-----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, VMeiXF4cSLxIO62cdNQqx2/hyZhsNyDcNksq9xumxVrMgi1uU+Mkhau25frHSlpt ixgqBCXnS02gKKotwsDQPg== 0000950144-98-009127.txt : 19980806 0000950144-98-009127.hdr.sgml : 19980806 ACCESSION NUMBER: 0000950144-98-009127 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980805 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-13508 FILM NUMBER: 98677916 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 10-Q 1 THE COLONIAL BANCGROUP, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 1-13508 [LOGO] THE COLONIAL BANCGROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 63-0661573 ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Commerce Street Montgomery, Alabama 36104 ---------------------------------------- (Address of principle executive offices) (334) 240-5000 ------------------------------- (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at July 31, 1998 ----------------------------- ---------------------------- Common Stock, $2.50 Par Value 49,146,355 2 THE COLONIAL BANCGROUP, INC. INDEX
Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Condition - June 30, 1998, December 31, 1997 and June 30, 1997................1 Consolidated Statements of Income - Six months ended June 30, 1998 and June 30, 1997 and three months ended June 30, 1998 and June 30, 1997.......................................................2 Consolidated Statements of Comprehensive Income - Six months ended June 30, 1998 and June 30, 1997 and three months ended June 30, 1998 and June 30, 1997.................................3 Consolidated Statements of Cash Flows - Six months ended June 30, 1998 and June 30, 1997.................4 Notes to Consolidated Financial Statements - June 30, 1998...............................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................7 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................................................................19 Item 6. Exhibits and Reports on Form 8-K........................................................................19 SIGNATURES......................................................................................................20
3 CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains "forward-looking statements" within the meaning of the federal securities laws. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among other things, the following possibilities: (i) deposit attrition, customer loss, or revenue loss in the ordinary course of business; (ii) increases in competitive pressure in the banking industry; (iii) costs or difficulties related to the integration of the businesses of BancGroup and the institutions acquired are greater than expected; (iv) changes in the interest rate environment which reduce margins (v) general economic conditions, either nationally or regionally, that are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (vi) changes which may occur in the regulatory environment; (vii) a significant rate of inflation (deflation); and (viii) changes in the securities markets. When used in this Report, the words "believes," "estimates," "plans," "expects," "should," "may," "might," "outlook," and "anticipates," and similar expressions as they relate to BancGroup (including its subsidiaries), or its management are intended to identify forward-looking statements. iii 4 THE COLONIAL BANCGROUP, Inc. AND SUBSIDIARIES Condensed Consolidated Statements of Condition (Unaudited) (Dollars in thousands, except per share amounts)
JUNE 30, DECEMBER 31, JUNE 30, 1998 1997* 1997* ----------- ---------- ---------- ASSETS: Cash and due from banks $ 344,388 $ 300,396 $ 233,313 Interest-bearing deposits in banks 20,630 41,897 34,225 Securities held for trading -- -- -- Securities available for sale 1,117,946 594,545 615,069 Investment securities 235,297 279,381 339,151 Mortgage loans held for sale 532,140 225,331 165,476 Loans, net of unearned income 6,027,489 5,670,009 5,174,845 Less: Allowance for possible loan losses (72,782) (68,595) (66,091) ---------- ---------- ---------- Loans, net 5,954,707 5,601,414 5,108,754 Premises and equipment, net 156,618 148,068 135,419 Excess of cost over tangible and identified intangible assets acquired, net 78,688 69,200 41,097 Mortgage servicing rights 174,693 141,865 125,375 Other real estate owned 10,624 14,491 12,853 Accrued interest and other assets 146,802 146,179 107,000 ---------- ---------- ---------- Total $8,772,533 $7,562,767 $6,917,732 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits $6,193,818 $5,880,363 $5,460,471 FHLB short-term borrowings 640,000 420,000 567,000 Other short-term borrowings 453,482 299,419 152,911 Subordinated debt 12,716 6,088 6,676 Trust preferred securities 70,000 70,000 70,000 FHLB long-term debt 448,422 234,830 60,516 Other long-term debt 200,075 4,334 6,363 Other liabilities 152,249 94,182 92,409 ---------- ---------- ---------- Total liabilities 8,170,762 7,009,216 6,416,346 ---------- ---------- ---------- SHAREHOLDERS' EQUITY: Preference Stock, $2.50 par value; 1,000,000 shares authorized, none issued -- -- -- Common Stock,** $2.50 par value; 200,000,000 shares authorized, 49,116,133, 48,013,661 and 47,627,112 shares issued and outstanding at June 30, 1998, December 31, 1997 and June 30, 1997 respectively 122,790 120,034 119,069 Treasury stock (671,165 shares) -- -- (15,887) Additional paid in capital 238,749 220,853 217,726 Retained earnings 238,996 212,428 181,402 Unearned compensation (3,282) (1,751) (1,956) Unrealized gains on securities available for sale, net of taxes 4,518 1,987 1,032 ---------- ---------- ---------- Total shareholders' equity 601,771 553,551 501,386 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,772,533 $7,562,767 $6,917,732 ========== ========== ==========
*See Note A. **See Note E. See Notes to the Unaudited Condensed Consolidated Financial Statements. 1 5 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- -------------------------- 1998 1997* 1998 1997* -------- -------- -------- -------- INTEREST INCOME: Interest and fees on loans $272,302 $231,196 $138,857 $118,657 Interest on investments 32,903 30,111 18,483 15,386 Other interest income 1,457 2,096 647 737 -------- -------- -------- -------- Total interest income 306,662 263,403 157,987 134,780 -------- -------- -------- -------- INTEREST EXPENSE: Interest on deposits 116,065 105,751 58,406 54,120 Interest on short-term borrowings 22,038 19,390 12,171 9,388 Interest on long-term debt 15,338 4,647 9,185 2,691 -------- -------- -------- -------- Total interest expense 153,441 129,788 79,762 66,199 -------- -------- -------- -------- NET INTEREST INCOME 153,221 133,615 78,225 68,581 Provision for possible loan losses 7,543 7,288 3,793 3,991 -------- -------- -------- -------- Net Interest Income After Provision for Possible Loan Losses 145,678 126,327 74,432 64,590 -------- -------- -------- -------- NONINTEREST INCOME: Mortgage servicing and origination fees 19,109 16,331 9,729 8,402 Service charges on deposit accounts 16,669 13,891 8,565 6,976 Other charges, fees and commissions 4,346 3,740 2,261 1,796 Securities gains (losses), net 991 (35) 820 (17) Other income 16,305 8,597 9,785 5,155 -------- -------- -------- -------- Total noninterest income 57,420 42,524 31,160 22,312 -------- -------- -------- -------- NONINTEREST EXPENSE: Salaries and employee benefits 50,692 44,739 25,774 22,584 Occupancy expense of bank premises, net 12,680 10,464 6,435 5,336 Furniture and equipment expenses 11,397 8,619 5,770 4,435 Amortization of mortgage servicing rights 11,820 7,712 6,932 4,013 Amortization of intangible assets 2,415 1,311 1,245 675 Acquisition and restructuring costs 7,596 2,634 1,477 1,877 Year 2000 expense 2,998 -- 668 -- Other expense 35,252 30,684 18,504 15,955 -------- -------- -------- -------- Total noninterest expense 134,850 106,163 66,805 54,875 -------- -------- -------- -------- Income before income taxes 68,248 62,688 38,787 32,027 Applicable income taxes 25,837 23,008 14,685 11,930 -------- -------- -------- -------- Net Income $ 42,411 $ 39,680 $ 24,102 $ 20,097 ======== ======== ======== ======== Earnings per share**: Basic $ 0.87 $ 0.85 $ 0.49 $ 0.43 Diluted $ 0.85 $ 0.82 $ 0.48 $ 0.42
