<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report February 2, 1998
THE COLONIAL BANCGROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-07945 63-0661573
(State of Incorporation) (Commission File No.) (IRS Employer I.D. No.)
One Commerce Street, Montgomery, Alabama 36104
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: 334-240-5000
<PAGE> 2
Item 5. OTHER EVENTS
BancGroup completed business combinations with United American Holding
Corporation ("UAH"), First Central Bank ("FCB") and South Florida Banking Corp.
("SFB") on February 2, 1998, February 11, 1998 and February 12, 1998. These
combinations were accounted for as poolings of interests. Accordingly, the
accompanying consolidated selected financial data, management's discussion and
analysis and consolidated financial statements as of December 31, 1997, 1996
and 1995, and for each of the three years in the period ended December 31, 1997
have been restated to give retroactive effect to the combinations with UAH, FCB
and SFB and include the combined operations of BancGroup, UAH, FCB and SFB for
all periods presented.
<PAGE> 3
SELECTED FINANCIAL DATA97
For the years ended
December 31, 1997, 1996, 1995, 1994 and 1993
(In thousands, except per share amounts)
<TABLE>
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Interest income $ 540,699 $ 444,082 $ 371,985 $ 278,223 $ 224,209
Interest expense 267,084 219,494 182,441 113,715 88,568
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 273,615 224,588 189,544 164,508 135,641
Provision for possible loan losses 14,860 13,564 10,180 8,943 14,437
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 258,755 211,024 179,364 155,565 121,204
Noninterest income 92,550 74,860 63,479 56,567 53,655
Noninterest expense 213,769 182,588 163,001 154,083 135,471
SAIF special assessment(1) -- 4,465 -- -- --
Acquisition expense(2) 6,463 11,918 1,738 1,348 960
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 131,073 86,913 78,104 56,701 38,428
Applicable income taxes 48,557 30,631 27,462 18,610 12,216
- ---------------------------------------------------------------------------------------------------------------------
Income before extraordinary items
and the cumulative effect of a change in
accounting for income taxes 82,516 56,282 50,642 38,091 26,212
Extraordinary items, net of income taxes -- -- -- -- (396)
Cumulative effect of a change in
accounting for income taxes -- -- -- -- 3,890
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 82,516 $ 56,282 $ 50,642 $ 38,091 $ 29,706
=====================================================================================================================
Income excluding SAIF special assessment
and acquisition expense(1)(2)(3) $ 87,686 $ 68,719 $ 52,032 $ 39,169 $ 26,980
=====================================================================================================================
EARNINGS PER SHARE
Income excluding SAIF special assessment
and acquisition expense:(1)(2)(3)
Basic $ 1.88 $ 1.60 $ 1.31 $ 1.05 $ 0.80
Diluted $ 1.83 $ 1.54 $ 1.22 $ 0.98 $ 0.76
Income before extraordinary items
and the cumulative effect of a change in
accounting for income taxes:
Basic $ 1.77 $ 1.31 $ 1.27 $ 1.02 $ 0.78
Diluted $ 1.72 $ 1.27 $ 1.18 $ 0.96 $ 0.74
Net income:
Basic $ 1.77 $ 1.31 $ 1.27 $ 1.02 $ 0.89
Diluted $ 1.72 $ 1.27 $ 1.18 $ 0.96 $ 0.84
Average shares outstanding:
Basic 46,536 42,839 39,787 37,361 33,512
Diluted 48,158 44,776 43,649 40,993 37,465
Cash dividends per common share:
Common $ 0.60 $ 0.54 $ 0.3375 -- --
Class A -- -- $ 0.1125 $ 0.40 $ 0.355
Class B -- -- $ 0.0625 $ 0.20 $ 0.155
=====================================================================================================================
</TABLE>
(1) Legislation approving a one-time special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") resulted in $4,465,000 in
expense before income taxes and $2,903,000 net of applicable income
taxes in 1996.
(2) Acquisition expenses reflect costs and related restructuring expense of
business combinations discussed in Note 2 to the Consolidated Financial
Statements.
(3) 1993 also excludes the effect of extraordinary items and the cumulative
effect of a change in accounting for income taxes.
<PAGE> 4
For the years ended
December 31, 1997, 1996, 1995, 1994 and 1993
(In thousands, except per share amounts)
<TABLE>
<S> <C> <C> <C> <C> <C>
STATEMENT OF CONDITION DATA
At year-end:
Total assets $7,442,661 $6,165,691 $5,370,361 $4,214,492 $4,022,477
Loans, net of unearned income 5,585,901 4,558,780 3,924,785 2,959,565 2,468,564
Mortgage loans held for sale 225,331 157,966 116,688 61,556 368,515
Deposits 5,771,702 4,728,896 4,223,539 3,378,252 3,252,771
Long-term debt 315,252 39,092 48,688 89,040 57,397
Shareholders' equity 543,262 443,391 388,770 298,812 279,300
Average balances:
Total assets 6,911,648 5,742,474 4,756,418 4,028,482 3,308,106
Interest-earning assets 6,325,872 5,253,921 4,347,437 3,645,499 2,945,172
Loans, net of unearned income 5,184,653 4,240,554 3,371,192 2,669,363 1,988,563
Mortgage loans held for sale 149,309 135,135 98,785 135,046 248,502
Deposits 5,442,818 4,463,015 3,787,613 3,280,208 2,666,025
Shareholders' equity 504,739 423,289 339,734 292,892 220,802
Book value per share at year-end $ 11.52 $ 10.23 $ 9.38 $ 7.88 $ 7.66
Tangible book value per share at year-end $ 10.05 $ 9.54 $ 8.65 $ 7.37 $ 7.21
================================================================================================================================
SELECTED RATIOS
Income excluding SAIF special assessment
and acquisition expense to:(1)(2)(3)
Average assets 1.27% 1.20% 1.09% 0.97% 0.82%
Average shareholders' equity 17.37 16.23 15.32 13.37 12.22
Income before extraordinary items and the
cumulative effect of a change in
accounting for income taxes to:
Average assets 1.19 0.98 1.06 0.95 0.79
Average shareholders' equity 16.35 13.30 14.91 13.01 11.87
Net income to:
Average assets 1.19 0.98 1.06 0.95 0.90
Average shareholders' equity 16.35 13.30 14.91 13.01 13.45
Efficiency ratio excluding SAIF and
acquisition expense(1)(2) 57.94 60.46 63.89 69.00 71.23
Dividend payout ratio 33.90 41.22 35.43 39.22 39.89
Average equity to average total assets 7.30 7.37 7.14 7.27 6.67
Total nonperforming assets to
net loans, other real estate and repossessions 0.76 0.81 0.90 1.37 2.15
Net charge-offs to average loans 0.24 0.16 0.18 0.11 0.52
Allowance for possible loan losses to
total loans (net of unearned income) 1.21 1.27 1.29 1.54 1.59
Allowance for possible loan losses to
nonperforming loans(4) 241% 225% 240% 208% 184%
================================================================================================================================
</TABLE>
(1) Legislation approving a one-time special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") resulted in $4,465,000 in
expense before income taxes and $2,903,000 net of applicable income
taxes in 1996.
(2) Acquisition expenses reflect costs and related restructuring expense of
business combinations discussed in Note 2 to the Consolidated Financial
Statements.
(3) 1993 also excludes the effect of extraordinary items and the cumulative
effect of a change in accounting for income taxes.
(4) 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 40.
<PAGE> 5
SELECTED QUARTERLY FINANCIAL DATA 97
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $142,492 $138,483 $132,680 $127,044 $117,041 $113,929 $109,767 $103,345
Interest expense 70,157 68,443 65,515 62,969 57,905 56,256 53,735 51,598
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 72,335 70,040 67,165 64,075 59,136 57,673 56,032 51,747
Provision for loan losses 5,272 2,819 3,713 3,056 6,490 2,882 2,185 2,007
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 67,063 67,221 63,452 61,019 52,646 54,791 53,847 49,740
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 21,145 $ 21,931 $ 19,968 $ 19,472 $ 8,251 $ 15,221 $ 17,533 $ 15,277
- ---------------------------------------------------------------------------------------------------------------------------
Income excluding SAIF
special assessment and
acquisition expense(1)(2) $ 23,704 $ 23,156 $ 20,748 $ 20,078 $ 16,497 $ 18,626 $ 17,889 $ 15,707
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Income excluding SAIF
special assessment and
acquisition expense:(1)(2)
Basic $ 0.50 $ 0.49 $ 0.45 $ 0.44 $ 0.38 $ 0.43 $ 0.42 $ 0.37
Diluted $ 0.49 $ 0.48 $ 0.44 $ 0.42 $ 0.37 $ 0.41 $ 0.40 $ 0.36
Net income:
Basic $ 0.45 $ 0.47 $ 0.43 $ 0.42 $ 0.19 $ 0.35 $ 0.41 $ 0.36
Diluted $ 0.44 $ 0.45 $ 0.42 $ 0.41 $ 0.18 $ 0.34 $ 0.40 $ 0.35
===========================================================================================================================
</TABLE>
(1) Legislation approving a one-time special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") resulted in $4,465,000 in
expense before income taxes and $2,903,000 net of applicable income
taxes in 1996.
(2) Acquisition expenses reflect costs and related restructuring expense of
business combinations discussed in Note 2 to the Consolidated Financial
Statements.
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS 97
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"). 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 with United American Holding Corporation,
First Central Bank, and South Florida Banking Corp. which occurred on February
2, 1998, February 11, 1998 and February 12, 1998, respectively.
<PAGE> 7
BACKGROUND
BancGroup (or the "Company") was established in 1981 with one bank and
$166 million in assets. Through 50 business combinations BancGroup has grown to
a $7.4 billion multistate bank holding company with substantial centralized
operations, local lending autonomy with centralized loan review and a strong
commercial lending function. During 1995, BancGroup expanded into the Atlanta
metropolitan market through the acquisition of Mt. Vernon Financial Corp. In
1996, the Company continued its expansion in the Atlanta area with the merger of
Commercial Bancorp of Georgia, Inc. and moved into Florida with the merger of
Orlando based Southern Banking Corporation. In 1997, expansion continued in
central Florida with the mergers of Tomoka Bancorp, Inc. in the Daytona area,
First Family Financial Corporation in Eutis and First Commerce Banks of Florida,
Inc. in Winter Haven. BancGroup entered four new banking markets during 1997
which include South Florida (Miami area), Southwest Florida (Ft. Myers area),
Bay Area (Tampa) and North Georgia (Dalton). The mergers of Jefferson Bancorp,
Inc. and Dadeland BancShares, Inc. in Miami and Great Southern Bancorp in Palm
Beach established the South Florida region. The merger with First Independence
Bank of Florida in Ft. Myers established the Company's presence in the Southwest
Florida market. The merger with Fort Brooke Bancorporation in Tampa created
BancGroup's Bay Area region. Expansion into North Georgia was established with
the merger of D/W Bancshares, Inc. in Dalton. In 1998, the Company increased its
presence in the Central, Bay Area and Southwest Florida markets with the mergers
of United American Holding Corporation in Orlando, First Central Bank in St.
Petersburg and South Florida Banking Corp. in Bonita Springs, respectively.
BancGroup also increased its market share in East Central Alabama with the
merger of ASB Bancshares, Inc. BancGroup currently has pending mergers with
Commercial Bank of Nevada in Las Vegas, Nevada, CNB Holding Corporation in
Daytona Beach, Florida, First Macon Bank & Trust in Macon, Georgia and FirstBank
in Dallas, Texas. BancGroup's expansion in Georgia, Florida and now in Nevada
and Texas reflects a corporate goal to establish its community banking concept
in the higher growth market areas not only in the Southeast, but other areas of
the country as well.
More importantly, BancGroup's operating earnings (income before extraordinary
items, accounting changes, the one-time special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") and acquisition expenses) per share
have increased an average of 20.6% per year since 1993 and in 1997 the Company
achieved a 17.37% return on average equity and a 1.27% return on average assets
(based on operating earnings).
BancGroup's performance goals are: 1) an annual earnings per share
growth rate in excess of 10%, 2) a 17.5% return on equity, 3) a 1.45% return on
assets and 4) a consistently increasing dividend. The strategies employed to
achieve these results are outlined below. They represent the foundation upon
which BancGroup operates and the basis for achieving the Company's goals.
- COMMUNITY BANK: BancGroup operates as a community bank allowing
autonomy in lending decisions and customer relationships. This
operating philosophy has been important in making acquisitions,
retaining a skilled and highly motivated local management team and
developing a strong customer base, particularly with respect to lending
relationships.
- CONTINUITY AND CONSISTENCY OF MANAGEMENT: Robert E. Lowder has been
Chairman and CEO of BancGroup since inception and Chairman and CEO of
Colonial Mortgage Company ("CMC") for 27 years. BancGroup's President,
P.L. (Mac) McLeod, has been with BancGroup for 16 years, previously
serving as President of the Montgomery Region bank. CMC's President
Ronnie Wynn, has been in that position for 21 years and is a former
president of the Mortgage Bankers Association of America.
- COMMERCIAL LENDING: Commercial lending primarily through groups located
in the Birmingham, Huntsville, Montgomery and Anniston, Alabama as well
as the Atlanta, Georgia and Orlando, Miami and Tampa, Florida
metropolitan centers has been a major factor in the Company's growth.
Commercial real estate and other commercial loans increased 23% and 14%
in 1997 and 1996, respectively. BancGroup has been very successful in
competing for these loans against other larger financial institutions,
due primarily to the Company's local lending strategy and management
continuity.
- CONSUMER REAL ESTATE: Since 1993, BancGroup has focused on residential
real estate lending as a means to increase consumer lending, broaden
the Company's customer base and create a significant stream of fee
income. In furtherance of this goal, BancGroup acquired CMC in February
1995, one of the 50 largest mortgage loan servicers in the country.
BancGroup has increased residential mortgage loans 158% from $904
million at December 31, 1993 to $2.3 billion at December 31, 1997. The
portfolio of mortgage loans has a relatively low credit risk and
provides a source of liquidity by serving
<PAGE> 8
as collateral for Federal Home Loan Bank borrowings. CMC's $12.9
billion portfolio of loans serviced for others provides a steady source
of noninterest income.
- GROWTH MARKET EXPANSION: The Company's strategy has concentrated on
expanding into growth markets by merging with banks that have strong
local management. BancGroup has been most successful in Florida, where
over the twenty-month period, from July 1996 through February 1998,
twelve acquisitions have been completed creating four regional banks in
major growth markets of Florida. The Central Florida Region now
consists of $880 million in assets and 33 branches in Orlando, Daytona
and the Lakeland/Winter Haven market areas. The South Florida Region
consists of $742 million in assets and 19 branches from Miami to West
Palm Beach. The Bay Area Region consists of $271 million in assets with
branches in Tampa and St. Petersburg. The Southwest Florida Region
consists of $320 million in assets and 15 branches in Naples, Bonita
Springs, and Ft. Myers. The management teams in each of these areas,
along with the significant physical presence in each area, should
provide a foundation for significant internal growth as well as an
efficient platform for future expansion.
In addition to the Florida expansion, during 1997 BancGroup added to
its Georgia locations with the acquisition of $139 million in
assets and three branches in Dalton and established a new loan
production office in Chattanooga, TN.
BancGroup increased its Alabama market share with the March 1997
acquisition of a bank with $55 million in assets and six branches
between Mobile and Montgomery and the February 1998 acquisition of a
$159 million asset bank with nine branches between Birmingham and
Chattanooga.
With the announcement of the pending mergers of Commercial Bank of
Nevada in Las Vegas, Nevada and FirstBank in Dallas, Texas, BancGroup
has made its first step into growth markets outside the Southeast. The
Las Vegas market represents one of the fastest growing markets in the
country and Nevada is ranked first in the country with respect to
projected population growth over the next twenty years. For a number of
years Colonial Mortgage Company has operated on a national basis
focusing on the highest growth markets in the country. This acquisition
represents the initiation of BancGroup's strategy to parallel the
mortgage company's focus and provide its banking services in some of
those same markets.
- COST CONTROL: An operational and organizational infrastructure
established in prior years has allowed the Company to grow
significantly and improve the efficiency ratio from 71.23% in 1993 to
57.94% in 1997. The operating structure is built around centralized
back-shop operations in areas that do not have direct customer contact.
As noted above, this structure has served the Company well over the
past few years and should allow for continued growth at low marginal
cost. This same structure should also allow for additional efficiencies
in the recently acquired institutions which are not reflected in the
operating costs presented.
- CAPITAL UTILIZATION: Management's goal is to provide a greater than
17.5% return on capital while effectively utilizing internally created
capital and exceeding regulatory capital requirements. BancGroup has an
asset generating capability that can effectively utilize the capital
generated. This capability is most evident in 1997 by BancGroup's
acquisition activities and its 10.39% internal growth in loans. CMC
provides asset generating sources for mortgage loans, as noted, and
mortgage servicing rights. The book value of CMC's mortgage servicing
rights increased by 43.44% in 1997 through the net addition of $2.2
billion to its servicing portfolio.
- 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 .76% at December 31, 1997, its lowest level in five years,
primarily through sales of other real estate. Net charge-offs over the
past five years have consistently compared favorably with the Company's
peer group and were only .24% of average loans in 1997 and .16% in
1996.
- PRODUCT AND SERVICE ENHANCEMENTS: In 1997, BancGroup continued its
commitment to expand its services through increased efforts in private
banking with additional products and asset management through trust
services and investment sales products and services. With BancGroup's
expansion into the Florida market, an international banking unit is
being established to provide and service the needs of customers
involved in international activities. In 1995 and 1996 steps were taken
to provide better customer access to products and services. As part of
this effort the Company 1) issued the Colonial Check Card,
<PAGE> 9
a debit card allowing customers to make purchases with funds from their
checking account, 2) established telephone banking, giving customers
the capability to pay bills and transfer funds by phone, and 3) created
computer banking services allowing customers to conduct banking
business from their home computers. Customers needs are constantly
changing, and BancGroup will continue to investigate methods of
improving customer service through new services, product enhancements
and technological advances.
- STOCK SPLIT: On January 15, 1997, BancGroup's Board of Directors
declared a two-for-one stock split which was effected in the form of a
100 percent stock dividend distributed on February 11, 1997. The stated
par value of each share was not changed from $2.50. Accordingly, all
prior period information has been restated to reflect the
reclassification from additional paid in capital to common stock.
