-----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, Jt+EVmMGQE35Mmun62APMP2SCnwmNuErd3NU/W6ieHyJP9bwBGE1mXy/3SlGl/K7 NPyGl9PkgTuquSdYaEvbFA== 0000950144-99-002432.txt : 19990309 0000950144-99-002432.hdr.sgml : 19990309 ACCESSION NUMBER: 0000950144-99-002432 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990308 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-K SEC ACT: SEC FILE NUMBER: 001-13508 FILM NUMBER: 99558577 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-K 1 THE COLONIAL BANCGROUP INC 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE #0-07945 THE COLONIAL BANCGROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 63-0661573 (State of Incorporation) (IRS Employer Identification No.) ONE COMMERCE STREET POST OFFICE BOX 1108 MONTGOMERY, AL 36101 (334) 240-5000 (Address of principal executive offices) (Telephone No.)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: COMMON STOCK, PAR VALUE $2.50 REGISTERED ON THE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011 (Title of Class) 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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ] The aggregate market value of the voting stock of the registrant held by non-affiliates as of February 26, 1999 based on the closing price of $12.3750 per share for Common Stock was $1,268,807,104. (For purposes of calculating this amount, all directors, officers and principal shareholders of the registrant are treated as affiliates). Shares of Common Stock outstanding at February 26, 1999 were 111,455,608. DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K -------- ----------------- Portions of Annual Report to Shareholders Part I, for fiscal year ended December 31, 1998 Part II, as specifically referred to herein. and Part IV Portions of Definitive Proxy Statement Part III for 1999 Annual Meeting as specifically referred to herein.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL The Registrant, The Colonial BancGroup, Inc., is hereinafter referred to as "BancGroup". BancGroup, a Delaware corporation, was organized in 1974 and is a bank holding company under the Bank Holding Act of 1956, as amended (the "BHCA"). BancGroup was originally organized as Southland Bancorporation, and its name was changed in 1981. In 1997, pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, BancGroup consolidated its banking subsidiaries located in Georgia, Florida and Tennessee into its banking subsidiary in Alabama, Colonial Bank ("Colonial Bank"). Colonial Bank has 136 branches in Alabama, 82 branches in Florida, 19 branches in Georgia, three branches in Tennessee, three branches in Texas and seven branches in Nevada. Colonial Bank conducts a general commercial banking business in its respective service areas and offers banking services such as the receipt of demand, savings and time deposits, credit card services, safe deposit box services, the purchase and sale of investment securities and the extension of credit through personal, commercial and mortgage loans. Colonial Bank is active as a correspondent bank for unaffiliated banks. Colonial Mortgage Company ("CMC") is a subsidiary of Colonial Bank and is a mortgage banking company. CMC operates retail offices in Alabama and four divisional offices and six regional offices that originate loans in 35 states. CMC services approximately $14.7 billion in residential loans for third parties in 45 states. CMC's retail operation offers conventional, government and jumbo loan products directly to borrowers. CMC's wholesale operation offers somewhat limited products comprised of conventional and jumbo loan products to various mortgage brokers. CMC offers a wholesale government program from its home office in Montgomery, Alabama. CMC has relationships with all housing agencies such as VA, the Department of Housing and Urban Development, FHA, FHLMC and FNMA. CMC underwrites, closes and sells loans according to the guidelines required by these agencies. InterWest Mortgage, a wholly owned subsidiary of CMC, based in Reno, Nevada was acquired as part of the Interwest Bancorp acquisition on October 14, 1998. Interwest Mortgage operates full-service mortgage loan origination offices in three states. Another Colonial Bank subsidiary, CBG, Inc. owns certain trade names and trademarks which it licenses to BancGroup, Colonial Bank and CMC for use in their businesses. At December 31, 1998, Colonial Bank accounted for approximately 99.9% of BancGroup's consolidated assets. The principal activity of BancGroup is to supervise and coordinate the business of its subsidiaries and to provide them with capital and services. BancGroup derives substantially all of its income from dividends received from Colonial Bank. Various statutory provisions and regulatory policies limit the amount of dividends Colonial Bank may pay without regulatory approval. In addition, federal statutes restrict the ability of Colonial Bank to make loans to BancGroup. Colonial Bank encounters intense competition in its commercial banking business, generally from other banks located in its respective metropolitan and service areas. Colonial Bank competes for interest bearing funds with other banks and with many issuers of commercial paper and other securities which are not banks. In the case of larger customers, competition exists with banks in other metropolitan areas of the United States, many of which are larger in terms of capital resources and personnel. In the conduct of certain aspects of its commercial banking business, Colonial Bank competes with savings and loan associations, credit unions, mortgage banks, factors, insurance companies and other financial institutions. BancGroup has three directly and wholly owned nonbanking subsidiaries that are currently active. The Colonial BancGroup Building Corporation was established primarily to own and lease the buildings and land used by Colonial Bank. Colonial Capital II, a Delaware business trust, issued $70 million in trust preferred securities in 1997, which are guaranteed by BancGroup. Colonial Asset Management, Inc. is an investment adviser registered under the Investment Adviser's Act of 1940. BancGroup and its subsidiaries employ approximately 3,666 persons. BancGroup's principal offices are located at and its mailing address is: One Commerce Street, Post Office Box 1108, Montgomery, Alabama 36101. Its telephone number is (334) 240-5000. 1 3 LENDING ACTIVITIES BancGroup's commercial banking loan portfolio is comprised primarily of commercial real estate loans (28%), residential real estate loans (34%) and real estate construction (commercial and residential) (14%). BancGroup's growth in loans over the past several years has been concentrated in commercial and residential real estate loans. In 1998, BancGroup experienced growth in commercial loans as well. The lending activities of Colonial Bank are dependent upon demand within the local markets of its branches. Based on this demand, loans collateralized by commercial and residential real estate have been the fastest growing component of Colonial Bank's loan portfolio. BancGroup, through the branches and loan production offices of Colonial Bank, makes loans for a range of business and personal uses in response to local demands for credit. Loans are concentrated in Alabama, Georgia, Florida, Nevada and Texas and are dependent upon economic conditions in those states. The Alabama economy experiences a generally slow but steady rate of growth, while Georgia, Florida, Texas and Nevada are experiencing higher rates of growth, with the Las Vegas metropolitan area experiencing significant growth. The following broad categories of loans have varying risks and underwriting standards. - - Commercial Real Estate. Loans classified as commercial real estate loans are loans which are collateralized by real estate and substantially dependent upon cash flow from income-producing improvements attached to the real estate. For BancGroup, these primarily consist of apartments, hotels, office buildings, warehouses, shopping centers, amusement/recreational facilities, one- to four-family residential housing developments, and health service facilities. Loans within this category are underwritten based on projected cash flows and loan-to-appraised-value ratios of 80% or less. The risks associated with commercial real estate loans primarily relate to real estate values in local market areas, the equity investments of borrowers, and the borrowers' experience and expertise. BancGroup has diversified its portfolio of commercial real estate loans with less than 10% of its total loan portfolio concentrated in any of the above-mentioned income producing activities. - - Real Estate Construction. Construction loans include loans to finance single family and multi-family residential as well as nonresidential real estate. Loan-to-value ratios for these loans do not exceed 80% to 85%. The principal risks associated with these loans are related to the borrowers' ability to complete the project, local market demand, the sales market, presales or preleasing, and permanent loan commitments. BancGroup evaluates presale requirements, preleasing rates, permanent loan take-out commitments, as well as other factors in underwriting construction loans. - - Real Estate Mortgages. These loans consist of loans made to finance one- to four-family residences and home equity loans on residences. BancGroup may loan up to 95% of appraised value on these loans without other collateral or security. The principal risks associated with one- to-four family residential loans are the borrowers' debt coverage ratios and real estate values. - - Commercial, Industrial, and Agricultural. Loans classified as commercial, industrial, and agricultural consist of secured and unsecured credit lines and equipment loans for various industrial, agricultural, commercial, retail, or service businesses. The risks associated with loans in this category are generally related to the earnings capacity of and the cash flows generated from the individual business activities of the borrowers. Collateral consists primarily of business equipment, inventory, and accounts receivables with loan-to-value ratios of less than 80%. Credit may be extended on an unsecured basis or in excess of 80% of collateral value, if the borrower's or guarantor's credit worthiness, the borrower's other banking relationships, the bank's lending experience with the borrower, or other potential sources of repayment support granting an exception to the policy. - - Consumer. Consumer loans are loans to individuals for various purposes. Automobile loans and unsecured loans make up the majority of these loans. The principal source of repayment is the earning capacity of the individual borrower, as well as the value of the collateral for secured loans. Consumer loans are sometimes made on an unsecured basis or with loan-to-value ratios in excess of 80%. 2 4 Collateral values referenced above are monitored by loan officers through property inspections, reference to broad measures of market values, as well as current experience with similar properties or collateral. Loans with loan-to-value ratios in excess of 80% have potentially higher risks which are offset by other factors including the borrower's or guarantors' credit worthiness, the borrower's other banking relationships, the bank's lending experience with the borrower, and any other potential sources of repayment. Colonial Bank funds loans primarily with customer deposits, approximately 13% of which are considered more rate sensitive or volatile than other deposits. CERTAIN REGULATORY CONSIDERATIONS BancGroup is a registered bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). As such, it is subject to the BHCA and many of the Federal Reserve's regulations promulgated thereunder. Colonial Bank, an Alabama state chartered bank that is a member of the Federal Reserve System, is subject to supervision and examination by the Federal Reserve and the Alabama State Banking Department (the "Department"). The deposits of Colonial Bank are insured by the FDIC to the extent provided by law. The FDIC assesses deposit insurance premiums the amount of which may, in the future, depend in part on the condition of Colonial Bank. Moreover, the FDIC may terminate deposit insurance of Colonial Bank under certain circumstances. Both the Federal Reserve and the Department have jurisdiction over a number of the same matters, including lending decisions, branching and mergers. Colonial Asset Management, Inc. is a registered investment adviser under the Investment Adviser's Act of 1940. It is regulated by the Securities Exchange Commission. One limitation under the BHCA and the Federal Reserve's regulations requires that BancGroup obtain prior approval of the Federal Reserve before BancGroup acquires, directly or indirectly, more than 5% of any class of voting securities of another bank. Prior approval also must be obtained before BancGroup acquires all or substantially all of the assets of another bank, or before it merges or consolidates with another bank holding company. BancGroup may not engage in "non-banking" activities unless it demonstrates to the Federal Reserve's satisfaction that the activity in question is closely related to banking and a proper incident thereto. Because BancGroup is a registered bank holding company, persons seeking to acquire 25% or more of any class of its voting securities must receive the approval of the Federal Reserve. Similarly, under certain circumstances, persons seeking to acquire between 10% and 25% also may be required to obtain prior Federal Reserve approval. In 1989, Congress expressly authorized the acquisition of savings associations by bank holding companies. BancGroup must obtain the prior approval of the Federal Reserve (among other agencies) before making such an acquisition, and must demonstrate that the likely benefits to the public of the proposed transaction (such as greater convenience, increased competition, or gains in efficiency) outweigh potential burdens (such as an undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices). As a result of enactment in 1991 of the FDIC Improvement Act, banks are subject to increased reporting requirements and more frequent examinations by the bank regulatory agencies. The agencies also have the authority to dictate certain key decisions that formerly were left to management, including compensation standards, loan underwriting standards, asset growth, and payment of dividends. Failure to comply with these standards, or failure to maintain capital above specified levels set by the regulators, could lead to the imposition of penalties or the forced resignation of management. If a bank becomes critically undercapitalized, the banking agencies have the authority to place an institution into receivership or require that the bank be sold to, or merged with, another financial institution. In September 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. This legislation, among other things, amended the BHCA to permit bank holding companies, subject to certain limitations, to acquire either control or substantial assets of a bank located in states other than that bank holding company's home state regardless of state law prohibitions. This legislation became effective on 3 5 September 29, 1995. In addition, this legislation also amended the Federal Deposit Insurance Act to permit, beginning on June 1, 1997 (or earlier where state legislatures provided express authorization), the merger of insured banks with banks in other states. The officers and directors of BancGroup and Colonial Bank are subject to numerous insider transaction restrictions, including limits on the amount and terms of transactions involving Colonial Bank, on the one hand, and its principal stockholders, officers, directors, and affiliates on the other. There are a number of other laws that govern the relationship between Colonial Bank and its customers. For example, the Community Reinvestment Act is designed to encourage lending by banks to persons in low and moderate income areas. The Home Mortgage Disclosure Act and the Equal Credit Opportunity Act attempt to minimize lending decisions based on impermissible criteria, such as race or gender. The Truth-in-Lending Act and the Truth-in-Savings Act require banks to provide certain disclosure of relevant terms related to loans and savings accounts, respectively. Anti-tying restrictions (which prohibit, for instance, conditioning the availability or terms of credit on the purchase of another banking product) further restrict Colonial Bank's relationships with its customers. The bank regulatory agencies have broad enforcement powers over depository institutions under their jurisdiction, including the power to terminate deposit insurance, to impose fines and other civil and criminal penalties, and to appoint a conservator or receiver if any of a number of conditions are met. The Federal Reserve has broad enforcement powers over bank holding companies, including the power to impose substantial fines and civil penalties. PAYMENT OF DIVIDENDS AND OTHER RESTRICTIONS BancGroup is a legal entity separate and distinct from its subsidiaries, including Colonial Bank. There are various legal and regulatory limitations on the extent to which BancGroup's subsidiaries, including among other things, can finance, or otherwise supply funds to, BancGroup. Specifically, dividends from Colonial Bank are the principal source of BancGroup's cash revenues and there are certain legal restrictions under federal and state law on the payment of dividends by banks. The relevant regulatory agencies also have authority to prohibit Colonial Bank from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound banking practice. The payment of dividends could, depending upon the financial condition of Colonial Bank, be deemed to constitute such an unsafe or unsound practice. In addition, Colonial Bank and its subsidiaries are subject to limitations under Section 23A of the Federal Reserve Act with respect to extensions of credit to, investments in, and certain other transactions with, BancGroup and its other subsidiaries. Furthermore, loans and extensions of credit are also subject to various collateral requirements. CAPITAL ADEQUACY The Federal Reserve has adopted minimum risk-based and leverage capital guidelines for bank holding companies. The minimum required ratio of total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%, of which 4% must consist of Tier 1 capital. As of December 31, 1998, BancGroup's total risk-based capital ratio was 9.85%, including 8.50% of Tier 1 capital. The minimum required leverage capital ratio (Tier 1 capital to average total assets) is 3% for banking organizations that meet certain specified criteria, including that they have the highest regulatory rating. A minimum leverage ratio of an additional 100 to 200 basis points is required for banking organizations not meeting these criteria. As of December 31, 1998, BancGroup's leverage capital ratio was 6.22%. Failure to meet capital guidelines can subject a banking organization to a variety of enforcement remedies, including restrictions on its operations and activities. As regards depository institutions, federal banking statutes establish five capital categories ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized"), and impose significant restrictions on the operations of an institution that is not at least adequately capitalized. Under certain circumstances, an institution may be downgraded to a category lower than that warranted by its capital levels, and subjected to the supervisory restrictions applicable to institutions 4 6 in the lower capital category. As of December 31, 1998, the most recent notification from the Federal Deposit Insurance Corporation categorized Colonial Bank as well capitalized under the regulatory framework for prompt corrective action. An undercapitalized depository institution is subject to restrictions in a number of areas, including capital distributions, payments of management fees and expansion. In addition, an undercapitalized depository institution is required to submit a capital restoration plan. A depository institution's holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount needed to restore the capital of the institution to the levels required for the institution to be classified as adequately capitalized at the time the institution fails to comply with the plan. A depository institution is treated as if it is significantly undercapitalized if it fails in any material respect to implement a capital restoration plan. Significantly undercapitalized depository institutions may be subject to a number of additional significant requirements and restrictions, including requirements to sell sufficient voting stock to become adequately capitalized, to improve management, to restrict asset growth, to prohibit acceptance of correspondent bank deposits, to restrict senior executive compensation and to limit transactions with affiliates. Critically undercapitalized depository institutions are further subject to restrictions on paying principal or interest on subordinated debt, making investments, expanding, acquiring or selling assets, extending credit for highly-leveraged transactions, paying excessive compensation, amending their charters or bylaws and making any material changes in accounting methods. In general, a receiver or conservator must be appointed for a depository institution within 90 days after the institution is deemed to be critically undercapitalized. SUPPORT OF SUBSIDIARY BANK Under Federal Reserve Board policy, BancGroup is expected to act as a source of financial strength to, and to commit resources to support, Colonial Bank. This support may be required at times when, absent such Federal Reserve Board policy, BancGroup might not otherwise be inclined to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. FDIC INSURANCE ASSESSMENTS Colonial Bank is subject to FDIC deposit insurance assessments. The FDIC applies a risk-based assessment system that places financial institutions in one of nine risk categories with premium rates, based on capital levels and supervisory criteria, ranging from 0.00% to 0.27% of deposits. The FDIC has the authority to raise or lower assessment rates on insured deposits in order to achieve certain designated reserve ratios in the deposit insurance funds. It should be noted that supervision, regulation, and examination of BancGroup and Colonial Bank are intended primarily for the protection of depositors, not security holders. ADDITIONAL INFORMATION Additional information, including statistical information concerning the business of BancGroup, is set forth in BancGroup's Annual Report to Shareholders for the year ended December 31, 1998, at pages 24 through 50 under the captions "Selected Financial Data, Selected Quarterly Financial Data 1998-1997" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. EXECUTIVE OFFICERS AND DIRECTORS Pursuant to general instruction G, information regarding executive officers of BancGroup is contained herein at Item 10. 5 7 ITEM 2. PROPERTIES The principal executive offices of BancGroup, Colonial Bank, and CMC are located in Montgomery, Alabama in the Colonial Financial Center and are leased from G.C. Associates I, Joint Venture, a partnership owned 50% by affiliates of BancGroup's principal stockholder. These leased premises comprise 68,142 square feet of office space. As of December 31, 1998, Colonial Bank owned 165 and leased 85 of their full-service banking offices. See Notes 8 and 13 of the Consolidated Financial Statements included in the Annual Report to Shareholders, which is incorporated herein by reference. Colonial Asset Management, Inc. leased offices in Ponte Vedra Beach, Florida. ITEM 3. LEGAL PROCEEDINGS In the opinion of BancGroup, based on review and consultation with legal counsel, the outcome of any litigation presently pending is not anticipated to have a material adverse effect on BancGroup's consolidated financial statements or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS "Market Price of and Dividends Declared on Common Stock" is contained on page 76 of the Annual Report to Shareholders for the year ended December 31, 1998, and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA "Selected Financial Data" and "Selected Quarterly Financial Data 1998-1997" on pages 24 through 26 of the Annual Report to Shareholders for the year ended December 31, 1998, are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 27 through 50 of the Annual Report to Shareholders for the year ended December 31, 1998, is incorporated herein by reference. "Year 2000 Readiness Disclosure" on pages 36 and 37 of the Annual Report to Shareholders for the year ended December 31, 1998, is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 27 through 50 of the Annual Report to Shareholders for the year ended December 31, 1998, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements set forth in BancGroup's Annual Report to Shareholders for 1998 at pages 51 through 75 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 6 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item as to BancGroup's directors is contained in BancGroup's proxy statement dated March 17, 1999, under the captions "Election of Directors" and "Section 16 (a) Beneficial Ownership Reporting Compliance," and is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME, AGE AND YEAR BECAME POSITION AND OFFICES HELD WITH PRESENT AND PRINCIPAL OCCUPATION EXECUTIVE OFFICER BANCGROUP AND SUBSIDIARIES FOR THE LAST FIVE YEARS ------------------------- ------------------------------ -------------------------------- Robert E. Lowder............... Chairman of the Board and Chief Chairman of the Board and Chief 56, 1981 Executive Officer, Colonial Executive Officer, Colonial BancGroup; Chairman of the BancGroup; Chairman of the Board and Chief Executive Board and Chief Executive Officer, Colonial Bank; Officer, Colonial Bank; Director, Birmingham Region; Chairman of the Board, Director, Huntsville Region; Colonial Mortgage Co.; Director, Northwest Region; Chairman of the Board and Director, East Central Region; President, Colonial Director, Gulf Coast Region; Broadcasting until July 1, Director, Montgomery Region; 1998, Montgomery, AL Director, Central Florida Region; Director, South Florida Region; Director, Bay Area Region; Director, Southwest Florida Region; Chairman of the Board, Atlanta Region; Director, Nevada Region; Director, Dallas Region; Director, Central Georgia Region; Chairman, Executive Committee, Colonial BancGroup; Chairman of the Board, Colonial Mortgage Co. P.L. "Mac" McLeod, Jr.......... President, Colonial BancGroup; President, Colonial BancGroup 50, 1997 Chairman of the Board, since August 1997; President and Montgomery Region; CEO, Colonial Bank Montgomery Director, North Georgia Region 1984 to August 1997, Region; President, Colonial Montgomery, AL Bank; Chairman, Colonial Asset Management, Inc.; Director, CBG, Inc. W. Flake Oakley, IV............ Executive Vice President, Chief Chief Financial Officer, 45, 1989 Financial Officer, Treasurer Secretary and Treasurer, and Secretary of Colonial BancGroup, since June 1991; BancGroup; Executive Vice Chief Financial Officer and President, Chief Financial Treasurer since October, 1990; Officer, Treasurer, Cashier Senior Vice President and and Secretary of Colonial Controller from April 1989 to Bank; Director and Secretary, October 1990, Montgomery, AL Colonial Asset Management, Inc.
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NAME, AGE AND YEAR BECAME POSITION AND OFFICES HELD WITH PRESENT AND PRINCIPAL OCCUPATION EXECUTIVE OFFICER BANCGROUP AND SUBSIDIARIES FOR THE LAST FIVE YEARS ------------------------- ------------------------------ -------------------------------- Young J. Boozer, III........... Executive Vice President -- Risk Executive Vice President since 50, 1986 Management; Executive Vice 1986; Executive Vice President, Colonial BancGroup President -- Risk Management, Building Corp. BancGroup since 1998; President, Colonial Investment Services, Inc. (a subsidiary of Colonial Bank) 1993 to 1997, Montgomery, AL Michelle Condon................ Executive Vice Executive Vice 44, 1995 President -- Retail Banking President -- Retail Banking, BancGroup since 1995; Colonial Bank -- Vice President, Budgeting & Planning, Colonial Bank 1990 to 1995, Montgomery, AL
ITEM 11. EXECUTIVE COMPENSATION The information required by this item is contained in BancGroup's proxy statement dated March 17, 1999 under the caption "Executive Compensation" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in BancGroup's proxy statement dated March 17, 1999, under the caption "Voting Securities and Principal Stockholders" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained in BancGroup's proxy statement dated March 17, 1999, under the captions "Compensation Committee Interlocks and Insider Participation" and "Executive Compensation" and is incorporated herein by reference. 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) changes in mortgage servicing rights prepayment assumptions; (vi) general economic conditions, either nationally or regionally, that are less favorable then expected, resulting in, among other things, a deterioration in credit quality, vendor representations, technological advancements, and economic factors including liquidity availability; (vii) changes which may occur in the regulatory environment; (viii) a significant rate of inflation (deflation); (ix) changes in the securities markets and (x) events specifically relating to Year 2000 readiness. 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. 8 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following financial statements are incorporated herein by reference from Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998; Consolidated Statements of Condition as of December 31, 1998 and 1997. Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996. Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997, and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996. Notes to Consolidated Financial Statements, including Parent Company only information. Report of Independent Accountants. 2. Financial Statements Schedules The financial statement schedules required to be included pursuant to this Item are not included herein because they are not applicable or the required information is shown in the financial statements or notes thereto which are incorporated by reference at subsection 1 of this Item, above. 3. Exhibits
EXHIBITS AND DESCRIPTION - ------------------------ Exhibit 3 -- Articles of Incorporation and Bylaws: 3.1 -- Restated Certificate of Incorporation of the Registrant, filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference. 3.2 -- Amendment to Article 4 of Registrant's Restated Certificate of Incorporation, dated May 15, 1998, filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-4 (File No. 333-56241), effective June 22, 1998, and incorporated herein by reference. 3.3 -- Bylaws of the Registrant, as amended, filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference. Exhibit 4 -- Instruments defining the rights of security holders: 4.1 -- Article 4 of the Restated Certificate of Incorporation of the Registrant filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference. 4.2 -- Amendment to Article 4 of Registrant's Restated Certificate of Incorporation, dated May 15, 1998, filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-4 (File No. 333-56241), effective June 22, 1998, and incorporated herein by reference. 4.3 -- Article II of the Bylaws of the Registrant filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference. 4.4 -- Dividend Reinvestment and Common Stock Purchase Plan of the Registrant dated January 15, 1986, and Amendment No, 1 thereto dated as of June 10, 1986, filed as Exhibit 4(C) to the Registrant's Registration Statement on Form S-4 (File No, 33-07015), effective July 15, 1986, and incorporated herein by reference.
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EXHIBITS AND DESCRIPTION - ------------------------ 4.5 -- All instruments defining the rights of holders of long-term debt of the Corporation and its subsidiaries. Not filed pursuant to clause 4(iii) of Item 601(b) of Regulation S-K; to be furnished upon request of the Commission. Exhibit 10 -- Material Contracts: 10.1 -- Second Amendment and Restatement of 1982 Incentive Stock Plan of the Registrant, filed as Exhibit 4-1 to the Registrant's Registration Statement on Form S-8 (File No. 33-41036), effective June 4, 1991, and incorporated herein by reference. 10.2 -- Second Amendment and Restatement to 1982 Nonqualified Stock Option Plan of the Registrant filed as Exhibit 4-2 to the Registrant's Registration Statement on Form S-8 (File No. 33-41036), effective June 4, 1991, and incorporated herein by reference. 10.3 -- 1992 Incentive Stock Option Plan of the Registrant, as amended, filed as Exhibit 10.1 to Registrant's Registration Statement on Form S-8 (File No. 333-71841), effective February 5, 1999, and incorporated herein by reference. 10.4 -- 1992 Nonqualified Stock Option Plan of the Registrant as amended, filed as Exhibit 10.2 to Registrant's Registration Statement on Form S-8 (File No. 333-71841), effective February 5, 1999, and incorporated herein by reference. 10.5 -- General Security Agreement by and between the Registrant and Barclay's Bank PLC, National Association, dated December 30, 1998 and Promissory Note, dated December 30, 1998. 10.6 -- The Colonial BancGroup, Inc. First Amended and Restated Restricted Stock Plan for Directors, as amended, included as Exhibit 10(C)(1) to the Registrant's Registration Statement on Form S-4 (File No. 33-52952), and incorporated herein by reference. 10.7 -- The Colonial BancGroup, Inc. Stock Bonus and Retention Plan, included as Exhibit 10(C)(2) to the Registrant's Registration Statement as Form S-4 (File No. 33-52952), and incorporated herein by reference. 10.8 -- Indenture dated as of January 29, 1997 between The Colonial BancGroup, Inc. and Wilmington Trust Company, as Debenture Trustee dated as of, included as Exhibit 4(A) to Registrant's Registration Statement on Form S-4 (File No. 333-22135), and incorporated herein by reference. Exhibit 11 -- Statement Regarding Computation of Earnings Per Share. Exhibit 12 -- Statement Regarding Computation of Ratio of Earnings to Fixed Charges. Exhibit 13 -- Portions of the 1998 Annual Report to Security Holders. (Such annual report, except for those portions expressly incorporated by reference in this report, is furnished solely for the information of the Commission and is not deemed to be filed as part of this report). Exhibit 21 -- List of subsidiaries of the Registrant. Exhibit 23 -- Consents of experts and counsel: 23.1 -- Consent of PricewaterhouseCoopers LLP. Exhibit 24 -- Power of Attorney.
(b) Registrant's Current Reports on Form 8-K dated October 1, 1998, December 2, 1998 and December 21, 1998, and incorporated herein by reference. 10 12 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, in the City of Montgomery, Alabama, on the 5th day of March, 1999. THE COLONIAL BANCGROUP, INC. By: /s/ ROBERT E. LOWDER ------------------------------------- Robert E. Lowder Its Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT E. LOWDER Chairman of the Board of ** - ----------------------------------------------------- Directors and Chief Executive Robert E. Lowder Officer /s/ W. FLAKE OAKLEY, IV Chief Financial Officer, ** - ----------------------------------------------------- Secretary and Treasurer W. Flake Oakley, IV (Principal Financial Officer and Principal Accounting Officer) * Director ** - ----------------------------------------------------- Lewis Beville * Director ** - ----------------------------------------------------- William Britton * Director ** - ----------------------------------------------------- Jerry J. Chesser * Director ** - ----------------------------------------------------- Augustus K. Clements, III * Director ** - ----------------------------------------------------- Robert C. Craft Director - ----------------------------------------------------- Patrick F. Dye * Director ** - ----------------------------------------------------- James L. Hewitt * Director ** - ----------------------------------------------------- Clinton O. Holdbrooks * Director ** - ----------------------------------------------------- Harold D. King
11 13
SIGNATURE TITLE DATE --------- ----- ---- * Director ** - ----------------------------------------------------- John Ed Mathison * Director ** - ----------------------------------------------------- Milton E. McGregor * Director ** - ----------------------------------------------------- John C. H. Miller, Jr. Director - ----------------------------------------------------- Joe D. Mussafer * Director ** - ----------------------------------------------------- William E. Powell * Director ** - ----------------------------------------------------- Jack H. Rainer * Director ** - ----------------------------------------------------- Jimmy Rane * Director ** - ----------------------------------------------------- Frances E. Roper * Director ** - ----------------------------------------------------- Simuel Sippial * Director ** - ----------------------------------------------------- Ed V. Welch
* The undersigned, acting pursuant to a power of attorney, has signed this Annual Report on Form 10-K for and on behalf of the persons indicated above as such persons' true and lawful attorney-in-fact and in their names, places and stead, in the capacities indicated above and on the date indicated below. /s/ W. FLAKE OAKLEY, IV - -------------------------------------- W. Flake Oakley, IV Attorney-in-Fact ** Dated: March 5, 1999 12 14 EXHIBIT INDEX Exhibit 3 -- Articles of Incorporation and Bylaws: 3.1 -- Restated Certificate of Incorporation of the Registrant, filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference.............................................. 3.2 -- Amendment to Article 4 of Registrant's Restated Certificate of Incorporation, dated May 15, 1998, filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-4 (File No. 333-56241), effective June 22, 1998, and incorporated herein by reference.......................... 3.3 -- Bylaws of the Registrant, as amended, filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference... Exhibit 4 -- Instruments defining the rights of security holders: 4.1 -- Article 4 of the Restated Certificate of Incorporation of the Registrant filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference.......................... 4.2 -- Amendment to Article 4 of Registrant's Restated Certificate of Incorporation, dated May 15, 1998, filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-4 (File No. 333-56241), effective June 22, 1998, and incorporated herein by reference.......................... 4.3 -- Article II of the Bylaws of the Registrant filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference... 4.4 -- Dividend Reinvestment and Class A Common Stock Purchase Plan of the Registrant dated January 15, 1986, and Amendment No. 1 thereto dated as of June 10, 1986, filed as Exhibit 4(C) to the Registrant's Registration Statement on Form S-4 (File No. 33-07015), effective July 15, 1986, and incorporated herein by reference.......................... 4.5 -- All instruments defining the rights of holders of long-term debt of the Corporation and its subsidiaries. Not filed pursuant to clause 4(iii) of Item 601(b) of Regulation S-K; to be furnished upon request of the Commission....... Exhibit 10 -- Material Contracts: 10.1 -- Second Amendment and Restatement of 1982 Incentive Stock Plan of the Registrant, filed as Exhibit 4-1 to the Registrant's Registration Statement on Form S-8 (File No. 33-41036), effective June 4, 1991, and incorporated herein by reference.............................................. 10.2 -- Second Amendment and Restatement to 1982 Nonqualified Stock Option Plan of the Registrant filed as Exhibit 4-2 to the Registrant's Registration Statement on Form S-8 (File No. 33-41036), effective June 4, 1991, and incorporated herein by reference.............................................. 10.3 -- 1992 Incentive Stock Option Plan of the Registrant, as amended, filed as Exhibit 10.1 to Registrant's Registration Statement on Form S-8 (File No. 333-71841), effective February 5, 1999, and incorporated herein by reference................................................. 10.4 -- 1992 Nonqualified Stock Option Plan of the Registrant, filed as Exhibit 10.2 to Registrant's Registration Statement on Form S-8 (File No. 333-71841), effective February 5, 1999, and incorporated herein by reference......................