*See Note A. **See Note E. See Notes to the Unaudited Condensed Consolidated Financial Statements. 2 6 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 1998 1997* 1998 1997* ------- ------- ------- ------- NET INCOME: Other comprehensive income, net of taxes: $24,102 $20,097 $42,411 $39,680 Unrealized gains on securities available for sale arising during the period, net of taxes 2,267 3,798 3,041 753 Less: reclassification adjustment for net (gains) losses included in net income (390) 40 (511) 52 ------- ------- ------- ------- Comprehensive income $25,979 $23,935 $44,941 $40,485 ======= ======= ======= =======
*See Note A. See Notes to the Unaudited Condensed Consolidated Financial Statements. 3 7 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) (Dollars in thousands, except per share amounts)
SIX MONTHS ENDED JUNE 30, ------------------------------- 1998 1997* ---------- --------- Net cash provided by (used in) operating activities ($219,876) $ 18,350 ---------- --------- Cash flows from investing activities: Proceeds from maturities of securities available for sale 129,089 67,705 Proceeds from sales of securities available for sale 171,365 23,763 Purchase of securities available for sale (795,334) (65,025) Proceeds from maturities of investment securities 108,161 88,829 Purchase of investment securities (64,188) (105,467) Net increase in loans (252,959) (248,429) Cash received in bank acquisitions 17,062 15,023 Capital expenditures (17,864) (24,935) Proceeds from sale of other real estate owned 6,015 4,357 Other, net 1,131 (2) ---------- --------- Net cash used in investing activities (697,522) (244,181) ---------- --------- Cash flows from financing activities: Net increase in demand, savings, and time deposits 168,728 238,234 Net increase (decrease) in federal funds purchased, repurchase agreements and other short-term borrowings 374,291 (102,640) Proceeds from issuance of long-term debt 409,696 70,000 Repayment of long-term debt (591) (17,226) Proceeds from issuance of common stock 3,840 7,398 Acquisition of treasury stock 0 (15,887) Dividends paid (15,842) (13,523) ---------- --------- Net cash provided by financing activities 940,122 166,356 ---------- --------- Net increase (decrease) in cash and cash equivalents 22,724 (59,475) Cash and cash equivalents at beginning of year 342,293 327,013 ---------- --------- Cash and cash equivalents at June 30 $365,017 $267,538 ========== ========= Supplemental Disclosure of cash flow information: Cash paid during the year for: Interest $151,540 $114,417 Income taxes 21,289 2,866 Non-cash investing activities: Transfer of loans to other real estate $ 4,706 $ 6,395 Origination of loans for the sale of other real estate 438 -- Non-cash financing activities: Conversion of subordinated debentures $ 1,087 $ 1,927 Assets acquired in business combinations 152,988 225,799 Liabilities assumed in business combinations 146,894 207,504
*See Note A. See Notes to the Unaudited Condensed Consolidated Financial Statements. 4 8 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES/RESTATEMENT The Colonial BancGroup, Inc. ("BancGroup") and its subsidiaries have not changed their accounting and reporting policies from those stated in the 1997 annual report. These unaudited interim financial statements should be read in conjunction with the audited financial statements and footnotes included in BancGroup's 1997 annual report on Form 10-K and BancGroup's 8-K filing dated February 2, 1998 disclosing the amended and restated financial statements for December 31, 1997 to give retroactive effect to the February 1998 pooling-of-interests method business combinations with United American Holding Corporation, First Central Bank and South Florida Banking Corp. The June 30, 1997 and December 31, 1997 financial statement amounts included herein have been restated to give retroactive effect to the pooling-of-interests business combination with Commercial Bank of Nevada. In the opinion of BancGroup, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of June 30, 1998 and 1997 and the results of operations and cash flows for the interim periods ended June 30, 1998 and 1997. All 1998 interim amounts are subject to year-end audit, and the results of operations for the interim period herein are not necessarily indicative of the results of operations to be expected for the year. NOTE B - BUSINESS COMBINATIONS On February 2, 1998, United American Holding Corporation ("United") was merged into BancGroup. United's subsidiary, United American Bank of Central Florida was merged into BancGroup's existing subsidiary bank, Colonial Bank. At December 31, 1997, United had approximately $275 million in assets and deposits and other liabilities of $252 million. United operated nine offices in Orange, Seminole, and Osceola counties, Florida. This business combination was accounted for as a pooling of interests and the financial statements have been restated accordingly. On February 5, 1998, ASB Bancshares, Inc. ("ASB") was merged into BancGroup. ASB's subsidiary, Ashville Savings Bank was merged into BancGroup's existing subsidiary bank, Colonial Bank. On February 5, 1998, ASB had approximately $159 million in assets and deposits and other liabilities of $138 million. ASB operated nine branches in Blount, Etowah and St. Clair counties, Alabama. This business combination was accounted for as a purchase and the results of operations are included in the accompanying financial statements only from the date of consummation forward. On February 11, 1998, First Central Bank was merged into BancGroup's existing subsidiary bank, Colonial Bank. At December 31, 1997, First Central Bank had approximately $63 million in assets and deposits and other liabilities of $53 million. First Central Bank operated a single branch located in St. Petersburg, Florida. This business combination was accounted for as a pooling of interests and the financial statements have been restated accordingly. On February 12, 1998, South Florida Banking Corp. ("SFB") was merged into BancGroup. SFB's subsidiary, First National Bank of Florida at Bonita Springs was merged into BancGroup's existing subsidiary bank, Colonial Bank. At December 31, 1997, SFB had approximately $256 million in assets and deposits and other liabilities of $238 million. SFB operated twelve branches in Lee, Collier, and Hendry counties, Florida. This business combination was accounted for as a pooling of interests and the financial statements have been restated accordingly. On June 15, 1998, Commercial Bank of Nevada ("CBN") was merged into BancGroup's existing subsidiary bank, Colonial Bank. At March 31, 1998, CBN had approximately $131 million in assets and deposits and other liabilities of $121 million. CBN operated three offices in Las Vegas, Nevada. This business combination was accounted for as a pooling of interests and the financial statements have been restated accordingly. On June 18, 1998, BancGroup purchased certain assets totaling $8,167,609 and assumed certain liabilities, primarily deposits, totaling $8,870,601 of the Wade Green Branch of Premier Bank located in Atlanta, Georgia. Presented below is BancGroup's summary operating information for the six months ended June 30, 1997, showing the effect of business combinations described above.