Additionally, all share and per share amounts in earnings per share
calculations have been restated to retroactively reflect the stock
split.
Obviously the Company cannot guarantee its success in implementing the
initiatives or reaching the goals set out previously. The following analysis of
financial condition and results of operations provide details with respect to
this summary material and demonstrates trends concerning the initiatives taken
through 1997.
<PAGE> 10
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, 1997. The balances reflected are as of
the date of consummation.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
ACCOUNTING DATE BANCGROUP TOTAL TOTAL TOTAL
FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED SHARES ASSETS LOANS DEPOSITS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995
Colonial Mortgage Company (AL) Pooling 02/17/95 4,545,454 $ 71,000 $ 1,675 $ --
Brundidge Banking Company (AL) Purchase 03/31/95 532,868 56,609 31,577 46,044
Mt. Vernon Financial Corp. (GA) Purchase 10/20/95 1,043,440 217,967 192,167 156,356
Farmers & Merchants Bank (AL) Purchase 11/03/95 513,686 56,050 25,342 45,448
- ----------------------------------------------------------------------------------------------------------------------------
1996*
Commercial Bancorp of Georgia, Inc. (GA) Pooling 07/03/96 2,306,460 232,555 145,429 207,641
Southern Banking Corporation (FL) Pooling 07/03/96 2,858,494 232,461 160,864 205,602
Dothan Federal Savings Bank (AL) Purchase 07/08/96 154,690 48,366 36,497 39,931
- ----------------------------------------------------------------------------------------------------------------------------
1997
Jefferson Bancorp, Inc. (FL) Pooling 01/03/97 3,854,952 472,732 322,857 405,836
Tomoka Bancorp, Inc. (FL) Pooling 01/03/97 661,992 76,700 51,600 68,200
First Family Financial Corp. (FL) Purchase 01/09/97 330,564 167,300 117,500 156,700
D/W Bankshares, Inc. (GA) Pooling 01/31/97 1,016,548 138,686 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 1,599,973 208,800 141,500 185,800
Great Southern Bancorp (FL) Pooling 07/01/97 927,811 121,009 98,100 106,673
First Commerce Banks of Florida, Inc. (FL) Purchase 07/01/97 685,695 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 10/01/97 503,932 65,048 50,699 58,283
- ----------------------------------------------------------------------------------------------------------------------------
1998
United American Holding Corp. (FL) Pooling 02/02/98 2,113,206 $275,263 $197,623 $236,773
First Central Bank (FL) Pooling 02/11/98 688,684 62,897 40,451 52,048
South Florida Banking Corp. (FL) Pooling 02/12/98 1,932,229 255,769 172,992 226,999
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
In addition to the combinations shown above, BancGroup has closed or
has plans to close the following combinations after December 31,1997. The
balances reflected are as of December 31, 1997. The following business
combinations have not been reflected in the financial statements at December 31,
1997.
<TABLE>
<CAPTION>
(Dollars in thousands)
ACCOUNTING DATE BANCGROUP TOTAL TOTAL TOTAL
FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED SHARES ASSETS LOANS DEPOSITS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASB Bancshares, Inc. (AL) Purchase 02/05/98 467,257 158,656 110,093 135,940
Commercial Bank of Nevada (NV) Pooling Pending 842,157 120,108 84,108 108,661
CNB Holding Corporation (FL) Pooling Pending 932,227 83,273 59,949 74,878
First Macon Bank & Trust (GA) Pooling Pending 1,844,500 186,370 126,556 169,055
FirstBank (TX) Pooling Pending 1,200,000 144,994 46,760 125,518
Prime Bank of Central Florida (FL) Pooling Pending 586,560 68,295 42,484 61,375
</TABLE>
<PAGE> 11
The combination with CMC in 1995 was accounted for using a method of accounting
similar to a pooling of interests. 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 and South Florida
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 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 of earnings of BancGroup for 1996
and 1997 cannot reasonably be determined.
The combinations have had an impact on the comparisons of operating
results for 1996 and 1997 with prior years. Where such information is
determinable it has been identified and discussed in the discussion of results
of operations and financial condition that follows.
COLONIAL MORTGAGE COMPANY
On February 17, 1995, BancGroup completed the acquisition of CMC. This
acquisition represents a major step in achieving several BancGroup strategic
goals. A principal initiative of BancGroup for the past several years has been
to increase fee income through the establishment of additional lines of business
that provide natural extensions of existing products or services. CMC in this
regard provides an excellent fit for the following reasons:
FEE INCOME
At December 31, 1997, CMC provided servicing for approximately 157,000
customers with a total outstanding balance of $12.9 billion. The servicing
revenues from this portfolio plus other fee income from CMC provided
approximately 49% and 48% of BancGroup's noninterest income for 1997 and 1996.
CONSUMER REAL ESTATE LENDING
Through its wholesale and retail offices, CMC originated over $4.2
billion in residential real estate loans from 1995 through 1997. These loans
have primarily been fixed rate loans sold into the secondary markets. However,
since the latter part of 1994 Colonial Bank has been retaining adjustable rate
mortgage (ARM) loans originated by CMC. This program provides CMC additional
loan products for its branch network. In addition, CMC provides the Bank with
fixed rate loan products for its customers.
GROWTH MARKET EXPANSION
CMC currently originates residential mortgages in 34 states through 4
regional offices and services 157,000 customers located in 44 states and the
District of Columbia. These locations provide BancGroup with a broader market
base to solicit business and include areas which currently have greater growth
rates than BancGroup's existing branch locations. These areas include the
greater Seattle area, Las Vegas, Phoenix, Dallas/Ft. Worth, Cincinnati and
Greensboro, N.C.
CAPITAL UTILIZATION
BancGroup provides a capital base for the expansion of CMC's low cost
servicing operation through bulk purchases of servicing. During 1996 and 1997,
CMC acquired a total of $2.8 billion in bulk servicing. In addition, CMC
provides another source of loans for the Bank's portfolio including ARM loans
and equity lines.
CUSTODIAL DEPOSITS
CMC maintains custodial accounts for its loan customers for the payment
of taxes and insurance as well as collection of principal and interest. The
balances in these accounts averaged approximately $187 million and $157 million
in 1997 and 1996, respectively. These balances represent 3.9% of the total
increase of 20.7% in average noninterest bearing demand deposits from 1996 to
1997. These balances have a positive impact on BancGroup's net interest margin
by providing a noninterest bearing source of funds.
<PAGE> 12
CROSS-SELLING OF CUSTOMERS
BancGroup has established a personal banking unit to solicit other
business from CMC customers, such as equity lines and deposits. In addition,
BancGroup plans to expand other customer relationships through establishment of
deposit relationships with CMC customers, acceptance of CMC payments in
branches, and establishing a linkage between construction and permanent lending.
REVIEW OF RESULTS OF OPERATIONS
OVERVIEW
BancGroup is involved in two primary lines of business: commercial
banking and mortgage banking, through its wholly owned subsidiaries Colonial
Bank and Colonial Mortgage Company ("CMC"). The following summary of BancGroup's
results of operations discusses the related impact of each line of business to
the earnings of the Company.
<TABLE>
<CAPTION>
LINE OF BUSINESS RESULTS
(Dollars in thousands)
COLONIAL COLONIAL CONSOLIDATED
YEAR ENDED DECEMBER 31, 1997 BANK MORTGAGE OTHER(1) BANCGROUP
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 272,445 $ 7,196 $ (6,026) $ 273,615
Provision for possible loan losses (14,860) -- -- (14,860)
Noninterest income 46,480 45,565 505 92,550
Amortization and depreciation 17,825 17,796 -- 35,621
Noninterest expense 162,750 17,132 4,729 184,611
- ------------------------------------------------------------------------------------------------------------------------
Pretax income 123,490 17,833 (10,250) 131,073
Income taxes (44,756) (6,688) 2,887 (48,557)
- ------------------------------------------------------------------------------------------------------------------------
Net income 78,734 11,145 (7,363) 82,516
Acquisition expense, net of taxes 4,483 -- 687 5,170
- ------------------------------------------------------------------------------------------------------------------------
Income excluding acquisition expense $ 83,217 $ 11,145 $ (6,676) $ 87,686
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
COLONIAL COLONIAL CONSOLIDATED
YEAR ENDED DECEMBER 31, 1996 BANK MORTGAGE OTHER(1) BANCGROUP
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 219,878 $ 6,354 $ (1,644) $ 224,588
Provision for possible loan losses (13,564) -- -- (13,564)
Noninterest income 36,881 36,249 1,730 74,860
Amortization and depreciation 12,536 13,088 -- 25,624
Noninterest expense 147,742 16,576 9,029 173,347
- ------------------------------------------------------------------------------------------------------------------------
Pretax income 82,917 12,939 (8,943) 86,913
Income taxes (28,039) (4,834) 2,242 (30,631)
- ------------------------------------------------------------------------------------------------------------------------
Net income 54,878 8,105 (6,701) 56,282
SAIF assessment, net of taxes 2,903 -- -- 2,903
Acquisition expense, net of taxes 8,567 -- 967 9,534
- ------------------------------------------------------------------------------------------------------------------------
Income excluding SAIF and acquisition
expense $ 66,348 $ 8,105 $ (5,734) $ 68,719
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
COLONIAL COLONIAL CONSOLIDATED
YEAR ENDED DECEMBER 31, 1995 BANK MORTGAGE OTHER(1) BANCGROUP
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 187,216 $ 4,690 $ (2,362) $ 189,544
Provision for possible loan losses (10,180) -- -- (10,180)
Noninterest income 34,822 28,353 304 63,479
Amortization and depreciation 8,862 9,518 -- 18,380
Noninterest expense 126,422 13,626 6,311 146,359
- ------------------------------------------------------------------------------------------------------------------------
Pretax income 76,574 9,899 (8,369) 78,104
Income taxes (25,486) (3,813) 1,837 (27,462)
- ------------------------------------------------------------------------------------------------------------------------
Net income 51,088 6,086 (6,532) 50,642
Acquisition expense, net of taxes 1,066 -- 324 1,390
- ------------------------------------------------------------------------------------------------------------------------
Income excluding acquisition expense $ 52,154 $ 6,086 $ (6,208) $ 52,032
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents holding company financing costs and certain unallocated
expenses.
Consistently increasing net income is a primary goal of management.
Operating earnings, as restated, increased 28% in 1997, 37% in 1996 and 34% in
1995. The most significant factors affecting income for 1997, 1996 and 1995 are
highlighted below and discussed in greater detail in subsequent sections.
- An increase in 1997 of 20.4% in average earning assets. This follows
an increase of 20.9% in 1996.
- An increase of $17.7 million (24%) and $11.4 million (18%) in
noninterest income in 1997 and 1996, respectively.
- Maintenance of high asset quality and reserve coverage ratios. Net
charge-offs were $12.2 million or .24% of average net loans in 1997 and
$7.0 million or .16% of average net loans in 1996.
- Loan growth, excluding acquisitions, of 10.39% in 1997 following an
increase of 17.36% in 1996.
- An increase in average loans as a percent of average earning assets to
82.0% in 1997 from 80.7% in 1996.
- Noninterest expenses, excluding SAIF special assessment and acquisition
expense, as a percent of average assets were reduced to 3.09% in 1997
from 3.18% in 1996.
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned
on loans, securities and other interest-earning assets (interest income) and
interest paid on deposits and borrowed funds (interest expense). Three year
comparisons of net interest income in dollars and yield on a tax equivalent
basis are reflected on the following schedule. The net yield on interest-earning
assets was 4.37% in 1997 compared to 4.33% in 1996 and 4.41% in 1995. Over this
period net interest income on a fully tax equivalent basis increased to $276
million in 1997 from $227 million in 1996 and $192 million in 1995. The
principal factors affecting the Company's yields and net interest income are
discussed on the following pages.
LEVELS OF INTEREST RATES
In 1996 and 1997 rates remained fairly constant resulting in little
impact on interest spreads or margins. Short-term rates increased into late 1995
before starting to decline and leveling off in 1996 and remaining relatively
constant through 1997. For example, the average fed funds rate for overnight
bank borrowings reached 6.00% midyear 1995 before decreasing to 5.95% in
December 1995 and 5.25% in February 1996 before increasing to 5.50% in March
1997. The Company's prime rate increased to 9% midyear 1995 before declining to
8.5% in December 1995 and 8.25% in February 1996. BancGroup's prime rate
increased to 8.5% in March 1997, where it remained the rest of the year.
<PAGE> 14
ACQUISITIONS
Further expansion into Florida in 1997 has resulted in improved margins
due to the lower cost of funds in this market. The institutions acquired in 1997
had an average cost of funds of 4.41% compared to the 5.08% as originally
reported by BancGroup in 1996.
The thrift acquisitions completed during 1995 and 1996 had a negative
impact on the Company's net interest yield due primarily to the fact that these
institutions had virtually no noninterest-bearing deposits and rates on
interest-bearing deposits were slightly higher. These institution's rates were
adjusted to BancGroup products and rates within a short time after the mergers.
INTEREST-EARNING ASSETS
- Growth in Earning Assets
One of the most significant factors in the Company's increase in income
has been the 20.4% and 20.9% increase in average interest-earning
assets in 1997 and 1996, respectively. In addition and equally
significant, average net loans increased $944 million (22%) from
December 31, 1996 to December 31, 1997. Earning assets as a percentage
of total average assets was 91.5% in both 1996 and 1997.
- 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. Average mortgage loans held for sale
increased from $99 million in 1995 to $135 million in 1996 and $149
million in 1997. Mortgage loans held for sale represent single family
residential mortgage loans originated or acquired by CMC then packaged
and sold in the secondary market. CMC incurs gains or losses associated
with rate fluctuations. CMC limits its risk associated with the sale of
these loans through an active hedging program which generally provides
for sales commitments on all loans funded. Mortgage loans held for sale
are funded primarily with short-term borrowings.
- Loan Mix
During 1997 all categories of loans increased. The mix of loans
remained relatively consistent. Residential real estate loans continue
to be the largest concentration at 41.8% and 42.3% of total loans at
December 31, 1997 and 1996, respectively. These loans are predominantly
adjustable rate mortgages which have a low level of credit risk and
accordingly have lower yields than other loans.
INTEREST-BEARING LIABILITIES
- Cost of Funds
Competitive pressures on new time deposits and variable rate deposits
remained strong in 1995, 1996 and 1997. The average cost of funds
remained fairly constant at 4.94%, 4.91% and 4.95% in 1995, 1996 and
1997, respectively. The primary reason for little change in the cost of
funds is the increase in concentration of Florida deposits which had
lower market rates. The Florida interest-bearing liabilities average
4.41% compared to BancGroup's consolidated rate of 4.95%. As discussed
under Liquidity and Interest Sensitivity, BancGroup's source of funds
are considered adequate to fund future loan growth.
AVERAGE VOLUME AND RATES
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(IN THOUSANDS) VOLUME INTEREST RATE VOLUME INTEREST RATE VOLUME INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans, net of unearned
income(1) $ 5,184,653 $467,784 9.02% $ 4,240,554 $381,797 9.00% $ 3,371,192 $313,147 9.29%
Mortgage loans held for sale 149,309 11,701 7.84 135,135 10,577 7.83 98,785 7,423 7.51
Investment securities and
securities available for sale:
Taxable 809,410 51,747 6.39 701,048 42,927 6.12 698,625 41,585 5.95
Nontaxable(2) 77,489 5,802 7.49 71,480 5,407 7.56 67,809 5,142 7.58
Equity securities(3) 42,798 3,142 7.34 34,350 2,494 7.26 33,146 2,499 7.54
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment securities 929,697 60,691 6.53% 806,878 50,828 6.30% 799,580 49,226 6.16%
Federal funds sold and
securities purchased under
resale agreements 61,526 3,282 5.33 69,860 3,618 5.18 66,551 3,884 5.84
Interest-earning deposits 687 45 6.55 1,494 89 5.96 11,329 698 6.16
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,325,872 $543,503 8.59% 5,253,921 $446,909 8.51% 4,347,437 $374,378 8.61%
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (65,134) (53,931) (44,917)
Cash and due from banks 209,094 179,566 170,668
Premises and equipment, net 132,294 97,564 73,365
Other assets 309,522 265,354 209,865
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,911,648 $ 5,742,474 $ 4,756,418
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 1,049,395 $ 27,527 2.62% $ 857,128 $ 22,925 2.67% $ 817,398 $ 23,212 2.84%
Savings deposits 471,610 15,739 3.34 409,706 12,897 3.15 393,408 13,168 3.35
Time deposits 3,003,183 172,658 5.75 2,435,186 141,386 5.81 1,911,519 111,153 5.81
Short-term borrowings 714,525 40,112 5.61 728,577 39,547 5.43 518,909 31,082 5.99
Long-term debt 158,498 11,048 6.97 40,807 2,739 6.71 49,866 3,826 7.67
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,397,211 $267,084 4.95% 4,471,404 $219,494 4.91% 3,691,100 $182,441 4.94%
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand
deposits 918,630 760,995 665,288
Other liabilities 91,068 86,786 60,296
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,406,909 5,319,185 4,416,684
Shareholders' equity 504,739 423,289 339,734
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 6,911,648 $ 5,742,474 $ 4,756,418
- ----------------------------------------------------------------------------------------------------------------------------------
RATE DIFFERENTIAL 3.64% 3.60% 3.67%
NET INTEREST INCOME AND
NET YIELD ON INTEREST-
EARNING ASSETS(4) $276,419 4.37% $227,415 4.33% $191,937 4.41%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loans classified as nonaccruing are included in the average volume
calculation. Interest earned and average rates on non-taxable loans are
reflected on a tax equivalent basis. This interest is included in the
total interest earned for loans. Tax equivalent interest earned is
actual interest earned times 145%.
(2) Interest earned and average rates on obligations of states and
political subdivisions are reflected on a tax equivalent basis. Tax
equivalent interest earned is actual interest earned times 145%. Tax
equivalent average rate is tax equivalent interest earned divided by
average volume.
(3) Dividends earned and average rates on preferred stock are reflected on
a tax equivalent basis. Tax equivalent dividends earned are actual
dividends times 137.7%. Tax equivalent average rate is tax equivalent
dividends divided by average volume.
(4) Net interest income divided by average total interest-earning assets.
