 29,741 20,786 15,790 Extraordinary items, net of income taxes -- -- -- (463) -- Cumulative effect of a change in accounting for income taxes -- -- -- 3,650 -- - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 53,608 $ 41,553 $ 29,741 $ 23,973 $ 15,790 ============================================================================================================================ Income excluding SAIF special assessment(1) $ 56,074 $ 41,553 $ 29,741 $ 23,973 $ 15,790 ============================================================================================================================ EARNINGS PER SHARE Income excluding SAIF special assessment: Primary**(1) $ 1.70 $ 1.32 $ 1.00 $ 0.82 $ 0.72 Fully-diluted**(1) $ 1.67 $ 1.28 $ 0.99 $ 0.80 $ 0.72 Income before extraordinary items and the cumulative effect of a change in accounting for income taxes: Primary** $ 1.62 $ 1.32 $ 1.00 $ 0.82 $ 0.72 Fully-diluted** $ 1.60 $ 1.28 $ 0.99 $ 0.80 $ 0.72 Net income: Primary** $ 1.62 $ 1.32 $ 1.00 $ 0.95 $ 0.72 Fully-diluted** $ 1.60 $ 1.28 $ 0.99 $ 0.91 $ 0.72 Average shares outstanding: Primary** 33,062 31,594 29,796 25,226 21,992 Fully-diluted** 33,792 33,334 31,330 28,286 24,614 Cash dividends per common share: Common** $ 0.54 $ 0.3375 -- -- -- Class A** -- $ 0.1125 $ 0.40 $ 0.355 $ 0.335 Class B** -- $ 0.0625 $ 0.20 $ 0.155 $ 0.135 ============================================================================================================================
* Restated to give retroactive effect to the mergers with Commercial Bancorp of Georgia, Inc. and Southern Banking Corporation on July 3, 1996. ** Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid February 11, 1997. (1) Legislation approving a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $3,817,000 in expense before income taxes and $2,466,000 net of applicable income taxes in 1996. 18 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 6
For the years ended December 31, 1996, 1995, 1994, 1993 and 1992 (In thousands, except per share amounts) 1996 1995* 1994* 1993* 1992* - ---------------------------------------------------------------------------------------------------------------------------- STATEMENT OF CONDITION DATA At year-end: Total assets $ 4,870,332 $ 4,202,194 $ 3,219,082 $ 3,104,410 $ 2,027,455 Loans, net of unearned income 3,680,415 3,175,506 2,352,870 1,963,062 1,330,928 Mortgage loans held for sale 157,433 110,486 60,726 361,496 144,215 Deposits 3,583,669 3,204,260 2,504,461 2,444,418 1,697,648 Long-term debt 37,667 46,263 86,662 57,397 22,979 Shareholders' equity 343,182 289,463 224,018 198,389 123,952 Average balances: Total assets $ 4,515,895 $ 3,659,140 $ 3,074,619 $ 2,379,628 $ 1,978,313 Interest-earning assets 4,128,570 3,333,887 2,768,705 2,100,674 1,730,373 Loans, net of unearned income 3,436,529 2,708,633 2,138,371 1,494,053 1,273,486 Mortgage loans held for sale 133,804 97,511 131,121 241,683 118,510 Deposits 3,393,519 2,828,864 2,471,657 1,876,026 1,665,417 Shareholders' equity 319,147 250,826 214,543 144,216 117,822 Book value per share at year-end** $ 10.48 $ 9.33 $ 7.81 $ 7.20 $ 5.52 Tangible book value per share at year-end** $ 9.56 $ 8.38 $ 7.17 $ 6.61 $ 5.23 ============================================================================================================================ SELECTED RATIOS Income excluding SAIF special assessment to: Average assets(1) 1.24% 1.14% 0.97% 0.87% 0.80% Average shareholders' equity(1) 17.57 16.57 13.86 14.41 13.40 Income before extraordinary items and the cumulative effect of a change in accounting for income taxes to: Average assets 1.19 1.14 0.97 0.87 0.80 Average shareholders' equity 16.80 16.57 13.86 14.41 13.40 Net income to: Average assets 1.19 1.14 0.97 1.01 0.80 Average shareholders' equity 16.80 16.57 13.86 16.62 13.40 Efficiency ratio(1) 58.69 62.13 67.65 70.40 72.41 Dividend payout ratio 33.33 34.09 40.00 43.29 46.53 Average equity to average total assets 7.07 6.85 6.98 6.06 5.96 Total nonperforming assets to net loans, other real estate and repossessions .84 0.83 0.96 1.38 1.47 Net charge-offs to average loans .18 0.15 0.09 0.32 0.44 Allowance for possible loan losses to total loans (net of unearned income) 1.23 1.31 1.57 1.58 1.55 Allowance for possible loan losses to nonperforming loans(2) 204% 265% 292% 284% 224% ============================================================================================================================
* Restated to give retroactive effect to the mergers with Commercial Bancorp of Georgia, Inc. and Southern Banking Corporation on July 3, 1996. ** Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid February 11, 1997. (1) Legislation approving a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $3,817,000 in expense before income taxes and $2,466,000 net of applicable income taxes in 1996. (2) Nonperforming loans and nonperforming assets are shown as defined in Management's Discussion and Analysis of Financial Condition and Results of Operations -- Nonperforming Assets on page 34. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 19 7 SELECTED QUARTERLY FINANCIAL DATA 1996-1995
(In thousands, except per share amounts) 1996 1995* ------------------------------------------- ------------------------------------------ DEC. 31 SEPT. 30 JUNE 30 MARCH 31* DEC. 31 SEPT. 30 JUNE 30 MARCH 31 - ---------------------------------------------------------------------------------------------------------------------------------- Interest income $91,915 $89,607 $85,327 $82,129 $80,431 $75,017 $69,721 $62,145 Interest expense 47,265 45,919 43,210 42,906 42,385 39,014 35,720 29,841 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income 44,650 43,688 42,117 39,223 38,046 36,003 34,001 32,304 Provision for loan losses 3,098 2,555 1,898 1,570 3,195 1,433 1,440 1,282 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 41,552 41,133 40,219 37,653 34,851 34,570 32,561 31,022 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $14,258 $12,300 $14,501 $12,549 $ 9,121 $11,665 $11,497 $ 9,270 - ---------------------------------------------------------------------------------------------------------------------------------- Income excluding SAIF special assessment (1) $14,258 $14,766 $14,501 $12,549 $ 9,121 $11,665 $11,497 $ 9,270 - ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: income excluding SAIF special assessment: Primary**(1) $ 0.43 $ 0.44 $ 0.44 $ 0.38 $ 0.28 $ 0.39 $ 0.39 $ 0.26 Fully-diluted**(1) 0.42 0.44 0.43 0.38 0.27 0.38 0.38 0.25 Net income: Primary** $ 0.43 $ 0.37 $ 0.44 $ 0.38 $ 0.28 $ 0.39 $ 0.39 $ 0.26 Fully-diluted** 0.42 0.37 0.43 0.38 0.27 0.38 0.38 0.25 ==================================================================================================================================
* Restated to give retroactive effect to the mergers with Commercial Bancorp of Georgia, Inc. and Southern Banking Corporation on July 3, 1996. ** Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid on February 11, 1997. (1) Legislation approving a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $3,817,000 in expense before income taxes and $2,466,000 net of applicable income taxes in 1996. 20 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 8 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 user of the attached financial statements and accompanying footnotes with a more detailed analysis of the financial results of The Colonial BancGroup, Inc. ("BancGroup"). 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. BACKGROUND BancGroup (or the "Company") was established in 1981 with one bank and $166 million in assets. Through 35 business combinations including Commercial Bancorp of Georgia, Inc. ("Commercial")and Southern Banking Corporation ("Southern"), the Company has grown to a $4.9 billion multistate bank holding company with substantial centralized operations, local lending autonomy with centralized loan review and a strong commercial lending function. During 1995, the Company acquired Mt. Vernon Financial Corp. and expanded its operations into the Atlanta, Georgia market. In July 1996, the Company continued its expansion in the metropolitan Atlanta market with the Commercial merger and also moved into Florida with the merger with Southern which is based in Orlando. BancGroup has also entered into agreements to merge with four additional banks in Florida, one in Georgia and one in Alabama. All of the transactions are expected to close in early 1997. BancGroup's expansion in Georgia and Florida reflects a corporate goal to establish its community banking concept in the higher growth market areas of the Southeast. More importantly, BancGroup's operating earnings per share have increased an average of 23.7% per year since 1992 and in 1996 the Company achieved a 17.57% return on average equity and a 1.24% return on average assets excluding the one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF"). BancGroup's performance goals are: 1) an annual earnings per share growth rate in excess of 10%, 2) a 17.5% return on equity, 3) a 1.45% return on assets and 4) a consistently increasing dividend. The strategies employed to achieve these results are outlined below. They represent the foundation upon which BancGroup operates and the basis for achieving the Company's goals. - COMMUNITY BANK: BancGroup operates as a community bank allowing autonomy in lending decisions and customer relationships. This operating philosophy has been important in making acquisitions, retaining a skilled and highly motivated management team and developing a strong customer base, particularly with respect to lending relationships. - COMMERCIAL LENDING: Commercial lending primarily through groups located in the Birmingham, Huntsville, Montgomery and Anniston, Alabama as well as the Atlanta, Georgia and Orlando, Florida metropolitan centers has been a major factor in the Company's growth. Commercial real estate and other commercial loans increased 14% during 1996 following a 13% increase in 1995. BancGroup has been very successful in competing for these loans against other larger financial institutions, due primarily to the Company's local lending strategy and management continuity. - CONSUMER REAL ESTATE: Since 1993, BancGroup has focused on residential real estate lending as a means to increase consumer lending, broaden the Company's customer base and create a significant stream of fee income. In furtherance of this goal, in February, 1995 BancGroup acquired Colonial Mortgage Company ("CMC"), one of the 50 largest mortgage loan servicers in the country. BancGroup has increased residential mortgage loans 432% from $318 million at December 31, 1992 to $1.7 billion at December 31, 1996. The portfolio of mortgage loans has a relatively low credit risk and provides a source of liquidity by serving as collateral for Federal Home Loan Bank borrowings. CMC's $10.6 billion portfolio of loans serviced for others provides a steady source of noninterest income. - GROWTH MARKET EXPANSION: In October, 1995, BancGroup completed the acquisition of Mt. Vernon Financial Corp., an Atlanta, Georgia based thrift with $225 million in assets. On July 3, 1996, BancGroup merged with Commercial, a $233 million bank in the north Atlanta area and Southern, a $232 million bank in Orlando, Florida. These business combinations provided BancGroup with a significant base of operations in the Southeast's two fastest growing markets. In addition, agreements to merge four other banks in Florida and one in Georgia into BancGroup will expand on this base and increase BancGroup's total assets in Florida and Georgia to approximately $1.2 billion and $625 million, respectively. - COST CONTROL: An operational and organizational infrastructure established in prior years has allowed the Company to grow significantly and improve the efficiency ratio from 72.41% in 1992 to 58.69% in 1996. The operating structure is built around centralized back-shop operations in areas that do not have direct customer contact. As noted above, this structure has served the Company well over the past few years and should allow for continued growth at a low marginal cost. In order to further enhance the cost efficiencies already established and position the Company for more rapid growth, in 1995 BancGroup completed a reengineering study to streamline transaction processing, increase the cost-effective use of technological resources and identify potential revenue enhancements. 1996 was the first full year that additional income was recognized due to the implementation of several revenue THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 21 9 enhancements consisting of 1) repriced service charges and fees, 2) the automation of fee collection, 3) improved reporting for tracking fee collection and 4) controlling cost by staffing efficiently in the branches. - CAPITAL UTILIZATION: Management's goal is to provide a greater than 17.5% return on capital while effectively utilizing internally created capital and exceeding regulatory capital requirements. BancGroup has an asset generating capability that can effectively utilize the capital generated. This capability is most evident in 1996 by BancGroup's 16.8% internal growth in loans of which 2.5% was contributed by CMC. CMC provides asset generating sources for mortgage loans, as noted, and mortgage servicing rights. CMC also increased its mortgage servicing rights by 23.5% in 1996. - ASSET QUALITY: Maintaining high asset quality is at the forefront of the Company's strategy to allow for consistent earnings growth. BancGroup's asset quality is demonstrated by its charge-off history and nonperforming asset levels, which compare favorably to its peer group. On December 31, 1993, BancGroup completed the acquisition of First AmFed Corporation, Huntsville, Alabama. This transaction increased total nonperforming assets in 1993 by $12.8 million to 1.38% of loans and other real estate. This ratio was reduced to .84% as of December 31, 1996 primarily through sales of other real estate. Net charge-offs over the past 5 years have consistently compared favorably with the Company's peer group and were only .18% of average loans in 1996 and .15% in 1995. - TECHNOLOGICAL ADVANCES: BancGroup is committed to increasing efficiencies and providing better customer access to products and services through effective utilization of technological advances. Some of the steps taken to achieve this objective include: 1) issuance of the Colonial Check Card, a debit card allowing customers to make purchases with funds from their checking account, 2) establishment of telephone banking, giving customers the capability to pay their bills and transfer funds by phone, 3) creation of a computer banking service allowing customers to conduct banking business from their home computers, and 4) expanded use of document imaging for certain loan and deposit documents. Technology is always changing, and BancGroup will continue to investigate methods of improving customer services through product enhancement and the efficiencies that technology provides. - STOCK SPLIT: On January 15, 1997, 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 February 11, 1997. The stated par value of each share was not changed from $2.50. 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. Obviously the Company cannot guarantee its success in implementing the initiatives or reaching the goals set out previously. The following analysis of financial condition and results of operations provide details with respect to this summary material and demonstrates trends concerning the initiatives taken through 1996. - -------------------------------------------------------------------------------- BUSINESS COMBINATIONS A principal part of BancGroup's strategy is 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 recently completed the following business combinations with other financial institutions. The balances reflected are as of the date of consummation.
COMPLETED ACQUISITIONS: (Dollars in thousands) ACCOUNTING DATE BANCGROUP TOTAL TOTAL TOTAL FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED SHARES ASSETS LOANS DEPOSITS - ----------------------------------------------------------------------------------------------------------------------- Colonial Mortgage Company (AL) Pooling 02/17/95 4,545,454 $ 71,000 $ 1,675 $ 0 Brundidge Banking Company (AL) Purchase 03/31/95 532,868 56,609 31,577 46,044 Mt. Vernon Financial Corp. (GA) Purchase 10/20/95 1,043,440 217,967 192,167 156,356 Farmers & Merchants Bank (AL) Purchase 11/03/95 513,686 56,050 25,342 45,448 Commercial Bancorp of Georgia, Inc. (GA) Pooling 07/03/96 2,306,460 232,555 145,429 207,641 Southern Banking Corporation (FL) Pooling 07/03/96 2,858,494 232,461 160,864 205,602 Dothan Federal Savings Bank (AL) Purchase 07/08/96 154,690 48,366 36,497 39,931
22 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 10 In addition to the combinations completed in 1996, BancGroup had the following combinations pending. The balances reflected are as of December 31, 1996.
PENDING ACQUISITIONS: (Dollars in thousands) ACCOUNTING DATE TOTAL TOTAL TOTAL FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED ASSETS LOANS DEPOSITS - -------------------------------------------------------------------------------------------------------------- Jefferson Bancorp, Inc. (FL) Pooling 01/03/97 $472,700 $319,300 $405,800 Tomoka Bancorp, Inc. (FL) Pooling 01/03/97 76,700 51,600 68,200 First Family Financial Corp. (FL) Purchase 01/09/97 167,300 117,500 156,700 D/W Bankshares, Inc. (GA) Pooling 01/31/97 138,700 71,100 124,500 Ft. Brooke Bancorporation (FL) Pooling Pending 208,800 141,500 185,800 Shamrock Holdings, Inc. (AL) Purchase Pending 54,500 19,300 46,400 First Commerce Banks of Florida, Inc. (FL) Purchase Pending* 105,900 68,200 94,700 Great Southern Bank (FL) Pooling Pending* 119,200 94,400 107,800
*Letters of intent were signed in February 1997. The combination with CMC in 1995 was accounted for using a method of accounting similar to a pooling-of-interests. In addition, on July 3, 1996, BancGroup completed the mergers with Southern and Commercial. These combinations were accounted for using the pooling-of-interests method. Accordingly, all financial statement amounts 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 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. 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 of earnings of BancGroup for 1995 and 1996 cannot reasonably be determined. The combinations have had an impact on the comparisons of operating results for 1995 and 1996 with prior years. Where such information is determinable it has been identified and discussed in the discussion of results of operations and financial condition that follows. In February 1997, BancGroup issued supplemental 1995 financial statements giving retroactive effect to the merger with Jefferson. 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; thus they do not include the effect of the Jefferson merger. COLONIAL MORTGAGE COMPANY On February 17, 1995, BancGroup completed the acquisition of CMC. This acquisition represents a major step in achieving several BancGroup strategic goals. A principal initiative of BancGroup for the past several years has been to increase fee income through establishment of additional lines of business that provide natural extensions of existing products or services. CMC in this regard provides an excellent fit for the following reasons: FEE INCOME At December 31, 1996, CMC provided servicing for approximately 132,000 customers with a total outstanding balance of $10.6 billion. The servicing revenues from this portfolio plus other fee income from CMC provided approximately 55% of BancGroup's noninterest income in 1996 and 1995. CONSUMER REAL ESTATE LENDING Through its wholesale and retail offices, CMC originated over $3.8 billion in residential real estate loans from 1994 through 1996. These loans have primarily been fixed rate loans sold into the secondary markets. However, since the latter part of 1994 Colonial Bank has been acquiring adjustable rate mortgage (ARM) loans originated by CMC. This program provides CMC additional loan products for its branch network. In addition, CMC provides the Bank with fixed rate loan products for its customers. GROWTH MARKET EXPANSION CMC currently originates residential mortgages in 32 states through 6 regional offices and services 132,000 customers located in 37 states and the District of Columbia. These locations provide BancGroup with a broader market base to solicit business and include areas which currently have greater growth rates than BancGroup's existing branch locations. These areas include Atlanta, Cincinnati, Dallas, Seattle, and Tallahassee. CAPITAL UTILIZATION BancGroup provides a capital base for the expansion of CMC's low cost servicing operation through bulk purchases of servicing. During 1995 and 1996, CMC acquired a total of $2.2 in bulk servicing. In addition CMC provides another source of loans for the Bank's portfolio including ARM loans and equity lines. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 23 11 CUSTODIAL DEPOSITS CMC maintains custodial accounts for its loan customers for the payment of taxes and insurance as well as collection of principal and interest. The balances in these accounts averaged approximately $152 million and $121 million in 1996 and 1995, respectively. These balances represent 6% of the 14% increase in average noninterest bearing demand deposits from 1995 to 1996. These balances have a positive impact on BancGroup's net interest margin by providing a noninterest bearing source of funds. CONTINUITY AND CONSISTENCY OF MANAGEMENT Robert E. Lowder, Chairman and CEO of BancGroup has been Chairman and CEO of CMC for 26 years. In addition, Ronnie Wynn has been the President of CMC for 20 years and is a former president of the Mortgage Bankers Association of America. This continuation of management has provided a very smooth transition in management and operating philosophy. CROSS-SELLING OF CUSTOMERS BancGroup has established a personal banking unit to solicit other business from CMC customers, such as equity lines and deposits. In addition, BancGroup plans to expand other customer relationships through establishment of deposit relationships with CMC customers, acceptance of CMC payments in branches, and establishing a linkage between construction and permanent lending. REVIEW OF RESULTS OF OPERATIONS OVERVIEW
The major components of BancGroup's net income are: (In thousands) 1996 1995 1994 - --------------------------------------------------------------- Net interest income $ 169,678 $ 140,354 $ 121,001 Provision for possible loan losses (9,121) (7,350) (7,506) Noninterest income 65,982 53,993 47,752 Noninterest expense (143,468) (122,204) (115,677) Pretax income 83,071 64,793 45,570 Taxes (29,463) (23,240) (15,829) - --------------------------------------------------------------- Net income 53,608 41,553 29,741 SAIF assessment, net of taxes 2,466 -- -- - --------------------------------------------------------------- Income excluding SAIF $ 56,074 $ 41,553 $ 29,741 - ---------------------------------------------------------------
Consistently increasing net income is a primary goal of management. Operating earnings (income before extraordinary items, accounting changes and SAIF special assessment) increased 35% in 1996, 40% in 1995 and 43% in 1994. The most significant factors affecting income for 1996, 1995 and 1994 are highlighted below and discussed in greater detail in subsequent sections. - An increase in 1996 of 23.8% in average earning assets. This follows an increase of 20.4% in 1995. - An increase of $12.0 million (22%) and $6.2 million (13%) in noninterest income in 1996 and 1995, respectively. - Maintenance of high asset quality and reserve coverage ratios. Net charge-offs were $6.2 million or .18% of average net loans in 1996 and $4.0 million or .15% of average net loans in 1995. - Loan growth, excluding acquisitions, of 17% in 1996 following an increase of 24% in 1995. - An increase in average loans as a percent of average earning assets to 83.2% in 1996 from 81.2% in 1995. - Noninterest expenses as a percent of average assets were reduced to 3.09% in 1996 from 3.34% in 1995. 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 yield on a tax equivalent basis are reflected on the following schedule. The net yield on interest-earning assets was 4.17% in 1996 compared to 4.28% in 1995 and 4.45% in 1994. Over this period net interest income on a fully tax equivalent basis increased to $172.0 million in 1996 from $142.7 million in 1995 and $123.3 million in 1994. The principal factors affecting the Company's yields and net interest income are discussed in the following paragraphs. LEVELS OF INTEREST RATES In 1995 and 1996 rates remained fairly constant resulting in little impact on interest spreads or margins. Short-term rates increased throughout 1994 and continued to increase into late 1995 before starting to decline and leveling off in 1996. For example, the average fed funds rate for overnight bank borrowings was 5.45% in December 1994, reached 6.00% midyear 1995 before decreasing to 5.95% in December 1995 and has remained at 5.25% since February 1996. The Company's prime rate increased from 8.5% in December 1994 to 9% midyear 1995 before declining to 8.5% in December 1995 and to 8.25% in February 1996 where it remained the rest of the year. ACQUISITIONS The thrift acquisitions completed during 1995 and 1996 had a negative impact on the Company's net interest yield due primarily to the fact that these institutions had virtually no noninterest-bearing deposits. The rates on the interest-bearing deposits in the acquired institutions were slightly higher than the Company's rates and were adjusted to BancGroup products and rates within a short time after the mergers. 24 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 12 INTEREST-EARNING ASSETS - GROWTH IN EARNING ASSETS One of the most significant factors in the Company's increase in income for 1996 has been the 23.8% increase in average interest-earning assets. This follows a 20.4% increase in 1995. In addition and equally significant, average net loans increased $728 million (28%) from December 31, 1995 to December 31, 1996. Earning assets as a percentage of total average assets also increased from 90.1% in 1994 to 91.1% in 1995 to 91.4% in 1996. - MORTGAGE LOANS HELD FOR SALE The level and direction of long-term interest rates has a dramatic impact on the volume of mortgage loan originations from new construction and refinancings. Fluctuation in these rates from 1994 to 1996 resulted in a decline in average mortgage loans held for sale from $131 million in 1994 to $98 million in 1995 and a subsequent increase to $134 million in 1996. Mortgage loans held for sale represent single family residential mortgage loans originated or acquired by CMC then packaged and sold in the secondary market. CMC incurs gains or losses associated with rate fluctuations. CMC limits its risk associated with the sale of these loans through an active hedging program which generally provides for sales commitments on all loans funded. Mortgage loans held for sale are funded primarily with short-term borrowings. - LOAN MIX During 1996 loans increased in all categories. The mix of loans remained relatively constant. Residential real estate loans continue to be the largest concentration at 45.9% and 45.7% of total loans at December 31, 1996 and 1995, respectively. These loans are predominantly adjustable rate mortgages which have a low level of credit risk and accordingly have lower yields than other loans. INTEREST-BEARING LIABILITIES - COST OF FUNDS The significant loan growth in 1995 and 1996 has been more rapid than BancGroup's growth in low cost deposits resulting in the funding of a portion of this growth with higher cost funds. This factor has been most responsible for the decline in net interest yield from 1995 to 1996. As discussed under Liquidity and Interest Sensitivity, BancGroup's source of funds are considered adequate to fund future loan growth. Rates paid on new time deposits and variable rate deposits increased during 1994 and continued to increase through 1995. Competitive pressures on these deposit rates continued in 1996, although rates declined slightly. The cost of funds averaged 3.78%, 5.18% and 5.08% in 1994, 1995 and 1996, respectively. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 25 13
AVERAGE VOLUME AND RATES 1996 1995 1994 ---------------------------- ----------------------------- --------------------------- 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) $3,436,529 $305,353 8.89% $2,708,633 $249,218 9.20% $2,138,371 $176,696 8.26% Mortgage loans held for sale 133,804 10,577 7.90 97,511 7,301 7.49 131,121 10,313 7.87 Investment securities and securities available for sale: Taxable 439,717 27,670 6.29 411,589 24,938 6.06 391,312 20,892 5.34 Nontaxable (2) 46,960 3,565 7.59 43,782 3,382 7.72 39,089 2,978 7.62 Equity securities (3) 29,712 2,096 7.05 30,595 2,323 7.59 36,196 2,032 5.61 - --------------------------------------------------------- --------------------- -------------------- Total investment securities 516,389 33,331 6.45% 485,966 30,643 6.31% 466,597 25,902 5.55% Federal funds sold and securities purchased under resale agreements 36,766 1,791 4.87 37,771 2,211 5.85 25,879 929 3.59 Interest-earning deposits 5,082 217 4.27 4,006 293 7.31 6,737 297 4.41 - --------------------------------------------------------- --------------------- -------------------- Total interest-earning assets 4,128,570 $351,269 8.51% 3,333,887 $289,666 8.69% 2,768,705 $214,137 7.73% - --------------------------------------------------------- --------------------- -------------------- Allowance for loan losses (44,001) (36,746) (32,713) Cash and due from banks 134,275 130,406 118,022 Premises and equipment, net 72,641 53,468 50,968 Other assets 224,410 178,125 169,637 - ----------------------------------------------- ---------- ---------- TOTAL ASSETS $4,515,895 $3,659,140 $3,074,619 - ----------------------------------------------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing demand deposits $ 573,438 $ 16,279 2.84% $ 542,906 $ 16,843 3.10% $ 594,979 $ 16,126 2.71% Savings deposits 308,300 10,418 3.38 276,902 10,140 3.66 292,343 8,939 3.06 Time deposits 1,921,978 112,258 5.84 1,492,024 86,929 5.83 1,195,551 51,917 4.34 Short-term borrowings 693,372 37,741 5.44 478,596 29,305 6.12 236,074 10,428 4.42 Long-term debt 35,790 2,604 7.28 48,683 3,743 7.69 83,858 3,461 4.13 - --------------------------------------------------------- --------------------- -------------------- Total interest-bearing liabilities 3,532,878 $179,300 5.08% 2,839,111 $146,960 5.18% 2,402,805 $ 90,871 3.78% - --------------------------------------------------------- --------------------- -------------------- Noninterest-bearing demand deposits 589,803 517,032 388,784 Other liabilities 74,067 52,171 68,487 - ----------------------------------------------- ---------- ---------- Total liabilities 4,196,748 3,408,314 2,860,076 Shareholders' equity 319,147 250,826 214,543 - ----------------------------------------------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,515,895 $3,659,140 $3,074,619 ================================================================================================================================= RATE DIFFERENTIAL 3.43% 3.51% 3.95% NET INTEREST INCOME AND NET YIELD ON INTEREST- EARNING ASSETS (4) $171,969 4.17% $142,706 4.28% $123,266 4.45% =================================================================================================================================
(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) Dividends earned and average rates 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 dividends divided by average volume. (4) Net interest income divided by average total interest-earning assets. 26 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 14
ANALYSIS OF INTEREST INCREASES (DECREASES) 1996 CHANGE FROM 1995 1995 CHANGE FROM 1994 ------------------------------------ ------------------------------------- ATTRIBUTED TO (1) ATTRIBUTED TO (1) ------------------------------------ ------------------------------------- (IN THOUSANDS) AMOUNT VOLUME RATE MIX AMOUNT VOLUME RATE MIX - ------------------------------------------------------------------------------------------------------------------------- Interest income: Taxable securities $ 2,732 $ 1,704 $ 962 $ 66 $ 4,046 $ 1,083 $ 2,817 $ 146 Nontaxable securities (2) 183 245 (58) (4) 404 358 41 5 Dividends on preferred stocks (3) (227) (67) (165) 5 291 (314) 716 (111) - ------------------------------------------------------------------------------------------------------------------------- Total securities 2,688 1,882 739 67 4,741 1,127 3,574 40 Total loans (net of unearned income) 56,135 66,973 (8,542) (2,296) 72,522 47,121 20,053 5,348 Mortgage loans held for sale 3,276 2,717 407 152 (3,012) (2,644) (495) 127 Federal funds sold and securities purchased under resale agreements (420) (59) (371) 10 1,282 427 586 269 Interest-earning deposits (76) 79 (122) (33) (4) (120) 196 (80) - ------------------------------------------------------------------------------------------------------------------------- Total 61,603 71,592 (7,889) (2,100) 75,529 45,911 23,914 5,704 - ------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest-bearing demand deposits (564) 947 (1,431) (80) 717 (1,411) 2,333 (205) Savings deposits 278 1,150 (783) (89) 1,201 (472) 1,766 (93) Time deposits 25,329 25,050 216 63 35,012 12,874 17,739 4,399 Short-term borrowings 8,436 13,151 (3,254) (1,461) 18,877 10,713 4,027 4,137 Long-term debt (1,139) (991) (201) 53 282 (1,452) 2,986 (1,252) - ------------------------------------------------------------------------------------------------------------------------- Total 32,340 39,307 (5,453) (1,514) 56,089 20,252 28,851 6,986 - ------------------------------------------------------------------------------------------------------------------------- Net interest income $29,263 $32,285 $(2,436) $ (586) $19,440 $ 25,659 $ (4,937) $(1,282) =========================================================================================================================
(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. Mix Change = change in volume times change in rate. (2) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned as actual interest earned times 145%. Tax equivalent average rate is tax equivalent interest earned divided by average volume. (3) Dividends earned and average rates 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 dividends divided by average volume. NONINTEREST INCOME BancGroup derives approximately 55% of its noninterest income from mortgage banking related activities with the remaining 45% from traditional retail banking services including various deposit account charges, safe deposit box rentals and credit life commissions. Prior to the CMC acquisition on February 17, 1995, BancGroup had not acquired other well-established ancillary income sources, such as trust operations, mortgage banking or credit card services with any of its acquisitions. One of the most important goals from 1994 through 1996 has been to increase noninterest income. The impact of this acquisition is evident by the volume of revenue included in the category entitled mortgage servicing fees. CMC has servicing and subservicing agreements under which it services 132,000, 118,000 and 83,000 mortgage loans with principal balances of $10.6 billion, $9.1 billion and $6.4 billion on December 31, 1996, 1995 and 1994, respectively. This servicing portfolio generated servicing fee and late charge income of approximately $28.1 million, $23.8 million and $18.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. CMC, through its wholesale and retail offices, originated $1.5 billion, $1.1 billion and $1.2 billion in residential real estate loans in 1996, 1995, and 1994, respectively. Noninterest income from deposit accounts is significantly affected by competitive pricing on these services and the volume of noninterest-bearing accounts. During 1996 and 1995 average noninterest demand accounts (excluding CMC custodial deposits) increased 10.6% and 12.8%, respectively. This increase in volume and increases in service fee rates resulted in an 18% increase in service charge income in 1996 and a 15% increase in 1995. Other charges, fees, and commissions increased $503,000 (13%) in 1996 and $486,000 (14%) in 1995. The increase is primarily from credit card related fees and official check commissions. BancGroup, through CMC, enters into offers to extend credit for mortgage loans to customers and into obligations to THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 27 15 deliver and sell originated or acquired mortgage loans to permanent investors. Sales of loans servicing released by CMC resulted in income of $330,000, $988,000, and $539,000 for 1996, 1995 and 1994, respectively. A majority of the change in other income from 1995 to 1996 is due primarily to an increase in the gain on sale of mortgage loans held for sale of $2.6 million as well as increases in income from safe deposit boxes, ATM transaction fees, check card fees and income from investment sales. BancGroup has an investment sales operation (primarily mutual funds and annuities). Fee income generated from this and other investment service activities totaled $929,000, $649,000 and $990,000 in 1996, 1995 and 1994, respectively. Securities gains and losses in each of the three years were not significant. While certain securities are considered available for sale, BancGroup currently intends to hold substantially all of its securities portfolio for investment purposes. Realized gains or losses in this portfolio are generally the result of calls of securities or sales of securities within the six months prior to maturity.
INCREASE (DECREASE) ------------------------------------- YEARS ENDED DECEMBER 31 1996 1995 ----------------------------------- COMPARED COMPARED (IN THOUSANDS) 1996 1995 1994 TO 1995 % TO 1994 % - --------------------------------------------------------------------------------------------------------------------- Noninterest income: Mortgage servicing $28,067 $23,787 $22,216 $ 4,280 18% $1,571 7% Service charges on deposit accounts 19,415 16,517 14,365 2,898 18 2,152 15 Other charges, fees, and commissions 4,403 3,900 3,414 503 13 486 14 Other income 14,034 9,635 7,597 4,399 46 2,038 27 - ---------------------------------------------------------------------------- ------- ------ Subtotal 65,919 53,839 47,592 12,080 22 6,247 13 Other noninterest income items: Securities gains, net 139 33 84 106 (51) Gain (loss) on disposal of other real estate and repossessions (76) 121 76 (197) 45 - ---------------------------------------------------------------------------- ------- ------ Total noninterest income $65,982 $53,993 $47,752 $11,989 22% $6,241 13% - ---------------------------------------------------------------------------- ------- ------ - ---------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE The impact of the acquisitions completed from 1994 through 1996 is reflected most noticeably in the increase in net interest income, discussed previously, as well as the 17.4% increase from 1995 to 1996 in noninterest expense as shown in the schedule following. The decrease in noninterest expense as a percent of average assets from 3.76% in 1994 to 3.34% in 1995 to 3.09% in 1996 is a direct result of the increased efficiency generated by this growth. The foundation for the efficiencies gained in 1996 and 1995 was laid in 1989 and 1990 when the Company established its current operating structure (regional and community banks supported by centralized backshop operations). Salaries and benefits decreased $1.9 million or 4% in 1995 and increased $6.4 million or 13% in 1996. The increase in 1996 is primarily due to increased staffing levels as a result of acquisitions. In addition to the increase in expenses related to growth, advertising and public relations expenses have increased $1,233,000 or 32% and $1,060,000 or 39% in 1996 and 1995, respectively, in concentrated efforts to expand the Company's customer base and take advantage of increased market share in certain key markets. Additional expense was also incurred in the marketing of new products and services such as the check card, telephone banking and computer banking. Other expenses in 1996, 1995 and 1994 include approximately $1,400,000, $1,700,000 and $1,200,000, respectively associated with various acquisition efforts. 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. The amount of costs deferred increased from $5 million in 1994 to $9 million in 1995 and $12 million in 1996 due to changes in the mix of loans and increases in the number of loans closed. Cost control and the capacity to absorb future growth continue to be a major focus for management. The Company has taken several steps to achieve this goal and to attempt to improve BancGroup's efficiency ratio. The incentive plan and its profit-based rewards represent a key element in the plan. During 1994 BancGroup also increased its data processing capacity through a major upgrade. The cost of this upgrade is reflected in equipment expenses. Finally, and most importantly, in 1995 the Company invested in a reengineering study. This study reviewed the Company's retail delivery systems to better position the company for future growth, product expansion and customer service. The cost of the study (approximately $2 million) was included in other expense. The Company's deposits are insured by the Federal Deposit Insurance Corporation in two separate funds: the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). Legislation was approved in Congress to recapitalize the SAIF with a special one-time charge of 65.7 basis 28 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 16 points, after adjusting for certain allowances. This recapitalization allows a reduction in the current .23% average annual premium rate. The assessment resulted in a pre-tax charge of $3.8 million in 1996. A significant number of the computer systems are not programmed to consider the start of a new century. Some of BancGroup's systems will require modification to process year 2000 transactions. Management is aware there will be one-time expenses related to this transition but the amount is not readily determinable at this time. Identification of the systems affected and the related costs is an active 1997 project.