As Previously Effect of Currently Reported Poolings Reported ------------------------------------------------ Net interest income $114,229 $19,386 $133,615 Non interest income 39,627 2,897 42,524 Net income 36,329 3,351 39,680
On March 27, 1998, BancGroup entered into a definitive agreement with CNB Holding Company ("CNB"). CNB is a Florida corporation and is a holding company for Commercial National Bank located in Daytona Beach, Florida. CNB will merge with BancGroup and following such merger Commercial National Bank will merge with BancGroup's existing subsidiary bank, Colonial Bank. BancGroup expects to issue a maximum of 937,227 shares of its Common Stock (depending upon the market value at the time of such merger) to the stockholders of CNB. This transaction is 5 9 subject to, among other things, approval by appropriate regulatory authorities and is expected to be accounted for as a pooling of interests. At June 30, 1998, CNB had assets of $89.8 million, deposits of $81.1 million and stockholders' equity of $8.5 million. On May 5, 1998, BancGroup entered into a definitive agreement with FirstBank ("FirstBank"). FirstBank is located in Dallas, Texas. CBG Acquistion Corp., a subsidiary of BancGroup, will be merged into FirstBank, and FirstBank will become a banking subsidiary of BancGroup. BancGroup expects to issue approximately 1,200,000 shares of its Common Stock (depending upon the market price at the time of such merger) to the stockholders of FirstBank. This transaction is subject to, among other things, approval by the stockholders of FirstBank and by the appropriate regulatory authorities and is expected to be accounted for as a pooling of interests. At June 30, 1998, FirstBank had assets of $172.9 million, deposits of $149.5 million and stockholders' equity of $9.4 million. On May 15, 1998, BancGroup entered into a definitive agreement with First Macon Bank & Trust Company ("First Macon"). First Macon is located in Macon, Georgia. First Macon will merge with BancGroup's existing subsidiary bank, Colonial Bank. BancGroup expects to issue a maximum of 1,844,500 shares of its Common Stock (depending upon the market price at the time of such merger) to the stockholders of First Macon. This transaction is subject to, among other things, approval by the stockholders of First Macon and by the appropriate regulatory authorities and is expected to be accounted for as a pooling of interests. At June 30, 1998, First Macon had assets of $199.1 million, deposits of $175.5 million and stockholders' equity of $15.8 million. On May 21, 1998, BancGroup entered into a definitive agreement with Prime Bank of Central Florida ("Prime"). Prime is located in Titusville, Florida. Prime will merge with BancGroup's existing subsidiary bank, Colonial Bank. BancGroup expects to issue a maximum of 661,989 shares of its Common Stock (depending upon the market price at the time of such merger) to the stockholders of Prime. This transaction is subject to, among other things, approval by the stockholders of Prime and approval by appropriate regulatory authorities and is expected to be accounted for as a pooling of interests. At June 30, 1998, Prime had assets of $71.6 million, deposits of $64.4 million and stockholders' equity of $6.8 million. On June 16, 1998, BancGroup entered into a definitive agreement with InterWest Bancorp ("InterWest"). InterWest owns 85 percent of InterWest Bank as well as 100 percent of InterWest Mortgage, both of which are located in Reno, Nevada. InterWest Bank will merge with BancGroup's existing subsidiary bank, Colonial Bank. InterWest Mortgage will become a subsidiary of Colonial Mortgage Company. BancGroup expects to issue approximately 735,000 shares of its Common Stock (depending upon the market price at the time of such merger) to the stockholders of InterWest. This transaction is subject to, among other things, approval by the stockholders of InterWest and approval by appropriate regulatory authorities and is expected to be accounted for as a pooling of interests. At June 30, 1998, InterWest had assets of $130.4 million, deposits of $115.7 and stockholders' equity of $7.7 million. NOTE C - COMMITMENTS AND CONTINGENCIES BancGroup and its subsidiaries are from time to time defendants in legal actions arising from normal business activities. Management does not anticipate that the ultimate liability arising from litigation outstanding at June 30, 1998, will have a materially adverse effect on BancGroup's financial statements. NOTE D - Recent ACCOUNTING Pronouncements On January 1, 1998, BancGroup adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which had been delayed under SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." The deferred provisions related to repurchase agreements, dollar-roll transactions, securities lending, and similar transactions. The adoption of the provisions of SFAS No. 125 as amended by SFAS No. 127 resulted in no material impact on BancGroup's financial condition or results of operations. On January 1, 1998, BancGroup adopted SFAS No. 130, "Reporting of Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of financial statements. This statement also requires that all items that are required to be recognized under accounting standards as componenets of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This standard is effective for fiscal years beginning after December 15, 1997 and has been implemented herein. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The adoption of SFAS No. 130 did not have a material impact on BancGroup's financial condition or results of operations. On January 1, 1998, BancGroup adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. This statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. Under SFAS No. 131, BancGroup reports two segments, commercial and mortgage banking. In February, 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises employers' disclosures about pension costs and other post-retirement benefit plans. It does not change the measurement or recognition of these plans but standardizes the disclosure requirements for pension and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair value of plan assets that will facilitate financial analysis and eliminates certain disclosures no longer useful. This statement is effective for fiscal years beginning after December 15, 1997. On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative 6 10 Instruments and Hedging Activities," which standardizes the accounting for derivative instruments by requiring that all derivatives be recognized as assets and liabilities and measured at fair value. This statement is effective for fiscal years beginning after June 15, 1999. NOTE E - STOCK SPLIT On July 15, 1998, BancGroup's Board of Directors declared a two-for-one stock split which is to be effected in the form of a 100 percent stock dividend to be distributed August 14, 1998. The stated par value of each share will not change from $2.50. Accordingly, all prior period information will be 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 will be retroactively restated to reflect the stock split. The following table reflects the impact of the stock split on earnings per share for the periods indicated:
FOR THE SIX FOR THE THREE MONTHS ENDED MONTHS ENDED JUNE 30 JUNE 30 1998 1997 1998 1997 ---------------------- ----------------------- Basic $0.43 $0.42 $0.25 $0.21 Diluted $0.43 $0.41 $0.24 $0.21
7 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION: Ending balances of total assets, securities, mortgage loans held for sale, net loans, mortgage servicing rights, deposits, and long term debt changed for the six months and twelve months ended June 30, 1998, respectively, as follows (in thousands):