ANALYSIS OF INTEREST INCREASES (DECREASES)
<TABLE>
<CAPTION>
1997 CHANGE FROM 1996 1996 CHANGE FROM 1995
- ------------------------------------------------------------------------------------------------------------------------------
ATTRIBUTED TO(1) ATTRIBUTED TO(1)
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) AMOUNT VOLUME RATE MIX AMOUNT VOLUME RATE MIX
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Taxable securities $ 8,820 $ 6,635 $ 1,892 $ 293 $ 1,342 $ 144 $ 1,194 $ 4
Nontaxable securities (2) 395 455 (55) (5) 265 278 (13) -
Dividends on preferred
stocks (3) 648 613 28 7 (5) 91 (92) (4)
- ------------------------------------------------------------------------------------------------------------------------------
Total securities 9,863 7,703 1,865 295 1,602 513 1,089 -
Total loans (net of unearned
income) 85,987 85,002 806 179 68,650 80,754 (9,623) (2,481)
Mortgage loans held for sale 1,124 1,109 13 2 3,154 2,731 309 114
Federal funds sold and
securities purchased
under resale agreements (336) (432) 109 (13) (266) 193 (437) (22)
Interest-earning deposits (44) (48) 9 (5) (609) (606) (23) 20
- ------------------------------------------------------------------------------------------------------------------------------
Total 96,594 93,334 2,802 458 72,531 83,585 (8,685) (2,369)
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand
deposits 4,602 5,142 (441) (99) (287) 1,128 (1,350) (65)
Savings deposits 2,842 1,949 776 117 (271) 546 (784) (33)
Time deposits 31,272 32,978 (1,383) (323) 30,233 30,451 (171) (47)
Short-term borrowings 565 (763) 1,354 (26) 8,465 12,559 (2,916) (1,178)
Long-term debt 8,309 7,900 105 304 (1,087) (695) (479) 87
- ------------------------------------------------------------------------------------------------------------------------------
Total 47,590 47,206 411 (27) 37,053 43,989 (5,700) (1,236)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income $49,004 $46,128 $ 2,391 $ 485 $ 35,478 $ 39,596 $(2,985) (1,133)
==============================================================================================================================
</TABLE>
(1) Increases (decreases) are attributed to volume changes and rate changes
on the following basis: Volume Change = change in volume times old
rate. Rate Change = change in rate times old volume. Mix Change =
change in volume times change in rate.
(2) Interest earned and average rates on obligations of states and
political subdivisions are reflected on a tax equivalent basis. Tax
equivalent interest earned as actual interest earned times 145%. Tax
equivalent average rate is tax equivalent interest earned divided by
average volume.
(3) Dividends earned and average rates on preferred stock are reflected on
a tax equivalent basis. Tax equivalent dividends earned are actual
dividends times 137.7%. Tax equivalent average rate is tax equivalent
dividends divided by average volume.
<PAGE> 16
NONINTEREST INCOME
One of the most important goals from 1995 through 1997 has been to
increase noninterest income. Prior to the CMC acquisition on February 17, 1995,
BancGroup had not acquired other well-established ancillary income sources, such
as trust operations, mortgage banking or credit card processing services with
any of its acquisitions. BancGroup currently derives approximately 49% of its
noninterest income from mortgage banking related activities with the remaining
51% from traditional retail banking services including various deposit account
charges, safe deposit box rentals, and credit life commissions. The impact of
this acquisition is evident by the volume of revenue included in the category
entitled mortgage servicing fees.
CMC has servicing and subservicing agreements under which it serviced
157,000, 132,000 and 118,000 mortgage loans with principal balances of $12.9
billion, $10.6 billion and $9.1 billion on December 31, 1997, 1996 and 1995,
respectively. This servicing portfolio generated servicing fee and late charge
income of approximately $35.8 million, $28.1 million and $23.8 million for the
years ended December 31, 1997, 1996 and 1995, respectively. CMC, through its
wholesale and retail offices, originated $1.6 billion, $1.5 billion and $1.1
billion in residential real estate loans in 1997, 1996, and 1995, respectively.
Noninterest income from deposit accounts is significantly affected by
competitive pricing on these services and the volume of noninterest-bearing
accounts. During 1997 and 1996 average noninterest-bearing demand accounts
(excluding CMC custodial deposits) increased 21% and 11%, respectively. This
increase in volume and increases in service fee rates resulted in a 17% increase
in service charge income in 1997 and a 18% increase in 1996.
Other charges, fees, and commissions increased $1,425,000 or 22% in
1997 and decreased $245,000 or 4% in 1996. The increase is primarily from credit
card related fees and official check commissions.
BancGroup, through CMC, enters into offers to extend credit for
mortgage loans to customers and into obligations to deliver and sell originated
or acquired mortgage loans to permanent investors. Sales of servicing and loans
servicing released by CMC resulted in income of $1,552,000, $330,000 and
$988,000 for 1997, 1996 and 1995, respectively, and is the primary reason for
the increase in other income from 1996 to 1997. There were smaller increases in
income from safe deposit boxes, ATM transaction fees, check card fees and income
from investment sales. BancGroup has an investment sales operation (primarily
mutual funds and annuities). Fee income generated from this and other investment
service activities totaled $1,193,000, $945,000 and $649,000 in 1997, 1996 and
1995, respectively. With the Jefferson acquisition in 1997, BancGroup
established trust services. Trust fees totaled $1,207,000,
$1,095,000 and $1,256,000 for 1997, 1996 and 1995, respectively. Through its
investment sales and trust departments, BancGroup has established asset
management services for its customers.
Securities gains and losses in each of the three years were not
significant. While certain securities are considered available for sale,
BancGroup currently intends to hold substantially all of its securities
portfolio for investment purposes. Realized gains or losses in this portfolio
are generally the result of calls of securities or sales of securities within
the six months prior to maturity.
<PAGE> 17
<TABLE>
INCREASE (DECREASE)
- --------------------------------------------------------------------------------------------------------------------------
1997 1996
YEARS ENDED DECEMBER 31 COMPARED COMPARED
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 TO 1996 % TO 1995 %
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest income:
Mortgage servicing fees $35,824 $28,057 $23,787 $ 7,767 28% $ 4,270 18%
Service charges on deposit
accounts 29,314 25,081 21,312 4,233 17 3,769 18
Other charges, fees, and
commissions 7,808 6,383 6,628 1,425 22 (245) (4)
Other income 18,152 15,382 10,939 2,770 18 4,443 41
- --------------------------------------------------------------------------------------------------------------------------
Subtotal 91,098 74,903 62,666 16,195 22 12,237 20
Other noninterest income items:
Securities gains, net 665 217 682 448 (465)
Gain (loss) on disposal of other
real estate and repossessions 787 (260) 131 1,047 (391)
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income $92,550 $74,860 $63,479 $17,690 24% $11,381 18%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE
The impact of the acquisitions is reflected most noticeably in the
increase in net interest income, discussed previously, as well as the 11%
increase from 1996 to 1997 in noninterest expense as shown in the following
schedule. The decrease in noninterest expense, excluding acquisition expense and
SAIF special assessment, as a percent of average assets from 3.43% in 1995 to
3.18% in 1996 to 3.09% in 1997 is a direct result of the increased efficiency
generated by this growth. The foundation for the efficiencies gained in 1997 and
1996 is the Company's current operating structure (regional and community banks
supported by centralized backshop operations).
Salaries and benefits increased $13.6 million or 17% in 1997 and
increased $9.4 million or 14% in 1996. These increases are primarily due to
increased staffing levels as a result of acquisitions as well as normal salary
increases. The increase in amortization of mortgage servicing rights is a direct
result of the growth in the mortgage servicing portfolio of CMC as previously
discussed. Amortization of intangible assets increased due to the closing of two
acquisitions, Shamrock and Dadeland, accounted for as purchases which required
the recording of goodwill and core deposit intangibles. Increases in legal fees
and supplies and postage are primarily due to additional branches and customers
as a result of acquisitions. In addition to the increase in expenses related to
growth, advertising and public relations expenses have increased $407,000 or 7%
and $1,336,000 or 27% in 1997 and 1996, respectively, due to concentrated
efforts to expand the Company's customer base and take advantage of increased
market share in certain key markets. Additional expense was also incurred in the
marketing of new products and services such as the check card, telephone banking
and computer banking.
Other expenses in 1997, 1996 and 1995 include approximately $6,463,000,
$11,918,000 and $1,738,000, respectively associated with various acquisition
efforts. Acquisition expenses are one time expenses associated with each
acquisition. These expenses will continue to be incurred in connection with
future acquisitions.
As discussed in Note 1 to BancGroup's Consolidated Financial
Statements, BancGroup defers certain salary and benefit costs associated with
loan originations and amortizes these costs as yield adjustments over the life
of the related loans. The amount of costs deferred increased from $10 million in
1995 to $13 million in 1996 and $14 million in 1997 due to changes in the mix of
loans, increases in the number of loans closed, and acquisitions.
Cost control and the capacity to absorb future growth continue to be a
major focus for management. The Company has taken several steps to achieve this
goal and to attempt to improve BancGroup's efficiency ratio. These steps include
continued centralization of accounting, data processing, deposit and loan
operations functions of each acquisition into BancGroup's existing structure.
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 $4.5 million in 1996 and allowed a reduction in the annual premium
rate in future years.
<PAGE> 18
<TABLE>
INCREASE (DECREASE)
- --------------------------------------------------------------------------------------------------------------------------
1997 1996
YEARS ENDED DECEMBER 31 COMPARED COMPARED
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 TO 1996 % TO 1995 %
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest expense:
Salaries and employee benefits $ 91,730 $ 78,102 $ 68,675 $ 13,628 17% $ 9,427 14%
Net occupancy expense 22,139 17,200 16,272 4,939 29 928 6
Furniture and equipment expense 18,804 14,862 11,380 3,942 27 3,482 31
Amortization of mortgage
servicing rights 17,071 13,627 10,261 3,444 25 3,366 33
Amortization of intangible assets 3,184 2,150 1,610 1,034 48 540 34
Acquisition expense 6,463 11,918 1,738 (5,455) (46) 10,180 586
FDIC assessment 982 2,475 5,070 (1,493) (60) (2,595) (51)
SAIF special assessment -- 4,465 -- (4,465) (100) 4,465 100
Advertising and public relations 6,659 6,252 4,916 407 7 1,336 27
Stationery, printing, and supplies 5,304 4,472 4,118 832 19 354 9
Telephone 5,198 5,044 4,045 154 3 999 25
Legal fees 2,860 3,258 2,818 (398) (12) 440 16
Postage 3,558 2,907 2,469 651 22 438 18
Insurance 1,901 2,183 1,842 (282) (13) 341 19
Other 34,379 30,056 29,525 4,323 14 531 2
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $220,232 $198,971 $164,739 $ 21,261 11% $ 34,232 21%
- --------------------------------------------------------------------------------------------------------------------------
Noninterest expense, excluding
acquisition expense to Average
Assets 3.09% 3.18%* 3.43%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Excluding one-time SAIF special assessment
<PAGE> 19
YEAR 2000 COSTS AND TECHNOLOGICAL RESTRUCTURING
Most computer software programs and processing systems, including those
used by BancGroup and its subsidiaries in their operations, have not been
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. In
response to the challenges of addressing such consequences in the banking
industry, bank regulatory agencies, including the Federal Reserve, BancGroup's
primary regulator, have established a Year 2000 Supervision Program and
published guidelines for implementing procedures to bring the computer software
programs and processing systems into Year 2000 compliance. In compliance with
the guidelines of the Federal Reserve, BancGroup has established a full time
Year 2000 task force to address all Year 2000 compliance issues as well as
enhancements to computer and communications systems resulting from upgrades
initiated in response to Year 2000 issues. Currently, BancGroup is in the
process of implementing its plans to bring all major computer systems into Year
2000 compliant status during the last quarter of 1998. Testing of all systems
and changes to the systems will begin in the last quarter of 1998 and will
continue through the full year of 1999. The major computer systems involved are:
- Colonial Bank's mainframe based systems: These systems are provided
by third party vendors of national stature. Upgrades to these systems
are in progress which will bring the systems into Year 2000 compliant
status and provide enhancements to current capability. The costs
associated with these upgrades are part of BancGroup's ongoing
operating costs.
- CMC's servicing and production systems: CMC's systems are primarily
in-house systems and are currently being rewritten to Year 2000
compliant status. The cost of the rewrites is estimated to be $1.0
million in 1998 and is incremental to the Company's ongoing operating
costs. In addition, CMC's computer hardware is being upgraded to Year
2000 compliant status. This upgrade will also provide additional
capacity for the servicing systems as well as an enhanced capability
for production. The additional annual cost of the mainframe upgrade
(approximately $240,000) is expected to be absorbed through growth in
the servicing portfolio and increased production.
<PAGE> 20
- Branch automation operating systems: Colonial Bank's branch
automation operating systems are being converted to Windows NT from
OS/2. This conversion along with establishment of an intranet and
increased capacity of communication lines is the most cost effective
method of bringing the system to Year 2000 compliant status while
allowing for more efficient flow of information to and from the
branches and providing the highest assurance of continuing vendor
support for the Company's branch automation solution. The incremental
operating cost for these upgrades (approximately $400,000 annually) is
expected to be absorbed through operational efficiencies and increased
revenue. In 1998, the Company will incur a one-time pretax charge of
approximately $2 million to write-off the remaining book value of the
current branch automation equipment that is not Windows NT compatible.
BancGroup expects to incur certain additional third party costs
totalling approximately $300,000 related to assessing the status of the
Company's systems and defining its strategy to bring all systems into Year 2000
compliance. These costs have been and will continue to be expensed as incurred
and are not significant to BancGroup's on-going operating costs. The costs to
bring other miscellaneous systems into Year 2000 compliance are not expected to
be material.
The above reflects management's current assessment and estimates.
Various factors could cause actual results to differ materially from those
contemplated by such assessments, estimates and forward-looking statements. Some
of these factors may be beyond the control of BancGroup, including but not
limited to, vendor representations, technological advancements, economic factors
and competitive considerations.
Management's evaluation of Year 2000 compliance and technological
upgrades is an 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 currently
anticipated.
INCOME TAXES
The provision for income taxes and related items are as follows:
<TABLE>
<CAPTION>
Tax Provision
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 $48,557,000
1996 30,631,000
1995 27,462,000
</TABLE>
BancGroup is subject to federal and state taxes at combined rates of
approximately 38% for regular tax purposes and 23% for alternative minimum tax
purposes. These rates are reduced or increased for certain nontaxable income or
nondeductible expenses, primarily consisting of tax exempt interest income,
partially taxable dividend income, and nondeductible amortization of goodwill.
Management's goal is to minimize income tax expense and maximize cash
yield on earning assets by increasing or decreasing its tax exempt securities
and/or investment in preferred and common stock. Accordingly, BancGroup's
investment in tax exempt securities was adjusted in 1995, 1996 and 1997.
REVIEW OF FINANCIAL CONDITION
OVERVIEW
Ending balances of selected components of the Company's balance sheet
changed from December 31, 1996 to December 31, 1997 as follows:
<TABLE>
<CAPTION>
Increase (Decrease)
-------------------
(IN THOUSANDS) AMOUNT %
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Colonial Bank $1,255,051 20%
CMC 110,505 39
Other(1) (88,586) --
- --------------------------------------------------------------------------------
Total assets 1,276,970 21
Securities available for sale 4,555 1
and investment securities
Mortgage loans held for sale 67,365 43
Loans, net of unearned income 1,027,121 23
Mortgage servicing rights 35,081 33
Deposits 1,042,806 22
Long-term debt 276,160 706
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes eliminations of certain intercompany transactions between
Colonial Bank and CMC regarding intercompany debt.
<PAGE> 21
Management continuously monitors the financial condition of BancGroup
in order to protect depositors, increase shareholder value and protect current
and future earnings.
The most significant factors affecting BancGroup's financial condition
from 1995 through 1997 have been:
- A consistent mix of residential mortgage loans of 41.8%, 42.3% and
42.1% of total loans as of December 31, 1997, 1996 and 1995,
respectively. BancGroup has continued to place emphasis on these loans
as a major product line which has a relatively low loss ratio.
- Internal loan growth of 10.39% in 1997 excluding acquisitions.
- 20.7% increase in 1997 in average noninterest bearing demand deposits
with 3.9% attributable to CMC escrow deposits and the remainder
primarily attributable to acquisitions.
- Maintenance of high asset quality and reserve coverage of nonperforming
assets. Nonperforming assets were .76%, .81%, and .90% of related
assets at December 31, 1997, 1996 and 1995. Net charge-offs were .24%,
.16%, and .18% of average loans during 1997, 1996 and 1995. The
allowance for possible loan losses was 1.21% of loans at December 31,
1997, providing a 241% coverage of non-performing loans (nonaccrual and
renegotiated).
- An increase in the loan to deposit ratio from 93% at December 31, 1995
to 97% at December 31, 1997. Federal Home Loan Bank borrowings continue
to be a major source of funding allowing the Company greater funding
flexibility.
- Increase of $67 million in CMC's mortgage loans held for sale during
1997 due primarily to increased refinancing activities in the fourth
quarter of 1997.
- Increase of $35 million in mortgage servicing rights due to the net
increase in CMC's servicing portfolio to $12.9 billion in 1997.
- Issuance of $70 million of Trust Preferred Securities during 1997.
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 41.8% of total loans. These loans are substantially
all mortgages on single-family, owner occupied properties and therefore
have minimal credit risk. While a portion of these loans were acquired
through acquisitions, the Company has continued to grow this portfolio
with a $403 million or 20.9% increase in these loans in 1997.
Residential mortgage loans are predominately adjustable rate loans and
therefore have not resulted in any material change in the Company's
interest rate sensitivity.
- 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 other areas including metropolitan Atlanta, Georgia, and
Central and South Florida 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 and Florida are experiencing
higher rates of growth. Real estate values in BancGroup's lending areas
in Alabama, Georgia and Florida have not experienced significantly
inflated real estate 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 being packaged for sale in the
secondary market. These loans are classified as mortgage loans held for
<PAGE> 22
sale with balances totaling $225 million, $158 million, and $112
million, at December 31, 1997, 1996, and 1995, 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. These loans are funded principally with short-term
borrowings, providing a relatively high margin for these funds.
- As discussed more fully in subsequent sections, management has
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 10.39% in 1997, 17.36% in
1996, 22.45% in 1995, and 9.6% in 1994, excluding acquisitions.
