<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE #0-07945
THE COLONIAL BANCGROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 63-0661573
(State of Incorporation) (IRS Employer Identification No.)
ONE COMMERCE STREET
POST OFFICE BOX 1108
MONTGOMERY, AL 36101 (334) 240-5000
(Address of principal executive offices) (Telephone No.)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, PAR VALUE $2.50 REGISTERED ON THE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates as of February 26, 1999 based on the closing price of $12.3750
per share for Common Stock was $1,268,807,104. (For purposes of calculating this
amount, all directors, officers and principal shareholders of the registrant are
treated as affiliates).
Shares of Common Stock outstanding at February 26, 1999 were 111,455,608.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
DOCUMENT PART OF FORM 10-K
-------- -----------------
<S> <C>
Portions of Annual Report to Shareholders Part I,
for fiscal year ended December 31, 1998 Part II,
as specifically referred to herein. and Part IV
Portions of Definitive Proxy Statement Part III
for 1999 Annual Meeting as specifically
referred to herein.
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
The Registrant, The Colonial BancGroup, Inc., is hereinafter referred to as
"BancGroup".
BancGroup, a Delaware corporation, was organized in 1974 and is a bank
holding company under the Bank Holding Act of 1956, as amended (the "BHCA").
BancGroup was originally organized as Southland Bancorporation, and its name was
changed in 1981. In 1997, pursuant to the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, BancGroup consolidated its banking
subsidiaries located in Georgia, Florida and Tennessee into its banking
subsidiary in Alabama, Colonial Bank ("Colonial Bank").
Colonial Bank has 136 branches in Alabama, 82 branches in Florida, 19
branches in Georgia, three branches in Tennessee, three branches in Texas and
seven branches in Nevada. Colonial Bank conducts a general commercial banking
business in its respective service areas and offers banking services such as the
receipt of demand, savings and time deposits, credit card services, safe deposit
box services, the purchase and sale of investment securities and the extension
of credit through personal, commercial and mortgage loans. Colonial Bank is
active as a correspondent bank for unaffiliated banks. Colonial Mortgage Company
("CMC") is a subsidiary of Colonial Bank and is a mortgage banking company. CMC
operates retail offices in Alabama and four divisional offices and six regional
offices that originate loans in 35 states. CMC services approximately $14.7
billion in residential loans for third parties in 45 states. CMC's retail
operation offers conventional, government and jumbo loan products directly to
borrowers. CMC's wholesale operation offers somewhat limited products comprised
of conventional and jumbo loan products to various mortgage brokers. CMC offers
a wholesale government program from its home office in Montgomery, Alabama. CMC
has relationships with all housing agencies such as VA, the Department of
Housing and Urban Development, FHA, FHLMC and FNMA. CMC underwrites, closes and
sells loans according to the guidelines required by these agencies. InterWest
Mortgage, a wholly owned subsidiary of CMC, based in Reno, Nevada was acquired
as part of the Interwest Bancorp acquisition on October 14, 1998. Interwest
Mortgage operates full-service mortgage loan origination offices in three
states. Another Colonial Bank subsidiary, CBG, Inc. owns certain trade names and
trademarks which it licenses to BancGroup, Colonial Bank and CMC for use in
their businesses. At December 31, 1998, Colonial Bank accounted for
approximately 99.9% of BancGroup's consolidated assets. The principal activity
of BancGroup is to supervise and coordinate the business of its subsidiaries and
to provide them with capital and services. BancGroup derives substantially all
of its income from dividends received from Colonial Bank. Various statutory
provisions and regulatory policies limit the amount of dividends Colonial Bank
may pay without regulatory approval. In addition, federal statutes restrict the
ability of Colonial Bank to make loans to BancGroup.
Colonial Bank encounters intense competition in its commercial banking
business, generally from other banks located in its respective metropolitan and
service areas. Colonial Bank competes for interest bearing funds with other
banks and with many issuers of commercial paper and other securities which are
not banks. In the case of larger customers, competition exists with banks in
other metropolitan areas of the United States, many of which are larger in terms
of capital resources and personnel. In the conduct of certain aspects of its
commercial banking business, Colonial Bank competes with savings and loan
associations, credit unions, mortgage banks, factors, insurance companies and
other financial institutions.
BancGroup has three directly and wholly owned nonbanking subsidiaries that
are currently active. The Colonial BancGroup Building Corporation was
established primarily to own and lease the buildings and land used by Colonial
Bank. Colonial Capital II, a Delaware business trust, issued $70 million in
trust preferred securities in 1997, which are guaranteed by BancGroup. Colonial
Asset Management, Inc. is an investment adviser registered under the Investment
Adviser's Act of 1940.
BancGroup and its subsidiaries employ approximately 3,666 persons.
BancGroup's principal offices are located at and its mailing address is: One
Commerce Street, Post Office Box 1108, Montgomery, Alabama 36101. Its telephone
number is (334) 240-5000.
1
<PAGE> 3
LENDING ACTIVITIES
BancGroup's commercial banking loan portfolio is comprised primarily of
commercial real estate loans (28%), residential real estate loans (34%) and real
estate construction (commercial and residential) (14%). BancGroup's growth in
loans over the past several years has been concentrated in commercial and
residential real estate loans. In 1998, BancGroup experienced growth in
commercial loans as well. The lending activities of Colonial Bank are dependent
upon demand within the local markets of its branches. Based on this demand,
loans collateralized by commercial and residential real estate have been the
fastest growing component of Colonial Bank's loan portfolio.
BancGroup, through the branches and loan production offices of Colonial
Bank, makes loans for a range of business and personal uses in response to local
demands for credit. Loans are concentrated in Alabama, Georgia, Florida, Nevada
and Texas and are dependent upon economic conditions in those states. The
Alabama economy experiences a generally slow but steady rate of growth, while
Georgia, Florida, Texas and Nevada are experiencing higher rates of growth, with
the Las Vegas metropolitan area experiencing significant growth. The following
broad categories of loans have varying risks and underwriting standards.
- - Commercial Real Estate. Loans classified as commercial real estate loans are
loans which are collateralized by real estate and substantially dependent upon
cash flow from income-producing improvements attached to the real estate. For
BancGroup, these primarily consist of apartments, hotels, office buildings,
warehouses, shopping centers, amusement/recreational facilities, one- to
four-family residential housing developments, and health service facilities.
Loans within this category are underwritten based on projected cash flows and
loan-to-appraised-value ratios of 80% or less. The risks associated with
commercial real estate loans primarily relate to real estate values in local
market areas, the equity investments of borrowers, and the borrowers'
experience and expertise. BancGroup has diversified its portfolio of
commercial real estate loans with less than 10% of its total loan portfolio
concentrated in any of the above-mentioned income producing activities.
- - Real Estate Construction. Construction loans include loans to finance single
family and multi-family residential as well as nonresidential real estate.
Loan-to-value ratios for these loans do not exceed 80% to 85%. The principal
risks associated with these loans are related to the borrowers' ability to
complete the project, local market demand, the sales market, presales or
preleasing, and permanent loan commitments. BancGroup evaluates presale
requirements, preleasing rates, permanent loan take-out commitments, as well
as other factors in underwriting construction loans.
- - Real Estate Mortgages. These loans consist of loans made to finance one- to
four-family residences and home equity loans on residences. BancGroup may loan
up to 95% of appraised value on these loans without other collateral or
security. The principal risks associated with one- to-four family residential
loans are the borrowers' debt coverage ratios and real estate values.