December 31, 1997 June 30, 1997 to June 30, 1998 to June 30, 1998 ---------------------- ----------------------- Increase Increase ---------------------- ----------------------- Amount % Amount % ---------------------- ----------------------- ASSETS Colonial Bank $ 869,377 12.1% $1,433,573 21.7% CMC 338,352 86.7 418,740 135.0 Other 2,037 15.0 2,488 18.9 ---------- ----- ---------- ----- Total assets $1,209,766 16.0 $1,854,801 26.8 Securities 479,317 54.8 399,023 41.8 Mortgage loans held for sale 306,809 136.2 366,664 221.6 Loans, net of unearned income 357,480 6.3 852,644 16.5 Mortgage Servicing Rights 32,828 23.1 49,318 39.3 Deposits 313,455 5.3 733,347 13.4 Long term debt 415,961 131.9 587,658 409.4
ASSETS: BancGroup's assets as restated have increased 26.8% and 16.0% since June 30, 1997 and December 31, 1997, respectively. The Company's strategy is to increase its asset size both internally and through acquisition efforts. BancGroup has concentrated on expanding into growth markets by merging with banks that have strong local management. BancGroup has been most successful with this strategy in Florida. With the merger of CBN in Las Vegas, Nevada followed by the announcement of the pending mergers with FirstBank in Dallas, Texas and InterWest in Reno, Nevada, BancGroup has made its first step into growth markets outside the Southeast. For a number of years, Colonial Mortgage Company has operated on a national basis focusing on the highest growth markets. These completed and pending acquisitions represent BancGroup's strategy to parallel the mortgage company's focus and provide its banking services in some of these same high growth markets. SECURITIES: Investment securities and securities available for sale have increased $479 million (54.8%) and $399 million (41.8%) from December 31, 1997 and June 30, 1997, respectively. The increase included $24 million from business combinations and $10 million from the purchase of preferred stocks. In addition, BancGroup entered into reverse repurchase arrangements with Morgan Stanley, Salomon Brothers and First Boston under which it purchased mortgage backed securities totaling approximately $349 million. These securities are collateral for $350 million in debt issued in connection with the purchase of these securities. The remainder of the increase is from normal funding operations of the Company. LOANS AND MORTGAGE LOANS HELD FOR SALE: Loans, net of unearned income, have increased $357 million (6.3%) and $853 million (16.5%) from December 31, 1997 and June 30, 1997, respectively. The increase from December 31, 1997 and June 30, 1997 included $111 million and $278 million attributable to purchase method business combinations, respectively. Mortgage loans held for sale are funded on a short-term basis (less than 90 days) while they are being packaged for sale in the secondary market by Colonial Mortgage Company, a wholly owned subsidiary of Colonial Bank. Loans originated amounted to approximately $1.7 billion and $659.7 million and sales thereof amounted to approximately $1.5 billion and $653.2 million during the six months ended June 30, 1998 and 1997, respectively. The increase in originations in 1998 was primarily due to a decrease in rates which resulted in an increase in loan refinancings. 8 12
GROSS LOANS BY CATEGORY June 30, Dec. 31, June 30, (In thousands) 1998 1997 1997 ---------- ---------- ---------- Commercial, financial, and agricultural $ 832,697 $ 703,113 $ 680,815 Real estate-commercial 1,683,255 1,540,868 1,308,982 Real estate-construction 731,710 703,271 588,475 Real estate-residential 2,360,559 2,338,170 2,230,039 Installment and consumer 319,602 314,618 306,581 Other 100,000 70,661 60,660 Total loans $6,027,823 $5,670,701 $5,175,552
Loans, excluding the impact of acquisitions, grew $220 million or 15.1% on an annualized basis, in the second quarter of 1998 versus $27 million or 1.97% annualized growth in the first quarter of 1998. The majority of the growth has been in loans collateralized by commercial real estate which has increased approximately $374 million since June 30, 1997 and $142 million since December 31, 1997. Residential real estate loans, excluding purchase method business combinations, decreased $74 million since December 31, 1997. This decline in residential real estate is primarily attributable to the refinancing of these predominately adjustable rate loans to fixed rates. The Company generally sells fixed rate loans in the secondary markets resulting in net reductions in outstanding balances. Due to current market rates for fixed mortgage loans, ARM loans are not in demand and run-off is expected to continue at a slower pace through the third quarter and then remain constant. These loans are concentrated in various areas in Alabama, the metropolitan Atlanta market in Georgia as well as the Company's markets in Florida. Allocations of the allowance for possible loan losses are made on an individual loan basis for all identified potential problem loans with a percentage allocation for the remaining portfolio. The allocations of the total allowance represent an approximation of the reserves for each category of loans based on management's evaluation of risk within each loan type. ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
Percent of Percent of Percent of JUNE 30, Loans to Dec. 31, Loans to June 30, Loans to (In thousands) 1998 Total Loans 1997 Total Loans 1997 Total Loans -------- ----------- -------- ----------- -------- ----------- Commercial, financial, and agricultural $16,137 13.8% $13,064 12.4% $12,079 13.1% Real estate-commercial 27,359 27.9 24,186 27.2 24,040 25.3 Real estate-construction 11,895 12.1 13,297 12.4 12,667 11.4 Real estate-mortgage 11,803 39.2 11,691 41.2 11,150 43.1 Installment and consumer 4,352 5.3 5,102 5.6 5,195 5.9 Other 1,236 1.7 1,254 1.2 960 1.2 ------- ----- ------- ----- ------- ----- TOTAL $72,782 100.0% $68,594 100.0% $66,091 100.0% ======= ===== ======= ===== ======= =====
9 13 SUMMARY OF LOAN LOSS EXPERIENCE
SIX MONTHS Year Six Months ENDED Ended Ended (In thousands) JUNE 30, 1998 Dec. 31, 1997 June 30, 1997 ------------- ------------- -------------- Allowance for possible loan losses - January 1 $68,595 $58,574 $58,574 Charge-offs: Commercial, financial, and agricultural 1,800 5,461 2,118 Real estate-commercial 900 2,954 183 Real estate-construction 285 433 30 Real estate-residential 798 1,724 534 Installment and consumer 2,961 5,594 2,518 Other 399 693 470 ------- ------- ------- Total charge-offs 7,143 16,859 5,853 ------- ------- ------- Recoveries: Commercial, financial, and agricultural 644 993 377 Real estate-commercial 412 1,019 63 Real estate-construction 15 91 67 Real estate-residential 406 244 91 Installment and consumer 1,021 1,794 838 Other 193 134 71 ------- ------- ------- Total recoveries 2,691 4,275 1,507 ------- ------- ------- Net charge-offs 4,452 12,584 4,346 Addition to allowance charged to operating expense 7,543 15,733 7,288 Allowance added from business combinations 1,096 6,872 4,575 ------- ------- ------- Allowance for possible loan losses-end of period $72,782 $68,595 $66,091 ======= ======= =======
Asset quality as measured by nonperforming assets remains strong at 0.73% of net loans and other real estate. Nonperforming assets have increased $1.5 million from December 31, 1997. The increase in nonperforming assets resulted from a $5.4 million increase in nonperforming loans which consists primarily of 3 large commercial real estate credits. The increase in nonperforming loans was offset by a $3.9 million decrease in other real estate and repossessions resulting primarily from the sale of a large commercial real estate property in North Alabama. Management continuously monitors and evaluates recoverability of problem assets and adjusts loan loss reserves accordingly. The loan loss reserve is 1.21% of loans at June 30, 1998 and December 31, 1997 as compared to 1.28% at June 30, 1997. NONPERFORMING ASSETS ARE SUMMARIZED BELOW
