<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 1-13508
THE COLONIAL BANCGROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 63-0661573
- ----------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
One Commerce Street
Montgomery, Alabama 36104
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(Address of principle executive offices)
(334) 240-5000
- -------------------------------------------------------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days.
YES l3 NO l
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at October 30, 1998
- -------------------------------------------------------------------------------
Common Stock, $2.50 Par Value 109,663,531
<PAGE> 2
THE COLONIAL BANCGROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Condition - September 30, 1998, December 31, 1997 and
September 30, 1997 1
Consolidated Statements of Income - Nine months ended September 30, 1998 and
September 30, 1997 and three months ended September 30, 1998 and September 30, 1997 2
Consolidated Statements of Comprehensive Income - Nine months ended
September 30, 1998 and September 30, 1997 and three months ended
September 30, 1998 and September 30, 1997 3
Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and
September 30, 1997 4
Notes to Consolidated Financial Statements - September 30, 1998 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
<PAGE> 3
CAUTIONARY STATEMENTS 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.
PART I Financial Information
The Company hereby amends its quarterly report on Form 10-Q for the quarter
ended September 30, 1998 as filed with the Securities and Exchange Commission on
November 13, 1998, to recognize an $18.5 million impairment charge on mortgage
servicing rights as of September 30, 1998 and the related income tax effect of
$7.0 million. The impairment recognition is based upon information that Company
management obtained from third party valuation consultants during December 1998
and January 1999 and management's analysis of that information.
<PAGE> 4
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1998 1997* 1997*
<S> <C> <C> <C>
Assets:
Cash and due from banks $ 362,607 $ 313,207 $ 267,753
Interest-bearing deposits in banks 25,444 84,540 78,670
Securities held for trading -- -- --
Securities available for sale 1,228,718 620,768 658,052
Investment securities 182,577 295,649 341,630
Mortgage loans held for sale 436,770 225,331 182,878
Loans, net of unearned income 6,441,776 5,716,769 5,530,062
Less:
Allowance for possible loan losses (74,096) (69,189) (69,340)
---------- ---------- ----------
Loans, net 6,367,680 5,647,580 5,460,722
Premises and equipment, net 168,809 148,110 144,331
Excess of cost over tangible and identified intangible
assets acquired, net 78,039 69,200 70,938
Mortgage servicing rights 173,412 141,865 134,169
Other real estate owned 9,121 14,491 15,176
Accrued interest and other assets 143,216 147,020 111,563
---------- ---------- ----------
Total $9,176,393 $7,707,761 $7,465,882
========== ========== ==========
Liabilities and Shareholders' Equity:
Deposits $6,482,466 $6,005,967 $5,888,347
FHLB short-term borrowings 475,000 420,000 560,000
Other short-term borrowings 652,844 308,885 214,185
Subordinated debt 12,633 6,088 6,208
Trust preferred securities 70,000 70,000 70,000
FHLB long-term debt 499,158 236,175 61,325
Other long-term debt 219,824 4,334 16,157
Other liabilities 136,063 94,493 104,606
---------- ---------- ----------
Total liabilities 8,547,988 7,145,942 6,920,828
---------- ---------- ----------
Shareholders' equity:
Common Stock, $2.50 par value; 200,000,000 shares
authorized, 103,195,227, 98,809,236** and 98,476,964**
shares issued and outstanding at September 30, 1998,
December 31, 1997 and September 30, 1997 respectively 257,988 247,023 246,192
Additional paid in capital 113,890 100,365 100,330
Retained earnings 249,877 214,068 198,427
Unearned compensation (2,774) (1,751) (1,865)
Unrealized gains on securities available
for sale, net of taxes 9,424 2,114 1,970
---------- ---------- ----------
Total shareholders' equity 628,405 561,819 545,054
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,176,393 $7,707,761 $7,465,882
========== ========== ==========
</TABLE>
*See Note A.
**See Note E.
<PAGE> 5
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997* 1998 1997*
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $426,846 $358,866 $149,094 $125,702
Interest on investments 57,278 47,136 22,568 15,973
Other interest income 3,858 3,920 1,002 1,328
-------- -------- -------- --------
Total interest income 487,982 409,922 172,664 143,003
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 180,816 163,528 61,794 56,764
Interest on short-term borrowings 37,655 30,288 15,252 10,703
Interest on long-term debt 26,925 7,326 11,587 2,679
-------- -------- -------- --------
Total interest expense 245,396 201,142 88,633 70,146
-------- -------- -------- --------
NET INTEREST INCOME 242,586 208,780 84,031 72,857
Provision for possible loan losses 11,516 10,304 3,927 2,982
-------- -------- -------- --------
Net Interest Income After Provision for
Possible Loan Losses 231,070 198,476 80,104 69,875
-------- -------- -------- --------
NONINTEREST INCOME:
Mortgage servicing and origination fees 30,974 25,886 10,923 9,147
Service charges on deposit accounts 26,022 21,566 9,028 7,600
Other charges, fees and commissions 5,363 5,134 1,937 1,789
Securities gains (losses), net 1,073 44 70 80
Other income 24,612 12,879 8,280 4,269
-------- -------- -------- --------
Total noninterest income 88,044 65,509 30,238 22,885
-------- -------- -------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits 80,161 69,567 27,965 24,136
Occupancy expense of bank premises, net 19,665 16,284 6,865 5,760
Furniture and equipment expenses 17,544 13,665 6,015 5,015
Amortization and impairment of mortgage
servicing rights 40,868 12,162 29,047 4,450
Amortization of intangible assets 3,646 2,177 1,232 865
Acquisition and restructuring costs 10,548 3,282 2,883 647
Year 2000 expense 3,410 233 412 223
Other expense 54,720 46,312 18,622 15,325
-------- -------- -------- --------
Total noninterest expense 230,562 163,682 93,041 56,421
-------- -------- -------- --------
Income before income taxes 88,552 100,303 17,301 36,339
Applicable income taxes 32,277 36,468 6,339 13,233
-------- -------- -------- --------
Net Income $ 56,275 $ 63,835 $ 10,962 $ 23,106
======== ======== ======== ========
Earnings per share**:
Basic $ 0.55 $ 0.66 $ 0.11 $ 0.24
Diluted $ 0.54 $ 0.64 $ 0.10 $ 0.23
</TABLE>
*See Note A.
**See Note E.
<PAGE> 6
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997* 1998 1997*
<S> <C> <C> <C> <C>
NET INCOME: $56,275 $63,835 $10,962 $23,106
Other comprehensive income, net of taxes:
Unrealized gains on securities available for sale
arising during the period, net of taxes 8,913 1,543 5,840 907
Less: reclassification adjustment for net (gains)
losses included in net income (1,603) (28) (1,085) (50)
------- ------- ------- -------
Comprehensive income $63,585 $65,350 $15,717 $23,963
======= ======= ======= =======
</TABLE>
*See Note A.