- - Commercial, Industrial, and Agricultural. Loans classified as commercial,
industrial, and agricultural consist of secured and unsecured credit lines and
equipment loans for various industrial, agricultural, commercial, retail, or
service businesses.
The risks associated with loans in this category are generally related to the
earnings capacity of and the cash flows generated from the individual business
activities of the borrowers. Collateral consists primarily of business
equipment, inventory, and accounts receivables with loan-to-value ratios of
less than 80%. Credit may be extended on an unsecured basis or in excess of
80% of collateral value, if the borrower's or guarantor's credit worthiness,
the borrower's other banking relationships, the bank's lending experience with
the borrower, or other potential sources of repayment support granting an
exception to the policy.
- - Consumer. Consumer loans are loans to individuals for various purposes.
Automobile loans and unsecured loans make up the majority of these loans. The
principal source of repayment is the earning capacity of the individual
borrower, as well as the value of the collateral for secured loans. Consumer
loans are sometimes made on an unsecured basis or with loan-to-value ratios in
excess of 80%.
2
<PAGE> 4
Collateral values referenced above are monitored by loan officers through
property inspections, reference to broad measures of market values, as well as
current experience with similar properties or collateral. Loans with
loan-to-value ratios in excess of 80% have potentially higher risks which are
offset by other factors including the borrower's or guarantors' credit
worthiness, the borrower's other banking relationships, the bank's lending
experience with the borrower, and any other potential sources of repayment.
Colonial Bank funds loans primarily with customer deposits, approximately
13% of which are considered more rate sensitive or volatile than other deposits.
CERTAIN REGULATORY CONSIDERATIONS
BancGroup is a registered bank holding company subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). As such, it is subject to the BHCA and many of the Federal Reserve's
regulations promulgated thereunder.
Colonial Bank, an Alabama state chartered bank that is a member of the
Federal Reserve System, is subject to supervision and examination by the Federal
Reserve and the Alabama State Banking Department (the "Department"). The
deposits of Colonial Bank are insured by the FDIC to the extent provided by law.
The FDIC assesses deposit insurance premiums the amount of which may, in the
future, depend in part on the condition of Colonial Bank. Moreover, the FDIC may
terminate deposit insurance of Colonial Bank under certain circumstances. Both
the Federal Reserve and the Department have jurisdiction over a number of the
same matters, including lending decisions, branching and mergers.
Colonial Asset Management, Inc. is a registered investment adviser under
the Investment Adviser's Act of 1940. It is regulated by the Securities Exchange
Commission.
One limitation under the BHCA and the Federal Reserve's regulations
requires that BancGroup obtain prior approval of the Federal Reserve before
BancGroup acquires, directly or indirectly, more than 5% of any class of voting
securities of another bank. Prior approval also must be obtained before
BancGroup acquires all or substantially all of the assets of another bank, or
before it merges or consolidates with another bank holding company. BancGroup
may not engage in "non-banking" activities unless it demonstrates to the Federal
Reserve's satisfaction that the activity in question is closely related to
banking and a proper incident thereto. Because BancGroup is a registered bank
holding company, persons seeking to acquire 25% or more of any class of its
voting securities must receive the approval of the Federal Reserve. Similarly,
under certain circumstances, persons seeking to acquire between 10% and 25% also
may be required to obtain prior Federal Reserve approval.
In 1989, Congress expressly authorized the acquisition of savings
associations by bank holding companies. BancGroup must obtain the prior approval
of the Federal Reserve (among other agencies) before making such an acquisition,
and must demonstrate that the likely benefits to the public of the proposed
transaction (such as greater convenience, increased competition, or gains in
efficiency) outweigh potential burdens (such as an undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices).
As a result of enactment in 1991 of the FDIC Improvement Act, banks are
subject to increased reporting requirements and more frequent examinations by
the bank regulatory agencies. The agencies also have the authority to dictate
certain key decisions that formerly were left to management, including
compensation standards, loan underwriting standards, asset growth, and payment
of dividends. Failure to comply with these standards, or failure to maintain
capital above specified levels set by the regulators, could lead to the
imposition of penalties or the forced resignation of management. If a bank
becomes critically undercapitalized, the banking agencies have the authority to
place an institution into receivership or require that the bank be sold to, or
merged with, another financial institution.
In September 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994. This legislation, among other things, amended
the BHCA to permit bank holding companies, subject to certain limitations, to
acquire either control or substantial assets of a bank located in states other
than that bank holding company's home state regardless of state law
prohibitions. This legislation became effective on
3
<PAGE> 5
September 29, 1995. In addition, this legislation also amended the Federal
Deposit Insurance Act to permit, beginning on June 1, 1997 (or earlier where
state legislatures provided express authorization), the merger of insured banks
with banks in other states.
The officers and directors of BancGroup and Colonial Bank are subject to
numerous insider transaction restrictions, including limits on the amount and
terms of transactions involving Colonial Bank, on the one hand, and its
principal stockholders, officers, directors, and affiliates on the other. There
are a number of other laws that govern the relationship between Colonial Bank
and its customers. For example, the Community Reinvestment Act is designed to
encourage lending by banks to persons in low and moderate income areas. The Home
Mortgage Disclosure Act and the Equal Credit Opportunity Act attempt to minimize
lending decisions based on impermissible criteria, such as race or gender. The
Truth-in-Lending Act and the Truth-in-Savings Act require banks to provide
certain disclosure of relevant terms related to loans and savings accounts,
respectively. Anti-tying restrictions (which prohibit, for instance,
conditioning the availability or terms of credit on the purchase of another
banking product) further restrict Colonial Bank's relationships with its
customers.
The bank regulatory agencies have broad enforcement powers over depository
institutions under their jurisdiction, including the power to terminate deposit
insurance, to impose fines and other civil and criminal penalties, and to
appoint a conservator or receiver if any of a number of conditions are met. The
Federal Reserve has broad enforcement powers over bank holding companies,
including the power to impose substantial fines and civil penalties.
PAYMENT OF DIVIDENDS AND OTHER RESTRICTIONS
BancGroup is a legal entity separate and distinct from its subsidiaries,
including Colonial Bank. There are various legal and regulatory limitations on
the extent to which BancGroup's subsidiaries, including among other things, can
finance, or otherwise supply funds to, BancGroup. Specifically, dividends from
Colonial Bank are the principal source of BancGroup's cash revenues and there
are certain legal restrictions under federal and state law on the payment of
dividends by banks. The relevant regulatory agencies also have authority to
prohibit Colonial Bank from engaging in what, in the opinion of such regulatory
body, constitutes an unsafe or unsound banking practice. The payment of
dividends could, depending upon the financial condition of Colonial Bank, be
deemed to constitute such an unsafe or unsound practice.
In addition, Colonial Bank and its subsidiaries are subject to limitations
under Section 23A of the Federal Reserve Act with respect to extensions of
credit to, investments in, and certain other transactions with, BancGroup and
its other subsidiaries. Furthermore, loans and extensions of credit are also
subject to various collateral requirements.
CAPITAL ADEQUACY
The Federal Reserve has adopted minimum risk-based and leverage capital
guidelines for bank holding companies. The minimum required ratio of total
capital to risk-weighted assets (including certain off-balance-sheet items, such
as standby letters of credit) is 8%, of which 4% must consist of Tier 1 capital.
As of December 31, 1998, BancGroup's total risk-based capital ratio was 9.85%,
including 8.50% of Tier 1 capital. The minimum required leverage capital ratio
(Tier 1 capital to average total assets) is 3% for banking organizations that
meet certain specified criteria, including that they have the highest regulatory
rating. A minimum leverage ratio of an additional 100 to 200 basis points is
required for banking organizations not meeting these criteria. As of December
31, 1998, BancGroup's leverage capital ratio was 6.22%. Failure to meet capital
guidelines can subject a banking organization to a variety of enforcement
remedies, including restrictions on its operations and activities.