(In thousands) JUNE 30, 1998 Dec. 31, 1997 June 30, 1997 ------------- ------------- ------------- Nonaccrual loans $31,921 $27,010 $28,181 Restructured loans 1,395 952 1,063 ------- ------- ------- Total nonperforming loans* 33,316 27,962 29,244 Other real estate owned 9,973 13,695 12,471 Repossessions 651 796 382 ------- ------- ------- Total nonperforming assets* $43,940 $42,453 $42,097 ======= ======= ======= Aggregate loans contractually past due 90 days for which interest is being accrued 7,146 $ 7,028 $ 3,938 Net charge-offs year-to-date 4,452 $12,584 $ 4,346 RATIOS Period end: Total nonperforming assets as a percent of net loans and other real estate 0.73% 0.75% 0.81% Allowance as a percent of net loans 1.21% 1.21% 1.28% Allowance as a percent of nonperforming assets* 166% 162% 157% Allowance as a percent of nonperforming loans* 218% 245% 226% For the period ended: Net charge-offs as a percent of average net loans- (annualized basis) 0.15% 0.24% 0.17%
*Total does not include loans contractually past due 90 days or more which are still accruing interest. 10 14 Management, through its loan officers, internal loan review staff, and external examinations by regulatory agencies and independent auditors has identified approximately $180.6 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 independent auditors and regulatory agencies. In connection with such reviews, collateral values are updated where considered necessary. If collateral values are judged insufficient and other sources of repayment inadequate, the loans are reduced to estimated recoverable amounts through increases in reserves allocated to the loans or charge-offs. As of June 30, 1998, substantially all of these loans are current with their existing repayment terms. Given the reserves and the ability of the borrowers to comply with the existing repayment terms, management believes any exposure from these potential problem loans has been adequately addressed at the present time. The above nonperforming loans and potential problem loans represent all material credits for which management has doubts as to the ability of the borrowers to comply with the loan repayment terms. Of these loans, management believes it is probable that loans totaling $25.9 million will not be collected as scheduled and therefore are considered impaired. 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. LIQUIDITY: The maintenance of an adequate liquidity position and the constant monitoring of rate sensitivity are principle components of BancGroup's asset/liability management strategy. BancGroup's governing policy provides for daily and longer term monitoring of both sources and uses of funds to properly maintain the cash position. The policy also establishes the criteria for monitoring the short and long term impact of interest rate fluctuations on these funds. To assist in funding loan growth, BancGroup has credit facilities at the Federal Home Loan Bank (FHLB). FHLB of Atlanta has established credit availability in an amount up to $2.3 billion with only $1.1 billion outstanding at June 30, 1998. This source of credit reduces BancGroup's dependency on deposits as a source of liquidity resulting in a loan to deposit ratio of 97% at June 30, 1998 and 96% at December 31, 1997. BancGroup has a brokered Certificate of Deposit (CD) program in conjunction with Merrill Lynch, Dean Witter and Oppenheimer Capital to offer CD's in increments of $1,000 to $99,000 to out of market customers at competitive rates ranging from 5.30% to 5.85% maturing in 6 to 24 month periods. At June 30, 1998, $138 million is outstanding under this program. BancGroup also has a brokered money market program with Merrill Lynch. At June 30, 1998, $124 million is outstanding under this program at an average rate of 5.5%. Funds are transferred daily to meet short-term funding fluctuations. As discussed previously, BancGroup has received funds under reverse repurchase arrangements with Morgan Stanley, Salomon Brothers and First Boston. At June 30, 1998, there was $251 million in outstanding debt under this agreement which is collateralized by mortgage-backed securities. CAPITAL RESOURCES: Management continuously monitors the capital adequacy and potential for future growth. The primary measurement for these evaluations for a bank holding company is its tier one leverage ratio. Tier one capital for BancGroup at June 30, 1998 consists of $597 million of equity and $70 million in trust preferred securities less $79 million of intangibles providing a 7.41% leverage ratio at June 30, 1998. The ratio of shareholders' equity to total assets at June 30, 1998 was 6.86% as compared to 7.32% at December 31, 1997. This decline is primarily attributable to the increase in assets as a result of mortgage loans held for sale and investment activities previously discussed. Management believes that capital levels are sufficient to support future internally generated growth and fund the quarterly dividend rates which are currently $0.17 per share prior to the 2-for-1 stock split as discussed in Note E. 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, merger or acquisition opportunities. YEAR 2000 COMPLIANCE: The Federal Reserve has established a Year 2000 Supervision Program and published guidelines for implementing procedures to bring computer software programs and processing systems into Year 2000 compliance. BancGroup has established a full time Year 2000 task force to address all Year 2000 compliance issues as well as enhancements to computer and communications systems resulting from upgrades initiated in response to Year 2000 issues. BancGroup is in the process of implementing plans in accordance with regulatory guidelines to bring all business critical computer systems into Year 2000 compliant status. These guidelines include requirements regarding project plans, testing plans and contingency plans. BancGroup is in conformity with the current requirements regarding completion and implementation of these plans. All business critical systems have been scheduled for implementation or upgrade and testing procedures established for completion by year end 1998. Year 2000 expenses of $3 million were incurred through the six months ended June 30, 1998. These expenses included a one-time pretax charge of approximately $2 million in the first quarter for the write off of the remaining book value of branch automation equipment that is to be replaced with year 2000 compliant software. The remaining $1 million is one time third party 11 15 incremental costs related to the completion of assessment of the Company's systems and upgrading internal systems to Year 2000 compliance. BancGroup anticipates approximately $2 million of additional expense throughout the remainder of 1998. In addition to these expenses, BancGroup plans to purchase $9 million in replacement equipment and software over the remainder of the year which will be depreciated over a period of 3 to 5 years. The above reflects management's current assessment and estimates. Various factors could cause actual results to differ materially from those contemplated by such assessments, estimates and forward looking statements. Some of these factors may be beyond the control of BancGroup, including but not limited to, vendor representations, technological advancements, economic factors and competitive considerations. Management's evaluation of Year 2000 compliance and technological upgrades is an ongoing process involving continual evaluation. Unanticipated problems could develop and alternative solutions may be available that could cause current solutions to be more difficult or costly than currently anticipated. COMPARISON OF THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997: SUMMARY: BancGroup is involved in two primary lines of business: commercial banking and mortgage banking, through its wholly owned subsidiaries Colonial Bank and Colonial Mortgage Company ("CMC"). The following schedule of BancGroup's results of operations reflects the related impact of each line of business to the earnings of the company. LINE OF BUSINESS RESULTS (In thousands)