INCREASE (DECREASE) --------------------------------------- YEARS ENDED DECEMBER 31 1996 1995 ------------------------------ COMPARED COMPARED (IN THOUSANDS) 1996 1995 1994 TO 1995 % TO 1994 % - ---------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits $ 55,074 $ 48,668 $ 50,548 $ 6,406 13% $(1,880) (4)% Net occupancy expense 12,013 10,605 10,688 1,408 13 (83) (1) Furniture and equipment expense 11,231 9,540 8,074 1,691 18 1,466 18 Amortization of mortgage servicing rights 12,522 9,095 6,078 3,427 38 3,017 50 Amortization of intangible assets 2,029 1,525 1,353 504 33 172 13 FDIC assessment 2,231 3,767 5,293 (1,536) (41) (1,526) (29) SAIF special assessment 3,817 -- -- 3,817 100 -- -- Stationery, printing, and supplies 3,469 3,080 3,084 389 13 (4) -- Postage 2,241 1,901 1,682 340 18 219 13 Telephone 4,284 3,429 2,915 855 25 514 18 Insurance 1,404 1,417 1,690 (13) (1) (273) (16) Legal fees 2,778 2,232 2,949 546 24 (717) (24) Advertising and public relations 5,029 3,796 2,736 1,233 32 1,060 39 Other 25,346 23,149 18,587 2,197 9 4,562 25 - --------------------------------------------------------------------------- -------- ------- Total noninterest expense $143,468 $122,204 $115,677 $ 21,264 17% $ 6,527 6% - --------------------------------------------------------------------------- -------- ------- Noninterest expense to Average Assets 3.09%* 3.34% 3.76% - --------------------------------------------------------------------------- * Excluding one-time SAIF special assessment - ----------------------------------------------------------------------------------------------------------------------
INCOME TAXES The provision for income taxes and related items are as follows:
Tax Provision ------------------------------- 1996 $29,463,000 1995 23,240,000 1994 15,829,000
BancGroup is subject to federal and state taxes at combined rates of approximately 38% 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, and nondeductible amortization of goodwill. Management's goal is to minimize income tax expense and maximize cash yield on earning assets by increasing or decreasing its tax exempt securities and/or investment in preferred and common stock. Accordingly, BancGroup's investment in tax exempt securities was adjusted in 1994, 1995 and 1996. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 29 17 REVIEW OF FINANCIAL CONDITION OVERVIEW Ending balances of selected components of the Company's balance sheet changed from December 31, 1995 to December 31, 1996 as follows:
(In Thousands) Increase Amount % - ------------------------------------------------------------ Total assets $668,138 15.9 Securities available for sale and investment securities 83,803 16.8 Mortgage loans held for sale 46,947 42.5 Loans, net of unearned income 504,909 15.9 Deposits 379,409 11.8 - ------------------------------------------------------------
Management continuously 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 1994 through 1996 have been: - An increase in residential mortgage loans from 38.2% of total loans at December 31, 1994 to 45.9% at December 31, 1996. This increase has resulted from the acquisition of thrifts as well as from loans CMC produced for the Company's portfolio. BancGroup has continued to place emphasis on these loans as a major product line which has a relatively low loss ratio. - Internal loan growth of 17% in 1996 excluding acquisitions. - A 14% increase in 1996 in average noninterest bearing demand deposits substantially from internal growth. - Maintenance of high asset quality and reserve coverage of nonperforming assets. Nonperforming assets were .84%, .83% and .96% of related assets at December 31, 1996, 1995 and 1994. Net charge-offs were .18%, .15% and .09% of average loans over the same periods. The allowance for possible loan losses was 1.23% at December 31, 1996, providing 204% coverage of non-performing loans (nonaccrual and renegotiated). - Increase in tier one leverage ratios from 6.43% at December 31, 1994 to 6.65% at December 31, 1996. - An increase in the loan to deposit ratio from 93.9% at December 31, 1994 to 102.7% at December 31, 1996. Federal Home Loan Bank borrowings continue to be a major source of funding allowing the Company greater funding flexibility. - Increase of $47 million in mortgage loans held for sale during 1996. 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 to improved earnings. This goal is achieved in various ways as outlined below: - Management's emphasis, within all of BancGroup's banking regions, is on loan growth in accordance with local market demands and the lending experience and expertise in the regional and county banks. Management believes that its strategy of meeting local demands and utilizing local lending expertise has proven successful. Management also believes that any existing concentrations of loans, whether geographically, by industry or by borrower do not expose BancGroup to unacceptable levels of risk. - BancGroup has a significant concentration of residential real estate loans representing 45.9% of total loans. These loans are substantially all mortgages on single-family, owner occupied properties and therefore have minimal credit risk. While a portion of these loans were acquired through acquisitions, the Company has continued to grow this portfolio with a $237 million or 16% increase in these loans in 1996. BancGroup securitized approximately $88 million of residential mortgage loans during 1996. Excluding this securitization, residential real estate loans increased $325 million or 22%. Residential mortgage loans are predominately adjustable rate loans and therefore have not resulted in any material change in the Company's rate sensitivity. - The most significant concentration is in loans collateralized by commercial real estate with loan balances of $797,341,000, $692,550,000, $626,618,000, $514,299,000 and $404,836,000 at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. BancGroup's commercial real estate loans are spread geographically throughout Alabama and other areas including metropolitan Atlanta, Georgia and Central Florida with no more than 30% of these loans in any one geographic region. The Alabama economy experiences a generally slow but steady rate of growth, while Georgia and Florida are experiencing higher rates of growth. For this reason, real estate values in Alabama have not been inflated due to excessive speculation. Due to BancGroup's lending areas in Georgia and Florida, real estate values have not been inflated due to excessive inflation. BancGroup's real estate related loans continue to perform at acceptable levels. - BancGroup holds mortgage loans on a short-term basis (generally less than ninety days) while these loans are being packaged for sale in the secondary market. These loans are classified as mortgage loans held for sale with balances totaling $157,433,000, $110,486,000, and $60,726,000, at December 31, 1996, 1995, and 1994, respectively. There is minimal credit risk associated with these loans. The decrease in mortgage loans held for sale during 1994 and subsequent increases in 1995 and 1996 are directly related to the fluctuation in long-term interest rates and its related 30 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 18 impact on mortgage loan refinancing. These loans are funded principally with short-term borrowings, providing a relatively high margin for these funds. - As discussed more fully in subsequent sections, management has determined to maintain adequate liquidity and liquidity sources. BancGroup has arranged funding sources in addition to customer deposits which provide the capability for the Company to exceed a 100% loan to deposit ratio and maintain adequate liquidity. - Internal loan growth has been a major factor in the Company's increasing earnings with growth rates of 16.8% in 1996, 24.3% in 1995, 20.3% in 1994, and 12.1% in 1993, excluding acquisitions.
- ---------------------------------------------------------------------------------------------------------------- GROSS LOANS BY CATEGORY (In thousands) DECEMBER 31 - ---------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 492,619 $ 436,791 $ 372,104 $ 308,954 $ 274,404 Real estate--commercial 797,341 692,550 626,618 514,299 404,836 Real estate--construction 402,502 335,645 227,645 172,367 131,835 Real estate--residential 1,688,299 1,451,338 900,318 760,176 317,511 Installment and consumer 247,195 215,043 185,272 166,126 158,451 Other 53,152 44,746 42,015 34,996 42,401 - ---------------------------------------------------------------------------------------------------------------- Total loans $ 3,681,108 $ 3,176,113 $ 2,353,972 $ 1,956,918 $ 1,329,438 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- Percent of loans in each category to total loans: Commercial, financial, and agricultural 13.4% 13.8% 15.8% 15.8% 20.6% Real estate--commercial 21.7 21.8 26.6 26.3 30.5 Real estate--construction 10.9 10.6 9.7 8.8 9.9 Real estate--residential 45.9 45.7 38.2 38.8 23.9 Installment and consumer 6.7 6.8 7.9 8.5 11.9 Other 1.4 1.3 1.8 1.8 3.2 - ---------------------------------------------------------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% 100.0% - ----------------------------------------------------------------------------------------------------------------
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 have been and will continue to be to focus on shorter term maturities and floating or adjustable rate loans. At December 31, 1996, approximately 57.2% of loans were floating rate or adjustable 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, particularly with respect to interest rates, of future events make it difficult to predict the actual maturities. BancGroup has not maintained records related to trends of early pay-off since management does not believe such trends would present any significantly more accurate estimate of actual maturities than the contractual maturities presented. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 31 19
LOAN MATURITY/RATE SENSITIVITY (In thousands) DECEMBER 31, 1996 - ------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY LOANS MATURING MATURING RATE SENSITIVITY OVER 1 YEAR ------------------------------- ------------------- -------------------- WITHIN 1-5 OVER 1 YEAR YEARS 5 YEARS FIXED FLOATING FIXED FLOATING - ------------------------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $244,537 $ 190,437 $ 57,645 $ 228,681 $ 263,938 $ 167,306 $ 80,776 Real estate--commercial 199,096 438,874 159,371 449,898 347,443 370,795 227,450 Real estate--construction 277,147 102,222 23,133 102,831 299,671 39,335 86,020 Real estate--residential 152,489 225,812 1,309,998 523,322 1,164,977 442,242 1,093,568 Installment and consumer 75,912 158,981 12,302 232,563 14,632 168,360 2,923 Other 12,808 8,213 32,131 38,910 14,242 31,785 8,559 - ------------------------------------------------------------------------------------------------------------------- Total loans $961,989 $1,124,539 $1,594,580 $1,576,205 $2,104,903 $1,219,823 $1,499,296 - -------------------------------------------------------------------------------------------------------------------
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 review of loans and through a company wide senior credit administration function. This function participates in the loan approval process with the regional banks and provides an independent review and grading of loan credits on a continual basis. 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, 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% loan to value ratios. Based on the above policies, procedures and loan review program, BancGroup determines its allowance for possible loan losses and the amount of provision for loan losses. The allowance for possible 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 possible loan losses charged to income, which increases the allowance, and (4) the allowance for loan losses of acquired banks. In determining the provision for possible loan losses in an effort to evaluate portfolio risks, 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 current and anticipated economic conditions. The 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 the most flexibility in their timely disposition. LOAN LOSS EXPERIENCE During 1996 the ratio of net charge-offs to average loans increased to .18% from .15% in 1995. This increase has been impacted by the increase in average loans and also by an increase of approximately $2.2 million in actual net charge-offs. The increase in net charge-offs in 1996 is primarily due to the partial charge-off of seven large credits in different geographic locations. 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 loans in 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 rather been on establishing reserves related to an earlier identification of potential problem loans. Management is committed to maintaining adequate reserve levels to absorb future losses. This commitment has allowed BancGroup to weather economic uncertainties without disruption of its earnings. 32 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 20
SUMMARY OF LOAN LOSS EXPERIENCE (IN THOUSANDS) YEARS ENDED DECEMBER 31 - --------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------- Allowance for possible loan losses-- January 1 $ 41,490 $ 36,985 $ 30,946 $ 20,598 $ 17,295 Charge-offs: Commercial, financial, and agricultural 2,602 2,781 2,017 3,179 3,346 Real estate--commercial 1,932 339 1,143 530 771 Real estate--construction 1,774 44 2 957 7 Real estate--residential 617 372 372 569 730 Installment and consumer 3,135 2,603 1,751 1,853 2,871 Other 594 163 168 7 83 - --------------------------------------------------------------------------------------------------------------- Total charge-offs 10,654 6,302 5,453 7,095 7,808 - --------------------------------------------------------------------------------------------------------------- Recoveries: Commercial, financial, and agricultural 888 777 1,686 637 524 Real estate--commercial 1,317 26 202 44 49 Real estate--construction 1 11 12 25 -- Real estate--residential 687 161 77 102 171 Installment and consumer 1,497 1,307 1,465 1,502 1,396 Other 85 46 43 7 15 - --------------------------------------------------------------------------------------------------------------- Total recoveries 4,475 2,328 3,485 2,317 2,155 - --------------------------------------------------------------------------------------------------------------- Net charge-offs 6,179 3,974 1,968 4,778 5,653 Addition to allowance charged to Operating expense 9,121 7,350 7,506 8,850 8,956 Allowance added from bank acquisitions 738 1,129 501 6,276 -- - --------------------------------------------------------------------------------------------------------------- Allowance for possible loan losses-- December 31 $ 45,170 $ 41,490 $ 36,985 $ 30,946 $ 20,598 - --------------------------------------------------------------------------------------------------------------- Loans (net of unearned income) December 31 $3,680,415 $3,175,506 $2,352,870 $1,963,062 $1,330,928 Ratio of ending allowance to ending loans (net of unearned income) 1.23% 1.31% 1.57% 1.58% 1.55% Average loans (net of unearned income) $3,436,529 $2,708,633 $2,138,371 $1,494,053 $1,273,486 Ratio of net charge-offs to average loans (net of unearned income) 0.18% 0.15% 0.09% 0.32% 0.44% Allowance for loan losses as a percent of nonperforming loans (nonaccrual and renegotiated) 204% 265% 292% 284% 224% - ---------------------------------------------------------------------------------------------------------------
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 33 21 NONPERFORMING ASSETS BancGroup classifies problem loans into four categories: nonaccrual, past due, renegotiated and other potential problems. When management determines a loan no longer meets the criteria for performing loans and collection of interest appears doubtful, the loan is placed on nonaccrual status. All loans that are 90 days past due are considered nonaccrual unless they are adequately collateralized, they are in the process of collection, and there is reasonable assurance of full collection of principal and interest. BancGroup's policy is also to charge off installment loans 120 days past due unless they are in the process of foreclosure and are adequately collateralized. Management closely monitors all loans which are contractually 90 days past due, renegotiated or nonaccrual. These loans are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------ NONPERFORMING ASSETS DECEMBER 31 - ------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ Aggregate loans for which interest is not being accrued $21,118 $13,840 $ 9,263 $ 9,472 $ 7,838 Aggregate loans renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial condition of the borrower 1,002 1,800 3,386 1,425 1,346 - ------------------------------------------------------------------------------------------------------------------ Total nonperforming loans* 22,120 15,640 12,649 10,897 9,184 Other real estate and in-substance foreclosure 8,563 10,592 9,873 16,399 10,382 Repossessions 314 171 81 88 103 - ------------------------------------------------------------------------------------------------------------------ Total nonperforming assets* $30,997 $26,403 $22,603 $27,384 $19,669 - ------------------------------------------------------------------------------------------------------------------ Aggregate loans contractually past due 90 days for which interest is being accrued $ 3,805 $ 1,381 $ 2,559 $ 2,218 $ 1,450 Total nonperforming loans as a percent of net loans 0.60% 0.49% 0.54% 0.56% 0.69% Total nonperforming assets as a percent of net loans, other real estate and repossessions 0.84% 0.83% 0.96% 1.38% 1.47% Total nonaccrual, renegotiated and past due loans as a percent of total loans 0.70% 0.54% 0.65% 0.67% 0.80% Allowance for loan loss as a percent of nonperforming loans (nonaccrual and renegotiated) 204% 265% 292% 284% 224% - ------------------------------------------------------------------------------------------------------------------ * 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. On December 31, 1993 BancGroup completed the acquisition of First AmFed Corporation. With this acquisition the Company recorded $11.2 million in other real estate, $1.6 million in nonaccrual loans, and $.5 million in 90 day past due loans that were still accruing. The carrying value of these nonperforming assets was adjusted at the acquisition date to their current estimated fair values based on BancGroup's intention to dispose of them in the most expeditious and profitable manner. Excluding these nonperforming assets acquired with First AmFed, the Company's nonperforming asset ratio would have been .74% at December 31, 1993 compared to 1.38% noted above. During 1994 a substantial portion of these problem assets, particularly other real estate, was disposed of and the nonperforming asset ratio was reduced to .96%. Nonaccrual loans at December 31, 1996 were $21.1 million compared to $13.8 million at December 31, 1995. This increase in nonaccrual loans is primarily due to four large credits in different geographic locations. Management, through its loan officers, internal loan review staff and external examinations by regulatory agencies, has identified approximately $127 million of potential problem loans not included above. The status of these loans is reviewed at least quarterly by loan officers and the centralized loan review function and annually by regulatory agencies. In connection with such reviews, collateral values are updated where 34 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 22 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, 1996 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 without disruption of earnings trends. 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 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 on nonaccrual loans was $800,000, $605,000, $414,000, $93,000 and $316,000 in 1996, 1995, 1994, 1993 and 1992, respectively. Interest income foregone on such loans was approximately $1,320,000, $905,000, $786,000, $562,000 and $279,000 in 1996, 1995, 1994, 1993 and 1992, respectively. On January 1, 1995, BancGroup adopted SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan--Income Recognition Disclosure. As a result, the following loans were considered impaired as of December 31, 1996. See Notes 1 and 4 to the consolidated financial statements for further discussion.
Carrying (In thousands) Balance Reserve Value - ----------------------------------------------------- Commercial, financial, and agricultural $2,807 $1,443 $1,364 Real Estate--Commercial 5,706 1,015 4,691 Real Estate--Construction 14,143 3,390 10,753 Real Estate--Residential 5,166 1,420 3,746 Installment and Consumer 977 386 591 - ----------------------------------------------------- Total impaired loans $28,799 $7,654 $21,145 - -----------------------------------------------------
- -------------------------------------------------------------------------------- ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES Allocations of the allowance for possible loan losses are made on an individual loan basis for all identified potential problem loans with a percent age 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 the respective historical charge-off experience and risk within each loan type. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES DECEMBER 31 - -------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- Balance at end of period applicable to: Commercial, financial, and agricultural $ 8,290 $ 8,020 $ 6,999 $ 6,235 $ 5,087 Real estate--commercial 14,330 13,662 12,168 11,112 6,030 Real estate--construction 9,410 7,233 3,636 1,830 2,077 Real estate--residential 8,441 7,256 8,837 7,182 3,906 Installment and consumer 3,406 3,076 2,844 2,754 2,327 Other 1,293 2,243 2,501 1,833 1,171 - -------------------------------------------------------------------------------------------------------------------------- Total $ 45,170 $ 41,490 $ 36,985 $ 30,946 $ 20,598 - --------------------------------------------------------------------------------------------------------------------------
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 35 23 SECURITIES BancGroup determines on a daily basis 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 forecast, an investment strategy is determined. Significant elements of this strategy as of December 31, 1996 include: - BancGroup's investment in U.S. Treasury securities and obligations of U.S. government agencies is substantially all pledged against public funds deposits. - Investment alternatives which maximize the highest 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 investment strategy also incorporates high-grade preferred stocks when the tax equivalent yield on these investments provides an attractive alternative. The yields on these preferred stocks are adjusted on a short-term basis and provide tax advantaged income without long-term interest rate risk. - The maturities of investment alternatives are determined in consideration of the yield curve, liquidity needs and the Company's asset/liability gap position. As interest rates increased and the Company's asset/liability gap position allowed, maturities were increased during 1994 to the 5-7 year range and reduced to the 2-3 year range in 1995 and the 3-5 year range in 1996. - The risk elements associated with the various types of securities are also considered in determining investment strategies. U.S. Treasury and 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 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, 1996 or 1995 does not include any interest-only strips and the amount of unamortized premium on mortgage backed securities is approximately $410,000. The recoverability of BancGroup's investment in mortgage-backed securities is reviewed periodically, and where necessary, appropriate adjustments are made to income for impaired values. - 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 established when necessary. 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 increased from $215 million at December 31, 1995 to $307 million at December 31, 1996. Securitization of residential mortgage loans represented $88 million of the $92 million increase in 1996. An increase from $104 million at December 31, 1994 to $215 million at December 31, 1995 was partially a result of a reclassification from investment securities of $57 million in December 1995 as allowed by the Financial Accounting Standards Board to realign the portfolios without risk of penalties and $26 million from acquisitions. The Company took this opportunity to reclassify certain structured notes, corporate and municipal bonds to allow for possible disposition and certain treasury notes for liquidity purposes.
SECURITIES BY CATEGORY - ------------------------------------------------------------------ CARRYING VALUE AT DECEMBER 31 - ------------------------------------------------------------------ (In thousands) 1996 1995 1994 - ------------------------------------------------------------------ Investment securities: U.S. Treasury securities and obligations of U.S.government agencies $237,764 $226,621 $288,554 Obligations of state and political subdivisions 37,284 46,337 44,489 Other 752 11,037 29,280 - ------------------------------------------------------------------ Total $275,800 $283,995 $362,323 - ------------------------------------------------------------------ Securities available for sale: U.S. Treasury securities and obligations of U.S. government agencies $292,743 $199,820 $83,752 Obligations of state and political subdivisions 6,812 7,021 101 Other 7,280 7,996 19,829 - ------------------------------------------------------------------ Total $306,835 $214,837 $103,682 - ------------------------------------------------------------------
At December 31, 1996, there was no single issuer, with the exception of U.S. government and U.S. government agencies, where the aggregate book value of these securities exceeded ten percent of shareholders' equity or $34.3 million. 36 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 24 MATURITY DISTRIBUTION OF SECURITIES
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS ------------------ -------------------- ------------------- ------------------- AVERAGE AVERAGE AVERAGE AVERAGE (in thousands) AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE - ------------------------------------------------------------------------------------------------------------------------- Investment securities: U.S. Treasury securities and obligations of U.S. government agencies $ 52,691 6.16% $113,929 6.31% $ -- -- $ 500 7.25% Mortgage-backed securities 2,625 6.64 50,991 6.79 1,396 8.16% 15,632 7.78 Obligations of state and political subdivisions (1) 6,639 7.45 16,423 6.96 12,684 8.32 1,537 8.62 Other (2) 199 6.08 421 7.50 133 7.49 -- -- -------- -------- ------- ------- Total $ 62,154 6.31% $181,764 6.50% $14,213 8.30% $17,669 7.83% - ------------------------------------------------------------------------------------------------------------------------- Securities available for sale (3): U.S. Treasury securities and obligations of U.S. government agencies $ 86,302 6.08% Mortgage-backed securities 169,583 6.83 Obligations of state and political subdivisions (1) 4,416 6.68 Other 7,405 7.46 -------- Total $267,706 6.61% - -------------------------------------------------------
(1) The weighted average yields are calculated on the basis of the cost and 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 35%. The taxable equivalent adjustment represents the annual amounts of income from tax exempt obligations multiplied by 145%. (2) This category excludes all corporate common and preferred stocks since these instruments have no maturity date. (3) 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.) - -------------------------------------------------------------------------------- DEPOSITS BancGroup's deposit structure consists of the following:
DECEMBER 31 % OF TOTAL - ----------------------------------------------------------------------------------------- (In thousands) 1996 1995 1996 1995 - ----------------------------------------------------------------------------------------- Noninterest-bearing demand deposits $ 594,385 $ 544,805 16.6% 17.0% Interest-bearing demand deposits 595,024 583,371 16.6 18.2 Savings deposits 359,533 289,932 10.0 9.1 Certificates of deposits less than $100,000 1,379,362 1,194,736 38.5 37.3 Certificates of deposits more than $100,000 390,169 355,153 10.9 11.1 IRAS 218,161 189,532 6.1 5.9 Open time deposits 47,035 46,731 1.3 1.4 - ----------------------------------------------------------------------------------------- Total deposits $3,583,669 $3,204,260 100.0% 100.0% =========================================================================================
The growth in deposits and the mix of deposits has been most significantly impacted in 1995 and 1996 by acquisitions in late 1995 of Mt. Vernon Financial and in mid 1996 of Dothan Federal both of which were thrifts. As such, the level of noninterest-bearing demand deposits was less than 3% of the total deposits acquired with the major portion of acquired deposits in certificates of deposits. Noninterest-bearing demand deposits have increased $49.6 million (9%) from December 31, 1995 to December 31, 1996. As noted above, the acquired thrifts did not add any significant amounts of noninterest-bearing demand accounts. However, the presence of such branches and customer relationships has attracted demand deposit accounts after the mergers. The Company also acquired two commercial banks in 1995, Brundidge Banking Company and Farmers and Merchants Bank, with approximately $12 million in non-interest bearing deposits at acquisition. The majority of the noninterest-bearing demand deposit growth is attributable to the Company's focus on developing customer relationships and sales efforts. BancGroup has attempted through its acquisitions and branch expansion programs to increase its market presence in the State of Alabama and expand into other growth markets in the Southeast, the first of which was Atlanta in 1995 followed by Orlando in 1996. This expansion is continuing with additional acquisitions closing in Florida and Georgia in early 1997. 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 COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 37 25 During 1995 and 1996 BancGroup established retail banking, training and policies and procedures departments as well as continuing its branch automation project to reinforce the Company's goal of providing the customer with the best possible service. In connection with this goal, several other initiatives have been undertaken, including an electronic banking division which includes home banking, business banking, automatic teller, credit card and check card services. The Company has increased its automatic teller machine services by expanding into 67 WalMart locations throughout Alabama. Full service banking is offered in eleven WalMart locations with ten located in Alabama and one in Tennessee. BancGroup is continuing its sales of investment products, such as mutual funds and annuities to customers seeking alternatives to deposit products. The overall goal of these steps has been to efficiently provide customers with the financial products they need and desire. In 1995 the Company initiated a 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 December 31, 1996 and 1995, $138 million and $75 million, respectively of CD's were outstanding under this program. - -------------------------------------------------------------------------------- SHORT-TERM BORROWINGS Short-term borrowings were comprised of the following at December 31, 1996, 1995 and 1994:
(In thousands) 1996 1995 1994 ============================================================ Federal funds purchased and securities sold under repurchase agreements $115,512 $131,115 $ 145,419 Federal Home Loan Bank borrowings 715,000 465,000 210,050 Other short-term borrowings 2,017 1,141 1,131 - ------------------------------------------------------------ Total $832,529 $597,256 $356,600 ============================================================
BancGroup has available Federal Funds lines from upstream banks including the Federal Home Loan Bank (FHLB) totaling $515 million at December 31, 1996. In addition, correspondent banks and customers with repurchase agreements have provided a consistent base of short-term funds. BancGroup became a member of the FHLB in late 1992. As a member of the FHLB, BancGroup has availability of up to $1 billion from the FHLB on either a short or long-term basis excluding funds available through the federal funds line. CMC has an additional $118 million available through a warehouse line with FHLB that is collateralized by mortgage loans held for sale. Short-term borrowings, including FHLB borrowings, have been used to fund short-term assets, primarily mortgage loans held for sale, and loans. FHLB borrowings have been used during 1996 and 1995 to fund loan growth. As discussed more fully in the "Liquidity and Interest Sensitivity" section of this report, the line of credit with the FHLB is considered a primary source of funding for the Company's asset growth. - -------------------------------------------------------------------------------- LIQUIDITY AND INTEREST 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 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 investment securities mature they are generally reinvested in new investment securities or assets held for sale. Financing activities generally provide funding for the growth in loans and investment 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 1992 through 1996 the significant changes in BancGroup's cash flows have centered around loan growth and fluctuations in mortgage loans held for sale. Loan growth of $548 million in 1996 and $590 million in 1995 has been one of the principal uses of cash in both years. In 1996, BancGroup securitized approximately $88 million of residential mortgage loans and repurchased the securities. Mortgage loans held for sale increased in 1996, using $47 million in funds. As noted in previous sections, short-term borrowings increased $235 million in 1996 and were used to fund loan growth. Management has chosen to fund short-term fluctuations in the 38 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 26 volume of mortgage loans held for sale with short-term borrowings as opposed to increasing rate sensitive deposits. Deposit growth of $308 million with $63 million from the previously discussed brokered CD program provided an additional source of funding for internal loan growth. As noted previously, the composition of the Company's loan portfolio has changed over the past three years. BancGroup at December 31, 1996 had $1.7 billion of residential real estate loans. These loans provide collateral for the current $1 billion credit availability at the FHLB. The FHLB unused credit capacity, $281 million at December 31, 1996, provides the Company significant flexibility in asset/liability management, liquidity and deposit pricing. In January 1996, the Company called $7.5 million of its 1985 subordinated debentures which had a maturity date of 2000. As a result, 806,598 shares of BancGroup stock were issued and cash was paid for the remaining debentures. In December 1996, BancGroup entered into a two year revolving line of credit for $35 million and a term loan with a maximum principal amount of $15.5 million. This line of credit provides an additional source of funding for acquisition related activities. In January 1997, BancGroup issued $70 million in Trust Preferred Securities. These securities qualify as Tier I Capital, will be shown as long-term debt in the consolidated financial statements, and carry an 8.92% interest rate. A portion of the proceeds of the offering were utilized to pay off the term note and revolving debt outstanding. The remainder of the proceeds will be used for acquisitions and other business purposes. 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 BancGroup's parent only statement of cash flows were $1.8 million for the payment of interest on debt, $2.4 million for principal payment on term notes (See Note 9 to the consolidated financial statements) and $16.2 million for the payment of dividends. The parent company's primary source of funds was $14.4 million in dividends received from its banking subsidiaries. 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 $104 million of retained earnings plus certain 1997 earnings would be available for distribution to BancGroup, from its subsidiaries, as dividends in 1997 without prior approval from the respective regulatory authorities. BancGroup anticipates that the cash flow needs of the parent company are well below the regulatory dividend restrictions of its subsidiary banks. At December 31, 1996, BancGroup's liquidity position was adequate with loan maturities of $962 million, or 26% of the total loan portfolio, due within one year. Securities totaling $330 million or 57% of the total portfolio also had maturities within one year or have been classified as available for sale. As of December 31, 1996 there were, however, no current plans to dispose of any significant portion of these securities. In addition BancGroup has $281 million in additional borrowing capacity at the FHLB and CMC has $118 million available through a warehouse line with FHLB. 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. The interest sensitivity schedule reflects an 9.4% negative gap at 12 months; therefore, BancGroup has a greater exposure to net income if interest rates increase. Based on this schedule, management believes that neither an increase or decrease in interest rates of 100 basis points would result in a material swing in net income. Management has managed the asset/liability position of the bank through traditional sources. BancGroup does however, use off balance sheet instruments for hedging purposes to limit its risk associated with the sale of mortgage loans by providing sales commitments on all loans funded and held for sale. (See Note 6 to the consolidated financial statements.) The following table summarizes BancGroup's interest rate sensitivity as of December 31, 1996. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 39 27
AT DECEMBER 31, 1996 - ----------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVE WITHIN - ----------------------------------------------------------------------------------------------------------------- TOTAL 0-90 91-180 181-365 1-5 OVER (IN THOUSANDS) BALANCE DAYS DAYS DAYS YEARS 5 YEARS ================================================================================================================= Rate Sensitive Assets: Federal funds sold and resale agree- ments and interest bearing deposits $ 7,603 $ 7,603 $ -- $ -- $ -- $ -- Investment securities 275,800 134,928 15,644 42,272 68,139 14,817 Securities available for sale 306,835 52,765 304 4,878 232,192 16,696 Mortgage loans held for sale 157,433 157,433 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- Loans, net of unearned income 3,680,415 1,241,805 197,353 444,306 1,281,769 515,182 Allowance for possible loan losses (45,170) (15,241) (2,422) (5,453) (15,731) (6,323) - ----------------------------------------------------------------------------------------------------------------- Net loans 3,635,245 1,226,564 194,931 438,853 1,266,038 508,859 Nonearning assets 487,416 -- -- - -- 487,416 ================================================================================================================= Total Assets $4,870,332 $1,579,293 $ 210,879 $ 486,003 $1,566,369 $1,027,788 ================================================================================================================= Rate Sensitive Liabilities: Interest-bearing demand deposits $ 595,024 $ 362,053 $ -- $ -- $ -- $ 232,971 Savings deposits 359,533 228,581 -- 408 -- 130,544 Certificates of deposits less than $100,000 1,379,362 399,887 206,440 304,821 467,309 905 Certificates of deposits more than $100,000 390,169 160,911 56,748 94,988 77,422 100 IRAS 218,161 75,982 25,683 30,877 85,365 254 Open time deposits 47,035 304 200 45,825 706 -- Short-term borrowings 832,529 672,529 -- 50,000 110,000 -- Long-term debt 37,667 15,460 295 403 1,484 20,025 Noncosting liabilities & equity 1,010,852 -- -- -- -- 1,010,852 ================================================================================================================= Total Liabilities & Equity $4,870,332 $1,915,707 $ 289,366 $ 527,322 $ 742,286 $1,395,651 ================================================================================================================= Gap $ -- $ (336,414) $ (78,487) $ (41,319) $ 824,083 $ 367,863 ================================================================================================================= Cumulative Gap $ -- $ (336,414) $(414,901) $ (456,220) $ 367,863 $ -- =================================================================================================================
At the bottom of the table is the 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. 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 has 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 $700 million with a corresponding cumulative gap at one year of negative $820 million. 40 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 28 CAPITAL ADEQUACY AND 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. BancGroup's dividend pay-out ratio in 1996 was 33%. This level is in the Company's target range of 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 out of 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 as of December 31, 1996 are stated below: Capital (thousands): Tier I Capital: Shareholders' equity (excluding unrealized gain on securities available for sale) less intangibles $ 312,056 Tier II Capital: Allowable loan loss reserve 43,362 Subordinated debt 7,187 ------------ Total Capital $ 362,605 Risk Adjusted Assets (thousands) $ 3,466,414 Total Assets (thousands) $ 4,870,332