As regards depository institutions, federal banking statutes establish five
capital categories ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized"), and impose significant restrictions on the operations of an
institution that is not at least adequately capitalized. Under certain
circumstances, an institution may be downgraded to a category lower than that
warranted by its capital levels, and subjected to the supervisory restrictions
applicable to institutions
4
<PAGE> 6
in the lower capital category. As of December 31, 1998, the most recent
notification from the Federal Deposit Insurance Corporation categorized Colonial
Bank as well capitalized under the regulatory framework for prompt corrective
action.
An undercapitalized depository institution is subject to restrictions in a
number of areas, including capital distributions, payments of management fees
and expansion. In addition, an undercapitalized depository institution is
required to submit a capital restoration plan. A depository institution's
holding company must guarantee the capital plan up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount needed to restore the capital of the institution
to the levels required for the institution to be classified as adequately
capitalized at the time the institution fails to comply with the plan. A
depository institution is treated as if it is significantly undercapitalized if
it fails in any material respect to implement a capital restoration plan.
Significantly undercapitalized depository institutions may be subject to a
number of additional significant requirements and restrictions, including
requirements to sell sufficient voting stock to become adequately capitalized,
to improve management, to restrict asset growth, to prohibit acceptance of
correspondent bank deposits, to restrict senior executive compensation and to
limit transactions with affiliates. Critically undercapitalized depository
institutions are further subject to restrictions on paying principal or interest
on subordinated debt, making investments, expanding, acquiring or selling
assets, extending credit for highly-leveraged transactions, paying excessive
compensation, amending their charters or bylaws and making any material changes
in accounting methods. In general, a receiver or conservator must be appointed
for a depository institution within 90 days after the institution is deemed to
be critically undercapitalized.
SUPPORT OF SUBSIDIARY BANK
Under Federal Reserve Board policy, BancGroup is expected to act as a
source of financial strength to, and to commit resources to support, Colonial
Bank. This support may be required at times when, absent such Federal Reserve
Board policy, BancGroup might not otherwise be inclined to provide it. In the
event of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
FDIC INSURANCE ASSESSMENTS
Colonial Bank is subject to FDIC deposit insurance assessments. The FDIC
applies a risk-based assessment system that places financial institutions in one
of nine risk categories with premium rates, based on capital levels and
supervisory criteria, ranging from 0.00% to 0.27% of deposits. The FDIC has the
authority to raise or lower assessment rates on insured deposits in order to
achieve certain designated reserve ratios in the deposit insurance funds.
It should be noted that supervision, regulation, and examination of
BancGroup and Colonial Bank are intended primarily for the protection of
depositors, not security holders.
ADDITIONAL INFORMATION
Additional information, including statistical information concerning the
business of BancGroup, is set forth in BancGroup's Annual Report to Shareholders
for the year ended December 31, 1998, at pages 24 through 50 under the captions
"Selected Financial Data, Selected Quarterly Financial Data 1998-1997" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is incorporated herein by reference.
EXECUTIVE OFFICERS AND DIRECTORS
Pursuant to general instruction G, information regarding executive officers
of BancGroup is contained herein at Item 10.
5
<PAGE> 7
ITEM 2. PROPERTIES
The principal executive offices of BancGroup, Colonial Bank, and CMC are
located in Montgomery, Alabama in the Colonial Financial Center and are leased
from G.C. Associates I, Joint Venture, a partnership owned 50% by affiliates of
BancGroup's principal stockholder. These leased premises comprise 68,142 square
feet of office space.
As of December 31, 1998, Colonial Bank owned 165 and leased 85 of their
full-service banking offices. See Notes 8 and 13 of the Consolidated Financial
Statements included in the Annual Report to Shareholders, which is incorporated
herein by reference. Colonial Asset Management, Inc. leased offices in Ponte
Vedra Beach, Florida.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of BancGroup, based on review and consultation with legal
counsel, the outcome of any litigation presently pending is not anticipated to
have a material adverse effect on BancGroup's consolidated financial statements
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
"Market Price of and Dividends Declared on Common Stock" is contained on
page 76 of the Annual Report to Shareholders for the year ended December 31,
1998, and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data" and "Selected Quarterly Financial Data 1998-1997"
on pages 24 through 26 of the Annual Report to Shareholders for the year ended
December 31, 1998, are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 27 through 50 of the Annual Report to Shareholders for the
year ended December 31, 1998, is incorporated herein by reference.
"Year 2000 Readiness Disclosure" on pages 36 and 37 of the Annual Report to
Shareholders for the year ended December 31, 1998, is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 27 through 50 of the Annual Report to Shareholders for the
year ended December 31, 1998, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements set forth in BancGroup's Annual Report to
Shareholders for 1998 at pages 51 through 75 are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
6
<PAGE> 8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to BancGroup's directors is
contained in BancGroup's proxy statement dated March 17, 1999, under the
captions "Election of Directors" and "Section 16 (a) Beneficial Ownership
Reporting Compliance," and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME, AGE AND YEAR BECAME POSITION AND OFFICES HELD WITH PRESENT AND PRINCIPAL OCCUPATION
EXECUTIVE OFFICER BANCGROUP AND SUBSIDIARIES FOR THE LAST FIVE YEARS
------------------------- ------------------------------ --------------------------------
<S> <C> <C>
Robert E. Lowder............... Chairman of the Board and Chief Chairman of the Board and Chief
56, 1981 Executive Officer, Colonial Executive Officer, Colonial
BancGroup; Chairman of the BancGroup; Chairman of the
Board and Chief Executive Board and Chief Executive
Officer, Colonial Bank; Officer, Colonial Bank;
Director, Birmingham Region; Chairman of the Board,
Director, Huntsville Region; Colonial Mortgage Co.;
Director, Northwest Region; Chairman of the Board and
Director, East Central Region; President, Colonial
Director, Gulf Coast Region; Broadcasting until July 1,
Director, Montgomery Region; 1998, Montgomery, AL
Director, Central Florida
Region; Director, South
Florida Region; Director, Bay
Area Region; Director,
Southwest Florida Region;
Chairman of the Board, Atlanta
Region; Director, Nevada
Region; Director, Dallas
Region; Director, Central
Georgia Region; Chairman,
Executive Committee, Colonial
BancGroup; Chairman of the
Board, Colonial Mortgage Co.
P.L. "Mac" McLeod, Jr.......... President, Colonial BancGroup; President, Colonial BancGroup
50, 1997 Chairman of the Board, since August 1997; President and
Montgomery Region; CEO, Colonial Bank Montgomery
Director, North Georgia Region 1984 to August 1997,
Region; President, Colonial Montgomery, AL
Bank; Chairman, Colonial
Asset Management, Inc.;
Director, CBG, Inc.
W. Flake Oakley, IV............ Executive Vice President, Chief Chief Financial Officer,
45, 1989 Financial Officer, Treasurer Secretary and Treasurer,
and Secretary of Colonial BancGroup, since June 1991;
BancGroup; Executive Vice Chief Financial Officer and
President, Chief Financial Treasurer since October, 1990;
Officer, Treasurer, Cashier Senior Vice President and
and Secretary of Colonial Controller from April 1989 to
Bank; Director and Secretary, October 1990, Montgomery, AL
Colonial Asset Management,
Inc.