Colonial Colonial Consolidated QUARTER ENDED JUNE 30,1998 Bank Mortgage Other(1) BancGroup -------- -------- -------- ------------ Net interest income $76,566 $ 3,360 $(1,701) $78,225 Provision for possible loan losses (3,793) -- -- (3,793) Noninterest income 14,395 16,782 (17) 31,160 Amortization and depreciation 6,030 7,042 (48) 13,024 Noninterest expense 46,289 6,745 747 53,781 ------- ------- ------- ------- Pretax income (loss) 34,849 6,355 (2,417) 38,787 Income taxes (12,907) (2,394) 616 (14,685) ------- ------- ------- ------- Net Income (loss) 21,942 3,961 (1,801) 24,102 Acquisition and restructuring costs, net of taxes 989 -- 17 1,006 Year 2000 expense, net of taxes 156 258 -- 414 ------- ------- ------- ------- Income excluding acquisition and restructuring costs and Year 2000 expense $23,087 $ 4,219 $(1,784) $25,522 ======= ======= ======= =======
Colonial Colonial Consolidated QUARTER ENDED JUNE 30,1997* Bank Mortgage Other(1) BancGroup -------- -------- -------- ------------ Net interest income $68,165 $ 1,999 $(1,583) $68,581 Provision for possible loan losses (3,991) -- -- (3,991) Noninterest income 10,574 11,765 (27) 22,312 Amortization and depreciation 3,942 4,180 64 8,186 Noninterest expense 40,779 4,149 1,761 46,689 ------- ------- ------- ------- Pretax income (loss) 30,027 5,435 (3,435) 32,027 Income taxes (10,818) (2,026) 914 (11,930) ------- ------- ------- ------- Net Income (loss) 19,209 3,409 (2,521) 20,097 Acquisition and restructuring costs, net of taxes 1,246 -- 255 1,501 Year 2000 expense, net of taxes -- -- -- -- ------- ------- ------- ------- Income excluding acquisition and restructuring costs and Year 2000 expense $20,455 $ 3,409 $(2,266) $21,598 ======= ======= ======= =======
12 16 LINE OF BUSINESS RESULTS (CONTINUED) (In thousands)
Colonial Colonial Consolidated SIX MONTHS ENDED JUNE 30,1998 Bank Mortgage Other(1) BancGroup -------- -------- --------- ------------ Net interest income $150,997 $ 5,569 $(3,345) $153,221 Provision for possible loan losses (7,543) -- -- (7,543) Noninterest income 27,723 29,727 (30) 57,420 Amortization and depreciation 11,849 12,153 (112) 23,890 Noninterest expense 97,189 12,408 1,363 110,960 -------- ------ ------- -------- Pretax income (loss) 62,139 10,735 (4,626) 68,248 Income taxes (23,020) (4,044) 1,227 (25,837) -------- ------ ------- -------- Net Income (loss) 39,119 6,691 (3,399) 42,411 Acquisition and restructuring costs, net of taxes 5,135 -- 31 5,166 Year 2000 expense, net of taxes 1,380 481 -- 1,861 -------- ------- ------- -------- Income excluding acquisition and restructuring costs and Year 2000 expense $ 45,634 $ 7,172 $(3,368) $49,438 ======== ======= ======= ========
Colonial Colonial Consolidated SIX MONTHS ENDED JUNE 30,1997* Bank Mortgage Other BancGroup -------- -------- ------- ------------ Net interest income $133,434 $ 2,775 $(2,594) $133,615 Provision for possible loan losses (7,288) -- -- (7,288) Noninterest income 21,422 21,131 (29) 42,524 Amortization and depreciation 7,587 8,045 134 15,766 Noninterest expense 79,458 8,149 2,790 90,397 -------- ------- ------- -------- Pretax income (loss) 60,523 7,712 (5,547) 62,688 Income taxes (21,638) (2,875) 1,505 (23,008) -------- ------- ------- -------- Net Income (loss) 38,885 4,837 (4,042) 39,680 Acquisition and restructuring costs, net of taxes 1,826 -- 281 2,107 Year 2000 expense, net of taxes -- -- -- -- -------- ------- ------- -------- Income excluding acquisition and restructuring costs and Year 2000 expense $ 40,711 $ 4,837 $(3,761) $ 41,787 ======== ======= ======= ========
Six Months Ended Three Months Ended SELECTED RATIOS: June 30, 1998 June 30, 1997* June 30, 1998 June 30, 1997* --------------------------------- ------------------------------ Income excluding acquisition and restructuring costs and Year 2000 expenses to: Average assets 1.24% 1.25% 1.23% 1.27% Average shareholders' equity 17.16% 17.15% 17.38% 17.47% Efficiency ratio (excluding acquisition and restructuring costs and Year 2000 expenses) 58.60% 58.31% 58.86% 57.91%
* Restated financial results above reflect the business combinations with United American Holding Corporation, South Florida Banking Corp., First Central Bank and Commercial Bank of Nevada. These mergers were accounted for as poolings of interests and the financial results have been restated accordingly. (1) Represents holding company financing costs and certain unallocable expenses. 13 17 AVERAGE VOLUME AND RATES (Unaudited) (Dollars in thousands)
SIX MONTHS ENDED JUNE 30, ----------------------------------- 1998 1997* -------------------------------------- ------------------------------------ AVERAGE AVERAGE VOLUME INTEREST RATE VOLUME INTEREST RATE ---------- -------- ------ ---------- -------- ----- ASSETS Loans, net $5,826,532 $ 260,712 9.00% $5,033,722 $ 226,620 9.06% Mortgage loans held for sale 327,638 12,047 7.35% 127,862 5,075 7.94% Investment securities and securities available for sale and other interest-earning assets 1,093,029 35,302 6.51% 1,032,698 33,119 6.47% ---------- --------- ---------- --------- Total interest-earning assets(l) 7,247,199 $ 308,061 8.54% 6,194,282 $ 264,814 8.60% --------- --------- Nonearning assets 776,295 549,119 ---------- ---------- Total assets $8,023,494 $6,743,401 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $4,923,586 $ 116,065 4.75% $4,462,935 $ 105,751 4.78% Short-term borrowings 791,878 22,038 5.56% 707,143 19,390 5.50% Long-term debt 496,765 15,338 6.15% 126,554 4,647 7.38% ---------- --------- ---------- --------- Total interest-bearing liabilities 6,212,229 $ 153,441 4.97% 5,296,632 $ 129,788 4.94% --------- --------- Noninterest-bearing demand deposits 1,106,484 870,231 Other liabilities 123,850 85,216 ---------- ---------- Total liabilities 7,442,563 6,252,079 Shareholders' equity 580,931 491,322 ---------- ---------- Total liabilities and shareholders' equity $8,023,494 $6,743,401 ========== ========== Rate differential 3.57% 3.66% Net yield on interest-earning assets $ 154,620 4.28% $ 135,026 4.37% ========= =========
* Restated financial results above reflect the business combinations with United American Holding Corporation, South Florida Banking Corp., First Central Bank and Commercial Bank of Nevada. These mergers were accounted for as poolings of interests and the financial results have been restated accordingly. (1) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is: actual interest earned times 145%. The taxable equivalent adjustment has given effect to the disallowance of interest expense deductions, for federal income tax purposes, related to certain tax-free assets. Dividends earned and average rates for preferred stocks are reflected on a tax equivalent basis. Tax equivalent dividends are: actual dividends times 137.7%. 14 18 AVERAGE VOLUME AND RATES (Unaudited) (Dollars in thousands)
THREE MONTHS ENDED JUNE 30, ----------------------------- 1998 1997* -------------------------------------- ------------------------------------ AVERAGE AVERAGE VOLUME INTEREST RATE VOLUME INTEREST RATE ---------- -------- ------ ---------- -------- ------ ASSETS Loans, net $5,893,667 $131,614 8.96% $5,105,083 $115,899 9.11% Mortgage loans held for sale 399,485 7,373 7.40% 140,702 2,910 8.30% Investment securities and securities available for sale and other interest-earning assets 1,199,710 19,477 6.51% 1,023,069 16,589 6.50% ---------- -------- ---------- -------- Total interest-earning assets(l) 7,492,862 $158,464 8.48% 6,268,854 $135,398 8.66% -------- -------- Nonearning assets 813,923 569,016 ---------- ---------- Total assets $8,306,785 $6,837,870 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits $4,942,610 $ 58,406 4.74% $4,524,948 $ 54,120 4.80% Short-term borrowings 878,357 12,171 5.51% 676,805 9,388 5.50% Long-term debt 600,648 9,185 6.08% 145,632 2,691 7.39% ---------- -------- ---------- -------- Total interest-bearing liabilities 6,421,615 $ 79,762 4.97% 5,347,385 $ 66,199 4.96% -------- -------- Noninterest-bearing demand deposits 1,160,073 910,060 Other liabilities 136,012 84,645 ---------- ---------- Total liabilities 7,717,700 6,342,090 Shareholders' equity 589,085 495,780 ---------- ---------- Total liabilities and shareholders' equity $8,306,785 $6,837,870 ========== ========== Rate differential 3.51% 3.70% Net yield on interest-earning assets $ 78,702 4.22% $ 69,199 4.44% ======== ========