1996 1995 1994 - ------------------------------------------------------------------- Tier I leverage ratio 6.65% 6.40% 6.43% Risk Adjusted Capital Ratios: Tier I Capital Ratio 9.00% 8.88% 9.24% Total Capital Ratio 10.46% 10.71% 11.27%
As previously mentioned, in January 1997 BancGroup issued $70 million in Trust Preferred Capital Securities. The above capital ratios would have been approximately 8.00%, 10.96% and 12.34% for Tier I leverage, Tier I risk adjusted and total risk adjusted capital had these securities been outstanding at December 31, 1996. BancGroup has increased capital gradually through normal earnings retention as well as through stock registrations to capitalize acquisitions. In December 1995, BancGroup notified the holders of its 1985 Convertible Subordinated Debentures of redemption of all debentures outstanding at January 31, 1996. In 1996 substantially all of the debentures were converted resulting in the issuance of 806,598 shares of Common Stock and payment in cash for the remaining balance. (See Note 9 to the consolidated financial statements.) 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. The subsidiary banks are also required by law to maintain noninterest-bearing deposits with the Federal Reserve Bank to meet regulatory reserve requirements. At December 31, 1996, these deposits totaled $22.9 million. FINANCIAL ACCOUNTING STANDARDS BOARD RELEASES In June 1996, the Financial Accounting Standards Board issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. However, in December 1996, the Financial Accounting Standards Board issued SFAS No. 127, "Deferral of the Effective Date of certain provisions of FASB Statement No. 125." This statement defers the effective date of Certain Provisions for one year (December 31, 1997). The deferred provisions relate to repurchase agreements, dollar-roll transactions, securities lending, and similar transactions. The effective date for all other transfers and servicing of financial assets is unchanged. Management does not believe that the adoption of SFAS No. 125, as amended by SFAS No. 127, will have a material impact on BancGroup's financial statements. BancGroup adopted SFAS No. 123, Accounting for Stock-based Compensation, on January 1, 1996. (See Notes 1 and 14 to the consolidated financial statements.) 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. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 41 29 TO THE BOARD OF DIRECTORS AND SHAREHOLDERS THE COLONIAL BANCGROUP, INC. We have audited the accompanying consolidated statements of condition of The Colonial BancGroup, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Colonial BancGroup, Inc. and subsidiaries as of December 31, 1996 and 1995, the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for mortgage servicing rights in 1995 and for investments in 1994. COOPERS & LYBRAND L.L.P. Montgomery, Alabama February 20, 1997 42 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 30 CONSOLIDATED STATEMENTS OF CONDITION December 31, 1996 and 1995 (Dollars in thousands)
ASSETS 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Cash and due from banks $ 196,675 $ 162,874 Interest-bearing deposits in banks 5,103 6,270 Federal funds sold 2,500 32,139 Securities available for sale (Note 3) 306,835 214,837 Investment securities (market value: 1996, $277,858; 1995, $287,314) (Note 3) 275,800 283,995 Mortgage loans held for sale 157,433 110,486 Loans, net of unearned income (Note 4) 3,680,415 3,175,506 Less: Allowance for possible loan losses (Note 5) (45,170) (41,490) - ----------------------------------------------------------------------------------------------------------------------------- Loans, net 3,635,245 3,134,016 Premises and equipment, net (Note 7) 78,849 65,833 Excess of cost over tangible and identified intangible assets acquired, net 30,064 29,460 Mortgage servicing rights 98,856 80,053 Other real estate owned 8,877 10,020 Accrued interest and other assets 74,095 72,211 - ----------------------------------------------------------------------------------------------------------------------------- Total $4,870,332 $4,202,194 ============================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing demand $ 594,385 $ 544,805 Interest-bearing demand 595,024 583,371 Savings 359,533 289,932 Time 2,034,727 1,786,152 - ----------------------------------------------------------------------------------------------------------------------------- Total deposits 3,583,669 3,204,260 FHLB short-term borrowings (Note 8) 715,000 465,000 Other short-term borrowings (Note 8) 117,529 132,256 Subordinated debt (Note 9) 7,187 17,120 Other long-term debt (Note 9) 30,480 29,143 Other liabilities 73,285 64,952 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 4,527,150 3,912,731 - ----------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 6, 15) Shareholders' Equity: (Notes 3, 10) Common Stock, $2.50 par value; 44,000,000 shares authorized, issued and outstanding: 32,749,282 and 31,039,376 in 1996 and 1995* 81,873 77,598 Additional paid in capital* 133,532 120,635 Retained earnings 128,318 90,885 Unearned compensation (1,603) (822) Unrealized gain on securities available for sale, net of taxes 1,062 1,167 - ----------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 343,182 289,463 - ----------------------------------------------------------------------------------------------------------------------------- Total $4,870,332 $4,202,194 =============================================================================================================================
See notes to consolidated financial statements. * Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock split dividend paid on February 11, 1997. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 43 31 CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1996,1995 and 1994 (Dollars in thousands)
1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $314,750 $255,447 $185,960 Interest and dividends on securities Taxable 27,663 24,803 20,701 Nontaxable 2,454 2,488 2,152 Dividends 2,103 2,137 1,779 Interest on federal funds sold and securities purchased under resale agreements 1,791 2,095 929 Other interest 217 344 382 - ----------------------------------------------------------------------------------------------------------------------------- Total interest income 348,978 287,314 211,903 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits 138,956 113,912 76,985 Interests on short-term borrowing 37,741 29,305 10,456 Interest on long-term debt 2,603 3,743 3,461 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 179,300 146,960 90,902 - ----------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME: 169,678 140,354 121,001 Provision for possible loan losses (Notes 1,5) 9,121 7,350 7,506 - ----------------------------------------------------------------------------------------------------------------------------- NET INTERST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES: 160,557 133,004 113,495 - ----------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage servicing fees 28,067 23,787 22,216 Service charges on deposit accounts 19,415 16,517 14,365 Securities gains, net (Note 3) 139 33 84 Other charges, fees and commmissions 4,403 3,900 3,414 Other income 13,958 9,756 7,673 - ----------------------------------------------------------------------------------------------------------------------------- Total noninterest income 65,982 53,993 47,752 - ----------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Salaries and employee benefits 55,074 48,668 50,548 Occupancy expense of bank premises, net 12,013 10,605 10,688 Furniture and equipment expenses 11,231 9,540 8,074 Amortization of mortgage servicing rights 12,522 9,095 6,078 Amortization of intangible assets 2,029 1,525 1,353 SAIF special assignment 3,817 -- -- Other expense (Note 17) 46,782 42,771 38,936 - ----------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 143,468 122,204 115,677 - ----------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 83,071 64,793 45,570 Applicable income taxes (Note 18) 29,463 23,240 15,829 - ----------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 53,608 $ 41,553 $ 29,741 ============================================================================================================================= EARNINGS PER SHARE: Primary* $ 1.62 $ 1.32 $ 1.00 Fully-diluted* 1.60 1.28 0.99 AVERAGE NUMBER OF SHARES OUTSTANDING: Primary* 33,062 31,594 29,796 Fully-diluted* 33,792 33,334 31,330 =============================================================================================================================
See notes to consolidated financial statements. * Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock split dividend paid on February 11, 1997. 44 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 32 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 1996, 1995 and 1994 (in thousands, except per share amounts)
CLASS A CLASS B ADDITIONAL COMMON STOCK COMMON STOCK COMMON STOCK PAID IN RETAINED SHARES* AMOUNT* SHARES* AMOUNT* SHARES* AMOUNT* CAPITAL* EARNINGS - ------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1994 26,286,278 $ 65,716 1,273,790 $3,184 $ 91,145 $ 37,544 - ------------------------------------------------------------------------------------------------------------------------------- Shares issued under: Directors Stock Plan 28,534 71 213 Stock Option Plans 134,156 335 571 Dividend Reinvestment 46,026 115 374 Stock Bonus & Retention Plan 1,300 3 9 Employee Stock Purchase Plan 4,372 11 37 Issuance of shares for previous year combinations 14,940 37 70 Issuance of common stock by a pooled bank prior to merger 901,370 2,254 2,880 Net income 29,741 Cash dividends: (Class A, $0.40 per share: Class B, $0.20 per share) (7,432) Conversion of Class B Common Stock to Class A Common Stock 3,614 9 (3,614) (9) Unrealized loss on securities available for sale, net of taxes - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 27,420,590 68,551 1,270,176 3,175 96,099 59,853 - ------------------------------------------------------------------------------------------------------------------------------- Shares issued under: Directors Stock Plan 1,716 4 32,332 $ 81 241 Stock Option Plans 13,182 33 65,856 165 180 Dividend Reinvestment 53,516 134 448 Stock Bonus & Retention Plan 50,000 125 697 Employee Stock Purchase Plan 536 1 7,534 19 90 Issuance of common stock by a pooled bank prior to merger 9,406 24 12 Conversion of Class A Common Stock and Class B Common Stock to Common Stock (27,445,430) (68,613) (1,270,176) (3,175) 28,715,606 71,788 Issuance of shares for business 2,089,994 5,225 22,591 combinations Net income Cash dividends: (Class A, $0.1125 per 41,553 share: Class B, $0.0625; Common, $0.3375 per share) (10,521) Conversion of 7 1/2% convertible subordinated debentures 23,418 59 269 Conversion of 12 3/4% convertible subordinated debentures 1,120 2 8 Change in unrealized gain (loss) on securities available for sale, net of taxes - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 0 0 0 0 31,039,376 77,598 120,635 90,885 - ------------------------------------------------------------------------------------------------------------------------------- Shares issued under: Directors Stock Plan 31,710 79 249 Stock Option Plans 423,336 1,058 1,196 Dividend Reinvestment 60,136 150 897 Stock Bonus & Retention Plan 48,340 121 833 Employee Stock Purchase Plan 10,264 26 154 Issuance of shares for business combination 154,596 387 2,214 Net income 53,608 Cash dividends: ($.54 per share) (16,175) Conversion of 7 1/2% convertible subordinated debentures 174,926 437 2,011 Conversion of 12 3/4% convertible subordinated debentures 806,598 2,017 5,343 Change in unrealized gain on securities available for sale, net of taxes - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 0 $ 0 0 $ 0 32,749,282 $81,873 $133,532 $128,318 =============================================================================================================================== Unrealized Gain (Loss) on Securities Total Unearned Available Shareholders' Compensation For Sale Equity - ---------------------------------------------------------------------------------------------------- Balance, January 1, 1994 - $198,389 - ---------------------------------------------------------------------------------------------------- Shares issued under: Directors Stock Plan 284 Stock Option Plans 906 Dividend Reinvestment 489 Stock Bonus & Retention Plan 12 Employee Stock Purchase Plan 48 Issuance of shares for previous year combinations 107 Issuance of common stock by a pooled bank prior to merger 5,134 Net income 29,741 Cash dividends: (Class A, $0.40 per share: Class B, $0.20 per share) (7,432) Conversion of Class B Common Stock to Class A Common Stock Unrealized loss on securities - available for sale, net of taxes $(3,660) (3,660) - ---------------------------------------------------------------------------------------------------- Balance, December 31, 1994 (3,660) 224,018 - ---------------------------------------------------------------------------------------------------- Shares issued under: Directors Stock Plan 326 Stock Option Plans 378 Dividend Reinvestment 582 Stock Bonus & Retention Plan $(822) - Employee Stock Purchase Plan 110 Issuance of common stock by a pooled bank prior to merger 36 Conversion of Class A Common Stock and Class B Common Stock to Common Stock - Issuance of shares for business 27,816 combinations Net income Cash dividends: (Class A, $0.1125 per 41,553 share: Class B, $0.0625; Common, $0.3375 per share) (10,521) Conversion of 7 1/2% convertible subordinated debentures 328 Conversion of 12 3/4% convertible subordinated debentures 10 Change in unrealized gain (loss) on securities available for sale, net of taxes 4,827 4,827 - ---------------------------------------------------------------------------------------------------- Balance, December 31, 1995 (822) 1,167 289,463 - ---------------------------------------------------------------------------------------------------- Shares issued under: Directors Stock Plan 328 Stock Option Plans 2,254 Dividend Reinvestment 1,047 Stock Bonus & Retention Plan (781) 173 Employee Stock Purchase Plan 180 Issuance of shares for business combination 2,601 Net income 53,608 Cash dividends: ($.54 per share) (16,175) Conversion of 7 1/2% convertible subordinated debentures 2,448 Conversion of 12 3/4% convertible subordinated debentures 7,360 Change in unrealized gain on securities available for sale, net of taxes (105) (105) - ---------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $(1,603) $ 1,062 $343,182 ====================================================================================================
See notes to consolidated financial statements. * Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid on February 11, 1997. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 45 33 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995, and 1994 (In thousands)
1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 53,608 $ 41,553 $ 29,741 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization and accretion 11,950 11,398 10,129 Amortization of mortgage servicing rights 12,522 9,095 6,078 Amortization of excess servicing fees 1,105 1,166 1,721 Provision for possible loan losses 9,121 7,350 7,506 Deferred income taxes (1,103) (2,225) (2,361) Gain on sale of securities, net (139) (33) (84) Additions to mortgage servicing rights (32,264) (32,139) (34,624) Net (increase) decrease in mortgage loans held for sale (46,947) (49,760) 303,577 Increase in interest receivable (1,770) (8,697) (3,977) Decrease in prepaids and other receivables 687 1,357 953 Decrease in accrued expenses and accounts payable (789) (6,719) (37,055) Increase (decrease) in accrued income taxes 414 2,709 (2,372) Increase in interest payable 3,737 10,643 2,233 Other, net 4,495 (1,595) (2,457) - ----------------------------------------------------------------------------------------------------------------------------- Total adjustments (38,981) (57,450) 249,267 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 14,627 (15,897) 279,008 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities of securities available for sale 66,185 21,034 35,601 Proceeds from sales of securities available for sale 3,425 13,585 20,329 Purchase of securities available for sale (67,851) (68,393) (16,970) Proceeds from maturities of investment securities 143,147 90,160 74,123 Proceeds from sales of investment securities -- 10,119 -- Purchases of investment securities (144,527) (55,186) (129,757) Net decrease (increase) in short-term investment securities 10,000 -- (4,494) Net increase in loans (547,821) (589,868) (375,343) Cash and cash equivalents received in bank acquisitions, net (Note 2) 1,437 23,201 -- Cash and cash equivalents received in the purchase of assets and assumption of liabilities (Note 2) 7,028 -- 12,154 Capital expenditures (20,406) (9,818) (9,723) Proceeds from sale of other real estate owned 7,147 6,430 7,639 Other, net 111 2,474 6,799 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (542,125) (556,262) (379,642) - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from Financing activities: Net increase in demand, savings and time deposits 308,484 451,888 3,466 Net increase in federal funds purchased and repurchase agreements and other short-term borrowings 233,397 200,588 60,373 Proceeds from issuance of long-term debt 6,394 12,092 25,336 Repayment of long-term debt (5,064) (55,510) (13,443) Proceeds from issuance of common stock 3,457 1,038 6,337 Dividends paid (16,175) (10,521) (7,432) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 530,493 599,575 74,637 - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,995 27,416 (25,997) Cash and cash equivalents at beginning of year 201,283 173,867 199,864 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year (Note 1) $ 204,278 $ 201,283 $ 173,867 ============================================================================================================================= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 175,563 $ 136,338 $ 89,191 Income taxes 27,593 21,323 23,079 Non-cash transactions: Transfer of loans to other real estate $ 8,184 $ 5,532 $ 3,816 Origination of loans from the sale of other real estate 303 456 1,309 Securitization of mortgage loans 87,641 -- -- Transfer of investment securities to securities available for sale -- 56,921 33,457 Conversion of subordinated debentures to common stock 9,808 428 -- Assets acquired in business combinations 48,367 330,626 47,985 Liabilities assumed in business combinations 45,766 302,810 57,191 ============================================================================================================================= See notes to consolidated financial statements.
46 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 1996, 1995 and 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES The Colonial BancGroup, Inc. ("BancGroup") and its subsidiaries operate predominantly in the domestic commercial and mortgage banking industry. The accounting and reporting policies of BancGroup and its subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. The following summarizes the most significant of these policies. BASIS OF PRESENTATION--The consolidated financial statements of The Colonial BancGroup, Inc. and subsidiaries for 1995 and 1994 have been previously restated to give retroactive effect to the mergers with Commercial Bancorp of Georgia, Inc. and Southern Banking Corporation on July 3, 1996, which were accounted for as poolings of interests. (See Note 2) PRINCIPLES OF CONSOLIDATION--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--The Company 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--Effective January 1, 1994, BancGroup adopted Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under this statement, 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. Prior to 1994, securities available for sale and marketable equity securities were recorded at the lower of aggregate cost or market value. 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. The cost of mortgage loans is adjusted by gains and losses generated from corresponding hedging transactions, principally using forward sales commitments, entered into to protect the inventory value of the loans from increases in interest rates. Hedge positions are also used to protect the pipeline of commitments to originate and purchase loans from changes in interest rates. Gains and losses resulting from changes in the market value of the inventory, pipeline and open hedge positions are netted. Any net gain that results is deferred; any net loss that results is recognized when incurred. Hedging gains and losses realized during the commitment and warehousing period related to the pipeline and mortgage loans held for sale are deferred. Hedging losses are recognized currently if deferring such losses would result in mortgage loans held for sale and the pipeline being valued in excess of their estimated net realizable value. The aggregate cost of mortgage loans held for sale at December 31, 1996 and 1995 is less than their aggregate net realizable value. Gains or losses on the sale of Federal National Mortgage Association mortgage-backed securities are recognized on the earlier of the date settled or the date that a forward commitment to deliver a security to a dealer is effectively offset by a commitment to buy a similar security (paired off). These gains or losses are included in other income. LOANS--Loans are stated at face value, net of unearned income and allowance for possible loan losses. 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 POSSIBLE LOAN LOSSES--BancGroup adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition Disclosure", on January 1, 1995. Under the new standards, 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 which consist of residential mortgages and consumer loans are evaluated collectively and reserves are established based on historical loss experience. The adoption of SFAS 114 and 118 resulted in no additional provision for credit losses at January 1, 1995. 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 measure- THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 47 35 ment 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 uncollectable, the portion deemed uncollectable 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, 1996, 1995 and 1994. 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 cost or market value less estimated costs to sell. Any write-down from the cost to market value required at the time of foreclosure is charged to the allowance for possible 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 years for the excess of cost over tangible and identified intangible assets acquired and ten years for deposit core base intangibles using the straight-line method. The recoverability of intangible assets is reviewed periodically based on the current earnings of acquired entities. If warranted, analysis, including undiscounted income projections, are made to determine if adjustments to carrying value or amortization periods are necessary. MORTGAGE SERVICING RIGHTS--BancGroup adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights", in May 1995 effective January 1,1995. This statement amends certain provisions of SFAS No. 65 to substantially eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. The statement requires an allocation of the total cost of mortgage loans held for sale to mortgage servicing rights and mortgage loans held for sale (without mortgage servicing rights) based on their relative fair values. Mortgage servicing rights are being amortized primarily using an accelerated method in proportion to the estimated net servicing income from the related loans, which approximates a level yield method. The amortization period represents management's best estimate of the remaining loan lives. The carrying values of the mortgage servicing rights are evaluated for impairment based on their fair values categorized by year of origination or acquisition. Fair values of servicing rights are determined by estimating the present value of future net servicing income considering the average interest rate and the average remaining lives of the related mortgage loans being serviced. At December 31, 1996, BancGroup had mortgage servicing and excess servicing rights with a net book value of $107 million. The estimated combined fair value of these assets is approximately $152 million. The servicing portfolio is geographically disbursed throughout the United States with a concentration in the southern states. The mortgage servicing rights at December 31, 1996 and 1995 are stated net of accumulated amortization of approximately $38,425,000 and $25,903,000, respectively. Mortgage servicing fees are deducted from the monthly payments on mortgage loans and are recorded as income when earned. Fees from investors for servicing their portfolios of resi- 48 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 36 dential loans generally range from 1/4 of 1% to 1/2 of 1% per year on the outstanding principal balance. LONG LIVED ASSETS--BancGroup adopted SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of" on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles to be held and used by the entity be reviewed 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 amount of the asset, an impairment loss is recognized. This statement also requires that long-lived assets and certain intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The adoption of SFAS No. 121 did not have a material impact on BancGroup's financial statements. INCOME TAXES--BancGroup uses the asset and liability method of accounting for income taxes (See Note 18). 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. BancGroup files a consolidated income tax return; however, income taxes are computed by each subsidiary on a separate basis, and taxes currently payable are remitted to BancGroup. STOCK-BASED COMPENSATION--BancGroup adopted SFAS No. 123, "Accounting for Stock-Based Compensation", on January 1, 1996. This statement 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 their stock option plan under the provisions in APB Opinion 25. EARNINGS PER SHARE--Primary earnings per share were computed based on the weighted average number of shares of common stock actually outstanding and common stock equivalents which consists of shares issuable under outstanding stock options. Fully diluted earnings per share also gives effect to shares issuable under convertible debenture agreements. All earnings per share data has been restated to reflect a two-for-one stock split effected in the form of a 100 percent stock dividend distributed on February 11, 1997. ADVERTISING COSTS--Advertising costs are expensed as incurred. Advertising expense was $5,029,000 $3,796,000 and $2,736,000 for the years ended December 31, 1996, 1995 and 1994, respectively. RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement utilizes the financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. This Statement requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of the transfer. This Statement requires that a liability be derecognized if and only if either (a) the debtor pays the creditor and is relieved of its obligation for the liability or (b) the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor. Therefore, a liability is not considered extinguished by an in-substance defeasance. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. However, in December 1996, the Financial Accounting Standards Board issued SFAS No. 127, "Deferral of the Effective Date of certain Provisions of FASB Statement No. 125." This statement defers the effective date of certain provisions for one year (December 31, 1997). The deferred provisions relate to repurchase agreements, dollar-roll transactions, securities lending, and similar transactions. The effective date for all other transfers and servicing of financial assets is unchanged. Management does not believe that the adoption of SFAS No. 125 will have a material impact on BancGroup's financial statements. 2. BUSINESS COMBINATIONS On July 3, 1996, BancGroup completed a business combination with Commercial Bancorp of Georgia,Inc. (CBG), of Lawrenceville, Georgia with the issuance of 2,306,460 shares of BancGroup common stock. At the date of combination, CBG had assets of $233 million and equity of $21 million. The transaction was accounted for under the pooling-of-interests method of accounting and accordingly CBG is included in all periods presented. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 49 37 On July 3, 1996, BancGroup completed a business combination with Southern Banking Corporation (SBC), of Orlando, Florida with the issuance of 2,858,494 shares of BancGroup common stock. At the date of combination, SBC had assets of $232 million and equity of $17 million. The transaction was accounted for under the pooling-of-interests method of accounting and accordingly, SBC is included in all periods presented. On February 17, 1995, BancGroup completed a merger with Colonial Mortgage Company (CMC) and its parent company, The Colonial Company (TCC). At the merger date TCC's only asset was its investment in CMC. BancGroup issued 4,545,454 shares of its common stock and assumed the debts of TCC. At the merger date, TCC and CMC had total assets of $71 million, total liabilities of $64 million, and total stockholders' equity of $7 million. This business combination by entities under common control was accounted for in a manner similar to a pooling-of-interests and, accordingly, CMC is included in all periods presented. Presented below is summary operating information for BancGroup showing the effect of the business combinations described in the preceding paragraphs.
AS PREVIOUSLY EFFECT OF CURRENTLY (In thousands) REPORTED POOLINGS REPORTED ========================================================== 1995: Net Interest Income $118,442 $21,912 $140,354 Noninterest income 45,982 8,011 53,993 Net income 38,794 2,759 41,553 1994: Net interest income 104,681 16,320 121,001 Noninterest income 18,125 29,627 47,752 Net income 27,671 2,070 29,741 ==========================================================
Prior to the date of consummation in 1996, CBG and SBC had net interest income of $6,473,000 and $7,166,000 respectively, and Net Income of $1,340,000 and $1,750,000 respectively. On April 19, 1996, BancGroup purchased certain assets totaling $31,428,000 and assumed certain liabilities, primarily deposits, totaling $30,994,000 of the Enterprise, Alabama branch of First Federal Bank. During 1995 and 1996, four purchase method combinations were consummated; the following table represents those acquisitions. (Dollars in thousands)
Common Stock Issued Consummation ------------------- Bank Date Shares Value ============================================================= Brundidge Banking Company March 31, 1995 532,868 $ 6,209 Mt. Vernon Financial Corp. October 20, 1995 1,043,440 14,608 Farmers and Merchants Bank November 3, 1995 513,686 6,999 Dothan Federal Savings Bank July 8, 1996 154,690 2,601
The value of the shares issued represents the total purchase price of Brundidge Banking Company and Mt. Vernon Financial Corp. Farmers and Merchants Bank and Dothan Federal Savings Bank shareholders received $3 million and $2.6 million in cash, respectively, in addition to the amounts received in stock. The financial institution mergers were accounted for as purchases and, accordingly, income and expenses of such institutions are included in the consolidated statements of BancGroup from the date of acquisition forward. The following table presents unaudited pro forma results of operations for the years ended December 31, 1996 and 1995, after giving effect to amortization of goodwill and other pro forma adjustments, as if the acquisitions had occurred at the beginning of the years presented. The pro forma summary information does not necessarily reflect the results of operations as they actually would have been, if the acquisition had occurred at the beginning of the years presented.
(In thousands, except per share amounts) 1996 1995 ===================================================== (Unaudited) Net interest income before provision for possible loan losses $169,716 $145,355 Net income 53,628 42,683 Earnings per share: Primary $1.62 $1.29 Fully-diluted $1.60 $1.26 Average shares outstanding: Primary 33,143 33,151 Fully-diluted 33,873 34,891 =====================================================
The following chart summarizes the assets acquired and the liabilities assumed in connection with the 1996 and 1995 purchase method combinations:
1996 1995 (In thousands) TOTAL TOTAL ========================================================== Cash and due froms $ 480 $ 5,899 Interest-bearing deposits in banks -- 987 Federal funds sold 957 16,325 Securities available for sale 7,529 25,557 Investment securities -- 11,456 Loans, net 35,985 249,086 Accrued interest and other assets 1,766 10,009 Deposits 39,931 247,848 Short-term borrowings 1,875 40,000 Other long-term debt -- 3,541 Other liabilities 3,960 11,421 Equity 2,601 27,816 ========================================================== Excess of cost over tangible and identified intangible assets acquired, net $ 1,648 $11,317 ==========================================================
50 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 38 RECENT BUSINESS COMBINATIONS On January 3, 1997, Jefferson Bancorp, Inc. ("Jefferson") was merged into BancGroup. Jefferson is a Florida corporation and is a holding company for Jefferson Bank of Florida located in Miami Beach, Florida. Jefferson has merged with BancGroup and Jefferson Bank of Florida will merge with BancGroup's existing bank subsidiary in Orlando, Florida, Colonial Bank, upon receipt of proper regulatory approval. A total of 3,854,952 shares of BancGroup's Common Stock was issued to the stockholders of Jefferson. At December 31, 1996, Jefferson had assets of $472.7 million, deposits of $405.8 million and stockholders' equity of $32.3 million. This merger will be accounted for as a pooling-of-interests. In February 1997, BancGroup issued supplemental 1995 financial statements giving retroactive effect to the merger with Jefferson. 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; thus, they do not include the effect of the Jefferson merger. On January 3, 1997, Tomoka Bancorp, Inc. ("Tomoka") was merged into BancGroup. Tomoka is a Florida corporation and is a holding company for Tomoka State Bank located in Ormond Beach, Florida. Tomoka has merged with BancGroup and Tomoka State Bank has merged with BancGroup's existing bank subsidiary in Orlando, Florida, Colonial Bank. A total of 661,992 shares of BancGroup's Common Stock was issued to the stockholders of Tomoka. At December 31, 1996, Tomoka had assets of $76.7 million, deposits of $68.2 million and stockholders' equity of $6.5 million. This merger will be accounted for as a pooling-of-interests. On January 9, 1997, First Family Financial Corporation ("First Family") was merged into BancGroup. First Family is a Florida corporation and is a holding company for First Family Bank, fsb located in Eustis, Florida. First Family has merged with BancGroup and following regulatory approval, First Family Bank, fsb will merge with BancGroup's existing subsidiary bank in Orlando, Florida, Colonial Bank. A total of 329,492 shares of BancGroup's Common Stock and $6,491,875 in cash has been issued to the stockholders of First Family. At December 31, 1996, First Family had assets of $167.3 million, deposits of $156.7 million and stockholders' equity of $8.7 million. This merger will be accounted for as a purchase method combination On, January 31, 1997, D/W Bankshares, Inc. ("Bankshares") was merged into BancGroup. Bankshares is a Georgia corporation and is a holding company for Dalton/Whitfield Bank & Trust located in Dalton, Georgia ("Dalton/Whitfield"). Bankshares has merged with BancGroup and following regulatory approval Dalton/Whitfield will merge with BancGroup's existing bank subsidiary in Lawrenceville, Georgia, Colonial Bank. A total of 1,016,548 shares of BancGroup's Common Stock was issued to the stockholders of Bankshares. At December 31, 1996, Bankshares had assets of $138.7 million, deposits of $124.4 million and stockholders' equity of $10.0 million. This merger will be accounted for as a pooling-of-interests. Pro forma unaudited results of operations assuming the Jefferson and Bankshares mergers had occurred on January 1, 1994 (earliest period presented), are as follows:
1996 1995 1994 - -------------------------------------------------------------------------- Net interest income $192,075 $163,003 $142,853 Noninterest income 70,818 59,260 52,830 Net income 50,371 44,801 33,875 Earnings Per Share: Primary $ 1.39 $ 1.27 $ 0.98 Fully-Diluted $ 1.37 $ 1.21 $ 0.97 - --------------------------------------------------------------------------
PENDING MERGERS BancGroup entered into a definitive agreement dated November 18, 1996, to merge Fort Brooke Bancorporation ("Fort Brooke") into BancGroup. Fort Brooke is a Florida corporation and is a holding company for Fort Brooke Bank located in Tampa, Florida. Fort Brooke will merge with BancGroup and following such merger, Fort Brooke Bank will merge with BancGroup's existing bank subsidiary in Orlando, Colonial Bank. Based on the market price of BancGroup's Common Stock as of February 25, 1997, a total of 1,600,124 shares of BancGroup's Common Stock would be issued to the stockholders of Fort Brooke. The actual number of shares of BancGroup's Common Stock to be issued in this transaction will depend upon the market value of such Common Stock at the time of the merger subject to a maximum of 1,950,152 shares and a minimum of 1,600,124 shares to be issued. This transaction is subject to, among other things, approval by the stockholders of Fort Brooke and approval by appropriate regulatory authorities. At December 31, 1996, Fort Brooke had assets of $208.8 million, deposits of $185.8 million and stockholders' equity of $16.6 million. This merger will be accounted for as a pooling-of-interests. BancGroup also entered into a definitive agreement to merge Shamrock Holding, Inc., parent of The Union Bank in Evergreen, Alabama, ("Shamrock") into BancGroup. Pursuant to that agreement, BancGroup will make a cash offer to purchase all of the outstanding shares of Shamrock for an aggregate cash price of $11,482,000, subject to regulatory approval and other conditions. At December 31, 1996, The Union Bank had total assets of approximately $54.5 million, deposits of $46.4 million, and stockholders' equity of $7.9 million. This merger will be accounted for as a purchase method combination. In February 1997, BancGroup executed letters of intent to merge two additional Florida banks into BancGroup. First Commerce Banks of Florida, Inc. ("First Commerce"), in Winter Haven, had assets of $106 million at December 31, 1996. Great Southern Bank ("Great Southern"), in West Palm Beach, had assets of $119 million at December 31, 1996. The First Commerce merger will be accounted for as a purchase while the Great Southern merger will be a pooling of interests. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 51 39 3. SECURITIES The carrying and market values of investment securities are summarized as follows:
INVESTMENT SECURITIES (In thousands) 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market COST GAINS LOSSES VALUE Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government agencies $237,764 $2,330 $ (992) $239,102 $226,621 $3,834 $(1,646) $228,809 Obligations of state and political subdivisions 37,284 945 (32) 38,197 46,337 1,250 (128) 47,459 Other 752 4 (197) 559 11,037 52 (43) 11,046 - --------------------------------------------------------------------------------------------------------------------------------- Total $275,800 $3,279 $(1,221) $277,858 $283,995 $5,136 $(1,817) $287,314 - ---------------------------------------------------------------------------------------------------------------------------------
The carrying and market values of securities available for sale are summarized as follows:
SECURITIES AVAILABLE FOR SALE (In thousands) 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market COST GAINS LOSSES VALUE Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. government agencies $291,982 $2,279 $(1,518) $292,743 $198,971 $1,959 $(1,110) $199,820 Obligations of state and political subdivisions 6,766 56 (10) 6,812 6,984 37 -- 7,021 Other 6,437 898 (55) 7,280 7,040 1,020 (64) 7,996 - --------------------------------------------------------------------------------------------------------------------------------- Total $305,185 $3,233 $(1,583) $306,835 $212,995 $3,016 $(1,174) $214,837 - ---------------------------------------------------------------------------------------------------------------------------------
The market values of 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 other investment securities are $10,000,000 in marketable equity securities at December 31, 1995. Included within securities available for sale is $37,574,000 and $24,496,000 in Federal Home Loan Bank stock at December 31, 1996 and 1995, respectively. Securities with a carrying value of approximately $432,216,000 and $312,630,000 at December 31, 1996 and 1995 respectively, were pledged for various purposes as required or permitted by law. Gross gains of $154,000, $85,000 and $222,000 and gross losses of $15,000, $52,000 and $138,000 were realized on sales of securities for 1996, 1995, and 1994, respectively. The amortized cost and market value of debt securities at December 31, 1996, 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.