13 15 10.5 -- General Security Agreement by and between the Registrant and Barclay's Bank LLP dated December 30, 1998 and Promissory Note dated December 30, 1998.............................. 10.6 -- The Colonial BancGroup, Inc. First Amended and Restated Restricted Stock Plan for Directors, as amended, included as Exhibit 10(C)(1) to the Registrant's Registration Statement as Form S-4 (File No. 33-52952), and incorporated herein by reference.......................... 10.7 -- The Colonial BancGroup, Inc. Stock Bonus and Retention Plan, included as Exhibit 10(C)(2) to the Registrant's Registration Statement as Form S-4 (File No. 33-52952), and incorporated herein by reference...................... 10.8 -- Indenture dated as of January 29, 1997 between The Colonial BancGroup, Inc. and Wilmington Trust Company, as Debenture Trustee dated as of, included as Exhibit 4(A) to Registrant's Registration Statement on Form S-4 (File No. 333-22135), and incorporated herein by reference.......... Exhibit 11 -- Statement Regarding Computation of Earnings Per Share....... Exhibit 12 -- Statement Regarding Computation of Ratio of Earnings to Fixed Charges............................................. Exhibit 13 -- Portions of the 1998 Annual Report to Security Holders. (Such annual report, except for those portions expressly incorporated by reference in this report, is furnished solely for the information of the Commission and is not deemed to be filed as part of this report.)............... Exhibit 21 -- List of subsidiaries of the Registrant...................... Exhibit 23 -- Consents of experts and counsel: 23.1 -- Consent of PricewaterhouseCoopers LLP....................... Exhibit 24 -- Power of Attorney
(b) Registrant's Current Reports on Form 8-K dated October 1, 1998, December 2, 1998 and December 21, 1998, and incorporated herein by reference. 14 16 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 0-07945 THE COLONIAL BANCGROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) EX-10.5 2 GENERAL SECURITY AGREEMENT 1 EXHIBIT 10.5 BARCLAYS BANK PLC GENERAL SECURITY AGREEMENT (STOCKS, BONDS, NOTES, TRUST INTERESTS, PARTNERSHIP INTERESTS, DEBENTURES, WARRANTS AND STOCK OPTIONS) 1. THE COLLATERAL. For value received, the undersigned (the "Debtor") hereby pledges, assigns and grants to BARCLAYS BANK PLC, acting through its Miami Agency at 801 Brickell Avenue, Miami, Florida 33131, with full recourse to Debtor and subject to the provisions of this Agreement, a first-ranking and perfected security interest in the following described personal property (the "Collateral"): (a) The following described Securities (as defined below): 21,750 shares of the common stock of Colonial Bank, an Alabama banking association ("Colonial Bank"), representing all of its issued and outstanding capital stock. (b) All General Intangibles, rights, powers, privileges and preferences pertaining or incidental to any Securities pledged and assigned hereunder from time to time, and any interest, stock rights, rights to subscribe, cash distributions, dividends, stock dividends, dividends paid in stock, liquidating dividends, new securities (whether certificated or uncertificated) and other property to which Debtor may become entitled by reason of the ownership of any Securities pledged and assigned hereunder from time to time. (c) All Proceeds and profits of any Collateral, all increases and additions to any Collateral and all replacements and substitutions for any Collateral, including without limitation any proceeds of any insurance, indemnity, warranty or guaranty payable with respect to any Collateral, any awards or payments due or payable in connection with any requisition, confiscation, seizure or forfeiture of any Collateral by any person acting under governmental authority or color thereof, and any damages or other amounts payable to Debtor in connection with any lawsuit regarding any of the Collateral. (d) All monies, bank accounts, balances, credits, deposits, collections, drafts, bills, notes and other property of every kind (whether tangible or intangible) now owned or hereafter acquired by Debtor and at any time in the actual or constructive possession of (or in transit to) Secured Party or its affiliates in any capacity or for any purpose. 2. THE OBLIGATIONS. The Collateral secures and will secure the prompt and unconditional payment of the "Obligations." As used in this Agreement, the term "Obligations" means all amounts of any nature whatsoever now or hereafter owing in respect of that certain Note (the "Note") from Debtor to Secured Party of even date herewith in the principal amount of 2 U.S. $25,000,000.00 and all renewals and extensions thereof, as well as all other obligations, indebtedness and liabilities of any nature whatsoever of Debtor to Secured Party under this Agreement. 3. CERTAIN DEFINITIONS. For purposes of this Agreement, unless Debtor shall have otherwise agreed in writing (a) the term "Securities" means any notes, stocks, treasury stocks, bonds, debentures, evidences of indebtedness, warrants, partnership interests, stock options, beneficial interests in trusts, or equity interests of any nature whatsoever in any legal entity or, in general, any interest or instrument commonly known as a "security," or any warrant or right to subscribe to or purchase any of the foregoing; (b) the term "issuer" means, with respect to any Securities, the legal entity in which such Securities evidence an ownership or beneficial interest; (c) the term "Loan Documents" means this Agreement and the Note; and (c) the term "organic documents" means with respect to Debtor or Colonial Bank, its articles of incorporation and by-laws, memorandum of association and articles of association, or comparable documents. All capitalized terms used but not otherwise defined in this Agreement shall have the respective meanings given them in the Florida Uniform Commercial Code. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS. Debtor acknowledges and agrees that Secured Party is relying on the representations and warranties and covenants in this Agreement and the Note as a condition precedent to the extension(s) of credit secured hereby, and that all such representations and warranties and covenants shall survive the execution and delivery of this Agreement, the extension(s) of credit and any bankruptcy, insolvency or similar proceedings. Debtor hereby represents and warrants to Secured Party and covenants for the benefit of Secured Party as follows: (a) Debtor is (and with respect to all Collateral acquired hereafter, shall be) the sole legal and equitable owner of the Collateral free from any adverse claim, lien, security interest, encumbrance or other right, title or interest of any person except for the security interest created hereby. Debtor has the unqualified right and power to grant a security interest in the Collateral without the consent of any person (other than any person whose written consent has been duly obtained, a true and correct copy of such consent having been delivered to Secured Party), and Debtor shall at Debtor's expense defend the Collateral against all claims and demands of all persons at any time claiming the Collateral or any interest therein adverse to Secured Party. Debtor shall not create, grant nor suffer to exist any pledge, security interest, lien, levy, garnishment, attachment, charge or encumbrance upon any of the Collateral (except in favor of Secured Party) and shall at all times keep the Collateral free from the same. (b) All Securities pledged and assigned hereunder are (and with respect to all Collateral acquired hereafter, shall be) duly authorized and validly issued, fully paid and nonassessable, authentic, genuine, unaltered and not stolen or forged or counterfeit, and in all respects what they purport to be. Except as otherwise disclosed in writing to Secured Party simultaneously with or prior to the execution of this Agreement, the Collateral is freely tradable and assignable and is not subject to any restrictions on transfer or resale or other disposition in any manner (other than any restrictions imposed by any applicable securities laws). 2 3 (c) Colonial Bank is a duly-organized and validly existing legal entity in good standing under the laws of the jurisdiction of its organization, is duly qualified to do business in those jurisdictions where the nature of its business requires it to be so qualified, and has the necessary legal power and authority to own its property and assets and to transact the business in which it is engaged. (d) Debtor is delivering (or causing to be delivered) to Secured Party upon or prior to execution of this Agreement all stock certificates, bonds, debentures, warrants, or other Instruments or writings evidencing any Securities pledged and assigned under this Agreement (and Debtor shall promptly deliver the same with respect to all certificated Securities pledged and assigned to Secured Party hereafter), together with duly executed stock powers in blank and all other assignments or endorsements requested by Secured Party. With respect to any uncertificated Securities pledged and assigned hereunder, Debtor has caused Secured Party to be registered as the transferee thereof on the books of the custodian bank, clearing corporation, brokerage house or issuer, as may have been requested by Secured Party (and Debtor shall promptly cause such registration with respect to all uncertificated Securities pledged and assigned to Secured Party hereafter). (e) If new or additional Securities are issued to Debtor (as a stock dividend, stock split, or pursuant to any reclassification or recapitalization of the capital, or the reorganization or, merger, acquisition or consolidation, of Colonial Bank, or otherwise) with respect to the Collateral, then the same shall be deemed an increment to the Collateral and under pledge and assignment to Secured Party hereunder. If evidenced by a stock certificate, bond, warrant, debenture, certificate, or other Instrument or writing, then such Securities shall (to the extent acquired or received by or placed under Debtor's control) be held in trust for and promptly delivered to Secured Party, together with duly executed stock powers in blank and any other assignments or endorsements as Secured Party may request. If any such Securities are uncertificated, then Debtor shall immediately upon acquisition of such Securities cause Secured Party to be registered as the transferee thereof on the books of the custodian bank, clearing corporation, brokerage house or issuer, as may be requested by Secured Party. (f) Unless otherwise agreed in writing by Secured Party, Debtor shall deliver to Secured Party, to be applied against the Obligations, whether or not matured, in any manner deemed appropriate by the Secured Party, any dividends, interest payments or other monies payable at any time in respect of any Security, promptly upon Debtor's receipt thereof and in the form received. Pending such delivery, Debtor shall hold such sums in trust for Secured Party and shall not commingle the same with Debtor's other funds. If any such dividend, interest payment or other monies shall be evidenced by a check, draft or other Instrument, Debtor shall endorse the same to the order of Secured Party immediately upon receipt and promptly deliver it to Secured Party, to be applied against the Obligations, whether or not matured, in any manner deemed appropriate by the Secured Party. (g) Debtor's principal place of business is: Colonial Financial Center, One Commerce Street, Montgomery, Alabama, 36104. Without obtaining Secured Party's prior written consent, Debtor shall not change Debtor's chief place of business or the office(s) where 3 4 Debtor's books, papers and records concerning the Collateral are kept, nor change Debtor's name, identity or corporate structure, nor do business under any fictitious or assumed name. (h) Without the prior written consent of Secured Party, Debtor shall not sell, transfer, assign, convey or otherwise dispose of any interest in any of the Collateral, nor enter into any contract or agreement to do so. (i) Debtor shall not take or permit any action that may impair the Collateral or Secured Party's security interest therein, and shall not permit any of the Collateral to be used in violation of any statute, regulation or other law. Without limiting the foregoing, Debtor will not compromise, release, surrender or waive any rights of any nature whatsoever in respect of any of the Collateral without Secured Party's prior written consent, which Secured Party may grant or withhold in its sole discretion. (j) Debtor shall pay when due all taxes or other governmental charges whatsoever levied against the Collateral and all assessments (including stock assessments) upon the Collateral, and Debtor shall pay any tax which may be levied on or assessed against any Loan Document or the Obligations. (k) Debtor shall pay on demand all reasonable filing fees and similar charges and all reasonable costs incurred by Secured Party in collecting or securing or attempting to collect or secure any Obligations, including the reasonable expenses and reasonable fees of Secured Party's legal counsel, whether or not involving litigation and/or appellate, administrative or bankruptcy proceedings. Debtor agrees to indemnify and hold Secured Party harmless on demand against all expenses, losses, consequences or damages incurred or suffered by Secured Party arising from or relating to any claim, demand, action or proceeding brought by any person(s) whomsoever in connection with or relating to the Collateral, the Obligations, this Agreement or any other Loan Document (including without limitation any court costs and the expenses and reasonable fees of Secured Party's legal counsel), except to the extent that a court of competent jurisdiction shall hold the same to be the result of Secured Party's own gross negligence or willful misconduct. Debtor shall pay any documentary stamp taxes, intangible taxes or other taxes (except for franchise or income taxes based on the net income of Secured Party) which may now or hereafter apply to the Collateral, the Obligations or this Agreement or any other Loan Document, and Debtor agrees to indemnify and hold Secured Party harmless from and against any liability, costs, attorney's fees, penalties, interest or expenses relating to any such taxes, as and when the same may be incurred. All sums payable by Debtor under this Agreement are and shall be secured by the Collateral. (l) If so requested by Secured Party at any time (whether before or after the occurrence of an Event of Default), Debtor shall immediately: (i) to the extent not previously delivered to the Secured Party in compliance with the terms hereof, deliver to Secured Party any and all Instruments and, Securities included in the Collateral at the time and place and manner specified by Secured Party, together with any endorsements, stock powers in blank and assignments requested by Secured Party for their transfer to Secured Party or to any other person selected by Secured Party, all in form and substance satisfactory to Secured Party; and (ii) 4 5 execute, deliver and file any and all financing statements, continuation statements, agreements, notices, vouchers, invoices, schedules, confirmatory assignments, conveyances, transfer endorsements, powers of attorney, proxies, certificates, deeds or other papers and/or perform any act which Secured Party may reasonably deem necessary or appropriate to create, perfect, preserve, validate or otherwise protect Secured Party's security interest in the Collateral or to enable Secured Party from time to time to exercise and enforce Secured Party's rights under this Agreement or any other Loan Document. (m) Debtor shall deliver to Secured Party a satisfactory annual financial statement and supporting documentation, prepared by an independent certified public accountant acceptable to Secured Party, for each of Debtor and Colonial Bank within ninety (90) days after the end of its fiscal year. Debtor shall also promptly deliver any other information reasonably requested by Secured Party from time to time regarding the respective financial condition or business operations or prospects of Debtor and Colonial Bank. All financial statements of Debtor previously delivered to Secured Party have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the correct respective financial conditions of Debtor as of their respective dates, and the foregoing shall be true with respect to all financial statements of Debtor and Colonial Bank delivered to Secured Party hereafter. (n) There is no fact (including any pending or threatened litigation or proceeding) that Debtor has not disclosed to Secured Party in writing that could materially adversely affect its or Colonial Bank's respective properties, businesses or financial condition, or any Collateral to the extent that Debtor's ability to repay the amount of the note would be jeopardized. Debtor shall promptly notify Secured Party in writing if any event shall occur or become known to Debtor which has or could have any such materially adverse effect with respect to Debtor or Colonial Bank, or which materially changes the truth or correctness of any representation or warranty in any Loan Document, or which affects any rights incidental to, any Collateral or the ability of Debtor or Secured Party to dispose of the same (including without limitation the levy of any legal process or the filing of any lien against the Collateral or the adoption of any marketing order, arrangement or procedure affecting the Collateral, whether governmental or otherwise). (o) Debtor has duly obtained all permits, licenses, approvals and consents from, and made all filings with, any governmental authority (and the same have not lapsed nor been rescinded or revoked) which are necessary in connection with the execution or delivery or enforcement of any Loan Document or the performance of Debtor's obligations thereunder. (p) There are no actions, suits or proceedings pending or threatened against or affecting any Collateral before any court of law or equity or any tribunal, administrative board or governmental authority, and Debtor is not in default under any other indebtedness or with respect to any order, writ, injunction, decree, judgment or demand of any court or any governmental authority. (q) The execution and delivery of this Agreement and all other Loan 5 6 Documents do not and shall not (i) violate any provisions of any law, rule, regulation, order, writ, judgment, injunction, decree, decision or award applicable to Debtor or Colonial Bank, nor (ii) result in a breach of, or constitute a default under, any indenture, bond, mortgage, lease, instrument, credit agreement, undertaking, contract or other agreement to which Debtor or Colonial Bank is a party or by which any of them or their respective properties may be bound or affected. This Agreement and each Loan Document constitutes the legal, valid and binding obligation of Debtor, enforceable against Debtor in accordance with its terms. (r) No extension of credit secured hereby is being used to purchase or carry any "margin stock" within the meaning of Regulation "U" of the Board of Governors of the Federal Reserve System, nor to extend credit to others for that purpose. No amount borrowed from Secured Party will be used for any purchase which violates or which is inconsistent with the provisions of Regulations G, U or X of the Board of Governors of the Federal Reserve System. (s) If Debtor shall receive from any issuer, broker, custodian, clearing corporation or other person, any notice or communication (including without limitation any proxy solicitation, purchase offer, notice of any stockholders' meetings or annual report) with respect to any Collateral, Debtor shall immediately notify Secured Party of such notice or communication and, if the same shall be in writing, shall provide to Secured Party a true and correct copy thereof. (t) Debtor shall at all times, unless Secured Party shall have otherwise instructed in writing, at Debtor's own expense and to the fullest extent permitted by law, exercise all voting rights in respect of any Securities pledged and assigned hereunder, and all other rights afforded to it by contract or by law, to actively oppose and prevent: (i) the issuance by Colonial Bank of additional Securities which might reduce or otherwise adversely affect the voting power or liquidation or other rights of Securities pledged and assigned hereunder; (ii) any modification or amendment to the organic documents of Colonial Bank; (iii) any liquidation, winding-up, dissolution or termination of existence of Colonial Bank; and (iv) any merger, consolidation, reorganization, recapitalization, or acquisition by or of Colonial Bank. 5. RIGHTS OF SECURED PARTY. Debtor agrees with and for the benefit of Secured Party that: (a) If Secured Party shall reasonably determine at any time that the Collateral is insufficient to secure the Obligations, then on demand by Secured Party Debtor shall reduce the outstanding amount of the Obligations to the extent specified by Secured Party, or shall pledge, assign and deliver to Secured Party additional Securities or other collateral reasonably acceptable to Secured Party sufficient to increase the Collateral to the amount specified by Secured Party. All such additional Securities or other Collateral so delivered to Secured Party from time to time shall thereupon become a part of the Collateral and subject to the provisions of this Agreement. From and after the occurrence of an Event of Default, Secured Party is authorized (but is not obligated) to sell all or any part of the Collateral whenever Secured Party considers such sale necessary for Secured Party's protection, and any such sale shall be made in accordance with this Agreement and applicable law, and may be made without prior demand for 6 7 additional collateral or for payment on the Obligations or any other demands whatsoever. (b) Debtor hereby grants Secured Party an irrevocable proxy, coupled with an interest, effective only from and after the occurrence and during the continuation of an Event of Default, to vote all Securities pledged and assigned hereunder, such proxy to remain effective as long as any Obligations shall remain outstanding. Pursuant to this proxy, Secured Party or its nominee(s) may, at any time an Event of Default is continuing, without notice to Debtor, exercise all voting and corporate rights at any meeting of Colonial Bank and may exercise any and all rights of conversion, exchange, subscription, receipt of cash tenders, or any other rights, privileges or options pertaining to such Securities as if Secured Party were the absolute owner thereof, including without limitation the right to exchange the same for other Securities or any other property upon the merger, consolidation, reorganization, recapitalization or other readjustment of Colonial Bank or upon the exercise by Colonial Bank or Secured Party of any right, privilege or option pertaining to such Securities, and in connection therewith, Secured Party may deposit and deliver any such Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as Secured Party may determine, all without liability except to account for property actually received by Secured Party. (c) Secured Party shall have the right (but not the obligation) at its option to discharge or pay any taxes, assessments, liens, security interests or other encumbrances at any time levied or placed on or against the Collateral, to pay for the preservation or protection of the Collateral, and/or to advance monies for any other reason or purpose permitted under any Loan Document. Any amount so paid or advanced by Secured Party shall be secured by the Collateral and shall be repayable by Debtor on demand. (d) Secured Party may sign and file financing statements, security agreements, recording instruments or other documents or amendments thereto with respect to the Collateral or any portion thereof without the signature of Debtor, all at Debtor's sole expense, and Debtor shall reimburse Secured Party on demand for any costs advanced or incurred by Secured Party in connection therewith. At Secured Party's option, a carbon, photographic or other reproduction of this Agreement (or of any financing statement executed by Debtor) shall be sufficient as a financing statement. (e) During any continuing Event of Default, Secured Party is hereby irrevocably appointed the attorney-in-fact of Debtor, which appointment is coupled with an interest, with full power of substitution, on behalf of Debtor to perform all acts, and to execute and deliver all endorsements, notices, instruments of assignment and transfer, deeds, releases, bills of sale or other writings whatsoever which Secured Party deems appropriate to protect and preserve the Collateral and to perfect and maintain and realize upon Secured Party's security interest and rights in the Collateral. If so requested by Secured Party or by any other person, Debtor shall ratify and confirm the acts of Secured Party (and/or any substitute) as Debtor's attorney-in-fact. (f) During any continuing Event of Default, Secured Party may take control of any Proceeds of Collateral at any time and may at its option apply any cash Proceeds of the 7 8 Collateral (including without limitation any insurance proceeds or amounts payable in any lawsuit on account of the Collateral) to the payment of the Obligations, whether or not matured, in any manner deemed appropriate by Secured Party, or return such cash Proceeds to Debtor for use in the operation of Debtor's business. (g) Secured Party shall not be obligated to do any of the acts authorized in this Agreement or any other Loan Document, but if Secured Party elects to do so then Secured Party shall not be responsible or liable to Debtor therefor (or for any consequences of such acts) except to the extent that a court of competent jurisdiction holds that Secured Party acted with gross negligence or willful misconduct. 6. DUTY OF CARE. Secured Party shall have the right (but not the obligation) at any time to take any action Secured Party deems appropriate in its sole discretion for the protection or preservation of any Collateral in its possession or control. Secured Party shall exercise reasonable care with respect to Collateral in its custody only to the extent required by applicable law. Secured Party shall be deemed to have used reasonable care if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property, or if Secured Party takes such action for that purpose as Debtor may reasonably request in writing. No omission to do any act not requested by Debtor shall be deemed a failure to exercise reasonable care, and no omission to comply with any request of Debtor shall of itself be deemed a failure to exercise reasonable care. Secured Party is not responsible for any injury or loss to the Collateral or any part thereof arising from Act of God, robbery, fire, flood, fraud or any other cause whatsoever beyond the control of Secured Party, and Secured Party shall not be liable for any negligent act or default of any of its collecting agents or correspondents. Secured Party shall not be required to examine or inquire into the validity of any Collateral subject to this Agreement, or to exchange or collect on any such Collateral, or to take any action necessary to hold any corporation, issuer or other person liable on the Collateral; Debtor hereby waives any obligation of diligence on the part of Secured Party in looking after, preserving or acting with respect to the Collateral or collecting the same. 7. EVENTS OF DEFAULT. The occurrence of any one or more of the following events, regardless of the cause thereof and whether within or beyond the control of Debtor, shall constitute an "Event of Default" under this Agreement: (a) The failure of Debtor to pay any sum when due under any Loan Document, whether upon maturity or by acceleration, and the expiration of any applicable grace period provided in such Loan Document for that payment; (b) the following events which have not been cured by Borrower within fifteen (15) calendar days after Borrower has learned of the event or which have not been cured by Borrower within fifteen (15) calendar days after Bank gives notice to Borrower of the occurrence of the event, whichever occurs first: (i) the failure of Debtor to observe or perform any other covenant or agreement in this Agreement or any other Loan Document, or the occurrence of any other default under any Loan Document, and the expiration of any applicable grace period provided in such Loan Document for the cure of that failure or default; (ii) the sale 8 9 or further voluntary or involuntary encumbrancing of any of the Collateral; (iii) if any levy, attachment, execution, charging order, garnishment or other process shall be issued, or any involuntary lien or encumbrance shall be filed, against any portion of the Collateral; (iv) with respect to Colonial Bank, if any event shall occur which, in the reasonable judgment of Secured Party, represents or constitutes a material adverse change in the business or financial condition or prospects of such bank; (v) if any representation, warranty, affidavit, certificate or statement made or delivered to Secured Party by Debtor or on Debtor's behalf from time to time in connection with the Loan Documents or the Obligations shall prove false, incorrect or misleading in any material respect; (vi) the dissolution or merger or consolidation or termination of existence of Debtor or of Colonial Bank, or the failure or cessation or liquidation of the business of Debtor or Colonial Bank; (vii) if Debtor or Colonial Bank shall default in the payment of any indebtedness for borrowed money (whether direct or contingent and whether matured or accelerated) to Secured Party, or to any other person whomsoever in an amount of not less than One Million United States Dollars (U.S. $1,000,000.00), or if Debtor or Colonial Bank shall become insolvent or unable to pay its debts as they become due; (viii) the anticipatory repudiation by Debtor of any of its obligations under any Loan Document, or any declaration by Debtor of intention not to perform any such obligations as and when the same become due; (ix) the disposition, transfer or exchange of all or substantially all of Debtor's or Colonial Bank's assets for less than fair market value; (x) the failure to obtain any permit, license, approval or consent from, or to make any filing with, any governmental authority (or the lapse or revocation or rescission thereof once obtained or made) which is necessary in connection with the execution or delivery or enforcement of any Loan Document or the performance of Debtor's obligations under any Loan Document; (xi) if it shall become unlawful for Secured Party to extend credit to Debtor, or to maintain any credit so extended, or for the Debtor to perform any of the Debtor's obligations under any Loan Document; and (xii) if any governmental authority (or any person acting or purporting to act under governmental authority) shall take any action to condemn, assume custody or control of, seize or appropriate all or any substantial part of Debtor's or Colonial Bank's property or to displace the management of Debtor's or Colonial Bank's business. 8. RIGHTS AND REMEDIES ON DEFAULT. If any of the foregoing Events of Default shall occur, then Secured Party, in its sole discretion and without prior notice to Debtor, may at any time and from time to time during the continuation thereof take any or all of the following actions: (a) declare any or all of the Obligations immediately due and payable; (b) declare any or all other liabilities of Debtor to Secured Party immediately due and payable; (c) terminate any obligation which Secured Party may have at that time to make further loans or extensions of credit or other financial accommodations to the Debtor; (d) foreclose Secured Party's security interest(s) in any or all of the Collateral as provided by law; 9 10 (e) sell, re-sell, discount or dispose of all or any portion of the Collateral, or endorse, assign and convey the same to any third party; (f) require Debtor to assemble Debtor's books, records, files, papers and other data pertaining to the Collateral and deliver them to Secured Party at Debtor's expense to a place designated by Secured Party; (g) enter the premises of Debtor and take possession of any Collateral not then in Secured Party's possession and any books, records, files and papers pertaining to the Collateral (Debtor hereby waiving and releasing Secured Party to the fullest extent permitted by law from any and all claims which Debtor might otherwise have against Secured Party in connection therewith or arising therefrom); and/or (h) exercise any and all other rights and remedies with respect to the Collateral which Secured Party may enjoy under the Loan Documents, the Florida Uniform Commercial Code or any other applicable law. All rights, remedies and powers granted to Secured Party in this Agreement or in any other Loan Document or by applicable law shall be cumulative and may be exercised singly or concurrently on one or more occasions. No delay in exercising or failure to exercise any of Secured Party's rights or remedies shall constitute a waiver thereof, nor shall any single or partial exercise of any right or remedy by Secured Party preclude any other or further exercise of that or any other right or remedy. No waiver of any right or remedy by Secured Party shall be effective unless made in writing and signed by Secured Party, nor shall any waiver on one occasion apply to any future occasion, but shall be effective only with respect to the specific occasion addressed in that signed writing. Debtor shall not be subrogated to any rights of Secured Party against any other party or any Collateral until all sums due to Secured Party under the Obligations shall have been paid in full, and if any of the Obligations shall remain unpaid after the exercise of any or all of Secured Party's rights and remedies, then Debtor shall remain liable for such deficiency. 9. SALE OF THE COLLATERAL. With respect to any sale or disposition of any of the Collateral provided for under this Agreement, whether made under the power of sale in this Agreement, under any applicable provisions of the Florida Uniform Commercial Code or other applicable law, or under judgment or order or decree in any judicial proceeding for the foreclosure of Secured Party's security interest or involving the enforcement of this Agreement: (a) The Collateral may be sold, resold, assigned or delivered in one or more parcels, at the same or at different times, in whole or in part, at public or private sale or at any broker's board or on any securities exchange, for cash or on credit or for other property, for immediate or future delivery, and at such price(s) and on such terms as Secured Party may determine in its sole discretion, so long as such disposition is commercially reasonable. Without precluding any other methods of sale, the sale of the Collateral shall be deemed made in a commercially reasonable manner if conducted in conformity with reasonable commercial practices of banks or other financial institutions when disposing of similar property. 10 11 (b) Debtor hereby waives any and all demand, advertisement or notice (except as required by law), and any notification required by law with respect to the time and place of such sale or disposition shall be deemed reasonable if given at least fifteen (15) days before the time thereof, but notice given in any other reasonable manner shall also be sufficient. In the case of any sale at a broker's board or on a securities exchange, the notice shall identify the board or exchange at which such sale is to be made and the day on which the Collateral (or a portion thereof) will first be offered for sale. Any public sale of any of the Collateral shall be held at such time or times within ordinary business hours at such place or places as Secured Party may state in the notice or publication (if any) of such sale. (c) Secured Party shall not be obligated to sell any of the Collateral if it determines not to do so, notwithstanding that notice of a sale of such Collateral may have been given. Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made, without further notice, at the time and place identified in such announcement. In case of any sale of all or any part of the Collateral on credit or for future delivery, Secured Party may retain the Collateral sold until the sales price is paid by the purchaser(s) thereof, but Secured Party shall not incur any liability if any such purchaser shall fail to take up and pay for the Collateral so sold, in which case such Collateral may again be sold upon like notice. (d) Debtor understands that applicable federal and state laws restricting and imposing requirements and restrictions on and the sales of bank securities to the general public (the "Banking and Securities Laws") may affect the disposition of any Securities and that Secured Party's concern that its sale or disposition of any such Securities be in compliance with the Banking and Securities Laws may very strictly limit Secured Party's course of conduct in disposing or attempting to dispose of all or any part of such Securities, and may also limit the extent to which or the manner in which any subsequent transferee may dispose of the same. Consequently, Debtor agrees that Secured Party may, in selling or disposing of any such Securities proceed in such manner and under such circumstances as it may deem reasonably necessary or advisable to assure compliance with the Banking and Securities Laws. Without limiting the generality of the foregoing, the Secured Party may, in its sole and absolute discretion: (i) sell privately any such Securities notwithstanding that such Securities may be qualified or registered for sale to the general public; (ii) approach and negotiate with a restricted number of potential purchasers to effect such sale; and (iii) restrict such sale to purchasers as to their number, nature of business and investment intention (including, without limitation, to purchasers each of whom will represent and agree to the satisfaction of Secured Party that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Securities or part thereof), it being understood that Secured Party may require Debtor, and Debtor hereby authorizes Secured Party, to cause a legend or legends to be placed on the certificates or Instruments to be delivered to such purchasers to the effect that the Securities represented thereby have not been registered under the Banking and Securities Laws and setting forth or referring to restrictions on the transferability of such Securities. 11 12 (e) Debtor agrees, if requested by Secured Party, at Debtor's sole expense to, and to cause Colonial Bank to, render such reasonable assistance as Secured Party or its legal counsel may request in connection with the private or public sale of such Securities. Debtor agrees to indemnify and hold harmless Secured Party and any underwriter against all loss, liability, expenses or claims (including the reasonable cost of any investigation) which any of them may incur in connection with the sale of such Securities to the extent that such loss, liability, expense or claim arises out of or is based upon any alleged untrue statement of a material fact contained in any registration statement, prospectus (or any amendment or supplement thereto) or in any notification or offering circular, or arises out of or is based upon any intentional omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except to the extent due to the gross negligence or willful misconduct of Secured Party or any such underwriter. (f) Secured Party may, to the fullest extent permitted by applicable law, bid for and purchase the Collateral in a commercially reasonable manner, and upon compliance with the terms of sale may hold, retain and possess and dispose of the same in its own absolute right without further accountability. Secured Party may credit all or any part of the Obligations against the purchase price(s) so bid, and may deliver any notes or instruments evidencing any of the Obligations in payment of such purchase price(s); if the amounts then owing under any such notes or instruments exceed such purchase price(s), then the same shall be returned to Secured Party after due notation of the partial discharge thereof. (g) Upon consummation of any sale, Secured Party shall have the right to assign, transfer, endorse, convey and deliver to the respective purchaser(s) the Collateral or portion thereof so sold. Secured Party is hereby irrevocably appointed Debtor's true and lawful attorney-in-fact (which appointment is coupled with an interest) in Debtor's name and stead, with power of substitution, to make all necessary bills of sale, endorsements and instruments of assignment and transfer of the Collateral thus sold, and for such other purposes as Secured Party may deem necessary or desirable to effectuate the provisions of this Agreement or any other Loan Document. If so requested by Secured Party or by any other person, Debtor shall ratify and confirm the acts of Secured Party (and/or any substitute) as Debtor's attorney-in-fact. (h) Such sale shall divest all right, title, interest, equity, redemption, claim and demand whatsoever of Debtor in and to the Collateral sold and shall be a perpetual bar both at law and in equity against Debtor and Debtor's successors and assigns, and against any and all persons claiming or who may claim all or any part of the Collateral from, through or under any of them. (i) A receipt given by Secured Party (or its designated agent) shall be a sufficient discharge to the purchaser(s) at such sale for his or their purchase money, and none of them shall, after such payment and receipt, be obliged to see to the application of such purchase money or be answerable for any loss, misapplication or non-application thereof. (j) Secured Party shall have no obligation whatsoever to resort first to any other security which Secured Party may hold for the Obligations. Secured Party shall not incur 12 13 any liability to Debtor as a result of the sale of any Collateral at any private sale conducted in a commercially reasonable manner, or as a result of any failure to sell or offer for sale any Collateral for any reason whatsoever or to exercise any other right, privilege, option or power to the fullest extent permitted by law granted to Secured Party hereunder. Debtor hereby waives to the fullest extent permitted by law any claims against Secured Party arising with respect to any decrease in the market value of any Collateral during the period held for sale, or arising by reason of the fact that the price at which the Collateral may have been sold was less than the price that might have been obtained had the sale been otherwise effected, even if Secured Party accepts the first offer received and does not offer the Collateral to more than one offeree. (k) A written agreement to sell any Collateral, which agreement Secured Party in good faith deems itself bound to perform, shall be treated as a sale of such Collateral and Secured Party shall be free to carry out such agreement. If such an agreement is then effective, Debtor shall not be entitled to the return of any Collateral subject thereto, even if after the date of such agreement all Events of Default shall have been cured or the Obligations shall have been fully paid and performed. (l) After deducting all costs and expenses of every kind for taking, retaking, care, safekeeping, collecting, holding, preparing for sale, selling, delivering and the like (including legal costs, insurance, commission for sale, and reasonable attorney's fees and expenses) and all other charges against the Collateral, Secured Party shall apply the residue of the proceeds of any such sale or other disposition against any and all amounts remaining unpaid under the Obligations, all in such order of priority as Secured Party may determine in its sole discretion. Debtor shall remain liable for any deficiency remaining after such application, and any surplus shall be returned to Debtor. 