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
NAME, AGE AND YEAR BECAME POSITION AND OFFICES HELD WITH PRESENT AND PRINCIPAL OCCUPATION
EXECUTIVE OFFICER BANCGROUP AND SUBSIDIARIES FOR THE LAST FIVE YEARS
------------------------- ------------------------------ --------------------------------
<S> <C> <C>
Young J. Boozer, III........... Executive Vice President -- Risk Executive Vice President since
50, 1986 Management; Executive Vice 1986; Executive Vice
President, Colonial BancGroup President -- Risk Management,
Building Corp. BancGroup since 1998;
President, Colonial Investment
Services, Inc. (a subsidiary
of Colonial Bank) 1993 to
1997, Montgomery, AL
Michelle Condon................ Executive Vice Executive Vice
44, 1995 President -- Retail Banking President -- Retail Banking,
BancGroup since 1995; Colonial
Bank -- Vice President,
Budgeting & Planning, Colonial
Bank 1990 to 1995, Montgomery,
AL
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in BancGroup's proxy
statement dated March 17, 1999 under the caption "Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in BancGroup's proxy
statement dated March 17, 1999, under the caption "Voting Securities and
Principal Stockholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in BancGroup's proxy
statement dated March 17, 1999, under the captions "Compensation Committee
Interlocks and Insider Participation" and "Executive Compensation" and is
incorporated herein by reference.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995:
This report contains "forward-looking statements" within the meaning of the
federal securities laws. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities: (i) deposit attrition, customer loss, or revenue loss in the
ordinary course of business; (ii) increases in competitive pressure in the
banking industry; (iii) costs or difficulties related to the integration of the
businesses of BancGroup and the institutions acquired are greater than expected;
(iv) changes in the interest rate environment which reduce margins (v) changes
in mortgage servicing rights prepayment assumptions; (vi) general economic
conditions, either nationally or regionally, that are less favorable then
expected, resulting in, among other things, a deterioration in credit quality,
vendor representations, technological advancements, and economic factors
including liquidity availability; (vii) changes which may occur in the
regulatory environment; (viii) a significant rate of inflation (deflation); (ix)
changes in the securities markets and (x) events specifically relating to Year
2000 readiness. When used in this Report, the words "believes," "estimates,"
"plans," "expects," "should," "may," "might," "outlook," and "anticipates," and
similar expressions as they relate to BancGroup (including its subsidiaries), or
its management are intended to identify forward-looking statements.
8
<PAGE> 10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are incorporated herein by reference
from Registrant's Annual Report to Shareholders for the fiscal year ended
December 31, 1998;
Consolidated Statements of Condition as of December 31, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31, 1998,
1997, and 1996.
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1998, 1997, and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996.
Notes to Consolidated Financial Statements, including Parent Company
only information.
Report of Independent Accountants.
2. Financial Statements Schedules
The financial statement schedules required to be included pursuant to this
Item are not included herein because they are not applicable or the required
information is shown in the financial statements or notes thereto which are
incorporated by reference at subsection 1 of this Item, above.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBITS AND DESCRIPTION
- ------------------------
<S> <C> <C>
Exhibit 3 -- Articles of Incorporation and Bylaws:
3.1 -- Restated Certificate of Incorporation of the Registrant,
filed as Exhibit 4.1 to the Registrant's Current Report on
Form 8-K, dated February 21, 1995, and incorporated herein
by reference.
3.2 -- Amendment to Article 4 of Registrant's Restated Certificate
of Incorporation, dated May 15, 1998, filed as Exhibit 4.2
to the Registrant's Registration Statement on Form S-4 (File
No. 333-56241), effective June 22, 1998, and incorporated
herein by reference.
3.3 -- Bylaws of the Registrant, as amended, filed as Exhibit 4.2
to the Registrant's Current Report on Form 8-K, dated
February 21, 1995, and incorporated herein by reference.
Exhibit 4 -- Instruments defining the rights of security holders:
4.1 -- Article 4 of the Restated Certificate of Incorporation of
the Registrant filed as Exhibit 4.1 to the Registrant's
Current Report on Form 8-K, dated February 21, 1995, and
incorporated herein by reference.
4.2 -- Amendment to Article 4 of Registrant's Restated Certificate
of Incorporation, dated May 15, 1998, filed as Exhibit 4.2
to the Registrant's Registration Statement on Form S-4 (File
No. 333-56241), effective June 22, 1998, and incorporated
herein by reference.
4.3 -- Article II of the Bylaws of the Registrant filed as Exhibit
4.2 to the Registrant's Current Report on Form 8-K, dated
February 21, 1995, and incorporated herein by reference.
4.4 -- Dividend Reinvestment and Common Stock Purchase Plan of the
Registrant dated January 15, 1986, and Amendment No, 1
thereto dated as of June 10, 1986, filed as Exhibit 4(C) to
the Registrant's Registration Statement on Form S-4 (File
No, 33-07015), effective July 15, 1986, and incorporated
herein by reference.
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
EXHIBITS AND DESCRIPTION
- ------------------------
<S> <C> <C>
4.5 -- All instruments defining the rights of holders of long-term
debt of the Corporation and its subsidiaries. Not filed
pursuant to clause 4(iii) of Item 601(b) of Regulation S-K;
to be furnished upon request of the Commission.
Exhibit 10 -- Material Contracts:
10.1 -- Second Amendment and Restatement of 1982 Incentive Stock
Plan of the Registrant, filed as Exhibit 4-1 to the
Registrant's Registration Statement on Form S-8 (File No.
33-41036), effective June 4, 1991, and incorporated herein
by reference.
10.2 -- Second Amendment and Restatement to 1982 Nonqualified Stock
Option Plan of the Registrant filed as Exhibit 4-2 to the
Registrant's Registration Statement on Form S-8 (File No.
33-41036), effective June 4, 1991, and incorporated herein
by reference.
10.3 -- 1992 Incentive Stock Option Plan of the Registrant, as
amended, filed as Exhibit 10.1 to Registrant's Registration
Statement on Form S-8 (File No. 333-71841), effective
February 5, 1999, and incorporated herein by reference.
10.4 -- 1992 Nonqualified Stock Option Plan of the Registrant as
amended, filed as Exhibit 10.2 to Registrant's Registration
Statement on Form S-8 (File No. 333-71841), effective
February 5, 1999, and incorporated herein by reference.
10.5 -- General Security Agreement by and between the Registrant and
Barclay's Bank PLC, National Association, dated December 30,
1998 and Promissory Note, dated December 30, 1998.
10.6 -- The Colonial BancGroup, Inc. First Amended and Restated
Restricted Stock Plan for Directors, as amended, included as
Exhibit 10(C)(1) to the Registrant's Registration Statement
on Form S-4 (File No. 33-52952), and incorporated herein by
reference.
10.7 -- The Colonial BancGroup, Inc. Stock Bonus and Retention Plan,
included as Exhibit 10(C)(2) to the Registrant's
Registration Statement as Form S-4 (File No. 33-52952), and
incorporated herein by reference.
10.8 -- Indenture dated as of January 29, 1997 between The Colonial
BancGroup, Inc. and Wilmington Trust Company, as Debenture
Trustee dated as of, included as Exhibit 4(A) to
Registrant's Registration Statement on Form S-4 (File No.
333-22135), and incorporated herein by reference.
Exhibit 11 -- Statement Regarding Computation of Earnings Per Share.
Exhibit 12 -- Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.
Exhibit 13 -- Portions of the 1998 Annual Report to Security Holders.
(Such annual report, except for those portions expressly
incorporated by reference in this report, is furnished
solely for the information of the Commission and is not
deemed to be filed as part of this report).