Securities Available Investment Securities For Sale - ---------------------------------------------------------------------------------- Amortized Market Amortized Market (In thousands) Cost Value Cost Value - ---------------------------------------------------------------------------------- Due in one year or less $ 59,529 $ 59,811 $ 15,955 $ 15,962 Due after one year through five years 130,773 132,176 68,257 68,759 Due after five years through ten years 12,817 13,401 13,019 13,237 Due after ten years 2,037 2,135 158 165 - ---------------------------------------------------------------------------------- 205,156 207,523 97,389 98,123 Mortgage-backed securities 70,644 70,335 169,064 169,583 - ---------------------------------------------------------------------------------- Total $275,800 $277,858 $266,453 $267,706 - ----------------------------------------------------------------------------------
During 1995 and pursuant to a FASB Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, BancGroup transferred approximately $56,921,000 from Investment Securities to Securities Available for Sale. 52 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 40 4. LOANS A summary of loans follows:
(In thousands) 1996 1995 - ------------------------------------------------------------ Commercial, financial, and agricultural $ 492,619 $ 436,791 Real estate--commercial 797,341 692,550 Real estate--construction 402,502 335,645 Real estate--mortgage 1,688,299 1,451,338 Installment and consumer 247,195 215,043 Other 53,152 44,746 - ------------------------------------------------------------ Subtotal $ 3,681,108 $ 3,176,113 Unearned income (693) (607) - ------------------------------------------------------------ Total $ 3,680,415 $ 3,175,506 ============================================================
BancGroup's lending is concentrated throughout Alabama, southern Tennessee, central Georgia and central Florida, and repayment of these loans is in part dependent upon the economic conditions in the respective regions of the 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 possible loan losses. Other than concentrations of credit risk in Alabama and commercial real estate loans in general, management is not aware of any significant concentrations. 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, 1996. 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, 1996 are summarized as follows:
(In thousands) Balance Balance 1/1/96 Additions Repayments 12/31/96 =============================================== $37,238 $48,935 $46,067 $40,106 ===============================================
At December 31, 1996 and 1995, the recorded investment in loans for which impairment has been recognized in accordance with SFAS 114 totaled $28,799,000 and $16,293,000, respectively, and these loans had a corresponding valuation allowance of $7,654,000 and $5,907,000, respectively. The impaired loans were measured for impairment based primarily on the value of underlying collateral. For the years ended December 31, 1996 and 1995, the average recorded investment in impaired loans was approximately $22,546,000 and $18,461,000. BancGroup recognized approximately $2,040,000 and $1,040,000 of interest on impaired loans during the portion of the year that they were impaired in 1996 and 1995, respectively. BancGroup uses several factors in determining if a loan is impaired under SFAS No. 114. 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, borrowers' financial data, and borrowers' operating factors such as cash flows, operating income or loss, etc. 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the allowance for possible loan losses is as follows:
(In thousands) 1996 1995 1994 - -------------------------------------------------------------------- Balance, January 1 $ 41,490 $ 36,985 $ 30,946 Addition due to acquisitions 738 1,129 501 Provision charged to income 9,121 7,350 7,506 Loans charged off (10,654) (6,302) (5,453) Recoveries 4,475 2,328 (3,485) - -------------------------------------------------------------------- Balance, December 31 $ 45,170 $ 41,490 $ 36,985 - --------------------------------------------------------------------
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 53 41 6. 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. These financial instruments include loan commitments and standby letters of credit and obligations to deliver and sell mortgage loans and 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, 1996 and 1995 are as follows:
Contract Amount ============================================================ (In thousands) 1996 1995 ============================================================ Financial instruments whose contract amounts represent credit risk: Loan commitments $ 625,896 $ 494,703 Standby letters of credit 45,229 28,440 Mortgage sales commitments 193,970 121,925
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. Obligations to sell loans at specified dates (typically within ninety days of the commitment date) and at specified prices are intended to hedge the interest rate risk associated with the time period between the initial offer to lend and the subsequent sale to a permanent investor. Risks arise from changes in interest rates. Changes in the market value of the sales commitments are included in the measurement of the gain or loss on mortgage loans held for sale. The current market value of these commitments was $194,858,000, and $120,644,000 at December 31, 1996 and 1995, respectively. 7. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
(In thousands) 1996 1995 =========================================================== Land $ 19,971 $ 16,601 Bank premises 58,544 53,406 Equipment 55,853 47,556 Leasehold improvements 8,682 4,614 Construction in progress 1,665 1,993 Automobiles 339 360 - ----------------------------------------------------------- Total 145,054 124,540 Less accumulated depreciation and amortization 66,205 58,707 - ----------------------------------------------------------- Premises and equipment, net $ 78,849 $ 65,833 ===========================================================
8. SHORT-TERM BORROWINGS Short-term borrowings are summarized as follows:
(In thousands) 1996 1995 1994 ===================================================================== Federal funds purchased and securities sold under repurchase agreements $115,512 $131,115 $145,419 FHLB borrowings 715,000 465,000 210,050 Other short-term borrowings 2,017 1,141 1,131 - --------------------------------------------------------------------- Total $832,529 $597,256 $356,600 =====================================================================
BancGroup had outstanding term notes (Note 9) of which the current portion, $1,033,000 and $1,000,000, is included in other short-term borrowings at December 31, 1996 and 1995, respectively. BancGroup became a member of the Federal Home Loan Bank (FHLB) in late 1992. Based on its investment in the FHLB and other factors at December 31, 1996, BancGroup can borrow up to $1.0 billion from the FHLB on either a short or long-term basis. At December 31, 1996, $726 was outstanding. BancGroup has available an additional unused credit of $281 million with the FHLB. FHLB has a blanket lien on BancGroup's 1-4 family mortgage loans in the amount of the outstanding debt. CMC has a warehouse line of credit with $118 million of availability from FHLB, of which none was outstanding at December 31, 1996. This warehouse line is collateralized by mortgage loans held for sale. Additional details regarding short-term borrowings are shown below:
(In thousands) 1996 1995 1994 ====================================================================== Average amount outstanding during the year $ 693,372 $ 478,596 $ 236,074 Maximum amount outstanding at any month-end 832,529 597,256 356,600 Weighted average interest rate: During year 5.44% 6.12% 4.42% End of year 5.56% 5.78% 5.62% ======================================================================
54 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 42 9. LONG-TERM DEBT Long-term debt is summarized as follows:
(In thousands) 1996 1995 =========================================================== 12 3/4% Convertible Subordinated Debentures $ -- $ 7,483 7 1/2% Convertible Subordinated Debentures 7,187 9,637 Term Note 14,116 10,250 Line of Credit and Other 19 6,353 FHLB Advances 10,809 5,516 REMIC Bonds 5,536 7,024 - ----------------------------------------------------------- Total $ 37,667 $ 46,263 ===========================================================
The 12 3/4% Convertible Subordinated Debentures due December 15, 2000 ("1985 Debentures") were issued in connection with the acquisition of a bank. The 1985 Debentures were redeemable, at the option of BancGroup, ten years from the date of issuance at face value plus accrued interest. At the option of the holder, each 1985 Debenture could be converted into BancGroup Common Stock at the conversion price of $9.125 principal amount of 1985 Debentures, subject to adjustment upon the occurrence of certain events, for each share of stock received. In January, 1996, BancGroup called the 12 3/4% subordinated debentures. As a result, 806,598 shares of BancGroup Common Stock were issued and cash was paid for the remaining debentures. 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 $14.00 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, a total of 512,800 shares of such Common Stock would be issued. At December 31, 1995, BancGroup had a term note with $11,250,000 outstanding and a line credit with $6,250,000 outstanding. This term note was payable in annual installments of $1,000,000 and was due in August 1997. In 1996, BancGroup transferred the outstanding balances of the term note and line of credit to a new term note. The 1996 term note has $15,149,000 outstanding at December 31, 1996. (Also see Note 8.) The 1996 term note is payable in annual installments of $1,033,000 with the balance due in 2001. In addition, BancGroup entered into a new line of credit with the same financial institution totaling $35 million, of which none is outstanding at December 31, 1996. The 1996 line of Credit is due at maturity in October 1998. The term note and the line of credit bear interest at a rate of 1.5% above LIBOR. All of the capital stock of BancGroup's subsidiary banks is pledged as collateral. The agreements contain restrictive covenants which, among other things, limit the sale of assets, incurrence of additional indebtedness, repurchase of BancGroup stock, and requires BancGroup to maintain certain specified financial ratios. In January 1997, the new term note was paid in full. The repayment was funded with a portion of the proceeds from the Trust Preferred Securities offering discussed below. BancGroup had long-term Federal Home Loan Bank (FHLB) Advances outstanding of $10,809,000 and $5,516,000 at December 31, 1996 and 1995, respectively. These advances bear interest rates of 5.32% to 7.53% and mature from 1999 to 2011. BancGroup, with the acquisition of First AmFed, also assumed the real estate mortgage investment conduit (REMIC) bonds through a conduit, Service Financial Corporation, a subsidiary of Colonial Bank. These bonds were series A (four classes) with an original principal amount of $28,123,000 and a coupon interest rate of 7.875%. As of December 31, 1996 the bonds have an outstanding balance of $5,536,000 and are collateralized by FNMA mortgaged-backed securities with a carrying value of $5,546,000. The collections on these securities are used to pay interest and principal on the bonds. Only Class A-3 and A-4 bonds remain outstanding. The REMIC bonds are summarized in the following table:
Balance at Expected December 31, 1996 Class Maturity (In thousands) ====================================================================== A-3 June 1, 2007 $ 845 A-4 September 1, 2017 4,691 - ---------------------------------------------------------------------- Total $5,536 ======================================================================
At December 31, 1996, long-term debt, including the current portion, is scheduled to mature as follows:
(In thousands) ==================================================== 1997 $ 2,199 1998 1,229 1999 1,438 2000 1,093 2001 11,082 Thereafter 22,643 - ---------------------------------------------------- Total $39,684 - ----------------------------------------------------
On January 29, 1997, BancGroup issued, through a special purpose trust, $70 million of Trust Preferred Securities in a private placement offering. In BancGroup's consolidated statement of condition, these securities will be shown as long-term debt. 10. CAPITAL STOCK On January 15, 1997, 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 February 11, 1997. The stated par value was not changed from $2.50. 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. Effective February 21, 1995 the Class A Common Stock and the Class B Common Stock were reclassified into one class of stock called Common Stock, $2.50 par value, with equal rights THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 55 43 for all shareholders. 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. Prior to the reclassification the holders of Class A Common Stock had limited voting rights compared with the holders of Class B Common Stock. The holders of the Class A Common Stock were entitled to elect, voting as a separate class, up to 25% (rounded up to the nearest whole number) of the entire Board of Directors of BancGroup, and the holders of the Class B Common Stock were entitled to elect the remaining directors. On all other matters coming before the stockholders of BancGroup, except matters for which Delaware law requires a class vote, the holders of the Class A Common Stock were entitled to one twentieth (1/20) of one (1) vote per share and the holders of the Class B Common Stock were entitled to one (1) vote per share. Stockholders of BancGroup may not act by written consent or call special meetings. At the option of the holder of record, and subject to adjustment to avoid dilution in the event of certain occurrences, each share of BancGroup Class B Common Stock was convertible at any time into one share of Class A Common Stock. Shares of Class A Common Stock were not convertible into any other securities of BancGroup. 11. 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 $104 million of retained earnings plus certain 1997 earnings would be available for distribution to BancGroup, from its subsidiaries, as dividends in 1997 without prior approval from the respective regulatory authorities. The subsidiary banks are required by law to maintain noninterest-bearing deposits with the Federal Reserve Bank to meet regulatory reserve requirements. At December 31, 1996, these deposits totaled $22.9 million. BancGroup and its subsidiary banks are subject to various regulatory capital requirements administered by 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 its subsidiary banks 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 its subsidiary banks' capital amounts and classi- fication 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 its subsidiary banks 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, 1996 and 1995, that BancGroup and its subsidiary banks meet all capital adequacy requirements to which they are subject. As of December 31, 1996, the most recent notification from the Federal Deposit Insurance Corporation categorized BancGroup's subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized BancGroup and its subsidiary banks 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 it significant bank subsidiaries are also presented in the following table: marquis
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE (In Thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ================================================================================================================== AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ================================================================================================================== AS OF DECEMBER 31, 1996 Total Capital (to Risk Weighted Assets) Consolidated $362,605 10.46% $277,374 >8.0% $346,718 >10.0% - - Colonial Bank Alabama 305,015 10.47% 233,112 >8.0% 291,391 >10.0% - - Colonial Bank Florida 20,680 10.01% 16,534 >8.0% 20,668 >10.0% - - Colonial Bank Georgia 39,139 11.53% 27,150 >8.0% 33,937 >10.0% - - Tier I Capital (to Risk Weighted Assets) Consolidated 312,056 9.00% 138,687 >4.0% 208,031 > 6.0% - - Colonial Bank Alabama 268,349 9.21% 116,556 >4.0% 174,834 > 6.0% - - Colonial Bank Florida 18,722 9.06% 8,267 >4.0% 12,401 > 6.0% - - Colonial Bank Georgia 34,870 10.27% 13,575 >4.0% 20,362 > 6.0% - - Total I Capital (to average assets) Consolidated 312,056 6.61% 188,771 >4.0% 235,963 > 5.0% - - Colonial Bank Alabama 268,349 6.65% 161,418 >4.0% 201,772 > 5.0% - - Colonial Bank Florida 18,722 6.57% 11,391 >4.0% 14,239 > 5.0% - - Colonial Bank Georgia 34,870 7.06% 19,768 >4.0% 24,710 > 5.0% - - AS OF DECEMBER 31, 1995 Total Capital (to Risk Weighted Assets) Consolidated $312,433 10.71% $233,274 >8.0% $291,593 >10.0% - - Colonial Bank Alabama 263,380 10.81% 194,981 >8.0% 243,726 >10.0% - - Colonial Bank Florida 16,271 9.72% 13,398 >8.0% 16,748 >10.0% - - Colonial Bank Georgia 34,296 12.61% 21,759 >8.0% 27,199 >10.0% - - Tier I Capital (to Risk Weighted Assets) Consolidated 258,857 8.88% 116,637 >4.0% 174,956 > 6.0% - - Colonial Bank Alabama 232,856 9.55% 97,490 >4.0% 146,236 > 6.0% - - Colonial Bank Florida 14,313 8.55% 6,699 >4.0% 10,049 > 6.0% - - Colonial Bank Georgia 31,473 11.57% 10,880 >4.0% 16,319 > 6.0% - - Tier I Capital (to average assets) Consolidated 258,857 7.15% 144,810 >4.0% 181,013 > 5.0% - - Colonial Bank Alabama 232,856 6.87% 135,498 >4.0% 169,373 > 5.0% - - Colonial Bank Florida 14,313 6.54% 8,753 >4.0% 10,941 > 5.0% - - Colonial Bank Georgia 31,483 9.42% 13,367 >4.0% 16,708 > 5.0% - -
56 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 44 12. 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, 1996 were as follows:
(In thousands) ===================================== 1997 $ 5,133 1998 4,245 1999 3,714 2000 3,357 2001 2,040 Thereafter 8,376 - ------------------------------------- Total $26,865 =====================================
Rent expense for all leases amounted to $7,050,000 in 1996, $6,175,000 in 1995 and $5,104,000 in 1994. 13. EMPLOYEE BENEFIT PLANS BancGroup and its subsidiaries are participants in a pension plan with certain other related companies. This plan 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. For purposes of determining the actuarial present value of the projected benefit obligation, the weighted average discount rate was 7.75% for 1996, 7.25% for 1995 and 8.5% for 1994. The rate of increase in future compensation levels was 4.75% for 1996, 4.00% for 1995 and 5.00% for 1994. The expected long-term rate of return on assets was 9% for 1996, 1995, and 1994. Employee pension benefit plan status at December 31:
(In thousands) 1996 1995 ============================================================================ Actuarial present value of benefit obligations: Accumulated benefit obligation $ 8,623 $ 10,211 Vested benefit obligation $ 8,191 $ 9,244 Projected benefit obligation for service rendered to date $ 13,279 $ 13,811 Plan assets at fair value $ 13,729 $ 11,567 - ---------------------------------------------------------------------------- Plan assets over/(under) projected benefit obligation 450 (2,244) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (2,549) (716) Unrecognized prior service cost 62 66 Unrecognized net asset at January, 1986 being recognized over 19 years (45) (38) - ---------------------------------------------------------------------------- Accrued pension cost $ (2,082) $ (2,932) ============================================================================
(In thousands) 1996 1995 1994 ========================================================================================= Net pension cost included the following components: Service cost $ 1,099 $ 873 $ 849 Interest cost 1,029 962 619 Actual return on plan assets (1,463) (851) (614) Net amortization and deferral 405 (6) (27) - ----------------------------------------------------------------------------------------- Net pension cost $ 1,070 $ 978 $ 827 =========================================================================================
At December 31, 1996 and 1995, the pension plan assets included investments of 45,260 and 59,874 shares of BancGroup Common Stock representing 7% of pension plan assets for both years. At December 31, 1996, BancGroup Common Stock included in pension plan assets had a cost and market value of $383,488 and $905,200, respectively. Pension plan assets are distributed approximately 10% in U.S. Government and agency issues, 26% in Corporate bonds and 48% in equity securities (including BancGroup Common Stock) and 16% in money market 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 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 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 57 45 plan and similar plans of combined banks amounted to $850,000, $772,000 and $606,000 for 1996, 1995 and 1994, respectively. 14. 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. An aggregate of 1,100,000 shares of Common Stock are reserved for issuance under the 1992 Plan. At December 31, 1996 and 1995, 704,872 and 977,038 shares, 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 1,600,000 shares of Common Stock are reserved for issuance under the 1992 Nonqualified Plan. At December 31, 1996 and 1995, 1,475,500 and 1,565,500 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 SBC and CBG combinations, BancGroup assumed qualified stock options and non-qualified stock options in exchange for existing officers and directors and other stock options according to the respective exchange ratios. Certain of the options issued during 1996 under the 1992 Nonqualified Plan and the 1992 Plan have vesting requirements. The option recipients are required to remain in the employment of BancGroup (subject to certain exemptions) for periods of between one and five years to fully vest in the options granted. The five year vesting options become exercisable on a pro-rata basis for five years. Following is a summary of the transactions in Common Stock under these plans for the years ended December 31, 1996, 1995 and 1994.
============================================================================================================================ Qualified Plans Nonqualified Plans - ---------------------------------------------------------------------------------------------------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ============================================================================================================================ Outstanding at December 31, 1993 321,796 $ 4.849 1,478,700 $ 5.163 Granted (at $5.74 per share) -- -- 126,182 5.740 Exercised (at $2.125-$6.50 per share) (104,156) 5.478 (30,000) 3.684 - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1994 217,640 4.532 1,574,882 5.269 Granted (at $8.445-$9.94 per share) 7,500 9.940 36,862 8.858 Exercised (at $3.08-$8.74 per share) (67,038) 3.741 (28,730) 3.391 - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1995 158,102 5.068 1,583,014 5.423 Granted (at $14.580-$19.94 per share) 292,166 17.895 90,000 14.714 Exercised (at $3.08-$9.12 per share) (22,354) 5.837 (406,778) 5.849 - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1996 427,914 $ 13.786 1,266,236 $ 6.084 ===========================================================================================================================
58 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 46 At December 31, 1996, the total shares outstanding and exercisable under these option plans were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE =========================================================================== ========================================== WEIGHTED AVERAGE WEIGHTED NUMBER REMAINING AVERAGE AGGREGATE NUMBER AVERAGE AGGREGATE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE OPTION EXERCISABLE EXERCISE OPTION EXERCISE PRICES AT 12/31/96 LIFE PRICE PRICE AT 12/31/96 PRICE PRICE - --------------------------------------------------------------------------- ------------------------------------------ $3.08-$3.19 278,776 3.96 years $ 3.088 $ 860,831 278,776 $ 3.088 $ 860,831 $3.625-$3.88 497,396 4.80 years 3.817 1,898,470 497,396 3.817 1,898,470 $4.31-$8.445 214,692 7.16 years 6.268 1,345,723 214,692 6.268 1,345,723 $9.12-$9.94 321,120 4.10 years 9.170 2,944,755 321,120 9.170 2,944,755 $14.715-$17.155 308,166 10.47 years 16.488 5,081,093 179,000 16.021 2,867,825 $19.53-$19.94 74,000 10.97 years 19.885 1,471,460 -- N/A -- - --------------------------------------------------------------------------- ------------------------------------------ Total 1,694,150 6.11 years $ 8.029 $13,602,332 1,490,984 $ 6.652 $ 9,917,604 =========================================================================== ==========================================
On January 1, 1996 BancGroup adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As permitted by SFAS 123, 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 fair market value of the shares at date of issue. Had compensation cost for BancGroup's Plans been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS 123, BancGroup's net income and net income per share would have been reduced to the pro forma amounts indicated below:
As Pro Reported Forma ======================================================= 1996 ---- Net income $53,608 $ 52,603 Earnings Per Share(Primary) $ 1.62 $ 1.59 1995 ---- Net income $41,553 $ 41,349 Earnings Per Share(Primary) $ 1.32 $ 1.31 1994 ---- Net income $29,741 $ 29,660 Earnings Per Share(Primary) $ 1.00 $ 1.00 =======================================================
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 1996, 1995, and 1994, respectively; dividend yield of 3.15%, 4.98% and 6.97%; expected volatility of 34% for all years; risk-free interest rates of 6.04%, 6.63% and 7.77%; and expected lives of ten years. The weighted average fair values of options granted during 1996, 1995 and 1994 was $6.51, $4.78 and $5.35, 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 1996, 1995 and 1994, respectively, 31,710, 34,048 and 28,534 shares of Common Stock were issued under the Directors Plan, representing approximately $328,000, $326,000 and $284,000 in directors' fees for 1996, 1995 and 1994, 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 20% per year commencing on the first anniversary of the award. An aggregate of 1,500,000 shares have been reserved for issuance under this Plan. There were 99,640 shares outstanding of which 10,520 shares were vested at December 31, 1996. In 1994, BancGroup adopted the Employee Stock Purchase Plan which provides salaried employees of BancGroup with a convenient way to become shareholders of BancGroup. The participant authorizes a regular payroll deduction of not less than $10 or more than 10% of salary. The participant may also contribute whole dollar amounts of not less than $100 or more than $1,000 each month toward the purchase of the stock at market price. There are 300,000 shares authorized for issuance under this Plan. There were 22,706 shares issued and outstanding under this Plan at December 31, 1996. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 59 47 15. CONTINGENCIES BancGroup and its subsidiary banks 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, 1996, will have a materially adverse effect on BancGroup's financial statements. 16. RELATED PARTIES Most of the insurance coverage for credit life, and accident and health insurance is provided to customers of BancGroup's subsidiary bank by companies owned by a principal shareholder and a director of BancGroup. Premiums collected from customers and remitted to these companies on such insurance were approximately $1,651,000, $1,712,000 and $2,242,000 in 1996, 1995 and 1994, respectively. BancGroup, Colonial Bank and CMC lease premises, including their principal corporate offices, and airplane services from companies owned by principal shareholders of BancGroup. Amounts paid under these leases and agreements approximated $3,252,000, $3,100,000 and $2,300,000 in 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, BancGroup and its subsidiaries paid or accrued fees of approximately $1,475,000, $1,306,000 and $1,326,000, respectively, for legal services required of law firms in which a partner of the firm serves on the Board of Directors. 17. OTHER EXPENSE The following amounts were included in Other Expense:
(In thousands) 1996 1995 1994 ===================================================================== Stationery, printing, and supplies $ 3,469 $ 3,080 $ 3,084 Postage 2,241 1,901 1,682 Telephone 4,284 3,429 2,915 Insurance 1,404 1,417 1,690 Legal fees 2,778 2,232 2,949 Advertising and public relations 5,029 3,796 2,736 FDIC assessment 2,231 3,767 5,293 Other 25,346 23,149 18,587 - --------------------------------------------------------------------- Total $ 46,782 $ 42,771 $ 38,936 =====================================================================
18. INCOME TAXES The components of income taxes were as follows:
(In thousands) 1996 1995 1994 ===================================================================== Currently payable: Federal $ 28,175 $ 23,265 $ 16,961 State 2,391 2,200 1,229 Deferred (1,103) (2,225) (2,361) - --------------------------------------------------------------------- Total $ 29,463 $ 23,240 $ 15,829 =====================================================================
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:
(In thousands) 1996 1995 1994 ===================================================================== Tax at statutory rate on income from operations $ 29,075 $ 22,627 $ 15,911 Add: State income taxes, net of federal tax benefit 2,131 1,453 829 Amortization of net purchase accounting adjustments 369 237 465 Other 441 871 261 - --------------------------------------------------------------------- Total 32,016 25,188 17,466 ===================================================================== Deduct: Nontaxable interest income 2,537 1,696 1,404 Dividends received deduction 16 252 233 - --------------------------------------------------------------------- Total 2,553 1,948 1,637 - --------------------------------------------------------------------- TOTAL INCOME TAXES $ 29,463 $ 23,240 $ 15,829 =====================================================================
60 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 48 The components of BancGroup's net deferred tax asset as of December 31, 1996 and 1995, were as follows:
(In thousands) 1996 1995 =========================================================================== Deferred tax assets: Allowance for possible loan losses $16,984 $15,294 Pension accrual in excess of contributions 952 755 Accumulated amortization of mortgage servicing rights 2,384 2,869 Acquisition related accruals -- 547 Other real estate owned writedowns 1,182 1,394 Other liabilities and reserves 1,556 1,514 Deferred loan fees, net 3 408 Accelerated tax depreciation 292 -- Other 1,082 2,132 - ------------------------------------------------------------------- Total deferred tax asset 24,435 24,913 =================================================================== Deferred tax liabilities: Accelerated tax depreciation -- 368 Cumulative accretion/discount on bonds 428 510 Differences between financial reporting and tax bases of net assets acquired 647 1,124 Stock dividends received 2,106 1,449 Prepaid FDIC assessment 1 407 Loan loss reserve recapture 1,779 2,248 Unrealized gain on securities available for sale 399 362 Other 1,125 1,561 - ------------------------------------------------------------------- Total deferred tax liability 6,485 8,029 =================================================================== Net deferred tax asset $17,950 $16,884 ===================================================================
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. 19. 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. - - 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 fair value is determined from quoted current market prices. - - MORTGAGE SERVICING RIGHTS AND EXCESS SERVICING FEES -- Fair value is estimated by discounting future cash flows from servicing fees using discount rates that approximate current market rates. - - 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, 1996 and 1995. 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 -- For these short-term instruments, the carrying amount is a reasonable estimate of fair value. - - 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, 1996 and 1995. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 61 49 The estimated fair values of BancGroup's financial instruments at December 31, 1996 and 1995 are as follows:
1996 1995 ===================================================== CARRYING FAIR Carrying Fair (In thousands) AMOUNT VALUE Amount Value ======================================================================================== Financial assets: Cash and short-term investments $ 204,278 $ 204,278 $ 201,283 $ 201,283 Securities available for sale 306,835 306,835 214,293 214,293 Investment securities 275,800 277,858 283,995 287,314 Mortgage loans held for sale 157,433 159,527 110,486 111,952 Mortgage servicing rights and excess servicing fees 107,797 152,064 88,165 130,156 Loans 3,680,445 3,175,506 Less: allowance for loan losses (45,170) (41,490) - ---------------------------------------------------------------------------------------- Loans, net 3,635,245 3,683,687 3,134,016 3,178,115 - ---------------------------------------------------------------------------------------- Total $ 4,687,418 $4,784,349 $ 4,032,238 $4,127,753 ======================================================================================== Financial liabilities: Deposits $ 3,583,669 $3,589,761 $ 3,204,260 $3,208,544 Short-term borrowings 832,529 832,529 597,256 597,256 Long-term debt 37,667 40,656 46,263 53,600 - ---------------------------------------------------------------------------------------- Total $ 4,453,865 $4,462,946 $ 3,847,779 $3,859,400 ========================================================================================
20. CONDENSED FINANCIAL INFORMATION OF THE COLONIAL BANCGROUP, INC. (PARENT COMPANY ONLY) STATEMENT OF CONDITION
December 31 - --------------------------------------------------------------------------- (In thousands) 1996 1995 =========================================================================== ASSETS: Cash* $ 1,061 $ 4,043 Investment in subsidiaries* 359,338 314,883 Intangible assets 3,224 3,642 Other assets 3,915 3,923 - --------------------------------------------------------------------------- Total assets $ 367,538 $ 326,491 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Short-term borrowings $ 1,033 $ 1,000 Subordinated debt 7,187 17,120 Other long-term debt 14,116 16,499 Other liabilities 2,020 2,409 Shareholders' equity 343,182 289,463 - --------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 367,538 $ 326,491 ===========================================================================
*Eliminated in consolidation. STATEMENT OF OPERATIONS
Years Ended December 31 - ---------------------------------------------------------------------- (In thousands) 1996 1995 1994 ====================================================================== INCOME: Cash dividends from subsidiaries* $ 14,411 $ 13,449 $ 12,027 Interest and dividends on short-term investments* 47 84 81 Other income 1,444 1,054 1,062 - ---------------------------------------------------------------------- Total income 15,902 14,587 13,170 ====================================================================== EXPENSES: Interest 1,818 2,616 2,486 Salaries and employee benefits 1,528 754 928 Occupancy expense 321 298 293 Furniture and equipment expense 96 73 111 Amortization of intangible assets 406 406 406 Other expenses 4,811 3,381 3,915 - ---------------------------------------------------------------------- Total expenses 8,980 7,528 8,139 ====================================================================== Income before income taxes, extraordinary item and equity in undistributed net income of subsidiaries 6,922 7,059 5,031 Income tax benefit 2,435 2,007 2,238 - ---------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 9,357 9,066 7,269 Equity in undistributed net income of subsidiaries* 44,251 32,487 22,472 - ---------------------------------------------------------------------- Net income $ 53,608 $ 41,553 $ 29,741 ======================================================================
*Eliminated in consolidation. 62 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 50 20. CONDENSED FINANCIAL INFORMATION OF THE COLONIAL BANCGROUP, INC. (continued) (PARENT COMPANY ONLY)
STATEMENT OF CASH FLOWS Years Ended December 31 (In thousands) 1996 1995 1994 ====================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 53,608 $ 41,553 $ 29,741 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of assets -- -- (7) Depreciation, amorti- zation, and accretion 509 629 649 Decrease (increase) in prepaids and other assets 8 (1,412) 180 (Decrease) increase in accrued income taxes (65) 3,387 (727) (Decrease) increase in accrued expenses (324) 930 74 Undistributed earnings of subsidiaries* (44,251) (32,487) (22,472) - ----------------------------------------------------------------------- Total adjustments (44,123) (28,953) (22,303) - ----------------------------------------------------------------------- Net cash provided by operating activities 9,485 12,600 7,438 - ----------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (124) (175) (343) Proceeds from sale of premises and equipment -- 538 399 Net repayment (investment) in subsidiaries* 2,692 (6,394) (5,603) - ----------------------------------------------------------------------- Net cash provided by (used in) investing activities 2,568 (6,031) (5,547) - -----------------------------------------------------------------------
STATEMENT OF CASH FLOWS(Continued) Years Ended December 31 (In thousands) 1996 1995 1994 ========================================================================= CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt -- 6,249 -- Repayment of long-term debt (2,350) (1,000) (2,000) Proceeds from issuance of common stock 3,457 1,038 6,518 Dividends paid (16,175) (10,521) (7,432) Other, net 33 (50) 52 - ------------------------------------------------------------------------- Net cash used in financing activities (15,035) (4,284) (2,862) - ------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (2,982) 2,285 (971) Cash and cash equivalents at beginning of year 4,043 1,758 2,729 - ------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR* 1,061 $ 4,043 $ 1,758 ========================================================================= Supplemental disclosure of cash flow information: Cash paid (received) during the year for: Interest $ 1,774 $ 2,661 $ 2,489 Income taxes (2,493) (700) (1,500) =========================================================================
*Eliminated in consolidation. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 63 51 COMMON STOCK INFORMATION MARKET PRICE OF AND DIVIDENDS DECLARED ON COMMON STOCK BancGroup's Common Stock is traded on the New York Stock Exchange under the symbol "CNB". This trading commenced on February 24, 1995. Prior to that time, BancGroup's Class A Common Stock was traded on the over-the-counter market and was quoted on NASDAQ under the symbol "CLBGA". There was no active public trading market for the Class B Common Stock. The following table indicates the high and low closing prices for Common Stock and Class A Common Stock, for 1996 and 1995.