10. WAIVER OF RIGHTS. Except for the written notice required under Section 7 hereof, to the fullest extent permitted by law, Debtor hereby waives notice, demand, presentment, protest, notice of dishonor, suit against or joinder of any other person, and all other requirements necessary to charge or hold Debtor liable with respect to the Obligations. Until Secured Party receives all sums due with respect to the Obligations in immediately available funds, Debtor shall not be released from liability unless Secured Party expressly releases Debtor in a writing signed by Secured Party. 11. ACTIONS OR PROCEEDINGS. With respect to any legal action or proceeding arising under this Agreement or any other Loan Document or concerning the Obligations and/or the Collateral, Debtor to the fullest extent permitted by law: (a) submits to the jurisdiction of the state and federal courts in the State of Florida; (b) agrees that the venue of any such action or proceeding may be laid in Dade County and waives any claim that the same is an inconvenient forum; (c) stipulates that service of process in any such action or proceeding shall be properly made if made on its registered service agent in the State of Florida; and (d) WAIVES TRIAL BY JURY (as does Secured Party by virtue of its acceptance of this Security Agreement). No provision of this Agreement or of the Note shall limit Secured Party's right to serve legal process in any other manner permitted by law or to bring any such action or proceeding in any other competent jurisdiction. 13 14 12. NOTICES. Except as otherwise provided in this Agreement for service of legal process, any notice to Debtor shall be in writing and shall be deemed sufficiently made when received by Debtor at the address set forth in Section 4(g) hereof to the attention of W. Flake Oakley, IV, Chief Financial Officer of Debtor. Any notice to Secured Party shall be directed to the attention of a Vice-President or higher ranking officer of Secured Party and shall be made in writing in the foregoing manner and shall be deemed sufficient when received by Secured Party at the following address: Barclays Bank PLC, Latin America Regional Office, 801 Brickell Avenue, Miami, Florida 33131. Any party may change its address for notice by giving written notice of the change in accordance with this paragraph. 13. BUSINESS ENTITY. If Debtor is a corporation, partnership or other business entity, then Debtor hereby further represents and warrants to Secured Party that: (a) Debtor is duly organized, validly existing and in good standing under the laws of the jurisdiction of its creation and is duly qualified to do business in those jurisdictions where the nature of its business requires it to be so qualified; (b) Debtor has all requisite power and authority (corporate or otherwise) to conduct its business, to own its properties, to execute and deliver this Agreement and all other Loan Documents, and to perform its obligations under the same; (c) the execution, delivery and performance of this Agreement and all other Loan Documents have been duly authorized by all necessary actions (corporate or otherwise) and do not require the consent or approval of Debtor's stockholders (if a corporation) or of any other person whose consent has not been obtained; and (d) the execution, delivery and performance of this Agreement and all other Loan Documents do not and shall not conflict with any provision of Debtor's by-laws or articles of incorporation (if a corporation), partnership agreement (if a partnership) or trust agreement or other document pursuant to which Debtor was created and exists or any other agreement by which Debtor is bound. 14. INTEREST. All Obligations of Debtor to Secured Party arising under this Agreement shall bear interest, from the date when due until paid in full, at the rate then applicable under the Note. All such interest is and shall be secured by the Collateral. 15. BINDING EFFECT; ASSIGNABILITY. The terms of this Agreement shall inure to the benefit of Secured Party and its permitted successors and assigns and shall be binding upon Debtor and Debtor's executors, personal representatives, heirs and permitted successors and assigns. Without the prior written consent of Secured Party (which it may grant or withhold in its sole discretion), Debtor shall not assign this Agreement nor delegate any of Debtor's duties hereunder. 16. TERM. This Agreement shall take effect when signed by Debtor and delivered to Secured Party. This Agreement is a continuing agreement and shall remain in full force and effect until all the Obligations shall have been paid in full, unless earlier terminated by Secured Party in writing. After termination of this Agreement and the full payment of the Obligations, Secured Party shall turn over to Debtor any Proceeds of the Collateral received or held by Secured Party and shall reassign the Collateral to Debtor without recourse to Secured Party and without any representation or warranty or agreement of any kind on the part of Secured Party. 14 15 17. INTERPRETATION. Whenever used in this Agreement, the term "person" means any individual, firm, corporation, trust or other organization or association or other enterprise or any governmental or political subdivision, agency, department or instrumentality thereof. Whenever used in this Agreement, the terms "written" or "in writing" mean any form of written communication and any communication by means of telex, telecopier device, telegraph or cable. Any reference in this Agreement to a sum expressed in dollars or with the symbol "U.S. $" or "$" means the lawful currency of the United States of America, unless such reference expressly identifies another dollar-denominated currency. Captions and paragraph headings contained in this Agreement are for convenience only and shall not affect its interpretation. Whenever used in this Agreement and unless the context otherwise requires, words in the plural include the singular, words in the singular include the plural, and pronouns of any gender include the other genders. 18. MISCELLANEOUS. Time is of the essence with respect to the provisions of this Agreement. This Agreement may be amended but only by an instrument in writing executed by the party to be burdened thereby. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction only, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. To the extent that Debtor may lawfully waive any law that would otherwise invalidate any provision of this Agreement, Debtor hereby waives the same, to the end that this Agreement shall be valid and binding and enforceable against Debtor in accordance with all its terms. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Florida, except that federal law shall govern to the extent that it may permit Secured Party to charge, from time to time, interest on the Obligations at a rate higher than may be permissible under Florida law. WITNESS THE DUE EXECUTION HEREOF by Debtor as of the 30th day of December, 1998. Witnesses: THE COLONIAL BANCGROUP, INC. /s/ William A. McCrary By: /s/ W. Flake Oakley, IV - ----------------------------------- ----------------------------------- Name: William A. McCrary, Esq. Name: W. Flake Oakley, IV Title: Chief Financial Officer /s/ Hugh C. Nickson, III - ----------------------------------- Name: Hugh Nickson, Esq. 15 16 PROMISSORY NOTE (TERM) U.S. $25,000,000.00 MONTGOMERY, ALABAMA DECEMBER 30, 1998 FOR VALUE RECEIVED, THE COLONIAL BANCGROUP, INC., a Delaware corporation, with its principal address at One Commerce Street, Montgomery, Alabama 36104 ("Borrower"), promise(s) to pay to the order of BARCLAYS BANK PLC, a United Kingdom public limited company, with offices at 801 Brickell Avenue, Miami, Florida 33131 ("Bank"), or at such other place as may be designated from time to time by Bank, the principal amount of Twenty-Five Million United States Dollars (U.S. $25,000,000.00), together with interest as provided in this promissory note ("Note"), at the Interest Rate described in Section II below until full and final payment of all sums, whether of principal and/or interest and full satisfaction of all Obligations (as hereinafter defined) due and owing to the Bank. I. DISBURSEMENT AND MATURITY: The loan hereunder (the "Loan") shall be disbursed on or before close of business on December 30, 1998 in a single advance by payment of such amount by Bank by wire transfer on behalf of Borrower to: SunTrust Bank, Central Florida, N.A.; ABA #063102152; Beneficiary: Commercial Loan Operations; Beneficiary Account Number: 9215004320; Re: For Further Credit to The Colonial BancGroup, Inc. Commercial Loan #1774434801/83; Attention: Sharon Kalish, Financial Institutions Group. The Loan shall mature on June 30, 1999. II. INTEREST: The unpaid principal balance hereunder shall bear interest at a rate per annum equal to LIBOR plus 100 basis points (the "Interest Rate"). "LIBOR" shall mean the rate (rounded, if necessary, up to the nearest 1/16 of 1%) at which deposits in United States Dollars in an amount comparable to the Loan and for a period equal to the interest period are available to the Bank in the London Interbank Eurodollar Market two (2) London business days prior to the first day of such interest period. Principal shall be repaid in full upon maturity together with all accrued interest and any and all other sums due under any Loan Document (as defined below). Interest shall be paid on that day which falls thirty (30) days from the date of this Note and on each and every successive date which falls thirty (30) consecutive days thereafter (each, an "Interest Payment Date") until repaid upon maturity or accelerated pursuant to the provisions hereof and of the other Loan Documents, until all amounts required to be paid have been paid in full. Simultaneously herewith Borrower is executing a Security Agreement (together with this Note, individually, a "Loan Document", and collectively, the "Loan Documents"). Capitalized terms used and not otherwise defined in this Note shall have the meanings respectively assigned to them in the Security Agreement. Each use of a neuter, masculine, feminine or plural pronoun shall be deemed to refer to the form of pronoun appropriate to the circumstance. This Note evidences any and all principal amounts outstanding from time to time (including future advances) in respect of the Loan and all other amounts advanced from time to time or on behalf of Borrower by Bank pursuant to this Note or any other Loan Document, together with all accrued and unpaid interest thereon (including, without limitation, any and all interest and other amounts accrued during the pendency of any bankruptcy, insolvency, receivership or other similar proceedings, irrespective of whether such interest and other amounts are allowed or allowable as claims in such proceedings), and all of the other amounts to be paid by Borrower under this Note and performance of all Obligations herein set forth or contained in any of the other Loan Documents and any renewals, extensions or modifications of the same (collectively the "Obligations"). All advances and payments made pursuant to this Note and the other Loan Documents may be recorded by Bank on its books and records, and such books and records, or any statement or certificate of Bank based upon such books and records, shall be conclusive as to the existence and amounts thereof absent manifest error. III. PREPAYMENTS: Unless otherwise provided for herein, the Borrower may prepay the Loan in part or in whole without penalty on any Interest Payment Date. IV. LOAN INSTRUMENTS AND COLLATERAL: As security for the timely payment of the Obligations, Borrower simultaneously with the execution of this Note and by means of the Security Agreement, is granting to Bank a first-ranking and perfected security interest in all of the issued and outstanding stock of Colonial Bank, a bank organized under the laws of the State of Alabama and the wholly-owned bank subsidiary of the Borrower ("Colonial Bank"). 17 V. GENERAL TERMS: 1. The occurrence of one or more of the following events, circumstances or conditions shall constitute a default hereunder (each an "Event of Default"): (a) the failure of Borrower to pay to Bank, promptly when the same shall become due (whether at scheduled maturity, upon acceleration or otherwise) any portion of the Obligations including, but not limited to, any installment of principal or of interest due under this Note or any fees due and owing to Bank under or in connection with the terms of this Note or any other Loan Documents; or (b) the following events which have not been cured by Borrower within fifteen (15) calendar days after Borrower has learned of the event or which have not been cured by Borrower within fifteen (15) calendar days after Bank gives notice to Borrower of the occurrence of the event, whichever occurs first: (i) the occurrence of any other default under any Loan Document between Bank and Borrower; (ii) the occurrence of any default under any other agreement, loan or credit facility which may be entered into between Bank and Borrower; (iii) the failure of Borrower to perform any agreement, term, covenant or provision hereunder; (iv) the filing of any petition under the United States Bankruptcy Code or any similar federal or state statute by Borrower, or the filing of an involuntary petition by any individual or entity against Borrower pursuant to the United States Bankruptcy Code or any similar federal or state statute, which petition is not dismissed within sixty (60) days of the date of filing thereof; (v) the appointment of a receiver for Borrower or Colonial Bank; (vi) the making of a general assignment for the benefit of creditors by, or the insolvency of, Borrower or Colonial Bank; (vii) the entry of a judgment against the Borrower or Colonial Bank by any court, tribunal or administrative agency, in an amount of not less than U.S. $50,000,000, which is not vacated or bonded within thirty (30) days following the entry or issuance thereof; (viii) the issuance of any writ of attachment or writ of garnishment against any substantial portion of the property of Borrower or Colonial Bank which is not vacated within thirty (30) days following issuance; (ix) the dissolution, merger, consolidation or reorganization of Borrower or Colonial Bank without the prior written consent of Bank; (x) the reasonable determination by Bank that a material adverse change has occurred in the financial condition, affairs or prospects of Borrower or Colonial Bank which is not cured or corrected to the reasonable satisfaction of Bank within thirty (30) days following notice by Bank; and (xi) any representation or warranty made by Borrower in connection the Loan proves to have been false or materially misleading when made. 2. Upon or at any time after the occurrence of any Event of Default, the indebtedness evidenced by this Note and all other Obligations of Borrower to Bank, however created and existing, under this Note and any other Loan Document shall at the option of Bank, accelerate and immediately become due and payable, without demand upon or notice to Borrower, and Bank shall be entitled to exercise any of the other remedies set forth herein and in the other Loan Documents or as otherwise provided by law. Any delay or failure by Bank to exercise any remedy hereunder or any forbearance by Bank in the exercise or partial exercise of any remedy hereunder shall not be deemed to constitute a waiver of any such remedy nor to preclude Bank from any further exercise of any such remedy or any other remedy provided hereunder or by law. 3. Upon the occurrence and during the continuance of any Event of Default, Bank is authorized and may, at its sole discretion, exercise or otherwise enforce, at any time and from time to time, any one or more of Bank's rights, privileges and/or remedies, at law or in equity, or as provided under this Note or any Loan Document, without exhausting, pursuing or enforcing any other right and without regard to any act or omission of Bank, without notice (except as set forth in Section V.1.(b) above) to or demand upon Borrower to the fullest extent permitted by applicable law (the giving of notice or demand being expressly waived by Borrower); and Bank may, in addition to all other rights and remedies set off and apply any indebtedness owing by Bank or any agency, branch or affiliate of Bank to Borrower against the indebtedness evidenced by this Note, although then contingent or unmatured, and may apply directly or through any agency, branch, office or affiliate any and all deposits, whether general or special, time or demand, provisional or final, individual or joint, and other assets and properties at any time held by, under the control or custody or otherwise in possession of Bank or any agency, branch, office, or affiliate of Bank for the credit, account or benefit of Borrower against any and all of the Obligations hereunder or under any other Loan Document, whether or not demand for payment has been made. Borrower hereby grants Bank a continuing security interest in and to all such deposits, assets, properties and indebtedness in the possession of Bank, its branches, agencies, offices and affiliates and authorizes each such person in the case of an Event of Default to so set off and apply such amounts at such time and in such manner as Bank may direct as if each such person were a direct creditor of Borrower in the full amount of all Obligations hereunder. Bank agrees to notify Borrower after any such setoff and application; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application; and Bank shall be deemed to have exercised such right of setoff and to have made a charge against any such money immediately upon the occurrence of such Event of Default even though such setoff, application and charge is made or entered on the books of Bank subsequent thereto. Bank, in its sole discretion, may proceed against Borrower without first executing against any Collateral held as security for Borrower's Obligations hereunder and Borrower hereby expressly waives any defense it may have against Bank for failure to execute against the Collateral. 4. From and after an Event of Default, Bank may transfer this Note and any other Loan Document and deliver to the transferee(s) all or any of the property, if any, then held by Bank as security or collateral for the indebtedness evidenced by this Note and the transferee(s) shall thereupon become vested with all the rights and 2 18 powers given to Bank under the Loan Documents with respect thereto; and, Bank shall thereafter be forever relieved and fully discharged from any liability or responsibility to Borrower, but shall retain all rights and powers hereby conferred with respect to any rights or property not so transferred. 5. Except as otherwise set forth herein, the Borrower hereby waives presentment for payment, demand, notice of demand, notice of non-payment or dishonor, protest and notice of protest, notice of renewal, modification or extension of time and all other notices except as otherwise specified in this Note and agrees that none of the terms or provisions hereof may be waived, altered, modified or amended without the written consent of Bank. Any waiver of any provision hereof shall be effective only in the specific instance and for the specific purpose for which such waiver is granted. 6. Borrower agrees to on demand pay all reasonable out-of-pocket costs and expenses, including reasonable attorneys' fees and related costs, incurred by the Bank in the collection of the indebtedness evidenced by this Note or any other Loan Document and any modification hereof or thereof, or in enforcing or protecting any of the rights, powers, remedies and privileges of the Bank hereunder or under any of the Loan Documents. 7. Both principal and interest evidenced by this Note shall be payable in lawful currency of the United States of America to Bank at its offices at 801 Brickell Avenue, Miami, Florida 33131 or such other offices as Bank may specify to Borrower in writing, or at such other place designated by Bank, from time to time, in writing, in immediately available (same day) funds without deduction for or on account of any present or future taxes, duties or other charges levied or imposed on this Note, the proceeds hereof, or on Borrower or holder hereof by any government, or any instrumentality, authority or political subdivision thereof and without any other setoff or deduction whatsoever. Borrower agrees, upon the request of Bank, to immediately pay all such taxes (other than taxes on income of the holder hereof), duties and other charges, in full, in addition to the principal and interest evidenced by this Note. 8. Borrower shall indemnify and hold Bank harmless against, and reimburse Bank for, any loss or expenses reasonably incurred by Bank (including without limitation any loss or expenses incurred to liquidate or re-employ deposits or other funds acquired by Bank to fund or maintain a loan hereunder) as a result of any payment or prepayment (whether or not authorized or required hereunder) of the Loan on any day other than the last day of the relevant interest period. If it shall become unlawful for Bank to fund or continue to maintain the Loan evidenced hereby or to perform Bank's obligations hereunder, upon Bank's demand, Borrower shall prepay in full all principal outstanding hereunder together with accrued interest thereon and all other amounts payable hereunder and upon such demand Bank shall have no further obligation to make the Loan. If by reason of the introduction of any law, regulation or other legal requirement or any change in any law, regulation or other legal requirement or the interpretation or administration of any law, regulation or other legal requirement or in compliance with any request or requirement from any central bank or any fiscal, monetary or other authority whatsoever (whether or not having the force of law) (a) Bank shall become subject to any tax (other than any tax based on Bank's net income) with respect to the indebtedness contemplated herein and or payment of all or any part of the indebtedness contemplated herein; or (b) the basis of taxation of payments to Bank in respect of all or any part of the indebtedness contemplated herein shall be changed or any additional taxes or an increase in existing taxes shall be imposed (other than any increase in any tax based on Bank's net income); or (c) any reserve requirements (not reflected in the calculation of the Eurodollar Rate) shall be imposed, modified or deemed applicable against assets held by or deposits in or for the account of loans by the lending office of the Bank; or (d) the manner in which the Bank allocates capital resources to its obligations hereunder or any ratio (whether cash, capital adequacy, liquidity or otherwise) which the Bank is required or requested to maintain shall be affected; and the result of any of the foregoing shall be to increase the cost to the Bank of maintaining the Loan or to cause the Bank to suffer a reduction in the rate of return on the Loan by an amount that the Bank deems to be material, then (i) the Bank will, as soon as reasonably practicable, notify the Borrower of the amount which Bank shall reasonably deem necessary to compensate Bank in respect of the Loan as a result of such event, and (ii) the Borrower shall within thirty (30) days after such notice pay such amount to the Bank, but shall also have the right to prepay the whole (but not part only) of the Loan subject to the provisions of this paragraph. 9. Nothing contained in this Note or any other agreement between the parties hereto shall be deemed to establish or require the payment of a rate of interest in excess of the rate that may be legally charged on loans or extensions of credit made by the Bank under the laws of the State of Florida or of the United States, whichever is applicable and higher as such rate now exists or may hereafter be increased or the ceiling, if any, on the legal rate of interest eliminated, by legislation or otherwise ("Maximum Rate"). In the event that the rate of interest so contracted should exceed the Maximum Rate, whether as a result of its fluctuation, acceleration of the maturity hereof or otherwise, the rate of interest to be paid hereunder shall be automatically reduced to the Maximum Rate and so much of any interest reserved, charged or taken as would cause the same to exceed the Maximum Rate shall be deemed not to be a credit against interest but rather a prepayment on account of and be automatically credited against outstanding principal evidenced hereby regardless of how the same may appear on Bank's or Borrower's books or records; provided, however, no such application shall operate to cure or as a waiver of any Event of Default occasioning acceleration. 10. All amounts outstanding hereunder shall bear interest during the continuance of any Event of Default hereunder or under any Loan Document until paid in full, to the extent permitted by law, at an annual 3 19 effective rate of simple interest (computed on the basis of actual days elapsed in a 360-day year) equal to four percent (4 %) in excess of the otherwise applicable Interest Rate. 11. All payments by Borrower shall be applied, first, to the payment of any indemnities or reimbursements owed to the Bank under the Loan Documents; second, to the payment of past-due interest; third, to accrued and unpaid interest; and finally, to the payment (or prepayment, if permitted) of the Loan. 12. TIME IS OF THE ESSENCE IN THE PAYMENT AND PERFORMANCE OF THIS PROMISSORY NOTE. WHENEVER, HOWEVER, A PAYMENT HEREUNDER BECOMES DUE ON A DATE ON WHICH BANKS ARE NOT OPEN FOR THE CONDUCT OF A GENERAL COMMERCIAL BANKING BUSINESS IN MONTGOMERY, ALABAMA AND MIAMI, FLORIDA (A "BUSINESS DAY"), THE DUE DATE FOR SUCH PAYMENT SHALL BE EXTENDED TO THE NEXT SUCCEEDING BUSINESS DAY, AND INTEREST APPLICABLE TO SUCH AMOUNT SHALL ACCRUE DURING ANY SUCH EXTENSION AND SHALL BE DUE AND PAYABLE ON SUCH NEXT SUCCEEDING BUSINESS DAY. 13. Any notice herein required or permitted to be given or service of process in any suit, action or other proceeding to enforce this Note or any of the other Loan Documents shall be made to Borrower by delivery to Borrower at the address set forth on page one hereof or as then specified on Bank's records, and shall be deemed to have been given when so delivered to the attention of W. Flake Oakley, IV, Chief Financial Officer of the Borrower. It shall be Borrower's sole responsibility to notify Bank of any change in Borrower's address and Bank is authorized to rely solely on its records, without any independent investigation, for purposes of giving notice as specified in this paragraph 13. 14. Borrower agrees that this Note has been made under and shall be governed by the laws of the State of Florida, without giving effect to the choice of law provisions thereof, in all respects (except as to interest rates which are or may be preempted by the federal laws of the United States), including matters of construction, validity and performance, and further consents that jurisdiction and venue in respect of any dispute arising out of or otherwise in connection with this Note shall be in Dade County, Florida and waives any and all objections thereto. 15. If any provision of this Note shall be deemed unenforceable under applicable law, such provision shall be ineffective but only to the extent of such unenforceability, without invalidating the remainder of such provision or the remaining provisions of this Note. 16. Borrower shall pay or reimburse on demand any and all reasonable costs and expenses incurred by Bank in connection with the preparation, execution and delivery of this Note and any other Loan Document, including, without limitation, the reasonable fees and disbursements of the Bank's legal counsel. 17. The Bank may sell participations in the Loan to other financial institutions and, in connection therewith, deliver to such institution any information which the Bank may have in its possession concerning the Borrower or Colonial Bank. 18. TO THE FULL EXTENT ALLOWED BY APPLICABLE LAW, IN ANY DISPUTE WITH BANK BORROWER AGREES THAT IT WILL NOT SEEK, RECOVER OR RETAIN ANY AND HEREBY WAIVES ANY RIGHT IT MAY HAVE TO RECEIVE SPECIAL, EXEMPLARY, PUNITIVE AND/OR CONSEQUENTIAL DAMAGES. 19. BANK AND BORROWER AND OTHER OBLIGOR(S) HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR OTHERWISE IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BANK EXTENDING CREDIT TO BORROWER. IN WITNESS WHEREOF, the undersigned has/have executed this Note on the 30th day of December, 1998. Witnesses THE COLONIAL BANCGROUP, INC. /s/ William A. McCrary By: /s/ W. Flake Oakley, IV - ----------------------------------- ----------------------------------- Name: William A. McCrary, Esq. Name: W. Flake Oakley, IV Title: Chief Financial Officer /s/ Hugh C. Nickson, III - ----------------------------------- Name: Hugh Nickson, Esq. 4 EX-11 3 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 THE COLONIAL BANCGROUP, INC. COMPUTATION OF EARNINGS PER SHARE
1998 1997 1996 ---- ---- ---- (In thousands, except per share amounts) A. Net income............................................. $ 55,196 $ 90,362 $ 61,849 B. Interest expense on convertible debentures............. 270 470 689 C. Tax effect of (B) above................................ 102 175 244 D. Average basic shares outstanding....................... 110,062 105,010 97,246 E. Dilutive potential common shares(1).................... 2,369 3,386 3,882 EARNINGS PER COMMON SHARE: Net income: Basic (A/D)............................................ $ 0.50 $ 0.86 $ 0.64 Diluted (A-B--(")/(D+E)................................ $ 0.49 $ 0.84 $ 0.62
- --------------- (1) Includes the effect of the average contingent shares from BancGroup's issue of convertible subordinated debentures; computed by dividing the outstanding balance of the convertible debentures by the conversion price. Also includes the effect of stock options. 18 EX-12 4 STATEMENT RE COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12 THE COLONIAL BANCGROUP, INC. RATIO OF EARNINGS TO FIXED CHARGES
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- In thousands A. Income before income taxes, extraordinary items and the cumulative effect of a change in accounting for income taxes................. $ 86,602 $141,776 $ 94,931 $ 84,291 $ 59,235 Fixed charges: Interest expense............................. 350,441 284,771 232,126 192,521 119,983 1/3 Rent expense............................. 6,212 4,216 3,589 3,348 2,865 -------- -------- -------- -------- -------- B. Total fixed charges........................... 356,653 288,987 235,715 145,869 122,848 -------- -------- -------- -------- -------- C. Sum of A and B................................ $443,255 $430,763 $330,646 230,160 182,083 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges (C/B)...... 1.24 1.49 1.40 1.58 1.48
19 EX-13 5 PORTIONS OF THE 1998 ANNUAL REPORT 1 EXHIBIT 13 Portions of the 1998 Annual Report to Security Holders (Such annual report, except for those portions expressly incorporated by reference in this report, is furnished solely for the information of the Commission and is not deemed to be filed as part of this report.) 20 2 SELECTED FINANCIAL DATA
EXHIBIT 13 For the years ended December 31, 1998, 1997, 1996, 1995 and 1994 (In thousands, except per share amounts) 1998 1997* 1996* 1995* 1994* - --------------------------------------------------------------------------------------------------------------------------- STATEMENT OF INCOME Interest income $693,542 $583,637 $481,478 $403,701 $300,039 Interest expense 350,441 284,771 232,126 192,521 119,983 - --------------------------------------------------------------------------------------------------------------------------- Net interest income 343,101 298,866 249,352 211,180 180,056 Provision for possible loan losses 26,345 16,321 14,442 10,989 9,673 - --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 316,756 282,545 234,910 200,191 170,383 Noninterest income 125,258 100,945 77,511 65,341 58,405 Noninterest expense 329,260 234,819 200,818 179,503 168,205 SAIF special assessment(1) -- -- 4,754 -- -- Acquisition, restructuring and Y2K expense(2) 26,152 6,895 11,918 1,738 1,348 - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 86,602 141,776 94,931 84,291 59,235 Applicable income taxes 31,406 51,414 33,082 29,671 19,499 Net income $ 55,196 $ 90,362 $ 61,849 $ 54,620 $ 39,736 - --------------------------------------------------------------------------------------------------------------------------- Income excluding SAIF special assessment, acquisition, restructuring and Y2K expense(1)(2) $ 72,715 $ 95,801 $ 74,474 $ 56,010 $ 40,814 - --------------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Income excluding SAIF special assessment, acquisition and restructuring costs and Y2K expenses:(1)(2) Basic** $ 0.66 $ 0.91 $0.76 $ 0.62 $ 0.48 Diluted** $ 0.65 $ 0.89 $0.74 $ 0.58 $ 0.45 Net income: Basic** $ 0.50 $ 0.86 $0.64 $ 0.60 $ 0.46 Diluted** $ 0.49 $ 0.84 $0.62 $ 0.57 $ 0.44 Average shares outstanding: Basic** 110,062 105,010 97,246 90,785 85,826 Diluted** 112,431 108,396 101,128 98,505 93,089 Cash dividends per common share: Common** $ 0.34 $ 0.30 $ 0.27 $ 0.1688 -- Class A** -- -- -- $ 0.0563 $ 0.20 Class B** -- -- -- $ 0.0313 $ 0.10 ===========================================================================================================================
(1)Legislation approving a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $4,754,000 in expense before income taxes and $3,091,000 net of applicable income taxes in 1996. (2)Acquisition expenses reflect costs associated with the business combinations discussed in Note 2 to the Consolidated Financial Statements. Restructuring charges are discussed in Note 18 to the Consolidated Financial Statements. * Restated to give retroactive effect to the 1998 mergers with United American, First Central, South Florida Banking Corp., Commercial Bank of Nevada, FirstBank, Prime Bank of Central Florida, First Macon Bank & Trust and InterWest Bancorp. ** Prior periods have been restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid August 14, 1998. 24 3
For the years ended December 31, 1998, 1997, 1996, 1995 and 1994 (In thousands, except per share amounts) 1998 1997* 1996* 1995* 1994* ============================================================================================================================ STATEMENT OF CONDITION DATA At year-end: Total assets $10,456,285 $8,061,566 $6,630,642 $5,724,025 $4,500,231 Loans, net of unearned income 7,110,295 5,951,067 4,835,274 4,130,126 3,112,937 Mortgage loans held for sale 692,042 238,540 167,993 131,114 68,878 Deposits 7,446,153 6,325,690 5,135,215 4,520,739 3,626,692 Long-term debt 746,447 315,281 39,092 49,756 90,309 Shareholders' equity 639,807 590,017 483,717 421,433 325,381 Average balances: Total assets 9,195,895 7,432,493 6,132,367 5,068,998 4,294,350 Interest-earning assets 8,300,873 6,804,087 5,610,184 4,636,115 3,887,838 Loans, net of unearned income 6,451,427 5,497,737 4,488,023 3,553,499 2,806,605 Mortgage loans held for sale 407,672 158,966 135,135 109,995 143,518 Deposits 6,750,880 5,902,179 4,797,516 4,054,063 3,502,314 Shareholders' equity 642,287 547,886 458,807 368,680 319,418 Book value per share** $5.77 $5.55 $4.71 $4.47 $3.75 Tangible book value per share** $5.00 $4.90 $4.41 $4.15 $3.52 ============================================================================================================================ SELECTED RATIOS Income excluding SAIF special assessment, acquisition and restructuring costs and Y2K expense to:(1)(2) Average assets 0.79% 1.29% 1.21% 1.10% 0.95% Average shareholders' equity 11.32 17.49 16.23 15.19 12.78 Net income to: Average assets 0.60 1.22 1.01 1.08 0.93 Average shareholders' equity 8.59 16.49 13.48 14.82 12.44 Efficiency ratio excluding SAIF, acquisition and restructuring costs and Y2K expenses(1)(2) 69.72 58.28 62.13 64.91 70.54 Efficiency ratio 75.38 59.99 67.19 65.54 71.10 Dividend payout ratio 68.00 34.88 42.86 37.50 43.48 Average equity to average total assets 6.98 7.37 7.48 7.27 7.44 Total nonperforming assets to net loans, other real estate and repossessions(3) 0.60 0.74 0.80 0.90 1.34 Net charge-offs to average loans 0.26 0.23 0.16 0.17 0.11 Allowance for possible loan losses to total loans (net of unearned income) 1.18 1.21 1.28 1.30 1.53 Allowance for possible loan losses to nonperforming loans(3) 245% 247% 234% 243% 212% ============================================================================================================================
(1)Legislation approving a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") resulted in $4,754,000 in expense before income taxes and $3,091,000 net of applicable income taxes in 1996. (2)Acquisition expenses reflect costs associated with the business combinations discussed in Note 2 to the Consolidated Financial Statements. Restructuring charges are discussed in Note 18 to the Consolidated Financial Statements. (3)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 42. * Restated to give retroactive effect to the 1998 mergers with United American, First Central, South Florida Banking Corp., Commercial Bank of Nevada, FirstBank, Prime Bank of Central Florida, First Macon Bank & Trust and InterWest Bancorp. ** Prior periods have been restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid August 14, 1998. 25 4 SELECTED QUARTERLY FINANCIAL DATA 1998-1997
(In thousands, except per share amounts) 1998* 1997* - ---------------------------------------------------------------------------------------------------------------------------- Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 - ---------------------------------------------------------------------------------------------------------------------------- Interest income $182,717 $180,459 $170,209 $160,157 $154,482 $149,796 $143,031 $136,328 Interest expense 94,434 92,176 85,203 78,628 75,154 73,163 69,708 66,746 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 88,283 88,283 85,006 81,529 79,328 76,633 73,323 69,582 Provision for loan losses 14,343 4,087 3,964 3,951 5,442 3,160 4,214 3,505 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 73,940 84,196 81,042 77,578 73,886 73,473 69,109 66,077 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (3,896) $ 11,445 $ 26,849 $ 20,798 $ 23,427 $ 24,345 $ 21,833 $ 20,757 - ---------------------------------------------------------------------------------------------------------------------------- Income excluding acquisition and restructuring costs and Y2K expense(1) $ 3,534 $ 14,413 $ 28,358 $ 26,410 $ 26,095 $ 25,001 $ 23,342 $ 21,363 - ---------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Net income (loss): Basic** $ (0.04) $ 0.10 $ 0.24 $ 0.20 $ 0.22 $ 0.23 $ 0.22 $ 0.19 Diluted** $ (0.04) $ 0.10 $ 0.24 $ 0.19 $ 0.21 $ 0.22 $ 0.22 $ 0.19 ============================================================================================================================
(1)Acquisition expenses reflect costs associated with the business combinations discussed in Note 2 to the Consolidated Financial Statements. Restructuring charges are discussed in Note 18 to the Consolidated Financial Statements. * All quarterly amounts have been restated to give effect to the pooling-of-interests business combinations consummated in 1998 and 1997. Any differences between the above amounts and those previously reported in BancGroup's Form 10-Q filings is a result of restatement for pooling-of interests business combinations consummated subsequent to those filings. ** Prior periods have been restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid August 14, 1998. 26 5 MANAGEMENT'S DISCUSSION AND ANALYSIS 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 detailed analysis of the financial results of The Colonial BancGroup, Inc. and subsidiaries ("BancGroup" or the "Company"). Among other things, this discussion provides commentary on BancGroup's history, operating philosophies, the components of net interest margin and balance sheet strength as measured by the quality of assets, the composition of the loan portfolio and capital adequacy. The following discussion reflects the effect of the poolings-of-interests business combinations which occurred during 1998 as listed below:
Institution Date Consummated - ----------- ---------------- United American Holding Corporation February 2, 1998 First Central Bank February 11, 1998 South Florida Banking Corp. February 12, 1998 Commercial Bank of Nevada June 15, 1998 FirstBank August 31, 1998 First Macon Bank & Trust October 1, 1998 Prime Bank of Central Florida October 6, 1998 InterWest Bancorp October 15, 1998
- -------------------------------------------------------------------------------- STRATEGY BancGroup was established in 1981 with one bank and $166 million in assets. Through 57 business combinations and strong internal growth, BancGroup has grown to a $10.5 billion multi-state bank holding company with 15 operating regions in six states. The foundation of BancGroup is built upon a community banking philosophy which allows local autonomy in lending decisions and customer relationships. This operating philosophy has been important in making acquisitions, retaining skilled and highly motivated local management teams and developing a strong customer base, particularly with respect to lending relationships. 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. GROWTH Over the past three years, BancGroup completed twenty-five acquisitions establishing operations in Florida, Georgia, Nevada and Texas. Following a strategy of expanding into high growth markets, BancGroup entered Florida with the acquisition of a $232 million bank in Orlando in July 1996. During 1997 and 1998, BancGroup acquired 13 banks in Florida and established additional operating regions in Miami, Tampa and Ft. Myers/Bonita Springs. At the end of 1998, BancGroup had assets of over $2.6 billion in Florida. Given BancGroup's focus on high growth markets, the Company looked west to Texas and Nevada, which are two of the fastest growing states in the country. In 1998, BancGroup took the opportunity to acquire two banks in Dallas, Texas, a bank in Las Vegas, Nevada and another in Reno, Nevada. The following table illustrates BancGroup's growth in assets by state over the past three years (as originally reported, prior to restatements for poolings-of-interest).