Although internal loan growth declined in 1997, the net interest
margin improved due primarily to the lower cost of funds of the
acquired banks in Florida, as previously discussed.
<PAGE> 23
GROSS LOANS BY CATEGORY
<TABLE>
<CAPTION>
DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 680,020 $ 642,402 $ 575,864 $ 494,127 $ 411,792
Real estate--commercial 1,515,645 1,146,642 986,817 872,501 718,885
Real estate--construction 674,557 493,182 403,828 264,413 191,730
Real estate--residential 2,332,611 1,929,142 1,652,886 1,058,663 903,700
Installment and consumer 313,121 293,709 260,112 228,606 204,354
Other 70,639 57,012 49,720 46,362 38,731
- ---------------------------------------------------------------------------------------------------------------------------
Total loans $5,586,593 $4,562,089 $3,929,227 $2,964,672 $2,469,192
===========================================================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
DECEMBER 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial, financial,
and agricultural $12,845 12.2% $12,133 14.1% $10,673 14.6% $ 9,874 16.7% $ 9,154 16.7%
Real estate--commercial 23,706 27.1 18,771 25.1 16,498 25.1 14,745 29.4 13,631 29.1
Real estate--construction 13,078 12.1 10,505 10.8 7,968 10.3 4,004 8.9 2,027 7.8
Real estate--residential 11,663 41.8 10,057 42.3 8,931 42.1 10,127 35.7 8,299 36.6
Installment and consumer 5,004 5.6 4,455 6.4 3,914 6.6 3,574 7.7 3,443 8.3
Other 1,232 1.2 2,095 1.3 2,819 1.3 3,223 1.6 2,577 1.5
- ---------------------------------------------------------------------------------------------------------------------------------
Total $67,528 100.0% $58,016 100.0% $50,803 100.0% $45,547 100.0% $39,131 100.0%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 24
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, 1997, approximately 56.7% of loans were floating rate
or adjustable rate loans.
Contractual maturities may vary significantly from actual maturities
due to loan extensions, early payoffs due to refinancing and other factors.
Fluctuations in interest rates are also a major factor in early loan pay-offs.
The uncertainties, particularly with respect to interest rates, of future events
make it difficult to predict the actual maturities. BancGroup has not maintained
records related to trends of early pay-off since management does not believe
such trends would present any significantly more accurate estimate of actual
maturities than the contractual maturities presented.
<PAGE> 25
LOAN MATURITY/RATE SENSITIVITY
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 325,488 $ 291,775 $ 62,757 $ 329,488 $ 350,532 $ 232,313 $ 122,219
Real estate--commercial 314,926 817,972 382,747 858,782 656,863 750,317 450,402
Real estate--construction 419,602 205,702 49,253 190,751 483,806 92,628 162,327
Real estate--residential 232,493 314,114 1,786,004 713,825 1,618,786 575,477 1,524,641
Installment and consumer 93,230 203,847 16,044 285,884 27,237 212,064 7,827
Other 18,519 24,035 28,085 37,810 32,829 32,598 19,522
- -----------------------------------------------------------------------------------------------------------------------------
$1,404,258 $1,857,445 $2,324,890 $2,416,540 $3,170,053 $1,895,397 $2,286,938
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
LOAN QUALITY
A major key to long-term earnings growth is maintenance of a high
quality loan portfolio. BancGroup's directive in this regard is carried out
through its policies and procedures for review of loans and through a company
wide senior credit administration function. This function participates in the
loan approval process with the regional banks and provides an independent review
and grading of loan credits on a continual basis.
BancGroup has standard policies and procedures for the evaluation of
new credits, including debt service evaluations and collateral guidelines.
Collateral guidelines vary with the credit worthiness of the borrower, but
generally require maximum loan-to-value ratios of 85% for commercial real estate
and 90% for residential real estate. Commercial, financial and agricultural
loans are generally collateralized by business inventory, accounts receivables
or new business equipment at 50%, 80% and 90% of estimated value, respectively.
Installment and consumer loan collateral where required is based on 90% loan to
value ratios.
Based on the 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 in an effort to evaluate portfolio risks, it is
necessary for management to monitor fluctuations in the allowance resulting from
actual charge-offs and recoveries and to periodically review the size and
composition of the loan portfolio in light of current and anticipated economic
conditions.
The overall goal and result of the aforementioned policies and
procedures is to provide a sound basis for new credit extensions and an early
recognition of problem assets to allow the most flexibility in their timely
disposition.
LOAN LOSS EXPERIENCE
During 1997 the ratio of net charge-offs to average loans increased to
.24% from .16% in 1996. The increase in net charge-offs in 1997 is primarily due
to the charge-off of three large credits totaling approximately $3.1 million in
North and Central Alabama and approximately $700,000 from banks acquired in 1998
in Central and Southwest Florida. As a result of the Company's localized lending
strategies and early identification of potential problem loans, BancGroup's net
charge-offs have been consistently low. In addition, the current concentration
of loans in residential real estate loans has had a favorable impact on net
charge-offs.
The following schedule reflects greater than 100% coverage of
nonperforming loans (nonaccrual and renegotiated) by the allowance for loan
losses. Management has not targeted any specific coverage ratio in excess of
100%, and the coverage ratio may fluctuate significantly as larger loans are
placed into or removed from nonperforming status. Management's focus has been on
establishing reserves related to an earlier identification of potential problem
loans. Management is committed to maintaining adequate reserve levels to absorb
future losses. This commitment has allowed BancGroup to weather economic
uncertainties without disruption of its earnings.
<PAGE> 27
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF LOAN LOSS EXPERIENCE
YEARS ENDED DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses--
January 1 $ 58,016 $ 50,803 $ 45,547 $ 39,131 $ 28,710
Charge-offs:
Commercial, financial, and agricultural 5,107 3,582 3,891 2,891 7,385
Real estate--commercial 2,954 2,389 1,299 1,666 1,674
Real estate--construction 433 1,783 44 2 957
Real estate--residential 1,724 885 499 512 623
Installment and consumer 5,577 3,410 2,936 1,933 2,408
Other 693 239 163 168 7
- -------------------------------------------------------------------------------------------------------------------
Total charge-offs 16,488 12,288 8,832 7,172 13,054
- -------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 984 1,439 1,132 2,225 909
Real estate--commercial 1,019 1,533 48 251 120
Real estate--construction 91 1 11 12 46
Real estate--residential 244 697 201 99 133
Installment and consumer 1,796 1,576 1,341 1,514 1,547
Other 134 73 46 43 7
- -------------------------------------------------------------------------------------------------------------------
Total recoveries 4,268 5,319 2,779 4,144 2,762
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs 12,220 6,969 6,053 3,028 10,292
Addition to allowance charged to
operating expense 14,860 13,564 10,180 8,943 14,437
Allowance added from bank acquisitions 6,872 618 1,129 501 6,276
- -------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses--
December 31 $ 67,528 $ 58,016 $ 50,803 $ 45,547 $ 39,131
===================================================================================================================
Loans (net of unearned income)
December 31 $5,585,901 $4,558,780 $3,924,785 $2,959,565 $2,468,564
Ratio of ending allowance to ending loans
(net of unearned income) 1.21% 1.27% 1.29% 1.54% 1.59%
Average loans (net of unearned income) $5,184,653 $4,240,554 $3,371,192 $2,669,363 $1,988,563
Ratio of net charge-offs to average loans
(net of unearned income) .24% .16% .18% .11% .52%
Allowance for loan losses as a percent
of nonperforming loans
(nonaccrual and renegotiated) 241% 225% 240% 208% 184%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
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:
<PAGE> 29
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate loans for which interest is
not being accrued $27,010 $24,049 $19,298 $18,394 $19,729
Aggregate loans renegotiated to
provide a reduction or deferral
of interest or principal because of
a deterioration in the financial
condition of the borrower 952 1,683 1,882 3,541 1,494
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans* $27,962 $25,732 $21,180 $21,935 $21,223
Other real estate and in-substance foreclosure 13,695 11,164 14,299 18,917 32,470
Repossessions 796 338 171 81 101
- -------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets* $42,453 $37,234 $35,650 $40,933 $53,794
- -------------------------------------------------------------------------------------------------------------------------
Aggregate loans contractually past due 90
days for which interest is being accrued $ 7,028 $ 7,760 $ 3,421 $ 4,399 $ 3,255
Total nonperforming loans as a
percent of net loans 0.50% 0.56% 0.54% 0.74% 0.86%
Total nonperforming assets as a percent of
net loans, other real estate and repossessions 0.76% 0.81% 0.90% 1.37% 2.15%
Total nonaccrual, renegotiated and 90 day
past due loans for which interest is being accrued
as a percent of total loans 0.63% 0.73% 0.63% 0.89% 0.99%
Allowance for loan loss as a percent of
nonperforming loans (nonaccrual
and renegotiated) 241% 225% 240% 208% 184%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total does not include loans contractually past due 90 days or more
which are still accruing interest
Fluctuations from year to year in the balances of nonperforming assets
are attributable to several factors including changing economic conditions in
various markets, nonperforming assets obtained in various acquisitions and the
disproportionate impact of larger (over $500,000) individual credits. On
December 31, 1993 BancGroup completed the acquisition of First AmFed
Corporation. With this acquisition the Company recorded $11.2 million in other
real estate, $1.6 million in nonaccrual loans, and $.5 million in 90 day past
due loans that were still accruing. The carrying value of these nonperforming
assets was adjusted at the acquisition date to their current estimated fair
values based on BancGroup's intention to dispose of them in the most expeditious
and profitable manner. The 1998 United American acquisition accounted for as a
pooling included $9.2 million in nonperforming assets in 1993. Excluding these
nonperforming assets acquired with First AmFed and United American, the
Company's nonperforming asset ratio would have been 1.28% at December 31, 1993
compared to 2.15% noted above. During 1994 a substantial portion of these
problem assets, particularly other real estate, was disposed of and the
nonperforming asset ratio was reduced to 1.37%.
Management, through its loan officers, internal loan review staff and
external examinations by regulatory agencies, has identified approximately $139
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, 1997 substantially all of these
loans are current with their existing repayment terms. Management believes that
classification of such loans as potential problem loans well in advance of their
reaching a delinquent status allows the Company the greatest flexibility in
correcting problems and providing adequate reserves without disruption of
earnings trends. Given the reserves and the ability of the borrowers to comply
with the existing repayment terms, management believes any exposure from these
potential problem loans has been adequately addressed at the present time.
The above nonperforming loans and potential problem loans represent all
material credits for which management has serious doubts as to the ability of
the borrowers to comply with the loan repayment terms.
<PAGE> 30
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, 1997, 1996, 1995,
1994 and 1993.
The recorded investment in impaired loans at December 31, 1997 and 1996
were $8,064,000 and $5,972,000, respectively and these loans had a corresponding
valuation allowance of $3,349,000 and $2,902,000, 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, 1997 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. Maturities were reduced to the 2-3 year
range in 1995, increased to the 3-5 year range in 1996 and 1997.
- 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, 1997 does not include any interest-only strips and the
amount of unamortized premium on mortgage backed securities is
approximately $1,008,000. 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 $551 million at December 31, 1996
to $595 million at December 31, 1997.
<PAGE> 31
At December 31, 1997, 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 ($54.3 million).
The changes noted above are reflected on the following table.
<PAGE> 32
SECURITIES BY CATEGORY
<TABLE>
<CAPTION>
CARRYING VALUE
AT DECEMBER 31
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities:
U.S. Treasury securities
and obligations of
U.S. government
agencies $150,536 $176,780 $186,548
Mortgage-backed
securities 72,155 78,247 60,312
Obligations of state
and political
subdivisions 44,781 46,127 52,699
Other 1,741 6,786 18,944
- --------------------------------------------------------------------------------
Total $269,213 $307,940 $318,503
- --------------------------------------------------------------------------------
CARRYING VALUE
AT DECEMBER 31
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury securities
and obligations of
U.S. government
agencies $307,810 $297,948 $317,454
Mortgage-backed
securities 242,560 211,117 103,159
Obligations of state
and political
subdivisions 35,928 28,488 23,145
Other 8,247 13,710 26,588
- --------------------------------------------------------------------------------
Total $594,545 $551,263 $470,346
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 33
The carrying value of securities at December 31, 1997 mature as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Treasury securities
and obligations of U.S.
government agencies $ 56,108 6.25% $ 93,844 6.45% $ -- -- $ 584 7.25%
Mortgage-backed securities 7,078 6.38 43,179 6.92 5,935 7.14% 15,963 7.53
Obligations of state and
political subdivisions (1) 6,359 4.60 19,940 5.03 14,498 5.22 3,984 5.32
Other 270 7.58 411 8.36 1,060 5.97 -- --
- --------------------------------------------------------------------------------------------------------------------------
Total $ 69,815 6.11% $157,374 6.40% $21,493 5.79% $20,531 7.09%
- --------------------------------------------------------------------------------------------------------------------------
Securities available for sale (2):
U.S. Treasury securities
and obligations of U.S.
government agencies $263,555 6.13%
Mortgage-backed securities 216,939 6.75
Obligations of state and political
subdivisions (1) 15,709 4.76
Other 5,663 7.29
- --------------------------------------------------------------------------------------------------------------------------
Total $501,866 6.37%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
DEPOSITS
BancGroup's deposit structure consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 % OF TOTAL
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 984,508 $ 773,726 17.1% 16.4%
Interest-bearing demand deposits 1,252,585 921,648 21.7 19.5
Savings deposits 489,572 439,550 8.5 9.3
Certificates of deposits less than $100,000 1,986,531 1,715,838 34.4 36.3
Certificates of deposits more than $100,000 722,891 544,657 12.5 11.5
IRAs 290,460 250,382 5.0 5.3
Open time deposits 45,155 83,095 0.8 1.7
- ------------------------------------------------------------------------------------------------------------------------
Total deposits $5,771,702 $4,728,896 100.0% 100.0%
</TABLE>
<PAGE> 34
The growth in deposits and the mix of deposits has been most significantly
impacted in 1996 and 1997 by the acquisitions accounted for under the purchase
method of accounting and immaterial poolings. Noninterest-bearing demand
deposits have increased $211 million (27%) from December 31, 1996 to December
31, 1997, of which 16% was due to the aforementioned acquisitions and 7% was due
to CMC escrow 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 in Alabama and expand into growth
markets in the Southeast. The expansion was concentrated in Central and South
Florida and the Atlanta metropolitan area. 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. In
1997, BancGroup continued to utilize its established retail banking, training
and policies and procedures departments as well as its branch automation project
to reinforce the Company's goal of providing the customer with the best possible
service. In connection with this goal, several other initiatives have been
undertaken, including establishing private banking and trust services,
international banking, an electronic banking division which includes home
banking, business banking, automatic teller, credit card and check card
services. Full service banking is offered in fourteen Wal-Mart locations with
twelve located in Alabama, one in Tennessee and one in Florida. Primarily
through acquisitions, the number of retail branches increased to 219 in 1997
from 157 in 1996. BancGroup is continuing its sales of investment products, such
as mutual funds and annuities to customers seeking alternatives to deposit
products. The overall goal of these steps has been to efficiently provide
customers with the financial products they need and desire.
In 1995, the Company initiated a brokered Certificate of Deposit (CD)
program to offer CD's in increments of $1,000 to $99,000 to out of market
customers at competitive rates and maturities. At December 31, 1997 and 1996,
$78 million and $138 million, respectively of CD's 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. The rate
currently charged for these funds is 5.5%. At December 31, 1997, these accounts
totaled $147 million.
SHORT-TERM BORROWINGS
Short-term borrowings were comprised of the following at December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased
and securities sold
under repurchase
agreements $273,929 $147,195 $168,763
Federal Home Loan
Bank borrowings 420,000 715,000 465,000
Other short-term
borrowings 25,490 2,305 1,301
- --------------------------------------------------------------------------------
Total $719,419 $864,500 $635,064
- --------------------------------------------------------------------------------
</TABLE>
BancGroup has available Federal Funds lines from upstream banks
including the Federal Home Loan Bank (FHLB) totaling $285 million at December
31, 1997. In addition, correspondent banks and customers with repurchase
agreements have provided a consistent base of short-term funds. BancGroup became
a member of the FHLB in late 1992. As a member of the FHLB, BancGroup has
availability of up to $1.5 billion from the FHLB on either a short or long-term
basis excluding funds available through the federal funds line.
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 1997 and 1996 to fund loan growth. As discussed
more fully in the "Liquidity and Interest Sensitivity" section of this report,
the line of credit with the FHLB is considered a primary source of funding for
the Company's asset growth.
<PAGE> 35
Colonial Bank has an additional $225 million available through a
warehouse line with FHLB that is collateralized by mortgage loans held for sale
with no balance outstanding at December 31, 1997.
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 1993 through 1997 the significant changes in BancGroup's cash
flows have centered around loan growth and fluctuations in mortgage loans held
for sale. Loan growth of $552 million in 1997 and $700 million in 1996 has been
one of the principal uses of cash in both years. Mortgage loans held for sale
increased in 1997, using $67 million in funds. Short-term borrowings excluding
acquisitions increased $70 million in 1997 and were 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. Deposit growth excluding acquisitions of $379 million with
$87 million from the previously discussed brokered CD and money market programs
provided an additional source of funding for internal loan growth.
As noted previously, the composition of the Company's loan portfolio
has changed over the past three years. BancGroup at December 31, 1997 had $2.3
billion of residential real estate loans. These loans provide collateral for the
current $1.5 billion credit availability at the FHLB. The FHLB unused credit
capacity, $769 million, at December 31, 1997, provides the Company significant
flexibility in asset/liability management, liquidity and deposit pricing.
In January 1996, the Company called $7.5 million of its 1985
subordinated debentures which had a maturity date of 2000. As a result, 806,598
shares of BancGroup stock were issued and cash was paid for the remaining
debentures. In December 1996, BancGroup entered into a two year revolving line
of credit for $35 million and a term loan with a maximum principal amount of
$15.5 million. This line of credit provides an additional source of funding for
acquisition related activities. In January 1997, BancGroup issued $70 million in
Trust Preferred Securities. These securities qualify as Tier I Capital and carry
an 8.92% interest rate. A portion of the proceeds of the offering were utilized
to pay off the term note and revolving debt outstanding. The remainder of the
proceeds were used for acquisitions and other business purposes. Management
believes its liquidity sources and funding strategies are adequate given the
nature of its asset base and current loan demand.