SALE PRICE OF COMMON STOCK* DIVIDENDS DECLARED ------------- ON COMMON STOCK* HIGH LOW (PER SHARE) ====================================================================== 1996 1st Quarter Common ........................ 18 1/4 15 $ .135 2nd Quarter Common ....................... 18 1/16 15 5/8 .135 3rd Quarter Common ....................... 17 15/16 15 5/8 .135 4th Quarter Common ....................... 20 1/8 17 3/8 .135 - ---------------------------------------------------------------------- 1995 1st Quarter Class A ...................... 11 13/16 9 3/4 $ 0.1125 Class B ...................... -- -- 0.0625 Common ....................... -- -- -- 2nd Quarter Common ....................... 13 5/8 11 9/16 0.1125 3rd Quarter Common ....................... 14 15/16 13 3/4 0.1125 4th Quarter Common ....................... 16 7/16 14 1/4 0.1125 ======================================================================
VOTING SECURITIES AND SHAREHOLDERS As of December 31, 1996 and 1995, BancGroup had outstanding 32,749,282* and 31,039,376*, respectively, shares of Common Stock, with 5,747 and 5,388 shareholders of record. *Restated to reflect the impact of a two-for-one stock split effected in the form of 100% stock dividend paid February 11, 1997. 64 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 52 SUPPLEMENTAL INFORMATION 53 SELECTED FINANCIAL DATA
For the years ended December 31, 1996, 1995, 1994, 1993 and 1992 (In thousands, except per share amounts) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------- STATEMENT OF INCOME Interest income $391,957 $327,897 $244,145 $193,026 $179,872 Interest expense 199,953 164,895 101,293 76,378 80,212 - ---------------------------------------------------------------------------------------------- Net interest income 192,004 163,002 142,852 116,648 99,660 Provision for possible loan losses 11,783 8,281 8,070 11,423 12,899 - ---------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 180,221 154,721 134,782 105,225 86,761 Noninterest income 70,818 59,261 52,830 49,555 44,518 Noninterest expense 171,005 144,525 136,906 119,589 105,853 SAIF special assessment(1) 3,817 -- -- -- -- - ---------------------------------------------------------------------------------------------- Income before income taxes 76,217 69,457 50,706 35,191 25,426 Applicable income taxes 26,834 24,656 16,831 10,727 6,926 - ---------------------------------------------------------------------------------------------- Income before extraordinary items and the cumulative effect of a change in accounting for income taxes 49,383 44,801 33,875 24,464 18,500 Extraordinary items, net of income taxes -- -- -- (396) -- Cumulative effect of a change in accounting for income taxes -- -- -- 3,890 -- - ---------------------------------------------------------------------------------------------- Net income 49,383 44,801 33,875 27,958 18,500 ============================================================================================== Income excluding SAIF special assessment(1) $ 51,849 $ 44,801 $ 33,875 $ 27,958 $ 18,500 ============================================================================================== EARNINGS PER SHARE Income excluding SAIF special assessment: Primary**(1) $ 1.36 $ 1.23 $ 0.98 $ 0.82 $ 0.70 Fully-diluted**(1) $ 1.34 $ 1.20 $ 0.97 $ 0.81 $ 0.70 Income before extraordinary items and the cumulative effect of a change in accounting for income taxes: Primary** $ 1.30 $ 1.23 $ 0.98 $ 0.82 $ 0.70 Fully-diluted** $ 1.28 $ 1.20 $ 0.97 $ 0.81 $ 0.70 Net income: Primary** $ 1.30 $ 1.23 $ 0.98 $ 0.94 $ 0.70 Fully-diluted** $ 1.28 $ 1.20 $ 0.97 $ 0.92 $ 0.70 Average shares outstanding: Primary** 38,117 36,327 34,445 29,884 26,470 Fully-diluted** 38,977 38,199 35,979 32,069 29,186 Cash dividends per common share: Common** $ 0.54 $ 0.3375 -- -- -- Class A** -- $ 0.1125 $ 0.40 $ 0.355 $ 0.335 Class B** -- $ 0.0625 $ 0.20 $ 0.155 $ 0.135 ==============================================================================================
** Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid February 11, 1997. (1) Legislation approving a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $3,817,000 in expense before income taxes and $2,466,000 net of applicable income taxes in 1996. 18 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 54
For the years ended December 31, 1996, 1995, 1994, 1993 and 1992 (In thousands, except per share amounts) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- STATEMENT OF CONDITION DATA At year-end: Total assets $5,466,851 $4,773,049 $3,690,626 $3,555,476 $2,493,824 Loans, net of unearned income 4,074,633 3,521,514 2,622,181 2,182,755 1,549,316 Mortgage loans held for sale 157,966 112,203 61,556 368,515 150,835 Deposits 4,113,934 3,700,715 2,909,623 2,831,978 2,102,575 Long-term debt 39,092 47,688 86,662 57,397 22,979 Shareholders' equity 386,996 336,931 261,560 243,396 152,602 Average balances: Total assets $5,093,410 $4,193,246 $3,535,205 $2,850,680 $2,426,537 Interest-earning assets 4,661,294 3,824,327 3,192,897 2,530,300 2,141,541 Loans, net of unearned income 3,799,947 3,007,312 2,375,396 1,710,797 1,505,114 Mortgage loans held for sale 135,135 98,785 135,046 248,502 121,820 Deposits 3,896,620 3,291,343 2,865,107 2,277,465 2,048,111 Shareholders' equity 367,075 293,651 255,861 187,322 147,980 Book value per share at year-end** $ 10.31 $ 9.41 $ 7.87 $ 7.62 $ 6.19 Tangible book value per share at year-end** $ 9.50 $ 8.57 $ 7.26 $ 7.09 $ 5.90 ========================================================================================================== SELECTED RATIOS Income excluding SAIF special assessment to: Average assets(1) 1.02% 1.07% 0.96% 0.86% 0.76% Average shareholders' equity(1) 14.12 15.26 13.24 13.06 12.50 Income before extraordinary items and the cumulative effect of a change in accounting for income taxes to: Average assets 0.97 1.07 0.96 0.86 0.76 Average shareholders' equity 13.45 15.26 13.24 13.06 12.50 Net income to: Average assets 0.97 1.07 0.96 0.98 0.76 Average shareholders' equity 13.45 15.26 13.24 14.93 12.50 Efficiency ratio(1) 64.54 64.43 69.20 71.67 72.87 Dividend payout ratio 41.54 36.59 40.82 37.77 47.86 Average equity to average total assets 7.21 7.00 7.24 6.57 6.10 Total nonperforming assets to net loans, other real estate and repossessions 0.81 0.82 1.24 1.77 2.25 Net charge-offs to average loans 0.18 0.17 0.13 0.35 0.57 Allowance for possible loan losses to total loans (net of unearned income) 1.25 1.28 1.56 1.62 1.54 Allowance for possible loan losses to nonperforming loans(2) 215% 262% 240% 211% 132% ==========================================================================================================
** Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid February 11, 1997. (1) Legislation approving a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $3,817,000 in expense before income taxes and $2,466,000 net of applicable income taxes in 1996. (2) Nonperforming loans and nonperforming assets are shown as defined in Management's Discussion and Analysis of Financial Condition and Results of Operations -- Nonperforming Assets on page 34. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 19 55 SELECTED QUARTERLY FINANCIAL DATA 1996-1995
(In thousands, except per share amounts) 1996 1995 ------------------------------------ ------------------------------------ DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 - ------------------------------------------------------------------------------------------------------- Interest income $102,805 $100,813 $95,902 $92,437 $91,307 $85,417 $79,973 $71,200 Interest expense 52,669 51,345 48,283 47,656 47,224 43,972 40,265 33,434 - ------------------------------------------------------------------------------------------------------- Net interest income 50,136 49,468 47,619 44,781 44,083 41,445 39,708 37,766 Provision for loan losses 5,460 2,635 1,938 1,750 3,576 1,655 1,612 1,438 - ------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 44,676 46,833 45,681 43,031 40,507 39,790 38,096 36,328 - ------------------------------------------------------------------------------------------------------- Net income $ 6,797 $ 13,446 $15,517 $13,623 $ 9,878 $12,423 $12,527 $ 9,973 - ------------------------------------------------------------------------------------------------------- Income excluding SAIF special assessment (1) $ 6,797 $ 15,912 $15,517 $13,623 $ 9,878 $12,423 $12,527 $ 9,973 - ------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Income excluding SAIF special assessment: Primary**(1) $ 0.18 $ 0.41 $ 0.41 $ 0.36 $ 0.26 $ 0.36 $ 0.37 $ 0.24 Fully-diluted**(1) 0.17 0.41 0.41 0.35 0.26 0.35 0.36 0.23 Net income: Primary** $ 0.18 $ 0.35 $ 0.41 $ 0.36 $ 0.26 $ 0.36 $ 0.37 $ 0.24 Fully-diluted** 0.17 0.35 0.41 0.35 0.26 0.35 0.36 0.23 =======================================================================================================
** Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid on February 11, 1997. (1) Legislation approving a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $3,817,000 in expense before income taxes and $2,466,000 net of applicable income taxes in 1996. 20 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 56 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 user of the attached financial statements and accompanying footnotes with a more detailed analysis of the financial results of The Colonial BancGroup, Inc. ("BancGroup"). 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 January 3, 1997 and January 31, 1997 poolings of interests with Jefferson Bancorp, Inc. ("Jefferson") and D/W Bankshares, Inc. ("Bankshares"), respectively. BACKGROUND BancGroup (or the "Company") was established in 1981 with one bank and $166 million in assets. Through 37 business combinations BancGroup has grown to a $5.5 billion multistate bank holding company with substantial centralized operations, local lending autonomy with centralized loan review and a strong commercial lending function. During 1995, the Company acquired Mt. Vernon Financial Corp. and expanded its operations into the Atlanta, Georgia market. In July 1996, the Company continued its expansion in the metropolitan Atlanta market with the Commercial Bancorp of Georgia, Inc. ("Commercial") merger and also moved into Florida with the merger with Southern Banking Corporation ("Southern") which is based in Orlando. In January 1997, BancGroup continued its growth in Florida with the mergers of Jefferson (based in Miami Beach), Tomoka Bancorp, Inc. ("Tomoka") (based in Ormond Beach) and First Family Financial Corporation ("First Family") (based in Eustis). Also in January 1997, expansion in Georgia continued with the merger of Bankshares into BancGroup. In March 1997, BancGroup acquired Shamrock Holdings, Inc. ("Shamrock") in Evergreen, Alabama. BancGroup has also entered into agreements to merge three additional banks in Florida into BancGroup. All of the transactions are expected to close in the second or third quarter of 1997. BancGroup's expansion in Georgia and Florida reflects a corporate goal to establish its community banking concept in the higher growth market areas of the Southeast. More importantly, BancGroup's operating earnings per share have increased an average of 17.7% per year since 1992 and in 1996 the Company achieved a 14.12% return on average equity and a 1.02% return on average assets excluding the one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF"). BancGroup's performance goals are: 1) an annual earnings per share growth rate in excess of 10%, 2) a 17.5% return on equity, 3) a 1.45% return on assets and 4) a consistently increasing dividend. The strategies employed to achieve these results are outlined below. They represent the foundation upon which BancGroup operates and the basis for achieving the Company's goals. - - COMMUNITY BANK: BancGroup operates as a community bank allowing autonomy in lending decisions and customer relationships. This operating philosophy has been important in making acquisitions, retaining a skilled and highly motivated management team and developing a strong customer base, particularly with respect to lending relationships. - - COMMERCIAL LENDING: Commercial lending primarily through groups located in the Birmingham, Huntsville, Montgomery and Anniston, Alabama as well as the Atlanta, Georgia and Orlando, Florida metropolitan centers has been a major factor in the Company's growth. Commercial real estate and other commercial loans increased 14% during both 1996 and 1995. BancGroup has been very successful in competing for these loans against other larger financial institutions, due primarily to the Company's local lending strategy and management continuity. - - CONSUMER REAL ESTATE: Since 1993, BancGroup has focused on residential real estate lending as a means to increase consumer lending, broaden the Company's customer base and create a significant stream of fee income. In furtherance of this goal, in February, 1995 BancGroup acquired Colonial Mortgage Company ("CMC"), one of the 50 largest mortgage loan servicers in the country. BancGroup has increased residential mortgage loans 363% from $381 million at December 31, 1992 to $1.8 billion at December 31, 1996. The portfolio of mortgage loans has a relatively low credit risk and provides a source of liquidity by serving as collateral for Federal Home Loan Bank borrowings. CMC's $10.6 billion portfolio of loans serviced for others provides a steady source of noninterest income. - - GROWTH MARKET EXPANSION: In October, 1995, BancGroup completed the acquisition of Mt. Vernon Financial Corp., an Atlanta, Georgia based thrift with $225 million in assets. On July 3, 1996, BancGroup merged with Commercial, a $233 million bank in the north Atlanta area and Southern, a $232 million bank in Orlando, Florida. On January 3, 1997, BancGroup merged with Jefferson, a $473 million bank in Miami Beach, Florida. Also on January 3, 1997, Tomoka, a $77 million bank in Ormond Beach, Florida, was merged into BancGroup. On January 9, 1997, BancGroup acquired First Family, a $167 million thrift in Eustis, Florida. On January 31, 1997, BancGroup merged with Bankshares, a $139 million bank in Dalton, Georgia. These business combinations provided BancGroup with a significant base of operations in the Southeast's two fastest growing markets. In addition, agreements to merge three other banks in Florida into BancGroup will expand on this base and increase BancGroup's total assets in Florida to approximately $1.4 billion. - - COST CONTROL: An operational and organizational infrastructure established in prior years has allowed the Company to grow significantly and improve the efficiency THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 21 57 ratio from 72.87% in 1992 to 64.54% in 1996. The operating structure is built around centralized back-shop operations in areas that do not have direct customer contact. As noted above, this structure has served the Company well over the past few years and should allow for continued growth at a low marginal cost. This same structure will allow for additional efficiencies in the recently acquired institutions which are not reflected in the operating costs presented. In order to further enhance the cost efficiencies already established and position the Company for more rapid growth, in 1995 BancGroup completed a reengineering study to streamline transaction processing, increase the cost-effective use of technological resources and identify potential revenue enhancements. 1996 was the first full year that additional income was recognized due to the implementation of several revenue enhancements consisting of 1) repriced service charges and fees, 2) the automation of fee collection, 3) improved reporting for tracking fee collection and 4) controlling cost by staffing efficiently in the branches. - - CAPITAL UTILIZATION: Management's goal is to provide a greater than 17.5% return on capital while effectively utilizing internally created capital and exceeding regulatory capital requirements. BancGroup has an asset generating capability that can effectively utilize the capital generated. This capability is most evident in 1996 by BancGroup's 16.5% internal growth in loans of which 2.5% was contributed by CMC. CMC provides asset generating sources for mortgage loans, as noted, and mortgage servicing rights. CMC increased its mortgage servicing rights by 23.5% in 1996. - - ASSET QUALITY: Maintaining high asset quality is at the forefront of the Company's strategy to allow for consistent earnings growth. BancGroup's asset quality is demonstrated by its charge-off history and nonperforming asset levels, which compare favorably to its peer group. On December 31, 1993, BancGroup completed the acquisition of First AmFed Corporation, Huntsville, Alabama. This transaction increased total nonperforming assets in 1993 by $12.8 million to 1.77% of loans and other real estate. This ratio was reduced to .81% as of December 31, 1996 primarily through sales of other real estate. Net charge-offs over the past 5 years have consistently compared favorably with the Company's peer group and were only .18% of average loans in 1996 and .17% in 1995. - - TECHNOLOGICAL ADVANCES: BancGroup is committed to increasing efficiencies and providing better customer access to products and services through effective utilization of technological advances. Some of the steps taken to achieve this objective include: 1) issuance of the Colonial Check Card, a debit card allowing customers to make purchases with funds from their checking account, 2) establishment of telephone banking, giving customers the capability to pay their bills and transfer funds by phone, 3) creation of a computer banking service allowing customers to conduct banking business from their home computers, and 4) expanded use of document imaging for certain loan and deposit documents. Technology is always changing, and BancGroup will continue to investigate methods of improving customer services through product enhancement and the efficiencies that technology provides. - - STOCK SPLIT: On January 15, 1997, 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 February 11, 1997. The stated par value of each share was not changed from $2.50. 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. Obviously the Company cannot guarantee its success in implementing the initiatives or reaching the goals set out previously. The following analysis of financial condition and results of operations provide details with respect to this summary material and demonstrates trends concerning the initiatives taken through l996. - -------------------------------------------------------------------------------- BUSINESS COMBINATIONS A principal part of BancGroup's strategy is 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 recently completed the following business combinations with other financial institutions. The balances reflected are as of the date of consummation.
COMPLETED ACQUISITIONS: (Dollars in thousands) ACCOUNTING DATE BANCGROUP TOTAL TOTAL TOTAL FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED SHARES ASSETS LOANS DEPOSITS - ----------------------------------------------------------------------------------------------------------------------------- Colonial Mortgage Company (AL) Pooling 02/17/95 4,545,454 $ 71,000 $ 1,675 $ 0 Brundidge Banking Company (AL) Purchase 03/31/95 532,868 56,609 31,577 46,044 Mt. Vernon Financial Corp. (GA) Purchase 10/20/95 1,043,440 217,967 192,167 156,356 Farmers & Merchants Bank (AL) Purchase 11/03/95 513,686 56,050 25,342 45,448 Commercial Bancorp of Georgia, Inc. (GA) Pooling 07/03/96 2,306,460 232,555 145,429 207,641 Southern Banking Corporation (FL) Pooling 07/03/96 2,858,494 232,461 160,864 205,602 Dothan Federal Savings Bank (AL) Purchase 07/08/96 154,690 48,366 36,497 39,931 Jefferson Bancorp, Inc. (FL) Pooling 01/03/97 3,854,952 472,732 322,857 405,836 D/W Bankshares, Inc. (GA) Pooling 01/31/97 1,016,548 138,686 71,317 124,429
22 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 58 In addition to the combinations shown above, BancGroup has closed or has plans to close the following combinations. The balances reflected are as of December 31, 1996. The following business combinations have not been reflected in the finanical statements at December 31, 1996.
PENDING ACQUISITIONS: (Dollars in thousands) ACCOUNTING DATE TOTAL TOTAL TOTAL FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED ASSETS LOANS DEPOSITS - ---------------------------------------------------------------------------------------------------------- Tomoka Bancorp, Inc. (FL) Pooling 01/03/97 $ 76,700 $ 51,600 $ 68,200 First Family Financial Corp. (FL) Purchase 01/09/97 167,300 117,500 156,700 Shamrock Holdings, Inc. (AL) Purchase 03/05/97 54,500 19,300 46,400 Ft. Brooke Bancorporation (FL) Pooling Pending 208,800 141,500 185,800 First Commerce Banks of Florida, Inc. (FL) Purchase Pending* 105,900 68,200 94,700 Great Southern Bank (FL) Pooling Pending* 119,200 94,400 107,800
* Definitive agreements were signed in March 1997. The combination with CMC in 1995 was accounted for using a method of accounting similar to a pooling-of-interests. In addition, on July 3, 1996, BancGroup completed the mergers with Southern and Commercial. On January 3, 1997 and January 31, 1997, BancGroup completed the mergers with Jefferson and Bankshares. These combinations were accounted for using the pooling-of-interests method. Accordingly, all financial statement amounts 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 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. 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 of earnings of BancGroup for 1995 and 1996 cannot reasonably be determined. The combinations have had an impact on the comparisons of operating results for 1995 and 1996 with prior years. Where such information is determinable it has been identified and discussed in the discussion of results of operations and financial condition that follows. COLONIAL MORTGAGE COMPANY On February 17, 1995, BancGroup completed the acquisition of CMC. This acquisition represents a major step in achieving several BancGroup strategic goals. A principal initiative of BancGroup for the past several years has been to increase fee income through establishment of additional lines of business that provide natural extensions of existing products or services. CMC in this regard provides an excellent fit for the following reasons: FEE INCOME At December 31, 1996, CMC provided servicing for approximately 132,000 customers with a total outstanding balance of $10.6 billion. The servicing revenues from this portfolio plus other fee income from CMC provided approximately 51% of BancGroup's noninterest income in 1996 and 1995. CONSUMER REAL ESTATE LENDING Through its wholesale and retail offices, CMC originated over $3.8 billion in residential real estate loans from 1994 through 1996. These loans have primarily been fixed rate loans sold into the secondary markets. However, since the latter part of 1994 Colonial Bank has been acquiring adjustable rate mortgage (ARM) loans originated by CMC. This program provides CMC additional loan products for its branch network. In addition, CMC provides the Bank with fixed rate loan products for its customers. GROWTH MARKET EXPANSION CMC currently originates residential mortgages in 32 states through 6 regional offices and services 132,000 customers located in 37 states and the District of Columbia. These locations provide BancGroup with a broader market base to solicit business and include areas which currently have greater growth rates than BancGroup's existing branch locations. These areas include Atlanta, Cincinnati, Dallas, Seattle, and Tallahassee. CAPITAL UTILIZATION BancGroup provides a capital base for the expansion of CMC's low cost servicing operation through bulk purchases of servicing. During 1995 and 1996, CMC acquired a total of $2.2 in bulk servicing. In addition CMC provides another source of loans for the Bank's portfolio including ARM loans and equity lines. CUSTODIAL DEPOSITS CMC maintains custodial accounts for its loan customers for the payment of taxes and insurance as well as collection of principal and interest. The balances in these accounts averaged approximately $152 million and $121 million in 1996 and 1995, respectively. These balances represent 5% of the 13% increase in average noninterest bearing demand deposits from 1995 to 1996. These balances have a positive impact on THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 23 59 BancGroup's net interest margin by providing a noninterest bearing source of funds. CONTINUITY AND CONSISTENCY OF MANAGEMENT Robert E. Lowder, Chairman and CEO of BancGroup has been Chairman and CEO of CMC for 26 years. In addition, Ronnie Wynn has been the President of CMC for 20 years and is a former president of the Mortgage Bankers Association of America. This continuation of management has provided a very smooth transition in management and operating philosophy. CROSS-SELLING OF CUSTOMERS BancGroup has established a personal banking unit to solicit other business from CMC customers, such as equity lines and deposits. In addition, BancGroup plans to expand other customer relationships through establishment of deposit relationships with CMC customers, acceptance of CMC payments in branches, and establishing a linkage between construction and permanent lending.
REVIEW OF RESULTS OF OPERATIONS OVERVIEW The major components of BancGroup's net income are: (In thousands) 1996 1995 1994 ----------------------------------------------------------------------- Net interest income $ 192,004 $163,002 $142,852 Provision for possible loan losses (11,783) (8,281) (8,070) Noninterest income 70,818 59,261 52,830 Noninterest expense 174,822 144,525 136,906 Pretax income 76,217 69,457 50,706 Taxes (26,834) (24,656) (16,831) ----------------------------------------------------------------------- Net income 49,383 44,801 33,875 SAIF assessment, net of taxes 2,466 -- -- ----------------------------------------------------------------------- Income excluding SAIF $51,849 $44,801 $33,875 =======================================================================
Consistently increasing net income is a primary goal of management. Operating earnings (income before extraordinary items, accounting changes and SAIF special assessment) increased 16% in 1996, 32% in 1995 and 38% in 1994. The most significant factors affecting income for 1996, 1995 and 1994 are highlighted below and discussed in greater detail in subsequent sections. - - An increase in 1996 of 21.9% in average earning assets. This follows an increase of 19.8% in 1995. - - An increase of $11.6 million (20%) and $6.4 million (12%) in noninterest income in 1996 and 1995, respectively. - - Maintenance of high asset quality and reserve coverage ratios. Net charge-offs were $6.9 million or .18% of average net loans in 1996 and $5.2 million or .17% of average net loans in 1995. - - Loan growth, excluding acquisitions, of 16.5% in 1996 following an increase of 24.8% in 1995. - - An increase in average loans as a percent of average earning assets to 81.5% in 1996 from 78.6% in 1995. - - Noninterest expenses as a percent of average assets were reduced to 3.36% in 1996 from 3.45% in 1995. 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 yield on a tax equivalent basis are reflected on the following schedule. The net yield on interest-earning assets was 4.16% in 1996 compared to 4.32% in 1995 and 4.54% in 1994. Over this period net interest income on a fully tax equivalent basis increased to $194 million in 1996 from $165 million in 1995 and $145 million in 1994. The principal factors affecting the Company's yields and net interest income are discussed in the following paragraphs. LEVELS OF INTEREST RATES In 1995 and 1996 rates remained fairly constant resulting in little impact on interest spreads or margins. Short-term rates increased throughout 1994 and continued to increase into late 1995 before starting to decline and leveling off in 1996. For example, the average fed funds rate for overnight bank borrowings was 5.45% in December 1994, reached 6.00% midyear 1995 before decreasing to 5.95% in December 1995 and has remained at 5.25% since February 1996. The Company's prime rate increased from 8.5% in December 1994 to 9% midyear 1995 before declining to 8.5% in December 1995 and to 8.25% in February 1996 where it remained the rest of the year. ACQUISITIONS The thrift acquisitions completed during 1995 and 1996 had a negative impact on the Company's net interest yield due primarily to the fact that these institutions had virtually no noninterest-bearing deposits. The rates on the interest-bearing deposits in the acquired institutions were slightly higher than the Company's rates and were adjusted to BancGroup products and rates within a short time after the mergers. 24 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 60 INTEREST-EARNING ASSETS - - GROWTH IN EARNING ASSETS One of the most significant factors in the Company's increase in income for 1996 has been the 21.9% increase in average interest-earning assets. This follows a 19.8% increase in 1995. In addition and equally significant, average net loans increased $793 million (26%) from December 31, 1995 to December 31, 1996. Earning assets as a percentage of total average assets also increased from 90.3% in 1994 to 91.2% in 1995 to 91.5% in 1996. - - MORTGAGE LOANS HELD FOR SALE The level and direction of long-term interest rates has a dramatic impact on the volume of mortgage loan originations from new construction and refinancings. Fluctuation in these rates from 1994 to 1996 resulted in a decline in average mortgage loans held for sale from $135 million in 1994 to $99 million in 1995 and a subsequent increase to $135 million in 1996. Mortgage loans held for sale represent single family residential mortgage loans originated or acquired by CMC then packaged and sold in the secondary market. CMC incurs gains or losses associated with rate fluctuations. CMC limits its risk associated with the sale of these loans through an active hedging program which generally provides for sales commitments on all loans funded. Mortgage loans held for sale are funded primarily with short-term borrowings. - - LOAN MIX During 1996 loans increased in all categories. The mix of loans remained relatively constant. Residential real estate loans continue to be the largest concentration at 43.3% and 43.0% of total loans at December 31, 1996 and 1995, respectively. These loans are predominantly adjustable rate mortgages which have a low level of credit risk and accordingly have lower yields than other loans. INTEREST-BEARING LIABILITIES - - COST OF FUNDS The significant loan growth in 1995 and 1996 has been more rapid than BancGroup's growth in low cost deposits resulting in the funding of a portion of this growth with higher cost funds. This factor has been most responsible for the decline in net interest yield from 1995 to 1996. As discussed under Liquidity and Interest Sensitivity, BancGroup's source of funds are considered adequate to fund future loan growth. Rates paid on new time deposits and variable rate deposits increased during 1994 and continued to increase through 1995. Competitive pressures on these deposit rates continued in 1996, although rates declined slightly. The cost of funds averaged 3.67%, 5.05% and 5.01% in 1994, 1995 and 1996, respectively. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 25 61
AVERAGE VOLUME AND RATES 1996 1995 1994 ------------------------------ ------------------------------ ------------------------------ 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) $3,799,947 $338,896 8.92% $3,007,312 $278,725 9.27% $2,375,396 $198,306 8.35% Mortgage loans held for sale 135,135 10,687 7.91 98,785 7,423 7.51 135,046 10,674 7.90 Investment securities and securities available for sale: Taxable 584,848 35,650 6.10 577,358 34,118 5.91 539,265 28,782 5.34 Nontaxable (2) 55,761 3,957 7.10 53,870 4,018 7.46 62,917 4,850 7.71 Equity securities (3) 30,312 2,132 7.03 30,595 2,323 7.59 36,196 2,032 5.61 - ----------------------------------------------------------- -------------------- -------------------- Total investment securities 670,921 41,739 6.22% 661,823 40,459 6.11% 638,378 35,664 5.59% Federal funds sold and securities purchased under resale agreements 50,169 2,505 4.99 52,401 3,046 5.81 37,340 1,333 3.57 Interest-earning deposits 5,122 219 4.28 4,006 293 7.31 6,737 297 4.41 - ----------------------------------------------------------- -------------------- -------------------- Total interest-earning assets 4,661,294 $394,046 8.45% 3,824,327 $329,946 8.63% 3,192,897 $246,274 7.71% - ----------------------------------------------------------- -------------------- -------------------- Allowance for loan losses (48,619) (40,510) (36,918) Cash and due from banks 158,922 151,715 136,621 Premises and equipment, net 82,252 62,483 59,454 Other assets 239,561 195,231 183,151 - ------------------------------------------------- ---------- ---------- TOTAL ASSETS $5,093,410 $4,193,246 $3,535,205 - ------------------------------------------------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing demand deposits $659,508 $17,970 2.72% $679,948 $19,632 2.89% $736,558 $18,937 2.57% Savings deposits 353,617 11,711 3.31 326,631 11,574 3.54 354,235 10,610 3.00 Time deposits 2,227,981 128,928 5.79 1,703,526 99,638 5.85 1,322,644 57,135 4.32 Short-term borrowings 713,912 38,673 5.42 503,578 30,226 6.00 258,235 11,119 4.31 Long-term debt 37,215 2,703 7.26 49,855 3,825 7.67 83,858 3,461 4.13 - ----------------------------------------------------------- ------------------- -------------------- Total interest-bearing liabilities 3,992,233 $199,985 5.01% 3,263,538 $164,895 5.05% 2,755,530 $101,262 3.67% - ----------------------------------------------------------- ------------------- -------------------- Noninterest-bearing demand deposits 655,514 581,238 451,670 Other liabilities 78,588 54,819 72,144 - ------------------------------------------------- ---------- ---------- Total liabilities 4,726,335 3,899,595 3,279,344 Shareholders' equity 367,075 293,651 255,861 - ------------------------------------------------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,093,410 $4,193,246 $3,535,205 ==================================================================================================================================== RATE DIFFERENTIAL 3.44% 3.58% 4.04% NET INTEREST INCOME AND NET YIELD ON INTEREST- EARNING ASSETS (4) $194,061 4.16% $165,051 4.32% $145,012 4.54% ====================================================================================================================================
(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) Dividends earned and average rates 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 dividends divided by average volume. (4) Net interest income divided by average total interest-earning assets. 26 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 62
ANALYSIS OF INTEREST INCREASES (DECREASES) 1996 CHANGE FROM 1995 1995 CHANGE FROM 1994 ------------------------------------------------ ---------------------------------------- ATTRIBUTED TO (1) ATTRIBUTED TO (1) ------------------------------------------------ ---------------------------------------- (In thousands) AMOUNT VOLUME RATE MIX AMOUNT VOLUME RATE MIX - ----------------------------------------------------------------------------------------------------------------------------------- Interest income: Taxable securities $ 1,532 $ 443 $ 1,075 $ 14 $ 5,336 $ 2,033 $ 3,085 $ 218 Nontaxable securities (2) (61) 141 (195) (7) (832) (697) (157) 22 Dividends on preferred stocks (3) (191) (21) (171) 1 291 (314) 716 (111) - ----------------------------------------------------------------------------------------------------------------------------------- Total securities 1,280 563 709 8 4,795 1,022 3,644 129 Total loans (net of unearned income) 60,171 73,463 (10,520) (2,772) 80,419 52,754 21,851 5,814 Mortgage loans held for sale 3,264 2,731 389 144 (3,251) (2,866) (526) 141 Federal funds sold and securities purchased under resale agreements (541) (130) (430) 19 1,713 538 838 337 Interest-earning deposits (74) 82 (122) (34) (4) (120) 196 (80) - ----------------------------------------------------------------------------------------------------------------------------------- Total 64,100 76,709 (9,974) (2,635) 83,672 51,328 26,003 6,341 - ----------------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest-bearing demand deposits (1,662) (590) (1,105) 33 695 (1,455) 2,329 (179) Savings deposits 137 956 (757) (62) 964 (827) 1,942 (151) Time deposits 29,290 30,675 (1,059) (326) 42,503 16,453 20,225 5,825 Short-term borrowings 8,447 12,625 (2,947) (1,231) 19,107 10,564 4,381 4,162 Long-term debt (1,122) (970) (204) 52 364 (1,403) 2,973 (1,206) - ----------------------------------------------------------------------------------------------------------------------------------- Total 35,090 42,696 (6,072) (1,534) 63,633 23,332 31,850 8,451 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 29,010 $34,013 $ (3,902) $(1,101) $20,039 $27,996 $(5,847) (2,110) ===================================================================================================================================
(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. Mix Change = change in volume times change in rate. (2) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned as actual interest earned times 145%. Tax equivalent average rate is tax equivalent interest earned divided by average volume. (3) Dividends earned and average rates 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 dividends divided by average volume. NONINTEREST INCOME BancGroup derives approximately 51% of its noninterest income from mortgage banking related activities with the remaining 49% from traditional retail banking services including various deposit account charges, safe deposit box rentals, trust services and credit life commissions. Prior to the CMC acquisition on February 17, 1995, BancGroup had not acquired other well-established ancillary income sources, such as trust operations, mortgage banking or credit card services with any of its acquisitions. One of the most important goals from 1994 through 1996 has been to increase noninterest income. The impact of this acquisition is evident by the volume of revenue included in the category entitled mortgage servicing fees. CMC has servicing and subservicing agreements under which it services 132,000, 118,000 and 83,000 mortgage loans with principal balances of $10.6 billion, $9.1 billion and $6.4 billion on December 31, 1996, 1995 and 1994, respectively. This servicing portfolio generated servicing fee and late charge income of approximately $28.1 million, $23.8 million and $22.2 million for the years ended December 31, 1996, 1995 and 1994, respectively. CMC, through its wholesale and retail offices, originated $1.5 billion, $1.1 billion and $1.2 billion in residential real estate loans in 1996, 1995, and 1994, respectively. Noninterest income from deposit accounts is significantly affected by competitive pricing on these services and the volume of noninterest-bearing accounts. During 1996 and 1995 average noninterest-bearing demand accounts (excluding CMC custodial deposits) increased 9.4% and 11.8%, respectively. This increase in volume and increases in service fee rates resulted in 15% increase in service charge income in 1996 and an 11% increase in 1995. Other charges, fees, and commissions increased $718,000 (12%) in 1996 and $1,029,000 (20%) in 1995. The increase is primarily from credit card related fees and official check commissions. BancGroup, through CMC, enters into offers to extend credit for mortgage loans to customers and into obligations to THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 27 63 deliver and sell originated or acquired mortgage loans to permanent investors. Sales of loans servicing released by CMC resulted in income of $330,000, $988,000, and $539,000 for 1996, 1995 and 1994, respectively. A majority of the change in other income from 1995 to 1996 is due primarily to an increase in the gain on sale of mortgage loans held for sale of $2.6 million as well as increases in income from safe deposit boxes, ATM transaction fees, check card fees and income from investment sales. BancGroup has an investment sales operation (primarily mutual funds and annuities). Fee income generated from this and other investment service activities totaled $929,000, $649,000 and $990,000 in 1996, 1995 and 1994, respectively. Securities gains and losses in each of the three years were not significant. While certain securities are considered available for sale, BancGroup currently intends to hold substantially all of its securities portfolio for investment purposes. Realized gains or losses in this portfolio are generally the result of calls of securities or sales of securities within the six months prior to maturity.
INCREASE (DECREASE) ---------------------------------- YEARS ENDED DECEMBER 31 1996 1995 ------------------------ COMPARED COMPARED (In thousands) 1996 1995 1994 TO 1995 % TO 1994 % - --------------------------------------------------------------------------------------------------- Noninterest income: Mortgage servicing $ 28,067 $23,787 $22,216 $ 4,280 18% $1,571 7% Service charges on deposit accounts 21,119 18,288 16,017 2,831 15 2,271 14 Other charges, fees, and commissions 6,937 6,219 5,190 718 12 1.029 20 Other income 15,700 10,224 7,846 5,476 54 2,378 30 - --------------------------------------------------------------- -------- Subtotal 71,823 58,518 51,269 13,305 23 7,249 14 Other noninterest income items: Securities gains (losses), net (1,512) 622 1,485 (2,134) (863) Gain (loss) on disposal of other real estate and repossessions 507 121 76 386 45 - --------------------------------------------------------------- -------- Total noninterest income $ 70,818 $59,261 $52,830 $ 11,557 20% $6,431 12% - --------------------------------------------------------------- -------- - -------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE The impact of the acquisitions completed from 1994 through 1996 is reflected most noticeably in the increase in net interest income, discussed previously, as well as the 21% increase from 1995 to 1996 in noninterest expense as shown in the following schedule. The decrease in noninterest expense as a percent of average assets from 3.87% in 1994 to 3.45% in 1995 to 3.36% in 1996 is a direct result of the increased efficiency generated by this growth. The foundation for the efficiencies gained in 1996 and 1995 was laid in 1989 and 1990 when the Company established its current operating structure (regional and community banks supported by centralized backshop operations). Salaries and benefits decreased $2.3 million or 4% in 1995 and increased $14.5 million or 24% in 1996. The increase in 1996 is primarily due to increased staffing levels as a result of acquisitions and $4.3 million of expense from Jefferson's severance plan. In addition to the increase in expenses related to growth, advertising and public relations expenses have increased $1,218,000 or 29% and $1,165,000 or 38% in 1996 and 1995, respectively, in concentrated efforts to expand the Company's customer base and take advantage of increased market share in certain key markets. Additional expense was also incurred in the marketing of new products and services such as the check card, telephone banking and computer banking. Other expenses in 1996, 1995 and 1994 include approximately $2,400,000, $1,700,000 and $1,200,000, respectively associated with various acquisition efforts. 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. The amount of costs deferred increased from $6 million in 1994 to $10 million in 1995 and $13 million in 1996 due to changes in the mix of loans and increases in the number of loans closed. Cost control and the capacity to absorb future growth continue to be a major focus for management. The Company has taken several steps to achieve this goal and to attempt to improve BancGroup's efficiency ratio. The incentive plan and its profit-based rewards represent a key element in the plan. During 1994 BancGroup also increased its data processing capacity through a major upgrade. The cost of this upgrade is reflected in equipment expenses. Finally, and most importantly, in 1995 the Company invested in a reengineering study. This study reviewed the Company's retail delivery systems to better position the company for future growth, product expansion and customer service. The cost of the study (approximately $2 million) was included in other expense. The Company's deposits are insured by the Federal Deposit Insurance Corporation in two separate funds: the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). Legislation was approved in Congress to recapitalize the SAIF with a special one-time charge of 65.7 basis 28 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 64 points, after adjusting for certain allowances. This recapitalization allows a reduction in the current .23% average annual premium rate. The assessment resulted in a pre-tax charge of $3.8 million in 1996. A significant number of the computer systems are not programmed to consider the start of a new century. Some of BancGroup's systems will require modification to process year 2000 transactions. Management is aware there will be one-time expenses related to this transition but the amount is not readily determinable at this time. Identification of the systems affected and the related costs is an active 1997 project.