December 31, (In millions) 1998 1997 1996 -------------------------------------- Alabama $ 3,813 $3,393 $3,068 CMC* 937 390 280 Corporate** 1,736 881 135 Georgia 703 484 398 Florida 2,602 1,600 291 Tennessee 101 103 98 Texas 287 Nevada 277 -------------------------------------- $10,456 $6,851 $4,270 --------------------------------------
* Assets are geographically disbursed in 45 states. **Assets consist primarily of investment portfolio less corporate eliminations. REGIONAL BANK COMPETITIVENESS Loan and deposit growth are emphasized in each market area through the Company's regional banks. BancGroup has been very successful in competing for loans against larger financial institutions, due primarily to the Company's local lending strategy which includes direct involvement by local management and directors. The success of the local market lending strategy is evidenced by 15% internal loan growth in 1998 and a net charge-off ratio of .26%. The regional banks have additional growth opportunities through the development of customer relationships by cross-selling a variety of bank products and services. Strong regional bank management supported by BancGroup's asset/liability and products and services management teams provide the Company with resources to remain competitive in its deposit markets. Through this group's efforts, the Company has established a strategy to grow and retain its deposit base while remaining competitive in deposit pricing and meeting the Company's funding and liquidity goals. OPERATIONAL CONSOLIDATION AND EFFICIENCIES During the fourth quarter of 1998, management shifted the Company's focus from bank acquisition activity to 27 6 streamlining operations and emphasizing profitable business units. An operational and organizational infrastructure established in prior years has allowed the Company to grow significantly and improve efficiency through streamlining its operations. The operating structure is built around centralized back-shop operations in areas that do not have direct customer contact. By shifting its focus, the Company has made its resources available to proceed with its plans to incorporate into this structure six acquired banks in Florida and five in other markets. In order to alleviate further conversion delays and the resulting delays in cost savings, the Company is establishing an item processing facility in Florida. This action became necessary when the prior item processor, Barnett Bank, delayed the Company's conversion schedule and became unable to meet the Company's other needs after Barnett's acquisition by NationsBank. EMPHASIZING PROFITABLE BUSINESS UNITS The Company has developed a strategic restructuring plan that encompasses its retail market base. Strategies were developed to close certain unprofitable branches, sell certain super-market branches and to relocate and upgrade other branches. As a part of this plan, the headquarters for the South Florida region was moved to downtown Miami and the trust department was consolidated into the South Florida headquarters to better serve its customer base. EXPANSION OF SERVICES Customer needs are constantly changing, and BancGroup continues to investigate methods of improving customer service through new services, product enhancements and technological advances. The Company created or augmented various services in 1998 that will expand its sources of noninterest income and provide better customer service. The international banking department became fully operational in July 1998. The department engages in confirming letters of credit, primarily with top-tier banks in Latin America, and direct disbursements to those banks from U.S. customers. Also during 1998, BancGroup established a private banking function and expanded the investment sales force within the regional bank structure to emphasize relationship banking and to generate income from sales of securities and annuities. Colonial Asset Management, Inc., an asset management group, was established under the former head of Barnett Bank's asset management group. This group has over $170 million in assets under management and is projected to have over $300 million in assets under management by the end of 1999. RISK MANAGEMENT OF MORTGAGE SERVICING RIGHTS During October of 1998, the Company, with the assistance of a third party advisor that specializes in analyzing mortgage servicing rights and hedging activities, developed a strategy to hedge a portion of its servicing portfolio and related mortgage servicing rights asset against risk associated with future fluctuations in interest rates and the resulting impact on prepayment estimates. This program has been aggressively implemented, and includes a daily system of monitoring the hedge position and servicing assets. The Company has established a committee to set policies and guidelines to monitor activities and to evaluate performance of the hedge program. The committee will also determine the appropriate levels of servicing rights and related risk that should be maintained by the Company. There is no guarantee that significant declines in interest rates will not have a material impact on the Company's MSRs or that this hedge program will be successful in protecting against such a decline. (Refer to more detailed discussions of the hedging activities included in Management's Discussion under Mortgage Servicing Rights and Servicing Hedge and Notes 6 and 7 to the Consolidated Financial Statements.) FUNDING CAPACITY BancGroup has developed plans to meet the Company's funding requirements. These plans include implementation of a system-wide retail deposit strategy, the establishment of short and long term credit facilities with the Federal Home Loan Bank, increased Fed Fund lines, brokered money market programs, brokered certificate of deposit programs and reverse repurchase arrangements. BancGroup has an asset generating capability that can effectively utilize these funds. This capability is most evident in 1998 by BancGroup's acquisition activities and its 15% internal loan growth. 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. Nonperforming assets as a percentage of loans and other real estate was reduced to .60% at December 31, 1998, its lowest level in five years, primarily through the sales of other real estate and a lower percentage of nonperforming loans to total loans. Net charge-offs over the past five years have consistently compared favorably with national averages and were only .26% of average loans in 1998 and .23% in 1997. 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 in 1998. 28 7 - -------------------------------------------------------------------------------- BUSINESS COMBINATIONS A principal part of BancGroup's growth strategy has been to merge other financial institutions into BancGroup in order to increase the Company's market share in existing markets, expand into other growth markets, more efficiently absorb the Company's overhead and add profitable new lines of business. BancGroup recently completed the following business combinations with other financial institutions. These business combinations have been reflected in the financial statements at December 31, 1998. The balances reflected below are as of the date of consummation. (DOLLARS IN THOUSANDS)
ACCOUNTING DATE BANCGROUP TOTAL TOTAL TOTAL FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED SHARES ASSETS LOANS DEPOSITS - ----------------------------------------------------------------------------------------------------------------------------- 1996* Commercial Bancorp of Georgia, Inc. (GA) Pooling 07/03/96 4,612,920 $232,555 $145,429 $207,641 Southern Banking Corporation (FL) Pooling 07/03/96 5,716,988 232,461 160,864 205,602 Dothan Federal Savings Bank (AL) Purchase 07/08/96 309,380 48,366 36,497 39,931 - ----------------------------------------------------------------------------------------------------------------------------- 1997 Jefferson Bancorp, Inc. (FL) Pooling 01/03/97 7,709,904 472,732 322,857 405,836 Tomoka Bancorp, Inc. (FL) Pooling 01/03/97 1,323,984 76,700 51,600 68,200 First Family Financial Corp. (FL) Purchase 01/09/97 661,128 167,300 117,500 156,700 D/W Bankshares, Inc. (GA) Pooling 01/31/97 2,033,096 138,686 71,317 124,429 Shamrock Holdings, Inc. (AL) Purchase 03/05/97 -- 54,500 19,300 46,400 Fort Brooke Bancorporation (FL) Pooling 04/22/97 3,199,946 208,800 141,500 185,800 Great Southern Bancorp (FL) Pooling 07/01/97 1,855,622 121,009 98,100 106,673 First Commerce Banks of Florida, Inc. (FL) Purchase 07/01/97 1,371,390 97,093 64,472 88,302 Dadeland BancShares, Inc. (FL) Purchase 09/15/97 -- 169,946 103,199 145,491 First Independence Bank of Florida (FL) Pooling 10/01/97 1,007,864 65,048 50,699 58,283 - ----------------------------------------------------------------------------------------------------------------------------- 1998* United American Holding Corp. (FL) Pooling 02/02/98 4,226,412 275,263 197,623 236,773 ASB Bancshares, Inc. (AL) Purchase 02/05/98 934,514 158,656 110,093 135,940 First Central Bank (FL) Pooling 02/11/98 1,377,368 62,897 40,451 52,048 South Florida Banking Corp. (FL) Pooling 02/12/98 3,864,458 255,769 172,992 226,999 Commercial Bank of Nevada (NV) Pooling 06/15/98 1,684,314 129,577 86,251 117,749 CNBHolding Corporation (FL) Pooling 08/12/98 1,767,562 89,893 58,456 81,445 FirstBank (TX) Pooling 08/31/98 2,782,038 187,445 59,664 163,254 First Macon Bank & Trust (GA) Pooling 10/01/98 4,643,025 199,525 135,651 174,774 Prime Bank of Central Florida (FL) Pooling 10/06/98 1,173,019 74,502 42,547 66,955 InterWest Bancorp (NV) Pooling 10/15/98 1,748,338 131,590 83,689 114,516 TB&T, Inc. (TX) Purchase 12/01/98 1,248,499 110,986 42,689 101,335 - -----------------------------------------------------------------------------------------------------------------------------
* 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. On June 18, 1998, BancGroup purchased certain assets totaling $8,168,000 and assumed certain liabilities, primarily deposits, totaling $8,871,000 of the Wade Green branch of Premier Bank in Atlanta, Georgia. The 1996 combinations with Southern and Commercial, the 1997 combinations with Jefferson, D/W Bankshares and Fort Brooke and the 1998 combinations with United American, First Central, South Florida, Commercial Bank of Nevada, FirstBank, First Macon, Prime Bank and InterWest were accounted for using the pooling-of-interests method. Accordingly, all financial statement amounts 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 1997 combinations with Tomoka, Great Southern and First Independence and the 1998 combination with CNB Holding were accounted for using the pooling-of-interests method; however, due to immateriality, the prior year financial statements were not restated. The remaining business combinations were accounted for as purchases, and the operations and income of the combined institutions are included in the income of BancGroup from the date of purchase. Each of the combined institutions that were accounted for as purchases was merged into BancGroup or one of its subsidiaries as of the listed dates, and the income and expenses have not been separately accounted for since the respective mergers. For this reason and due to the fact that significant changes have been made to the cost structure of each combined institution, a separate determination of the impact after combination on the earnings of BancGroup for 1997 and 1998 cannot reasonably be determined. The combinations have had an impact on the comparisons of operating results for 1997 and 1998 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. 29 8 - -------------------------------------------------------------------------------- REVIEW OF RESULTS OF OPERATIONS OVERVIEW BancGroup is involved in two primary lines of business: commercial banking and mortgage banking, through its wholly owned subsidiary Colonial Bank and Colonial Bank's subsidiary Colonial Mortgage Company ("CMC"). The following summary of BancGroup's results of operations discusses the related impact of each line of business to the earnings of the Company. LINE OF BUSINESS RESULTS (Dollars in thousands)
COMMERCIAL MORTGAGE CORPORATE/ CONSOLIDATED YEAR ENDED DECEMBER 31, 1998 BANKING BANKING OTHER* BANCGROUP - ---------------------------------------------------------------------------------------------------------------------------- Net interest income $336,970 $12,900 $ (6,769) $343,101 Provision for possible loan losses 26,345 -- -- 26,345 Noninterest income 60,055 66,306 (1,103) 125,258 Amortization and depreciation 25,227 64,025 (283) 88,969 Noninterest expense 230,548 33,444 2,451 266,443 - ---------------------------------------------------------------------------------------------------------------------------- Pretax income 114,905 (18,263) (10,040) 86,602 Income taxes 40,760 (6,384) (2,970) 31,406 - ---------------------------------------------------------------------------------------------------------------------------- Net income 74,145 (11,879) (7,070) 55,196 Acquisition and restructuring expenses, net of taxes 14,520 -- 124 14,644 Y2K expenses, net of taxes 1,986 889 -- 2,875 - ---------------------------------------------------------------------------------------------------------------------------- Income excluding acquisition, restructuring and Y2K expenses $ 90,651 $(10,990) $ (6,946) $ 72,715 - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income $297,691 $ 7,199 $ (6,024) $298,866 Provision for possible loan losses 16,321 -- -- 16,321 Noninterest income 50,200 51,319 (574) 100,945 Amortization and depreciation 18,768 17,972 9 36,749 Noninterest expense 178,497 22,710 3,758 204,965 - ---------------------------------------------------------------------------------------------------------------------------- Pretax income 134,305 17,836 (10,365) 141,776 Income taxes 47,605 6,698 (2,889) 51,414 - ---------------------------------------------------------------------------------------------------------------------------- Net income 86,700 11,138 (7,476) 90,362 Acquisition expenses, net of taxes 4,483 -- 687 5,170 Y2K expense, net of taxes 194 75 -- 269 - ---------------------------------------------------------------------------------------------------------------------------- Income excluding acquisition and Y2K expenses $ 91,377 $ 11,213 $ (6,789) $ 95,801 - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income $244,687 $ 6,307 $ (1,642) $249,352 Provision for possible loan losses 14,442 -- -- 14,442 Noninterest income 35,635 42,774 (898) 77,511 Amortization and depreciation 16,181 13,182 31 29,394 Noninterest expense 159,099 22,586 6,411 188,096 - ---------------------------------------------------------------------------------------------------------------------------- Pretax income 90,600 13,313 (8,982) 94,931 Income taxes 30,744 4,952 (2,614) 33,082 - ---------------------------------------------------------------------------------------------------------------------------- Net income 59,856 8,361 (6,368) 61,849 SAIF assessment, net of taxes 3,091 -- -- 3,091 Acquisition expenses, net of taxes 8,567 -- 967 9,534 - ---------------------------------------------------------------------------------------------------------------------------- Income excluding SAIF special assessment and acquisition expenses $ 71,514 $ 8,361 $ (5,401) $ 74,474 - ----------------------------------------------------------------------------------------------------------------------------
*Includes eliminations of certain intercompany transactions. 30 9 The most significant factors affecting income for 1998, 1997 and 1996 are highlighted below and discussed in greater detail in subsequent sections. - An increase of 22.0% in average earning assets in 1998. This follows an increase of 21.3% in 1997. - An increase of $24.3 million (24%) and $23.4 million (30%) in noninterest income in 1998 and 1997, respectively. - Maintenance of high asset quality and reserve coverage ratios. Net charge-offs were $16.7 million or .26% of average net loans in 1998 and $12.8 million or .23% of average net loans in 1997. - Loan growth, excluding acquisitions, of 15.1% in 1998 following an increase of 9.75% in 1997. - Noninterest expense for 1998 included $37.0 million in impairment of mortgage servicing rights, $21.5 million in acquisition and restructuring charges and $4.6 million in Y2K expenses. NET INTEREST INCOME Net interest income is the difference between interest and fees earned on loans, securities and other interest earning assets (interest income) and interest paid on deposits and borrowed funds (interest expense). Three year comparisons of net interest income in dollars and the yields on a tax equivalent basis are reflected on the following schedule. The net yield on interest-earning assets is 4.17% in 1998 compared to 4.44% in 1997 and 4.49% in 1996. Over this period net interest income on a fully tax equivalent basis increased to $346 million for 1998 from $302 million for 1997 and $252 million for 1996. The principal factors affecting the Company's yields and net interest income are discussed on the following pages. LEVELS OF INTEREST RATES The primary factor affecting net interest margin in 1998 was the dramatic change in interest rates that began in September and continued through the remainder of the year. The average fed funds rate for overnight borrowings was at 5.50% in March 1997 where it remained until September 1998 when it decreased to 5.25% and then continued to decline to 4.75% by the end of the year. The Company's prime rate increased to 8.50% in March 1997 where it remained until September 1998 when it decreased to 8.25% and continued to decrease to 7.75% in November where it remained through the end of the year. As a result of declining rates, the Company's yield on earning assets decreased to 8.39% from 8.62% in 1997 and 8.63% in 1996. Interest-bearing liabilities do not re-price as quickly as earning assets due to the competition for certain types of deposits. The yield on interest bearing liabilities remained constant at 4.94% for 1998 and 1997 both of which are slightly higher than the 4.89% for 1996. The Florida expansion resulted in improved margins from the originally reported 4.31% for 1997 and 4.24% for 1996 to 4.44% and 4.49%, respectively. The Florida institutions acquired in 1997 had an average cost of funds of 4.47% compared to the 5.08% originally reported in 1996. INTEREST-EARNING ASSETS - Growth in Earning Assets One of the most significant factors in the Company's increase in income has been the 22.0% and 21.3% increase in average interest-earning assets in 1998 and 1997, respectively. In addition and equally significant, average net loans (including mortgage loans held for sale) increased $1.2 billion (21.3%) from December 31, 1997 to December 31, 1998. Earning assets as a percentage of total average assets was 90.3% and 91.5% in 1998 and 1997, respectively. - 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. Low rates in 1998 resulted in an increase in new home sales and refinancings. As a result of this increased activity, average mortgage loans held for sale increased to $408 million in 1998 from $159 million in 1997 and $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 At December 31, 1998 the Company's mix of loans reflected an increase in commercial loans to 15.5% of the total portfolio from 12.6% at December 31, 1997. Residential real estate loans decreased to 34.3% of the total portfolio at December 31, 1998 from 40.0% at December 31, 1997. The increase in the commercial loan portfolio is a result of loan growth in the Georgia, Florida, Texas and Nevada Regions which are located in higher growth areas of the country. The residential real estate loans are predominantly adjustable rate mortgages which have a low level of credit risk and accordingly have lower yields than other loans. 31 10 AVERAGE VOLUME AND RATES
1998 1997 1996 -------------------------------- ------------------------------ ------------------------------ 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) $6,451,427 $575,851 8.93% $5,497,737 $500,801 9.11% $4,488,023 $412,500 9.19% Mortgage loans held for sale 407,672 29,585 7.26 158,966 12,437 7.82 135,135 10,577 7.83 Investment securities and securities available for sale: Taxable 1,152,624 73,829 6.41 895,083 57,107 6.38 766,440 46,852 6.11 Nontaxable (2) 93,721 6,981 7.45 88,490 6,689 7.56 80,807 5,925 7.33 Equity securities (3) 88,920 4,775 5.37 43,044 3,154 7.33 34,826 2,508 7.20 - ---------------------------------------------------- --------------------- -------------------- Total securities 1,335,265 85,585 6.41% 1,026,617 66,950 6.52% 882,073 55,285 6.27% Federal funds sold and securities purchased under resale agreements and other short-term investments 106,509 5,641 5.30 120,767 6,575 5.44 104,953 5,530 5.27 - ---------------------------------------------------- --------------------- -------------------- Total interest-earning assets 8,300,873 696,662 8.39% 6,804,087 586,763 8.62% 5,610,184 483,892 8.63% - ---------------------------------------------------- --------------------- -------------------- Allowance for loan losses (76,683) (69,314) (57,264) Cash and due from banks 331,680 238,776 200,693 Premises and equipment, net 175,492 144,281 104,950 Other assets 464,533 314,663 273,804 - ----------------------------------------- ---------- ---------- TOTAL ASSETS $9,195,895 $7,432,493 $6,132,367 - ----------------------------------------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Interest-bearing demand deposits $1,493,490 $ 44,330 2.97% $1,208,266 $ 33,708 2.79% $ 965,180 $ 26,763 2.77% Savings deposits 531,032 16,872 3.18 485,376 16,134 3.32 422,432 13,241 3.13 Time deposits 3,428,448 195,244 5.69 3,185,125 183,056 5.75 2,570,393 148,934 5.79 Short-term borrowings 1,004,372 54,866 5.46 727,790 40,825 5.61 743,795 40,388 5.43 Long-term debt 641,367 39,129 6.10 158,529 11,048 6.97 41,285 2,800 6.78 - ---------------------------------------------------- --------------------- ----------- -------- Total interest-bearing liabilities 7,098,709 350,441 4.94% 5,765,086 284,771 4.94% 4,743,085 232,126 4.89% - ---------------------------------------------------- --------------------- ----------- -------- Noninterest-bearing demand deposits 1,297,910 1,023,412 839,511 Other liabilities 156,989 96,109 90,964 - ----------------------------------------- ---------- ---------- Total liabilities 8,553,608 6,884,607 5,673,560 Shareholders' equity 642,287 547,886 458,807 - ----------------------------------------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,195,895 $7,432,493 $6,132,367 - ------------------------------------------------------------------------------------------------------------------------------- RATE DIFFERENTIAL 3.45% 3.68% 3.74% NET INTEREST INCOME AND NET YIELD ON INTEREST- EARNING ASSETS (4) $346,221 4.17% $301,992 4.44% $251,766 4.49% - -------------------------------------------------------------------------------------------------------------------------------
(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 on preferred stock 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. 32 11 ANALYSIS OF INTEREST INCREASES (DECREASES)
1998 CHANGE FROM 1997 1997 CHANGE FROM 1996 ------------------------------------------- ------------------------------------------- ATTRIBUTED TO (1) ATTRIBUTED TO (1) ------------------------------------------- ------------------------------------------- (IN THOUSANDS) AMOUNT VOLUME RATE MIX AMOUNT VOLUME RATE MIX - ------------------------------------------------------------------------------- ------------------------------------------- Interest income: Taxable securities $ 16,722 $ 16,431 $ 226 $ 65 $ 10,255 $ 7,864 $2,047 $ 344 Nontaxable securities (2) 292 395 (98) (5) 764 563 183 18 Dividends on preferred stocks (3) 1,621 3,362 (843) (898) 646 592 44 10 - ------------------------------------------------------------------------------------------------------------------------------ Total securities 18,635 20,188 (715) (838) 11,665 9,019 2,274 372 Total loans (net of unearned income) 75,050 86,874 (10,076) (1,748) 88,301 92,804 (3,676) (827) Mortgage loans held for sale 17,148 19,458 (901) (1,409) 1,860 1,865 (4) (1) Federal funds sold and securities purchased under resale agreements and other short-term investments (934) (771) (189) 26 1,045 833 178 34 - ------------------------------------------------------------------------------------------------------------------------------ Total 109,899 125,749 (11,881) (3,969) 102,871 104,521 (1,228) (422) - ------------------------------------------------------------------------------------------------------------------------------ Interest expense: Interest-bearing demand deposits 10,622 7,957 2,156 509 6,945 6,740 163 42 Savings deposits 738 1,518 (713) (67) 2,893 1,973 801 119 Time deposits 12,188 13,984 (1,669) (127) 34,122 35,619 (1,208) (289) Short-term borrowings 14,041 15,515 (1,068) (406) 437 (869) 1,335 (29) Long-term debt 28,081 33,649 (1,376) (4,192) 8,248 7,952 77 219 - ------------------------------------------------------------------------------------------------------------------------------ Total 65,670 72,623 (2,670) (4,283) 52,645 51,415 1,168 62 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 44,229 $ 53,126 $(9,211) $ 314 $ 50,226 $ 53,106 $(2,396) $(484) ==============================================================================================================================
(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 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 on preferred stock are actual dividends times 137.7%. Tax equivalent average rate is tax equivalent dividends divided by average volume. INTEREST-BEARING LIABILITIES - - Cost of Funds The average cost of funds remained fairly constant at 4.94% in 1998, 4.94% in 1997 and 4.89% in 1996. Competitive pressures on new time deposits and variable interest deposits remained strong. Due to these pressures the Company's funding mix has shifted to a higher concentration of borrowings, primarily through credit facilities with the Federal Home Loan Bank. The percentage of average total borrowings to total funding sources is 20% for 1998 compared to 13% for 1997 and 14% for 1996. These borrowings are an excellent funding source since they are at rates lower than or comparable to what the market demands for new time deposit funds. As discussed under Liquidity and Interest Sensitivity, BancGroup's management considers these sources of funds to be adequate to fund future loan growth. 33 12 NONINTEREST INCOME One of BancGroup's primary strategies over the last three years has been to expand its sources of noninterest income. The Company recently established international banking and asset management services and expanded its electronic banking services. These services provide a broader base of revenue generation capabilities. Noninterest income increased $24 million or 24% from 1997 to 1998 and $23 million or 30% from 1996 to 1997.