<PAGE> 7
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997*
<S> <C> <C>
Net cash (used in) provided by operating activities $ (113,916) $ 56,030
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 183,610 108,928
Proceeds from sales of securities available for sale 334,892 36,663
Purchase of securities available for sale (1,057,810) (116,084)
Proceeds from maturities of investment securities 161,184 154,525
Purchase of investment securities (64,691) (156,145)
Net increase in loans (567,292) (425,405)
Cash received in bank acquisitions 20,566 28,241
Capital expenditures (32,392) (32,481)
Proceeds from sale of other real estate owned 9,393 3,108
Other, net 1,294 3,001
---------- ---------
Net cash used in investing activities (1,011,246) (395,649)
---------- ---------
Cash flows from financing activities:
Net increase in demand, savings, and time deposits 256,893 343,438
Net increase (decrease) in federal funds purchased,
repurchase agreements and other short-term borrowings 398,959 (57,564)
Proceeds from issuance of long-term debt 480,453 81,675
Repayment of long-term debt (1,981) (19,168)
Proceeds from issuance of common stock 7,582 9,094
Acquisition of treasury stock 0 (16,011)
Dividends paid (26,440) (20,687)
---------- ---------
Net cash provided by financing activities 1,115,466 320,777
---------- ---------
Net decrease in cash and cash equivalents (9,696) (18,842)
Cash and cash equivalents at beginning of year 397,747 365,265
---------- ---------
Cash and cash equivalents at September 30 $ 388,051 $ 346,423
========== =========
Supplemental Disclosure of cash flow information:
Cash paid during the year for:
Interest $ 245,073 $ 181,889
Income taxes 32,441 35,615
Non-cash investing activities:
Transfer of loans to other real estate $ 5,283 $ 7,466
Origination of loans for the sale of other real estate 438 --
Non-cash financing activities:
Conversion of subordinated debentures $ 1,169 $ 2,395
Assets acquired in business combinations 139,556 521,265
Liabilities assumed in business combinations 147,492 464,945
</TABLE>
*See Note A.
<PAGE> 8
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES/RESTATEMENT
The Colonial BancGroup, Inc. ("BancGroup") and its subsidiaries have not
changed their accounting and reporting policies from those stated in the 1997
annual report. These unaudited interim financial statements should be read in
conjunction with the audited financial statements and footnotes included in
BancGroup's 1997 annual report on Form 10-K and BancGroup's 8-K filing dated
February 2, 1998 disclosing the amended and restated financial statements for
December 31, 1997 to give retroactive effect to the February 1998
pooling-of-interests method business combinations with United American Holding
Corporation, First Central Bank and South Florida Banking Corp. The September
30, 1997 and December 31, 1997 financial statement amounts included herein have
been restated to give retroactive effect to the pooling-of-interests business
combinations with Commercial Bank of Nevada and FirstBank.
In the opinion of BancGroup, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the financial position
as of September 30, 1998 and 1997 and the results of operations and cash flows
for the interim periods ended September 30, 1998 and 1997. All 1998 interim
amounts are subject to year-end audit, and the results of operations for the
interim period herein are not necessarily indicative of the results of
operations to be expected for the year.
NOTE B - BUSINESS COMBINATIONS
On February 2, 1998, United American Holding Corporation ("United") was
merged into BancGroup. United's subsidiary, United American Bank of Central
Florida was merged into BancGroup's existing subsidiary bank, Colonial Bank. At
December 31, 1997, United had approximately $275 million in assets and deposits
and other liabilities of $252 million. United operated nine offices in Orange,
Seminole, and Osceola counties, Florida. This business combination was
accounted for as a pooling of interests and the financial statements have been
restated accordingly.
On February 5, 1998, ASB Bancshares, Inc. ("ASB") was merged into BancGroup.
ASB's subsidiary, Ashville Savings Bank was merged into BancGroup's existing
subsidiary bank, Colonial Bank. On February 5, 1998, ASB had approximately $159
million in assets and deposits and other liabilities of $138 million. ASB
operated nine branches in Blount, Etowah and St. Clair counties, Alabama. This
business combination was accounted for as a purchase and the results of
operations are included in the accompanying financial statements only from the
date of consummation forward.
On February 11, 1998, First Central Bank was merged into BancGroup's existing
subsidiary bank, Colonial Bank. At December 31, 1997, First Central Bank had
approximately $63 million in assets and deposits and other liabilities of $53
million. First Central Bank operated a single branch located in St. Petersburg,
Florida. This business combination was accounted for as a pooling of interests
and the financial statements have been restated accordingly.
On February 12, 1998, South Florida Banking Corp. ("SFB") was merged into
BancGroup. SFB's subsidiary, First National Bank of Florida at Bonita Springs
was merged into BancGroup's existing subsidiary bank, Colonial Bank. At
December 31, 1997, SFB had approximately $256 million in assets and deposits
and other liabilities of $238 million. SFB operated twelve branches in Lee,
Collier, and Hendry counties, Florida. This business combination was accounted
for as a pooling of interests and the financial statements have been restated
accordingly.
On June 15, 1998, Commercial Bank of Nevada ("CBN") was merged into
BancGroup's existing subsidiary bank, Colonial Bank. At March 31, 1998, CBN had
approximately $131 million in assets and deposits and other liabilities of $121
million. CBN operated three offices in Las Vegas, Nevada. This business
combination was accounted for as a pooling of interests and the financial
statements have been restated accordingly.
On June 18, 1998, BancGroup purchased certain assets totaling $8,167,609 and
assumed certain liabilities, primarily deposits, totaling $8,870,601 of the
Wade Green Branch of Premier Bank located in Atlanta, Georgia.
On August 12, 1998, CNB Holding Company ("CNB") was merged into BancGroup.
CNB's subsidiary, Commercial National Bank was merged into BancGroup's existing
subsidiary bank, Colonial Bank. At June 30, 1998, CNB had approximately $90
million in assets and deposits and other liabilities of $81 million. CNB
operated four offices in Volusia County, Florida. This business combination was
accounted for as a pooling of interests, however, due to immateriality, the
prior year financial statements have not been restated.
On August 31, 1998, BancGroup's subsidiary, CBG Acquisition Corp. merged into
FirstBank. On September 17, 1998, FirstBank was then merged into BancGroup's
existing subsidiary, Colonial Bank. At June 30, 1998, FirstBank had
approximately $158 million in assets and deposits and other liabilities of $149
million. FirstBank operated one office in Dallas, Texas. This business
combination was accounted for as a pooling of interests and the financial
statements have been restated accordingly.
<PAGE> 9
Presented below is BancGroup's summary operating information for the nine
months ended September 30, 1997, showing the effect of business combinations
described above.
<TABLE>
<CAPTION>
As Previously Effect of Currently
Reported Poolings Reported
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $180,333 $28,447 $208,780
Non interest income 61,623 3,886 65,509
Net income 56,054 7,781 63,835
</TABLE>
On October 1, 1998, First Macon Bank & Trust Company ("First Macon") was
merged into BancGroup's existing subsidiary bank, Colonial Bank. At September
30, 1998, First Macon had approximately $200 million in assets and deposits and
other liabilities of $184 million. First Macon operated 5 offices in Macon,
Georgia. This business combination was accounted for as a pooling of interests
and the financial statements will be restated accordingly.
On October 6, 1998, Prime Bank of Central Florida ("Prime") was merged into
BancGroup's existing subsidiary bank, Colonial Bank. At September 30, 1998,
Prime had approximately $74 million in assets and deposits and other
liabilities of $68 million. Prime operated five offices in Brevard County,
Florida. This business combination was accounted for as a pooling of interests
and the financial statements will be restated accordingly.
On October 14, 1998, InterWest Bancorp ("InterWest") was merged into
BancGroup. InterWest's subsidiaries, InterWest Bank was merged into BancGroup's
existing subsidiary bank, Colonial Bank and Interwest Mortgage became a
subsidiary of Colonial Mortgage Company. At September 30, 1998, InterWest had
approximately $122 million in assets and deposits and other liabilities of $115
million. InterWest Bank operated four offices in Washoe and Churchill Counties,
Nevada. InterWest Mortgage operated full service loan origination offices in
Portland, Oregon, Idaho Falls, Idaho and in Las Vegas, Carson City and Reno,
Nevada. This business combination was accounted for as a pooling of interest
and the financial statements will be restated accordingly.