Exhibit 21 -- List of subsidiaries of the Registrant.
Exhibit 23 -- Consents of experts and counsel:
23.1 -- Consent of PricewaterhouseCoopers LLP.
Exhibit 24 -- Power of Attorney.
</TABLE>
(b) Registrant's Current Reports on Form 8-K dated October 1, 1998, December 2,
1998 and December 21, 1998, and incorporated herein by reference.
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Montgomery, Alabama, on the 5th day of March, 1999.
THE COLONIAL BANCGROUP, INC.
By: /s/ ROBERT E. LOWDER
-------------------------------------
Robert E. Lowder
Its Chairman of the Board of
Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT E. LOWDER Chairman of the Board of **
- ----------------------------------------------------- Directors and Chief Executive
Robert E. Lowder Officer
/s/ W. FLAKE OAKLEY, IV Chief Financial Officer, **
- ----------------------------------------------------- Secretary and Treasurer
W. Flake Oakley, IV (Principal Financial Officer
and Principal Accounting
Officer)
* Director **
- -----------------------------------------------------
Lewis Beville
* Director **
- -----------------------------------------------------
William Britton
* Director **
- -----------------------------------------------------
Jerry J. Chesser
* Director **
- -----------------------------------------------------
Augustus K. Clements, III
* Director **
- -----------------------------------------------------
Robert C. Craft
Director
- -----------------------------------------------------
Patrick F. Dye
* Director **
- -----------------------------------------------------
James L. Hewitt
* Director **
- -----------------------------------------------------
Clinton O. Holdbrooks
* Director **
- -----------------------------------------------------
Harold D. King
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director **
- -----------------------------------------------------
John Ed Mathison
* Director **
- -----------------------------------------------------
Milton E. McGregor
* Director **
- -----------------------------------------------------
John C. H. Miller, Jr.
Director
- -----------------------------------------------------
Joe D. Mussafer
* Director **
- -----------------------------------------------------
William E. Powell
* Director **
- -----------------------------------------------------
Jack H. Rainer
* Director **
- -----------------------------------------------------
Jimmy Rane
* Director **
- -----------------------------------------------------
Frances E. Roper
* Director **
- -----------------------------------------------------
Simuel Sippial
* Director **
- -----------------------------------------------------
Ed V. Welch
</TABLE>
* The undersigned, acting pursuant to a power of attorney, has signed this
Annual Report on Form 10-K for and on behalf of the persons indicated above as
such persons' true and lawful attorney-in-fact and in their names, places and
stead, in the capacities indicated above and on the date indicated below.
/s/ W. FLAKE OAKLEY, IV
- --------------------------------------
W. Flake Oakley, IV
Attorney-in-Fact
** Dated: March 5, 1999
12
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<S> <C> <C> <C>
Exhibit 3 -- Articles of Incorporation and Bylaws:
3.1 -- Restated Certificate of Incorporation of the Registrant,
filed as Exhibit 4.1 to the Registrant's Current Report on
Form 8-K, dated February 21, 1995, and incorporated herein
by reference..............................................
3.2 -- Amendment to Article 4 of Registrant's Restated Certificate
of Incorporation, dated May 15, 1998, filed as Exhibit 4.2
to the Registrant's Registration Statement on Form S-4
(File No. 333-56241), effective June 22, 1998, and
incorporated herein by reference..........................
3.3 -- Bylaws of the Registrant, as amended, filed as Exhibit 4.2
to the Registrant's Current Report on Form 8-K, dated
February 21, 1995, and incorporated herein by reference...
Exhibit 4 -- Instruments defining the rights of security holders:
4.1 -- Article 4 of the Restated Certificate of Incorporation of
the Registrant filed as Exhibit 4.1 to the Registrant's
Current Report on Form 8-K, dated February 21, 1995, and
incorporated herein by reference..........................
4.2 -- Amendment to Article 4 of Registrant's Restated Certificate
of Incorporation, dated May 15, 1998, filed as Exhibit 4.2
to the Registrant's Registration Statement on Form S-4
(File No. 333-56241), effective June 22, 1998, and
incorporated herein by reference..........................
4.3 -- Article II of the Bylaws of the Registrant filed as Exhibit
4.2 to the Registrant's Current Report on Form 8-K, dated
February 21, 1995, and incorporated herein by reference...
4.4 -- Dividend Reinvestment and Class A Common Stock Purchase Plan
of the Registrant dated January 15, 1986, and Amendment
No. 1 thereto dated as of June 10, 1986, filed as Exhibit
4(C) to the Registrant's Registration Statement on Form
S-4 (File No. 33-07015), effective July 15, 1986, and
incorporated herein by reference..........................
4.5 -- All instruments defining the rights of holders of long-term
debt of the Corporation and its subsidiaries. Not filed
pursuant to clause 4(iii) of Item 601(b) of Regulation
S-K; to be furnished upon request of the Commission.......
Exhibit 10 -- Material Contracts:
10.1 -- Second Amendment and Restatement of 1982 Incentive Stock
Plan of the Registrant, filed as Exhibit 4-1 to the
Registrant's Registration Statement on Form S-8 (File No.
33-41036), effective June 4, 1991, and incorporated herein
by reference..............................................
10.2 -- Second Amendment and Restatement to 1982 Nonqualified Stock
Option Plan of the Registrant filed as Exhibit 4-2 to the
Registrant's Registration Statement on Form S-8 (File No.
33-41036), effective June 4, 1991, and incorporated herein
by reference..............................................
10.3 -- 1992 Incentive Stock Option Plan of the Registrant, as
amended, filed as Exhibit 10.1 to Registrant's
Registration Statement on Form S-8 (File No. 333-71841),
effective February 5, 1999, and incorporated herein by
reference.................................................
10.4 -- 1992 Nonqualified Stock Option Plan of the Registrant, filed
as Exhibit 10.2 to Registrant's Registration Statement on
Form S-8 (File No. 333-71841), effective February 5, 1999,
and incorporated herein by reference......................
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
10.5 -- General Security Agreement by and between the Registrant and
Barclay's Bank LLP dated December 30, 1998 and Promissory
Note dated December 30, 1998..............................
10.6 -- The Colonial BancGroup, Inc. First Amended and Restated
Restricted Stock Plan for Directors, as amended, included
as Exhibit 10(C)(1) to the Registrant's Registration
Statement as Form S-4 (File No. 33-52952), and
incorporated herein by reference..........................
10.7 -- The Colonial BancGroup, Inc. Stock Bonus and Retention Plan,
included as Exhibit 10(C)(2) to the Registrant's
Registration Statement as Form S-4 (File No. 33-52952),
and incorporated herein by reference......................
10.8 -- Indenture dated as of January 29, 1997 between The Colonial
BancGroup, Inc. and Wilmington Trust Company, as Debenture
Trustee dated as of, included as Exhibit 4(A) to
Registrant's Registration Statement on Form S-4 (File No.
333-22135), and incorporated herein by reference..........
Exhibit 11 -- Statement Regarding Computation of Earnings Per Share.......
Exhibit 12 -- Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.............................................
Exhibit 13 -- Portions of the 1998 Annual Report to Security Holders.
(Such annual report, except for those portions expressly
incorporated by reference in this report, is furnished
solely for the information of the Commission and is not
deemed to be filed as part of this report.)...............
Exhibit 21 -- List of subsidiaries of the Registrant......................
Exhibit 23 -- Consents of experts and counsel:
23.1 -- Consent of PricewaterhouseCoopers LLP.......................