INCREASE (DECREASE) ------------------------------------------- YEARS ENDED DECEMBER 31 1998 1997 ---------------------------------- COMPARED COMPARED (IN THOUSANDS) 1998 1997 1996 TO 1997 % TO 1996 % - --------------------------------------------------------------------------------------------------------------------------- Noninterest income: Mortgage servicing fees $ 44,308 $ 38,352 $28,106 $ 5,956 16% $10,246 36% Service charges on deposit accounts 39,090 32,709 27,020 6,381 20 5,689 21 Other charges, fees, and commissions 7,398 6,919 6,616 479 7 303 5 Other income 33,595 21,440 15,592 12,155 57 5,848 38 - ------------------------------------------------------------ ------- ------- ------- Subtotal 124,391 99,420 77,334 24,971 25 22,086 29 Other noninterest income items: Securities gains, net 1,449 669 431 780 238 Gain (loss) on disposal of other real estate and repossessions (582) 856 (254) (1,438) 1,110 - -------------------------------------------------------------------------- ------- ------- Total noninterest income $125,258 $100,945 $77,511 $24,313 24% $23,434 30% - -------------------------------------------------------------------------- ------- -------
Noninterest income from deposit accounts is significantly affected by competitive pricing on these services and the volume of noninterest-bearing accounts. During 1998 and 1997 average noninterest-bearing demand accounts (excluding CMC custodial deposits) increased 19% and 23%, respectively. This increase in volume and increases in service fee rates resulted in a 20% increase in service charge income in 1998 and a 21% increase in 1997. Other charges, fees, and commissions increased $479,000 or 7% in 1998 and $303,000 or 5% in 1997. The increase is primarily from credit card related fees and official check commissions. The Company has created or expanded various sources of other noninterest income in 1998. The international banking department that became fully operational in July 1998 generated $392,000 of income in 1998. Also, during 1998, a private banking function was established and the investment sales force and asset management services were expanded. At December 31, 1998 the Company had $375 million in assets under management through its trust department and Colonial Asset Management and is projecting a $150 million increase by the end of 1999. Income generated from these services was approximately $3,539,000, $2,387,000 and $2,039,000 for 1998, 1997 and 1996, respectively. As shown in the table above, securities gains and losses in each of the three years were $1,449,000, $669,000 and $431,000, respectively. 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. CMC serviced 186,000, 157,000, and 132,000 customers in December 31, 1998, 1997, and 1996, respectively. These customers are located in 45 states and the District of Columbia. The outstanding balance of the servicing portfolio was $16.3 billion, $13.1 billion and $10.6 billion at December 31, 1998, 1997 and 1996, respectively. Income from loan servicing increased 16% from 1997 to 1998 and 36% from 1996 to 1997. CMC currently originates residential mortgages in 35 states through four division offices and six region offices. Production volume fluctuates with interest rates. Low rates in 1998 resulted in an increase in new home sales and refinancings. Through its wholesale and retail offices, CMC originated $3.9 billion, $1.6 billion and $1.5 billion in residential real estate loans in 1998, 1997, and 1996, respectively. These loans are primarily fixed rate loans sold into the secondary markets. Due to this increased activity, gains on the sales of loans increased $9.3 million in 1998 to $20.4 million and $3.3 million in 1997 to $11.3 million. These increases are reflected in other income in the accompanying table. 34 13 NONINTEREST EXPENSE Noninterest expenses in 1998 included $37.0 million of impairment of mortgage servicing rights, $21.5 million in acquisition and restructuring charges and $4.6 million in Y2K expense.(Refer to the discussion of Acquisition expense and Restructuring charges and Year 2000 following this section.) Excluding these charges as well as the SAIF special assessment in 1996, noninterest expense to average assets was 3.18%, 3.16% and 3.27% in 1998, 1997, and 1996, respectively. The impact of the acquisitions is reflected most noticeably in the increase in net interest income, discussed previously, as well as the increase in noninterest expense (excluding the aforementioned charges) of 24% in 1998 and 14% in 1997. One of the primary reasons for the increase in noninterest expense to average assets in 1998 compared to 1997 is the delay in conversion efforts of the banks acquired in Florida. As previously mentioned, in order to alleviate further conversion delays and the resulting delays in cost savings, the Company is establishing an item processing facility in Florida. This action became necessary when the prior item processor, Barnett Bank, delayed the Company's conversion schedule and became unable to meet the Company's other needs after Barnett's acquisition by NationsBank. During the fourth quarter of 1998, management made the decision to shift the Company's focus from bank acquisitions to streamlining operations. The Company's plans include incorporating into its existing structure six acquired banks in Florida and five in other markets. The foundation for these efficiencies is the current operating structure where the regional banks are supported by centralized back shop operations.
INCREASE (DECREASE) ------------------------------------------- YEARS ENDED DECEMBER 31 1998 1997 ----------------------------------- COMPARED COMPARED (IN THOUSANDS) 1998 1997 1996 TO 1997 % TO 1996 % - --------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and employee benefits $121,445 $105,287 $ 88,346 $ 16,158 15% $16,941 19% Net occupancy expense 28,291 23,821 18,797 4,470 19 5,024 27 Furniture and equipment expense 24,787 20,086 15,727 4,701 23 4,359 28 Amortization and impairment of mortgage servicing rights 62,909 17,123 13,634 45,786 267 3,489 26 Amortization of intangible assets 4,927 3,206 2,151 1,721 54 1,055 49 Acquisition and restructuring expense 21,535 6,463 11,918 15,072 233 (5,455) (46) Year 2000 expense 4,617 432 -- 4,185 969 432 -- FDIC assessment 2,221 1,822 2,582 399 22 (760) (29) SAIF assessment -- -- 4,754 -- -- (4,754) (100) Advertising and public relations 7,835 7,574 7,083 261 3 491 7 Stationery, printing, and supplies 6,551 5,525 5,028 1,026 19 497 10 Telephone 7,276 5,510 5,291 1,766 32 219 4 Legal fees 4,663 2,949 3,350 1,714 58 (401) (12) Postage 7,185 6,001 3,187 1,184 20 2,814 88 Insurance 1,644 2,095 2,360 (451) (22) (265) (11) Professional Services 13,739 9,945 6,841 3,794 38 3,104 45 Travel 4,695 4,035 3,118 660 16 917 29 Other 31,092 19,840 23,323 11,252 57 (3,483) (15) - -------------------------------------------------------------------------- -------- ------- Total noninterest expense $355,412 $241,714 $217,490 $113,698 47% $24,224 11% - -------------------------------------------------------------------------- -------- ------- Noninterest expense, excluding acquisition, restructuring and Y2K expense to Average Assets 3.58% 3.16% 3.27%* - --------------------------------------------------------------------------
* Excluding one-time SAIF special assessment Salaries and benefits increased $16.2 million or 15% in 1998 and $16.9 million or 19% in 1997. These increases are primarily due to increased staffing levels as a result of acquisitions as well as normal salary rate increases. 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 remained relatively constant from 1996 to 1998. Net occupancy and furniture and equipment expense increases are primarily due to acquisition activities and improvements to the Company's computer and communications technology. These improvements in technology give the company the ability to enhance customer service and continue to improve back shop efficiencies. There were also increased occupancy costs related to the reloca- 35 14 tion of certain facilities. These relocations should allow for expansion of its customer base and provide better customer service. In 1998, CMC recorded $37 million in additional write-downs to its mortgage servicing rights (MSRs). This write-down was caused primarily by anticipated prepayments of mortgages in the servicing portfolio being greater than previously expected. The write-down increased the valuation allowance against loss occasioned by future prepayments to $38.3 million at December 31, 1998 from $1.4 million at December 31, 1997. The remaining increase in MSR amortization of $8.8 million in 1998 and $3.5 million in 1997 is primarily a result of the growth in the servicing portfolio and higher estimates of mortgage prepayments. The net balance of MSRs was $183 million and $142 million at December 31, 1998 and 1997, respectively. Amortization of intangible assets primarily increased due to the acquisitions in 1998 of ASB and TB&T and in 1997 of Shamrock, First Commerce and Dadeland which were accounted for as purchases and therefore required the recording of goodwill and core deposit intangibles. Increases in supplies, postage and other expenses are primarily due to additional branches, customers and other acquisition related activities. 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). In 1996, legislation was approved in Congress to recapitalize the SAIF with a special one-time charge of 65.7 basis points, after adjusting for certain allowances. The assessment resulted in a pre-tax charge of $4.8 million in 1996 and allowed a reduction in the annual premium rate in future years. ACQUISITION EXPENSE & RESTRUCTURING CHARGES In the first quarter of 1998, BancGroup reorganized executive management of its Florida regions. The reorganization resulted in a restructuring charge of $2.5 million. During the fourth quarter of 1998, the Company developed a plan to: - close certain unprofitable branches - sell certain super-market branches - relocate and upgrade other branches - move the headquarters of the South Florida Region to downtown Miami and to consolidate the trust department into the South Florida headquarters to better serve its customer base. As a result of these actions, BancGroup recognized a fourth quarter restructuring charge of $6.3 million which is net of $902,000 in reversal of unused reserves. The following is a summary of restructuring charges for the year ended December 31, 1998:
(IN THOUSANDS) 1998 - --------------------------------------------------------- Reduction of asset values $4,395 Lease termination liabilities 2,878 Accrued severance & other 1,512 - --------------------------------------------------------- Net Expense $8,785 - ---------------------------------------------------------
Employee severance consists primarily of employment contract buy-outs of executives that were replaced in the reorganization during the first quarter. BancGroup plans to discontinue operations in fourteen supermarket branches. The Company expects to close nine supermarket branches in the second quarter of 1999. The Company plans to buy-out its service contracts and lease commitments and has written-off the related leasehold improvements of those branches based on discounted operating cash flow calculations. All equipment should be redeployed to other branch locations. By closing these branches, the Company expects to save approximately $2 million per year in operating expenses. The Company also plans to sell five other supermarket branches. This sale is expected to close in March 1999. To better serve its customers in South Florida, management moved its regional headquarters to downtown Miami and relocated the trust department to the same building in the fourth quarter of 1998. The region also plans to consolidate two branches into a new location in 1999. As a result of these decisions, certain facilities have been vacated by the Company and are expected to be subleased to third parties and certain related leasehold improvements have been written-off. BancGroup has accrued the costs of the leases for the vacated properties net of the estimated sub-lease revenue. At December 31, 1998, $3.5 million in restructuring accruals remained for activities expected to occur in 1999. Additionally, the Company has recognized acquisition related expenses totaling $12,750,000, $6,463,000 and $11,918,000 for each of the years ended December 31, 1998, 1997 and 1996, respectively. These expenses relate primarily to transaction costs such as legal and accounting fees and incremental charges related to the integration of acquired banks, such as system conversion (including contract buy-outs and write-off of equipment) and employee severance. YEAR 2000 READINESS DISCLOSURE Most computer software programs and processing systems, including those used by BancGroup and its subsidiaries in their operations, were not originally designed to accommodate entries beyond the year 1999 in date fields. Failure to address the anticipated consequences of this design deficiency could have material adverse effects on the business and operations of any business, including BancGroup, that relies on computers and associated technologies. 36 15 BancGroup has aggressively addressed the challenges that Year 2000 presents to its operations. Management has completed its remediation efforts and has tested the core business applications which are customer related. Therefore management does not anticipate significant disruptions in its operations as a result of entering the new millennium. BancGroup expects to finish the remainder of its testing, primarily involving non-mission critical applications and testing with service providers during the first quarter of 1999. As a final check to ensure that BancGroup will be ready for the new millennium, management plans to perform additional Year 2000 testing during the fourth quarter of 1999. Year 2000 compliant applications of BancGroup are currently being used in production thereby minimizing risk factors relating to implementing new software applications. Throughout 1998, BancGroup has been assessing Year 2000 readiness of vendors, business partners and other counter-parties focusing on those considered critical to BancGroup operations. BancGroup began assessing the Year 2000 readiness of loan customers, depositors and other funds providers during the third quarter of 1998. BancGroup will continue to monitor and evaluate the Year 2000 readiness of third parties whose Year 2000 noncompliance could have a material adverse impact on the operations of BancGroup. BancGroup is taking appropriate measures including development of contingency plans to mitigate the risk to the company of Year 2000 noncompliance by third parties. However, the impact of Year 2000 noncompliance by all third parties with which BancGroup transacts business cannot be assessed at this time. BancGroup has a customer awareness program in place designed to keep our customers informed of our Year 2000 progress. The awareness program is expected to minimize customer anxiety as we approach the new millennium. However, management recognizes that a customer awareness program will not completely eliminate such customer concerns. BancGroup is working closely with the Federal Reserve to provide increased liquidity in our branches to meet the anticipated increase in the cash needs of our customers. BancGroup expects to spend approximately $15 million on the Year 2000 project. To date, BancGroup has incurred approximately $11.4 million of those expenditures, $11 million in 1998 and $0.4 million in 1997. During 1998, BancGroup purchased equipment and software totaling $5.7 million, paid third parties approximately $2.8 million and wrote-off non-compliant equipment totaling $2.7 million of which approximately $0.9 million was charged to operations. Year 2000 project costs of approximately $4.6 million were expensed during the year ended December 31, 1998 and $432,000 was expensed during the year ended December 31, 1997. BancGroup expects to purchase approximately $3 million in equipment and pay third parties approximately $0.6 million during 1999. Although presently not anticipated, regulators require that management disclose what could happen if BancGroup's systems fail as a result of entering the new millennium. A possible worst case scenario could include interruption in the normal servicing of customers as well as the funds management of the Company. Management is currently developing a contingency plan to minimize the impact of a failure on our customers and/or shareholders. Management's evaluation of Year 2000 compliance and technological upgrades is an on-going 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 anticipated. INCOME TAXES The provision for income taxes and related items are as follows:
Tax Provision --------------------------------- 1998 $31,406,000 1997 51,414,000 1996 33,082,000
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, nondeductible amortization of goodwill, and certain nondeductible acquisition expenses. 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 1996, 1997 and 1998. 37 16 REVIEW OF FINANCIAL CONDITION OVERVIEW Changes in ending asset balances of the company's segments and changes in selected components of the Company's balance sheet from December 31, 1997 to December 31, 1998 are as follows:
Increase (Decrease) --------------------- (In thousands) Amount % - ----------------------------------------------------------- Assets: Commercial Banking $1,852,170 24.2% Mortgage Banking 542,976 138.0 Corporate/Other(1) (427) (3.4) ---------- Total assets $2,394,719 29.7 ---------- Other Balance Sheet components: Securities available for sale and investment securities 616,168 63.6 Mortgage loans held for sale 453,502 190.1 Loans, net of unearned income 1,159,228 19.5 Mortgage servicing rights 41,429 29.2 Deposits 1,120,463 17.7 Long-term debt 431,166 136.8 - ----------------------------------------------------------
(1) Includes eliminations of certain intercompany transactions. Management continually monitors the financial condition of BancGroup in order to protect depositors, increase shareholder value and protect current and future earnings. The most significant factors affecting BancGroup's financial condition from 1996 through 1998 have been: - Internal loan growth of 15% in 1998 excluding acquisitions. - Loan mix changed to reflect an increase in commercial loans to 15.5% of the total portfolio from 12.6% in 1997. BancGroup continues to consider residential mortgage loans as a consistent product line which has a relatively low loss ratio. Residential mortgage loans were 34.3% and 40.1% of total loans as of December 31, 1998 and 1997, respectively. - A 26.8% increase in 1998 in average noninterest bearing demand deposits with 11.1% attributable to CMC escrow deposits and the remainder attributable to acquisitions and internal growth. - Maintenance of high asset quality and reserve coverage of nonperforming assets. Nonperforming assets were .60% and .74% of related assets at December 31, 1998 and 1997. Net charge-offs were .26% and .23% of average loans during 1998 and 1997. The allowance for possible loan losses was 1.18% of loans at December 31, 1998, providing a 245% coverage of non-performing loans (nonaccrual and renegotiated). - A loan to deposit ratio of 95.5% and 94.1% at December 31, 1998 and 1997, respectively. Federal Home Loan Bank borrowings continue to be a major source of funding allowing the Company greater funding flexibility. - Increase of $454 million in CMC's mortgage loans held for sale during 1998 due primarily to increased refinancing activities and new home sales resulting from lower interest rates. - Increase of $41.4 million in mortgage servicing rights due to the net increase in CMC's servicing portfolio to $16.3 billion in 1998. The Company has hedged approximately 52% of its servicing portfolio and the related mortgage servicing rights asset at December 31, 1998. 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 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 34.3% of total loans. Substantially all of these loans are adjustable rate mortgages on single-family, owner occupied properties and therefore, have minimal credit risk and lower interest rate sensitivity. A portion of these loans were acquired through bank acquisitions. - BancGroup also has a significant concentration in loans collateralized by commercial real estate as shown on the following table. BancGroup's commercial real estate loans are spread geographically throughout Alabama and Florida and other areas including metropolitan Atlanta, Georgia, Dallas, Texas and Reno and Las Vegas, Nevada with no more than 25% of these loans in any one geographic region. The Alabama economy experiences a generally slow but steady rate of growth, while Georgia, Florida, Texas and Nevada are experiencing higher rates of growth with the Las Vegas metropolitan area experiencing significant growth. Real estate in BancGroup's lending areas have not experienced significantly inflated values due to excessive inflation or speculation. BancGroup's real estate related loans continue to perform at acceptable levels. - CMC holds mortgage loans on a short-term basis (generally less than ninety days) while these loans are 38 17 being packaged for sale in the secondary market. These loans are classified as mortgage loans held for sale with balances totaling $692 million, $239 million, and $168 million, at December 31, 1998, 1997, and 1996, respectively. There is minimal credit risk associated with these loans. The increases in mortgage loans held for sale are directly related to the fluctuation in long-term interest rates and its related impact on mortgage loan refinancing and new home sales. These loans are funded principally with short-term borrowings, providing a relatively high margin for these funds. - BancGroup's international banking department became fully operational in July 1998. The department engages in confirming letters of credit, primarily with top-tier banks in Latin America, and direct disbursements to those banks from U.S. customers. Loans outstanding to Latin American banks at December 1998 totalled approximately $97 million. However, due to the immaterial balance of these loans in relation to total loans, these amounts will not be reported separately. - As discussed more fully in subsequent sections, management has established policies and procedures to ensure maintenance of adequate liquidity and liquidity sources. BancGroup has arranged funding sources in addition to customer deposits 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 15.1% in 1998, 9.75% in 1997, 16.4% in 1996, and 24.1% in 1995, excluding acquisitions.
- ---------------------------------------------------------------------------------------------------------------------------- GROSS LOANS BY CATEGORY December 31 -------------------------------------------------------------------------- (In thousands) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 1,102,446 $ 751,375 $ 692,761 $ 609,683 $ 518,513 Real estate--commercial 2,006,851 1,673,505 1,217,175 1,031,146 906,209 Real estate--construction 1,028,471 734,239 545,681 449,542 295,238 Real estate--residential 2,438,236 2,382,324 2,010,420 1,719,537 1,112,121 Installment and consumer 344,860 329,136 315,143 276,097 240,464 Other 189,934 81,181 58,607 49,727 46,477 - ---------------------------------------------------------------------------------------------------------------------------- Total loans $ 7,110,798 $ 5,951,760 $ 4,839,787 $ 4,135,732 $ 3,119,022 - ----------------------------------------------------------------------------------------------------------------------------
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 remaining 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 ----------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------ ------------------- ------------------- ------------------ -------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO (IN THOUSANDS) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS - ------------------------------------------------- ------------------- ------------------- ------------------ ------------------- Balance at end of period applicable to: Commercial, financial, and agricultural $19,068 15.5% $13,955 12.6% $12,932 14.3% $11,153 14.7% $10,182 16.6% Real estate--commercial 30,382 28.2 25,979 28.1 19,792 25.1 17,353 24.9 15,410 29.1 Real estate--construction 14,681 14.5 13,854 12.3 10,886 11.3 8,277 10.9 4,236 9.5 Real estate--residential 12,191 34.3 11,912 40.1 11,303 41.5 10,034 41.6 10,974 35.7 Installment and consumer 4,930 4.8 5,079 5.5 4,673 6.5 4,099 6.7 3,722 7.7 Other 2,310 2.7 1,328 1.4 2,146 1.3 2,854 1.2 3,249 1.4 - --------------------------------------------------------------------------------- -------------------------------------------------- Total $83,562 100.0% $72,107 100.0% $61,732 100.0% $53,770 100.0% $47,773 100.0% - ------------------------------------------------------------------------------------------------------------------------------------
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 continue to focus on shorter term maturities and floating or adjustable rate loans. At December 31, 1998, approximately 50.9% of loans were floating rate loans. Contractual maturities may vary significantly from actual maturities due to loan extensions, early payoffs 39 18 due to refinancing and other factors. Fluctuations in interest rates are also a major factor in early loan pay-offs. The uncertainties of future events, particularly with respect to interest rates, make it difficult to predict the actual maturities. 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.
- -------------------------------------------------------------------------------------------------------------------------------- LOAN MATURITY/RATE SENSITIVITY DECEMBER 31, 1998 --------------------------------------------------------------------------------------------- RATE SENSITIVITY, LOANS MATURING MATURING RATE SENSITIVITY OVER 1 YEAR --------------------------------------------------------------------------------------------- WITHIN 1-5 OVER (IN THOUSANDS) 1 YEAR YEARS 5 YEARS FIXED FLOATING FIXED FLOATING - -------------------------------------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 507,719 $ 406,490 $ 188,237 $ 405,363 $ 697,083 $ 274,327 $ 320,400 Real estate--commercial 486,225 1,069,500 451,126 1,371,993 634,858 1,152,046 368,580 Real estate--construction 588,494 384,375 55,602 362,541 665,930 193,096 246,881 Real estate--residential 348,035 375,398 1,714,803 973,334 1,464,902 775,647 1,314,554 Installment and consumer 127,815 198,837 18,208 297,098 47,762 201,726 15,319 Other 77,679 89,705 22,550 81,913 108,021 54,472 57,783 - -------------------------------------------------------------------------------------------------------------------------------- $2,135,967 $2,524,305 $ 2,450,526 $ 3,492,242 $ 3,618,556 $ 2,651,314 $ 2,323,517 - --------------------------------------------------------------------------------------------------------------------------------
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 reviews larger credits prior to approval and also provides an independent review of credits on a continued 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 non-real estate, financial and agricultural loans are generally collateralized by business inventory, accounts receivables or new business equipment at 50%, 80% and 90% of estimated value, respectively. Installment and consumer loan collateral where required is based on 90% or lower loan to value ratios. Based on the credit review process and loan grading system, 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, it is necessary for management to monitor fluctuations in the allowance resulting from actual charge-offs and recoveries and to periodically review the size and composition of the loan portfolio in light of historical loss experience and current economic conditions. The overall goal and result of these policies and procedures is to provide a sound basis for new credit extensions and an early recognition of problem assets to allow increased flexibility in their timely disposition. LOAN LOSS EXPERIENCE During 1998 the ratio of net charge-offs to average loans increased to .26% from .23% in 1997 and .16% in 1996. 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 early identification of potential problem loans. Management is committed to maintaining adequate reserve levels to absorb losses present in the loan portfolio. 40 19
- --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF LOAN LOSS EXPERIENCE YEARS ENDED DECEMBER 31 ----------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Allowance for possible loan losses-- January 1 $ 72,107 $ 61,732 $ 53,770 $ 47,773 $ 40,733 Charge-offs: Commercial, financial, and agricultural 6,001 5,577 3,627 4,044 2,944 Real estate--commercial 3,273 2,972 2,389 1,299 1,666 Real estate--construction 1,731 433 1,803 44 2 Real estate--residential 3,380 1,765 911 499 539 Installment and consumer 6,803 5,695 3,482 2,984 2,001 Other 1,469 694 239 166 169 - --------------------------------------------------------------------------------------------------------------------------- Total charge-offs 22,657 17,136 12,451 9,036 7,321 - --------------------------------------------------------------------------------------------------------------------------- Recoveries: Commercial, financial, and agricultural 1,206 1,001 1,452 1,252 2,249 Real estate--commercial 1,399 1,024 1,533 48 251 Real estate--construction 43 91 1 11 12 Real estate--residential 545 244 697 201 104 Installment and consumer 1,945 1,820 1,589 1,358 1,527 Other 789 137 82 46 44 - --------------------------------------------------------------------------------------------------------------------------- Total recoveries 5,927 4,317 5,354 2,916 4,187 - --------------------------------------------------------------------------------------------------------------------------- Net charge-offs 16,730 12,819 7,097 6,120 3,134 Addition to allowance charged to operating expense 26,345 16,321 14,442 10,989 9,673 Allowance added from bank acquisitions 1,840 6,873 617 1,128 501 - --------------------------------------------------------------------------------------------------------------------------- Allowance for possible loan losses-- December 31 $ 83,562 $ 72,107 $ 61,732 $ 53,770 $ 47,773 - --------------------------------------------------------------------------------------------------------------------------- Loans (net of unearned income) December 31 $7,110,295 $5,951,067 $4,835,274 $4,130,126 $3,112,937 Ratio of ending allowance to ending loans (net of unearned income) 1.18% 1.21% 1.28% 1.30% 1.53% Average loans (net of unearned income) $6,451,427 $5,497,737 $4,488,023 $3,553,499 $2,806,605 Ratio of net charge-offs to average loans (net of unearned income) .26% .23% .16% .17% .11% Allowance for loan losses as a percent of nonperforming loans (nonaccrual and renegotiated) 245% 247% 234% 243% 212% - ---------------------------------------------------------------------------------------------------------------------------
41 20 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. Loans are generally placed on nonaccrual if full collection of principal and interest becomes unlikely (even if all payments are current) or if the loan is delinquent in principal or interest payments for 90 days or more, unless the loan is well secured and in the process of collection. BancGroup's policy is also to charge off 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) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Aggregate loans for which interest is not being accrued $32,823 $28,209 $24,729 $20,201 $18,963 Aggregate loans renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial condition of the borrower 1,334 1,014 1,683 1,882 3,541 - ---------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans* 34,157 29,223 26,412 22,083 22,504 Other real estate and in-substance foreclosure 8,164 14,044 11,834 14,884 19,387 Repossessions 564 796 338 171 81 - ---------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets* $42,885 $ 44,063 $38,584 $37,138 $41,972 - ---------------------------------------------------------------------------------------------------------------------------- Aggregate loans contractually past due 90 days for which interest is being accrued $ 8,992 $ 7,335 $ 7,860 $ 3,532 $ 4,399 Total nonperforming loans as a percent of net loans 0.48% 0.49% 0.55% 0.53% 0.72% Total nonperforming assets as a percent of net loans, other real estate and repossessions 0.60% 0.74% 0.80% 0.90% 1.34% Total nonperforming and 90 day past due loans for which interest is being accrued as a percent of total loans 0.61% 0.61% 0.71% 0.62% 0.86% Allowance for loan loss as a percent of nonperforming loans (nonaccrual and renegotiated) 245% 247% 234% 243% 212% - ----------------------------------------------------------------------------------------------------------------------------
* 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. The decrease in the Company's nonperforming ratio from 1994 to 1995 was primarily due to the disposition of assets from the 1993 acquisition of First AmFed. Management, through its loan officers, internal loan review staff and external examinations by regulatory agencies, has identified approximately $158 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 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, 1998 substantially all of these loans are current with their existing repayment terms. Management believes that classification of such loans as potential problem loans well in advance of their reaching a delinquent status allows the Company the greatest flexibility in correcting problems and providing adequate reserves. Given the reserves and the ability of the borrowers to comply with the existing repayment terms, management believes any exposure from these potential problem loans has been adequately addressed at the present time. 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. 42 21 Management also expects that the resolution of these problem credits as well as other performing loans will not materially impact future operating results, liquidity or capital resources. Interest income recognized and interest income foregone on nonaccrual loans was not significant for the years ended December 31, 1998, 1997, 1996, 1995 and 1994. The recorded investment in impaired loans at December 31, 1998 and 1997 was $18,640,000 and $16,462,000, respectively and these loans had a corresponding valuation allowance of $4,813,000 and $5,381,000, respectively. The average investment in impaired loans during 1998 and 1997 totaled $20,014,000 and $18,853,000, respectively. 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, 1998 include: - BancGroup's investment in U.S. Treasury securities and obligations of U.S. government agencies is substantially all pledged against public funds deposits or used as collateral for repurchase agreements. - BancGroup is required to carry Federal Home Loan Bank (FHLB) Stock in connection with its borrowings with FHLB. BancGroup is also required to carry Federal Reserve Stock since its subsidiary bank became a member bank of the Federal Reserve system in June 1997. - Investment alternatives which maximize the after-tax net yield are considered. - Management has also attempted to increase the investment portfolio's overall yield by investing funds in excess of pledging requirements in high-grade corporate notes and mortgage-backed securities. - The 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. - 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, 1998 does not include any interest-only strips and the amount of unamortized premium on mortgage backed securities is approximately $2,973,000. 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 are established when necessary. Investment securities are those securities which management has the ability and intent to hold until maturity. The decline in investment securities is due to maturities and calls in the portfolio. Securities available for sale represent those securities that BancGroup intends to hold for an indefinite period of time or that may be sold in response to changes in interest rates, prepayment risk and other similar factors. These securities are recorded at market value with unrealized gains or losses, net of any tax effect, added or deducted from shareholders' equity. The balance in securities available for sale increased from $656 million at December 31, 1997 to $1,414 million at December 31, 1998. At December 31, 1998, BancGroup had $310 million in mortgage backed securities purchased under a reverse repurchase agreement. These securities are collateral for $317 million in debt outstanding in connection with the purchase of these securities. Other securities available for sale increased $164 million primarily as a result of investments in Corporate notes, FHLB stock and preferred stocks. At December 31, 1998, 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 ($64.0 million). The changes noted above are reflected on the following table. 43 22 SECURITIES BY CATEGORY
CARRYING VALUE AT DECEMBER 31 ----------------------------- (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------- Investment securities: U.S. Treasury securities and obligations of U.S. government agencies $ 83,322 $172,065 $192,468 Mortgage-backed securities 45,037 85,298 91,445 Obligations of state and political subdivisions 41,185 54,036 52,069 Other 1,410 1,741 7,652 - ------------------------------------------------------------- Total $170,954 $313,140 $343,634 - -------------------------------------------------------------
CARRYING VALUE AT DECEMBER 31 -------------------------------- (IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------- Securities available for sale: U.S. Treasury securities and obligations of U.S. government agencies $ 152,162 $350,398 $332,114 Mortgage-backed securities 1,030,801 256,396 216,921 Obligations of state and political subdivisions 58,316 40,233 32,071 Other 172,939 8,837 13,710 - ------------------------------------------------------------------ Total $1,414,218 $655,864 $594,816 - ------------------------------------------------------------------
The carrying value of securities at December 31, 1998 mature as follows:
- ------------------------------------------------------------------------------------------------------------------------------- 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 $ 70,573 5.90% $12,249 6.66% $ -- -- $ 500 7.24% Mortgage-backed securities 5,510 6.63 21,712 6.94 5,685 7.05% 12,130 7.65 Obligations of state and political subdivisions (1) 4,321 4.74 19,898 5.13 9,716 5.30 7,250 6.19 Other 70 5.22 1,340 6.49 -- -- -- -- ------------------------------------------------------------------------------------------- Total $ 80,474 5.89% $55,199 6.21% $15,401 5.95% $19,880 7.11% - ------------------------------------------------------------------------------------------------------------------------------- Securities available for sale (2): U.S. Treasury securities and obligations of U.S. government agencies $ 152,162 6.07% Mortgage-backed securities 1,030,801 6.43 Obligations of state and political subdivisions (1) 58,316 4.94 Other 83,302 6.81 ------------------------------------------------------------------------------------------- Total $1,324,581 6.35% - -------------------------------------------------------------------------------------------------------------------------------
(1) The weighted average yields are calculated on the basis of the cost and effective yield weighted for the scheduled maturity of each security. The weighted average yields on tax exempt obligations have been computed on a fully taxable equivalent basis using a tax rate of 38%. The taxable equivalent adjustment represents the annual amounts of income from tax exempt obligations multiplied by 145%. (2) Securities available for sale are shown as maturing within one year although BancGroup intends to hold these securities for an indefinite period of time. (See Contractual Maturities in Note 3 to the consolidated financial statements.) This category excludes all corporate common and preferred stocks since these instruments have no maturity date. - ------------------------------------------------------------------------------ MORTGAGE SERVICING RIGHTS (MSRS) AND SERVICING HEDGE The balances of MSRs were $183 million and $142 million at December 31, 1998 and 1997, respectively. In 1998, the Company recorded $37 million of impairment to its unhedged MSRs. This write-down was caused primarily by anticipated prepayments of mortgages in the servicing portfolio being greater than previously expected. The write-down increased the valuation allowance against loss occasioned by future prepayments to $38.3 million at December 31, 1998. The Company, with the assistance of a third party advisor, developed a strategy to hedge against future decreases in interest rates through the use of Treasury futures and options. In October 1998, the Company began to hedge a portion of its servicing portfolio and related mortgage servicing rights asset. At December 31, 1998 the Company had hedged approximately 52% of its servicing portfolio and 44 23 related MSRs asset. The hedge positions are designated to specific portions of the servicing asset and are monitored daily and adjusted as necessary for changes in the market and projected interest rate movement. The objective of this strategy is to achieve a high degree of correlation between changes in value associated with the hedged asset (the servicing portfolio and the related servicing rights) and the servicing hedge. The servicing hedge is designed to rise in value when interest rates fall and decline in value when interest rates rise, in contrast to the expected movements in value of the servicing asset, therefore reducing earnings volatility caused by interest rate movements. These risk-management activities do not eliminate interest-rate risk in the MSRs. Treasury rates, to which the MSR hedges are indexed, may not move in tandem with mortgage interest rates. As mortgage interest rates change, actual prepayments may not respond exactly as anticipated. Other pricing factors, such as the volatility of the market yields, may affect the value of the option hedges without similarly impacting the MSRs. (Refer to Notes 6 and 7 to the Consolidated Financial Statements for additional information.)