INCREASE (DECREASE) --------------------------------- YEARS ENDED DECEMBER 31 1996 1995 ------------------------------- COMPARED COMPARED (In thousands) 1996 1995 1994 TO 1995 % TO 1994 % - -------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits $ 73,567 $ 59,094 $ 61,437 $14,473 24% $(2,343) (4)% Net occupancy expense 15,712 13,703 13,375 2,009 15 328 2 Furniture and equipment expense 11,695 9,857 8,343 1,838 19 1,514 18 Amortization of mortgage servicing rights 12,522 9,095 6,078 3,427 38 3,017 50 Amortization of intangible assets 2,065 1,525 1,353 540 35 172 13 FDIC assessment 2,233 4,318 6,277 (2,085) (48) (1,959) (31) SAIF special assessment 3,817 -- -- 3,817 100 -- -- Stationery, printing, and supplies 4,051 3,540 3,510 511 14 30 1 Postage 2,527 2,159 1,928 368 17 231 12 Telephone 4,665 3,762 3,214 903 24 548 17 Insurance 2,373 1,722 2,059 651 38 (337) (16) Legal fees 2,966 2,420 3,081 546 23 (661) (21) Advertising and public relations 5,415 4,197 3,032 1,218 29 1,165 38 Other 31,214 29,133 23,219 2,080 7 5,914 25 - -------------------------------------------------------------------- ------- ------- Total noninterest expense $174,822 $144,525 $136,906 $30,296 21% $ 7,619 6% - -------------------------------------------------------------------- ------- ------- Noninterest expense to Average Assets 3.36%* 3.45% 3.87% - --------------------------------------------------------------------- * Excluding one-time SAIF special assessment - --------------------------------------------------------------------------------------------------------
INCOME TAXES The provision for income taxes and related items are as follows: Tax Provision --------------------------------------------- 1996 $26,834,000 1995 24,656,000 1994 16,831,000
BancGroup is subject to federal and state taxes at combined rates of approximately 38% 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, and nondeductible amortization of goodwill. Management's goal is to minimize income tax expense and maximize cash yield on earning assets by increasing or decreasing its tax exempt securities and/or investment in preferred and common stock. Accordingly, BancGroup's investment in tax exempt securities was adjusted in 1994, 1995 and 1996. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 29 65 REVIEW OF FINANCIAL CONDITION OVERVIEW Ending balances of selected components of the Company's balance sheet changed from December 31, 1995 to December 31, 1996 as follows:
(In thousands) Increase Amount % - --------------------------------------------- Total assets $693,802 14.5 Securities available for sale and investment securities 71,799 11.0 Mortgage loans held for sale 45,763 40.8 Loans, net of unearned income 553,119 15.7 Deposits 413,219 11.2 - ---------------------------------------------
Management continuously 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 1994 through 1996 have been: - - An increase in residential mortgage loans from 36.2% of total loans at December 31, 1994 to 43.3% at December 31, 1996. This increase has resulted from the acquisition of thrifts as well as from loans CMC produced for the Company's portfolio. BancGroup has continued to place emphasis on these loans as a major product line which has a relatively low loss ratio. - - Internal loan growth of 16.5% in 1996 excluding acquisitions. - - A 12.8% increase in 1996 in average noninterest bearing demand deposits substantially from internal growth. - - Maintenance of high asset quality and reserve coverage of nonperforming assets. Nonperforming assets were .81%, .82% and 1.24% of related assets at December 31, 1996, 1995 and 1994. Net charge-offs were .18%, .17% and .13% of average loans over the same periods. The allowance for possible loan losses was 1.25% of loans at December 31, 1996, providing 215% coverage of non-performing loans (nonaccrual and renegotiated). - - An increase in the loan to deposit ratio from 90% at December 31, 1994 to 99% at December 31, 1996. Federal Home Loan Bank borrowings continue to be a major source of funding allowing the Company greater funding flexibility. - - Increase of $46 million in mortgage loans held for sale during 1996. 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 to improved earnings. This goal is achieved in various ways as outlined below: - - Management's emphasis, within all of BancGroup's banking regions, is on loan growth in accordance with local market demands and the lending experience and expertise in the regional and county banks. Management believes that its strategy of meeting local demands and utilizing local lending expertise has proven successful. Management also believes that any existing concentrations of loans, whether geographically, by industry or by borrower do not expose BancGroup to unacceptable levels of risk. - - BancGroup has a significant concentration of residential real estate loans representing 43.3% of total loans. These loans are substantially all mortgages on single-family, owner occupied properties and therefore have minimal credit risk. While a portion of these loans were acquired through acquisitions, the Company has continued to grow this portfolio with a $250 million or 16.5% increase in these loans in 1996. BancGroup securitized approximately $88 million of residential mortgage loans during 1996. Excluding this securitization, residential real estate loans increased $338 million or 22.3%. Residential mortgage loans are predominately adjustable rate loans and therefore have not resulted in any material change in the Company's rate sensitivity. - - BancGroup also has a significant concentration in loans collateralized by commercial real estate with loan balances of $983,673,000, $844,460,000, $743,331,000, $616,424,000 and $495,650,000 at December 31, 1996, 1995, 1994, 1993 and 1992, respectively. BancGroup's commercial real estate loans are spread geographically throughout Alabama and other areas including metropolitan Atlanta, Georgia, and Central and South Florida with no more than 30% of these loans in any one geographic region. The Alabama economy experiences a generally slow but steady rate of growth, while Georgia and Florida are experiencing higher rates of growth. For this reason, real estate values in Alabama have not been inflated due to excessive speculation. BancGroup's lending areas in Georgia and Florida, have not experienced inflated real estate values due to excessive inflation. BancGroup's real estate related loans continue to perform at acceptable levels. - - BancGroup holds mortgage loans on a short-term basis (generally less than ninety days) while these loans are being packaged for sale in the secondary market. These loans are classified as mortgage loans held for sale with balances totaling $157,966,000, $112,203,000, and $61,556,000, at December 31, 1996, 1995, and 1994, respectively. There is minimal credit risk associated with these loans. The decrease in mortgage loans held for sale during 1994 and subsequent increases in 1995 and 1996 are directly related to the fluctuation in long-term interest rates and its related 30 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 66 impact on mortgage loan refinancing. These loans are funded principally with short-term borrowings, providing a relatively high margin for these funds. - - As discussed more fully in subsequent sections, management has determined to maintain adequate liquidity and liquidity sources. BancGroup has arranged funding sources in addition to customer deposits which provide the capability for the Company to exceed a 100% loan to deposit ratio and maintain adequate liquidity. - - Internal loan growth has been a major factor in the Company's increasing earnings with growth rates of 16.5% in 1996, 24.8% in 1995, 20.5% in 1994, and 10.6% in 1993, excluding acquisitions.
============================================================================================================== GROSS LOANS BY CATEGORY (In thousands) DECEMBER 31 - -------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ============================================================================================================== Commercial, financial, and agricultural $560,824 $509,526 $ 439,556 $362,165 $326,463 Real estate--commercial 983,673 844,460 743,331 616,424 495,650 Real estate--construction 446,288 370,442 243,217 179,123 135,021 Real estate--residential 1,767,003 1,516,512 951,877 810,077 381,387 Installment and consumer 264,307 236,834 204,433 181,500 172,336 Other 55,883 48,231 44,599 36,803 43,699 - -------------------------------------------------------------------------------------------------------------- Total loans $4,077,978 $3,526,005 $2,627,013 $2,186,092 $1,554,556 ============================================================================================================== ============================================================================================================== Percent of loans in each category to total loans: Commercial, financial, and agricultural 13.8% 14.5% 16.7% 16.6% 21.0% Real estate--commercial 24.1 23.9 28.3 28.2 31.9 Real estate--construction 10.9 10.5 9.3 8.2 8.7 Real estate--residential 43.3 43.0 36.2 37.0 24.5 Installment and consumer 6.5 6.7 7.8 8.3 11.1 Other 1.4 1.4 1.7 1.7 2.8 - -------------------------------------------------------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% 100.0% ==============================================================================================================
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 have been and will continue to be to focus on shorter term maturities and floating or adjustable rate loans. At December 31, 1996, approximately 57.8% of loans were floating rate or adjustable 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, particularly with respect to interest rates, of future events make it difficult to predict the actual maturities. BancGroup has not maintained records related to trends of early pay-off since management does not believe such trends would present any significantly more accurate estimate of actual maturities than the contractual maturities presented. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 31 67
LOAN MATURITY/RATE SENSITIVITY (In thousands) DECEMBER 31, 1996 =================================================================================================================== RATE SENSITIVITY, LOANS MATURING MATURING RATE SENSITIVITY OVER 1 YEAR ---------------------------------- ---------------------- ---------------------- WITHIN 1-5 OVER 1 YEAR YEARS 5 YEARS FIXED FLOATING FIXED FLOATING =================================================================================================================== Commercial, financial, and agricultural $ 280,052 $ 216,462 $ 64,310 $ 246,786 $ 314,038 $ 179,716 $ 101,056 Real estate--commercial 212,721 489,568 281,384 530,594 453,079 444,778 326,174 Real estate--construction 303,886 119,269 23,133 111,141 335,147 41,410 100,992 Real estate--residential 158,316 242,382 1,366,305 542,425 1,224,578 458,562 1,150,125 Installment and consumer 81,073 167,202 16,032 249,003 15,304 180,218 3,016 Other 11,326 9,561 34,996 41,596 14,287 35,971 8,586 - ------------------------------------------------------------------------------------------------------------------- Total loans $1,047,374 $1,244,444 $1,786,160 $1,721,545 $2,356,433 $1,340,655 $1,689,949 ===================================================================================================================
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 review of loans and through a company wide senior credit administration function. This function participates in the loan approval process with the regional banks and provides an independent review and grading of loan credits on a continual basis. 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, 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% loan to value ratios. Based on the above policies, procedures and loan review program, BancGroup determines its allowance for possible loan losses and the amount of provision for loan losses. The allowance for possible 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 possible loan losses charged to income, which increases the allowance, and (4) the allowance for loan losses of acquired banks. In determining the provision for possible loan losses in an effort to evaluate portfolio risks, 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 current and anticipated economic conditions. The 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 the most flexibility in their timely disposition. LOAN LOSS EXPERIENCE During 1996 the ratio of net charge-offs to average loans increased to .18% from .17% in 1995. This increase has been impacted by the increase in average loans and also by an increase of approximately $1.7 million in actual net charge-offs. The increase in net charge-offs in 1996 is primarily due to the partial charge-off of seven large credits in different geographic locations. 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 loans in 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 earlier identification of potential problem loans. Management is committed to maintaining adequate reserve levels to absorb future losses. This commitment has allowed BancGroup to weather economic uncertainties without disruption of its earnings. 32 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 68
SUMMARY OF LOAN LOSS EXPERIENCE (IN THOUSANDS) YEARS ENDED DECEMBER 31 - --------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ========================================================================================================= Allowance for possible loan losses-- January 1 $ 45,215 $ 40,965 $ 35,428 $ 23,791 $ 19,421 Charge-offs: Commercial, financial, and agricultural 3,078 3,314 2,766 4,119 5,034 Real estate--commercial 1,941 1,165 1,605 938 1,635 Real estate--construction 1,774 44 2 957 7 Real estate--residential 837 421 419 569 742 Installment and consumer 3,281 2,726 1,809 2,052 3,261 Other 594 163 168 7 83 - --------------------------------------------------------------------------------------------------------- Total charge-offs 11,505 7,833 6,769 8,642 10,762 - --------------------------------------------------------------------------------------------------------- Recoveries: Commercial, financial, and agricultural 1,016 1,054 1,901 810 543 Real estate--commercial 1,317 48 218 96 64 Real estate--construction 1 11 12 25 -- Real estate--residential 693 184 79 112 175 Installment and consumer 1,538 1,330 1,482 1,530 1,436 Other 85 46 43 7 15 - --------------------------------------------------------------------------------------------------------- Total recoveries 4,650 2,673 3,735 2,580 2,233 - --------------------------------------------------------------------------------------------------------- Net charge-offs 6,855 5,160 3,034 6,062 8,529 Addition to allowance charged to operating expense 11,783 8,281 8,070 11,423 12,899 Allowance added from bank acquisitions 618 1,129 501 6,276 -- - --------------------------------------------------------------------------------------------------------- Allowance for possible loan losses-- December 31 $ 50,761 $ 45,215 $ 40,965 $ 35,428 $ 23,791 ========================================================================================================= Loans (net of unearned income) December 31 $4,074,633 $3,521,514 $2,622,181 $2,182,755 $1,549,313 Ratio of ending allowance to ending loans (net of unearned income) 1.25% 1.28% 1.56% 1.62% 1.54% Average loans (net of unearned income) $3,799,947 $3,007,312 $2,375,396 $1,710,797 $1,505,114 Ratio of net charge-offs to average loans (net of unearned income) 0.18% 0.17% 0.13% 0.35% 0.57% Allowance for loan losses as a percent of nonperforming loans (nonaccrual and renegotiated) 215% 262% 240% 211% 132% =========================================================================================================
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 33 69 NONPERFORMING ASSETS BancGroup classifies problem loans into four categories: nonaccrual, past due, renegotiated and other potential problems. When management determines a loan no longer meets the criteria for performing loans and collection of interest appears doubtful, the loan is placed on nonaccrual status. All loans that are 90 days past due are considered nonaccrual unless they are adequately collateralized, they are in the process of collection, and there is reasonable assurance of full collection of principal and interest. BancGroup's policy is also to charge off installment loans 120 days past due unless they are in the process of foreclosure and are adequately collateralized. Management closely monitors all loans which are contractually 90 days past due, renegotiated or nonaccrual. These loans are summarized as follows:
================================================================================================== NONPERFORMING ASSETS DECEMBER 31 - -------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 1993 1992 ================================================================================================== Aggregate loans for which interest is not being accrued $21,982 $15,360 $13,528 $15,302 $16,744 Aggregate loans renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial condition of the borrower 1,683 1,882 3,541 1,494 1,346 - -------------------------------------------------------------------------------------------------- Total nonperforming loans* 23,665 17,242 17,069 16,796 18,090 Other real estate and in-substance foreclosure 8,956 11,557 15,502 22,066 17,126 Repossessions 314 171 81 101 103 - -------------------------------------------------------------------------------------------------- Total nonperforming assets* $32,935 $28,970 $32,652 $38,963 $35,319 ================================================================================================== Aggregate loans contractually past due 90 days for which interest is being accrued $ 6,695 $ 2,303 $ 3,609 $ 2,230 $ 1,485 Total nonperforming loans as a percent of net loans 0.58% 0.49% 0.65% 0.77% 1.17% Total nonperforming assets as a percent of net loans, other real estate and repossessions 0.81% 0.82% 1.24% 1.77% 2.25% Total nonaccrual, renegotiated and past due loans as a percent of total loans 0.75% 0.56% 0.79% 0.87% 1.26% Allowance for loan loss as a percent of nonperforming loans (nonaccrual and renegotiated) 215% 262% 240% 211% 132% ================================================================================================== * 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. On December 31, 1993 BancGroup completed the acquisition of First AmFed Corporation. With this acquisition the Company recorded $11.2 million in other real estate, $1.6 million in nonaccrual loans, and $.5 million in 90 day past due loans that were still accruing. The carrying value of these nonperforming assets was adjusted at the acquisition date to their current estimated fair values based on BancGroup's intention to dispose of them in the most expeditious and profitable manner. Excluding these nonperforming assets acquired with First AmFed, the Company's nonperforming asset ratio would have been 1.26% at December 31, 1993 compared to 1.77% noted above. During 1994 a substantial portion of these problem assets, particularly other real estate, was disposed of and the nonperforming asset ratio was reduced to 1.24%. Nonaccrual loans at December 31, 1996 were $22 million compared to $15.4 million at December 31, 1995. This increase in nonaccrual loans is primarily due to four large credits in different geographic locations. Management, through its loan officers, internal loan review staff and external examinations by regulatory agencies, has identified approximately $146 million of potential problem loans not included above. The status of these loans is reviewed at least quarterly by loan officers and the centralized loan review function and annually by regulatory agencies. In connection with such reviews, collateral values are updated where 34 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 70 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, 1996 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 without disruption of earnings trends. 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 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 on nonaccrual loans was $800,000, $605,000, $414,000, $93,000 and $316,000 in 1996, 1995, 1994, 1993 and 1992, respectively. Interest income foregone on such loans was approximately $1,428,000, $1,062,000, $1,196,000, $958,000 and $1,121,000 in 1996, 1995, 1994, 1993 and 1992, respectively. On January 1, 1995, BancGroup adopted SFAS No. 114, Accounting By Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan--Income Recognition Disclosure. As a result, the following loans were considered impaired as of December 31, 1996. See Notes 1 and 4 to the consolidated financial statements for further discussion.
Carrying (In thousands) Balance Reserve Value ===================================================== Commercial, financial, and agricultural $2,927 $1,456 $ 1,471 Real Estate--Commercial 5,735 1,028 4,707 Real Estate--Construction 14,143 3,390 10,753 Real Estate--Residential 5,657 1,571 4,086 Installment and Consumer 992 397 595 ----------------------------------------------------- Total impaired loans $29,454 $7,842 $21,612 =====================================================
================================================================================ ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES 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 the respective historical charge-off experience and risk within each loan type.
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES DECEMBER 31 - -------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1996 1995 1994 1993 1992 ======================================================================================================== Balance at end of period applicable to: Commercial, financial, and agricultural $10,644 $9,587 $8,989 $8,398 $6,200 Real estate--commercial 15,705 14,230 12,750 12,099 6,878 Real estate--construction 9,574 7,477 3,703 1,877 2,077 Real estate--residential 8,835 7,568 9,107 7,400 4,096 Installment and consumer 3,914 3,546 3,205 3,096 2,663 Other 2,089 2,807 3,211 2,558 1,877 - -------------------------------------------------------------------------------------------------------- Total $50,761 $45,215 $40,965 $35,428 $23,791 ========================================================================================================
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 35 71 SECURITIES BancGroup determines on a daily basis 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 forecast, an investment strategy is determined. Significant elements of this strategy as of December 31, 1996 include: - - BancGroup's investment in U.S. Treasury securities and obligations of U.S. government agencies is substantially all pledged against public funds deposits. - - Investment alternatives which maximize the highest 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 investment strategy also incorporates high-grade preferred stocks when the tax equivalent yield on these investments provides an attractive alternative. The yields on these preferred stocks are adjusted on a short-term basis and provide tax advantaged income without long-term interest rate risk. - - The maturities of investment alternatives are determined in consideration of the yield curve, liquidity needs and the Company's asset/liability gap position. As interest rates increased and the Company's asset/liability gap position allowed, maturities were increased during 1994 to the 5-7 year range and reduced to the 2-3 year range in 1995 and the 3-5 year range in 1996. - - The risk elements associated with the various types of securities are also considered in determining investment strategies. U.S. Treasury and 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 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, 1996 or 1995 does not include any interest-only strips and the amount of unamortized premium on mortgage backed securities is approximately $410,000. The recoverability of BancGroup's investment in mortgage-backed securities is reviewed periodically, and where necessary, appropriate adjustments are made to income for impaired values. - - 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 established when necessary. 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 increased from $359 million at December 31, 1995 to $440 million at December 31, 1996. Securitization of residential mortgage loans represented $88 million of the increase in 1996. An increase from $236 million at December 31, 1994 to $359 million at December 31, 1995 was partially a result of a reclassification from investment securities of $60.5 million in December 1995 as allowed by the Financial Accounting Standards Board to realign the portfolios without risk of penalties and $26 million from acquisitions. The Company took this opportunity to reclassify certain structured notes, corporate and municipal bonds to allow for possible disposition and certain treasury notes for liquidity purposes.
SECURITIES BY CATEGORY ============================================================== CARRYING VALUE AT DECEMBER 31 -------------------------------------------------------------- (In thousands) 1996 1995 1994 ============================================================== Investment securities: U.S. Treasury securities and obligations of U.S.government agencies $239,964 $229,571 $297,695 Obligations of state and political subdivisions 40,979 50,256 48,428 Other 1,167 11,472 29,715 ------------------------------------------------------------- Total $282,110 $291,299 $375,838 ============================================================= Securities available for sale: U.S. Treasury securities and obligations of U.S. government agencies $420,015 $337,410 $205,393 Obligations of state and political subdivisions 11,967 11,631 7,518 Other 8,133 10,086 22,874 ------------------------------------------------------------- Total $440,115 $359,127 $235,785 =============================================================
At December 31, 1996, there was no single issuer, with the exception of U.S. government and U.S. government agencies, where the aggregate book value of these securities exceeded ten percent of shareholders' equity or $38.7 million. 36 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 72
MATURITY DISTRIBUTION OF SECURITIES WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS ------------------ ---------------- ---------------- ---------------- AVERAGE AVERAGE AVERAGE AVERAGE (In thousands) AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE ======================================================================================================================= Investment securities: U.S. Treasury securities and obligations of U.S. government agencies $ 53,691 6.13% $115,129 6.29% $ -- -- $ 500 7.25% Mortgage-backed securities 2,625 6.64 50,991 6.79 1,396 8.16% 15,632 7.78 Obligations of state and political subdivisions (1) 6,839 7.33 17,874 6.75 14,729 7.81 1,537 8.62 Other (2) 99 6.08 806 8.93 262 7.30 -- -- -------- -------- ------- ------- Total $ 63,254 6.28% $184,800 6.49% $16,387 7.83% $17,669 7.83% ======================================================================================================================= Securities available for sale (3): U.S. Treasury securities and obligations of U.S. government agencies $213,573 5.82% Mortgage-backed securities 169,735 6.82 Obligations of state and political subdivisions (1) 9,572 3.08 Other 8,105 6.90 -------- Total $400,985 6.20% ================================================================
(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 35%. The taxable equivalent adjustment represents the annual amounts of income from tax exempt obligations multiplied by 145%. (2) This category excludes all corporate common and preferred stocks since these instruments have no maturity date. (3) 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.) ================================================================================ DEPOSITS BancGroup's deposit structure consists of the following:
DECEMBER 31 % OF TOTAL - --------------------------------------------------------------------------------------- (In thousands) 1996 1995 1996 1995 ======================================================================================= Noninterest-bearing demand deposits $663,893 $ 616,960 16.1% 16.7% Interest-bearing demand deposits 683,716 680,889 16.6 18.4 Savings deposits 439,902 379,352 10.7 10.2 Certificates of deposits less than $100,000 1,536,003 1,312,383 37.3 35.5 Certificates of deposits more than $100,000 513,702 464,052 12.5 12.5 IRAs 229,683 200,348 5.6 5.4 Open time deposits 47,035 46,731 1.2 1.3 - --------------------------------------------------------------------------------------- Total deposits $4,113,934 $3,700,715 100.0% 100.0% =======================================================================================
The growth in deposits and the mix of deposits has been most significantly impacted in 1995 and 1996 by acquisitions in late 1995 of Mt. Vernon Financial and in mid 1996 of Dothan Federal both of which were thrifts. As such, the level of noninterest-bearing demand deposits was less than 3% of the total deposits acquired with the major portion of acquired deposits in certificates of deposits. Noninterest-bearing demand deposits have increased $46.9 million (8%) from December 31, 1995 to December 31, 1996. As noted above, the acquired thrifts did not add any significant amounts of noninterest-bearing demand accounts. However, the presence of such branches and customer relationships has attracted demand deposit accounts after the mergers. The Company also acquired two commercial banks in 1995, Brundidge Banking Company and Farmers and Merchants Bank, with approximately $12 million in non-interest bearing deposits at acquisition. The majority of the noninterest-bearing demand deposit growth is attributable to the Company's focus on developing customer relationships and sales efforts. BancGroup has attempted through its acquisitions and branch expansion programs to increase its market presence in the State of Alabama and expand into other growth markets in the Southeast, the first of which was Atlanta in 1995 followed by Orlando in 1996. This expansion continued with the additional mergers in Florida and Georgia in early 1997. 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 COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 37 73 During 1995 and 1996 BancGroup established retail banking, training and policies and procedures departments as well as continuing its branch automation project to reinforce the Company's goal of providing the customer with the best possible service. In connection with this goal, several other initiatives have been undertaken, including an electronic banking division which includes home banking, business banking, automatic teller, credit card and check card services. The Company has increased its automatic teller machine services by expanding into 67 WalMart locations throughout Alabama. Full service banking is offered in eleven WalMart locations with ten located in Alabama and one in Tennessee. BancGroup is continuing its sales of investment products, such as mutual funds and annuities to customers seeking alternatives to deposit products. The overall goal of these steps has been to efficiently provide customers with the financial products they need and desire. In 1995 the Company initiated a 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 December 31, 1996 and 1995, $138 million and $75 million, respectively of CD's were outstanding under this program. SHORT-TERM BORROWINGS Short-term borrowings were comprised of the following at December 31, 1996, 1995 and 1994:
(In thousands) 1996 1995 1994 ----------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements $124,245 $150,540 $171,264 Federal Home Loan Bank borrowings 715,000 465,000 210,050 Other short-term borrowings 2,017 1,141 1,131 ----------------------------------------------------- Total $841,262 $616,681 $382,445 =====================================================
BancGroup has available Federal Funds lines from upstream banks including the Federal Home Loan Bank (FHLB) totaling $532 million at December 31, 1996. In addition, correspondent banks and customers with repurchase agreements have provided a consistent base of short-term funds. BancGroup became a member of the FHLB in late 1992. As a member of the FHLB, BancGroup has availability of up to $1 billion from the FHLB on either a short or long-term basis excluding funds available through the federal funds line. CMC has an additional $118 million available through a warehouse line with FHLB that is collateralized by mortgage loans held for sale. Short-term borrowings, including FHLB borrowings, have been used to fund short-term assets, primarily mortgage loans held for sale, and loans. FHLB borrowings have been used during 1996 and 1995 to fund loan growth. As discussed more fully in the "Liquidity and Interest Sensitivity" section of this report, the line of credit with the FHLB is considered a primary source of funding for the Company's asset growth. LIQUIDITY AND INTEREST 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 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 investment securities mature they are generally reinvested in new investment securities or assets held for sale. Financing activities generally provide funding for the growth in loans and investment 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 1992 through 1996 the significant changes in BancGroup's cash flows have centered around loan growth and fluctuations in mortgage loans held for sale. Loan growth of $548 million in 1996 and $667 million in 1995 has been one of the principal uses of cash in both years. In 1996, BancGroup securitized approximately $88 million of residential mortgage loans and repurchased the securities. Mortgage loans held for sale increased in 1996, using $46 million in funds. As noted in previous sections, short-term borrowings increased $238 million in 1996 and were used to fund loan growth. Management has chosen to fund short-term fluctuations in the volume of 38 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 74 mortgage loans held for sale with short-term borrowings as opposed to increasing rate sensitive deposits. Deposit growth of $413 million with $63 million from the previously discussed brokered CD program provided an additional source of funding for internal loan growth. As noted previously, the composition of the Company's loan portfolio has changed over the past three years. BancGroup at December 31, 1996 had $1.8 billion of residential real estate loans. These loans provide collateral for the current $1 billion credit availability at the FHLB. The FHLB unused credit capacity, $281 million at December 31, 1996, provides the Company significant flexibility in asset/liability management, liquidity and deposit pricing. In January 1996, the Company called $7.5 million of its 1985 subordinated debentures which had a maturity date of 2000. As a result, 806,598 shares of BancGroup stock were issued and cash was paid for the remaining debentures. In December 1996, BancGroup entered into a two year revolving line of credit for $35 million and a term loan with a maximum principal amount of $15.5 million. This line of credit provides an additional source of funding for acquisition related activities. In January 1997, BancGroup issued $70 million in Trust Preferred Securities. These securities qualify as Tier I Capital, will be shown as long-term debt in the consolidated financial statements, and carry an 8.92% interest rate. A portion of the proceeds of the offering were utilized to pay off the term note and revolving debt outstanding. The remainder of the proceeds will be used for acquisitions and other business purposes. 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 BancGroup's parent only statement of cash flows were $1.9 million for the payment of interest on debt, $2.4 million for principal payment on term notes (See Note 9 to the consolidated financial statements) and $18.1 million for the payment of dividends. The parent company's primary source of funds was $16.5 million in dividends received from its banking subsidiaries. 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 $109 million of retained earnings plus certain 1997 earnings would be available for distribution to BancGroup, from its subsidiaries, as dividends in 1997 without prior approval from the respective regulatory authorities. BancGroup anticipates that the cash flow needs of the parent company are well below the regulatory dividend restrictions of its subsidiary banks. At December 31, 1996, BancGroup's liquidity position was adequate with loan maturities of $1,047 million, or 26% of the total loan portfolio, due within one year. Securities totaling $464 million or 64% of the total portfolio also had maturities within one year or have been classified as available for sale. As of December 31, 1996 there were, however, no current plans to dispose of any significant portion of these securities. In addition BancGroup has $281 million in additional borrowing capacity at the FHLB and CMC has $118 million available through a warehouse line with FHLB. 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. The interest sensitivity schedule reflects an 9.7% negative gap at 12 months; therefore, BancGroup has a greater exposure to net income if interest rates increase. Based on this schedule, management believes that neither an increase or decrease in interest rates of 100 basis points would result in a material swing in net income. Management has managed the asset/liability position of the bank through traditional sources. BancGroup does however, use off balance sheet instruments for hedging purposes to limit its risk associated with the sale of mortgage loans by providing sales commitments on all loans funded and held for sale. (See Note 6 to the consolidated financial statements.) The following table summarizes BancGroup's interest rate sensitivity as of December 31, 1996. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 39 75