The primary uses of funds as reflected in BancGroup's parent only
statement of cash flows were $4.0 million for the payment of interest on debt,
$17.3 million for principal payment on term notes (See Note 9 to the
consolidated financial statements), $15.9 million to purchase treasury stock
which was subsequently issued in the First Commerce acquisition, $55.2 million
advanced to Colonial Bank for acquisition related activities including the
Dadeland Bancshares purchase and $26.5 million for the payment of dividends. The
parent company's primary sources of funds were $42.6 million in dividends
received from its subsidiaries and $70 million from the issuance of the Trust
Preferred Securities. 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 $134
million of retained earnings plus certain 1998 earnings would be
<PAGE> 36
available for distribution to BancGroup, from its subsidiaries, as dividends in
1998 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, 1997, BancGroup's liquidity position was adequate with
loan maturities of $1.4 billion, or 25% of the total loan portfolio, due within
one year. Securities totaling $572 million or 66% of the total portfolio also
had maturities within one year or have been classified as available for sale. As
of December 31, 1997 there were, however, no current plans to dispose of any
significant portion of these securities. In addition BancGroup has $769 million
in additional borrowing capacity at the FHLB and Colonial Bank has $225 million
available through a warehouse line with FHLB.
BancGroup's asset/liability management policy has also established
targets for interest rate sensitivity. Changes in interest rates will
necessarily lead to changes in the net interest margin. It is ALMCO's goal to
minimize volatility in the net interest margin by taking an active role in
managing the level, mix and maturities of assets and liabilities and by
analyzing and taking action to manage mismatch and basis risk. The interest
sensitivity schedule reflects a 11.7% 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 assets,
liabilities, and off-balance sheet contracts. Following are the estimated
impacts of immediate changes in interest rates at the specified levels at
December 31, 1997.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN:
BASIS NET INTEREST NET PORTFOLIO
POINTS INCOME(1) VALUE(2)
- --------------------------------------------------------------------------------
<S> <C> <C>
+400 (8)% (16)%
+300 (3) (9)
+200 0 (5)
+100 1 (2)
-100 (4) 2
-200 (9) 3
-300 (15) 3
-400 (25) (4)
- --------------------------------------------------------------------------------
</TABLE>
(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 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 instruments
for hedging purposes to limit its risk associated with the sale of mortgage
loans by providing sales commitments on all loans funded and held for sale. (See
Note 6 to the consolidated financial statements.)
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, 1997.
<PAGE> 37
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
INTEREST SENSITIVE WITHIN
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL 0-90 91-180 181-365 1-5 OVER
(IN THOUSANDS) BALANCE DAYS DAYS DAYS YEARS 5 YEARS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Federal funds sold and resale
agreements $ 24,947 $ 24,947 $ -- $ -- $ -- $ --
Investment securities 269,213 32,646 23,916 23,690 147,392 41,569
Securities available for sale 594,545 230,791 26,971 33,569 179,095 124,119
Mortgage loans held for sale 225,331 225,331 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 5,585,901 1,997,531 283,307 537,520 2,130,539 637,004
Allowance for possible loan losses (67,528) (23,715) (3,376) (6,531) (25,987) (7,919)
- --------------------------------------------------------------------------------------------------------------------------------
Net loans 5,518,373 1,973,816 279,931 530,989 2,104,552 629,085
Nonearning assets 810,252 -- -- -- -- 810,252
================================================================================================================================
Total Assets $ 7,442,661 $ 2,487,531 $ 330,818 $ 588,248 $ 2,431,039 $ 1,605,025
- --------------------------------------------------------------------------------------------------------------------------------
Rate Sensitive Liabilities:
Interest-bearing demand deposits $ 1,252,585 $ 814,055 $ -- $ 49,069 $ -- $ 389,461
Savings deposits 489,572 245,379 -- 35,544 -- 208,649
Certificates of deposits less than
$100,000 1,985,667 548,950 397,051 641,132 397,531 1,003
Certificates of deposits more than
$100,000 723,921 274,352 157,300 175,871 116,398 --
IRAs 290,451 79,570 48,001 46,582 114,418 1,880
Open time deposits 44,998 43,045 116 315 1,522 --
Short-term borrowings 719,419 649,419 60,000 10,000 -- --
Long-term debt 315,252 256 241 298 225,682 88,775
Noncosting liabilities & equity 1,620,796 -- -- -- -- 1,620,796
================================================================================================================================
Total Liabilities & Equity $ 7,442,661 $ 2,655,026 $ 662,709 $ 958,811 $ 855,551 $ 2,310,564
================================================================================================================================
Gap $ -- $ (167,495) $ (331,891) $ (370,563) $ 1,575,488 $ (705,539)
================================================================================================================================
Cumulative Gap $ -- $ (167,495) $ (499,386) $ (869,949) $ 705,539 $ 0
================================================================================================================================
</TABLE>
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 $766 million with a corresponding cumulative gap at one year of
negative $1.5 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. BancGroup's dividend
pay-out ratio in 1997 was 34%. This level is in the Company's target range of
30-45%. Dividend rates are determined by the Board of Directors in consideration
of several factors including: current and projected capital ratios, liquidity
and income levels and other bank dividend yields and payment ratios.
<PAGE> 38
The amount of a cash dividend, if any, rests with the discretion of the
Board of Directors of BancGroup as well as upon applicable statutory constraints
such as the Delaware law requirement that dividends may be paid only out of
capital surplus or out of net profits for the fiscal year in which the dividend
is declared or the preceding fiscal year.
BancGroup also has access to equity capital markets through both public
and private issuances. Management considers these sources and related return in
addition to internally generated capital in evaluating future expansion or
acquisition opportunities.
The Federal Reserve Board has issued guidelines identifying minimum
Tier I leverage ratios relative to total assets and minimum capital ratios
relative to risk-adjusted assets. The minimum leverage ratio is 3% but is
increased from 100 to 200 basis points based on a review of individual banks by
the Federal Reserve. The minimum risk adjusted capital ratios established by the
Federal Reserve are 4% for Tier I and 8% for total capital. BancGroup's actual
capital ratios and the components of capital and risk adjusted asset information
as of December 31, 1997 are stated below:
<TABLE>
<S> <C>
Capital (thousands):
Tier I Capital:
Shareholders' equity
(excluding unrealized gain
on securities available
for sale and intangibles)
plus Trust Preferred Securities $ 542,075
Tier II Capital:
Allowable loan loss reserve 67,528
Subordinated debt 6,088
- --------------------------------------------------------------------------------
Total Capital $ 615,691
Risk Adjusted Assets (thousands) $5,416,909
Total Assets (thousands) $7,442,661
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier I leverage ratio 7.52% 6.93% 7.25%
Risk Adjusted Capital
Ratios:
Tier I Capital Ratio 10.04% 9.40% 9.76%
Total Capital Ratio 11.40% 10.85% 11.42%
</TABLE>
BancGroup has increased capital gradually through normal earnings
retention as well as through stock registrations to capitalize acquisitions.
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, 1997, these deposits totaled $23.1
million.
<PAGE> 39
FINANCIAL ACCOUNTING STANDARDS
BOARD RELEASES
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and is to be applied prospectively. Earlier or retroactive
application is not permitted. However, in December 1996, the Financial
Accounting Standards Board issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125." This statement defers the
effective date of certain provisions for one year (December 31, 1997). The
deferred provisions relate to repurchase agreements, dollar-roll transactions,
securities lending, and similar transactions. The effective date for all other
transfers and servicing of financial assets is unchanged. Management does not
believe that the adoption of SFAS No. 125, as amended by SFAS No. 127, will
have a material impact on BancGroup's financial statements.
BancGroup adopted SFAS No. 128, Earnings Per Share, on December 31, 1997.
(See Note 1 to the consolidated financial statements.)
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 statements.
This statement is effective for fiscal years beginning after December 15,
1997. Although earlier application is permitted, BancGroup has chosen not to
adopt early. Reclassification of financial statements for earlier periods
provided for comparative purposes will be required.
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.
This statement is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. Under SFAS No. 131, BancGroup
will report two segments, commercial and mortgage banking.
In February, 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which revises employers' disclosures about pension costs and other
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. This statement is effective for fiscal years
beginning after December 15, 1997.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of
the federal securities laws. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities: (i) deposit attrition, customer loss, or revenue loss in the
ordinary course of business; (ii) increases in competitive pressure in the
banking industry; (iii) costs or difficulties related to the integration of the
businesses of BancGroup and the institutions acquired are greater than
expected; (iv) changes in the interest rate environment which reduce margins
(v) general economic conditions, either nationally or regionally, that are less
favorable than expected, resulting in, among other things, a deterioration in
credit quality; (vi) changes which may occur in the regulatory environment;
(vii) a significant rate of inflation (deflation); and (viii) changes in the
securities markets. When used in this Report, the words "believes,"
"estimates," "plans," "expects," "should," "may," "might," "outlook," and
"anticipates," and similar expressions as they relate to BancGroup (including
its subsidiaries), or its management are intended to identify forward-looking
statements.
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS97
TO THE BOARD OF DIRECTORS
AND SHAREHOLDERS
THE COLONIAL BANCGROUP, INC.
We have audited the accompanying consolidated statements of condition of
The Colonial BancGroup, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The consolidated financial statements give retroactive effect of the
mergers of The Colonial BancGroup, Inc. with United American Holding
Corporation, First Central Bank and South Florida Banking Corp. These
combinations occurred on February 2, 1998, February 11, 1998 and February 12,
1998, respectively, and have been accounted for as poolings of interests as
described in Notes 1 and 2 to the consolidated financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Colonial
BancGroup, Inc. and subsidiaries as of December 31, 1997 and 1996, the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles after financial statements are issued for a
period which includes the date of consummation of the business combinations.
COOPERS & LYBRAND L.L.P.
Montgomery, Alabama
March 10, 1998
<PAGE> 41
CONSOLIDATED STATEMENTS OF CONDITION 97
<TABLE>
<CAPTION>
December 31, 1997 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 293,310 $ 260,811
Interest-bearing deposits in banks 24,947 37,967
Securities available for sale (Note 3) 594,545 551,263
Investment securities (market value: 1997, $271,366; 1996, $310,136) (Note 3) 269,213 307,940
Mortgage loans held for sale 225,331 157,966
Loans, net of unearned income (Note 4) 5,585,901 4,558,780
Less:
Allowance for possible loan losses (Note 5) (67,528) (58,016)
- --------------------------------------------------------------------------------------------------------------------
Loans, net 5,518,373 4,500,764
Premises and equipment, net (Note 7) 146,189 106,295
Excess of cost over tangible and identified intangible assets
acquired, net 69,200 29,773
Mortgage servicing rights 141,865 106,784
Other real estate owned 14,491 11,502
Accrued interest and other assets 145,197 94,626
- --------------------------------------------------------------------------------------------------------------------
Total $ 7,442,661 $ 6,165,691
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing demand $ 984,508 $ 773,726
Interest-bearing demand 1,252,585 921,648
Savings 489,572 439,550
Time 3,045,037 2,593,972
- --------------------------------------------------------------------------------------------------------------------
Total deposits 5,771,702 4,728,896
FHLB short-term borrowings (Note 8) 420,000 715,000
Other short-term borrowings (Note 8) 299,419 149,500
Subordinated debt (Note 9) 6,088 8,612
Trust preferred securities (Note 9) 70,000 --
FHLB long-term borrowings 234,831 10,809
Other long-term debt (Note 9) 4,333 19,671
Other liabilities 93,026 89,812
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 6,899,399 5,722,300
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6, 12, 15)
Shareholders' equity: (Notes 2, 10)
Common Stock, $2.50 par value; 100,000,000 shares authorized;
issued and outstanding; 47,171,504 and 43,334,590 in 1997 and 1996 117,929 108,336
Additional paid in capital 213,854 184,088
Retained earnings 211,243 152,343
Unearned compensation (1,751) (1,603)
Unrealized gain on securities available for sale, net of taxes 1,987 227
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 543,262 443,391
- --------------------------------------------------------------------------------------------------------------------
Total $ 7,442,661 $ 6,165,691
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 42
CONSOLIDATED STATEMENTS OF INCOME 97
<TABLE>
<CAPTION>
For the years ended
December 31, 1997, 1996 and 1995
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $478,480 $391,219 $319,947
Interest and dividends on securities:
Taxable 51,761 42,469 40,879
Nontaxable 3,989 4,218 4,270
Dividends 3,142 2,472 2,372
Interest on federal funds sold and securities purchased under
resale agreements 2,596 3,092 3,770
Other interest 731 612 747
- -------------------------------------------------------------------------------------------------------
Total interest income 540,699 444,082 371,985
- -------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 215,924 177,208 147,536
Interest on short-term borrowings 40,112 39,547 31,104
Interest on long-term debt 11,048 2,739 3,801
- -------------------------------------------------------------------------------------------------------
Total interest expense 267,084 219,494 182,441
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 273,615 224,588 189,544
Provision for possible loan losses (Notes 1, 5) 14,860 13,564 10,180
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 258,755 211,024 179,364
- -------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Mortgage servicing fees 35,824 28,057 23,787
Service charges on deposit accounts 29,314 25,081 21,312
Securities gains, net (Note 3) 665 217 682
Other charges, fees and commissions 7,808 6,383 6,628
Other income 18,939 15,122 11,070
- -------------------------------------------------------------------------------------------------------
Total noninterest income 92,550 74,860 63,479
- -------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 91,730 78,102 68,675
Occupancy expense of bank premises, net 22,139 17,200 16,272
Furniture and equipment expenses 18,804 14,862 11,380
Amortization of mortgage servicing rights 17,071 13,627 10,261
Amortization of intangible assets 3,184 2,150 1,610
SAIF special assessment -- 4,465 --
Acquisition expense 6,463 11,918 1,738
Other expense (Note 17) 60,841 56,647 54,803
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 220,232 198,971 164,739
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 131,073 86,913 78,104
Applicable income taxes (Note 18) 48,557 30,631 27,462
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 82,516 $ 56,282 $ 50,642
=======================================================================================================
EARNINGS PER SHARE (NOTE 19):
Basic $ 1.77 $ 1.31 $ 1.27
Diluted 1.72 1.27 1.18
AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 46,536 42,839 39,787
Diluted 48,158 44,776 43,649
=======================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 43
CONSOLIDATED STATEMENTS OF CHANGES97
IN SHAREHOLDERS' EQUITY
For the years ended
December 31, 1997, 1996 and 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 33,450,262 $83,626 1,270,176 $ 3,175
Adjustments for pooling-of-
interests combinations 3,196,274 7,991
- -------------------------------------------------------------------------------------------------------------------
Restated Beginning Balance 36,646,536 91,617 1,270,176 3,175
- -------------------------------------------------------------------------------------------------------------------
Shares issued under:
Directors Plan 1,716 4
Stock Option Plans 13,182 33
Dividend Reinvestment -- --
Stock Bonus Plan -- --
Employee Stock Purchase Plan 536 1
Issuance of common stock by
a pooled bank prior to merger 156,790 392
Conversion of Class A Common
Stock and Class B Common
Stock to Common Stock (36,818,760) (92,047) (1,270,176) (3,175)
Issuance of shares for business
combinations
Net income
Cash dividends: (Class A, $0.1125 per
share; Class B, $0.0625 per share;
Common, $0.3375 per share)
Cash dividends by pooled banks prior to merger
Treasury Stock activity by pooled prior to merger
Conversion of 7 1/2% convertible
subordinated debentures
Conversion of 12 3/4% convertible
subordinated debentures
Changes in unrealized gain (loss) on
securities available for sale, net of taxes
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Shares issued under:
Directors Plan
Stock Option Plans
Dividend Reinvestment
Stock Bonus Plan
Employee Stock Purchase Plan
Issuance of common stock by a pooled bank prior to merger
Issuance of shares for business combinations
Net income
Cash dividends: ($.054 per share)
Cash dividends by pooled banks prior to merger
Treasury Stock activity by pooled bank prior to merger
Conversion of 7 1/2% convertible
subordinated debentures
Conversion of 12 3/4% convertible
subordinated debentures
Change in unrealized gain (loss) on
securities available for sale, net of taxes
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Issuance of shares for immaterial poolings:
Tomoka Bancorporation
Great Southern Bancorp
First Independence Bank of Florida
Shares issued under:
Directors Plan
Stock Option Plans
Dividend Reinvestment
Stock Bonus Plan
Employee Stock Purchase Plan
Issuance of common stock by a pooled bank prior to merger
Purchase of treasury stock for issuance in a business combination
Issuance of shares for business combinations
Net income
Cash dividends: ($0.60 per share)
Cash dividends by pooled banks prior to merger
Conversion of 7 1/2% convertible
subordinated debentures
Conversion of 7% convertible
subordinated debentures
Change in unrealized gain on securities
available for sale, net of taxes
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1995 -- -- $ 128,156 $ 73,746
Adjustments for pooling-of-
interests combinations 9,576 7,956
- -------------------------------------------------------------------------------------------------------------------------
Restated Beginning Balance -- -- 137,732 81,702
- -------------------------------------------------------------------------------------------------------------------------
Shares issued under:
Directors Plan 32,332 $ 81 241
Stock Option Plans 244,079 611 1,222
Dividend Reinvestment 53,516 134 448
Stock Bonus Plan 50,000 125 697
Employee Stock Purchase Plan 7,534 19 90
Issuance of common stock by
a pooled bank prior to merger 871,697 2,179 6,863 (2,240)
Conversion of Class A Common
Stock and Class B Common
Stock to Common Stock 38,088,936 95,222
Issuance of shares for business
combinations 2,089,994 5,225 22,591
Net income 50,642
Cash dividends: (Class A, $0.1125 per
share; Class B, $0.0625 per share;
Common, $0.3375 per share) (10,521)
Cash dividends by pooled banks prior to merger (2,274)
Treasury Stock activity by pooled prior to merger (6,687) (17) (46)