- -------------------------------------------------------------------------------------------------------------------------- DEPOSITS BancGroup's deposit structure consists of the following: DECEMBER 31 % OF TOTAL ------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing demand deposits $1,548,082 $1,147,280 20.8% 18.1% Interest-bearing demand deposits 1,747,321 1,416,404 23.4 22.6 Savings deposits 560,308 501,857 7.5 7.9 Certificates of deposits less than $100,000 2,222,301 2,127,176 29.8 33.6 Certificates of deposits more than $100,000 1,002,503 787,187 13.5 12.4 IRAs 316,844 300,289 4.3 4.7 Open time deposits 48,794 45,497 0.7 0.7 - -------------------------------------------------------------------------------------------------------------------------- Total deposits $7,446,153 $6,325,690 100.0% 100.0% - --------------------------------------------------------------------------------------------------------------------------
The growth in deposits and the mix of deposits has been most significantly impacted in 1997 and 1998 by the acquisitions accounted for under the purchase method of accounting. Noninterest-bearing demand deposits have increased $401 million (35%) from December 31, 1997 to December 31, 1998, of which 16% was due to the aforementioned acquisitions and 6% was due to CMC custodial deposits. The remaining increase is attributable to the development of customer relationships and sales efforts. BancGroup has attempted through its acquisitions and branch expansion programs to increase its market presence into high growth markets in the country. Prior to 1998 the expansion was concentrated in Florida and the Atlanta metropolitan area. In 1998, Colonial continued its efforts by moving west into Dallas, Texas and Reno and Las Vegas, Nevada. The principal goal is to provide the Company's retail customer base with convenient access to branch locations while enhancing the Company's potential for future increases in profitability. Primarily through acquisitions, the number of retail branches increased to 250 in 1998 from 219 in 1997. In an effort to continue improving customer service, the Company has established asset management services, international banking and electronic banking (which includes home banking, business banking, automatic teller, credit card and check card services). Through asset management services, 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. The Company has an established brokered Certificate of Deposit (CD) program to offer CD's in increments of $1,000 to $99,000 to out of market customers at competitive rates and maturities. At December 31, 1998 and 1997, $188 million and $78 million, respectively were outstanding under this program. In 1997, the Company initiated a brokered money market program. Funds are transferred daily to meet short-term funding fluctuations. At December 31, 1998 and 1997, $249 million and $147 million were outstanding, respectively. 45 24 SHORT-TERM BORROWINGS Short-term borrowings were comprised of the following at December 31, 1998, 1997 and 1996:
(IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------- Federal Funds purchased and securities sold under repurchase agreements $ 480,008 $284,740 $154,927 Federal Home Loan Bank borrowings 769,987 420,000 715,000 Reverse repurchase agreements 184,834 12,695 -- Current Maturities of FHLB Advances 50,840 1,345 983 Other short-term borrowings 25,299 12,579 1,322 - ---------------------------------------------------------- Total $1,510,968 $731,359 $872,232 - ----------------------------------------------------------
BancGroup has available additional Federal Funds lines from upstream banks including the Federal Home Loan Bank (FHLB) totaling $190 million at December 31, 1998. In addition, correspondent banks and customers with repurchase agreements have provided a consistent base of short-term funds. BancGroup is a member of the FHLB which provides availability of up to $2 billion from the FHLB on either a short or long-term basis excluding funds available through the Federal Funds line. At December 31, 1998, the FHLB unused line of credit was $651 million of which $158 million was available based on current collateral. This credit facility is collateralized by the Company's residential real estate loans. 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 1998 and 1997 to fund loan growth. As discussed more fully in the "Liquidity and Interest Sensitivity" section of this report, the line of credit with FHLB is considered a primary source of funding for the Company's asset growth. Colonial Bank has an additional $500 million available through a warehouse line with FHLB that is collateralized by mortgage loans held for sale with no balance outstanding at December 31, 1998. BancGroup entered into reverse repurchase arrangements under which it purchased mortgage backed securities. These securities are collateral for the $185 million in short-term debt as well as the $132 million in long-term debt. In December 1998, the Company entered into a term note with an unaffiliated financial institution for $25 million. This note is scheduled to mature in June 1999. 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 securities mature they are generally reinvested in new securities or assets held for sale. Financing activities generally provide funding for the growth in loans and securities with increased deposits. Short-term borrowings are used to provide funding for temporary gaps in the funding of long-term assets and deposits, as well as to provide funding for mortgage loans held for sale and loan growth. BancGroup has the ability to tap other markets for certificates of deposits and to utilize established lines for Federal funds purchased and FHLB advances. BancGroup maintains and builds diversified funding sources in order to provide flexibility in meeting its requirements. From 1996 through 1998 the significant changes in BancGroup's cash flows have centered around loan growth and fluctuations in mortgage loans held for sale. Loan growth of $974 million in 1998 and $651 million in 1997 has been one of the principal uses of cash in both years. Mortgage loans held for sale increased in 1998 and 1997, using $454 million and $71 million, respectively, in funds. Deposit growth, excluding acquisitions, of $800 million in 1998 and $526 million in 1997 provided the primary source of funding for internal loan growth. Short-term borrowings excluding acquisitions increased $646 million in 1998 and $72 million in 1997 and were also used to fund loan growth. Management has chosen to fund short-term fluctuations in the volume of mortgage loans held for sale with short-term borrowings as opposed to increasing rate sensitive deposits. BancGroup had $2.4 billion of residential real estate loans at both December 31, 1998 and 1997. These loans provide collateral for the current $2.0 billion credit facility at the FHLB. At December 31, 1998, the FHLB unused line of credit was $651 million of which $158 million was available based on current collateral. This line provides the Company significant flexibility in asset/ liability management, liquidity and deposit pricing. 46 25 During 1998 and in connection with the ASB acquisition, BancGroup issued $7.73 million of variable rate subordinated debentures. The debentures bear interest equal to the New York Prime Rate minus 1% (but not less than 7%). BancGroup entered into reverse repurchase arrangements under which it purchased mortgage backed securities. These securities are collateral for the $185 million in short-term debt as well as the $132 million in long-term debt. BancGroup had an outstanding term note with an unaffiliated financial institution in the amount of $25 million at December 31, 1998. The term note is payable in full upon maturity on June 30, 1999 and bears an interest rate of 1% above LIBOR. Management believes its liquidity sources and funding strategies are adequate given the nature of its asset base and current loan demand. In January 1997, BancGroup issued $70 million in Trust Preferred Securities. These securities qualify as Tier I Capital and carry an 8.92% interest rate. A portion of the proceeds of the offering were utilized to pay off a term note and revolving debt outstanding. The remainder of the proceeds were used for acquisitions and other business purposes. In January 1996, the Company called $7.5 million of its 1985 subordinated debentures which had a maturity date of 2000. As a result, 1,613,196 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 expired in 1998. The primary uses of funds as reflected in BancGroup's parent only statement of cash flows (Note 24) were $7 million for the payment of interest on debt, $17 million to purchase treasury stock which was subsequently issued in the TB&T acquisition, $25 million advanced to Colonial Bank for acquisition related activities and $36 million for the payment of dividends. The parent company's primary sources of funds were $49.5 million in dividends received from its subsidiaries and $12 million from the increase in short-term borrowings. 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 $107 million of retained earnings plus certain 1999 earnings would be available for distribution to BancGroup, from its subsidiaries, as dividends in 1999 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, 1998, BancGroup's liquidity position was adequate with loan maturities of $2.1 billion, or 30% of the total loan portfolio, due within one year. Securities totaling $1.5 billion or 94% of the total portfolio also had maturities within one year or have been classified as available for sale. As of December 31, 1998 there were, however, no current plans to dispose of any significant portion of these securities. In addition BancGroup has $158 million in additional borrowing capacity at the FHLB, $500 million available through a warehouse line with FHLB and $190 million from Fed Fund lines. 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 a 11.4% negative gap at 12 months; therefore, BancGroup has a greater exposure to net income if interest rates increase. BancGroup's profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest earning assets and interest bearing liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company's exposure to differential changes in interest rates between assets and liabilities is shown in the Company's Maturity and Rate Sensitivity Analysis. The following table measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of interest-earning assets, interest-bearing liabilities, and off-balance sheet contracts. Following are the estimated impacts of immediate changes in interest rates at the specified levels at December 31, 1998.
PERCENTAGE CHANGE IN: BASIS NET INTEREST NET PORTFOLIO POINTS INCOME(1) VALUE(2) - ------------------------------------------------------------ +400 (7)% (26)% +300 (4) (17) +200 (2) (11) +100 (1) (5) -100 (3) 4 -200 (7) 7 -300 (14) 9 -400 (22) 11 - ------------------------------------------------------------
(1) The percentage change in this column represents net interest income for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios. (2) The percentage change in this column represents net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in the various rate scenarios. The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions 47 26 BancGroup could undertake in response to changes in interest rates. Management has managed the asset/liability position of the bank through traditional sources. BancGroup does, however, use off balance sheet financial 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. As previously discussed, the Company has developed a strategy to hedge its servicing portfolio against future declines in interest through the use of Treasury futures and options. The objective of this strategy is to maintain a correlation over time between the value of servicing rights and the servicing hedge. At December 31, 1998, the Company had hedged approximately 52% of its servicing portfolio. (Refer to more detailed discussions of the hedging activities included in Management's Discussion under Mortgage Servicing Rights and Servicing Hedge and Notes 6 and 7 to the Consolidated Financial Statements.) In December 1997 BancGroup purchased $30 million of Bank-Owned Life Insurance ("BOLI"). This long-term asset represents life insurance purchased from highly rated insurance companies on certain employees with the bank named as the beneficiary. The Company considers these funds available for the future payment of benefits due the employee's beneficiaries from group benefit plans. The following table summarizes BancGroup's interest rate sensitivity at December 31, 1998.
AT DECEMBER 31, 1998 ----------------------------------------------------------------------------------- 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 agreements $ 57,247 $ 57,247 $ -- $ -- $ -- $ -- Investment securities 170,954 7,582 11,320 66,558 53,907 31,587 Securities available for sale 1,414,218 254,463 14,380 42,505 173,949 928,921 Mortgage loans held for sale 692,042 692,042 -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Loans, net of unearned income 7,110,295 2,456,658 355,537 509,978 2,634,297 1,153,825 Allowance for possible loan losses (83,562) (28,871) (4,179) (5,993) (30,960) (13,559) - ---------------------------------------------------------------------------------------------------------------------------- Net loans 7,026,733 2,427,787 351,358 503,985 2,603,337 1,140,266 Nonearning assets 1,095,091 -- -- -- -- 1,095,091 - ---------------------------------------------------------------------------------------------------------------------------- Total Assets $10,456,285 $3,439,121 $ 377,058 $ 613,048 $2,831,193 $3,195,865 - ---------------------------------------------------------------------------------------------------------------------------- Rate Sensitive Liabilities: Interest-bearing demand deposits $ 1,747,321 $ 997,719 $ -- $ -- $ -- $ 749,602 Savings deposits 560,308 246,660 13 498 -- 313,137 Certificates of deposits less than $100,000 2,222,301 712,004 385,140 530,989 586,778 7,390 Certificates of deposits more than $100,000 1,002,503 339,590 208,491 217,971 236,251 200 IRAs 316,844 90,844 44,613 64,683 116,280 424 Open time deposits 48,794 44,608 424 636 3,126 -- Short-term borrowings 1,510,968 1,485,128 -- 25,840 -- -- Long-term debt 746,447 122,091 52,888 50,074 377,687 143,707 Noncosting liabilities & equity 2,300,799 -- -- -- -- 2,300,799 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities & Equity $10,456,285 $4,038,644 $ 691,569 $ 890,691 $1,320,122 $3,515,259 - ---------------------------------------------------------------------------------------------------------------------------- Gap $ -- $ (599,523) $(314,511) $ (277,643) $1,511,071 $ (319,394) - ---------------------------------------------------------------------------------------------------------------------------- Cumulative Gap $ -- $ (599,523) $(914,034) $(1,191,677) $ 319,394 $ 0 - ----------------------------------------------------------------------------------------------------------------------------
48 27 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 $1.7 billion with a corresponding cumulative gap at one year of negative $2.3 billion. 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. The Company's dividend pay-out ratio target range is 30-45%. Dividend rates are determined by the Board of Directors in consideration of several factors including: current and projected capital ratios, liquidity and income levels and other bank dividend yields and payment ratios. The amount of a cash dividend, if any, rests with the discretion of the Board of Directors of BancGroup as well as upon applicable statutory constraints such as the Delaware law requirement that dividends may be paid only out of capital surplus or net profits for the fiscal year in which the dividend is declared or the preceeding fiscal year. BancGroup also has access to equity capital markets through both public and private issuances. Management considers these sources and related return in addition to internally generated capital in evaluating future expansion or acquisition opportunities. The Federal Reserve Board has issued guidelines identifying minimum Tier I leverage ratios relative to total assets and minimum capital ratios relative to risk-adjusted assets. The minimum leverage ratio is 3% but is increased from 100 to 200 basis points based on a review of individual banks by the Federal Reserve. The minimum risk adjusted capital ratios established by the Federal Reserve are 4% for Tier I and 8% for total capital. BancGroup's actual capital ratios and the components of capital and risk adjusted asset information (subject to regulatory review) as of December 31, 1998 are stated below: Capital (thousands): Tier I Capital: Shareholders' equity (excluding unrealized gain on securities available for sale and intangibles plus Trust Preferred Securities) $ 607,110 Tier II Capital: Allowable loan loss reserve 83,562 Subordinated debt 12,542 ------------ Total Capital $ 703,214 Risk Adjusted Assets (thousands) $ 7,140,985 Total Assets (thousands) $ 10,456,285
1998 1997 - ----------------------------------------------------------- Tier I leverage ratio 6.08% 7.56% Risk Adjusted Capital Ratios: Tier I Capital Ratio 8.50% 10.07% Total Capital Ratio 9.85% 11.41%
BancGroup has increased capital gradually through normal earnings retention as well as through stock registrations to capitalize acquisitions. The decline in the ratios is primarily due to rapid asset growth and the charges recorded in 1998 related to acquisition, restructuring and mortgage servicing rights write downs. These charges are discussed in the "Noninterest Expense" and "Acquisition Expense and Restructuring Charges" sections of Management's Discussion and Analysis. In January 1997, BancGroup issued $70 million of Trust Preferred Securities which qualify as Tier 1 Capital. 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, 1998, these deposits totaled $52.6 million. FINANCIAL ACCOUNTING STANDARDS BOARD RELEASES In June 1997, the Financial Accounting Standards Board issued 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 components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial 49 28 statements. On January 1, 1998 BancGroup adopted SFAS No. 130. In June 1997, the Financial Accounting Standards Board also issued 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. This statement requires the reporting of financial and descriptive information about an enterprise's reportable operating segments. On January 1, 1998 BancGroup adopted SFAS No. 131. Under SFAS No. 131, BancGroup is reporting two segments, commercial banking 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 postretirement 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. On January 1, 1998, BancGroup adopted this statement. (See note 14 to the Consolidated Financial Statements.) In June 1998, the Financials Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. Earlier application of all of the provisions of this Statement is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of the Statement. This Statement should not be applied retroactively to financial statements of prior periods. Management is currently in the process of assessing the impact that SFAS No. 133 will have on BancGroup's 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. 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) changes in mortgage servicing rights prepayment assumptions; (vi) general economic conditions, either nationally or regionally, that are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (vii) changes which may occur in the regulatory environment; (viii) a significant rate of inflation (deflation); (ix) changes in the securities markets; and (x) specifically relating to Year 2000 readiness disclosure, vendor representations, technological advancements, and economic factors including liquidity availability. 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. 50 29 REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Shareholders The Colonial BancGroup, Inc. In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of The Colonial BancGroup, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Montgomery, Alabama February 26, 1999 51 30 CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1998 and 1997 (Dollars in thousands) ASSETS 1998 1997 - -------------------------------------------------------------------------------------------------------- Cash and due from banks $ 437,719 $ 337,079 Interest-bearing deposits in banks and federal funds sold 57,247 100,172 Securities available for sale (Note 3) 1,414,218 655,864 Investment securities (market value: 1998, $173,542; 1997, $315,787) 170,954 313,140 Mortgage loans held for sale 692,042 238,540 Loans, net of unearned income (Note 4) 7,110,295 5,951,067 Less: Allowance for possible loan losses (83,562) (72,107) - -------------------------------------------------------------------------------------------------------- Loans, net 7,026,733 5,878,960 Premises and equipment, net (Note 8) 181,617 161,387 Excess of cost over tangible and identified intangible assets acquired, net 84,893 69,250 Mortgage servicing rights 183,469 142,040 Other real estate owned 8,728 14,840 Accrued interest and other assets 198,665 150,294 - -------------------------------------------------------------------------------------------------------- Total $ 10,456,285 $ 8,061,566 ======================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing demand $ 1,548,082 $ 1,147,280 Interest-bearing demand 1,747,321 1,416,404 Savings 560,308 501,857 Time 3,590,442 3,260,149 - -------------------------------------------------------------------------------------------------------- Total deposits 7,446,153 6,325,690 FHLB short-term borrowings (Note 9) 769,987 420,000 Other short-term borrowings (Note 9) 740,981 311,359 Subordinated debt (Note 10) 12,542 6,088 Trust preferred securities (Note 10) 70,000 70,000 FHLB long-term debt (Note 10) 528,163 234,831 Other long-term debt (Note 10) 135,742 4,362 Other liabilities 112,910 99,219 - -------------------------------------------------------------------------------------------------------- Total liabilities 9,816,478 7,471,549 - -------------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 6, 13, 16) Shareholders' equity (Notes 2,11) Common Stock, $2.50 par value; 200,000,000 shares authorized; 110,962,365 and 106,282,975 shares issued and outstanding at December 31, 1998 and December 31, 1997, respectively* 277,406 265,707 Treasury Stock (26,501 shares) (355) -- Additional paid in capital* 113,469 97,324 Retained earnings 249,297 226,513 Unearned compensation (2,348) (1,750) Accumulated other comprehensive income, net of taxes 2,338 2,223 - -------------------------------------------------------------------------------------------------------- Total shareholders' equity 639,807 590,017 - -------------------------------------------------------------------------------------------------------- Total $ 10,456,285 $ 8,061,566 ========================================================================================================
See notes to consolidated financial statements. *Prior year has been restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid August 14, 1998. 52 31 CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Interest Income: Interest and fees on loans $604,493 $512,213 $421,922 Interest and dividends on securities: Taxable 73,829 57,107 46,852 Nontaxable 4,815 4,601 4,702 Dividends 4,764 3,141 2,472 Interest on federal funds sold and securities purchased under resale agreements 4,661 5,738 4,597 Other interest 980 837 933 - -------------------------------------------------------------------------------------------------------- Total interest income 693,542 583,637 481,478 - -------------------------------------------------------------------------------------------------------- Interest Expense: Interest on deposits 256,446 232,898 188,938 Interest on short-term borrowings 54,866 40,825 40,388 Interest on long-term debt 39,129 11,048 2,800 - -------------------------------------------------------------------------------------------------------- Total interest expense 350,441 284,771 232,126 - -------------------------------------------------------------------------------------------------------- Net Interest Income 343,101 298,866 249,352 Provision for possible loan losses (Notes 1, 5) 26,345 16,321 14,442 - -------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Possible Loan Losses 316,756 282,545 234,910 - -------------------------------------------------------------------------------------------------------- Noninterest Income: Mortgage servicing fees 44,308 38,352 28,106 Service charges on deposit accounts 39,090 32,709 27,020 Securities gains, net (Note 3) 1,449 669 431 Other charges, fees and commissions 7,398 6,919 6,616 Other income 33,013 22,296 15,338 - -------------------------------------------------------------------------------------------------------- Total noninterest income 125,258 100,945 77,511 - -------------------------------------------------------------------------------------------------------- Noninterest Expense: Salaries and employee benefits 121,445 105,287 88,346 Occupancy expense of bank premises, net 28,291 23,821 18,797 Furniture and equipment expenses 24,787 20,086 15,727 Amortization and impairment of mortgage servicing rights 62,909 17,123 13,634 Amortization of intangible assets 4,927 3,206 2,151 Year 2000 expense 4,617 432 -- Acquisition and restructuring expense 21,535 6,463 11,918 SAIF special assessment -- -- 4,754 Other expense (Note 18) 86,901 65,296 62,163 - -------------------------------------------------------------------------------------------------------- Total noninterest expense 355,412 241,714 217,490 - -------------------------------------------------------------------------------------------------------- Income before income taxes 86,602 141,776 94,931 Applicable income taxes (Note 20) 31,406 51,414 33,082 - -------------------------------------------------------------------------------------------------------- Net Income $ 55,196 $ 90,362 $ 61,849 ======================================================================================================== Earnings per share (Note 21): Basic* $ .50 $ .86 $ .64 Diluted* .49 .84 .62 Average number of shares outstanding: Basic* 110,062 105,010 97,246 Diluted* 112,431 108,396 101,128 ========================================================================================================
See notes to consolidated financial statements. *Prior years have been restated to reflect the impact of a two-for-one stock split in the form of a 100% stock dividend paid August 14, 1998. 53 32 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 1998, 1997 and 1996 (In thousands, except per share amounts)
1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Net income $ 55,196 $ 90,362 $ 61,849 Other comprehensive income, net of taxes: Unrealized gains on securities available for sale arising during the period, net of taxes 1,880 2,398 940 Less reclassification adjustment for net (gains) losses included in net income, net of taxes (1,784) (429) (285) - ------------------------------------------------------------------------------------------------------ Comprehensive income $ 55,292 $ 92,331 $ 62,504 - ------------------------------------------------------------------------------------------------------
See Notes to the Consolidated Financial Statements. 54 33 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 1998, 1997 and 1996 (In thousands, except per share amounts)
Common Stock Additional Paid Retained Unearned Shares Amount In Capital Earnings Compensation - ---------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1996 41,455,939 $103,640 $ 170,115 $117,309 $ (1,849) Two-for-one stock split 41,455,939 103,640 (103,640) Adjustments for pooling-of-interests business combinations 9,203,226 23,008 488 9,050 - ---------------------------------------------------------------------------------------------------------------------------------- Restated Beginning Balance 92,115,104 230,288 66,963 126,359 (1,849) - ---------------------------------------------------------------------------------------------------------------------------------- Shares issued under: Directors Plan 63,420 159 169 Stock Option Plans 1,011,640 2,529 623 Dividend Reinvestment 120,272 301 746 Stock Bonus Plan 96,680 242 712 246 Employee Stock Purchase Plan 20,528 51 129 Issuance of common stock by pooled banks prior to merger 3,068,032 7,670 (2,384) (2,479) Issuance of shares for business combinations 309,380 773 1,827 Net income 61,849 Cash dividends: ($0.27 per share) (16,175) Cash dividends by pooled banks prior to merger (4,291) Treasury stock activity by pooled banks prior to merger (145,988) (365) (304) (207) Conversion of 7 1/2% convertible subordinated debentures 349,852 874 1,574 Conversion of 12 3/4% convertible subordinated debentures 1,613,196 4,033 3,327 Change in unrealized gain (loss) on securities available for sale, net of taxes - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 98,622,116 246,555 73,382 165,056 (1,603) - ---------------------------------------------------------------------------------------------------------------------------------- Issuance of shares for immaterial poolings: Tomoka Bancorporation 1,323,984 3,310 (27) 3,043 Great Southern Bancorp 1,855,622 4,639 2,968 2,514 First Independence Bank of Florida 1,007,864 2,520 4,374 (1,430) Shares issued under: Directors Plan 62,164 155 348 Stock Option Plans 1,339,778 3,349 2,054 Dividend Reinvestment 84,398 211 737 Stock Bonus Plan 46,024 115 385 (78) Employee Stock Purchase Plan 32,784 82 344 Issuance of common stock by pooled banks prior to merger 902,296 2,256 6,514 (4,905) (69) Purchase of treasury stock for issuance in business combination (1,342,330) (3,356) (12,531) Issuance of shares for business combinations 2,032,518 5,081 17,177 Net income 90,362 Cash dividends: ($0.30 per share) (24,957) Cash dividends by pooled banks prior to merger (3,170) Treasury stock activity by pooled banks prior to merger (40,913) (102) (24) Conversion of 7 1/2% convertible subordinated debentures 326,328 816 1,469 Conversion of 7% convertible subordinated debentures 30,342 76 154 Change in unrealized gain on securities available for sale, net of taxes - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 106,282,975 265,707 97,324 226,513 (1,750) - ---------------------------------------------------------------------------------------------------------------------------------- Issuance of shares for immaterial poolings: CNB Holding Company 1,767,562 4,419 (4,125) 7,965 Shares issued under: Directors Plan 79,092 198 621 Stock Option Plans 1,513,701 3,784 794 Stock Bonus Plans 94,080 235 1,506 (598) Employee Stock Purchase Plan 47,221 118 571 Issuance of common stock by pooled banks prior to merger 88,714 222 5,341 (4,000) Purchase of treasury stock for issuance in a business combination (1,275,000) (3,188) (13,912) Issuance of shares for business combinations 2,183,013 5,458 24,185 Net income 55,196 Cash dividends: ($0.34 per share) (35,869) Cash dividends by pooled banks prior to merger (508) Conversion of 7 1/2% convertible subordinated debentures 181,007 453 809 Change in unrealized gain on securities available for sale, net of taxes - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 110,962,365 $277,406 $113,114 $249,297 $(2,348) ================================================================================================================================== Accumulated Total Other Comprehensive Shareholders' Income Equity - --------------------------------------------------------------------------------------------------- Balance, January 1, 1996 $ (445) $ 388,770 Two-for-one stock split Adjustments for pooling-of-interests business combinations 117 32,663 - --------------------------------------------------------------------------------------------------- Restated Beginning Balance (328) 421,433 - --------------------------------------------------------------------------------------------------- Shares issued under: Directors Plan 328 Stock Option Plans 3,152 Dividend Reinvestment 1,047 Stock Bonus Plan 1,200 Employee Stock Purchase Plan 180 Issuance of common stock by pooled banks prior to merger 2,807 Issuance of shares for business combinations 2,600 Net income 61,849 Cash dividends: ($0.27 per share) (16,175) Cash dividends by pooled banks prior to merger (4,291) Treasury stock activity by pooled banks prior to merger (876) Conversion of 7 1/2% convertible subordinated debentures 2,448 Conversion of 12 3/4% convertible subordinated debentures 7,360 Change in unrealized gain (loss) on securities available for sale, net of taxes 655 655 - --------------------------------------------------------------------------------------------------- Balance, December 31, 1996 327 483,717 - --------------------------------------------------------------------------------------------------- Issuance of shares for immaterial poolings: Tomoka Bancorporation (23) 6,303 Great Southern Bancorp (25) 10,096 First Independence Bank of Florida (25) 5,439 Shares issued under: Directors Plan 503 Stock Option Plans 5,403 Dividend Reinvestment 948 Stock Bonus Plan 422 Employee Stock Purchase Plan 426 Issuance of common stock by pooled banks prior to merger 3,796 Purchase of treasury stock for issuance in business combination (15,887) Issuance of shares for business combinations 22,258 Net income 90,362 Cash dividends: ($0.30 per share) (24,957) Cash dividends by pooled banks prior to merger (3,170) Treasury stock activity by pooled banks prior to merger (126) Conversion of 7 1/2% convertible subordinated debentures 2,285 Conversion of 7% convertible subordinated debentures 230 Change in unrealized gain on securities available for sale, net of taxes 1,969 1,969 - --------------------------------------------------------------------------------------------------- Balance, December 31, 1997 2,223 590,017 - --------------------------------------------------------------------------------------------------- Issuance of shares for immaterial poolings: CNB Holding Company 19 8,278 Shares issued under: Directors Plan 819 Stock Option Plans 4,578 Stock Bonus Plans 1,143 Employee Stock Purchase Plan 689 Issuance of common stock by pooled banks prior to merger 1,563 Purchase of treasury stock for issuance in a business combination (17,100) Issuance of shares for business combinations 29,643 Net income 55,196 Cash dividends: ($0.34 per share) (35,869) Cash dividends by pooled banks prior to merger (508) Conversion of 7 1/2% convertible subordinated debentures 1,262 Change in unrealized gain on securities available for sale, net of taxes 96 96 - --------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $2,338 $639,807 ===================================================================================================
55 34 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1997, and 1996 (In thousands)
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 55,196 $ 90,362 $ 61,849 Adjustments to reconcile net income: Depreciation, amortization and accretion 28,721 22,840 17,034 Amortization and impairment of mortgage servicing rights 62,909 17,123 13,634 Provision for loan loss 26,345 16,321 14,442 Deferred taxes (17,459) 612 (1,720) Gain on sale of securities, net (1,449) (669) (431) Loss (gain) on sale and disposal of other assets 10,627 (1,548) (766) Additions to mortgage servicing rights (104,338) (52,315) (32,264) Net increase in mortgage loans held for sale (453,502) (70,679) (41,632) Increase in interest receivable (22,216) (12,814) (2,272) Increase in prepaids and other receivables (12,604) (303) (729) Decrease in accrued expenses & accounts payable (13) (203) (889) Increase (decrease) in accrued income taxes 5,009 1,145 (183) Increase in interest payable 7,558 10,060 4,541 Other, net 5,274 (11,727) 1,733 - -------------------------------------------------------------------------------------------------------------- Total adjustments (465,138) (82,157) (29,493) - -------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (409,942) 8,205 32,356 - -------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities of securities available for sale 243,325 171,207 154,810 Proceeds from sales of securities available for sale 716,574 55,729 80,215 Purchase of securities available for sale (1,667,591) (178,824) (229,771) Proceeds from maturities of investment securities 207,136 230,947 166,225 Purchase of investment securities (65,045) (171,892) (159,810) Net decrease in short-term investment securities -- -- 5,460 Net increase in loans (974,465) (651,318) (775,145) Purchase of bank owned life insurance -- (30,000) -- Cash received in bank acquisitions 80,682 28,242 8,465 Capital expenditures (46,865) (46,281) (33,546) Purchase of treasury stock for issuance in a business combination (17,100) (16,013) (876) Proceeds from sale of other real estate owned 16,204 3,619 11,542 Other, net 516 3,478 102 - -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,506,629) (601,106) (772,329) - -------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in demand, savings and time deposits 799,522 525,507 565,333 Net increase in federal funds purchased, repurchase agreements and other short-term borrowings 646,386 72,366 236,988 Proceeds from issuance of long-term debt 560,232 70,029 6,394 Repayment of long-term debt (2,307) (16,996) (6,132) Proceeds from issuance of common stock 6,830 10,573 7,186 Dividends paid (36,377) (28,127) (20,466) - -------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,974,286 633,352 789,303 - -------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 57,715 40,451 49,330 Cash and cash equivalents at beginning of year 437,251 396,800 347,470 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 494,966 $ 437,251 $ 396,800 ============================================================================================================== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 342,883 $ 274,711 $ 227,585 Income taxes 37,881 49,657 34,985 Non-cash investing activities: Transfer of loans to other real estate $ 10,865 $ 15,657 $ 10,150 Origination of loans for the sale of other real estate 399 643 1,610 Securitization of mortgage loans -- -- 99,276 Non-cash financing activities: Conversion of subordinated debentures to common stock $ 1,262 $ 2,515 $ 9,808 Assets acquired in business combinations 277,810 488,839 79,794 Liabilities assumed in business combinations 247,464 526,741 76,760 ==============================================================================================================