AT DECEMBER 31, 1996 ----------------------------------------------------------------------------- INTEREST SENSITIVE WITHIN ----------------------------------------------------------------------------- TOTAL 0-90 91-180 181-365 1-5 OVER (IN THOUSANDS) BALANCE DAYS DAYS DAYS YEARS 5 YEARS =================================================================================================================== Rate Sensitive Assets: Federal funds sold and resale agree- ments and interest bearing deposits 21,133 $ 21,133 $ -- $ -- $ -- $ -- Investment securities 282,110 136,528 15,644 42,272 70,658 17,008 Securities available for sale 440,115 62,883 1,810 12,338 286,065 77,019 Mortgage loans held for sale 157,966 157,433 -- -- -- 533 - ------------------------------------------------------------------------------------------------------------------- Loans, net of unearned income 4,074,633 1,392,530 200,846 509,358 1,369,503 602,396 Allowance for possible loan losses (50,761) (17,503) (2,500) (6,324) (17,029) (7,405) - ------------------------------------------------------------------------------------------------------------------- Net loans 4,023,872 1,375,027 198,346 503,034 1,352,474 594,991 Nonearning assets 541,655 -- -- - -- 541,655 =================================================================================================================== Total Assets $5,466,851 $1,753,004 $ 215,800 $ 557,644 $1,709,197 $1,231,206 =================================================================================================================== Rate Sensitive Liabilities: Interest-bearing demand deposits $ 683,716 $ 419,616 $ -- $ -- $ -- $ 264,100 Savings deposits 439,902 284,839 -- 408 -- 154,655 Certificates of deposits less than $100,000 1,536,003 409,499 215,017 398,624 511,958 905 Certificates of deposits more than $100,000 513,702 175,666 61,947 136,556 99,335 40,198 IRAs 229,683 75,982 25,683 42,399 85,365 254 Open time deposits 47,035 304 200 45,825 706 -- Short-term borrowings 841,262 681,262 -- 50,000 110,000 -- Long-term debt 39,092 15,460 295 403 1,484 21,450 Noncosting liabilities & equity 1,136,456 -- -- -- -- 1,136,456 =================================================================================================================== Total Liabilities & Equity $5,466,851 $2,062,628 $ 303,142 $ 674,215 $ 808,848 $1,618,018 =================================================================================================================== Gap $ -- $ (309,624) $ (87,342) $(116,571) $ 900,349 $ (386,812) =================================================================================================================== Cumulative Gap $ -- $ (309,624) $ (396,966) $(513,537) $ 386,812 $ -- ===================================================================================================================
At the bottom of the table is the 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. 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 has 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 $743 million with a corresponding cumulative gap at one year of negative $947 million. 40 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 76 CAPITAL ADEQUACY AND 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. BancGroup's dividend pay-out ratio in 1996 was 42%. This level is in the Company's target range of 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 out of 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 as of December 31, 1996 are stated below: Capital (thousands): Tier I Capital: Shareholders' equity (excluding unrealized gain on securities available for sale) less intangibles $ 356,043 Tier II Capital: Allowable loan loss reserve 48,648 Subordinated debt 8,612 ---------- Total Capital $ 413,303 Risk Adjusted Assets (thousands)$ 3,889,755 Total Assets (thousands) $5,468,050
1996 1995 1994 =========================================================================== Tier I leverage ratio 6.73% 7.03% 6.82% Risk Adjusted Capital Ratios: Tier I Capital Ratio 9.15% 9.38% 9.58% Total Capital Ratio 10.63% 11.20% 11.62%
As previously mentioned, in January 1997 BancGroup issued $70 million in Trust Preferred Capital Securities. The above capital ratios would have been approximately 8.05%, 10.95% and 12.43% for Tier I leverage, Tier I risk adjusted and total risk adjusted capital had these securities been outstanding at December 31, 1996. BancGroup has increased capital gradually through normal earnings retention as well as through stock registrations to capitalize acquisitions. In December 1995, BancGroup notified the holders of its 1985 Convertible Subordinated Debentures of redemption of all debentures outstanding at January 31, 1996. In 1996 substantially all of the debentures were converted resulting in the issuance of 806,598 shares of Common Stock and payment in cash for the remaining balance. (See Note 9 to the consolidated financial statements.) 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. The subsidiary banks are also required by law to maintain noninterest-bearing deposits with the Federal Reserve Bank to meet regulatory reserve requirements. At December 31, 1996, these deposits totaled $29.9 million. FINANCIAL ACCOUNTING STANDARDS BOARD RELEASES In June 1996, the Financial Accounting Standards Board issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occuring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. However, in December 1996, the Financial Accounting Standards Board issued SFAS No. 127, "Deferral of the Effective Date of certain provisions of FASB Statement No. 125." This statement defers the effective date of Certain Provisions for one year (December 31, 1997). The deferred provisions relate to repurchase agreements, dollar-roll transactions, securities lending, and similar transactions. The effective date for all other transfers and servicing of financial assets is unchanged. Management does not believe that the adoption of SFAS No. 125, as amended by SFAS No. 127, will have a material impact on BancGroup's financial statements. BancGroup adopted SFAS No. 123, Accounting for Stock-based Compensation, on January 1, 1996. (See Notes 1 and 14 to the consolidated financial statements.) 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. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 41 77 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS THE COLONIAL BANCGROUP, INC. We have audited the accompanying supplemental consolidated statements of condition of The Colonial BancGroup, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related supplemental consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The supplemental consolidated financial statements give retroactive effect to the mergers of The Colonial BancGroup, Inc. with Jefferson Bancorp, Inc. and D/W Bankshares, Inc. These combinations occurred on January 3, 1997 and January 31, 1997, respectively, and have been accounted for as poolings of interests as described in Notes 1 and 2 to the supplemental consolidated financial statements. 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; however, they will become the historical consolidated financial statements of The Colonial BancGroup, Inc. and subsidiaries after financial statements covering the date of consummation of the business combinations are issured. In our opinion, the supplemental financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Colonial BancGroup, Inc. and subsidiaries as of December 31, 1996 and 1995, the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles after financial statements are issued for a period which includes the date of consummation of the business combination. As discussed in Note 1 to the consolidated supplemental financial statements, the Company changed its method of accounting for mortgage servicing rights in 1995 and for investments in 1994. COOPERS & LYBRAND L.L.P. Montgomery, Alabama February 20, 1997, except for Note 2 as to which the date is March 5, 1997 42 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 78 SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1996 and 1995 (Dollars in thousands) ASSETS 1996 1995 - ----------------------------------------------------------------------------------------------------- Cash and due from banks $ 222,059 $ 190,321 Interest-bearing deposits in banks 5,143 6,270 Federal funds sold 15,990 48,919 Securities available for sale (Note 3) 440,115 359,127 Investment securities (market value: 1996, $284,164; 1995, $294,609) (Note 3) 282,110 291,299 Mortgage loans held for sale 157,966 112,203 Loans, net of unearned income (Note 4) 4,074,633 3,521,514 Less: Allowance for possible loan losses (Note 5) (50,761) (45,215) - ----------------------------------------------------------------------------------------------------- Loans, net 4,023,872 3,476,299 Premises and equipment, net (Note 7) 87,514 75,351 Excess of cost over tangible and identified intangible assets acquired, net 30,381 30,032 Mortgage servicing rights 98,856 80,053 Other real estate owned 9,270 10,654 Accrued interest and other assets 93,575 92,521 - ----------------------------------------------------------------------------------------------------- Total $5,466,851 $4,773,049 ===================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing demand $ 663,893 $ 616,960 Interest-bearing demand 683,716 680,889 Savings 439,902 379,352 Time 2,326,423 2,023,514 - ----------------------------------------------------------------------------------------------------- Total deposits 4,113,934 3,700,715 FHLB short-term borrowings (Note 8) 715,000 465,000 Other short-term borrowings (Note 8) 126,262 151,681 Subordinated debt (Note 9) 8,612 18,545 Other long-term debt (Note 9) 30,480 29,143 Other liabilities 85,567 71,034 - ----------------------------------------------------------------------------------------------------- Total liabilities 5,079,855 4,436,118 - ----------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 6, 15) Shareholders' equity: (Notes 3, 10) Common Stock, $2.50 par value; 44,000,000 shares authorized, issued and outstanding: 37,545,561 and 35,793,294 in 1996 and 1995* 93,864 89,483 Additional paid in capital* 159,640 146,587 Retained earnings 134,523 103,224 Unearned compensation (1,603) (1,849) Unrealized gain on securities available for sale, net of taxes 572 (514) - ----------------------------------------------------------------------------------------------------- Total shareholders' equity 386,996 336,931 - ----------------------------------------------------------------------------------------------------- Total $5,466,851 $4,773,049 =====================================================================================================
See notes to supplemental consolidated financial statements. * Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid on February 11, 1997. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 43 79 SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1996, 1995 and 1994 (In thousands, except per share amounts)
1996 1995 1994 - ------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $348,563 $285,539 $208,617 Interest and dividends on securities: Taxable 35,581 33,983 28,590 Nontaxable 2,846 2,964 3,444 Dividends 2,103 2,137 1,779 Interest on federal funds sold and securities purchased under resale agreements 2,515 2,930 1,333 Other interest 349 344 382 - ------------------------------------------------------------------------------------------- Total interest income 391,957 327,897 244,145 - ------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits 158,591 130,844 86,685 Interest on short-term borrowings 38,660 30,308 11,132 Interest on long-term debt 2,702 3,743 3,476 - ------------------------------------------------------------------------------------------- Total interest expense 199,953 164,895 101,293 - ------------------------------------------------------------------------------------------- NET INTEREST INCOME 192,004 163,002 142,852 Provision for possible loan losses (Notes 1, 5) 11,783 8,281 8,070 - ------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 180,221 154,721 134,782 - ------------------------------------------------------------------------------------------- NONINTEREST INCOME: Mortgage servicing fees 28,067 23,787 22,216 Service charges on deposit accounts 21,119 18,288 16,017 Securities gains (losses), net (Note 3) (1,512) 622 1,485 Other charges, fees and commissions 6,937 6,219 5,190 Other income 16,207 10,345 7,922 - ------------------------------------------------------------------------------------------- Total noninterest income 70,818 59,261 52,830 - ------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Salaries and employee benefits 73,567 59,094 61,437 Occupancy expense of bank premises, net 15,712 13,703 13,375 Furniture and equipment expenses 11,695 9,857 8,343 Amortization of mortgage servicing rights 12,522 9,095 6,078 Amortization of intangible assets 2,065 1,525 1,353 SAIF special assessment 3,817 -- -- Other expense (Note 17) 55,444 51,251 46,320 - ------------------------------------------------------------------------------------------- Total noninterest expense 174,822 144,525 136,906 - ------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 76,217 69,457 50,706 Applicable income taxes (Note 18) 26,834 24,656 16,831 - ------------------------------------------------------------------------------------------- NET INCOME $ 49,383 $ 44,801 $ 33,875 =========================================================================================== EARNINGS PER SHARE: Primary* $ 1.30 $ 1.23 $ 0.98 Fully-diluted* 1.28 1.20 0.97 AVERAGE NUMBER OF SHARES OUTSTANDING: Primary* 38,117 36,327 34,445 Fully-diluted* 38,977 38,199 35,979 ===========================================================================================
See notes to supplemental consolidated financial statements. * Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid on February 11, 1997. 44 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 80 SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 1996, 1995 and 1994 (In thousands, except per share amounts)
CLASS A CLASS B ADDITIONAL COMMON STOCK COMMON STOCK COMMON STOCK PAID IN SHARES * AMOUNT* SHARES* AMOUNT* SHARES* AMOUNT* CAPITAL* - ------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 1994 26,286,278 $ 65,716 1,273,790 $3,184 $ 91,945 Adjustments for pooling-of-interests combinations (Notes 1 and 2) 4,401,182 11,003 -- -- 23,460 - ------------------------------------------------------------------------------------------------------------------------------ Restated Beginning Balance 30,687,460 76,719 1,273,790 3,184 115,405 - ------------------------------------------------------------------------------------------------------------------------------ Shares issued under: Directors Stock Plan 28,534 71 213 Stock Option Plans 188,894 472 869 Dividend Reinvestment 46,026 115 374 Stock Bonus & Retention Plan 44,500 111 340 Employee Stock Purchase Plan 4,372 11 37 Issuance of shares for previous year combinations 14,940 37 69 Issuance of common stock by a pooled bank prior to merger 954,420 2,387 3,282 Net income Cash dividends: (Class A, $0.40 per share; Class B, $0.20 per share) Cash dividends by pooled bank prior to merger Conversion of Class B Common Stock to Class A Common Stock 3,614 9 (3,614) (9) Unrealized loss on securities available for sale, net of taxes - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994 31,972,760 79,932 1,270,176 3,175 120,589 - ------------------------------------------------------------------------------------------------------------------------------ Shares issued under: Directors Stock Plan 1,716 4 32,332 $81 241 Stock Option Plans 13,182 33 224,396 562 1,165 Dividend Reinvestment 53,516 Stock Bonus & Retention Plan 50,000 Employee Stock Purchase Plan 536 1 7,534 19 90 Issuance of common stock by a pooled bank prior to merger 9,344 23 43,270 108 489 Conversion of Class A Common Stock and Class B Common Stock to Common Stock (31,997,538) (79,993) (1,270,176) (3,175) 33,267,714 83,168 Issuance of shares for business combinations 2,089,994 5,225 22,591 Net income Cash dividends: (Class A, $0.1125 per share; Class B, $0.0625 per share; Common, $0.3375 per share) Cash dividends by pooled bank prior to merger Conversion of 7 1/2% convertible subordinated debentures 23,418 59 269 Conversion of 12 3/4% convertible subordinated debentures 1,120 Change in unrealized gain (loss) on securities available for sale, net of taxes - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1995 0 0 0 0 35,793,294 89,483 146,587 - ------------------------------------------------------------------------------------------------------------------------------ Shares issued under: Directors Stock Plan 31,710 79 249 Stock Option Plans 499,079 1,248 1,706 Dividend Reinvestment 60,136 150 897 Stock Bonus & Retention Plan 48,340 121 833 Employee Stock Purchase Plan 10,264 26 154 Issuance of shares for business combination 154,596 386 2,214 Net income Cash dividends: ($0.54 per share) Cash dividends by pooled bank prior to merger Treasury Stock activity of a pooled bank prior to merger (33,382) (83) (354) Conversion of 7 1/2% convertible subordinated debentures 174,926 437 2,011 Conversion of 12 3/4% convertible subordinated debentures 806,598 2,017 5,343 Change in unrealized gain on securities available for sale, net of taxes - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 0 $ 0 0 $0 37,545,561 $93,864 $159,640 ============================================================================================================================== UNREALIZED GAIN (LOSS) ON SECURITIES TOTAL RETAINED UNEARNED AVAILABLE SHAREHOLDERS EARNINGS COMPENSATION FOR SALE EQUITY - ------------------------------------------------------------------------------------------- Balance, January 1, 1994 $37,544 $-- $-- $198,389 Adjustments for pooling-of-interests combinations (Notes 1 and 2) 9,613 (763) 1,694 45,007 - ------------------------------------------------------------------------------------------- Restated Beginning Balance 47,157 (763) 1,694 243,396 - ------------------------------------------------------------------------------------------- Shares issued under: Directors Stock Plan 284 Stock Option Plans 1,341 Dividend Reinvestment 489 Stock Bonus & Retention Plan (77) 374 Employee Stock Purchase Plan 48 Issuance of shares for previous year combinations 106 Issuance of common stock by a pooled bank prior to merger (1,109) 4,560 Net income 33,875 33,875 Cash dividends: (Class A, $0.40 per share; Class B, $0.20 per share) (7,432) (7,432) Cash dividends by pooled bank prior to merger (1,739) (1,739) Conversion of Class B Common Stock to Class A Common Stock -- Unrealized loss on securities available for sale, net of taxes (13,742) (13,742) - ------------------------------------------------------------------------------------------- Balance, December 31, 1994 70,752 (840) (12,048) 261,560 - ------------------------------------------------------------------------------------------- Shares issued under: Directors Stock Plan 326 Stock Option Plans 1,760 Dividend Reinvestment 582 Stock Bonus & Retention Plan (822) -- Employee Stock Purchase Plan 110 Issuance of common stock by a pooled bank prior to merger (187) 433 Conversion of Class A Common Stock and Class B Common Stock to Common Stock -- Issuance of shares for business combinations 27,816 Net income 44,801 44,801 Cash dividends: (Class A, $0.1125 per share; Class B, $0.0625 per share; Common, $0.3375 per share) (10,521) (10,521) Cash dividends by pooled bank prior to merger (1,808) (1,808) Conversion of 7 1/2% convertible subordinated debentures 328 Conversion of 12 3/4% convertible subordinated debentures 10 Change in unrealized gain (loss) on securities available for sale, net of taxes 11,534 11,534 - ------------------------------------------------------------------------------------------- Balance, December 31, 1995 103,224 (1,849) (514) 336,931 - ------------------------------------------------------------------------------------------- Shares issued under: Directors Stock Plan 328 Stock Option Plans 2,954 Dividend Reinvestment 1,047 Stock Bonus & Retention Plan 246 1,200 Employee Stock Purchase Plan 180 Issuance of shares for business combination 2,600 Net income 49,383 49,383 Cash dividends: ($0.54 per share) (16,175) (16,175) Cash dividends by pooled bank prior to merger (1,909) (1,909) Treasury Stock activity of a pooled bank prior to merger (437) Conversion of 7 1/2% convertible subordinated debentures 2,448 Conversion of 12 3/4% convertible subordinated debentures 7,360 Change in unrealized gain on securities available for sale, net of taxes 1,086 1,086 - ------------------------------------------------------------------------------------------- Balance, December 31, 1996 $134,523 $(1,603) $572 $386,996 ===========================================================================================
See notes to supplemental consolidated financial statements. * Restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid on February 11, 1997. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 45 81 SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995, and 1994 (In thousands)
1996 1995 1994 - ------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $49,383 $44,801 $33,875 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization and accretion 14,356 13,705 11,503 Amortization of mortgage servicing rights 12,522 9,095 6,078 Amortization of excess servicing fees 1,105 1,166 1,721 Provision for possible loan losses 11,783 8,281 8,070 Deferred income taxes (1,103) (2,342) (2,333) Loss (gain) on sale of securities, net 1,512 (622) (1,485) Gain on sale of other assets (537) -- -- Additions to mortgage servicing rights (32,264) (32,139) (34,624) Net (increase) decrease in mortgage loans held for sale (45,763) (50,647) 309,766 Increase in interest receivable (1,795) (9,087) (3,874) Decrease in prepaids and other receivables 687 4,683 (3,701) Decrease in accrued expenses and accounts payable (789) (4,687) (35,775) Increase (decrease) in accrued income taxes 414 3,054 (2,491) Increase in interest payable 3,923 11,230 2,491 Other, net 6,401 (12,388) 5,217 - ------------------------------------------------------------------------------------------------------- Total adjustments (29,548) (60,698) 260,563 - ------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 19,835 (15,897) 294,438 - ------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities of securities available for sale 88,346 59,067 52,100 Proceeds from sales of securities available for sale 55,367 74,522 104,499 Purchase of securities available for sale (139,625) (164,634) (104,682) Proceeds from maturities of investment securities 145,724 92,871 74,123 Proceeds from sales of investment securities -- 10,119 -- Purchases of investment securities (144,527) (55,186) (134,403) Net decrease (increase) in short-term investment securities 5,300 200 (1,094) Net increase in loans (605,813) (667,294) (426,266) Cash and cash equivalents received in bank acquisitions, net (Note 2) 1,437 23,201 -- Cash and cash equivalents received in the purchase of assets and assumption of liabilities(Note 2) 7,028 -- 12,154 Capital expenditures (21,866) (11,608) (11,988) Proceeds from sale of other real estate owned 10,238 10,644 7,611 Other, net 111 2,474 6,799 - ------------------------------------------------------------------------------------------------------- Net cash used in investing activities (598,280) (625,624) (421,147) - ------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in demand, savings and time deposits 363,961 543,180 21,070 Net increase in federal funds purchased and repurchase agreements and other short-term borrowings 225,201 194,168 71,302 Proceeds from issuance of long-term debt 6,394 12,092 25,336 Repayment of long-term debt (5,064) (55,526) (13,524) Proceeds from issuance of common stock 3,718 2,406 6,198 Proceeds from issuance of subordinated debt -- 1,425 -- Dividends paid (18,083) (12,339) (9,171) - ------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 576,127 685,406 101,211 - ------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (2,318) 43,885 (25,498) - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 245,510 201,625 227,123 - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year (Note 1) $243,192 $245,510 $201,625 ======================================================================================================= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $190,451 $152,573 $97,870 Income taxes 28,503 22,614 24,487 Non-cash transactions: Transfer of loans to other real estate $8,184 $6,013 $4,787 Origination of loans from the sale of other real estate 303 456 1,309 Securitization of mortgage loans 87,641 -- -- Transfer of investment securities to securities available for sale -- 60,421 33,457 Conversion of subordinated debentures to common stock 9,808 428 -- Assets acquired in business combinations 48,367 330,626 47,985 Liabilities assumed in business combinations 45,766 302,810 57,191 =======================================================================================================
See notes to supplemental consolidated financial statements. 46 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 82 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 1996, 1995 and 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES The Colonial BancGroup, Inc. ("BancGroup") and its subsidiaries operate predominantly in the domestic commercial and mortgage banking industry. The accounting and reporting policies of BancGroup and its subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. The following summarizes the most significant of these policies. BASIS OF PRESENTATION--The supplemental consolidated financial statements of The Colonial BancGroup, Inc. and subsidiaries have been prepared to give retroactive effect to the mergers with Jefferson Bancorp, Inc. (Jefferson) and D/W Bankshares, Inc. (Bankshares) on January 3, and January 31, 1997, respectively. 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 will become the historical consolidated financial statements of The Colonial BancGroup, Inc. and subsidiaries after financial statements covering the date of consummation of the business combinations are issued. The consolidated financial statements of BancGroup for 1995 and 1994 have also previously been restated to give retroactive effect to the July 3, 1996 mergers with Commercial Bancorp of Georgia, Inc. and Southern Banking Corporation which were accounted for as poolings of interests. (See Note 2) PRINCIPLES OF CONSOLIDATION--The supplemental consolidated financial statements and notes to supplemental 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--Effective January 1, 1994, BancGroup adopted Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under this statement, 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. Prior to 1994, securities available for sale and marketable equity securities were recorded at the lower of aggregate cost or market value. 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. The cost of mortgage loans is adjusted by gains and losses generated from corresponding hedging transactions, principally using forward sales commitments, entered into to protect the inventory value of the loans from increases in interest rates. Hedge positions are also used to protect the pipeline of commitments to originate and purchase loans from changes in interest rates. Gains and losses resulting from changes in the market value of the inventory, pipeline and open hedge positions are netted. Any net gain that results is deferred; any net loss that results is recognized when incurred. Hedging gains and losses realized during the commitment and warehousing period related to the pipeline and mortgage loans held for sale are deferred. Hedging losses are recognized currently if deferring such losses would result in mortgage loans held for sale and the pipeline being valued in excess of their estimated net realizable value. The aggregate cost of mortgage loans held for sale at December 31, 1996 and 1995 is less than their aggregate net realizable value. Gains or losses on the sale of Federal National Mortgage Association mortgage-backed securities are recognized on the earlier of the date settled or the date that a forward commitment to deliver a security to a dealer is effectively offset by a commitment to buy a similar security (paired off). These gains or losses are included in other income. LOANS--Loans are stated at face value, net of unearned income and allowance for possible loan losses. 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 POSSIBLE LOAN LOSSES--BancGroup adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition Disclosure", on January 1, 1995. Under the new standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to col- THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 47 83 lect 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 which consist of residential mortgages and consumer loans are evaluated collectively and reserves are established based on historical loss experience. The adoption of SFAS 114 and 118 resulted in no additional provision for credit losses at January 1, 1995. 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 uncollectable, the portion deemed uncollectable 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, 1996, 1995 and 1994. 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 cost or market value less estimated costs to sell. Any write-down from the cost to market value required at the time of foreclosure is charged to the allowance for possible 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 years for the excess of cost over tangible and identified intangible assets acquired and ten years for deposit core base intangibles using the straight-line method. The recoverability of intangible assets is reviewed periodically based on the current earnings of acquired entities. If warranted, analysis, including undiscounted income projections, are made to determine if adjustments to carrying value or amortization periods are necessary. MORTGAGE SERVICING RIGHTS--BancGroup adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights", in May 1995 effective January 1,1995. This statement amends certain provisions of SFAS No. 65 to substantially eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. The statement requires an allocation of the total cost of mortgage loans held for sale to mortgage servicing rights and mortgage loans held for sale (without mortgage servicing rights) based on their relative fair values. Mortgage servicing rights are being amortized primarily using an accelerated method in proportion to the estimated net servicing income from the related loans, which approximates a level yield method. The amortization period represents management's best estimate of the remaining loan lives. The carrying values of the mortgage servicing rights are evaluated for impairment based on their fair values categorized by year of origination or acquisition. Fair values of servicing rights are determined by estimating the present value of future 48 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 84 net servicing income considering the average interest rate and the average remaining lives of the related mortgage loans being serviced. At December 31, 1996, BancGroup had mortgage servicing and excess servicing rights with a net book value of $107 million. The estimated combined fair value of these assets is approximately $152 million. The servicing portfolio is geographically disbursed throughout the United States with a concentration in the southern states. The mortgage servicing rights at December 31, 1996 and 1995 are stated net of accumulated amortization of approximately $38,425,000 and $25,903,000, respectively. Mortgage servicing fees are deducted from the monthly payments on mortgage loans and are recorded as income when earned. Fees from investors for servicing their portfolios of residential loans generally range from 1/4 of 1% to 1/2 of 1% per year on the outstanding principal balance. LONG LIVED ASSETS--BancGroup adopted SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of" on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles to be held and used by the entity be reviewed 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 amount of the asset, an impairment loss is recognized. This statement also requires that long-lived assets and certain intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The adoption of SFAS No. 121 did not have a material impact on BancGroup's financial statements. INCOME TAXES--BancGroup uses the asset and liability method of accounting for income taxes (See Note 18). 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. BancGroup files a consolidated income tax return; however, income taxes are computed by each subsidiary on a separate basis, and taxes currently payable are remitted to BancGroup. STOCK-BASED COMPENSATION--BancGroup adopted SFAS No. 123, "Accounting for Stock-Based Compensation", on January 1, 1996. This statement 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 their stock option plan under the provisions in APB Opinion 25. EARNINGS PER SHARE--Primary earnings per share were computed based on the weighted average number of shares of common stock actually outstanding and common stock equivalents which consists of shares issuable under outstanding stock options. Fully diluted earnings per share also gives effect to shares issuable under convertible debenture agreements. All earnings per share data has been restated to reflect a two-for-one stock split effected in the form of a 100 percent stock dividend distributed on February 11, 1997. ADVERTISING COSTS--Advertising costs are expensed as incurred. Advertising expense was $5,415,000 $4,197,000 and $3,032,000 for the years ended December 31, 1996, 1995 and 1994, respectively. RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement utilizes the financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. This Statement requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of the transfer. This Statement requires that a liability be derecognized if and only if either (a) the debtor pays the creditor and is relieved of its obligation for the liability or (b) the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor. Therefore, a liability is not considered extinguished by an in-substance defeasance. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occuring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. However, in December 1996, the Financial Accounting Standards Board issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASBStatement No. 125". This statement defers the effective date of certain provisions for one year (December 31, 1997). The deferred provisions relate to repurchase agreements, dollar-roll transactions, securities lending, and similar THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 49 85 transactions. The effective date for all other transfers and servicing of financial assets is unchanged. Management does not believe that the adoption of SFAS No. 125 will have a material impact on BancGroup's financial statements. 2. BUSINESS COMBINATIONS On January 3, 1997, Jefferson was merged into BancGroup. Jefferson is a Florida corporation and is a holding company for Jefferson Bank of Florida located in Miami Beach, Florida. Jefferson has merged with BancGroup and Jefferson Bank of Florida merged with BancGroup's existing bank subsidiary in Orlando, Florida, Colonial Bank. A total of 3,854,952 shares of BancGroup's Common Stock was issued to the stockholders of Jefferson. At December 31, 1996, Jefferson had assets of $472.7 million, deposits of $405.8 million and stockholders' equity of $32.3 million. This merger was accounted for under the pooling-of-interests method of accounting and, accordingly, all information presented has been restated to include Jefferson. On, January 31, 1997, Bankshares was merged into BancGroup. Bankshares is a Georgia corporation and is a holding company for Dalton/Whitfield Bank & Trust located in Dalton, Georgia ("Dalton/Whitfield"). Bankshares has merged with BancGroup and Dalton/Whitfield merged with BancGroup's existing bank subsidiary in Lawrenceville, Georgia, Colonial Bank. A total of 1,016,548 shares of BancGroup's Common Stock was issued to the stockholders of Bankshares. At December 31, 1996, Bankshares had assets of $138.7 million, deposits of $124.4 million and stockholders' equity of $10.0 million. This merger was accounted for under the pooling-of-interests method of accounting and, accordingly, all information presented has been restated to include Bankshares. On July 3, 1996, BancGroup completed a business combination with Commercial Bancorp of Georgia, Inc. ("Commercial"), of Lawrenceville, Georgia with the issuance of 2,306,460 shares of BancGroup common stock. At the date of combination, Commercial had assets of $233 million and equity of $21 million. The transaction was accounted for under the pooling-of-interests method of accounting and, accordingly, Commercial is included in all periods presented. On July 3, 1996, BancGroup completed a business combination with Southern Banking Corporation ("Southern"), of Orlando, Florida with the issuance of 2,858,494 shares of BancGroup common stock. At the date of combination, Southern had assets of $232 million and equity of $17 million. The transaction was accounted for under the pooling-of-interests method of accounting and, accordingly, Southern is included in all periods presented. On February 17, 1995, BancGroup completed a merger with Colonial Mortgage Company (CMC) and its parent company, The Colonial Company (TCC). At the merger date TCC's only asset was its investment in CMC. BancGroup issued 4,545,454 shares of its common stock and assumed the debts of TCC. At the merger date, TCC and CMC had total assets of $71 million, total liabilities of $64 million, and total stockholders' equity of $7 million. This business combination by entities under common control was accounted for in a manner similar to a pooling-of-interests and, accordingly, CMC is included in all periods presented. Presented below is summary operating information for BancGroup showing the effect of the business combinations described in the preceding paragraphs (years prior to consummation).
AS PREVIOUSLY EFFECT OF CURRENTLY (In thousands) REPORTED POOLINGS REPORTED ----------------------------------------------------------- 1996: Net interest income $169,678 $22,326 $192,004 Noninterest income 65,982 4,836 70,818 Net income 53,608 (4,225) 49,383 1995: Net interest income 118,442 44,560 163,002 Noninterest income 45,982 13,279 59,261 Net income 38,794 6,007 44,801 1994: Net interest income 104,681 38,171 142,852 Noninterest income 18,125 34,705 52,830 Net income 27,671 6,204 33,875 ===========================================================
Prior to the date of consummation in 1996, Commercial and Southern had net interest income of $6,437,000 and $7,166,000, respectively, and net income of $1,340,000 and $1,750,000, respectively. On April 19, 1996, BancGroup purchased certain assets totaling $31,428,000 and assumed certain liabilities, primarily deposits, totaling $30,994,000 of the Enterprise, Alabama branch of First Federal Bank. During 1995 and 1996, four purchase method combinations were consummated; the following table represents those acquisitions.
(Dollars in thousands) Common Consummation Stock Issued ---------------------- Bank Date Shares Value ====================================================== Brundidge Banking Company March 31, 1995 532,868 $ 6,209 Mt. Vernon Financial Corp. October 20, 1995 1,043,440 14,608 Farmers and Merchants Bank November 3, 1995 513,686 6,999 Dothan Federal Savings Bank July 8, 1996 154,690 2,601
The value of the shares issued represents the total purchase price of Brundidge Banking Company and Mt. Vernon Financial Corp. Farmers and Merchants Bank and Dothan Federal Savings Bank shareholders received $3 million and $2.6 million in cash, respectively, in addition to the amounts received in stock. The financial institution mergers were accounted for as purchases and, accordingly, income and expenses of such institutions are included in the consolidated statements of BancGroup from the date of acquisition forward. 50 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 86 The following table presents unaudited pro forma results of operations for the years ended December 31, 1996 and 1995, after giving effect to amortization of goodwill and other pro forma adjustments, as if the acquisitions had occurred at the beginning of the years presented. The pro forma summary information does not necessarily reflect the results of operations as they actually would have been, if the acquisition had occurred at the beginning of the years presented.