On August 6, 1998, BancGroup entered into a definitive agreement with TB&T,
Inc. ("TB&T"). TB&T is a Texas corporation and is a holding company for Texas
Bank and Trust located in Dallas, Texas. TB&T is expected to merge with
BancGroup and following such merger Texas Bank and Trust will merge with
BancGroup's existing subsidiary bank, Colonial Bank. BancGroup expects to issue
approximately 1,275,000 shares of its Common Stock to the stockholders of TB&T.
This transaction is subject to, among other things, approval by the
stockholders of TB&T and approval by appropriate regulatory authorities and is
expected to be accounted for a purchase. At June 30, 1998, TB&T had assets of
$104 million, deposits of $94 million and stockholders' equity of $9 million.
NOTE C - COMMITMENTS AND CONTINGENCIES
BancGroup and its subsidiaries are from time to time defendants in legal
actions arising from normal business activities. Management does not anticipate
that the ultimate liability arising from litigation outstanding at September
30, 1998, will have a materially adverse effect on BancGroup's financial
statements.
NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, BancGroup adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which had
been delayed under SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." The deferred provisions related to
repurchase agreements, dollar-roll transactions, securities lending, and
similar transactions. The adoption of the provisions of SFAS No. 125 as amended
by SFAS No. 127 resulted in no material impact on BancGroup's financial
condition or results of operations.
On January 1, 1998, BancGroup adopted SFAS No. 130, "Reporting of
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of financial statements. This statement also requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This standard
is effective for fiscal years beginning after December 15, 1997 and has been
implemented herein. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The adoption of SFAS No.
130 did not have a material impact on BancGroup's financial condition or
results of operations.
On January 1, 1998, BancGroup adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This statement also establishes standards for
related disclosures
<PAGE> 10
about products and services, geographic areas, and major customers. Under SFAS
No. 131, BancGroup reports two segments, commercial and mortgage banking.
In February, 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
which revises employers' disclosures about pension costs and other
post-retirement benefit plans. It does not change the measurement or
recognition of these plans but standardizes the disclosure requirements for
pension and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair value of
plan assets that will facilitate financial analysis and eliminates certain
disclosures no longer useful. This statement is effective for fiscal years
beginning after December 15, 1997.
On June 15, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities and measured at fair value.
This statement is effective for fiscal years beginning after June 15, 1999 and
Management is currently evaluating the impact that SFAS No. 133 will have on
BancGroup's financial statements.
On October 12, 1998, the Financial Accounting Standards Board issued SFAS
No. 134," Accounting for Mortgage-Backed Securities after the Securitization of
Mortgage Loans Held For Sale by a Mortgage Banking Enterprises." This statement
is effective for the first fiscal quarter beginning after December 15, 1998 and
Management does not expect SFAS No. 134 to have a material impact on BancGroup's
financial condition or results of operations.
NOTE E - STOCK SPLIT
All prior period information has been restated to reflect a two-for-one stock
split effected in the form of a 100 percent stock dividend distributed on
August 14, 1998.
NOTE F - AMENDMENT
The Company hereby amends its quarterly report on Form 10-Q for the quarter
ended September 30, 1998 as filed with the Securities and Exchange Commission on
November 13, 1998, to recognize an $18.5 million impairment charge on mortgage
servicing rights as of September 30, 1998 and the related income tax effect of
$7.0 million. As a result of this impairment earnings per share decreased $0.11
for both the three months and nine months ended September 30, 1998. The
impairment recognition is based upon information that Company management
obtained from third party valuation consultants during December 1998 and January
1999 and management's analysis of that information.
<PAGE> 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations
FINANCIAL CONDITION:
Ending balances of total assets, securities, mortgage loans held for sale,
net loans, mortgage servicing rights, deposits, and long term debt changed for
the nine months and twelve months ended September 30, 1998, respectively, as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
to September 30, 1998 to September 30, 1998
Increase Increase
Amount % Amount %
<S> <C> <C> <C> <C>
ASSETS
Colonial Bank $1,225,493 16.8% $1,413,313 19.9%
CMC 241,537 61.9 297,003 88.7
Other 1,602 11.8 195 1.3
- ------------------------------------------------------------------------------------------------------------
Total assets $1,468,632 19.1 $1,710,511 22.9
Securities 494,878 54.0 411,613 41.2
Mortgage loans held for sale 211,439 93.8 253,892 138.8
Loans, net of unearned income 725,007 12.7 911,714 16.5
Mortgage Servicing Rights 31,547 22.2 39,243 29.2
Deposits 476,499 7.9 594,119 10.1
Long term debt 485,018 153.2 647,925 421.6
</TABLE>
Assets:
BancGroup's assets as restated have increased 22.9% and 19.1% since September
30, 1997 and December 31, 1997, respectively. The Company's strategy has been to
increase its asset size both internally and through acquisition efforts.
BancGroup has concentrated on expanding into growth markets by merging with
banks that have strong local management. BancGroup has been most successful with
this strategy in Florida. With the merger of CBN in Las Vegas, Nevada, FirstBank
in Dallas, Texas and the October merger of InterWest in Reno, Nevada, BancGroup
has made its first steps into growth markets outside the Southeast. For a number
of years, Colonial Mortgage Company has operated on a national basis focusing on
the highest growth markets. These completed and pending acquisitions represent
BancGroup's strategy to parallel the mortgage company's focus and provide its
banking services in some of these same high growth markets.
Securities:
Investment securities and securities available for sale have increased $495
million (54.0%) and $412 million (41.2%) from December 31, 1997 and September
30, 1997, respectively. The increase included $41 million from business
combinations and $10 million from the purchase of preferred stocks. In addition,
BancGroup entered into reverse repurchase arrangements with Morgan Stanley,
Salomon Brothers and First Boston under which it purchased mortgage backed
securities totaling approximately $449 million. These securities are collateral
for $318 million in outstanding debt issued in connection with the purchase of
these securities. The remainder of the increase is from normal funding
operations of the Company.
Loans and Mortgage Loans Held for Sale:
Loans, net of unearned income, have increased $725 million (12.7%) and $912
million (16.5%) from December 31, 1997 and September 30, 1997, respectively.
The increase from December 31, 1997 and September 30, 1997 included $111
million and $278 million attributable to purchase method business combinations,
respectively.
Mortgage loans held for sale are funded on a short-term basis (less than 90
days) while they are being packaged for sale in the secondary market by
Colonial Mortgage Company, a wholly owned subsidiary of Colonial Bank. Loans
originated amounted to approximately $2.7 billion and $1.1 billion and sales
thereof amounted to approximately $2.6 billion and $ 1.1 million during the nine
months ended September 30, 1998 and 1997, respectively. The increase in
originations in 1998 was primarily due to a decrease in interest rates which
resulted in an increase in loan refinancings.
<PAGE> 12
<TABLE>
<CAPTION>
GROSS LOANS BY CATEGORY SEPT. 30, Dec. 31, SEPT. 30,
(In thousands) 1998 1997 1997
<S> <C> <C> <C>
Commercial, financial, and agricultural $ 902,764 $ 710,706 $ 691,607
Real estate-commercial 1,824,963 1,545,918 1,425,091
Real estate-construction 874,603 722,089 691,839
Real estate-residential 2,412,732 2,350,860 2,323,716
Installment and consumer 319,885 314,618 320,626
Other 107,501 73,270 78,089
---------- ---------- ----------
Total loans $6,442,448 $5,717,461 $5,530,968
========== ========== ==========
</TABLE>
Loans, excluding the impact of acquisitions, grew $298 million or 19.4% on
an annualized basis, in the third quarter of 1998. The majority of the growth
has been in loans collateralized by commercial real estate which has increased
approximately $400 million since September 30, 1997 and $279 million since
December 31, 1997. Residential real estate loans, excluding purchase method
business combinations and immaterial poolings, decreased $59 million since
December 31, 1997. This decline in residential real estate is primarily
attributable to the refinancing of these predominately adjustable rate loans to
fixed rates. The Company generally sells fixed rate loans in the secondary
markets resulting in net reductions in outstanding balances. Due to current
market rates for fixed mortgage loans, ARM loans are not in demand and run-off
is expected to continue. These loans are concentrated in various areas in
Alabama, the metropolitan Atlanta market in Georgia as well as the Company's
markets in Florida.