See notes to consolidated financial statements 56 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 1998, 1997 and 1996 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 BancGroup have been restated to give retroactive effect to the 1998 pooling-of-interests method business combinations with United American Holding Corporation ("United American"), First Central Bank ("First Central"), South Florida Banking Corp. ("South Florida"), Commercial Bank of Nevada ("CBN"), FirstBank, First Macon Bank & Trust ("First Macon"), InterWest Bancorp. ("InterWest") and Prime Bank of Central Florida ("Prime") and the 1997 pooling-of-interests method business combinations with Fort Brooke Bancorporation ("Fort Brooke"), Jefferson Bancorp, Inc. ("Jefferson") and D/W Bankshares, Inc. ("Bankshares"). (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--BancGroup considers cash and highly liquid investments with maturities of three months or less when purchased as cash and cash equivalents. Cash and cash equivalents consist primarily of cash and due from banks, interest-bearing deposits in banks and Federal funds sold. INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE--Securities are classified as either held to maturity, available for sale or trading. Held to maturity or investment securities are securities for which management has the ability and intent to hold on a long-term basis or until maturity. These securities are carried at amortized cost, adjusted for amortization of premiums, and accretion of discount to the earlier of the maturity or call date. Securities available for sale represent those securities intended to be held for an indefinite period of time, including securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar factors. Securities available-for-sale are recorded at market value with unrealized gains and losses net of any tax effect, added or deducted directly from shareholders' equity. Securities carried in trading accounts are carried at market value with unrealized gains and losses reflected in income. Realized and unrealized gains and losses are based on the specific identification method. MORTGAGE LOANS HELD FOR SALE--Mortgage loans held for sale are carried at the lower of aggregate cost or market. The cost of mortgage loans held for sale is the mortgage note amount plus certain net origination costs less discounts collected. 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, 1998 and 1997 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--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 57 36 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 allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, and an analysis of current economic conditions. While management believes that it has established the allowance in accordance with generally accepted accounting principles and has taken into account the views of its regulators and the current economic environment, there can be no assurance that in the future the Bank's regulators or its economic environment will not require further increases in the allowance. INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS--Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well collateralized and in the process of collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms of interest and principal. While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge offs have been fully recovered. Interest income recognized on a cash basis was immaterial for the years ended December 31, 1998, 1997 and 1996. PREMISES AND EQUIPMENT--Bank premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed generally using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Estimated useful lives range from five to forty years for bank buildings and leasehold improvements and three to ten years for furniture and equipment. Expenditures for maintenance and repairs are charged against earnings as incurred. Costs of major additions and improvements are capitalized. Upon disposition or retirement of property, the asset account is relieved of the cost of the item and the allowance for depreciation is charged with accumulated depreciation. Any resulting gain or loss is reflected in current income. OTHER REAL ESTATE OWNED--Other real estate owned includes real estate acquired through foreclosure or deed taken in lieu of foreclosure. These amounts are recorded at the lower of the loan balance prior to foreclosure, plus certain costs incurred for improvements to the property ("cost") or market value less estimated costs to sell the property. Any write-down from the cost to market value required at the time of foreclosure is charged to the allowance for 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-five years for the excess of cost over tangible and identified intangible assets acquired using the straight-line method or an accelerated method, as applicable, and ten years for deposit core base intangibles using an accelerated method. The recoverability of intangible assets is reviewed periodically based on the current earnings of acquired entities. If warranted, analysis, including undiscounted income projections, are made to determine if adjustments to carrying value or amortization periods are necessary. MORTGAGE SERVICING RIGHTS, AMORTIZATION AND IMPAIRMENT--BancGroup recognizes as separate assets the rights to service mortgage loans for others, whether the servicing rights are acquired through a separate purchase or through loan origination activities. The total cost of mortgage loans held for sale is allocated to mortgage loans held for sale and mortgage servicing rights, based on their relative fair values at date of sale. Amortization of mortgage servicing rights ("MSRs") is 58 37 based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the MSRs. Projected net servicing income is based on the estimated remaining life of the underlying mortgage loan portfolio, which declines over time from prepayments and scheduled loan amortization. The Company estimates future prepayments rates based on current interest rate levels, other economic conditions and market forecasts, as well as relevant characteristics of the servicing portfolio, such as loan types, interest rate stratification and recent prepayment experience. The carrying value of MSRs is evaluated for impairment, which is recognized in the statement of income during the period in which impairment occurs as an adjustment to a valuation allowance. For purposes of performing its impairment evaluation, the Company stratifies its portfolio on the basis of certain risk characteristics including loan type (fixed or adjustable) and note rate and determines the fair value of MSRs based on market prices for similar MSRs and estimates of future net servicing income, considering market concensus loan prepayment predictions, interest rates, service costs and other economic factors. HEDGING OF MORTGAGE SERVICING RIGHTS--BancGroup acquires derivative contacts that are expected to change in value inversely to the movement of interest rates ("Servicing Hedges"). These derivatives include Treasury options and futures. The Servicing Hedges are designed to protect the value of the hedged MSRs from the effects of increased prepayment activity that generally results from declining interest rates. The value of the Treasury futures and options is derived from an underlying instrument; however, the notional or contractual amount is not recognized in the balance sheet. The carrying value of the MSRs is adjusted for realized and unrealized gains and losses in the derivative financial instruments that qualify for hedge accounting. For the year ended December 31, 1998, the unrealized loss on the Servicing Hedges was $4,339,000 and was included in the carrying value of MSRs. To qualify for hedge accounting, net changes in value of the Servicing Hedges are expected to be highly correlated with changes in the value of the hedged MSRs throughout the hedge period, and the Servicing Hedges must be designated to specific pools of MSRs. The Company measures initial and ongoing correlation by statistical analysis and dollar value offset comparison of the relative movements of the Servicing Hedges and related MSRs. If correlation were to cease on the derivatives hedging MSRs, they would then be accounted for as trading instruments. If a derivative contract hedging MSRs is terminated, the gain or loss is treated as an adjustment to the carrying value of the hedged MSRs and amortized over its remaining life. The servicing portfolio is geographically disbursed throughout the United States with a concentration in the southern states. 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 reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset, an impairment loss is recognized. Long-lived assets and certain intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. INCOME TAXES--BancGroup uses the asset and liability method of accounting for income taxes (See Note 20). Under the asset and liability method, deferred tax assets and liabilities are recorded at currently enacted tax rates applicable to the period in which assets or liabilities are expected to be realized or settled. Deferred tax assets and liabilities are adjusted to reflect changes in statutory tax rates resulting in income adjustments in the period such changes are enacted. STOCK-BASED COMPENSATION--SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value based method of accounting for an employee stock option or similar equity instrument. However, SFAS No. 123 allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. BancGroup has elected to continue to measure compensation cost for its stock option plans under the provisions in APB Opinion 25. EARNINGS PER SHARE--BancGroup presents basic and diluted earnings per share (EPS). All prior year earnings per share data has been restated to reflect the presentation required under SFAS No. 128 as well as a two-for-one stock split effected in the form of a 100 percent stock dividend distributed on August 14, 1998. ADVERTISING COSTS--Advertising costs are expensed as incurred. RECLASSIFICATIONS--Certain reclassifications have been made to the 1997 financial statements to conform to the 1996 presentation. RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting of Comprehensive Income," 59 38 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 components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. BancGroup adopted SFAs No. 130 effective January 1, 1998. Prior period financial statements have been reclassified for comparative purposes. In June 1997, the Financial Accounting Standards Board also issued 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. This statement requires the reporting of financial and descriptive information about an enterprise's reportable operating segments. BancGroup adopted SFAS No. 131 effective January 1, 1998. Prior period comparative information is included herein. Pursuant to SFAS No. 131, BancGroup reports two segments: commercial banking 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 postretirement 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. BancGroup adopted this statement effective January 1, 1998 and the required disclosures are included herein. In June 1998, the Financials Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. Earlier application of all of the provisions of this Statement is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this Statement. This Statement should not be applied retroactively to financial statements of prior periods. Management has not fully determined the impact that SFAS No. 133 will have on BancGroup's financial statements. 60 39 - -------------------------------------------------------------------------------- 2. 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. These business combinations have been reflected in the financial statements at December 31, 1998. The balances reflected are as of the date of consummation. (Dollars in thousands)
Accounting Date BancGroup Cash Total Total Total Financial Institutions Treatment Consummated Shares Paid(2) Assets Loans Deposits - --------------------------------------------------------------------------------------------------------------------------- 1996* Commercial Bancorp of Georgia, Inc. (GA) Pooling 07/03/96 4,612,920 $232,555 $145,429 $207,641 Southern Banking Corporation (FL) Pooling 07/03/96 5,716,988 232,461 160,864 205,602 Dothan Federal Savings Bank (AL) Purchase 07/08/96 309,380 $2,600 48,366 36,497 39,931 - --------------------------------------------------------------------------------------------------------------------------- 1997 Jefferson Bancorp, Inc. (FL) Pooling 01/03/97 7,709,904 472,732 322,857 405,836 Tomoka Bancorp, Inc. (FL) Pooling(1) 01/03/97 1,323,984 76,700 51,600 68,200 First Family Financial Corp. (FL) Purchase 01/09/97 661,128 6,492 167,300 117,500 156,700 D/W Bankshares, Inc. (GA) Pooling 01/31/97 2,033,096 138,686 71,317 124,429 Shamrock Holdings, Inc. (AL) Purchase 03/05/97 -- 11,813 54,500 19,300 46,400 Fort Brooke Bancorporation (FL) Pooling 04/22/97 3,199,946 208,800 141,500 185,800 Great Southern Bancorp (FL) Pooling(1) 07/01/97 1,855,622 121,009 98,100 106,673 First Commerce Banks of Florida, Inc. (FL) Purchase 07/01/97 1,371,390 97,093 64,472 88,302 Dadeland BancShares, Inc. (FL) Purchase 09/15/97 -- 38,000 169,946 103,199 145,491 First Independence Bank of Florida (FL) Pooling(1) 10/01/97 1,007,864 65,048 50,699 58,283 - --------------------------------------------------------------------------------------------------------------------------- 1998* United American Holding Corp. (FL) Pooling 02/02/98 4,226,412 275,263 197,623 236,773 ASB Bancshares, Inc. (AL) Purchase 02/05/98 934,514 158,656 110,093 135,940 First Central Bank (FL) Pooling 02/11/98 1,377,368 62,897 40,451 52,048 South Florida Banking Corp. (FL) Pooling 02/12/98 3,864,458 255,769 172,992 226,999 Commercial Bank of Nevada (NV) Pooling 06/15/98 1,684,314 129,577 86,251 117,749 CNB Holding Corporation (FL) Pooling(1) 08/12/98 1,767,562 89,893 58,456 81,445 FirstBank (TX) Pooling 08/31/98 2,782,038 187,445 59,664 163,254 First Macon Bank & Trust (GA) Pooling 10/01/98 4,643,025 199,525 135,651 174,774 Prime Bank of Central Florida (FL) Pooling 10/06/98 1,173,019 74,502 42,547 66,955 InterWest Bancorp (NV) Pooling 10/15/98 1,748,338 131,590 83,689 114,516 TB&T, Inc. (TX) Purchase 12/01/98 1,248,499 110,986 42,689 101,335 - ---------------------------------------------------------------------------------------------------------------------------
* 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. On June 18, 1998, BancGroup purchased certain assets totaling $8,168,000 and assumed certain liabilities, primarily deposits, totaling $8,871,000 of the Wade Green branch of Premier Bank in Atlanta, Georgia. (1) Due to the immaterial impact on BancGroup's Financial Statements, prior years have not been restated to include these poolings of interests. (2) Does not include immaterial amounts paid in lieu of fractional shares. The 1996 combinations with Southern and Commercial, the 1997 combinations with Jefferson, D/W Bankshares, and Fort Brooke and the 1998 combinations with United American, South Florida, First Central, Commercial Bank, FirstBank, First Macon, Prime, and Interwest Bancorp were accounted for using the pooling-of-interests method. Accordingly, all financial statement amounts have been restated to reflect the financial condition and results of operations as if these combinations had occurred at the beginning of the earliest period presented. For the purchase method business combinations, the operations and income of the combined institutions are included in the income of BancGroup from the date of purchase. The proforma impact of the purchase method business combinations on BancGroup's financial statements for periods prior to acquisition is not significant. The following is summary operating information for BancGroup showing the effect of the business combinations described in the preceding paragraphs (years prior to consummation).
As Originally Effect of Currently (In thousands) Reported Poolings Reported - ----------------------------------------------------------------------- 1997: Net interest income $248,499 $50,367 $298,866 Noninterest income 87,759 13,186 100,945 Net income 77,191 13,171 90,362 1996: Net interest income $169,678 $79,674 $249,352 Noninterest income 65,982 11,529 77,511 Net income 53,608 8,241 61,849 - -----------------------------------------------------------------------
61 40 3. SECURITIES The carrying and market values of investment securities are summarized as follows: INVESTMENT SECURITIES
1998 1997 ----------------------------------------- ------------------------------------------ Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value Cost Gains Losses Value - -------------------------------------------------------------------- ------------------------------------------ U.S. Treasury securities and obligations of U.S. government agencies $ 83,322 $ 574 $ (2) $ 83,894 $172,065 $ 1,029 $ (74) $173,020 Mortgage-backed securities 45,037 704 (221) 45,520 85,298 1,089 (635) 85,752 Obligations of state and political subdivisions 41,185 1,548 (4) 42,729 54,036 1,415 (45) 55,406 Other 1,410 1 (12) 1,399 1,741 115 (247) 1,609 - -------------------------------------------------------------------- ------------------------------------------ Total $170,954 $ 2,827 $ (239) $173,542 $313,140 $ 3,648 $(1,001) $315,787 - -------------------------------------------------------------------- ------------------------------------------
The carrying and market values of securities available for sale are summarized as follows: SECURITIES AVAILABLE FOR SALE
1998 1997 -------------------------------------------- ------------------------------------------- Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value Cost Gains Losses Value - -------------------------------------------------------------------------- ------------------------------------------- U.S. Treasury securities and obligations of U.S. government agencies $ 151,333 $ 871 $ (42) $ 152,162 $349,214 $1,759 $ (575) $350,398 Mortgage-backed securities 1,028,796 4,755 (2,750) 1,030,801 256,162 2,019 (1,785) 256,396 Obligations of state and political subdivisions 56,559 1,768 (11) 58,316 38,938 1,299 (4) 40,233 Other 173,722 1,256 (2,039) 172,939 7,840 998 (1) 8,837 - -------------------------------------------------------------------------- ------------------------------------------ Total $1,410,410 $8,650 $(4,842) $1,414,218 $652,154 $6,075 $(2,365) $655,864 - -------------------------------------------------------------------------- ------------------------------------------
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 securities available for sale is $79,122,000 and $77,295,000 in Federal Home Loan Bank stock at December 31, 1998 and 1997, respectively. Securities with a carrying value of approximately $1,060,554,000 and $647,839,000 at December 31, 1998 and 1997 respectively, were pledged for various purposes as required or permitted by law. Gross gains of $2,961,000, $760,000 and $935,000 and gross losses of $1,512,000, $91,000 and $504,000 were realized on sales of securities for 1998, 1997, and 1996, respectively. The amortized cost and market value of debt securities at December 31, 1998, by contractual maturity, are as follows (equity securities are not included as they have no maturity). 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 $ 74,964 $ 75,364 $ 68,240 $ 68,453 or less Due after one year 33,487 34,244 88,654 89,776 through five years Due after five years 9,716 10,209 39,445 40,046 through ten years Due after ten years 7,750 8,205 96,391 95,505 - ----------------------------------------------------------------------------------- Total 125,917 128,022 292,730 293,780 - ----------------------------------------------------------------------------------- Mortgage-backed securities 45,037 45,520 1,028,796 1,030,801 - ------------------------------------------------------------------------------------ Total $170,954 $173,542 $1,321,526 $1,324,581 - ------------------------------------------------------------------------------------
62 41 4. LOANS A summary of loans follows:
(In thousands) 1998 1997 - ------------------------------------------------------- Commercial, financial, and agricultural $1,102,446 $ 751,375 Real estate--commercial 2,006,851 1,673,505 Real estate--construction 1,028,471 734,239 Real estate--residential 2,438,236 2,382,324 Installment and consumer 344,860 329,136 Other 189,934 81,181 - ------------------------------------------------------- Subtotal 7,110,798 5,951,760 Unearned income (503) (693) - ------------------------------------------------------- Total $7,110,295 $5,951,067 - -------------------------------------------------------
BancGroup's lending is concentrated throughout Alabama, southern Tennessee, central Georgia, central, southwest and south Florida, central Texas and Nevada 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 commercial real estate and residential 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, 1998. 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, 1998 are summarized as follows:
(In thousands) Balance Balance 1/1/98 Additions Reductions 12/31/98 - --------------------------------------------------------------- $51,720 17,229 43,202 $25,747 - ---------------------------------------------------------------
At December 31, 1998 and 1997, the recorded investment in loans for which impairment has been recognized totaled approximately $18,640,000 and $16,462,000, respectively, and these loans had a corresponding valuation allowance of $4,813,000 and $5,381,000, respectively. The impaired loans were measured for impairment based primarily on the value of underlying collateral. For the years ended December 31, 1998 and 1997, the average recorded investment in impaired loans was approximately $20,014,000 and $18,853,000. The amount of interest recognized on impaired loans during the portion of the year that they were impaired was not significant for either 1998 or 1997. BancGroup uses several factors in determining if a loan is impaired. Generally, nonaccrual loans as well as loans classified by internal loan review are reviewed for impairment. The internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment status, borrower's financial data, collateral value and borrower's operating factors such as cash flows, operating income or loss, etc. As mentioned previously, BancGroup's international banking department became fully operational in July 1998. The department engages in confirming letters of credit with top-tier banks in Latin America and direct disbursements to those banks from U.S. customers. Loans outstanding at December 1998 totalled approximately $97 million. However, due to the immaterial balance of these loans in relation to total loans, these amounts will not be disclosed separately. 5. ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the allowance for possible loan losses is as follows:
(In thousands) 1998 1997 1996 - -------------------------------------------------------- Balance, January 1 $ 72,107 $ 61,732 $ 53,770 Addition due to acquisitions 1,840 6,873 617 Provision charged to income 26,345 16,321 14,442 Loans charged off (22,657) (17,136) (12,451) Recoveries 5,927 4,317 5,354 - -------------------------------------------------------- Balance, December 31 $ 83,562 $ 72,107 $ 61,732 - --------------------------------------------------------
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 and to manage interest rate risk. These financial instruments include loan commitments, standby letters of credit, obligations to deliver and sell mortgage loans, options on interest rate futures and interest rate futures. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. BancGroup's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of 63 42 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, 1998 and 1997 are as follows:
----------------------- Contract Amount ----------------------- (In thousands) 1998 1997 - -------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Loan commitments $2,541,231 $1,422,070 Standby letters of credit 99,378 59,589 Mortgage sales commitments 927,750 287,395
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. BancGroup's policy generally requires hedging for substantially all of its held for sale inventory and the estimated portion of the committed pipeline that is expected to close. The correlation between the price performance of the inventory being hedged and the sales commitments is high due to the similarity of the asset and the related hedge instrument. BancGroup is exposed to the risk that the portion of loans from the committed pipeline that actually closes is less than or more than the estimated amount of closing in the event of a decline or rise in rates during the commitment period. 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 loss in market value of these commitments was approximately $2,104,000 and $1,149,000 at December 31, 1998 and 1997, respectively. For options on interest rate futures and interest rate futures, BancGroup's exposure to interest rate risk is mitigated by the expected inverse relationship these instruments have with mortgage servicing rights. BancGroup's exposure to credit risk in the event of nonperformance by the other party to the financial instrument has been minimized from guaranties by BancGroup's broker as well as the Chicago Board of Trade. The following summarizes the notional amounts of BancGroup's derivative contracts:
(In thousands) Call Options Put Options Futures - --------------------------------------------------------- Balance, January 1, 1998 $ -- $ -- $ -- Additions 369,000 426,000 648,000 Dispositions/ Expirations (170,500) (123,000) (305,000) - --------------------------------------------------------- Balance, December 31,1998 $ 198,500 $ 303,000 $ 343,000 - ---------------------------------------------------------
These instruments are used by BancGroup to protect the value of its investment in mortgage servicing rights from the effects of increased prepayment activity that generally results from declining interest rates. As interest rates increase, the value of the mortgage servicing rights increases while the value of the hedge instruments declines. There can be no assurance that, in periods of increasing interest rates, the increase in value of hedged mortgage servicing rights will offset the loss in value of the Servicing Hedges; or, in periods of declining interest rates, that the Company's Servicing Hedges will generate gains, or if gains are generated, that they will fully off-set impairment of the hedged mortgage servicing rights. 7. MORTGAGE SERVICING RIGHTS An analysis of mortgage servicing rights and the related valuation reserve is as follows:
(In thousands) 1998 1997 - ---------------------------------------------------------- Mortgage Servicing Rights Balance, January 1 $143,401 $106,848 Additions 99,999 52,315 Scheduled amortization (25,941) (15,762) Hedge losses applied 4,339 -- - ---------------------------------------------------------- Balance, December 31 $221,798 $143,401 - ---------------------------------------------------------- Valuation Reserve Balance, January 1 $ 1,361 $ -- Additions 36,968 1,361 - ---------------------------------------------------------- Balance, December 31 $ 38,329 $ 1,361 - ---------------------------------------------------------- Mortgage Servicing Rights, Net $183,469 $142,040 - ----------------------------------------------------------
The estimated fair value of mortgage servicing rights was $186,669,000 and $163,948,000 at December 31, 1998 and 1997, respectively. As of December 31, 1998, 1997 and 1996, Colonial Mortgage services approximately $14.7 billion, $11.4 billion and $9.3 billion, respectively of loans for third parties. 64 43 8. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
(In thousands) 1998 1997 - ----------------------------------------------------- Land $ 38,743 $ 36,307 Bank premises 113,726 98,030 Equipment 109,852 97,713 Leasehold improvements 21,708 19,208 Construction in progress 15,112 13,494 Automobiles 804 1,232 - ----------------------------------------------------- Total 299,945 265,984 Less accumulated depreciation and amortization (118,328) (104,597) - ----------------------------------------------------- Premises and equipment, net $ 181,617 $ 161,387 - -----------------------------------------------------
9. SHORT-TERM BORROWINGS Short-term borrowings are summarized as follows:
(In thousands) 1998 1997 1996 - ---------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements $ 480,008 $284,740 $154,927 FHLB borrowings 769,987 420,000 715,000 Reverse Repurchase Agreements 184,834 12,695 -- Current maturities of FHLB advances 50,840 1,345 983 Term notes 25,000 10,000 1,033 Other short-term borrowings 299 2,579 289 - ---------------------------------------------------------- Total $1,510,968 $731,359 $872,232 - ----------------------------------------------------------
BancGroup had an outstanding term note with an unaffiliated financial institution in the amount of $25 million at December 31, 1998. The term note is payable in full upon maturity on June 30, 1999, and bears interest at a rate of 1% above LIBOR. All of the capital stock of BancGroup's subsidiary, Colonial Bank, is pledged as collateral. In 1997, BancGroup had a line of credit with an unaffiliated financial institution totaling $35 million of which $10 million was outstanding and is included in short-term borrowings at December 31, 1997. The line of credit bore interest at a rate of 1.5% above LIBOR. All of the capital stock of BancGroup's subsidiary, Colonial Bank, was pledged as collateral. This line of credit expired in 1998 and all amounts outstanding were paid in full. At December 31, 1998 and 1997, BancGroup had reverse repurchase agreements outstanding in the amount of $185 million and $13 million, respectively. This debt corresponds to securities purchased under resale agreements with other financial institutions (Note 10). BancGroup is a member of the Federal Home Loan Bank (FHLB). At December 31, 1998 and 1997, $1.3 billion and $656 million was outstanding of which $528 million and $235 million, respectively, (Note 10) is included in long-term debt with the remaining portion included in short-term borrowings, leaving credit availability at December 31, 1998 of $158 million based on current collateral. FHLB has a blanket lien on BancGroup's 1-4 family mortgage loans in the amount of the outstanding debt. Colonial Bank has a warehouse line of credit with $500 million of availability from FHLB, of which none was outstanding at December 31, 1998. This warehouse line is collateralized by mortgage loans held for sale. Additional details regarding short-term borrowings (excluding current maturities of long-term debt) are shown below:
(In thousands) Year Ended December 31 - ------------------------------------------------------------------------------ Maximum Average Outstanding Average Interest At Any Average Interest Rate At Month End Balance Rate Year End - ------------------------------------------------------------------------------ 1998 FHLB borrowings $ 901,149 $ 554,629 5.62% 5.29% Other short-term borrowings 598,813 449,743 5.26% 4.96% - ------------------------------------------------------------------------------ $1,499,962 $1,004,372 5.46% 5.15% - ------------------------------------------------------------------------------ 1997 FHLB borrowings $ 652,000 $ 539,587 5.74% 5.92% Other short-term borrowings 311,360 188,203 5.14% 5.49% - ------------------------------------------------------------------------------ $ 963,360 $ 727,790 5.61% 5.74% - ------------------------------------------------------------------------------ 1996 FHLB borrowings $ 715,000 $ 565,243 5.56% 5.57% Other short-term borrowings 252,591 178,552 4.95% 4.91% - ------------------------------------------------------------------------------ $ 967,591 $ 743,795 5.43% 5.53% - ------------------------------------------------------------------------------
65 44 10. LONG-TERM DEBT Long-term debt is summarized as follows:
(In thousands) 1998 1997 - ----------------------------------------------------------- 7 1/2% Convertible Subordinated Debentures $ 3,672 $ 4,893 7% Convertible Subordinated Debentures 1,145 1,195 Variable Rate Subordinated Debentures 7,725 -- Trust Preferred Securities 70,000 70,000 FHLB Advances 528,163 234,831 Reverse Repurchase Agreements 132,356 -- REMIC Bonds 3,386 4,333 Other -- 29 - ----------------------------------------------------------- Total $746,447 $315,281 - -----------------------------------------------------------
The 7 1/2% Convertible Subordinated Debentures due March 31, 2011 ("1986 Debentures") issued in 1986 are convertible at any time into shares of BancGroup Common Stock, at the conversion price of $7.00 principal amount of 1986 Debentures, subject to adjustment upon the occurrence of certain events, for each share of stock received. The 1986 Debentures are redeemable at the option of BancGroup at the face amount plus accrued interest. In the event all of the remaining 1986 Debentures are converted into shares of BancGroup Common Stock in accordance with the 1986 Indenture, approximately 524,500 shares of such Common Stock would be issued. The 7% Convertible Subordinated Debentures due December 31, 2004 ("1994 Debentures"), were issued by D/W Bankshares prior to being merged into BancGroup. The 1994 Debentures are convertible into BancGroup Common Stock, at the conversion price of $7.58 principal amount of the 1994 Debentures, subject to adjustment upon occurrence of certain events, for each share of stock received. In the event all of the remaining 1994 Debentures are converted into shares of BancGroup Common Stock in accordance with the 1994 Indenture, approximately 151,000 shares of such Common Stock would be issued. In connection with the ASB acquisition, on February 5, 1998, BancGroup issued $7,725,000 of variable rate subordinated debentures due February 5, 2008 ("1998 Debentures"). The 1998 Debentures bear interest equal to the New York Prime Rate minus 1% (but in no event less than 7% per annum). On January 29, 1997, BancGroup issued, through a special purpose trust, $70 million of Trust Preferred Securities. The securities bear interest at 8.92% and are subject to redemption by BancGroup, in whole or in part at any time after January 29, 2007 until maturity in January 2017. Circumstances are remote that redemption will occur prior to maturity. The subordinated debentures and Trust Preferred Securities described above are subordinate to substantially all remaining liabilities of BancGroup. BancGroup had long-term Federal Home Loan Bank (FHLB) Advances (Note 9) outstanding of $528,163,000 and $234,831,000 at December 31, 1998 and 1997, respectively. These advances bear interest rates of 4.90% to 5.89% and mature from 2000 to 2013. BancGroup has received funds under reverse repurchase agreements with Morgan Stanley, Salomon Brothers and First Boston. At December 31, 1998, BancGroup had long-term reverse repurchase agreements outstanding of $132 million. These agreements, which are collateralized by mortgage-backed securities, bear interest rates of 5.66% to 6.03% and mature from 2001 to 2003. BancGroup, with the acquisition of First AmFed in 1993, 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, 1998, only the Class A-4 bonds due September 1, 2017 remain outstanding with an outstanding balance of $3,386,000 and are collateralized by FNMA mortgaged-backed securities with a carrying value of $3,403,000. The collections on these securities are used to pay interest and principal on the bonds. At December 31, 1998, long-term debt, including the current portion, is scheduled to mature as follows:
Consolidated (In thousands) Parent Only BancGroup - ----------------------------------------------- 1999 $134,567 2000 175,000 2001 55,000 2002 114,293 2003 167,845 Thereafter $82,542 234,309 - ----------------------------------------------- Total $82,542 $881,014 - -----------------------------------------------
11. CAPITAL STOCK On July 15, 1998, BancGroup's Board of Directors declared a two-for-one stock split which was effected in the form of a 100 percent stock dividend distributed on August 14, 1998. The stated par value was not changed from $2.50 per share. Accordingly, all prior period information has been restated to reflect the reclassification from additional paid in capital to common stock. Additionally, all share and per share amounts in earnings per share calculations have been restated to retroactively reflect the stock split. The Board of Directors is authorized to issue shares of the preference stock in one or more series, and in connection with such issuance, to establish the relative rights, preferences, and limitations of each such series. Stockholders of BancGroup may not act by written consent or call special meetings. 12. REGULATORY MATTERS AND RESTRICTIONS During 1997, BancGroup became a member of the Federal Reserve and merged its subsidiary banks into one bank, Colonial Bank. Dividends payable by national and state banks in any year, without prior approval of the appropriate regulatory 66 45 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 $107 million of retained earnings plus certain 1999 earnings would be available for distribution to BancGroup, from its subsidiaries, as dividends in 1999 without prior approval from the respective regulatory authorities. Colonial Bank is required by law to maintain noninterest-bearing deposits with the Federal Reserve Bank to meet regulatory reserve requirements. At December 31, 1998, these deposits totaled $52.6 million. BancGroup and Colonial Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on BancGroup's financial position. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, BancGroup and Colonial Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. BancGroup's and Colonial Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require BancGroup and Colonial Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998 and 1997, that BancGroup and Colonial Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1998, the most recent notification from the Federal Deposit Insurance Corporation categorized Colonial Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized BancGroup and Colonial Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed BancGroup's category. Actual capital amounts and ratios for BancGroup and Colonial Bank are also presented in the following table:
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------- (In thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------- As of December 31,1998 Total Capital (to Risk Weighted Assets) Consolidated $703,549 9.85% $571,279 >8.0% $714,099 >10.0% - - Colonial Bank 727,764 10.20% 570,911 >8.0% 713,638 >10.0% - - Tier I Capital (to Risk Weighted Assets) Consolidated 607,110 8.50% 285,639 >4.0% 428,459 >6.0% - - Colonial Bank 643,867 9.02% 285,455 >4.0% 428,183 >6.0% - - Tier I Capital (to average assets) Consolidated 607,110 6.08% 399,717 >4.0% 499,646 >5.0% - - Colonial Bank 643,867 6.44% 399,670 >4.0% 499,625 >5.0% - - As of December 31,1997 Total Capital (to Risk Weighted Assets) Consolidated $665,648 11.41% $465,701 >8.0% $583,595 >10.0% - - Colonial Bank 662,681 11.28% 470,136 >8.0% 587,670 >10.0% - - Tier I Capital (to Risk Weighted Assets) Consolidated 587,613 10.07% 233,438 >4.0% 350,157 >6.0% - - Colonial Bank 590,734 10.05% 235,068 >4.0% 352,602 >6.0% Tier I Capital (to average assets) - - Consolidated 587,613 7.56% 310,341 >4.0% 387,926 >5.0% - - Colonial Bank 590,734 7.62% 310,157 >4.0% 387,696 >5.0% - - - ---------------------------------------------------------------------------------------------------------- *These ratios are subject to regulatory review.