(In thousands, except per share amounts) 1996 1995 ====================================================== (Unaudited) Net interest income $192,042 $168,003 Net income 49,403 45,931 Earnings per share: Primary $ 1.29 $ 1.21 Fully-diluted $ 1.28 $ 1.18 Average shares outstanding: Primary 38,198 37,884 Fully-diluted 39,058 39,756 ======================================================
The following chart summarizes the assets acquired and the liabilities assumed in connection with the 1996 and 1995 purchase method combinations:
1996 1995 (In thousands) Total Total ======================================================= Cash and due froms $ 480 $ 5,899 Interest-bearing deposits in banks -- 987 Federal funds sold 957 16,325 Securities available for sale 7,529 25,557 Investment securities -- 11,456 Loans, net 35,985 249,086 Accrued interest and other assets 1,767 10,009 Deposits 39,931 247,848 Short-term borrowings 1,875 40,000 Other long-term debt -- 3,541 Other liabilities 3,960 11,421 Equity 2,600 27,816 ======================================================= Excess of cost over tangible and identified intangible assets acquired, net $ 1,648 $ 11,317 =======================================================
The above business combinations have been reflected in BancGroup's consolidated financial statements. The following business combinations have not yet been reflected in BancGroup's financial statements. On January 3, 1997, Tomoka Bancorp, Inc. ("Tomoka") was merged into BancGroup. Tomoka is a Florida corporation and is a holding company for Tomoka State Bank located in Ormond Beach, Florida. Tomoka has merged with BancGroup and Tomoka State Bank has merged with BancGroup's existing bank subsidiary in Orlando, Florida, Colonial Bank. A total of 661,992 shares of BancGroup's Common Stock was issued to the stockholders of Tomoka. At December 31, 1996, Tomoka had assests of $76.7 million, deposits of $68.2 million and stockholders' equity of $6.5 million. This merger was accounted for as a pooling of interests, however the merger is not material to BancGroup's financial statements, and thus, prior period information has not been restated to include Tomoka. On January 9, 1997, First Family Financial Corporation ("First Family") was merged into BancGroup. First Family is a Florida corporation and is a holding company for First Family Bank, fsb located in Eustis, Florida. First Family has merged with BancGroup and following regulatory approval, First Family Bank, fsb will merge with BancGroup's existing subsidiary bank in Orlando, Florida, Colonial Bank. A total of 329,492 shares of BancGroup's Common Stock and $6,491,875 in cash has been issued to the stockholders of First Family. At December 31, 1996, First Family had assets of $167.3 million, deposits of $156.7 million and stockholders' equity of $8.7 million. This merger was accounted for as a purchase method combination, and thus results of operations will be included in BancGroup's financial statements only from the date of consummation forward. PENDING MERGERS BancGroup entered into a definitive agreement dated November 18, 1996, to merge Fort Brooke Bancorporation ("Fort Brooke") into BancGroup. Fort Brooke is a Florida corporation and is a holding company for Fort Brooke Bank located in Tampa, Florida. Fort Brooke will merge with BancGroup and following such merger, Fort Brooke Bank will merge with BancGroup's existing bank subsidiary in Orlando, Colonial Bank. Based on the market price of BancGroup's Common Stock as of February 25, 1997, a total of 1,600,124 shares of BancGroup's Common Stock would be issued to the stockholders of Fort Brooke. The actual number of shares of BancGroup's Common Stock to be issued in this transaction will depend upon the market value of such Common Stock at the time of the merger subject to a maximum of 1,950,152 shares and a minimum of 1,600,124 shares to be issued.This transaction is subject to, among other things, approval by the stockholders of Fort Brooke and approval by appropriate regulatory authorities. At December 31, 1996, Fort Brooke had assets of $208.8 million, deposits of $185.8 million and stockholders' equity of $16.6 million. This merger will be accounted for as a pooling-of-interests. On March 5, 1997, Shamrock Holding, Inc., parent of The Union Bank in Evergreen, Alabama, ("Shamrock") was merged into BancGroup. BancGroup purchased all of the outstanding shares of Shamrock for an aggregate cash price of $11,482,000. At December 31, 1996, The Union Bank had total assets of approximately $54.5 million, deposits of $46.4 million, and stockholders' equity of $7.9 million. This merger will be accounted for as a purchase method business combination, and thus the results of operations will be included in BancGroup's financial statements only from the date of consummation forward. In March 1997, BancGroup entered into definitve agreements to merge two additional Florida banks into BancGroup. First Commerce Banks of Florida, Inc. ("First Commerce"), in Winter Haven, had assets of $106 million at December 31, 1996. Great Southern Bank ("Great Southern"), in West Palm Beach, had assets of $119 million at December 31, 1996. The First Commerce merger will be accounted for as a purchase while the Great Southern merger will be a pooling of interests. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 51 87 3. SECURITIES The carrying and market values of investment securities are summarized as follows:
INVESTMENT SECURITIES (In thousands) 1996 1995 - -------------------------------------------------------------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market COST GAINS LOSSES VALUE Cost Gains Losses Value ==================================================================================================================== U.S. Treasury securities and obligations of U.S. government agencies $239,964 $2,331 $(1,001) $241,294 $229,571 $3,841 $(1,660) $231,752 Obligations of state and political subdivisions 40,979 960 (49) 41,890 50,256 1,265 (155) 51,366 Other 1,167 15 (202) 980 11,472 68 (49) 11,491 - -------------------------------------------------------------------------------------------------------------------- Total $282,110 $3,306 $(1,252) $284,164 $291,299 $5,174 $(1,864) $294,609 ====================================================================================================================
The carrying and market values of securities available for sale are summarized as follows:
SECURITIES AVAILABLE FOR SALE (In thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market COST GAINS LOSSES VALUE Cost Gains Losses Value ======================================================================================================================== U.S. Treasury securities and obligations of U.S. government agencies $420,014 $2,819 $(2,818) $420,015 $339,090 $2,287 $(3,967) $337,410 Obligations of state and political subdivisions 11,934 84 (51) 11,967 11,617 60 (46) 11,631 Other 7,306 898 (71) 8,133 9,271 1,020 (205) 10,086 - ------------------------------------------------------------------------------------------------------------------------ Total $439,254 $3,801 $(2,940) $440,115 $359,978 $3,367 $(4,218) $359,127 ========================================================================================================================
Securities Available Investment Securities For Sale Amortized Market Amortized Market (In thousands) Cost Value Cost Value ----------------------------------------------------------------------- Due in one year or less $ 60,629 $ 60,912 $ 68,025 $ 67,737 Due after one year through five years 133,808 135,213 136,619 136,725 Due after five years through ten years 14,987 15,569 26,489 26,623 Due after ten years 2,037 2,135 158 165 ----------------------------------------------------------------------- 211,461 213,829 231,291 231,250 Mortgage-backed securities 70,649 70,335 169,233 169,735 ----------------------------------------------------------------------- Total $282,110 $284,164 $400,524 $400,985 =======================================================================
During 1995 and pursuant to a FASB Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, BancGroup transferred approximately $60,421,000 from Investment Securities to Securities Available for Sale. 52 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 88 4. LOANS A summary of loans follows:
(In thousands) 1996 1995 ------------------------------------------------- Commercial, financial, and agricultural $ 560,824 $ 509,526 Real estate--commercial 983,673 844,460 Real estate--construction 446,288 370,442 Real estate--mortgage 1,767,003 1,516,512 Installment and consumer 264,307 236,834 Other 55,883 48,231 ------------------------------------------------- Subtotal $4,077,978 $3,526,005 Unearned income (3,345) (4,491) ------------------------------------------------- Total $4,074,633 $3,521,514 =================================================
BancGroup's lending is concentrated throughout Alabama, southern Tennessee, central Georgia and central and south Florida, and repayment of these loans is in part dependent upon the economic conditions in the respective regions of the 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 possible loan losses. Other than concentrations of credit risk in Alabama and commercial real estate loans in general, management is not aware of any significant concentrations. 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, 1996. 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, 1996 are summarized as follows:
(In thousands) Balance Balance 1/1/96 Additions Repayments 12/31/96 =============================================== $41,045 $48,659 $46,933 $43,771 ===============================================
At December 31, 1996 and 1995, the recorded investment in loans for which impairment has been recognized in accordance with SFAS 114 totaled $29,454,000 and $17,064,000, respectively, and these loans had a corresponding valuation allowance of $7,842,000 and $6,257,000, respectively. The impaired loans were measured for impairment based primarily on the value of underlying collateral. For the years ended December 31, 1996 and 1995, the average recorded investment in impaired loans was approximately $23,259,000 and $19,150,000. BancGroup recognized approximately $2,199,000 and $1,121,000 of interest on impaired loans during the portion of the year that they were impaired in 1996 and 1995, respectively. BancGroup uses several factors in determining if a loan is impaired under SFAS No. 114. 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, and borrowers' operating factors such as cash flows, operating income or loss, etc. 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the allowance for possible loan losses is as follows:
(In thousands) 1996 1995 1994 ================================================ Balance, January 1 $45,215 $40,965 $35,428 Addition due to acquisitions 618 1,129 501 Provision charged to income 11,783 8,281 8,070 Loans charged off (11,505) (7,833) (6,769) Recoveries 4,650 2,673 3,735 ------------------------------------------------ Balance, December 31 $50,761 $45,215 $40,965 ================================================
6. 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. These financial instruments include loan commitments and standby letters of credit and obligations to deliver and sell mortgage loans and 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, 1996 and 1995 are as follows: THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 53 89
Contract Amount ----------------------------------------------- (In thousands) 1996 1995 ----------------------------------------------- Financial instruments whose contract amounts represent credit risk: Loan commitments $696,426 $578,241 Standby letters of credit 47,486 30,978 Mortgage sales commitments 193,970 121,925
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. Obligations to sell loans at specified dates (typically within ninety days of the commitment date) and at specified prices are intended to hedge the interest rate risk associated with the time period between the initial offer to lend and the subsequent sale to a permanent investor. Risks arise from changes in interest rates. Changes in the market value of the sales commitments are included in the measurement of the gain or loss on mortgage loans held for sale. The current market value of these commitments was $194,858,000, and $120,644,000 at December 31, 1996 and 1995, respectively. 7. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
(In thousands) 1996 1995 ----------------------------------------------- Land $ 21,392 $ 18,041 Bank premises 66,613 62,323 Equipment 62,337 53,883 Leasehold improvements 8,877 4,810 Construction in progress 1,665 1,993 Automobiles 355 360 ----------------------------------------------- Total 161,239 141,410 Less accumulated depreciation and amortization 73,725 66,059 ----------------------------------------------- Premises and equipment, net $ 87,514 $ 75,351 ===============================================
8. SHORT-TERM BORROWINGS Short-term borrowings are summarized as follows:
(In thousands) 1996 1995 1994 ------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements $124,245 $150,540 $171,264 FHLB borrowings 715,000 465,000 210,050 Other short-term borrowings 2,017 1,141 1,131 ------------------------------------------------------------- Total $841,262 $616,681 $382,445 =============================================================
BancGroup had outstanding term notes (Note 9) of which the current portion, $1,033,000 and $1,000,000, is included in other short-term borrowings at December 31, 1996 and 1995, respectively. BancGroup became a member of the Federal Home Loan Bank (FHLB) in late 1992. Based on its investment in the FHLB and other factors at December 31, 1996, BancGroup can borrow up to $1.0 billion from the FHLB on either a short or long-term basis. At December 31, 1996, $726 million was outstanding. BancGroup has available an additional unused credit of $281 million with the FHLB. FHLB has a blanket lien on BancGroup's 1-4 family mortgage loans in the amount of the outstanding debt. CMC has a warehouse line of credit with $118 million of availability from FHLB, of which none was outstanding at December 31, 1996. This warehouse line is collateralized by mortgage loans held for sale. Additional details regarding short-term borrowings are shown below:
(In thousands) 1996 1995 1994 -------------------------------------------------------------------------- Average amount outstanding during the year $713,912 $503,578 $257,561 Maximum amount outstanding at any month-end 878,598 638,249 378,930 Weighted average interest rate: During year 5.41% 6.00% 4.31% End of year 5.53% 5.69% 5.48% --------------------------------------------------------------------------
9. LONG-TERM DEBT Long-term debt is summarized as follows:
(In thousands) 1996 1995 -------------------------------------------------------------- 12 3/4% Convertible Subordinated Debentures $ -- $ 7,483 7 1/2% Convertible Subordinated Debentures 7,187 9,637 7% Convertible Subordinated Debentures 1,425 1,425 Term Note 14,116 10,250 Line of Credit and Other 19 6,353 FHLB Advances 10,809 5,516 REMIC Bonds 5,536 7,024 -------------------------------------------------------------- Total $39,092 $47,688 ==============================================================
The 12 3/4% Convertible Subordinated Debentures due December 15, 2000 ("1985 Debentures") were issued in connection with the acquisition of a bank. The 1985 Debentures were redeemable, at the option of BancGroup, ten years from the date of issuance at face value plus accrued interest. At the option of the holder, each 1985 Debenture could be converted into BancGroup Common Stock at the conversion price of $9.125 principal amount of 1985 Debentures, subject to adjustment upon the occurrence of certain events, for each share of stock received. In January, 1996, BancGroup called the 12 3/4% subordinated debentures. As a result, 806,598 shares 54 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 90 of BancGroup Common Stock were issued and cash was paid for the remaining debentures. 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 $14.00 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, a total of 512,800 shares of such Common Stock would be issued. The 7 % Convertible Subordinated debentures due December 31, 2004 ("1994 Debentures"), were issued by Bankshares prior to being merged into BancGroup. The 1994 Debentures are convertible into BancGroup Common Stock, at the conversion price of $15.16 principal amount of the 1994 Debentures, subject to adjustment upon occurance of certain events, for each share of stock received. The 1994 Debentures cannot be redeemed by BancGroup before January 1, 1998. At December 31, 1995, BancGroup had a term note with $11,250,000 outstanding and a line credit with $6,250,000 outstanding. This term note was payable in annual installments of $1,000,000 and was due in August 1997. In 1996, BancGroup transferred the outstanding balances of the term note and line of credit to a new term note. The 1996 term note has $15,149,000 outstanding at December 31, 1996. (Also see Note 8.) The 1996 term note is payable in annual installments of $1,033,000 with the balance due in 2001. In addition, BancGroup entered into a new line of credit with the same financial institution totaling $35 million, of which none is outstanding at December 31, 1996. The 1996 line of credit is due at maturity in October 1998. The term note and the line of credit bear interest at a rate of 1.5% above LIBOR. All of the capital stock of BancGroup's subsidiary banks is pledged as collateral. The agreements contain restrictive covenants which, among other things, limit the sale of assets, incurrence of additional indebtedness, repurchase of BancGroup stock, and requires BancGroup to maintain certain specified financial ratios. In January 1997, the new term note was paid in full. The repayment was funded with a portion of the proceeds from the Trust Preferred Securities offering discussed below. BancGroup had long-term Federal Home Loan Bank (FHLB) Advances outstanding of $10,809,000 and $5,516,000 at December 31, 1996 and 1995, respectively. These advances bear interest rates of 5.32% to 7.53% and mature from 1999 to 2011. BancGroup, with the acquisition of First AmFed, also assumed the real estate mortgage investment conduit (REMIC) bonds through a conduit, Service Financial Corporation, a subsidiary of Colonial Bank. These bonds were series A (four classes) with an original principal amount of $28,123,000 and a coupon interest rate of 7.875%. As of December 31, 1996 the bonds have an outstanding balance of $5,536,000 and are collateralized by FNMA mortgaged-backed securities with a carrying value of $5,546,000. The collections on these securities are used to pay interest and principal on the bonds. Only Class A-3 and A-4 bonds remain outstanding. The REMIC bonds are summarized in the following table:
Balance at Expected December 31, 1996 Class Maturity (In thousands) ========================================================================= A-3 June 1, 2007 $ 845 A-4 September 1, 2017 4,691 ------------------------------------------------------------------------- Total $5,536 =========================================================================
At December 31, 1996, 1ong-term debt, including the current portion, is scheduled to mature as follows:
(In thousands) ================================================================================== 1997 $ 2,199 1998 1,229 1999 1,438 2000 1,093 2001 11,082 Thereafter 24,068 - ---------------------------------------------------------------------------------- Total $41,109 ==================================================================================
On January 29, 1997, BancGroup issued, through a special purpose trust, $70 million of Trust Preferred Securities in a private placement offering. The securities bear interest at 8.92% and are manditorily redeemable by BancGroup beginning January 2017 through January 2027. Also, BancGroup has the option to redeem the Securities in whole or in part, at a premium after January 2007 through January 2017, or at the Face amount plus accrued interest after January 2017. The securities are subordinated to substantially all of BancGroup's indebtedness. In BancGroup's consolidated statement of condition, these securities will be shown as long-term debt. 10. CAPITAL STOCK On January 15, 1997, 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 February 11, 1997. The stated par value was not changed from $2.50. 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. Effective February 21,1995 the Class A Common Stock and the Class B Common Stock were reclassified into one class of stock called Common Stock, $2.50 par value, with equal rights for all shareholders. 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. Prior to the reclassification the holders of Class A Common Stock had limited voting rights compared with the holders of Class B Common Stock. The holders of the Class A Common Stock were entitled to elect, voting as a separate class, up to 25% (rounded up to the nearest whole number) of the entire Board of Directors of BancGroup, and the holders of the Class B Common Stock were entitled to elect the remaining directors. On all other matters coming before the stockholders of BancGroup, except matters for which Delaware law requires a class vote, the holders of the Class A Common Stock were entitled to one twentieth (1/20) of one (1) vote per share and the holders of the Class B Common Stock were entitled to one (1) vote per share. Stockholders of BancGroup may not act by written consent or call special meetings. At the option of the holder of record, and subject to THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 55 91 adjustment to avoid dilution in the event of certain occurrences, each share of BancGroup Class B Common Stock was convertible at any time into one share of Class A Common Stock. Shares of Class A Common Stock were not convertible into any other securities of BancGroup. 11. 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 $109 million of retained earnings plus certain 1997 earnings would be available for distribution to BancGroup, from its subsidiaries, as dividends in 1997 without prior approval from the respective regulatory authorities. The subsidiary banks are required by law to maintain noninterest-bearing deposits with the Federal Reserve Bank to meet regulatory reserve requirements. At December 31,1996, these deposits totaled $29.9 million. BancGroup and its subsidiary banks 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 its subsidiary banks 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 its subsidiary banks' 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 its subsidiary banks 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, 1996 and 1995, that BancGroup and its subsidiary banks meet all capital adequacy requirements to which they are subject. As of December 31, 1996, the most recent notification from the Federal Deposit Insurance Corporation categorized BancGroup's subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized BancGroup and its subsidiary banks 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 its significant bank subsidiaries are also presented in the following table:
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE (In Thousands) ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS - --------------------------------------------------------------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ===================================================================================================================== AS OF DECEMBER 31,1996 Total Capital (to Risk Weighted Assets) CONSOLIDATED $413,303 10.63% $311,241 >8.0% $389,052 >10.0% - - Colonial Bank Alabama 305,015 10.47% 233,112 >8.0% 291,391 >10.0% - - Colonial Bank Florida 57,673 11.06% 41,732 >8.0% 52,165 >10.0% - - Colonial Bank Georgia 52,632 12.51% 33,664 >8.0% 42,080 >10.0% - - Tier I Capital (to Risk Weighted Assets) CONSOLIDATED 356,043 9.15% 155,621 >4.0% 233,385 >6.0% - - Colonial Bank Alabama 268,349 9.21% 116,556 >4.0% 174,834 >6.0% - - Colonial Bank Florida 51,707 9.91% 20,866 >4.0% 31,299 >6.0% - - Colonial Bank Georgia 45,872 10.90% 16,832 >4.0% 25,248 >6.0% - - Tier I Captial (to average assets) CONSOLIDATED 356,043 6.69% 212,776 >4.0% 265,970 >5.0% - - Colonial Bank Alabama 268,349 6.65% 161,418 >4.0% 201,772 >5.0% - - Colonial Bank Florida 51,707 6.87% 30,093 >4.0% 37,617 >5.0% - - Colonial Bank Georgia 45,872 7.32% 25,071 >4.0% 31,339 >5.0% - - AS OF DECEMBER 31, 1995 Total Capital (to Risk Weighted Assets) CONSOLIDATED $366,948 11.20% $262,072 >8.0% $327,590 >10.0% - - Colonial Bank Alabama 263,380 10.81% 194,981 >8.0% 243,726 >10.0% - - Colonial Bank Florida 57,485 12.89% 35,684 >8.0% 44,605 >10.0% - - Colonial Bank Gerogia 47,190 13.10% 28,821 >8.0% 36,026 >10.0% - - Tier I Capital (to Risk Weighted Assets) CONSOLIDATED 307,415 9.38% 131,036 >4.0% 196,554 >6.0% - - Colonial Bank Alabama 232,856 9.55% 97,490 >4.0% 146,236 >6.0% - - Colonial Bank Florida 53,093 11.90% 17,842 >4.0% 26,763 >6.0% - - Colonial Bank Georgia 41,261 11.45% 14,410 >4.0% 21,616 >6.0% - - Tier I Capital (to average assets) CONSOLIDATED 307,415 6.99% 175,966 >4.0% 219,958 >5.0% - - Colonial Bank Alabama 232,856 6.87% 135,498 >4.0% 169,373 >5.0% - - Colonial Bank Florida 53,093 8.14% 26,088 >4.0% 32,609 >5.0% - - Colonial Bank Georgia 41,261 8.95% 18,436 >4.0% 23,045 >5.0% - -
56 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 92 12. 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, 1996 were as follows:
(In thousands) ----------------------- 1997 $7,023 1998 6,069 1999 5,461 2000 5,076 2001 3,646 Thereafter 14,940 ----------------------- Total $42,215 =======================
Rent expense for all leases amounted to $9,131,000 in 1996, $8,162,000 in 1995 and $6,677,000 in 1994. 13. EMPLOYEE BENEFIT PLANS BancGroup and the majority of its subsidiaries are participants in a pension plan with certain other related companies. This plan 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. For purposes of determining the actuarial present value of the projected benefit obligation, the weighted average discount rate was 7.75% for 1996, 7.25% for 1995 and 8.5% for 1994. The rate of increase in future compensation levels was 4.75% for 1996, 4.00% for 1995 and 5.00% for 1994. The expected long-term rate of return on assets was 9% for 1996, 1995, and 1994. Employee pension benefit plan status at December 31:
(In thousands) 1996 1995 ------------------------------------------------------ Actuarial present value of benefit obligations: Accumulated benefit obligation $ 8,623 $ 10,211 Vested benefit obligation $ 8,191 $ 9,244 Projected benefit obligation for service rendered to date $ 13,279 $ 13,811 Plan assets at fair value $ 13,729 $ 11,567 ------------------------------------------------------ Plan assets over/(under) projected benefit obligation 450 (2,244) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (2,549) (716) Unrecognized prior service cost 62 66 Unrecognized net asset at January, 1986 being recognized over 19 years (45) (38) ------------------------------------------------------ Accrued pension cost $(2,082) $ (2,932) ======================================================
(In thousands) 1996 1995 1994 ---------------------------------------------------- Net pension cost included the following components: Service cost $ 1,099 $ 873 $ 849 Interest cost 1,029 962 619 Actual return on plan assets (1,463) (851) (614) Net amortization and deferral 405 (6) (27) ---------------------------------------------------- Net pension cost $ 1,070 $ 978 $ 827 ====================================================
At December 31, 1996 and 1995, the pension plan assets included investments of 45,260 and 59,874 shares of BancGroup Common Stock representing 7% of pension plan assets for both years. At December 31, 1996, BancGroup Common Stock included in pension plan assets had a cost and market value of $383,488 and $905,200, respectively. Pension plan assets are distributed approximately 10% in U.S. Government and agency issues, 26% in Corporate bonds, 48% in equity securities (including BancGroup Common Stock) and 16% in money market 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 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 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 57 93 plan and similar plans of combined banks amounted to $850,000, $772,000 and $606,000 for 1996, 1995 and 1994, respectively. Prior to the merger, Jefferson maintained a severance plan for certain senior officers and directors of Jefferson. The plan provided cash payments to the effected personnel in the event of retirement or a change in control (whether or not their employment is terminated. During the years ended December 31, 1996, 1995 and 1994, expense recognized under the plan totaled $4,333,000, $615,000, and $550,000, respectively. 14. 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. An aggregate of 1,100,000 shares of Common Stock are reserved for issuance under the 1992 Plan. At December 31, 1996 and 1995, 704,872 and 977,038 shares, 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 1,600,000 shares of Common Stock are reserved for issuance under the 1992 Nonqualified Plan. At December 31,1996 and 1995, 1,475,500 and 1,565,500 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 Southern, Commercial, Jefferson and Bankshares business combinations, BancGroup assumed qualified stock options and non-qualified stock options in exchange for existing officers and directors and other stock options according to the respective exchange ratios. Certain of the options issued during 1996 under the 1992 Nonqualified Plan and the 1992 Plan have vesting requirements. The option recipients are required to remain in the employment of BancGroup (subject to certain exemptions) for periods of between one and five years to fully vest in the options granted. The five year vesting options become exercisable on a pro-rata basis over five years. Following is a summary of the transactions in Common Stock under these plans for the years ended December 31, 1996, 1995 and 1994.
==================================================================================================== Qualified Plans Nonqualified Plans - ---------------------------------------------------------------------------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ==================================================================================================== Outstanding at December 31, 1993 684,635 $ 6.607 1,617,750 $5.416 Granted (at $5.74-$10.32 per share) 96,250 10.010 153,992 5.607 Exercised (at $2.125-$6.50 per share) (131,867) 5.962 (58,669) 5.632 Cancelled (at $7.975 per share) (29,260) 7.975 -- -- - ---------------------------------------------------------------------------------------------------- Outstanding at December 31, 1994 619,758 7.158 1,713,073 5.536 Granted (at $8.445-$13.495 per share) 8,482 9.571 36,862 8.858 Exercised (at $3.08-$8.74 per share) (150,599) 6.499 (103,715) 7.237 Cancelled (at $6.26 per share) (5,986) 6.260 -- -- - ---------------------------------------------------------------------------------------------------- Outstanding at December 31, 1995 471,655 7.418 1,646,220 5.539 Granted (at $14.580-$19.94 per share) 292,166 17.895 90,000 14.714 Exercised (at $3.08-$9.12 per share) (95,569) 8.216 (409,306) 5.874 Cancelled (at $11.16 per share) (62,632) 11.160 -- -- - ---------------------------------------------------------------------------------------------------- Outstanding at December 31, 1996 605,620 $12.122 1,326,914 $6.189 ====================================================================================================
58 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 94 At December 31, 1996, the total shares outstanding and exercisable under these option plans were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------------------------- ---------------------------------- WEIGHTED WEIGHTED NUMBER AVERAGE AVERAGE AGGERGATE NUMBER AVERAGE AGGERGATE RANGE OF OUTSTANDING REMAINING EXERCISE OPTION EXERCISABLE EXERCISE OPTION EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE PRICE AT 12/31/96 PRICE PRICE - ----------------------------------------------------------------------- ---------------------------------- $3.08-$3.19 278,776 3.96years $ 3.088 $ 860,831 278,776 $ 3.088 $ 860,831 $3.625-$3.88 497,396 4.80years 3.817 1,898,470 497,396 3.817 1,898,470 $4.31-$8.445 324,252 6.24years 6.446 2,090,199 324,252 6.446 2,090,199 $8.78-$10.005 449,948 4.50years 9.214 4,145,730 449,948 9.214 4,145,730 $14.580-$17.155 308,166 10.47years 16.488 5,081,093 179,000 16.021 2,867,825 $19.53-$19.94 74,000 10.97years 19.885 1,471,460 -- N/A -- - ----------------------------------------------------------------------- ---------------------------------- Total 1,932,538 5.97years $ 8.045 $15,547,783 1,729,372 $ 6.860 $11,863,055 ======================================================================= ==================================
On January 1, 1996 BancGroup adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As permitted by SFAS 123, 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 fair market value of the shares at date of issue. Had compensation cost for BancGroup's Plans been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS 123, BancGroup's net income and net income per share would have been reduced to the pro forma amounts indicated below:
As Pro Reported Forma ================================================ 1996 ------- Net income $49,383 $48,378 Earnings per share (primary) $ 1.30 $ 1.27 1995 -------- Net income $44,801 $44,597 Earnings per share (primary) $ 1.23 $ 1.23 ------------------------------------------------
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 1996 and 1995, respectively: dividend yield of 3.15% and 4.98%; expected volatility of 34% for both years; risk-free interest rates of 6.04% and 6.63%; and expected lives of ten years.The weighted average fair values of options granted during 1996 and 1995 was $6.51 and $4.78, 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 1996, 1995 and 1994, respectively, 31,710, 34,048 and 28,534 shares of Common Stock were issued under the Directors Plan, representing approximately $328,000, $326,000 and $284,000 in directors' fees for 1996, 1995 and 1994, 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 20% per year commencing on the first anniversary of the award. An aggregate of 1,500,000 shares have been reserved for issuance under this Plan. There were 99,640 shares outstanding of which 10,520 shares were vested at December 31, 1996. In 1994, BancGroup adopted the Employee Stock Purchase Plan which provides salaried employees of BancGroup with a convenient way to become shareholders of BancGroup. The participant authorizes a regular payroll deduction of not less than $10 or more than 10% of salary. The participant may also contribute whole dollar amounts of not less than $100 or more than $1,000 each month toward the purchase of the stock at market price. There are 300,000 shares authorized for issuance under this Plan. There were 22,706 shares issued and outstanding under this Plan at December 31, 1996. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 59 95 15. CONTINGENCIES BancGroup and its subsidiary banks 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, 1996, will have a materially adverse effect on BancGroup's financial statements. 16. RELATED PARTIES Most of the insurance coverage for credit life, and accident and health insurance is provided to customers of BancGroup's subsidiary bank by companies owned by a principal shareholder and a director of BancGroup. Premiums collected from customers and remitted to these companies on such insurance were approximately $1,651,000, $1,712,000 and $2,242,000 in 1996, 1995 and 1994, respectively. BancGroup, Colonial Bank and CMC lease premises, including their principal corporate offices, and airplane services from companies owned by principal shareholders of BancGroup. Amounts paid under these leases and agreements approximated $3,252,000, $3,100,000 and $2,300,000 in 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, BancGroup and its subsidiaries paid or accrued fees of approximately $1,475,000, $1,306,000 and $1,326,000, respectively, for legal services required of law firms in which a partner of the firm serves on the Board of Directors. 17. OTHER EXPENSE The following amounts were included in Other Expense:
(In thousands) 1996 1995 1994 ------------------------------------------------ Stationery, printing, and supplies $ 4,051 $ 3,540 $ 3,510 Postage 2,527 2,159 1,928 Telephone 4,665 3,762 3,214 Insurance 2,373 1,722 2,059 Legal fees 2,966 2,420 3,081 Advertising and public relations 5,415 4,197 3,032 FDIC assessment 2,233 4,318 6,277 Other 31,214 29,133 23,219 ------------------------------------------------ Total $55,444 $51,251 $46,320 ================================================
18. INCOME TAXES The components of income taxes were as follows:
(In thousands) 1996 1995 1994 --------------------------------------------- Currently payable: Federal $25,831 $24,396 $18,110 State 2,238 2,284 1,311 Deferred (1,235) (2,024) (2,590) --------------------------------------------- Total $26,834 $24,656 $16,831 =============================================
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:
(In thousands) 1996 1995 1994 --------------------------------------------------- Tax at statutory rate on income from operations $26,676 $24,310 $17,747 Add: State income taxes, net of federal tax benefit 1,871 1,519 858 Amortization of net purchase accounting adjustments 369 237 465 Other 636 840 497 --------------------------------------------------- Total 29,552 26,906 19,567 =================================================== Deduct: Nontaxable interest income 2,702 1,861 1,886 Dividends received deduction 16 252 233 Other -- 137 617 --------------------------------------------------- Total 2,718 2,250 2,736 --------------------------------------------------- TOTAL INCOME TAXES $26,834 $24,656 $16,831 ===================================================
60 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 96 The components of BancGroup's net deferred tax asset as of December 31, 1996 and 1995, were as follows:
(In thousands) 1996 1995 ------------------------------------------------- Deferred tax assets: Allowance for possible loan losses $18,233 $16,543 Pension accrual in excess of contributions 952 755 Accumulated amortization of mortgage servicing rights 2,384 2,869 Acquisiton related accruals -- 547 Other real estate owned writedowns 1,301 1,513 Other liabilities and reserves 1,556 1,514 Deferred loan fees, net 310 715 Accelerated tax depreciation 201 -- Other 1,913 2,963 ------------------------------------------------- Total deferred tax asset 26,850 27,419 ================================================= Deferred tax liabilities: Accelerated tax depreciation -- 459 Cumulative accretion/discount on bonds 428 510 Differences between financial reporting and tax bases of net assets acquired 853 1,330 Stock dividends received 2,106 1,449 Prepaid FDIC assessment 1 407 Loan loss reserve recapture 1,779 2,248 Unrealized gain on securities available for sale 217 (652) Other 1,548 1,984 ------------------------------------------------- Total deferred tax liability 6,932 7,735 ================================================= Net deferred tax asset $19,918 $19,684 =================================================
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. 19. 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. - - 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 fair value is determined from quoted current market prices. - - MORTGAGE SERVICING RIGHTS AND EXCESS SERVICING FEES -- Fair value is estimated by discounting future cash flows from servicing fees using discount rates that approximate current market rates. - - 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, 1996 and 1995. 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 -- For these short-term instruments, the carrying amount is a reasonable estimate of fair value. - - 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, 1996 and 1995. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 61 97
The estimated fair values of BancGroup's financial instruments at December 31, 1996 and 1995 are as follows: 1996 1995 --------------------------------------------------------------------------------------- CARRYING FAIR Carrying Fair (In thousands) AMOUNT VALUE Amount Value - ----------------------------------------------------------------------------------------------------------------------------------- Financial assets: Cash and short-term investments $ 243,192 $ 243,192 $ 245,510 $ 245,510 Securities available for sale 440,115 440,115 359,127 359,127 Investment securities 282,110 284,164 291,299 294,609 Mortgage loans held for sale 157,966 160,060 112,203 113,669 Mortgage servicing rights and excess servicing fees 107,797 152,064 88,165 130,156 Loans 4,074,633 3,521,514 Less: allowance for loan losses (50,761) (45,215) - ----------------------------------------------------------------------------------------------------------------------------------- Loans, net 4,023,872 4,087,519 3,476,299 3,529,631 - ----------------------------------------------------------------------------------------------------------------------------------- Total $5,255,052 $5,367,114 $4,572,603 $4,672,702 =================================================================================================================================== Financial liabilities: Deposits $4,113,934 $4,127,114 $3,700,715 $3,710,403 Short-term borrowings 841,262 841,262 616,681 616,681 Long-term debt 39,092 42,121 47,688 55,065 - ----------------------------------------------------------------------------------------------------------------------------------- Total $4,994,288 $5,010,497 $4,365,084 $4,382,149 ===================================================================================================================================
20. CONDENSED FINANCIAL INFORMATION OF THE COLONIAL BANCGROUP, INC. (PARENT COMPANY ONLY)
STATEMENT OF CONDITION December 31 -------------------------------------------------------------- (In thousands) 1996 1995 ============================================================== ASSETS: Cash* $ 1,238 $ 5,977 Investment in subsidiaries* 407,972 359,647 Intangible assets 3,541 4,234 Other assets 4,523 6,070 -------------------------------------------------------------- Total assets $417,274 $375,928 ============================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Short-term borrowings $ 1,033 $ 1,000 Subordinated debt 8,612 18,545 Other long-term debt 14,116 16,499 Other liabilities 6,517 2,953 Shareholders' equity 386,996 336,931 -------------------------------------------------------------- Total liabilities and shareholders' equity $417,274 $375,928 ============================================================== *Eliminated in consolidation. STATEMENT OF OPERATIONS
Years Ended December 31 ------------------------------------------------------------- (In thousands) 1996 1995 1994 ============================================================= INCOME: Cash dividends from subsidiaries* $16,470 $17,019 $14,357 Interest and dividends on short-term investments* 203 111 87 Other income 2,210 1,430 1,933 ------------------------------------------------------------- Total income 18,883 18,560 16,377 ============================================================= EXPENSES: Interest 1,917 2,698 2,486 Salaries and employee benefits 3,447 754 928 Occupancy expense 347 298 293 Furniture and equipment expense 96 73 111 Amortization of intangible assets 442 459 460 Other expenses 5,432 4,753 5,699 ------------------------------------------------------------- Total expenses 11,681 9,035 9,977 ============================================================= Income before income taxes, extraordinary item and equity in undistributed net income of subsidiaries 7,202 9,525 6,400 Income tax benefit 3,057 2,406 2,941 ------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 10,259 11,931 9,341 Equity in undistributed net income of subsidiaries* 39,124 32,870 24,534 Net income $49,383 $44,801 $33,875 =============================================================
*Eliminated in consolidation. 62 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 98 20. CONDENSED FINANCIAL INFORMATION OF THE COLONIAL BANCGROUP, INC. (continued) (PARENT COMPANY ONLY)
STATEMENT OF CASH FLOWS Years Ended December 31 (In thousands) 1996 1995 1994 ================================================================ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $49,383 $44,801 $33,875 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of assets -- -- (7) Depreciation, amorti- zation, and accretion 544 1,099 1,072 Decrease (increase) in prepaids and other assets (852) (2,460) 13 (Decrease) increase in accrued income taxes (65) 3,387 (727) (Decrease) increase in accrued expenses 251 1,735 (19) Undistributed earnings of subsidiaries* (42,881) (32,870) (24,533) ---------------------------------------------------------------- Total adjustments (43,003) (29,108) (24,201) ---------------------------------------------------------------- Net cash provided by operating activities 6,380 15,692 9,674 ---------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (124) (175) (343) Purchase of securities -- (400) -- Proceeds from sale of premises and equipment 3,000 538 399 Net repayment (investment) in subsidiaries* 2,692 (8,468) (5,909) ---------------------------------------------------------------- Net cash provided by (used in) investing activities 5,568 (8,505) (5,853) ----------------------------------------------------------------
STATEMENT OF CASH FLOWS (continued) Years Ended December 31 (In thousands) 1996 1995 1994 ================================================================ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of subordinated debt -- 1,425 -- Proceeds from issuance of long-term debt -- 6,249 -- Repayment of long-term debt (2,350) (1,000) (2,000) Proceeds from issuance of common stock 3,719 2,418 6,953 Dividends paid (18,084) (12,340) (9,170) Other, net 28 (50) (522) ---------------------------------------------------------------- Net cash used in financing activities (16,687) (3,298) (4,739) ---------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (4,739) 3,889 (918) Cash and cash equivalents at beginning of year 5,977 2,088 3,006 ---------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR* $1,238 $5,977 $2,088 ================================================================ Supplemental disclosure of cash flow information: Cash paid (received) during the year for: Interest $1,874 $2,743 $2,490 Income taxes (2,493) (274) (860) ================================================================
*Eliminated in consolidation. THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES 63 EX-23 2 CONSENT OF COOPERS & LYBRAND 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of The Colonial BancGroup, Inc., on Form S-8 (File No. 2-89959), Form S-8 (File No. 33-11540), Form S-8 (File No. 33-13376), Form S-8 (File No. 33-41036), Form S-8 (File No. 33-47770), Form S-8 (File No. 33-63347), Form S-8 (File No. 333-78118), Form S-8 (File No. 333-10475), Form S-8 (File No. 333-14883), Form S-3 (File No. 33-5665), and Form S-3 (File No. 33-62071) of our report dated February 20, 1997, on our audits of the consolidated financial statements of The Colonial BancGroup, Inc., as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, and our report dated February 20, 1997, except for Note 2, as to which the date is March 5, 1997, on our audits of the supplemental consolidated financial statements of The Colonial BancGroup, Inc., as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which reports are included on this Form 8-K. COOPERS & LYBRAND L.L.P. Montgomery, Alabama April 11, 1997 EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 222,059 5,143 15,990 0 440,115 282,110 284,164 4,074,633 50,761 5,466,851 4,113,934 841,262 85,567 39,092 0 0 93,864 293,132 5,466,851 348,563 40,530 2,864 391,957 158,591 199,953 192,004 11,783 (1,512) 174,822 76,217 0 0 0 49,383 1.30 1.28 4.16 21,982 6,695 0 146,000 45,215 11,505 4,650 50,761 50,761 0 2,089
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