Allocations of the allowance for possible loan losses are made on an
individual loan basis for all identified potential problem loans with a
percentage allocation for the remaining portfolio. The allocations of the total
allowance represent an approximation of the reserves for each category of loans
based on management's evaluation of risk within each loan type.
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
Percent of Percent of Percent of
SEPT. 30, Loans to Dec. 31, Loans to Sept. 30, Loans to
(In thousands) 1998 Total Loans 1997 Total Loans 1997 Total Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $15,174 14.0% $13,176 12.4% $13,306 12.5%
Real estate-commercial 26,312 28.3 24,427 27.1 23,962 25.8
Real estate-construction 15,020 13.6 13,415 12.6 13,557 12.5
Real estate-mortgage 12,064 37.4 11,754 41.1 11,619 42.0
Installment and consumer 4,027 5.0 5,151 5.5 5,243 5.8
Other 1,499 1.7 1,266 1.3 1,653 1.4
------- ----- ------- ----- ------- -----
TOTAL $74,096 100.0% $69,189 100.0% $69,340 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
<PAGE> 13
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
NINE MONTHS Year Nine Months
ENDED Ended Ended
(In thousands) SEPT. 30, 1998 Dec. 31, 1997 Sept. 30, 1997
<S> <C> <C> <C>
Allowance for possible loan losses - January 1 $69,189 $59,097 $59,097
Charge-offs:
Commercial, financial, and agricultural 3,442 5,460 3,154
Real estate-commercial 1,417 2,954 770
Real estate-construction 379 433 147
Real estate-residential 1,328 1,724 1,195
Installment and consumer 4,514 5,592 4,052
Other 716 693 601
------- ------- -------
Total charge-offs 11,796 16,856 9,919
------- ------- -------
Recoveries:
Commercial, financial, and agricultural 852 993 659
Real estate-commercial 530 1,019 748
Real estate-construction 16 91 67
Real estate-residential 521 244 140
Installment and consumer 1,466 1,794 1,262
Other 286 134 110
------- ------- -------
Total recoveries 3,671 4,275 2,986
------- ------- -------
Net charge-offs 8,125 12,581 6,933
Addition to allowance charged to operating expense 11,516 15,801 10,304
Allowance added from business combinations 1,516 6,872 6,872
------- ------- -------
Allowance for possible loan losses-end of period $74,096 $69,189 $69,340
======= ======= =======
</TABLE>
Asset quality as measured by nonperforming assets remains strong at 0.72% of
net loans and other real estate. Nonperforming assets have increased $4.0
million from December 31, 1997. The increase in nonperforming assets resulted
from a $9.3 million increase in nonperforming loans which consists primarily of
4 large commercial real estate credits. The increase in nonperforming loans was
offset by a $5.4 million decrease in other real estate and repossessions
resulting primarily from the sale of a large commercial real estate property in
North Alabama. Management continuously monitors and evaluates recoverability of
problem assets and adjusts loan loss reserves accordingly. The loan loss
reserve is 1.15% of loans at September 30, 1998 as compared to 1.21% at
December 31, 1997 and 1.25% at September 30, 1997.
NONPERFORMING ASSETS ARE SUMMARIZED BELOW
<TABLE>
<CAPTION>
(In thousands) SEPT. 30, 1998 Dec. 31, 1997 Sept. 30, 1997
<S> <C> <C> <C>
Nonaccrual loans $35,939 $27,010 $31,898
Restructured loans 1,370 952 1,062
------- ------- -------
Total nonperforming loans* 37,309 27,962 32,960
Other real estate owned 8,352 13,695 14,475
Repossessions 769 796 701
------- ------- -------
Total nonperforming assets* $46,430 $42,453 $48,136
======= ======= =======
Aggregate loans contractually past due 90 days
for which interest is being accrued $ 6,468 $ 7,029 $ 6,295
Net charge-offs year-to-date $ 8,123 $12,526 $ 6,885
RATIOS
Period end:
Total nonperforming assets as a percent of net
loans and other real estate 0.72% 0.74% 0.87%
Allowance as a percent of net loans 1.15% 1.21% 1.25%
Allowance as a percent of nonperforming assets* 160% 163% 144%
Allowance as a percent of nonperforming loans* 199% 247% 210%
For the period ended:
Net charge-offs as a percent of average net loans-
(annualized basis) 0.18% 0.24% 0.18%
</TABLE>
*Total does not include loans contractually past due 90 days or more which
are still accruing interest.
<PAGE> 14
Management, through its loan officers, internal loan review staff, and
external examinations by regulatory agencies and independent auditors has
identified approximately $197 million of potential problem loans not included
above. The status of these loans is reviewed at least quarterly by loan
officers and the centralized loan review function and annually by independent
auditors and regulatory agencies. In connection with such reviews, collateral
values are updated where considered necessary. If collateral values are judged
insufficient and other sources of repayment inadequate, the loans are reduced
to estimated recoverable amounts through increases in reserves allocated to the
loans or charge-offs. As of September 30, 1998, substantially all of these
loans are current with their existing repayment terms. Given the reserves and
the ability of the borrowers to comply with the existing repayment terms,
management believes any exposure from these potential problem loans has been
adequately addressed at the present time.
The above nonperforming loans and potential problem loans represent all
material credits for which management has doubts as to the ability of the
borrowers to comply with the loan repayment terms. Of these loans, management
believes it is probable that loans totaling $28 million will not be collected
as scheduled and therefore are considered impaired. Management also expects
that the resolution of these problem credits as well as other performing loans
will not materially impact future operating results, liquidity or capital
resources.
LIQUIDITY:
The maintenance of an adequate liquidity position and the constant
monitoring of rate sensitivity are principle components of BancGroup's
asset/liability management strategy. BancGroup's governing policy provides for
daily and longer term monitoring of both sources and uses of funds to properly
maintain the cash position. The policy also establishes the criteria for
monitoring the short and long term impact of interest rate fluctuations on
these funds. To assist in funding loan growth, BancGroup has credit facilities
at the Federal Home Loan Bank (FHLB). FHLB of Atlanta has established credit
availability in an amount up to $2.3 billion with only $974 million outstanding
at September 30, 1998. This source of credit reduces BancGroup's dependency on
deposits as a source of liquidity resulting in a loan to deposit ratio of 99%
at September 30, 1998 and 95% at December 31, 1997. BancGroup has a brokered
Certificate of Deposit (CD) program in conjunction with Merrill Lynch, Dean
Witter and Oppenheimer Capital to offer CD's in increments of $1,000 to $99,000
to out of market customers at competitive rates ranging from 5.20% to 5.85%
maturing in 6 to 24 month periods. At September 30, 1998, $163 million is
outstanding under this program. BancGroup also has a brokered money market
program with Merrill Lynch. At September 30, 1998, $141 million is outstanding
under this program at an average rate of 4.42%. Funds are transferred daily to
meet short-term funding fluctuations. As discussed previously, BancGroup has
received funds under reverse repurchase arrangements with Morgan Stanley,
Salomon Brothers and First Boston. At September 30, 1998, there was $318
million in outstanding debt under this agreement which is collateralized by
mortgage-backed securities.