Conversion of 7 1/2% convertible
subordinated debentures 23,418 59 269
Conversion of 12 3/4% convertible
subordinated debentures 1,120 2 8
Changes in unrealized gain (loss) on
securities available for sale, net of taxes
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 41,455,939 103,640 170,115 117,309
- -------------------------------------------------------------------------------------------------------------------------
Shares issued under:
Directors Plan 31,710 79 249
Stock Option Plans 535,899 1,340 1,812
Dividend Reinvestment 60,136 150 897
Stock Bonus Plan 48,340 121 833
Employee Stock Purchase Plan 10,264 26 154
Issuance of common stock by a pooled bank prior to merger 108,720 272 909 (979)
Issuance of shares for business combinations 154,596 386 2,214
Net income 56,282
Cash dividends: ($.054 per share) (16,175)
Cash dividends by pooled banks prior to merger (3,887)
Treasury Stock activity by pooled bank prior to merger (52,538) (132) (449) (207)
Conversion of 7 1/2% convertible
subordinated debentures 174,926 437 2,011
Conversion of 12 3/4% convertible
subordinated debentures 806,598 2,017 5,343
Change in unrealized gain (loss) on
securities available for sale, net of taxes
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 43,334,590 108,336 184,088 152,343
- -------------------------------------------------------------------------------------------------------------------------
Issuance of shares for immaterial poolings:
Tomoka Bancorporation 661,992 1,655 1,628 3,043
Great Southern Bancorp 927,811 2,320 5,287 2,514
First Independence Bank of Florida 503,932 1,260 5,634 (1,430)
Shares issued under:
Directors Plan 31,082 78 425
Stock Option Plans 722,933 1,807 3,596
Dividend Reinvestment 42,199 105 843
Stock Bonus Plan 23,012 58 443
Employee Stock Purchase Plan 16,392 41 385
Issuance of common stock by pooled banks prior to merger 384,130 960 3,948 (1,164)
Purchase of treasury stock for issuance in a business combination (671,165) (1,678) (14,209)
Issuance of shares for business combinations 1,016,261 2,541 19,717
Net income 82,516
Cash dividends: ($0.60 per share) (24,957)
Cash dividends by pooled banks prior to merger (1,622)
Conversion of 7 1/2% convertible
subordinated debentures 163,164 408 1,877
Conversion of 7% convertible
subordinated debentures 15,171 38 192
Change in unrealized gain on securities
available for sale, net of taxes
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 47,171,504 $ 117,929 $ 213,854 $211,243
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
SECURITIES TOTAL
UNEARNED AVAILABLE SHAREHOLDERS'
COMPENSATION FOR SALE EQUITY
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1995 $ (840) $(12,546) $ 275,317
Adjustments for pooling-of-
interests combinations (2,028) 23,495
- -----------------------------------------------------------------------------------------------------------
Restated Beginning Balance (840) (14,574) 298,812
- -----------------------------------------------------------------------------------------------------------
Shares issued under:
Directors Plan 326
Stock Option Plans 1,866
Dividend Reinvestment 582
Stock Bonus Plan (822) --
Employee Stock Purchase Plan 110
Issuance of common stock by
a pooled bank prior to merger (187) 7,007
Conversion of Class A Common
Stock and Class B Common
Stock to Common Stock --
Issuance of shares for business
combinations 27,816
Net income 50,642
Cash dividends: (Class A, $0.1125 per --
share; Class B, $0.0625 per share; --
Common, $0.3375 per share) (10,521)
Cash dividends by pooled banks prior to merger (2,274)
Treasury Stock activity by pooled prior to merger (63)
Conversion of 7 1/2% convertible
subordinated debentures 328
Conversion of 12 3/4% convertible
subordinated debentures 10
Changes in unrealized gain (loss) on
securities available for sale, net of taxes 14,129 14,129
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 (1,849) (445) 388,770
- -----------------------------------------------------------------------------------------------------------
Shares issued under:
Directors Plan 328
Stock Option Plans 3,152
Dividend Reinvestment 1,047
Stock Bonus Plan 246 1,200
Employee Stock Purchase Plan 180
Issuance of common stock by a pooled bank prior to merger 202
Issuance of shares for business combinations 2,600
Net income 56,282
Cash dividends: ($.054 per share) (16,175)
Cash dividends by pooled banks prior to merger (3,887)
Treasury Stock activity by pooled bank prior to merger (788)
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 672 672
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 (1,603) 227 443,391
- -----------------------------------------------------------------------------------------------------------
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 (79) 422
Employee Stock Purchase Plan 426
Issuance of common stock by a pooled bank prior to merger (69) 3,675
Purchase of treasury stock for issuance in a business combination (15,887)
Issuance of shares for business combinations 22,258
Net income 82,516
Cash dividends: ($0.60 per share) (24,957)
Cash dividends by pooled banks prior to merger (1,622)
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 1,833 1,833
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $(1,751) $ 1,987 $ 543,262
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 44
CONSOLIDATED STATEMENTS OF CASH FLOWS97
<TABLE>
<CAPTION>
For the years ended
December 31, 1997, 1996, and 1995
(In thousands)
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 82,516 $ 56,282 $ 50,642
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation, amortization and accretion 21,663 16,122 15,109
Amortization of mortgage servicing rights 17,071 13,627 10,261
Provision for possible loan losses 14,860 13,564 10,180
Deferred income taxes 747 (1,632) (2,215)
Gain on sale of securities, net (665) (220) (682)
Gain on sale of other assets (1,468) (747) (65)
Additions to mortgage servicing rights (52,152) (32,264) (32,139)
Net increase in mortgage loans held for sale (67,365) (46,022) (50,647)
Increase in interest receivable (12,036) (1,918) (9,685)
(Increase) decrease in prepaids and other receivables (287) (729) 3,808
Increase (decrease) in accrued expenses and accounts payable 145 (1,875) (3,467)
Increase in accrued income taxes 770 136 3,086
Increase in interest payable 8,793 4,038 11,455
Other, net (7,978) 9,192 (12,555)
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments (77,902) (28,728) (57,556)
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities 4,614 27,554 (6,914)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 155,973 138,627 105,274
Proceeds from sales of securities available for sale 54,279 76,511 90,415
Purchase of securities available for sale (146,082) (201,318) (226,233)
Proceeds from maturities of investment securities 201,757 153,518 107,488
Purchases of investment securities (133,157) (149,104) (56,184)
Net decrease in short-term investment securities -- 5,300 200
Net increase in loans (552,349) (699,709) (738,104)
Purchase of bank owned life insurance (30,000) -- --
Cash and cash equivalents received in bank acquisitions, net (Note 2) 28,242 1,437 23,201
Cash and cash equivalents received in the purchase
of assets and assumption of liabilities(Note 2) -- 7,028 --
Capital expenditures (39,143) (29,233) (15,520)
Proceeds from sale of other real estate owned 3,123 11,632 11,491
Purchase of treasury stock for issuance in a business acquisition (15,887) -- 10
Other, net 3,469 111 2,283
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (469,775) (685,200) (695,679)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand, savings and time deposits 379,283 456,213 597,774
Net increase in federal funds purchased,
repurchase agreements and other short-term borrowings 69,287 233,835 196,963
Proceeds from issuance of long-term debt 70,000 6,394 12,092
Repayment of long-term debt (16,996) (5,064) (55,526)
Proceeds from issuance of common stock 9,645 3,768 9,026
Proceeds from issuance of subordinated debt -- -- 1,425
Dividends paid (26,579) (20,062) (12,795)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 484,640 675,084 748,959
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 19,479 17,438 46,366
Cash and cash equivalents at beginning of year 298,778 281,340 234,974
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year (Note 1) $ 318,257 $ 298,778 $ 281,340
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 257,597 $ 209,229 $ 169,759
Income taxes 47,827 32,903 25,180
Non-cash transactions:
Transfer of loans to other real estate $ 15,532 $ 9,893 $ 6,060
Origination of loans from the sale of other real estate 643 1,507 1,181
Securitization of mortgage loans -- 99,276 3,471
Transfer of investment securities to securities available for sale -- -- 60,421
Conversion of subordinated debentures to common stock 2,515 9,808 428
Assets acquired in business combinations 554,803 77,923 307,425
Liabilities assumed in business combinations 526,741 76,760 302,810
======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS 97
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 statement of The Colonial
BancGroup, Inc. and subsidiaries have been prepared to give retroactive effect
to the pooling-of-interests method business combinations with United American
Holding Corporation ("United American"), First Central Bank ("First Central")
and South Florida Banking Corp. ("South Florida") on February 2, 1998, February
11, 1998 and February 12, 1998, respectively. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation; however, they became the historical
consolidated financial statements of The Colonial BancGroup, Inc. and
subsidiaries after financial statements covering the date of consummation of the
business combinations were issued. The consolidated financial statements of
BancGroup for 1996 and 1995 have been previously restated to give retroactive
effect to the April 1997 combination with Fort Brooke Bancorporation ("Fort
Brooke"), the January 1997 combinations with Jefferson Bancorp, Inc.
("Jefferson") and D/W Bankshares, Inc. ("Bankshares") as well as the July 1996
combinations with Commercial Bancorp of Georgia, Inc., ("Commercial") and
Southern Banking Corporation ("Southern") which were accounted for as poolings
of interests. (See Note 2)
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements and
notes to consolidated financial statements include the accounts of BancGroup and
its subsidiaries, all of which are wholly owned. All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--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.
<PAGE> 46
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, 1997 and 1996 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 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
<PAGE> 47
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, 1997, 1996 and 1995.
PREMISES AND EQUIPMENT--Bank premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation is computed
generally using the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. Estimated useful lives range from five to forty years for bank
buildings and leasehold improvements and three to ten years for furniture and
equipment.
Expenditures for maintenance and repairs are charged against earnings as
incurred. Costs of major additions and improvements are capitalized. Upon
disposition or retirement of property, the asset account is relieved of the cost
of the item and the allowance for depreciation is charged with accumulated
depreciation. Any resulting gain or loss is reflected in current income.
OTHER REAL ESTATE OWNED--Other real estate owned includes real estate
acquired through foreclosure or deed taken in lieu of foreclosure. These amounts
are recorded at the lower of cost or market value less estimated costs to sell.
Any write-down from the cost to market value required at the time of foreclosure
is charged to the allowance for possible loan losses. Subsequent write-downs and
gains or losses recognized on the sale of these properties are included in
noninterest income or expense.
INTANGIBLE ASSETS--Intangible assets acquired in acquisitions of banks are
stated at cost, net of accumulated amortization. Amortization is provided over a
period up to twenty-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--The total cost of mortgage loans held for sale
is allocated to mortgage servicing rights and mortgage loans held for sale
(without mortgage servicing rights) based on their relative fair values. The
aggregate basis is used to determine the lower of cost or market value when
capitalizing mortgage servicing rights.
Mortgage servicing rights are being amortized primarily using an
accelerated method in proportion to the estimated net servicing income from the
related loans, which approximates a level yield method. The amortization period
represents management's best estimate of the remaining loan lives.
The carrying values of the mortgage servicing rights are evaluated for
impairment based on their fair values categorized by coupon rate. Fair values of
servicing rights are determined by estimating the present value of future net
servicing income considering the average interest rate and the average remaining
lives of the related mortgage loans being serviced.
The servicing portfolio is geographically disbursed throughout the United
States with a concentration in the southern states. The mortgage servicing
rights at December 31, 1997 and 1996 are stated net of accumulated amortization
of approximately $74 million and $58 million, respectively.
Mortgage servicing fees are deducted from the monthly payments on mortgage
loans and are recorded as income when earned. Fees from investors for servicing
their portfolios of residential loans generally range from 1/4 of 1% to 1/2 of
1% per year on the outstanding principal balance.
LONG LIVED ASSETS--BancGroup 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.
<PAGE> 48
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 18). Under the asset and liability method, deferred
tax assets and liabilities are recorded at currently enacted tax rates
applicable to the period in which assets or liabilities are expected to be
realized or settled. Deferred tax assets and liabilities are adjusted to reflect
changes in statutory tax rates resulting in income adjustments in the period
such changes are enacted.
STOCK-BASED COMPENSATION--BancGroup adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," on January 1, 1996. This statement defines a fair
value based method of accounting for an employee stock option or similar equity
instrument. However, SFAS No. 123 allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting defined in SFAS No. 123 had been applied.
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock. BancGroup has elected to continue to measure compensation
cost for its stock option plans under the provisions in APB Opinion 25.
EARNINGS PER SHARE--BancGroup adopted SFAS No. 128, "Earnings Per Share" on
December 31, 1997. This statement establishes standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly held
common stock or potential common stock. This statement replaces the presentation
of primary EPS with a presentation of basic EPS and requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. 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 February 11, 1997.
ADVERTISING COSTS--Advertising costs are expensed as incurred.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1996
financial statements to conform to the 1997 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1996, the Financial
Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities utilizing the
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished.
This Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
However, in December 1996, the Financial Accounting Standards Board issued SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASBStatement
No. 125." This statement defers the effective date of certain provisions for one
year (December 31, 1997). The deferred provisions relate to repurchase
agreements, dollar-roll transactions, securities lending, and similar
transactions. The effective date for all other transfers and servicing of
financial assets is unchanged. Management does not believe that the adoption of
SFAS No. 125 will have a material impact on BancGroup's financial statements.
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
statements.
This statement is effective for fiscal years beginning after December 15,
1997. Although earlier application is permitted, BancGroup has chosen not to
adopt early. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
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.
This statement is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated.
Pursuant to SFAS No. 131, BancGroup will report 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. This statement is effective for fiscal years beginning after
December 15, 1997.
<PAGE> 49
2. BUSINESS COMBINATIONS
BancGroup recently completed the following business combinations with other
financial institutions. These business combinations have been reflected in the
financial statements at December 31, 1997. The balances reflected are as of the
date of consummation.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
ACCOUNTING DATE BANCGROUP CASH TOTAL
FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED SHARES PAID (2) ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995
Colonial Mortgage Company (AL) Pooling of interests 02/17/95 4,545,454 $ 71,000
Brundidge Banking Company (AL) Purchase 03/31/95 532,868 56,609
Mt. Vernon Financial Corp. (GA) Purchase 10/20/95 1,043,440 217,967
Farmers & Merchants Bank (AL) Purchase 11/03/95 513,686 $ 3,000 56,050
- -------------------------------------------------------------------------------------------------------------------------
1996*
Commercial Bancorp of Georgia, Inc. (GA) Pooling of interests 07/03/96 2,306,460 232,555
Southern Banking Corporation (FL) Pooling of interests 07/03/96 2,858,494 232,461
Dothan Federal Savings Bank (AL) Purchase 07/08/96 154,690 2,600 48,366
- -------------------------------------------------------------------------------------------------------------------------
1997
Jefferson Bancorp, Inc. (FL) Pooling of interests 01/03/97 3,854,952 472,732
Tomoka Bancorp, Inc. (FL) Pooling of interests(1) 01/03/97 661,992 76,700
First Family Financial Corp. (FL) Purchase 01/09/97 330,564 6,492 167,300
D/W Bankshares, Inc. (GA) Pooling of interests 01/31/97 1,016,548 138,686
Shamrock Holdings, Inc. (AL) Purchase 03/05/97 11,813 54,500
Fort Brooke Bancorporation (FL) Pooling of interests 04/22/97 1,599,973 208,800
Great Southern Bancorp (FL) Pooling of interests(1) 07/01/97 927,811 121,009
First Commerce Banks of Florida, Inc. (FL) Purchase 07/01/97 685,695 97,093
Dadeland BancShares, Inc. (FL) Purchase 09/15/97 38,000 169,946
First Independence Bank of Florida (FL) Pooling of interests(1) 10/01/97 503,932 65,048
- -------------------------------------------------------------------------------------------------------------------------
1998
United American Holding Corp. (FL) Pooling of interests 02/02/98 2,113,206 275,263
First Central Bank (FL) Pooling of interests 02/11/98 688,684 62,897
South Florida Banking Corp. (FL) Pooling of interests 02/12/98 1,932,229 255,769
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
(3) Represents subordinated debentures.
* 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.
<PAGE> 50
In addition to the combinations shown above, BancGroup has closed or has
plans to close the following combinations since December 31, 1997. The balances
reflected are as of December 31, 1997. The following business combinations have
not been reflected in the financial statements at December 31, 1997.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
ACCOUNTING DATE BANCGROUP OTHER TOTAL
FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED SHARES CONSIDERATION(1) ASSETS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASB Bancshares, Inc. (AL) Purchase 02/05/98 467,257 $ 7,725(3) 158,656
Commercial Bank of Nevada (NV) Pooling of interests Pending 842,157 -- 120,108
CNB Holding Corporation (FL) Pooling of interests Pending 932,227 -- 83,273
First Macon Bank & Trust (GA) Pooling of interests Pending 1,844,500 -- 186,370
First Bank (TX) Pooling of interests Pending 1,200,000 -- 144,994
Prime Bank of Central
Florida (FL) Pooling of interests Pending 586,560 -- 68,295
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include immaterial amounts paid in lieu of fractional shares.
<PAGE> 51
The combination with Colonial Mortgage Company ("CMC") in 1995 was
accounted for using a method of accounting similar to a pooling of interests.
The 1996 combinations with Southern and Commercial, the 1997 combinations with
Jefferson, Bankshares and Fort Brooke and the 1998 combinations with United
American, South Florida, and First Central 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. The 1997 combinations with Tomoka Bancorp, Inc., Great Southern
Bancorp and First Independence Bank of Florida 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.
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).