* Restated financial results above reflect the business combinations with United American Holding Corporation, South Florida Banking Corp., First Central Bank and Commercial Bank of Nevada. These mergers were accounted for as poolings of interests and the financial results have been restated accordingly. (1) Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is: actual interest earned times 145%. The taxable equivalent adjustment has given effect to the disallowance of interest expense deductions, for federal income tax purposes, related to certain tax-free assets. Dividends earned and average rates for preferred stocks are reflected on a tax equivalent basis. Tax equivalent dividends are: actual dividends times 137.7%. 15 19 ANALYSIS OF INTEREST INCREASES (DECREASES) (Unaudited) (Dollars in thousands)
SIX MONTHS ENDED JUNE 30, 1998 CHANGE FROM 1997* -------------------------------------------------- ATTRIBUTED TO (1) ----------------- TOTAL VOLUME YIELD/RATE ------ -------- ---------- INTEREST INCOME: Total Loans, Net $34,092 $35,214 ($1,122) Mortgage loans held for sale 6,972 7,776 (804) Investment securities and securities available for sale and other interest-earning assets 2,183 1,913 270 ------- ------- ------- Total interest income(2) 43,247 44,903 (1,656) ------- ------- ------- INTEREST EXPENSE: Interest bearing deposits 10,314 9,146 1,168 Short-term borrowings 2,648 1,936 712 Long-term debt 10,691 11,353 (662) ------- ------- ------- Total interest expense 23,653 22,435 1,218 ------- ------- ------- NET INTEREST INCOME $19,594 $22,468 ($2,874) ======= ======= =======
THREE MONTHS ENDED JUNE 30, 1998 CHANGE FROM 1997* ---------------------------------------------------- ATTRIBUTED TO (1) ------------------- TOTAL VOLUME YIELD/RATE ------- ------- ---------- INTEREST INCOME: Total Loans, Net $15,715 $18,121 ($2,406) Mortgage loans held for sale 4,463 5,417 (954) Investment securities and securities available for sale and other interest-earning assets 2,888 2,899 (11) ------- ------- ------- Total interest income(2) 23,066 26,437 (3,371) ------- ------- ------- INTEREST EXPENSE: Interest bearing deposits 4,286 4,111 175 Short-term borrowings 2,783 2,275 508 Long-term debt 6,494 6,899 (405) ------- ------- ------- Total interest expense 13,563 13,285 278 ------- ------- ------- Net interest income $ 9,503 $13,152 ($3,649) ======= ======= =======
* Restated financial results above reflect the business combinations with United American Holding Corporation, South Florida Banking Corp., First Central Bank and Commercial Bank of Nevada. These mergers were accounted for as poolings of interests and the financial results have been restated accordingly. (1) Increases (decreases) are attributable 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. Changes not solely attributable to a change in rate or volume are allocated proportionately relative to the absolute value of the total change of rate and volume. (2) Interest earned on obligations of state and political subdivisions is reflected on a tax equivalent basis. Tax equivalent interest earned is: actual interest earned times 145%. The taxable equivalent adjustment has given effect to the disallowance of interest, for federal income tax purposes, related to certain tax-free assets. Dividends earned on preferred stock are reflected on a tax equivalent basis. Tax equivalent dividends earned are: actual dividends times 137.7%. Tax equivalent average rate is tax equivalent interest or dividends earned divided by average volume. 16 20 NET INTEREST INCOME: Net interest income on a tax equivalent basis increased $9.5 million to $78.7 million for the quarter ended June 30, 1998 from $69.2 million for the quarter ended June 30, 1997. The net yield on interest earning assets decreased from 4.44% to 4.22% for the three months ended June 30, 1997 and 1998, respectively. For the first six months of 1998, net interest income on a tax equivalent basis increased $19.6 million to $154.6 million as compared to $135.0 million for the same period in 1997. The net yield on interest earning assets decreased from 4.37% to 4.28% for the six months ended June 30, 1997 compared to the same period in 1998, while the rate differential decreased from 3.66% to 3.57% for the six months ended June 30, 1997 compared to 1998. As previously discussed, BancGroup has acquired mortgage banker securities under reverse repurchase agreements in order to more effectively utilize its established capital base. These leverage transactions resulted in additional income of approximately $500,000 while decreasing net interest margins by approximately 11 basis points to 4.22% and 6 basis points to 4.28% for the three and six months ended June 30, 1998, respectively. Colonial Bank has improved its cost of funds through its acquisitions in Florida and maintenance of realistic pricing standards. BancGroup's net interest margin prior to Florida acquisitions, which began in July 1996, was 4.04% compared to its peers* 4.52%. By the second quarter of 1998, net interest margin has improved to 4.28% compared to its peers first quarter 1998, 4.34%. As reflected on the previous tables, the increase in net interest income for the three and six months was primarily attributable to loan growth which was partially offset by lower loan rates. During the first quarter of 1997 the prime rate increased to 8.50% where it has remained through the second quarter of 1998. LOAN LOSS PROVISION: The provision for loan losses for the first six months of 1998 was $7,543,000 compared to $7,288,000 for the same period in 1997. Asset quality remains good. The current allowance for loan losses provides a 218% coverage of nonperforming loans compared to 245% at December 31, 1997 and 226% at June 30, 1997. See management's discussion on loan quality and the allowance for possible loan losses presented in the Financial Condition section of this report. NONINTEREST INCOME: Noninterest income increased $14.9 million for the six months ended June 30, 1998 compared to the same period in 1997. This increase is primarily due to mortgage servicing and origination fees of $2.8 million, fees on deposit accounts of $2.8 million, gains on sales of loans of $5.2 million, gains on securities of $1.0 million and $.8 million in income related to bank owned life insurance. The increase in noninterest income for the three months ended June 30, 1998 compared to the three months ended June 30, 1997 of $8.9 million is primarily due to increases in mortgage servicing fees of $1.3 million, fees on deposit accounts of $1.6 million, gains on sales of loans of $3.3 million, gains on securities of $.9 million and $.6 million in income related to bank owned life insurance. Mortgage servicing fees increased due to an increase in the servicing portfolio of $2.4 billion to $14.7 billion at June 30, 1998 from $12.3 billion at June 30, 1997. Gain on sales increased due to additional loan volume resulting from increased refinancing activity. Colonial Mortgage provides additional sources of non-interest income to BancGroup through fees from its servicing portfolio as well as loan originations from its 4 divisional offices. Colonial Mortgage purchases, originates and services conventional, government, and jumbo mortgage products in 44 states and the District of Columbia. Colonial Mortgage had non-interest income of $29.7 million for the six months ended June 30, 1998, compared to $21.1 million for the six months ended June 30, 1997. BancGroup is continuing to expand its services through increased efforts in private banking and additional products including asset management services, trust services and investment sales products and services. In addition, BancGroup has established an international banking unit through its Florida market to provide and service the needs of customers involved in international activities. Commissions on sales of securities and annuities were $1.0 million for the six months ended June 30, 