CAPITAL RESOURCES:
Management continuously monitors the capital adequacy and potential for
future growth. The primary measurement for these evaluations for a bank holding
company is its tier one leverage ratio. Tier one capital for BancGroup at
September 30, 1998 consists of $619 million of equity and $70 million in trust
preferred securities less $78 million of intangibles providing a 6.72% leverage
ratio at September 30, 1998. The ratio of shareholders' equity to total assets
at September 30, 1998 was 6.96% as compared to 7.29% at December 31, 1997. This
decline is primarily attributable to the amortization and impairment of
mortgage servicing rights, an increase in assets as a result of increases in
loan growth, mortgage loans held for sale and investment activities previously
discussed. Management believes that capital levels are sufficient to support
future internally generated growth and fund the quarterly dividend rates which
are currently $0.085 per share.
BancGroup also has access to equity capital markets through both public and
private issuances. Management considers these sources and related return in
addition to internally generated capital in evaluating future expansion, merger
or acquisition opportunities.
Year 2000 Readiness Disclosure:
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.
During the third quarter of 1998, BancGroup substantially completed the
remediation of its critical software applications and began testing of internal
mission critical applications. In accordance with
<PAGE> 15
the guidelines established by the Federal Reserve, BancGroup expects to be
substantially completed with testing of internal mission critical software
applications by December 31, 1998. Testing of other nonmission critical
applications is also well underway and is expected to be substantially
completed by the end of the first quarter 1999. Additionally, BancGroup expects
to have testing substantially completed with third party service providers by
March 31, 1999.
Throughout 1998, BancGroup has been working to assess Year 2000 readiness of
vendors, business partners and other counterparties focusing on those
considered critical to BancGroup operations. BancGroup began assessing the Year
2000 readiness of loan customers, depositors and other funds providers during
the third quarter of 1998. BancGroup will continue to monitor and evaluate the
Year 2000 readiness of third parties whose Year 2000 noncompliance could have a
material adverse impact on the operations of BancGroup through the first
quarter of the Year 2000. BancGroup will take appropriate measures including
development of contingency plans to mitigate the risk to the company of Year
2000 noncompliance by third parties. However, the impact of Year 2000
noncompliance by all third parties with whom BancGroup transacts business
cannot be assessed at this time.
BancGroup estimates that the total cost of the Year 2000 project will range
from $13.5 million to $15.5 million. Approximately $8.4 million of those costs
relate to the replacement of hardware and software and will therefore be
capitalized while $3 million of the costs will be incremental expenses paid to
third parties. Year 2000 project costs of approximately $3.8 million were
expensed during the nine months ended September 30, 1998 and $432,000 were
expensed during the year ended December 31, 1997. The 1998 expenses include a
one-time pretax charge of approximately $2 million in the first quarter for the
write off of the remaining book value of branch automation equipment that is
being replaced with Year 2000 compliant software.
Management expects its remediation efforts to occur in a timely manner and
does not anticipate significant disruptions in its operations. In the event that
such remediations are not completed in a timely fashion, there could be a
potential material adverse impact. Although presently not anticipated, a
possible worst case scenario could include interruption in the normal servicing
of customers as well as the funds management of the Company. Management is
currently developing a contingency plan to address hypothetical worst case
scenarios.
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 representation, 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.
<PAGE> 16
COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997:
SUMMARY:
BancGroup is involved in two primary lines of business: commercial banking
and mortgage banking, through its wholly owned subsidiaries Colonial Bank and
Colonial Mortgage Company ("CMC"). The following schedule of BancGroup's
results of operations reflects the related impact of each line of business to
the earnings of the company.
LINE OF BUSINESS RESULTS
(In thousands)
<TABLE>
<CAPTION>
Colonial Colonial Consolidated
QUARTER ENDED SEPTEMBER 30, 1998 Bank Mortgage Other(1) BancGroup
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 82,001 $ 3,681 $(1,651) $84,031
Provision for possible loan losses (3,927) -- -- (3,927)
Noninterest income 14,268 15,984 (14) 30,238
Amortization and depreciation 6,244 29,289 (83) 35,450
Noninterest expense 49,609 6,879 1,103 57,591
- --------------------------------------------------------------------------------------------------------------
Pretax income (loss) 36,489 (16,503) (2,685) 17,301
Income taxes (13,333) 6,260 734 (6,337)
- --------------------------------------------------------------------------------------------------------------
Net Income (loss) 23,156 (10,243) (1,951) 10,962
Acquisition and restructuring costs, net of taxes 1,938 -- 23 1,961
Year 2000 expense, net of taxes 172 90 -- 262
-------- -------- ------- -------
Income excluding acquisition and restructuring
costs and Year 2000 expense $ 25,266 $(10,153) $(1,928) $13,185
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Colonial Colonial Consolidated
QUARTER ENDED SEPTEMBER 30, 1997* Bank Mortgage Other(1) BancGroup
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 72,244 $ 2,236 $(1,623) $ 72,857
Provision for possible loan losses (2,982) -- -- (2,982)
Noninterest income 11,823 10,759 303 22,885
Amortization and depreciation 4,887 4,643 (9) 9,521
Noninterest expense 41,497 4,414 989 46,900
- --------------------------------------------------------------------------------------------------------------
Pretax income (loss) 34,701 3,938 (2,300) 36,339
Income taxes (12,387) (1,483) 637 (13,233)
- --------------------------------------------------------------------------------------------------------------
Net Income (loss) 22,314 2,455 (1,663) 23,106
Acquisition and restructuring costs, net of taxes 490 -- 28 518
Year 2000 expense, net of taxes 101 37 -- 138
-------- ------- ------- -------
Income excluding acquisition and restructuring $ 22,905 $ 2,492 $(1,635) $ 23,762
======== ======= ======= ========
costs and Year 2000 expense
</TABLE>
<PAGE> 17
LINE OF BUSINESS RESULTS (continued)
(In thousands)
<TABLE>
<CAPTION>
Colonial Colonial Consolidated
NINE MONTHS ENDED SEPTEMBER 30, 1998 Bank Mortgage Other(1) BancGroup
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $238,330 $ 9,250 $(4,994) $242,586
Provision for possible loan losses (11,516) -- -- (11,516)
Noninterest income 42,376 45,713 (45) 88,044
Amortization and depreciation 18,052 41,562 (196) 59,418
Noninterest expense 149,426 19,167 2,551 171,144
- --------------------------------------------------------------------------------------------------------------
Pretax income (loss) 101,712 (5,766) (7,394) 88,552
Income taxes (36,456) 2,216 1,963 (32,277)
- --------------------------------------------------------------------------------------------------------------
Net Income (loss) 65,256 (3,550) (5,431) 56,275
Acquisition and restructuring costs, net of taxes 7,092 -- 81 7,173
Year 2000 expense, net of taxes 1,552 571 -- 2,123
-------- ------- ------- --------
Income excluding acquisition and restructuring
costs and Year 2000 expense $ 73,900 $(2,979) $(5,350) $ 65,571
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Colonial Colonial Consolidated
NINE MONTHS ENDED SEPTEMBER 30, 1997* Bank Mortgage Other BancGroup
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $207,984 $ 5,011 $(4,215) $208,780
Provision for possible loan losses (10,304) -- -- (10,304)
Noninterest income 33,345 31,891 273 65,509
Amortization and depreciation 12,490 12,688 128 25,306
Noninterest expense 122,037 12,563 3,776 138,376
- --------------------------------------------------------------------------------------------------------------
Pretax income (loss) 96,498 11,651 (7,846) 100,303
Income taxes (34,253) (4,359) 2,144 (36,468)
- ---------------------------------------------------------------------------------------------------------------
Net Income (loss) 62,245 7,292 (5,702) 63,835
Acquisition and restructuring costs, net of taxes 2,318 -- 308 2,626
Year 2000 expense, net of taxes 107 37 -- 144
-------- ------- ------- --------
Income excluding acquisition and restructuring
costs and Year 2000 expense $ 64,670 $ 7,329 $(5,394) $ 66,605
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
SELECTED RATIOS: Sept. 30, 1998 Sept. 30, 1997* Sept. 30, 1998 Sept. 30, 1997*
<S> <C> <C> <C> <C>
Income excluding acquisition and restructuring
costs and Year 2000 expenses to:
Average assets 1.03% 1.28% 0.58% 1.31%
Average shareholders' equity 14.40% 17.46% 8.31% 17.66%
Efficiency ratio (excluding acquisition and
restructuring costs and Year 2000 expenses) 65.10% 57.94% 78.06% 57.59%
</TABLE>
* Restated financial results above reflect the business combinations with
United American Holding Corporation, South Florida Banking Corp., First
Central Bank, Commercial Bank of Nevada and FirstBank. These mergers were
accounted for as poolings of interests and the financial results have been
restated accordingly.