Exhibit 24 -- Power of Attorney
</TABLE>
(b) Registrant's Current Reports on Form 8-K dated October 1, 1998, December 2,
1998 and December 21, 1998, and incorporated herein by reference.
14
<PAGE> 16
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS TO FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 0-07945
THE COLONIAL BANCGROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE> 1
EXHIBIT 10.5
BARCLAYS BANK PLC
GENERAL SECURITY AGREEMENT
(STOCKS, BONDS, NOTES, TRUST INTERESTS,
PARTNERSHIP INTERESTS, DEBENTURES,
WARRANTS AND STOCK OPTIONS)
1. THE COLLATERAL. For value received, the undersigned (the
"Debtor") hereby pledges, assigns and grants to BARCLAYS BANK PLC, acting
through its Miami Agency at 801 Brickell Avenue, Miami, Florida 33131, with full
recourse to Debtor and subject to the provisions of this Agreement, a
first-ranking and perfected security interest in the following described
personal property (the "Collateral"):
(a) The following described Securities (as defined
below):
21,750 shares of the common stock of Colonial Bank,
an Alabama banking association ("Colonial Bank"), representing all of its issued
and outstanding capital stock.
(b) All General Intangibles, rights, powers, privileges
and preferences pertaining or incidental to any Securities pledged and assigned
hereunder from time to time, and any interest, stock rights, rights to
subscribe, cash distributions, dividends, stock dividends, dividends paid in
stock, liquidating dividends, new securities (whether certificated or
uncertificated) and other property to which Debtor may become entitled by reason
of the ownership of any Securities pledged and assigned hereunder from time to
time.
(c) All Proceeds and profits of any Collateral, all
increases and additions to any Collateral and all replacements and substitutions
for any Collateral, including without limitation any proceeds of any insurance,
indemnity, warranty or guaranty payable with respect to any Collateral, any
awards or payments due or payable in connection with any requisition,
confiscation, seizure or forfeiture of any Collateral by any person acting under
governmental authority or color thereof, and any damages or other amounts
payable to Debtor in connection with any lawsuit regarding any of the
Collateral.
(d) All monies, bank accounts, balances, credits,
deposits, collections, drafts, bills, notes and other property of every kind
(whether tangible or intangible) now owned or hereafter acquired by Debtor and
at any time in the actual or constructive possession of (or in transit to)
Secured Party or its affiliates in any capacity or for any purpose.
2. THE OBLIGATIONS. The Collateral secures and will secure the
prompt and unconditional payment of the "Obligations." As used in this
Agreement, the term "Obligations" means all amounts of any nature whatsoever now
or hereafter owing in respect of that certain Note (the "Note") from Debtor to
Secured Party of even date herewith in the principal amount of
<PAGE> 2
U.S. $25,000,000.00 and all renewals and extensions thereof, as well as all
other obligations, indebtedness and liabilities of any nature whatsoever of
Debtor to Secured Party under this Agreement.
3. CERTAIN DEFINITIONS. For purposes of this Agreement, unless
Debtor shall have otherwise agreed in writing (a) the term "Securities" means
any notes, stocks, treasury stocks, bonds, debentures, evidences of
indebtedness, warrants, partnership interests, stock options, beneficial
interests in trusts, or equity interests of any nature whatsoever in any legal
entity or, in general, any interest or instrument commonly known as a
"security," or any warrant or right to subscribe to or purchase any of the
foregoing; (b) the term "issuer" means, with respect to any Securities, the
legal entity in which such Securities evidence an ownership or beneficial
interest; (c) the term "Loan Documents" means this Agreement and the Note; and
(c) the term "organic documents" means with respect to Debtor or Colonial Bank,
its articles of incorporation and by-laws, memorandum of association and
articles of association, or comparable documents. All capitalized terms used but
not otherwise defined in this Agreement shall have the respective meanings given
them in the Florida Uniform Commercial Code.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS. Debtor acknowledges
and agrees that Secured Party is relying on the representations and warranties
and covenants in this Agreement and the Note as a condition precedent to the
extension(s) of credit secured hereby, and that all such representations and
warranties and covenants shall survive the execution and delivery of this
Agreement, the extension(s) of credit and any bankruptcy, insolvency or similar
proceedings. Debtor hereby represents and warrants to Secured Party and
covenants for the benefit of Secured Party as follows:
(a) Debtor is (and with respect to all Collateral
acquired hereafter, shall be) the sole legal and equitable owner of the
Collateral free from any adverse claim, lien, security interest, encumbrance or
other right, title or interest of any person except for the security interest
created hereby. Debtor has the unqualified right and power to grant a security
interest in the Collateral without the consent of any person (other than any
person whose written consent has been duly obtained, a true and correct copy of
such consent having been delivered to Secured Party), and Debtor shall at
Debtor's expense defend the Collateral against all claims and demands of all
persons at any time claiming the Collateral or any interest therein adverse to
Secured Party. Debtor shall not create, grant nor suffer to exist any pledge,
security interest, lien, levy, garnishment, attachment, charge or encumbrance
upon any of the Collateral (except in favor of Secured Party) and shall at all
times keep the Collateral free from the same.
(b) All Securities pledged and assigned hereunder are
(and with respect to all Collateral acquired hereafter, shall be) duly
authorized and validly issued, fully paid and nonassessable, authentic, genuine,
unaltered and not stolen or forged or counterfeit, and in all respects what they
purport to be. Except as otherwise disclosed in writing to Secured Party
simultaneously with or prior to the execution of this Agreement, the Collateral
is freely tradable and assignable and is not subject to any restrictions on
transfer or resale or other disposition in any manner (other than any
restrictions imposed by any applicable securities laws).
2
<PAGE> 3
(c) Colonial Bank is a duly-organized and validly
existing legal entity in good standing under the laws of the jurisdiction of its
organization, is duly qualified to do business in those jurisdictions where the
nature of its business requires it to be so qualified, and has the necessary
legal power and authority to own its property and assets and to transact the
business in which it is engaged.
(d) Debtor is delivering (or causing to be delivered) to
Secured Party upon or prior to execution of this Agreement all stock
certificates, bonds, debentures, warrants, or other Instruments or writings
evidencing any Securities pledged and assigned under this Agreement (and Debtor
shall promptly deliver the same with respect to all certificated Securities
pledged and assigned to Secured Party hereafter), together with duly executed
stock powers in blank and all other assignments or endorsements requested by
Secured Party. With respect to any uncertificated Securities pledged and
assigned hereunder, Debtor has caused Secured Party to be registered as the
transferee thereof on the books of the custodian bank, clearing corporation,
brokerage house or issuer, as may have been requested by Secured Party (and
Debtor shall promptly cause such registration with respect to all uncertificated
Securities pledged and assigned to Secured Party hereafter).
(e) If new or additional Securities are issued to Debtor
(as a stock dividend, stock split, or pursuant to any reclassification or
recapitalization of the capital, or the reorganization or, merger, acquisition
or consolidation, of Colonial Bank, or otherwise) with respect to the
Collateral, then the same shall be deemed an increment to the Collateral and
under pledge and assignment to Secured Party hereunder. If evidenced by a stock
certificate, bond, warrant, debenture, certificate, or other Instrument or
writing, then such Securities shall (to the extent acquired or received by or
placed under Debtor's control) be held in trust for and promptly delivered to
Secured Party, together with duly executed stock powers in blank and any other
assignments or endorsements as Secured Party may request. If any such Securities
are uncertificated, then Debtor shall immediately upon acquisition of such
Securities cause Secured Party to be registered as the transferee thereof on the
books of the custodian bank, clearing corporation, brokerage house or issuer, as
may be requested by Secured Party.