13. 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, 1998 were as follows:
(In thousands) - --------------------------------------- 1999 $12,999 2000 11,339 2001 8,289 2002 5,910 2003 3,785 Thereafter 15,137 - --------------------------------------- Total $57,459 - ---------------------------------------
67 46 Rent expense for all leases amounted to $18,635,000 in 1998, $12,649,000 in 1997 and $10,766,000 in 1996. 14. EMPLOYEE BENEFIT PLANS BancGroup and subsidiaries are participants in a pension plan which covers most employees who have met certain age and length of service requirements. BancGroup's policy is to contribute annually an amount that can be deducted for federal income tax purposes using the frozen entry age actuarial method. Actuarial computations for financial reporting purposes are based on the projected unit credit method. Employee pension benefit plan status at December 31:
Change in benefit obligation: 1998 1997 - ---------------------------------------------------------------------------- Benefit obligation at January 1 $ 17,348 $ 13,279 Service cost 2,095 1,407 Interest cost 1,370 1,199 Actuarial loss 1,287 1,766 Benefits paid (559) (303) - ---------------------------------------------------------------------------- Benefit obligation at December 31 21,541 17,348 - ---------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at January 1 18,486 13,729 Actual return on plan assets 1,150 4,286 Employer contributions 1,578 774 Benefits paid (559) (303) - ---------------------------------------------------------------------------- Fair value of plan assets at December 31 20,655 18,486 - ---------------------------------------------------------------------------- Funded status at December 31 (886) 1,138 Unrecognized net actuarial gain (1,774) (3,824) Unrecognized prior service cost 19 18 - ---------------------------------------------------------------------------- Accrued benefit cost at December 31 $(2,641) $(2,668) - ----------------------------------------------------------------------------
Weighted-average assumptions as of December 31: 1998 1997 1996 - ------------------------------------------------------------------------------------ Discount rate 6.75% 7.25% 7.75% Expected return on plan assets 9.00% 9.00% 9.00% Rate of compensation increase 4.00% 4.25% 4.75% Components of net periodic benefit cost for the year ended December 31: 1998 1997 1996 - ------------------------------------------------------------------------------------ Service cost $ 2,095 $ 1,407 $ 1,099 Interest cost 1,370 1,199 1,029 Expected return on plan assets (1,691) (1,246) (1,058) Actuarial gain (163) - ------------------------------------------------------------------------------------ Net annual benefit cost $ 1,611 $ 1,360 $ 1,070 - ------------------------------------------------------------------------------------
At both December 31, 1998 and 1997, the pension plan assets included investments of 164,520 shares of BancGroup Common Stock representing 10% and 14% of pension plan assets, respectively. At December 31, 1998, BancGroup Common Stock included in pension plan assets had a cost and market value of approximately $616,500 and $1,974,000, respectively. Pension plan assets are distributed approximately 5% in U.S. Government and agency issues, 21% in Corporate bonds, 63% in equity securities (including BancGroup Common Stock) and 11% 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 plan and similar plans of combined banks amounted to approximately $1,794,000, $1,561,000 and $1,146,000 for 1998, 1997 and 1996, respectively. Prior to the merger, Jefferson maintained a retirement and 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 year ended December 31, 1996, expense recognized under the plan totaled $4,333,000. 15. 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 4,200,000 shares of Common Stock are reserved for issuance under the 1992 Plan. At December 31, 1998 and 1997, approximately 1,814,500 and 1,404,000, respectively, remained available for the granting of options under the 1992 Plan. The 1992 Nonqualified Stock Option Plan ("the 1992 Nonqualified Plan") provides an incentive to directors, officers and employees of BancGroup and its subsidiaries. Options granted under the 1992 Nonqualified Plan must be at a price not less than 85% of the fair market value of the shares at the date of grant. All options expire no more than ten years after the date of grant, or three months after an employee's termination. An aggregate of 3,200,000 shares of Common Stock are reserved for issuance under the 1992 Nonqualified Plan. At December 31, 1998 and 1997, approximately 2,712,000 and 2,814,000 shares, respectively remained available for the granting of options under the 1992 Nonqualified Plan. 68 47 Prior to 1992, BancGroup had both a qualified incentive stock option plan ("Plan") under which options were granted at a price not less than fair market value and a nonqualified stock option plan ("Nonqualified Plan") under which options were granted at a price not less than 85% of fair market value. All options under the plans expire ten years from the date of grant, or three months after the employee's termination. Although options previously granted under these plans may be exercised, no further options may be granted. Pursuant to the various business combinations, BancGroup assumed qualified stock options and non-qualified stock options according to the respective exchange ratios. Certain of the options issued during 1998 and 1997 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. These options become exercisable on a pro-rata basis over a period of one to five years. Following is a summary of the transactions in Common Stock under these plans for the years ended December 31, 1998, 1997 and 1996.
Qualified Plans(1) Nonqualified Plans(1) - --------------------------------------------------------------------------------------------------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price - --------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1995 1,049,722 $ 3.913 3,381,363 $ 2.845 Granted (at $7.29-$9.97 per share) 584,332 8.948 180,000 7.357 Exercised (at $1.54-$4.56 per share) (196,194) 4.108 (815,446) 2.939 Cancelled (at $5.58 per share) (125,264) 5.580 -- -- - --------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1996 1,312,596 5.966 2,745,917 3.113 Assumed in business combinations (at $6.20-$13.78 per share) 127,652 3.660 505,948 4.800 Granted (at $9.578-$13.86 per share) 226,200 11.477 117,000 10.609 Exercised (at $1.54-$8.658 per share) (617,362) 3.548 (722,416) 3.093 Cancelled (at $8.578-$13.60 per share) (85,788) 9.596 (3,228) 3.690 - --------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1997 963,298 8.181 2,643,221 3.773 Assumed in business combinations (at $2.378-$5.9758 per share) 578,339 4.234 226,700 4.419 Granted (at $7.585-$18.20315 per share) 1,695,000 13.821 132,000 12.366 Exercised (at $1.54-$12.125 per share) (567,459) 4.913 (946,242) 3.426 Cancelled (at $8.578-$17.1875 per share) (105,280) 13.778 (30,000) 9.995 - --------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1998 2,563,898 $ 11.513 2,025,679 $ 4.475 - ---------------------------------------------------------------------------------------------------------
(1) This table includes those plans assumed pursuant to various business combinations according to the respective exchange ratios. At December 31, 1998, the total shares outstanding and exercisable under these option plans were as follows:
Options Outstanding Options Exercisable - ---------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Number Average Average Aggregate Number Average Aggregate Range of Outstanding Remaining Exercise Option Exercisable Exercise Option Exercise Prices at 12/31/98 Contractual Life Price Price at 12/31/98 Price Price - ---------------------------------------------------------------------------------------------------------------------------- $1.54-$1.813 455,432 1.95 years $ 1.552 $ 706,664 455,432 $ 1.552 $ 706,664 $1.863-$1.94 190,910 3.60 years 1.927 367,823 190,910 1.927 367,823 $2.378-$4.223 402,997 4.45 years 3.499 1,409,979 402,997 3.499 1,409,979 $4.313-$4.56 696,582 2.46 years 4.499 3,134,178 696,582 4.499 3,134,178 $4.625-$5.4965 222,445 5.44 years 4.909 1,091,932 222,445 4.909 1,091,932 $5.85-$8.658 521,411 7.39 years 7.855 4,095,875 419,333 7.831 3,283,801 $9.5775-$13.86 1,359,800 9.45 years 11.335 15,413,102 106,720 10.413 1,111,235 $14.45-$18.203 740,000 9.15 years 16.857 12,473,944 2,000 14.450 28,900 - ---------------------------------------------------------------------------------------------------------------------------- Total 4,589,577 6.49 years $ 8.431 $ 38,693,497 2,496,419 $ 4.460 $ 11,134,512 - ----------------------------------------------------------------------------------------------------------------------------
69 48 As permitted by Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (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, BancGroup's net income and net income per share would have been reduced to the pro forma amounts indicated below:
As Pro Reported Forma - ------------------------------------------------------------- 1998 Net income $ 55,196 $ 54,426 Earnings per share (basic) $ 0.50 $ 0.49 1997 Net income $ 90,362 $ 89,836 Earnings per share (basic) $ 0.86 $ 0.86 1996 Net income $ 61,849 $ 60,844 Earnings per share (basic) $ 0.64 $ 0.63 - -------------------------------------------------------------
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 1998, 1997 and 1996, respectively: dividend yield of 2.50%, 3.11%, and 3.15%; expected volatility of 25%, 23%, and 34% for 1998, 1997 and 1996; risk-free interest rates of 5.06%, 6.46%, and 6.04% for 1998, 1997 and 1996, respectively; and expected lives of ten years. The weighted average fair values of options granted during 1998, 1997 and 1996 was $3.66, $4.81, and $6.51, 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 1998, 1997 and 1996, respectively, 79,092, 62,164 and 63,420 shares of Common Stock were issued under the Directors Plan, representing approximately $819,000, $503,000 and $328,000 in directors' fees for 1998, 1997 and 1996, 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. A total of $1,123,000, $423,000 and $171,000 in compensation expense was charged to operations under this plan for the years ended December 31, 1998, 1997 and 1996, respectively. During 1998, 1997 and 1996 the Company awarded 123,960, 58,204 and 100,000 shares, respectively, under the Stock Bonus and Retention Plan having weighted average fair value at grant date of $17.19, $10.41 and $9.68, respectively. An aggregate of 3,000,000 shares have been reserved for issuance under this Plan. There were 385,364 shares outstanding of which 121,921 shares were vested at December 31, 1998. In 1994, BancGroup adopted the Employee Stock Purchase Plan which provides employees of BancGroup, who work in excess of 29 hours per week, with a convenient way to become shareholders of BancGroup. The participant authorizes a regular payroll deduction of not less than $10 or not more than 10% of salary. The participant may also contribute whole dollar amounts of not less than $100 or not more than $1,000 each month toward the purchase of the stock at market price. There are 600,000 shares authorized for issuance under this Plan. An additional 400,000 may be acquired from time to time on the open market for issuance under the Plan. There were 125,417 shares issued and outstanding under this Plan at December 31, 1998. 16. CONTINGENCIES BancGroup and its subsidiaries are from time to time defendants in legal actions from normal business activities. Management does not anticipate that the ultimate liability arising from litigation outstanding at December 31, 1998, will have a materially adverse effect on BancGroup's financial statements. 17. RELATED PARTIES Prior to 1998, insurance coverage for credit life, and accident and health insurance was provided to customers of Colonial 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 $976,000 and $1,651,000 in 1997 and 1996, respectively. BancGroup, Colonial Bank and CMC lease premises, including their principal corporate offices, and airplane services from companies owned partly or wholly by principal shareholders of BancGroup. Amounts paid under these leases and agreements approximated $3,717,000, $3,475,000 and $3,252,000 in 1998, 1997 and 1996, respectively. During 1998, 1997 and 1996, BancGroup and its subsidiaries paid or accrued fees of approximately $1,198,000, $1,659,000 and $1,475,000, respectively, for legal services required of law firms in which a partner of the firm serves on the Board of Directors. 70 49 18. ACQUISITION EXPENSE & RESTRUCTURING CHARGES In the first quarter of 1998, BancGroup reorganized executive management of its Florida regions. The reorganization resulted in a restructuring charge of $2.5 million. During the fourth quarter of 1998, the Company developed a plan to: - Close certain unprofitable branches - Sell five super-market branches - Relocate and upgrade two other branches - Move the headquarters of the South Florida Region to downtown Miami and to consolidate the trust department into the South Florida headquarters to better serve its customer base. As a result of these actions BancGroup recognized a fourth quarter restructuring charge of $6.3 million, which is net of $902,000 in reversals of unused reserves. The following is a summary of restructuring charges and activity for the year ended December 31, 1998:
Leasehold Accrued Lease Reduction of Termination Severance (In thousands) Asset Values Liabilities & Other Total - ---------------------------------------------------------------------------------- Additions(expense) $ 4,395 $ 3,240 $ 2,052 $ 9,687 Reversal of unused reserves -- (362) (540) (902) - ---------------------------------------------------------------------------------- Net expense 4,395 2,878 1,512 8,785 Write-off of assets (4,395) -- -- (4,395) Reductions (payments) -- -- (914) (914) - ---------------------------------------------------------------------------------- Balance at December 31, 1998 $ -- $ 2,878 $ 598 $ 3,476 - ----------------------------------------------------------------------------------
Additionally, the Company has recognized acquisition related expenses totaling $12,750,000, $6,463,000 and $11,918,000 for each of the years ended December 31, 1998, 1997 and 1996, respectively. These expenses relate primarily to transaction costs such as legal and accounting fees and incremental charges related to the integration of acquired banks, such as system conversion (including contract buy-outs and write off of equipment) and employee severance. 19. OTHER EXPENSE The following amounts were included in Other Expense:
(In thousands) 1998 1997 1996 - ------------------------------------------------------------- FDIC assessment $ 2,221 $ 1,822 $ 2,582 Advertising and public relations 7,835 7,574 7,083 Stationery, printing and supplies 6,551 5,525 5,028 Telephone 7,276 5,510 5,291 Legal 4,663 2,949 3,350 Postage 7,185 6,001 3,187 Insurance 1,644 2,095 2,360 Professional services 13,739 9,945 6,841 Travel 4,695 4,035 3,118 Other 31,092 19,840 23,323 - ------------------------------------------------------------- Total $ 86,901 $ 65,296 $ 62,163 - -------------------------------------------------------------
20. INCOME TAXES The components of income taxes were as follows:
(In thousands) 1998 1997 1996 - ------------------------------------------------------------ Currently payable: Federal $ 44,880 $ 46,395 $ 32,021 State 3,985 4,407 2,781 Deferred (17,459) 612 (1,720) - ------------------------------------------------------------ Total $ 31,406 $ 51,414 $ 33,082 - ------------------------------------------------------------
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) 1998 1997 1996 - ------------------------------------------------------------------ Tax at statutory rate on income from operations $ 30,311 $ 49,622 $ 32,945 Add: State income taxes, net of federal tax benefit 1,259 3,067 2,290 Amortization of net purchase accounting adjustments 1,681 1,026 392 Other 367 (142) 668 - ------------------------------------------------------------------ Total 3,307 3,951 3,350 - ------------------------------------------------------------------ Deduct: Nontaxable interest income 1,622 2,116 3,111 Other 590 43 102 - ------------------------------------------------------------------ Total 2,212 2,159 3,213 - ------------------------------------------------------------------ Total income taxes $ 31,406 $ 51,414 $ 33,082 - ------------------------------------------------------------------
71 50 The components of BancGroup's net deferred tax asset as of December 31, 1998 and 1997, were as follows:
1998 1997 - ---------------------------------------------------------- Deferred tax assets: Allowance for possible loan losses $31,670 $22,057 Pension accrual in excess of contributions 497 1,078 Accumulated amortization and valuation reserve for mortgage servicing rights 7,642 1,348 Other real estate owned write-downs 544 1,304 Other liabilities and reserves 7,709 2,100 Accelerated tax depreciation 655 37 Other 5,679 2,500 - ---------------------------------------------------------- Total deferred tax asset $54,396 $30,424 - ---------------------------------------------------------- Deferred tax liabilities: Cumulative accretion/discount on bonds 1,125 1,309 Differences between financial reporting and tax bases of net assets acquired 1,233 528 Loan loss reserve recapture 3,498 1,090 Unrealized gain on securities available for sale 1,443 681 Deferred compensation 8,603 2,480 Other 1,033 1,231 - ---------------------------------------------------------- Total deferred tax liability 16,935 7,319 - ---------------------------------------------------------- Net deferred tax asset $37,461 $23,105 - ----------------------------------------------------------
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. 21. EARNINGS PER SHARE The following table reflects a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation:
(Dollars in thousands, Per Share except per share amounts) Income Shares Amount - ------------------------------------------------------------------ 1998 Basic EPS Net income $55,196 110,062 $0.50 Effect of dilutive securities Options 1,640 Convertible debentures 168 729 - ------------------------------------------------------------------ Diluted EPS $55,364 112,431 $0.49 - ------------------------------------------------------------------ 1997 Basic EPS Net income $90,362 105,010 $0.86 Effect of dilutive securities Options 2,422 Convertible debentures 295 964 - ------------------------------------------------------------------ Diluted EPS $90,657 108,396 $0.84 - ------------------------------------------------------------------ 1996 Basic EPS Net income $61,849 97,246 $0.64 Effect of dilutive securities Options 2,642 Convertible debentures 445 1,240 - ------------------------------------------------------------------ Diluted EPS $62,294 101,128 $0.62 - ------------------------------------------------------------------
22. 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. - DERIVATIVES -- Fair value is defined as the amount that the company would receive or pay to terminate the contracts at the reporting date. Market or dealer quotes were used to value the instruments. - LOANS -- For loans, the fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. - DEPOSITS -- The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at December 31, 1998 and 1997. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. - SHORT-TERM BORROWINGS -- Rates currently available to BancGroup for borrowings with similar terms and remaining maturities are used to estimate fair value of existing borrowings. 72 51 - 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, 1998 and 1997. The estimated fair values of BancGroup's financial instruments at December 31, 1998 and 1997 are as follows:
1998 1997 ------------------------------------------------------------ Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - ----------------------------------------------------------------------------------------------------- Financial assets: Cash and short-term investments $ 494,966 $ 494,966 $ 437,251 $ 437,251 Securities available for sale 1,414,218 1,414,218 655,864 655,864 Investment securities 170,954 173,542 313,140 315,787 Mortgage loans held for sale 692,042 692,099 238,540 240,584 Loans 7,110,295 5,951,067 Less: allowance for loan losses (83,562) (72,107) - ----------------------------------------------------------------------------------------------------- Loans, net 7,026,733 7,150,559 5,878,960 5,793,793 - ----------------------------------------------------------------------------------------------------- Total $ 9,798,913 $ 9,925,384 $7,523,755 $7,443,279 - ----------------------------------------------------------------------------------------------------- Financial liabilities: Deposits $ 7,446,153 $ 7,341,289 $6,325,690 $5,987,853 Short-term borrowings 1,510,968 1,510,131 731,359 728,739 Long-term debt 746,447 739,840 315,281 323,361 - ----------------------------------------------------------------------------------------------------- Total $ 9,703,568 $ 9,591,260 $7,372,330 $7,039,953 - ----------------------------------------------------------------------------------------------------- DERIVATIVES: Options on Interest rate futures $ (4,234) $ (4,234) Interest rate futures (2,730) (2,730) - -------------------------------------------------------------------- $ (6,964) $ (6,964) - --------------------------------------------------------------------
73 52 23. SEGMENT INFORMATION Through its wholly owned subsidiary Colonial Bank and Colonial Bank's wholly owned subsidiary Colonial Mortgage Company ("CMC"), BancGroup segments its operations into two distinct lines of business: Commercial Banking and Mortgage Banking. Colonial Bank provides general Commercial Banking services in 250 branches throughout 6 states. As both an originator and servicing agent of mortgage loans, CMC provides services in 45 states. Operating results and asset levels of the two segments reflect those which are specifically identifiable or which are based on an internal allocation method. The two segments are designed around BancGroup's organizational and management structure, and while the assignments and allocations have been consistently applied for all periods presented, the results are not necessarily comparable to similar information published by other financial institutions. The following table reflects the approximate amounts of consolidated revenue, expense, and assets for the years ended December 31, for each segment: SEGMENT DATA (Dollars in thousands)
COMMERCIAL MORTGAGE CORPORATE/ CONSOLIDATED YEAR ENDED DECEMBER 31, 1998 BANKING BANKING OTHER* BANCGROUP - ----------------------------------------------------------------------------------------------------------------- Interest income $ 664,664 $ 28,897 $ (19) $ 693,542 Interest expense 327,694 15,997 6,750 350,441 Provision for possible loan loss 26,345 -- -- 26,345 Noninterest income 60,055 66,306 (1,103) 125,258 Amortization and depreciation 25,227 64,025 (283) 88,969 Noninterest expense 230,548 33,444 2,451 266,443 - ----------------------------------------------------------------------------------------------------------------- Pretax income 114,905 (18,263) (10,040) 86,602 Income taxes 40,760 (6,384) (2,970) 31,406 - ----------------------------------------------------------------------------------------------------------------- Net income $ 74,145 $ (11,879) $ (7,070) $ 55,196 - ----------------------------------------------------------------------------------------------------------------- Identifiable assets $9,507,563 $ 936,562 $ 12,160 $10,456,285 - ----------------------------------------------------------------------------------------------------------------- Capital expenditures $ 45,134 $ 1,636 $ 95 $ 46,865 - ----------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 - ----------------------------------------------------------------------------------------------------------------- Interest income $ 571,784 $ 11,836 $ 17 $ 583,637 Interest expense 274,093 4,637 6,041 284,771 Provision for possible loan losses 16,321 -- -- 16,321 Noninterest income 50,200 51,319 (574) 100,945 Amortization and depreciation 18,768 17,972 9 36,749 Noninterest expense 178,497 22,710 3,758 204,965 - ----------------------------------------------------------------------------------------------------------------- Pretax income 134,305 17,836 (10,365) 141,776 Income taxes 47,605 6,698 (2,889) 51,414 - ----------------------------------------------------------------------------------------------------------------- Net income $ 86,700 $ 11,138 $ (7,476) $ 90,362 - ----------------------------------------------------------------------------------------------------------------- Identifiable assets $7,655,393 $ 393,586 $ 12,587 $ 8,061,566 - ----------------------------------------------------------------------------------------------------------------- Capital expenditures $ 44,313 $ 1,506 $ 462 $ 46,281 - ----------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 - ----------------------------------------------------------------------------------------------------------------- Interest income $ 470,158 $ 11,044 $ 276 $ 481,478 Interest expense 225,471 4,737 1,918 232,126 Provision for possible loan losses 14,442 -- -- 14,442 Noninterest income 35,635 42,774 (898) 77,511 Amortization and depreciation 16,181 13,182 31 29,394 Noninterest expense 159,099 22,586 6,411 188,096 - ----------------------------------------------------------------------------------------------------------------- Pretax income 90,600 13,313 (8,982) 94,931 Income taxes 30,744 4,952 (2,614) 33,082 - ----------------------------------------------------------------------------------------------------------------- Net income $ 59,856 $ 8,361 $ (6,368) $ 61,849 - ----------------------------------------------------------------------------------------------------------------- Identifiable assets $6,339,750 $ 286,463 $ 4,429 $ 6,630,642 - ----------------------------------------------------------------------------------------------------------------- Capital expenditures $ 32,810 $ 612 $ 124 $ 33,546 - -----------------------------------------------------------------------------------------------------------------
* Includes eliminations of certain intercompany transactions. 74 53 24. CONDENSED FINANCIAL INFORMATION OF THE COLONIAL BANCGROUP, INC. (PARENT COMPANY ONLY) STATEMENT OF CONDITION
December 31 ---------------------- (In thousands) 1998 1997 - ----------------------------------------------------------------- ASSETS: Cash* $ 1,704 $ 12,270 Investment in subsidiaries* 742,047 660,096 Intangible assets 4,831 5,226 Other assets 4,834 7,983 - ----------------------------------------------------------------- Total assets $753,416 $685,575 - ----------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Short-term borrowings $ 25,000 $ 13,140 Subordinated debt 82,542 76,088 Other liabilities 6,067 6,330 Shareholders' equity 639,807 590,017 - ----------------------------------------------------------------- Total liabilities and shareholders' equity $753,416 $685,575 - -----------------------------------------------------------------
*Eliminated in consolidation. STATEMENT OF OPERATIONS
Years Ended December 31 --------------------------------- (In thousands) 1998 1997 1996 - -------------------------------------------------------------------- INCOME: Cash dividends from subsidiaries* $49,532 $43,827 $18,116 Interest and dividends on short-term investments* 480 913 252 Other income 2,418 2,505 1,494 - -------------------------------------------------------------------- Total income 52,430 47,245 19,862 - -------------------------------------------------------------------- EXPENSES: Interest 7,249 6,937 2,020 Salaries and employee benefits 1,492 1,703 3,658 Occupancy expense 311 346 321 Furniture and equipment expense 108 95 122 Amortization of intangible assets 432 447 514 Other expenses 4,286 4,904 4,550 - -------------------------------------------------------------------- Total expenses 13,878 14,432 11,185 - -------------------------------------------------------------------- Income before income taxes and equity in undistributed net income of subsidiaries 38,552 32,813 8,677 Income tax benefit 3,875 2,336 3,064 - -------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 42,427 35,149 11,741 Equity in undistributed net income of subsidiaries* 12,769 55,213 50,108 - -------------------------------------------------------------------- Net income $55,196 $90,362 $61,849 - --------------------------------------------------------------------
*Eliminated in consolidation. STATEMENT OF CASH FLOWS
Years Ended December 31 -------------------------------------- (In thousands) 1998 1997 1996 - -------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES $ 46,927 $ 37,819 $ 10,026 - -------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (95) (462) (124) Purchase of securities -- -- (78) Proceeds from maturities of securities -- 506 295 Proceeds from sale of premises and equipment 2,389 -- 3,000 Net investment in subsidiaries* (25,000) (56,865) (2,317) - -------------------------------------------------------------------- Net cash (used in) provided by investing activities (22,706) (56,821) 776 - -------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings 11,860 8,500 425 Proceeds from issuance of subordinated debt -- 70,000 -- Repayment of long-term debt -- (15,149) (3,410) Proceeds from issuance of common stock 6,830 10,573 7,186 Purchase of treasury stock (17,100) (16,013) (876) Dividends paid (36,377) (28,127) (20,466) Other, net (22) 1,377 - -------------------------------------------------------------------- Net cash (used in) provided by financing activities (34,787) 29,762 (15,764) - -------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (10,566) 10,760 (4,962) Cash and cash equivalents at beginning of year 12,270 1,510 6,472 - -------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR* $ 1,704 $ 12,270 $ 1,510 - -------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid (received) during the year for: Interest $ 7,350 $ 4,037 $ 1,910 Income taxes (3,565) (3,140) (2,493) - --------------------------------------------------------------------
*Eliminated in consolidation. 75 54 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 Common Stock was traded on the over-the-counter market and was quoted on NASDAQ under the symbol "CLBGA." The following table indicates the high and low closing prices for Common Stock during 1997 and 1998.
Sale Price of Common Stock* Dividends Declared ---------------------- on Common Stock* High Low (per share) - ------------------------------------------------------------------- 1997 1st Quarter Common ........... $ 12 $ 9 1/3 $ .075 2nd Quarter Common ........... 12 7/16 11 .075 3rd Quarter Common ........... 14 5/8 12 1/8 .075 4th Quarter Common ........... $ 17 9/16 $ 14 1/2 $ .075 - ------------------------------------------------------------------- 1998 1st Quarter Common ........... $ 18 1/8 $ 15 3/4 $ .085 2nd Quarter Common ........... 18 13/16 14 3/4 .085 3rd Quarter Common ........... 17 5/16 11 5/8 .085 4th Quarter Common ........... $ 13 11/16 $ 10 3/8 $ .085 - -------------------------------------------------------------------
*Restated to reflect the impact of two-for-one stock splits effected in the form of 100% stock dividends paid February 11, 1997 and August 14, 1998. VOTING SECURITIES AND SHAREHOLDERS As of December 31, 1998, BancGroup had outstanding 110,962,365 shares of Common Stock, with 9,754 shareholders of record. 76 55 SHAREHOLDER INFORMATION CORPORATE OFFICES FORM 10-K Colonial Financial Center Form 10-K is BancGroup's annual report One Commerce Street filed with the Securities and Exchange Montgomery, Alabama 36104 Commission. A copy of this report is avail- (334) 240-5000 able by writing to: ANNUAL MEETING Steve Alexander The Colonial BancGroup, Inc. The annual meeting of shareholders of P.O. Box 1108 The Colonial BancGroup, Inc. will be Montgomery, Alabama 36101 held on Wednesday, April 21, 1999, at (888) 843-0622 10:00 a.m., in the corporate offices. TRANSFER AND DIVIDEND STOCK EXCHANGE LISTING DISBURSING AGENT Common Stock is traded on the New SunTrust Bank, Atlanta York Stock Exchange under symbol CNB. Stock Transfer Department In many newspapers the stock is listed as P.O. Box 4625 ColBgp. Atlanta, Georgia 30302 (800) 568-3476 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Owners of BancGroup Common Stock may participate in the Dividend Reinvestment and Common Stock Purchase Plan. Dividends are reinvested and additional shares purchased at 100% of the market price average, determined as provided in the plan. A quarterly dividend of $0.095 per share was declared on January 21, 1999, payable on February 12, 1999 to share- holders of record on January 29, 1999. Dividends have been paid every year since the company was founded in 1981. During those 17 years of uninterrupted dividend payments, the annual dividend rate has increased every year since 1990. For further information, plus a prospec- tus and enrollment card, contact: Becky Murchison The Colonial BancGroup, Inc. Dividend Reinvestment Plan P.O. Box 1108 Montgomery, Alabama 36101 (888) 843-0622
77 EX-21 6 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 List of Subsidiaries of the Registrant Colonial Bank, an Alabama banking corporation. The Colonial BancGroup Building Corporation, an Alabama corporation. Colonial Asset Management, Inc. Colonial Capital II, a Delaware business trust. Colonial Software Services, Inc., a Florida Corporation TB&T Holdings, Inc. ProImage, Inc. 21 EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of The Colonial BancGroup, Inc. listed below of our report dated February 26, 1999 on our audits of the consolidated financial statements of The Colonial BancGroup, Inc. and Subsidiaries, as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is incorporated by reference in this annual report on Form 10-K for the year ended December 31, 1998.
Registration Statements on Form S-3 Registration Numbers: 33-5665 333-25463 33-62071 Registration Statements on Form S-4 Registration Numbers: 333-26537 333-57763 333-32163 333-57935 333-39267 333-59403 333-39277 333-61875 333-39283 333-64721 333-50415 333-71841 Registration Statements on Form S-8 Registration Numbers: 2-89959 33-63347 33-11540 33-78118 33-13376 333-10475 33-41036 333-11255 33-47770 333-71841 Post-Effective Amendment No. 2 on Form S-8 to Registration Statements on Form S-4 Registration Numbers: 333-14703 333-16481 333-14883 333-20291
/s/ PricewaterhouseCoopers LLP Montgomery, Alabama March 5, 1998 22 EX-24 8 POWER OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes Robert E. Lowder, Young J. Boozer, III, and W. Flake Oakley, IV, and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign on his or her behalf The Colonial BancGroup, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998. Hereby executed by the following persons in the capacities indicated on January 20, 1999, in Montgomery, Alabama. /s/ Robert E. Lowder Chairman of the Board - ------------------------------ and Chief Executive Officer Robert E. Lowder /s/ Lewis Beville Director - ------------------------------ Lewis Beville /s/ William Britton Director - ------------------------------ William Britton /s/ Jerry J. Chesser Director - ------------------------------ Jerry J. Chesser /s/ Augustus K. Clements, III Director - ------------------------------ Augustus K. Clements, III /s/ Robert Craft Director - ------------------------------ Robert Craft - ------------------------------ Director Patrick F. Dye /s/ James L. Hewitt Director - ------------------------------ James L. Hewitt 23 2 /s/Clinton Holdbrooks Director - --------------------------------- Clinton Holdbrooks /s/Harold D. King Director - --------------------------------- Harold D. King /s/John Ed Mathison Director - --------------------------------- John Ed Mathison /s/Milton E. McGregor Director - --------------------------------- Milton E. McGregor /s/John C. H. Miller, Jr. - --------------------------------- Director John C. H. Miller, Jr. Director - --------------------------------- Joe D. Mussafer /s/William B. Powell, III Director - --------------------------------- William B. Powell, III /s/Jack H. Rainer Director - --------------------------------- Jack H. Rainer /s/James W. Rane Director - --------------------------------- James W. Rane /s/Frances B. Roper Director - --------------------------------- Frances B. Roper
24 3 /s/ Simuel Sippial Director - ------------------ Simuel Sippial /s/ Ed V. Welch Director - ------------------ Ed V. Welch 25 EX-27 9 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF COLONIAL BANCGROUP FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 437,719 44,377 12,870 0 1,414,218 170,954 173,542 7,110,295 83,562 10,456,285 7,446,153 1,510,968 112,910 746,447 0 0 277,406 362,401 10,456,285 604,493 88,069 980 693,542 256,446 350,441 343,101 26,345 1,449 355,412 86,602 0 0 0 55,196 0.50 0.49 4.17 32,823 8,992 0 158,000 72,107 22,657 5,927 83,562 83,562 0 0
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