(1) Represents holding company financing costs and certain unallocable expenses.
<PAGE> 18
AVERAGE VOLUME AND RATES
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997*
Average Average
Volume Interest Rate Volume Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $6,056,101 $407,459 8.99% $5,175,222 $351,481 9.07%
Mortgage loans held for sale 364,373 20,085 7.35% 137,939 8,142 7.87%
Investment securities and securities
available for sale and other
interest-earning assets 1,304,354 62,545 6.41% 1,089,167 52,430 6.44%
---------- -------- ---------- --------
Total interest-earning assets(l) 7,724,828 $490,089 8.47% 6,402,328 $412,053 8.60%
-------- --------
Nonearning assets 818,183 580,052
---------- ----------
Total assets $8,543,011 $6,982,380
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $5,105,981 $ 180,816 4.73% $4,573,124 $ 163,528 4.78%
Short-term borrowings 899,731 37,655 5.60% 734,076 30,288 5.52%
Long-term debt 585,100 26,925 6.15% 133,499 7,326 7.34%
---------- --------- ---------- ---------
Total interest-bearing liabilities 6,590,812 $ 245,396 4.98% 5,440,699 $ 201,142 4.94%
--------- ---------
Noninterest-bearing demand deposits 1,206,306 943,809
Other liabilities 137,119 87,765
---------- ----------
Total liabilities 7,934,237 6,472,273
Shareholders' equity 608,774 510,107
---------- ----------
Total liabilities and shareholders'
equity $8,543,011 $6,982,380
========== ==========
Rate differential 3.49% 3.66%
Net yield on interest-earning assets $244,693 4.22% $ 210,911 4.40%
======== =========
</TABLE>
* Restated financial results above reflect the business combinations with
United American Holding Corporation, South Florida Banking Corp., First
Central Bank, Commercial Bank of Nevada and FirstBank. These mergers were
accounted for as poolings of interests and the financial results have been
restated accordingly.
(1)Interest earned and average rates on obligations of states and political
subdivisions are reflected on a tax equivalent basis. Tax equivalent interest
earned is: actual interest earned times 145%. The taxable equivalent
adjustment has given effect to the disallowance of interest expense
deductions, for federal income tax purposes, related to certain tax-free
assets. Dividends earned and average rates for preferred stocks are reflected
on a tax equivalent basis. Tax equivalent dividends are: actual dividends
times 137.7%.
<PAGE> 19
AVERAGE VOLUME AND RATES
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997*
Average Average
Volume Interest Rate Volume Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $6,283,818 $141,293 8.92% $5,375,114 $122,894 9.07%
Mortgage loans held for sale 436,645 8,039 7.36% 157,764 3,068 7.78%
Investment securities and securities
available for sale and other
interest-earning assets 1,504,326 24,035 6.34% 1,096,564 17,757 6.42%
---------- -------- ---------- --------
Total interest-earning assets(l) 8,224,789 $173,367 8.36% 6,629,442 $143,719 8.60%
-------- --------
Nonearning assets 865,949 587,257
---------- ----------
Total assets $9,090,738 $7,216,699
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $5,179,302 $ 61,794 4.73% $4,651,122 $ 56,764 4.84%
Short-term borrowings 1,083,975 15,252 5.58% 771,093 10,703 5.51%
Long-term debt 758,885 11,587 6.06% 147,162 2,679 7.22%
---------- --------- ---------- --------
Total interest-bearing liabilities 7,022,162 $ 88,633 5.01% 5,569,377 $ 70,146 5.00%
--------- --------
Noninterest-bearing demand deposits 1,277,384 1,021,788
Other liabilities 161,790 91,660
---------- ----------
Total liabilities 8,461,336 6,682,825
Shareholders' equity 629,402 533,874
---------- ----------
Total liabilities and shareholders'
equity $9,090,738 $7,216,699
========== ==========
Rate differential 3.35% 3.60%
Net yield on interest-earning assets $ 84,734 4.09% $ 73,573 4.40%
======== =========
</TABLE>
* Restated financial results above reflect the business combinations with
United American Holding Corporation, South Florida Banking Corp., First
Central Bank, Commercial Bank of Nevada and FirstBank. These mergers were
accounted for as poolings of interests and the financial results have been
restated accordingly.
(1)Interest earned and average rates on obligations of states and political
subdivisions are reflected on a tax equivalent basis. Tax equivalent
interest earned is: actual interest earned times 145%. The taxable
equivalent adjustment has given effect to the disallowance of interest
expense deductions, for federal income tax purposes, related to certain
tax-free assets. Dividends earned and average rates for preferred stocks are
reflected on a tax equivalent basis. Tax equivalent dividends are:
actual dividends times 137.7%.
<PAGE> 20
ANALYSIS OF INTEREST INCREASES (DECREASES)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998 Change from 1997*
Attributed to(1)
Total Volume Yield/Rate
<S> <C> <C> <C>
INTEREST INCOME:
Total Loans, Net $55,978 $40,419 $15,559
Mortgage loans held for sale 11,943 9,011 2,932
Investment securities and securities available
for sale and other interest-earning assets 10,115 7,003 3,112
------- ------- -------
Total interest income(2) 78,036 56,433 21,603
------- ------- -------
INTEREST EXPENSE:
Interest bearing deposits 17,288 10,603 6,685
Short-term borrowings 7,367 3,803 3,564
Long-term debt 19,599 13,788 5,811
------- ------- -------
Total interest expense 44,254 28,194 16,060
------- ------- -------
Net interest income $33,782 $28,239 $ 5,543
======= ======= =======
Three Months Ended September 30, 1998 Change from 1997*
Attributed to(1)
Total Volume Yield/Rate
INTEREST INCOME:
Total Loans, Net $18,399 $21,637 $(3,238)
Mortgage loans held for sale 4,971 5,695 (724)
Investment securities and securities available
for sale and other interest-earning assets 6,278 6,877 (599)
------- ------- -------
Total interest income(2) 29,648 34,209 (4,561)
------- ------- -------
INTEREST EXPENSE:
Interest bearing deposits 5,030 5,321 (291)
Short-term borrowings 4,549 3,584 965
Long-term debt 8,908 9,192 (284)
------- ------- -------
Total interest expense 18,487 18,097 390
------- ------- -------
Net interest income $11,161 $16,112 $(4,951)
======= ======= =======
</TABLE>
* Restated financial results above reflect the business combinations with
United American Holding Corporation, South Florida Banking Corp., First
Central Bank, Commercial Bank of Nevada and FirstBank. These mergers were
accounted for as poolings of interests and the financial results have been
restated accordingly.