(f) Unless otherwise agreed in writing by Secured Party,
Debtor shall deliver to Secured Party, to be applied against the Obligations,
whether or not matured, in any manner deemed appropriate by the Secured Party,
any dividends, interest payments or other monies payable at any time in respect
of any Security, promptly upon Debtor's receipt thereof and in the form
received. Pending such delivery, Debtor shall hold such sums in trust for
Secured Party and shall not commingle the same with Debtor's other funds. If any
such dividend, interest payment or other monies shall be evidenced by a check,
draft or other Instrument, Debtor shall endorse the same to the order of Secured
Party immediately upon receipt and promptly deliver it to Secured Party, to be
applied against the Obligations, whether or not matured, in any manner deemed
appropriate by the Secured Party.
(g) Debtor's principal place of business is: Colonial
Financial Center, One Commerce Street, Montgomery, Alabama, 36104. Without
obtaining Secured Party's prior written consent, Debtor shall not change
Debtor's chief place of business or the office(s) where
3
<PAGE> 4
Debtor's books, papers and records concerning the Collateral are kept, nor
change Debtor's name, identity or corporate structure, nor do business under any
fictitious or assumed name.
(h) Without the prior written consent of Secured Party,
Debtor shall not sell, transfer, assign, convey or otherwise dispose of any
interest in any of the Collateral, nor enter into any contract or agreement to
do so.
(i) Debtor shall not take or permit any action that may
impair the Collateral or Secured Party's security interest therein, and shall
not permit any of the Collateral to be used in violation of any statute,
regulation or other law. Without limiting the foregoing, Debtor will not
compromise, release, surrender or waive any rights of any nature whatsoever in
respect of any of the Collateral without Secured Party's prior written consent,
which Secured Party may grant or withhold in its sole discretion.
(j) Debtor shall pay when due all taxes or other
governmental charges whatsoever levied against the Collateral and all
assessments (including stock assessments) upon the Collateral, and Debtor shall
pay any tax which may be levied on or assessed against any Loan Document or the
Obligations.
(k) Debtor shall pay on demand all reasonable filing fees
and similar charges and all reasonable costs incurred by Secured Party in
collecting or securing or attempting to collect or secure any Obligations,
including the reasonable expenses and reasonable fees of Secured Party's legal
counsel, whether or not involving litigation and/or appellate, administrative or
bankruptcy proceedings. Debtor agrees to indemnify and hold Secured Party
harmless on demand against all expenses, losses, consequences or damages
incurred or suffered by Secured Party arising from or relating to any claim,
demand, action or proceeding brought by any person(s) whomsoever in connection
with or relating to the Collateral, the Obligations, this Agreement or any other
Loan Document (including without limitation any court costs and the expenses and
reasonable fees of Secured Party's legal counsel), except to the extent that a
court of competent jurisdiction shall hold the same to be the result of Secured
Party's own gross negligence or willful misconduct. Debtor shall pay any
documentary stamp taxes, intangible taxes or other taxes (except for franchise
or income taxes based on the net income of Secured Party) which may now or
hereafter apply to the Collateral, the Obligations or this Agreement or any
other Loan Document, and Debtor agrees to indemnify and hold Secured Party
harmless from and against any liability, costs, attorney's fees, penalties,
interest or expenses relating to any such taxes, as and when the same may be
incurred. All sums payable by Debtor under this Agreement are and shall be
secured by the Collateral.
(l) If so requested by Secured Party at any time (whether
before or after the occurrence of an Event of Default), Debtor shall
immediately: (i) to the extent not previously delivered to the Secured Party in
compliance with the terms hereof, deliver to Secured Party any and all
Instruments and, Securities included in the Collateral at the time and place and
manner specified by Secured Party, together with any endorsements, stock powers
in blank and assignments requested by Secured Party for their transfer to
Secured Party or to any other person selected by Secured Party, all in form and
substance satisfactory to Secured Party; and (ii)
4
<PAGE> 5
execute, deliver and file any and all financing statements, continuation
statements, agreements, notices, vouchers, invoices, schedules, confirmatory
assignments, conveyances, transfer endorsements, powers of attorney, proxies,
certificates, deeds or other papers and/or perform any act which Secured Party
may reasonably deem necessary or appropriate to create, perfect, preserve,
validate or otherwise protect Secured Party's security interest in the
Collateral or to enable Secured Party from time to time to exercise and enforce
Secured Party's rights under this Agreement or any other Loan Document.
(m) Debtor shall deliver to Secured Party a satisfactory
annual financial statement and supporting documentation, prepared by an
independent certified public accountant acceptable to Secured Party, for each of
Debtor and Colonial Bank within ninety (90) days after the end of its fiscal
year. Debtor shall also promptly deliver any other information reasonably
requested by Secured Party from time to time regarding the respective financial
condition or business operations or prospects of Debtor and Colonial Bank. All
financial statements of Debtor previously delivered to Secured Party have been
prepared in accordance with generally accepted accounting principles
consistently applied and fairly present the correct respective financial
conditions of Debtor as of their respective dates, and the foregoing shall be
true with respect to all financial statements of Debtor and Colonial Bank
delivered to Secured Party hereafter.
(n) There is no fact (including any pending or threatened
litigation or proceeding) that Debtor has not disclosed to Secured Party in
writing that could materially adversely affect its or Colonial Bank's respective
properties, businesses or financial condition, or any Collateral to the extent
that Debtor's ability to repay the amount of the note would be jeopardized.
Debtor shall promptly notify Secured Party in writing if any event shall occur
or become known to Debtor which has or could have any such materially adverse
effect with respect to Debtor or Colonial Bank, or which materially changes the
truth or correctness of any representation or warranty in any Loan Document, or
which affects any rights incidental to, any Collateral or the ability of Debtor
or Secured Party to dispose of the same (including without limitation the levy
of any legal process or the filing of any lien against the Collateral or the
adoption of any marketing order, arrangement or procedure affecting the
Collateral, whether governmental or otherwise).
(o) Debtor has duly obtained all permits, licenses,
approvals and consents from, and made all filings with, any governmental
authority (and the same have not lapsed nor been rescinded or revoked) which are
necessary in connection with the execution or delivery or enforcement of any
Loan Document or the performance of Debtor's obligations thereunder.
(p) There are no actions, suits or proceedings pending or
threatened against or affecting any Collateral before any court of law or equity
or any tribunal, administrative board or governmental authority, and Debtor is
not in default under any other indebtedness or with respect to any order, writ,
injunction, decree, judgment or demand of any court or any governmental
authority.
(q) The execution and delivery of this Agreement and all
other Loan
5
<PAGE> 6
Documents do not and shall not (i) violate any provisions of any law, rule,
regulation, order, writ, judgment, injunction, decree, decision or award
applicable to Debtor or Colonial Bank, nor (ii) result in a breach of, or
constitute a default under, any indenture, bond, mortgage, lease, instrument,
credit agreement, undertaking, contract or other agreement to which Debtor or
Colonial Bank is a party or by which any of them or their respective properties
may be bound or affected. This Agreement and each Loan Document constitutes the
legal, valid and binding obligation of Debtor, enforceable against Debtor in
accordance with its terms.
(r) No extension of credit secured hereby is being used
to purchase or carry any "margin stock" within the meaning of Regulation "U" of
the Board of Governors of the Federal Reserve System, nor to extend credit to
others for that purpose. No amount borrowed from Secured Party will be used for
any purchase which violates or which is inconsistent with the provisions of
Regulations G, U or X of the Board of Governors of the Federal Reserve System.