1998 compared to $402,000 for the same period last year. NONINTEREST EXPENSES: BancGroup's net overhead expense (total noninterest expense, excluding acquisition and restructuring costs and Year 2000 expenses, less noninterest income, excluding security gains) was $67.8 million and $61.0 million for the six months ended June 30, 1998 and 1997, respectively. Noninterest expenses, excluding acquisition and restructuring costs and Year 2000 expenses, increased $20.7 million for the six months ended June 30, 1998, compared to the same period in 1997. The majority of this increase is due to the addition of acquisitions accounted for as purchases, normal salary increases and an increase in amortization of mortgage servicing rights. Noninterest expenses increased $11.9 million for the three months ended June 30, 1998 compared to the same period in 1997. This increase primarily relates to a $2.9 million increase in the amortization of mortgage servicing rights, $570,000 in additional amortization of intangibles and a $6.7 million increase in salaries and benefits. Lower long-term interest rates have caused higher prepayments of mortgages serviced for others, resulting in additional amortization of the mortgage servicing rights asset. This additional amortization in excess of scheduled amortization amounted to $1.5 million in the second quarter. The increase in the amortization of intangibles is attributable to goodwill recognized as a result of purchase method business combinations. Salary and benefit increases related to increased staffing levels as a result of activities related to business combinations and normal wage increases. ---------- * Southeast Regional as provided by Keefe, Bruyette and Woods, Inc. 17 21 BancGroup's efficiency ratio, excluding acquisition and restructuring costs and Year 2000 expense, was 58.60% and 58.31% for the six months ended June 30, 1998 and June 30, 1997, respectively. The Company should continue to improve efficiencies with the conversion of the newly acquired banks. Conversions will allow the consolidation of back-shop operational areas into BancGroup's existing loan and deposit operations, accounting and data processing departments. These consolidation efforts should result in continued improvement of the efficiency ratio through the reduction of expenses. Refer to further discussion of conversion efforts under the Acquisition and Restructuring Costs section which follows. ACQUISITION AND RESTRUCTURING COSTS: One time acquisition and restructuring costs of $7.6 million were incurred for the six months ended June 30, 1998, with $6.1 million and $1.5 million recorded in the first and second quarter, respectively. These costs represent one-time costs in connection with the acquisition of various banking institutions and the integration of those institutions into BancGroup's systems as well as the restructuring of BancGroup's regional banks in Florida. The primary components of these one-time costs are as follows:
(In thousands) Accounting and legal services $ 675 Asset write-offs 2,373 Contract buy-outs 1,002 Severance costs 2,299 Stock option related costs 69 Other miscellaneous 1,179 ------ Total $7,597 ======
These are one-time costs with respect to each individual transaction, but represent ongoing expenses so long as BancGroup continues its acquisition program. BancGroup anticipates incurring approximately $1.5 million and $3.3 million in one-time costs associated with acquisitions scheduled to close in the third and fourth quarters of 1998, respectively. These one-time costs should be more than offset by revenue growth from the acquired banks and cost savings from consolidation expected to be realized in 1999 and 2000. As noted in previous discussions, BancGroup's Year 2000 testing will be the primary focus of technology efforts for the remainder of 1998. As a result, BancGroup is planning to convert two acquired banks during the second half of 1998 and to convert four acquired banks and two currently pending acquisitions to BancGroup's computer systems during the first four months of 1999. BancGroup expects to incur additional third party costs of approximately $1.5 million in order to accomplish six conversions in the first four months of 1999. BancGroup expects to realize cost savings of approximately $3.1 million during 1999 from the eight scheduled conversions. Three of BanGroup's pending acquisitions have computer systems that are on track to become Year 2000 complaint in accordance with regulatory guidance promulgated by the FFEIC and thus the Federal Reserve. Colonial may continue to operate these entities on their current computer systems as the incremental cost of leaving them on their computer systems is not substantial. Although these entities may not be converted until the Year 2000, Colonial expects to achieve cost savings of approximately $1 million during 1999 from these banks. Colonial anticipates realizing additional cost savings of approximately $1.5 million from conversions of these banks during the year 2000. The conversion timetable is dependent upon numerous factors, including but not limited to, additional bank acquisitions as well as changes in the Year 2000 compliance regulations promulgated by the Federal Reserve. YEAR 2000 EXPENSES: Year 2000 expenses of $3.0 million were incurred during the six months ended June 30, 1998. For additional information refer to the Year 2000 Compliance section presented in the Financial Condition section of this report. PROVISION FOR INCOME TAXES: BancGroup's provision for income taxes is based on an approximately 37.9% and 36.7%, respectively, estimated annual effective tax rate for the years 1998 and 1997, respectively. The provision for income taxes for the six months ended June 30, 1998 and 1997 was $25,837, and $23,008, respectively. 18 22 PART II OTHER INFORMATION ITEM 1: Legal Proceedings - See Note C - COMMITMENTS AND CONTINGENCIES AT PART 1 ITEM 1 ITEM 2: Changes in Securities - N/A ITEM 3: Defaults Upon Senior Securities - N/A ITEM 4: Submission of Matters to a Vote of Security Holders ITEM 5: Other Events - N/A ITEM 6: Form 8-K - A) Report on Form 8-K was filed on June 2, 1998 disclosing the amended and restated financial statements for December 31, 1997. B) Report on Form 8-K filed on July 17, 1998 disclosing the declaration of a two for one stock split effected in the form of a 100% stock dividend. Exhibit 11 - Computation of Earnings Per Share Exhibit 27 - Financial Data Schedule (for SEC use only) 19 23 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE COLONIAL BANCGROUP, INC. Date: August 3, 1998 By: /S/W. Flake Oakley, IV ------------------------------ W. Flake Oakley, IV Its Chief Financial Officer 20 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE June 30, 1998 (Unaudited) (In thousands, except per share amounts) EXHIBIT 11
Basic Diluted --------------------------------------------- Q-T-D Y-T-D Q-T-D Y-T-D ------- ------- ------- ------- Net income $24,102 $42,411 $24,102 $42,411 Interest expense on convertible subordinated debentures 97 198 Tax effect @ 37.90% for the quarter and year to date (37) (75) ------- ------- ------- ------- Net income $24,102 $42,411 24,162 42,534 ======= ======= ======= ======= Average shares outstanding 49,059 48,841 49,059 48,841 Effect of stock options 859 922 Convertible subordinated debentures 368 383 ------- ------- Diluted average shares outstanding 50,286 50,146 ======= ======= Earnings per share: Net Income $ 0.49 $ 0.87 $ 0.48 $ 0.85 ======= ======= ======= =======
21 EX-27 3 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE COLONIAL BANCGROUP, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1998 JUN-30-1998 1 344,388 20,630 0 0 1,117,946 235,297 237,448 6,027,489 72,782 8,772,533 6,193,818 1,093,482 152,249 731,213 0 0 122,790 478,981 8,772,533 272,302 32,903 1,457 306,662 116,065 153,441 153,221 7,543 991 134,850 68,248 68,248 0 0 42,411 .87 .85 4.28 31,921 7,146 1,395 180,600 68,595 7,143 2,691 72,782 72,782 0 1,236
-----END PRIVACY-ENHANCED MESSAGE-----