(1)Increases (decreases) are attributable to volume changes and rate changes on
the following basis: Volume Change = change in volume times old rate. Rate
Change = change in rate times old volume. Changes not solely attributable to
a change in rate or volume are allocated proportionately relative to the
absolute value of the total change of rate and volume.
(2)Interest earned on obligations of state and political subdivisions is
reflected on a tax equivalent basis. Tax equivalent interest earned is:
actual interest earned times 145%. The taxable equivalent adjustment has
given effect to the disallowance of interest, for federal income tax
purposes, related to certain tax-free assets. Dividends earned on preferred
stock are reflected on a tax equivalent basis. Tax equivalent dividends
earned are: actual dividends times 137.7%. Tax equivalent average rate is
tax equivalent interest or dividends earned divided by average volume.
<PAGE> 21
NET INTEREST INCOME:
Net interest income on a tax equivalent basis increased $11.1 million to
$84.7 million for the quarter ended September 30, 1998 from $73.6 million for
the quarter ended September 30, 1997. The net yield on interest earning assets
decreased from 4.40% to 4.09% for the three months ended September 30, 1997 and
1998, respectively. For the first nine months of 1998, net interest income on a
tax equivalent basis increased $33.8 million to $244.7 million as compared to
$210.9 million for the same period in 1997. The net yield on interest earning
assets decreased from 4.40% to 4.22% for the nine months ended September 30,
1997 compared to the same period in 1998, while the rate differential decreased
from 3.66% to 3.49% for the nine months ended September 30, 1997 compared to
1998. As previously discussed, BancGroup has acquired mortgage backed securities
under reverse repurchase agreements in order to more effectively utilize its
established capital base. These leverage transactions resulted in additional
income of approximately $1.3 million while decreasing net interest margins by
approximately 18 basis points to 4.09% and 10 basis points to 4.22% for the
three and nine months ended September 30, 1998, respectively. Colonial Bank has
improved its cost of funds through its acquisitions in Florida and maintenance
of realistic pricing standards. BancGroup's net interest margin prior to Florida
acquisitions, which began in July 1996, was 4.04% compared to its peers* 4.52%.
By the third quarter of 1998, net interest margin has improved to 4.22% or
4.32%, excluding leverage transactions, compared to its peers third quarter
1998, 4.44%.
As reflected on the previous tables, the increase in net interest income for
the three and six months was primarily attributable to loan growth which was
partially offset by lower loan rates. During the first quarter of 1997 the prime
rate increased to 8.50% where it remained until the September 30, 1998 reduction
to 8.25%. In October, prime rate was reduced another 25 basis points to 8%.
LOAN LOSS PROVISION:
The provision for loan losses for the first nine months of 1998 was
$11,516,000 compared to $10,304,000 for the same period in 1997. Asset quality
remains good. The current allowance for loan losses provides a 199% coverage of
nonperforming loans compared to 247% at December 31, 1997 and 210% at September
30, 1997. See management's discussion on loan quality and the allowance for
possible loan losses presented in the Financial Condition section of this
report.
NONINTEREST INCOME:
Noninterest income increased $22.5 million for the nine months ended
September 30, 1998 compared to the same period in 1997. This increase is
primarily due to increases in mortgage servicing and origination fees of $5.1
million, fees on deposit accounts of $4.5 million, gains on sales of loans of
$8.5 million, gains on securities of $1.0 million, $1.3 million in income
related to bank owned life insurance and $.9 million in security and annuity
commissions.
The increase in noninterest income for the three months ended September 30,
1998 compared to the three months ended September 30, 1997 of $7.4 million is
primarily due to increases in mortgage servicing fees of $1.8 million, fees on
deposit accounts of $1.4 million, gains on sales of first mortgage real estate
loans of $3.3 million, $.4 million in income related to bank owned life
insurance and $.3 million in security and annuity commissions.
Colonial Mortgage provides additional sources of non-interest income to
BancGroup through fees from its servicing portfolio as well as loan
originations from its 4 divisional offices. Colonial Mortgage purchases,
originates and services conventional, government, and jumbo mortgage products
in 44 states and the District of Columbia. Colonial Mortgage had non-interest
income of $31.6 million for the nine months ended September 30, 1998, compared
to $27.8 million for the nine months ended September 30, 1997.
Mortgage servicing fees increased due to a $2.7 billion increase in the
servicing portfolio to $15.1 billion at September 30, 1998 from $12.5 billion
at September 30, 1997. Gains on sales of loans increased due to additional loan
production resulting from increased refinancing activity.
BancGroup is continuing to expand its services through increased efforts in
private banking and additional products including asset management services,
trust services and sales of mutual funds and annuities. In addition, BancGroup
has established an international banking unit to provide and service the needs
of customers involved in international activities. Commissions on sales of
securities and annuities were $1.7 million for the nine months ended September
30, 1998 compared to $.8 million for the same period last year.
NONINTEREST EXPENSES:
BancGroup's net overhead expense (total noninterest expense, excluding
acquisition and restructuring costs and Year 2000 expenses, less noninterest
income, excluding security gains) was $128.6 million and $94.7 million for the
nine months ended September 30, 1998 and 1997, respectively. Noninterest
expenses, excluding acquisition and restructuring costs and Year 2000 expenses,
increased $56.4 million for the nine months ended September 30, 1998, compared
to the same period in 1997. The majority of this increase is due to the
addition of acquisitions accounted for as purchases, normal salary increases
<PAGE> 22
and an increase in amortization and impairment of mortgage servicing rights, as
well as additional expenses to build the infrastructure to support the Company's
expansion into new growth market areas.
Noninterest expenses, excluding acquisition and restructuring costs and year
2000 expenses, increased $34.2 million for the three months ended September 30,
1998 compared to the same period in 1997. This increase primarily relates to a
$24.6 million increase in the amortization of mortgage servicing rights,
$367,000 in additional amortization of intangibles and a $3.8 million increase
in salaries and benefits. Lower long term interest rates have caused higher
anticipated prepayments of mortgages serviced for others, resulting in a decline
in the fair market value of the mortgage servicing rights assets requiring an
increase in the related valuation allowance. This additional amortization in
excess of scheduled amortization amounted to $22.8 million in the third quarter.
$18.5 million of the additional amortization is based upon information that
Company management obtained from third party valuation consultants during
December 1998 and January 1999 and management's analysis of that information.
BancGroup has entered into certain hedges as part of its strategy to offset
portions of the loss of value of the servicing asset that may result from
declines in mortgage rates. The increase in the amortization of intangibles is
attributable to goodwill recognized as a result of purchase method business
combinations. Salary and benefit increases related to increased staffing levels
as a result of activities related to business combinations and normal wage
increases.
BancGroup's efficiency ratio, excluding acquisition and restructuring costs
and Year 2000 expense, was 65.10% and 57.94% for the nine months ended September
30, 1998 and September 30, 1997, respectively. The increase in BancGroup's
efficiency ratio is primarily due to the $22.8 million in additional
amortization and impairment of its mortgage servicing rights. The Company should
improve efficiencies upon the conversion of the newly acquired banks.