<TABLE>
<CAPTION>
AS ORIGINALLY EFFECT OF CURRENTLY
(IN THOUSANDS) REPORTED POOLINGS REPORTED
- ------------------------------------------------------------
<S> <C> <C> <C>
1997:
Net interest income $248,499 $25,116 $273,615
Noninterest income 87,759 4,791 92,550
Net income 77,191 5,325 82,516
1996:
Net interest income 169,678 54,910 224,588
Noninterest income 65,982 8,878 74,860
Net income 53,608 2,674 56,282
1995:
Net interest income 118,442 71,102 189,544
Noninterest income 45,982 17,497 63,479
Net income 38,794 11,848 50,642
- ------------------------------------------------------------
</TABLE>
<PAGE> 52
3. SECURITIES
The carrying and market values of investment securities are summarized as
follows:
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market
(IN THOUSANDS) COST GAINS LOSSES VALUE Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $150,536 $ 925 $ (67) $151,394 $176,780 $1,720 $ (161) $178,339
and obligations of U.S.
government agencies
Mortgage-backed 72,155 754 (634) 72,275 78,247 667 (899) 78,015
securities
Obligations of state and 44,781 1,316 (9) 46,088 46,127 1,064 (55) 47,136
political subdivisions
Other 1,741 115 (247) 1,609 6,786 74 (214) 6,646
- -----------------------------------------------------------------------------------------------------------------------------------
Total $269,213 $3,110 $ (957) $271,366 $307,940 $3,525 $(1,329) $310,136
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The carrying and market values of securities available for sale are
summarized as follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market
(IN THOUSANDS) COST GAINS LOSSES VALUE Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $306,780 $1,584 $ (554) $307,810 $298,502 $1,260 $(1,814) $297,948
and obligations of U.S.
government agencies
Mortgage-backed 242,387 1,933 $(1,760) 242,560 211,519 1,734 $(2,136) 211,117
securities
Obligations of state and 34,718 1,214 (4) 35,928 27,955 626 (93) 28,488
political subdivisions
Other 7,250 998 (1) 8,247 12,962 1,002 (254) 13,710
- -----------------------------------------------------------------------------------------------------------------------------------
Total $591,135 $5,729 $(2,319) $594,545 $550,938 $4,622 $(4,297) $551,263
</TABLE>
<PAGE> 53
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 $44,459,000 and
$40,040,000 in Federal Home Loan Bank stock at December 31, 1997 and 1996,
respectively.
Securities with a carrying value of approximately $621,718,000 and
$562,641,000 at December 31, 1997 and 1996 respectively, were pledged for
various purposes as required or permitted by law.
Gross gains of $754,000, $400,000 and $863,000 and gross losses of
$89,000, $183,000 and $181,000 were realized on sales of securities for 1997,
1996, and 1995, respectively. The amortized cost and market value of debt
securities at December 31, 1997, by contractual maturity, are as follows.
Expected maturities differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES SECURITIES AVAILABLE FOR SALE
AMORTIZED MARKET AMORTIZED MARKET
(IN THOUSANDS) COST VALUE COST VALUE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year $ 62,737 $ 62,938 $ 83,125 $ 83,155
or less
Due after one year 114,195 115,072 140,141 140,839
through five years
Due after five years 15,558 16,190 52,418 53,227
through ten years
Due after ten years 4,568 4,891 29,171 30,071
- -------------------------------------------------- ---------------------------
197,058 199,091 304,855 307,292
- -------------------------------------------------- ---------------------------
Mortgage-backed 72,155 72,275 242,388 242,560
securities
- -------------------------------------------------- ---------------------------
Total $269,213 $271,366 $547,243 $549,852
- -------------------------------------------------- ---------------------------
</TABLE>
4. LOANS
A summary of loans follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Commercial, financial,
and agricultural $ 680,020 $ 642,402
Real estate--commercial 1,515,645 1,146,642
Real estate--construction 674,557 493,182
Real estate--mortgage 2,332,611 1,929,142
Installment and consumer 313,121 293,709
Other 70,639 57,012
- ------------------------------------------------------------
Subtotal 5,586,593 4,562,089
Unearned income (692) (3,309)
- ------------------------------------------------------------
Total $ 5,585,901 $ 4,558,780
- ------------------------------------------------------------
</TABLE>
BancGroup's lending is concentrated throughout Alabama, southern Tennessee,
central Georgia and central, southwest and south Florida, and repayment of these
loans is in part dependent upon the economic conditions in the respective
regions of the states. Management does not believe the loan portfolio contains
concentrations of credits either geographically or by borrower which would
expose BancGroup to unacceptable amounts of risk. Management continually
evaluates the potential risk in all segments of the portfolio in determining the
adequacy of the allowance for possible loan losses. Other than concentrations of
credit risk in 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
<PAGE> 54
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, 1997.
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, 1997 are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
Balance Balance
<S> <C> <C> <C>
1/1/97 Additions Repayments 12/31/97
- ----------------------------------------------
$50,174 42,542 54,751 37,965
- ----------------------------------------------
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans for which
impairment has been recognized totaled $8,064,000 and $5,972,000, respectively,
and these loans had a corresponding valuation allowance of $3,349,000 and
$2,902,000, respectively. The impaired loans were measured for impairment based
primarily on the value of underlying collateral. For the years ended December
31, 1997 and 1996, the average recorded investment in impaired loans was
approximately $5,672,000 and $4,845,247. BancGroup recognized approximately
$677,000 and $292,000 of interest on impaired loans during the portion of the
year that they were impaired in 1997 and 1996, respectively.
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.
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------
Balance, January 1 $ 58,016 $ 50,803 $ 45,547
Addition due to
acquisitions 6,872 618 1,129
Provision charged
to income 14,860 13,564 10,180
Loans charged off (16,488) (12,288) (8,832)
Recoveries 4,268 5,319 2,779
- ----------------------------------------------------------------
Balance, December 31 $ 67,528 $ 58,016 $ 50,803
- ----------------------------------------------------------------
</TABLE>
6. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
BancGroup is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include loan commitments and standby letters of
credit and obligations to deliver and sell mortgage loans and involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the financial statements.
BancGroup's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and obligations to deliver and sell mortgage loans is represented by the
contractual amount of those instruments. BancGroup uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. BancGroup has no significant concentrations of credit risk
with any individual counterparty to originate loans. The total amounts of
financial instruments with off-balance sheet risk as of December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
CONTRACT AMOUNT
- ---------------------------------------------------------
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------
<S> <C> <C>
Financial instruments whose
contract amounts represent
credit risk:
Loan commitments $1,306,151 $788,524
Standby letters of credit 55,631 50,980
Mortgage sales commitments 287,395 193,970
</TABLE>
<PAGE> 55
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash requirements.
The credit risk involved in issuing letters of credit and funding loan
commitments is essentially the same as that involved in extending loan
facilities to customers.
Obligations to sell loans at specified dates (typically within ninety days
of the commitment date) and at specified prices are intended to hedge the
interest rate risk associated with the time period between the initial offer to
lend and the subsequent sale to a permanent investor. Risks arise from changes
in interest rates. Changes in the market value of the sales commitments are
included in the measurement of the gain or loss on mortgage loans held for sale.
The current market value of these commitments was $286,246,000 and $194,858,000
at December 31, 1997 and 1996, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
- --------------------------------------------------
<S> <C> <C>
Land $32,903 $25,677
Bank premises 90,209 72,513
Equipment 91,387 72,660
Leasehold improvements 18,318 15,786
Construction in progress 12,739 2,819
Automobiles 882 624
- --------------------------------------------------
Total 246,438 190,079
Less accumulated depreciation
and amortization 100,249 83,784
- --------------------------------------------------
Premises and equipment, net $146,189 $106,295
- --------------------------------------------------
</TABLE>
8. SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased
and securities sold
under repurchase
agreements $273,929 $147,195 $168,763
FHLB borrowings 420,000 715,000 465,000
Other short-term
borrowings 25,490 2,305 1,301
- ----------------------------------------------------------------
Total $719,419 $864,500 $635,064
- ----------------------------------------------------------------
</TABLE>
BancGroup's Parent Company had outstanding term notes (Note 9) of which the
current portion, $0 and $1,033,000, is included in other short-term borrowings
at December 31, 1997 and 1996, respectively.
In 1996, BancGroup entered into a line of credit with a financial
institution totaling $35 million of which the current portion, $10,000,000 and
$0, is included in other short-term borrowings at December 31, 1997 and 1996,
respectively (Note 9).
BancGroup had a reverse repurchase agreement outstanding in the amount of
$12 million at December 31, 1997, which is included in other short-term
borrowings. This debt is directly related to an asset of $12 million in
securities purchased under resale agreement with another financial institution.
BancGroup is a member of the Federal Home Loan Bank (FHLB). Based on its
investment in the FHLB and other factors at December 31, 1997, BancGroup can
borrow up to $1.5 billion from the FHLB on either a short or long-term basis. At
December 31, 1997, $656 million was outstanding of which $235 million (Note 9)
is included in long term debt with the remaining portion included in other
short-term borrowings. An additional unused credit of $768 million is available
with the FHLB. FHLB has a blanket lien on BancGroup's 1-4 family mortgage
<PAGE> 56
loans in the amount of the outstanding debt. Colonial Bank has a warehouse line
of credit with $225 million of availability from FHLB, of which none was
outstanding at December 31, 1997. This warehouse line is collateralized by
mortgage loans held for sale.
Additional details regarding short-term borrowings are shown below:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Average amount
outstanding
during the year $ 714,525 $ 728,577 $ 518,909
Maximum amount
outstanding at
any month-end 719,419 885,765 643,698
Weighted average
interest rate:
During year 5.61% 5.43% 5.99%
End of year 5.95% 5.53% 5.68%
- ----------------------------------------------------------------------
</TABLE>
9. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
- -------------------------------------------------------
<S> <C> <C>
71/2% Convertible Subordinated
Debentures $ 4,893 $ 7,187
7% Convertible Subordinated
Debentures 1,195 1,425
Trust Preferred Securities 70,000 --
Term Note -- 14,116
FHLB Advances 234,831 10,809
REMIC Bonds 4,333 5,536
Other -- 19
- -------------------------------------------------------
Total $315,252 $39,092
- -------------------------------------------------------
</TABLE>
The 7 1/2% Convertible Subordinated Debentures due March 31, 2011 ("1986
Debentures") issued in 1986 are convertible at any time into shares of BancGroup
Common Stock, at the conversion price of $14.00 principal amount of 1986
Debentures, subject to adjustment upon the occurrence of certain events, for
each share of stock received. The 1986 Debentures are redeemable at the option
of BancGroup at the face amount plus accrued interest. In the event all of the
remaining 1986 Debentures are converted into shares of BancGroup Common Stock in
accordance with the 1986 Indenture, approximately 349,500 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 $15.16 principal amount of the 1994 Debentures, subject
to adjustment upon occurrence of certain events, for each share of stock
received. The 1994 Debentures cannot be redeemed by BancGroup before January 1,
1998. In the event all of the remaining 1986 Debentures are converted into
shares of BancGroup Common Stock in accordance with the 1994 Indenture,
approximately 78,800 shares of such Common Stock would be issued.
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 securities are subordinated to
substantially all of BancGroup's indebtedness.
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 8)
outstanding of $234,831,000 and $10,809,000 at December 31, 1997 and 1996,
respectively. These advances bear interest rates of 5.24% to 7.53% and mature
from 1999 to 2011.
In 1996, BancGroup transferred the outstanding balances of a term note and
line of credit to a new term note. The 1996 term note had $15,149,000
outstanding at December 31, 1996. (Also see Note 8.) The 1996 term note was
payable in annual installments of $1,033,000 with the balance due in 2001. In
January 1997, the new term note was paid in full. The repayment was funded with
a portion of the proceeds from the Trust Preferred
<PAGE> 57
Securities offering discussed above. In addition, BancGroup entered into a new
line of credit with the same financial institution as discussed in Note 8. The
term note and the line of credit bear interest at a rate of 1.5% above LIBOR.
All of the capital stock of BancGroup's subsidiary, Colonial Bank, is pledged as
collateral. The agreements contain restrictive covenants which, among other
things, limit the sale of assets, incurrence of additional indebtedness,
repurchase of BancGroup stock, and requires BancGroup to maintain certain
specified financial ratios.
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, 1997, only the Class A-4 bonds due
September 1, 2017 remain outstanding with an outstanding balance of $4,333,000
and are collateralized by FNMA mortgaged-backed securities with a carrying value
of $4,523,000. The collections on these securities are used to pay interest and
principal on the bonds. At December 31, 1997, long-term debt, including the
current portion, is scheduled to mature as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- -----------------------
<C> <C>
1998 $ 1,345
1999 75,407
2000 50,094
2001 86
2002 100,095
Thereafter 89,020
- -----------------------
Total $316,047
- -----------------------
</TABLE>
10. CAPITAL STOCK
On January 15, 1997, BancGroup's Board of Directors declared a two-for-one
stock split which was effected in the form of a 100 percent stock dividend
distributed on February 11, 1997. The stated par value was not changed from
$2.50. Accordingly, all prior period information has been restated to reflect
the reclassification from additional paid in capital to common stock.
Additionally, all share and per share amounts in earnings per share calculations
have been restated to retroactively reflect the stock split.
Effective February 21,1995 the Class A Common Stock and the Class B Common
Stock were reclassified into one class of stock called Common Stock, $2.50 par
value, with equal rights for all shareholders. The Board of Directors is
authorized to issue shares of the preference stock in one or more series, and in
connection with such issuance, to establish the relative rights, preferences,
and limitations of each such series. Stockholders of BancGroup may not act by
written consent or call special meetings.
11. 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 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 $134 million
of retained earnings plus certain 1998 earnings would be available for
distribution to BancGroup, from its subsidiaries, as dividends in 1998 without
prior approval from the respective regulatory authorities.
Colonial Bank isrequired by law to maintain noninterest-bearing deposits
with the Federal Reserve Bank to meet regulatory reserve requirements. At
December 31,1997, these deposits totaled $23.1 million.
BancGroup and its subsidiary 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 its subsidiary 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 its subsidiary 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 its subsidiary 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,
1997 and 1996, that BancGroup and its subsidiary bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized BancGroup's subsidiary bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized BancGroup and its subsidiary 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.
<PAGE> 58
Actual capital amounts and ratios for BancGroup and its significant bank
subsidiaries are also presented in the following table:
<TABLE>
<CAPTION>
ACTUAL TO BE WELL CAPITALIZED
(IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31,1997
Total Capital (to Risk Weighted Assets)
CONSOLIDATED $615,588 11.40% $540,222 *10.0%
Colonial Bank 612,621 11.22% 545,766 *10.0%
Tier I Capital (to Risk Weighted Assets)
CONSOLIDATED 542,132 10.04% 324,133 *6.0%
Colonial Bank 545,253 9.99% 327,459 *6.0%
Tier I Capital (to average assets)
CONSOLIDATED 542,132 7.52% 363,902 *5.0%
Colonial Bank 545,253 7.50% 363,902 *5.0%
AS OF DECEMBER 31,1996
Total Capital (to Risk Weighted Assets)
CONSOLIDATED $476,021 10.85% $438,650 *10.0%
Colonial Bank Alabama 305,015 10.47% 291,391 *10.0%
Colonial Bank Florida 121,086 11.89% 101,833 *10.0%
Colonial Bank Georgia 52,632 12.51% 42,080 *10.0%
Tier I Capital (to Risk Weighted Assets)
CONSOLIDATED 412,540 9.40% 263,190 *6.0%
Colonial Bank Alabama 268,349 9.21% 174,834 *6.0%
Colonial Bank Florida 108,154 10.62% 61,100 *6.0%
Colonial Bank Georgia 45,872 10.90% 25,248 *6.0%
Tier I Capital (to average assets)
CONSOLIDATED 412,540 6.93% 299,273 *5.0%
Colonial Bank Alabama 268,349 6.65% 201,772 *5.0%
Colonial Bank Florida 108,154 7.58% 71,919 *5.0%
Colonial Bank Georgia 45,872 7.32% 31,339 *5.0%
</TABLE>
<PAGE> 59
12. LEASES
BancGroup and its subsidiaries have entered into certain noncancellable
leases for premises and equipment used in connection with its operations. The
majority of these noncancellable lease agreements contain renewal options for
varying periods at the same or renegotiated rentals, and several contain
purchase options at fair value. Future minimum lease payments under all
noncancellable operating leases with initial or remaining terms (exclusive of
renewal options) of one year or more at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------
<S> <C>
1998 $7,776
1999 6,618
2000 5,607
2001 4,193
2002 3,302
Thereafter 18,569
- ------------------------
Total $46,065
- ------------------------
</TABLE>
Rent expense for all leases amounted to $11,712,000 in 1997, $9,968,000 in
1996 and $9,163,000 in 1995.
<PAGE> 60
13. EMPLOYEE BENEFIT PLANS
BancGroup and the majority of its subsidiaries are participants in a
pension plan with certain other related companies. This plan covers most
employees who have met certain age and length of service requirements.
BancGroup's policy is to contribute annually an amount that can be deducted for
federal income tax purposes using the frozen entry age actuarial method.
Actuarial computations for financial reporting purposes are based on the
projected unit credit method. For purposes of determining the actuarial present
value of the projected benefit obligation, the weighted average discount rate
was 7.25% for 1997, 7.75% for 1996 and 7.25% for 1995. The rate of increase in
future compensation levels was 4.25% for 1997, 4.75% for 1996 and 4.00% for
1995. The expected long-term rate of return on assets was 9% for 1997, 1996, and
1995.
<PAGE> 61
Employee pension benefit plan status at December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation $ 11,869 $ 8,623
Vested benefit obligation $ 11,116 $ 8,191
Projected benefit obligation for
service rendered to date $ 17,348 $ 13,279
Plan assets at fair value $ 18,486 $ 13,729
- -------------------------------------------------------------------
Plan assets over projected
benefit obligation 1,138 450
Unrecognized net gain (3,824) (2,549)
Unrecognized prior service cost 57 62
Unrecognized net transition asset
over 19 years (39) (45)
- -------------------------------------------------------------------
Accrued pension cost $ (2,668) $ (2,082)
- -------------------------------------------------------------------
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net pension cost included the
following components:
Service cost $ 1,407 $ 1,099 $ 873
Interest cost 1,199 1,029 962
Actual return on plan assets (1,245) (1,463) (851)
Net amortization and deferral (1) 405 (6)
- -------------------------------------------------------------------
Net pension cost $ 1,360 $ 1,070 $ 978
- -------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, the pension plan assets included investments
of 82,260 and 45,260 shares of BancGroup Common Stock representing 14% and 7% of
pension plan assets, respectively. At December 31, 1997, BancGroup Common Stock
included in pension plan assets had a cost and market value of $616,429 and
$2,832,869, respectively. Pension plan assets are distributed approximately 7%
in U.S. Government and agency issues, 22% in Corporate bonds, 63% in equity
securities (including BancGroup Common Stock) and 8% 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 $1,409,000, $1,082,000 and $966,100 for 1997, 1996,
and 1995, 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 years ended
December 31, 1996 and 1995, expense recognized under the plan totaled $4,333,000
and $615,000, respectively.
14. STOCK PLANS
The 1992 Incentive Stock Option Plan ("the 1992 Plan") provides an
incentive to certain officers and key management employees of BancGroup and its
subsidiaries. Options granted under the 1992 Plan must be at a price not less
than the fair market value of the shares at the date of grant. All options
expire no more than ten years from the date of grant, or three months after an
employee's termination. An aggregate of
<PAGE> 62
1,100,000 shares of Common Stock are reserved for issuance under the 1992 Plan.
At December 31, 1997 and 1996, 702,128 and 772,334, respectively, remained
available for the granting of options under the 1992 Plan.
The 1992 Nonqualified Stock Option Plan ("the 1992 Nonqualified Plan")
provides an incentive to directors, officers and employees of BancGroup and its
subsidiaries. Options granted under the 1992 Nonqualified Plan must be at a
price not less than 85% of the fair market value of the shares at the date of
grant. All options expire no more than ten years after the date of grant, or
three months after an employee's termination. An aggregate of 1,600,000 shares
of Common Stock are reserved for issuance under the 1992 Nonqualified Plan. At
December 31,1997 and 1996, 1,407,000 and 1,465,500 shares, respectively remained
available for the granting of options under the 1992 Nonqualified Plan.
Prior to 1992, BancGroup had both a qualified incentive stock option plan
("Plan") under which options were granted at a price not less than fair market
value and a nonqualified stock option plan ("Nonqualified Plan") under which
options were granted at a price not less than 85% of fair market value. All
options under the plans expire ten years from the date of grant, or three months
after the employee's termination. Although options previously granted under
these plans may be exercised, no further options may be granted.
Pursuant to the 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 1997 and 1996 under the 1992
Nonqualified Plan and the 1992 Plan have vesting requirements. The option
recipients are required to remain in the employment of BancGroup (subject to
certain exemptions) for periods of between one and five years to fully vest in
the options granted. 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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
QUALIFIED PLANS(1) NONQUALIFIED PLANS(1)
- ------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 953,419 $ 7.109 1,739,766 $ 5.710
Granted (at $8.445-$13.495 per share) 46,272 10.701 57,779 8.744
Exercised (at $3.08-$8.74 per share) (242,905) 6.364 (32,335) 7.208
Cancelled (at $6.26 per share) (5,986) 6.260 -- --
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 750,800 $ 7.579 1,765,210 $ 5.782
Granted (at $14.580-$19.94 per share) 326,425 17.076 96,298 14.275
Exercised (at $3.08-$9.12 per share) (132,555) 7.458 (410,085) 5.890
Cancelled (at $11.16 per share) (62,632) 11.160 -- --
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 882,038 $ 10.857 1,451,423 $ 6.315
Assumed in business combinations
(at $6.20-$13.78 per share) 63,826 7.320 252,974 9.600
Granted (at $19.155-$27.72 per share) 134,008 21.099 109,131 15.447
Exercised (at $3.080-$17.315 per share) (345,977) 7.040 (376,954) 6.250
Cancelled (at $17.155-$27.20 per share) (42,894) 19.192 (1,614) 7.380
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 691,001 $ 13.910 1,434,960 $ 7.604
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This table includes those plans assumed pursuant to various business
combinations according to the respective exchange ratios.
<PAGE> 63
At December 31, 1997, the total shares outstanding and exercisable under
these option plans were as follows:
<TABLE>
<CAPTION>
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 12/31/97 CONTRACTUAL LIFE PRICE PRICE AT 12/31/97 PRICE PRICE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$3.08-$3.625 320,510 2.71 years $ 3.203 $ 1,026,704 320,510 $ 3.203 $ 1,026,704
$3.725-$3.88 371,033 4.97 years 4.486 1,664,539 371,033 4.486 1,664,539
$5.740-$8.445 300,085 4.55 years 7.815 2,345,201 294,475 7.799 2,296,480
$8.685-$9.12 412,740 4.79 years 9.013 3,719,977 412,741 9.012 3,719,977
$9.25-$10.48 314,876 6.50 years 11.948 3,762,025 314,876 11.948 3,762,029
$11.70-$17.315 265,717 8.66 years 17.911 4,759,300 92,899 17.284 1,605,657
$19.155-$27.72 141,000 9.35 years 23.107 3,258,150 16,000 20.931 334,900
- -----------------------------------------------------------------------------------------------------------
Total 2,125,961 5.45 years $ 9.660 $20,535,896 1,822,534 $ 7.907 $14,410,286
===========================================================================================================
</TABLE>
On January 1, 1996 BancGroup adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As
permitted by SFAS 123, BancGroup has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its Plans. Accordingly, no compensation cost has been
recognized for options granted under the Incentive Plan. For the Nonqualified
Plan, compensation expense is recognized for the difference between exercise
price and fair market value of the shares at date of issue. Had compensation
cost for BancGroup's Plans been determined based on the fair value at the grant
dates for awards under the Plan, BancGroup's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
<PAGE> 64
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
1997
<S> <C> <C>
Net income $82,516 $81,990
Earnings per share (basic) $ 1.77 $ 1.76
1996
Net income $56,282 $55,277
Earnings per share (basic) $ 1.31 $ 1.29
1995
Net income $50,642 $50,438
Earnings per share (basic) $ 1.27 $ 1.27
- -------------------------------------------------------
</TABLE>
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 1997, 1996 and 1995, respectively: dividend yield
of 3.11%, 3.15% and 3.15%; expected volatility of 23% for 1997 and 34% for both
1996 and 1995; risk-free interest rates of 6.46%, 6.04% and 6.63% for 1997, 1996
and 1995, respectively; and expected lives of ten years. The weighted average
fair values of options granted during 1997, 1996 and 1995 was $4.81, $6.51 and
$4.78, respectively.
In 1987, BancGroup adopted the Restricted Stock Plan for Directors
("Directors Plan") whereby directors of BancGroup and its subsidiary banks may
receive Common Stock in lieu of cash director fees. The election to participate
in the Directors Plan is made at the inception of the director's term except for
BancGroup directors who make their election annually. Shares earned under the
plan for regular fees are issued quarterly while supplemental fees are issued
annually. All shares become vested at the expiration of the director's term.
During 1997, 1996 and 1995, respectively, 31,082, 31,710 and 34,048 shares of
Common Stock were issued under the Directors Plan, representing approximately
$503,000, $328,000 and $326,000 in directors' fees for 1997, 1996 and 1995,
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 $423,000, $171,000 and $0 in compensation
expense was charged to operations under this plan for the years ended December
31, 1997, 1996 and 1995, respectively. During 1997, 1996 and 1995 the Company
awarded 29,102, 50,000 and 50,000 shares, respectively, under the Stock Bonus
and Retention Plan having weighted average fair value at grant date of $20.82,
$19.37 and $16.25, respectively. An aggregate of 1,500,000 shares have been
reserved for issuance under this Plan. There were 130,702 shares outstanding of
which 28,960 shares were vested at December 31, 1997.
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 300,000 shares authorized for issuance under this Plan. There
were 39,098 shares issued and outstanding under this Plan at December 31, 1997.
15. 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, 1997,
will have a materially adverse effect on BancGroup's financial statements.
16. RELATED PARTIES
Insurance coverage for credit life, and accident and health insurance is
provided to customers of BancGroup's subsidiary bank by companies owned by a
principal shareholder and a director of BancGroup. Premiums collected from
customers and remitted to these companies on such insurance were approximately
$976,000, $1,651,000, and $1,712,000 in 1997, 1996 and 1995, 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 $3,475,000, $3,252,000 and $3,100,000 in 1997, 1996 and
1995, respectively.
<PAGE> 65
During 1997, 1996 and 1995, BancGroup and its subsidiaries paid or accrued
fees of approximately $1,659,000, $1,475,000 and $1,306,000, respectively, for
legal services required of law firms in which a partner of the firm serves on
the Board of Directors.
17. OTHER EXPENSE
The following amounts were included in Other Expense:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
FDIC assessment $ 982 $ 2,475 $ 5,070
Advertising and
public relations 6,659 6,252 4,916
Stationery, printing,
and supplies 5,304 4,472 4,118
Telephone 5,198 5,044 4,045
Legal fees 2,860 3,258 2,818
Postage 3,558 2,907 2,469
Insurance 1,901 2,183 1,842
Other 34,379 30,056 29,525
- ---------------------------------------------------------
Total $ 60,841 $ 56,647 $ 54,803
- ---------------------------------------------------------
</TABLE>
18. INCOME TAXES
The components of income taxes were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 43,600 $ 29,489 $ 27,109
State 4,252 2,773 2,569
Deferred 705 (1,631) (2,216)
- ---------------------------------------------------------
Total $ 48,557 $ 30,631 $ 27,462
- ---------------------------------------------------------
</TABLE>
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:
<PAGE> 66
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
Tax at statutory rate
on income from
operations $45,238 $30,360 $27,294
Add:
State income taxes, net
of federal tax benefit 2,858 2,198 1,702
Amortization of net
purchase accounting
adjustments 1,026 392 260
Other 1,427 659 978
- ---------------------------------------------------------------
Total 50,549 33,609 30,234
- ---------------------------------------------------------------
Deduct:
Nontaxable interest
income 1,949 2,946 2,094
Dividends received
deduction 34 16 252
Other 9 16 426
- ---------------------------------------------------------------
Total 1,992 2,978 2,772
- ---------------------------------------------------------------
TOTAL INCOME TAXES $48,557 $30,631 $27,462
</TABLE>
The components of BancGroup's net deferred tax asset as of December 31,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan
losses $21,002 $19,347
Pension accrual in excess
of contributions 1,078 952
Accumulated amortization of
mortgage servicing rights 1,348 2,384
Other real estate owned
write-downs 1,258 1,443
Other liabilities and reserves 2,100 1,616
Accelerated tax depreciation 37 22
Other 2,650 2,397
- ---------------------------------------------------------------
Total deferred tax asset 29,473 28,161
- ---------------------------------------------------------------
Deferred tax liabilities:
Cumulative accretion/discount
on bonds 1,194 460
Differences between financial
reporting and tax bases of net
assets acquired 477 962
Prepaid FDIC assessment 223 1
Loan loss reserve recapture 1,090 1,779
Unrealized gain on securities
available for sale 615 118
Other 3,407 3,759
- ---------------------------------------------------------------
Total deferred tax liability 7,006 7,079
- ---------------------------------------------------------------
Net deferred tax asset $22,467 $21,082
- ---------------------------------------------------------------
</TABLE>
The net deferred tax asset is included as a component of accrued interest
and other assets in the Consolidated Statement of Condition.
<PAGE> 67
BancGroup did not establish a valuation allowance related to the net
deferred tax asset due to taxes paid within the carryback period being
sufficient to offset future deductions resulting from the reversal of these
temporary differences.
19. EARNINGS PER SHARE
BancGroup adopted SFAS No. 128, "Earnings Per Share" on December 31,1997.
This statement requires all entities with complex capital structures to present
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. The following
table reflects this reconciliation:
<TABLE>
<CAPTION>
PER SHARE
(IN THOUSANDS) INCOME SHARES AMOUNT
- -------------------------------------------------------------------
<S> <C> <C> <C>
1997
Basic EPS
Net income $82,516 46,536 $1.77
Effect of dilutive securities
Options 1,140
Convertible debentures,
net of taxes 295 482
- -------------------------------------------------------------------
Diluted EPS $82,811 48,158 $1.72
- -------------------------------------------------------------------
1996
Basic EPS
Net income $56,282 42,839 $1.31
Effect of dilutive securities
Options 1,317
Convertible debentures,
net of taxes 445 620
- -------------------------------------------------------------------
Diluted EPS $56,727 44,776 $1.27
- -------------------------------------------------------------------
1995
Basic EPS
Net income $50,642 39,787 $1.27
Effect of dilutive securities
Options 2,351
Convertible debentures,
net of taxes 1,075 1,511
- -------------------------------------------------------------------
Diluted EPS $51,717 43,649 $1.18
- -------------------------------------------------------------------
</TABLE>
<PAGE> 68
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
- CASH AND CASH EQUIVALENTS -- For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
- INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE -- For debt
securities and marketable equity securities held either for investment
purposes or for sale, fair value equals quoted market price, if available.
If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
- MORTGAGE LOANS HELD FOR SALE -- For these short-term instruments, the fair
value is determined from quoted current market prices.
- MORTGAGE SERVICING RIGHTS AND EXCESS SERVICING FEES -- Fair value is
estimated by discounting future cash flows from servicing fees using
discount rates that approximate current market rates.
- LOANS -- For loans, the fair value is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
- DEPOSITS -- The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at December
31, 1997 and 1996. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.
- SHORT-TERM BORROWINGS -- Rates currently available to BancGroup for
borrowings with similar terms and remaining maturities are used to
estimate fair value of existing borrowings.
- LONG-TERM DEBT -- Rates currently available to BancGroup for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
- COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT -- The value of
the unrecognized financial instruments is estimated based on the related
fee income associated with the commitments, which is not material to
BancGroup's financial statements at December 31, 1997 and 1996.
<PAGE> 69
The estimated fair values of BancGroup's financial instruments at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 318,257 $ 318,257 $ 298,778 $ 298,778
Securities available for sale 594,545 594,545 551,263 551,263
Investment securities 269,213 271,366 307,940 302,295
Mortgage loans held for sale 225,331 227,375 157,966 157,494
Mortgage servicing rights and
excess servicing fees 141,865 163,948 106,784 152,064
Loans 5,585,901 4,558,780
Less: allowance for loan losses (67,528) (58,016)
- -----------------------------------------------------------------------------------------------
Loans, net 5,518,373 5,433,206 4,500,764 4,562,364
- -----------------------------------------------------------------------------------------------
Total $7,067,584 $7,008,697 $5,923,495 $6,026,824
- -----------------------------------------------------------------------------------------------
Financial liabilities:
Deposits $5,771,702 $5,435,003 $4,728,896 $4,743,707
Short-term borrowings 719,419 716,764 864,500 864,500
Long-term debt 315,252 323,332 39,092 42,121
- -----------------------------------------------------------------------------------------------
Total $6,806,373 $6,475,099 $5,632,488 $5,650,328
- -----------------------------------------------------------------------------------------------
</TABLE>
21. CONDENSED FINANCIAL INFORMATION OF THE COLONIAL BANCGROUP, INC.
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
STATEMENT OF CONDITION
December 31
- ---------------------------------------------------------------
(IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash* $ 13,158 $ 1,377
Investment in subsidiaries* 613,955 464,567
Intangible assets 5,226 5,681
Other assets 5,651 5,016
- ---------------------------------------------------------------
Total assets $637,990 $476,641
- ---------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term borrowings $ 11,050 $1,033
Subordinated debt 76,088 8,612
Other long-term debt -- 14,116
Other liabilities 7,590 9,489
Shareholders' equity 543,262 443,391
- ---------------------------------------------------------------
Total liabilities and
shareholders' equity $637,990 $476,641
- ---------------------------------------------------------------
</TABLE>
*Eliminated in consolidation.
<PAGE> 70
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Cash dividends from
subsidiaries* $42,576 $17,166 $17,543
Interest and dividends
on short-term investments* 859 250 142
Other income 2,517 2,255 1,529
- --------------------------------------------------------------------
Total income 45,952 19,671 19,214
- --------------------------------------------------------------------
EXPENSES:
Interest 6,901 2,020 2,756
Salaries and
employee benefits 1,703 3,447 754
Occupancy expense 346 347 298
Furniture and
equipment expense 93 96 73
Amortization of
intangible assets 460 514 542
Other expenses 4,774 5,472 4,816
- --------------------------------------------------------------------
Total expenses 14,277 11,896 9,239
- --------------------------------------------------------------------
Income before income taxes
and equity in undistributed
net income of
subsidiaries 31,675 7,775 9,975
Income tax benefit 2,334 3,066 2,389
- --------------------------------------------------------------------
Income before equity in
undistributed net
income of subsidiaries 34,009 10,841 12,364
Equity in undistributed
net income of
subsidiaries* 48,507 45,441 38,278
- --------------------------------------------------------------------
Net income $82,516 $56,282 $50,642
- --------------------------------------------------------------------
</TABLE>
*Eliminated in consolidation.
<PAGE> 71
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 82,516 $ 56,282 $ 50,642
Adjustments to
reconcile net income
to net cash provided by
operating activities:
Depreciation, amorti-
zation, and accretion 699 618 1,184
Increase in prepaids
and other assets (629) (921) (2,471)
Increase (decrease) in
accrued income taxes 1,972 (65) 3,387
Increase in accrued
expenses 2,039 510 1,598
Undistributed
earnings
of subsidiaries* (48,507) (45,441) (38,278)
- --------------------------------------------------------------------------------
Total adjustments (44,426) (45,299) (34,580)
- --------------------------------------------------------------------------------
Net cash provided by
operating activities 38,090 10,983 16,062
- --------------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures (462) (124) (175)
Purchase of securities (78) (526)
Proceeds from maturities
of securities 506 295 339
Proceeds from sale
of premises and
equipment -- 3,000 538
Net investment
in subsidiaries* (56,861) (2,317) (13,456)
- --------------------------------------------------------------------------------
Net cash (used in)
provided by investing
activities (56,817) 776 (13,280)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 72
STATEMENT OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Years Ended December 31
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase in short-term
borrowings (1,500) 425 1,000
Proceeds from issuance
of subordinated debt 70,000 -- 1,425
Proceeds from issuance
of long-term debt -- -- 6,249
Proceeds from issuance
of short-term debt 10,000 -- --
Repayment of
long-term debt (15,149) (2,350) (1,000)
Proceeds from
issuance of
common stock 9,645 3,768 9,026
Purchase of treasury
stock (15,887) -- --
Dividends paid (26,579) (20,062) (12,795)
Other, net (22) 1,377 (2,644)
- --------------------------------------------------------------------------------
Net cash provided by
(used in) financing
activities 30,508 (16,842) 1,261
- --------------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents 11,781 (5,083) 4,043
Cash and cash
equivalents at
beginning of year 1,377 6,460 2,417
- --------------------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS AT END
OF YEAR* $ 13,158 $ 1,377 $ 6,460
- --------------------------------------------------------------------------------
Supplemental
disclosure of cash
flow information:
Cash paid (received)
during the year for:
Interest $ 4,037 $ 1,910 $ 2,801
Income taxes (3,140) (2,493) (274)
- --------------------------------------------------------------------------------
</TABLE>
*Eliminated in consolidation.
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE COLONIAL BANCGROUP, INC.
----------------------------
(Registrant)
Date: May 27, 1998 /s/ W. Flake Oakley
----------------------------
W. Flake Oakley
Chief Financial Officer