Conversions will allow the consolidation of back-shop operational areas into
BancGroup's existing loan and deposit operations, accounting and data processing
departments. These consolidation efforts should result in improvement of the
efficiency ratio through the reduction of expenses. Refer to further discussion
of conversion efforts under the Acquisition and Restructuring Costs section
which follows.
ACQUISITION AND RESTRUCTURING COSTS:
One time acquisition and restructuring costs of $10.5 million were incurred
for the nine months ended September 30, 1998, with $2.9 million recorded in the
quarter. These costs represent one-time costs in connection with the
acquisition of various banking institutions and the integration of those
institutions into BancGroup's systems as well as the restructuring of
BancGroup's regional banks in Florida. The primary components of these one-time
costs are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Accounting and legal services $ 1,497
Other professional fees 1,016
Asset write-offs 2,573
Contract buy-outs 1,002
Severance costs 3,091
Stock option related costs 69
Other miscellaneous 1,210
-------
Total $10,548
=======
</TABLE>
BancGroup anticipates incurring approximately $3.3 million in one-time costs
associated with acquisitions scheduled to close in the fourth quarter of 1998.
These one-time costs should be more than offset by revenue growth from the
acquired banks and cost savings from consolidation expected to be realized in
1999 and 2000.
As noted in previous discussions, BancGroup's Year 2000 testing will be the
primary focus of technology efforts for the remainder of 1998. As a result,
BancGroup is planning to convert one acquired bank during the last quarter of
1998 and to convert six acquired banks and one currently pending acquisition to
BancGroup's computer systems during 1999. BancGroup expects to incur additional
third party costs of approximately $1.5 million in order to accomplish seven
conversions in 1999. BancGroup expects to realize cost savings of approximately
$3.1 million during 1999 from the eight scheduled conversions.
Two of the acquisitions completed in October 1998 have computer systems that
are on track to become Year 2000 compliant in accordance with regulatory
guidance promulgated by the FFEIC and thus the Federal Reserve. Colonial may
continue to operate these entities on their current computer systems as the
incremental cost of leaving them on their computer systems is not substantial.
Although these entities may not be converted until the Year 2000, Colonial
expects to achieve cost savings of approximately $1 million during 1999 from
these banks. Colonial anticipates realizing additional cost savings of
approximately $1.5 million from conversions of these banks during the year
2000.
In October, management initiated a program to reduce cost and streamline
operations over the next six to twelve months. In establishing this initiative,
management has considered that the Company would not actively seek further bank
acquisitions. Certain restructuring costs may be incurred in the fourth quarter
of 1998 in undertaking this initiative, however the magnitude of these potential
one-time costs has not been determined.
The conversion timetable is dependent upon numerous factors, including but
not limited to, changes in the Year 2000 compliance regulations promulgated by
the Federal Reserve.
<PAGE> 23
YEAR 2000 EXPENSES:
Year 2000 expenses of $3.8 million were incurred during the nine months
ended September 30, 1998. For additional information refer to the Year 2000
Readiness section presented in the Financial Condition section of this report.
PROVISION FOR INCOME TAXES:
BancGroup's provision for income taxes is based on an approximately 36.9% and
36.4%, estimated annual effective tax rate for the years 1998 and 1997,
respectively. The provision for income taxes for the nine months ended September
30, 1998 and 1997 was $32,277,000, and $36,468,000, respectively.
<PAGE> 24
PART II
OTHER INFORMATION
ITEM 1: Legal Proceedings - See Note C - COMMITMENTS AND CONTINGENCIES AT
PART 1 ITEM 1
ITEM 2: Changes in Securities - N/A
ITEM 3: Defaults Upon Senior Securities - N/A
ITEM 4: Submission of Matters to a Vote of Security Holders
ITEM 5: Other Events - Shareholder Proposals.
Pursuant to Rule 14a-4(c)(1) of the Securities and Exchange
Commission, proxies submitted in connection with BancGroup's 1999
Annual Meeting will confer discretionary authority to vote on any
matter of which BancGroup did not have timely advance notice
sufficient under BancGroup's Bylaws. To be timely, such notice must be
received by BancGroup not earlier than January 16, 1999 nor later than
February 15, 1999, provided that if the date of the 1999 Annual
Meeting is advanced by more than 30 days or delayed by more than 60
days from the anniversary of the 1998 Annual Meeting (April 15, 1998),
notice will be timely if it is delivered not earlier than the 90th day
prior to such meeting date and not later than the 60th day prior to
such meeting date or the 10th day following the day on which public
announcement of such meeting date is first made.
ITEM 6:
a) Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule (for SEC use only)
b) Form 8-K - 1) Report on Form 8-K filed on July 17, 1998 disclosing
the declaration of a two for one stock split effected in the form of a
100% stock dividend. 2) Report on Form 8-K filed November 10, 1998
disclosing the financial results for the month ended October 31, 1998
to include First Macon Bank & Trust Company.
<PAGE> 25
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
The Colonial BancGroup, Inc.
Date: January 22, 1999 By: /S/ W. Flake Oakley, IV
-------------------------------
W. Flake Oakley, IV
Its Chief Financial Officer
<PAGE> 1
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
September 30, 1998
(Unaudited)
(In thousands, except per share amounts)
EXHIBIT 11
<TABLE>
<CAPTION>
Basic Diluted
------------------------ -----------------------
Q-T-D Y-T-D Q-T-D Y-T-D
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 10,962 $ 56,275 $ 10,962 $ 56,275
Interest expense on convertible
subordinated debentures 85 241
Tax effect @ 37.90% for the quarter (32) (91)
and year to date
-------- -------- -------- --------
Net income $ 10,962 $ 56,275 $ 11,015 $ 56,425
======== ======== ======== ========
Average shares outstanding 102,947 102,452 102,947 102,452
Effect of stock options 1,561 1,827
Convertible subordinated debentures 698 743
-------- --------
Diluted average shares outstanding 105,206 105,022
======== ========
Earnings per share:
Net Income $ 0.11 $ 0.55 $ 0.10 $ 0.54
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 362,607
<INT-BEARING-DEPOSITS> 12,224
<FED-FUNDS-SOLD> 13,220
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,228,718
<INVESTMENTS-CARRYING> 182,577
<INVESTMENTS-MARKET> 185,267
<LOANS> 6,441,776
<ALLOWANCE> 74,096
<TOTAL-ASSETS> 9,176,393
<DEPOSITS> 6,482,466
<SHORT-TERM> 1,127,844
<LIABILITIES-OTHER> 136,063
<LONG-TERM> 801,615
0
0
<COMMON> 257,988
<OTHER-SE> 370,417
<TOTAL-LIABILITIES-AND-EQUITY> 9,176,393
<INTEREST-LOAN> 426,846
<INTEREST-INVEST> 57,278
<INTEREST-OTHER> 3,858
<INTEREST-TOTAL> 487,982
<INTEREST-DEPOSIT> 180,816
<INTEREST-EXPENSE> 245,396
<INTEREST-INCOME-NET> 242,586
<LOAN-LOSSES> 11,516
<SECURITIES-GAINS> 1,073
<EXPENSE-OTHER> 230,562
<INCOME-PRETAX> 88,552
<INCOME-PRE-EXTRAORDINARY> 88,552
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,225
<EPS-PRIMARY> .55
<EPS-DILUTED> .54
<YIELD-ACTUAL> 4.22
<LOANS-NON> 35,939
<LOANS-PAST> 6,468
<LOANS-TROUBLED> 1,370
<LOANS-PROBLEM> 197,000
<ALLOWANCE-OPEN> 69,189
<CHARGE-OFFS> 11,796
<RECOVERIES> 3,671
<ALLOWANCE-CLOSE> 74,096
<ALLOWANCE-DOMESTIC> 74,096
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