(s) If Debtor shall receive from any issuer, broker,
custodian, clearing corporation or other person, any notice or communication
(including without limitation any proxy solicitation, purchase offer, notice of
any stockholders' meetings or annual report) with respect to any Collateral,
Debtor shall immediately notify Secured Party of such notice or communication
and, if the same shall be in writing, shall provide to Secured Party a true and
correct copy thereof.
(t) Debtor shall at all times, unless Secured Party shall
have otherwise instructed in writing, at Debtor's own expense and to the fullest
extent permitted by law, exercise all voting rights in respect of any Securities
pledged and assigned hereunder, and all other rights afforded to it by contract
or by law, to actively oppose and prevent: (i) the issuance by Colonial Bank of
additional Securities which might reduce or otherwise adversely affect the
voting power or liquidation or other rights of Securities pledged and assigned
hereunder; (ii) any modification or amendment to the organic documents of
Colonial Bank; (iii) any liquidation, winding-up, dissolution or termination of
existence of Colonial Bank; and (iv) any merger, consolidation, reorganization,
recapitalization, or acquisition by or of Colonial Bank.
5. RIGHTS OF SECURED PARTY. Debtor agrees with and for the
benefit of Secured Party that:
(a) If Secured Party shall reasonably determine at any
time that the Collateral is insufficient to secure the Obligations, then on
demand by Secured Party Debtor shall reduce the outstanding amount of the
Obligations to the extent specified by Secured Party, or shall pledge, assign
and deliver to Secured Party additional Securities or other collateral
reasonably acceptable to Secured Party sufficient to increase the Collateral to
the amount specified by Secured Party. All such additional Securities or other
Collateral so delivered to Secured Party from time to time shall thereupon
become a part of the Collateral and subject to the provisions of this Agreement.
From and after the occurrence of an Event of Default, Secured Party is
authorized (but is not obligated) to sell all or any part of the Collateral
whenever Secured Party considers such sale necessary for Secured Party's
protection, and any such sale shall be made in accordance with this Agreement
and applicable law, and may be made without prior demand for
6
<PAGE> 7
additional collateral or for payment on the Obligations or any other demands
whatsoever.
(b) Debtor hereby grants Secured Party an irrevocable
proxy, coupled with an interest, effective only from and after the occurrence
and during the continuation of an Event of Default, to vote all Securities
pledged and assigned hereunder, such proxy to remain effective as long as any
Obligations shall remain outstanding. Pursuant to this proxy, Secured Party or
its nominee(s) may, at any time an Event of Default is continuing, without
notice to Debtor, exercise all voting and corporate rights at any meeting of
Colonial Bank and may exercise any and all rights of conversion, exchange,
subscription, receipt of cash tenders, or any other rights, privileges or
options pertaining to such Securities as if Secured Party were the absolute
owner thereof, including without limitation the right to exchange the same for
other Securities or any other property upon the merger, consolidation,
reorganization, recapitalization or other readjustment of Colonial Bank or upon
the exercise by Colonial Bank or Secured Party of any right, privilege or option
pertaining to such Securities, and in connection therewith, Secured Party may
deposit and deliver any such Securities with any committee, depositary, transfer
agent, registrar or other designated agency upon such terms and conditions as
Secured Party may determine, all without liability except to account for
property actually received by Secured Party.
(c) Secured Party shall have the right (but not the
obligation) at its option to discharge or pay any taxes, assessments, liens,
security interests or other encumbrances at any time levied or placed on or
against the Collateral, to pay for the preservation or protection of the
Collateral, and/or to advance monies for any other reason or purpose permitted
under any Loan Document. Any amount so paid or advanced by Secured Party shall
be secured by the Collateral and shall be repayable by Debtor on demand.
(d) Secured Party may sign and file financing statements,
security agreements, recording instruments or other documents or amendments
thereto with respect to the Collateral or any portion thereof without the
signature of Debtor, all at Debtor's sole expense, and Debtor shall reimburse
Secured Party on demand for any costs advanced or incurred by Secured Party in
connection therewith. At Secured Party's option, a carbon, photographic or other
reproduction of this Agreement (or of any financing statement executed by
Debtor) shall be sufficient as a financing statement.
(e) During any continuing Event of Default, Secured Party
is hereby irrevocably appointed the attorney-in-fact of Debtor, which
appointment is coupled with an interest, with full power of substitution, on
behalf of Debtor to perform all acts, and to execute and deliver all
endorsements, notices, instruments of assignment and transfer, deeds, releases,
bills of sale or other writings whatsoever which Secured Party deems appropriate
to protect and preserve the Collateral and to perfect and maintain and realize
upon Secured Party's security interest and rights in the Collateral. If so
requested by Secured Party or by any other person, Debtor shall ratify and
confirm the acts of Secured Party (and/or any substitute) as Debtor's
attorney-in-fact.
(f) During any continuing Event of Default, Secured Party
may take control of any Proceeds of Collateral at any time and may at its option
apply any cash Proceeds of the
7
<PAGE> 8
Collateral (including without limitation any insurance proceeds or amounts
payable in any lawsuit on account of the Collateral) to the payment of the
Obligations, whether or not matured, in any manner deemed appropriate by Secured
Party, or return such cash Proceeds to Debtor for use in the operation of
Debtor's business.
(g) Secured Party shall not be obligated to do any of the
acts authorized in this Agreement or any other Loan Document, but if Secured
Party elects to do so then Secured Party shall not be responsible or liable to
Debtor therefor (or for any consequences of such acts) except to the extent that
a court of competent jurisdiction holds that Secured Party acted with gross
negligence or willful misconduct.
6. DUTY OF CARE. Secured Party shall have the right (but not the
obligation) at any time to take any action Secured Party deems appropriate in
its sole discretion for the protection or preservation of any Collateral in its
possession or control. Secured Party shall exercise reasonable care with respect
to Collateral in its custody only to the extent required by applicable law.
Secured Party shall be deemed to have used reasonable care if such Collateral is
accorded treatment substantially equal to that which Secured Party accords its
own property, or if Secured Party takes such action for that purpose as Debtor
may reasonably request in writing. No omission to do any act not requested by
Debtor shall be deemed a failure to exercise reasonable care, and no omission to
comply with any request of Debtor shall of itself be deemed a failure to
exercise reasonable care. Secured Party is not responsible for any injury or
loss to the Collateral or any part thereof arising from Act of God, robbery,
fire, flood, fraud or any other cause whatsoever beyond the control of Secured
Party, and Secured Party shall not be liable for any negligent act or default of
any of its collecting agents or correspondents. Secured Party shall not be
required to examine or inquire into the validity of any Collateral subject to
this Agreement, or to exchange or collect on any such Collateral, or to take any
action necessary to hold any corporation, issuer or other person liable on the
Collateral; Debtor hereby waives any obligation of diligence on the part of
Secured Party in looking after, preserving or acting with respect to the
Collateral or collecting the same.
7. EVENTS OF DEFAULT. The occurrence of any one or more of the
following events, regardless of the cause thereof and whether within or beyond
the control of Debtor, shall constitute an "Event of Default" under this
Agreement:
(a) The failure of Debtor to pay any sum when due under
any Loan Document, whether upon maturity or by acceleration, and the expiration
of any applicable grace period provided in such Loan Document for that payment;
(b) the following events which have not been cured by
Borrower within fifteen (15) calendar days after Borrower has learned of the
event or which have not been cured by Borrower within fifteen (15) calendar days
after Bank gives notice to Borrower of the occurrence of the event, whichever
occurs first: (i) the failure of Debtor to observe or perform any other covenant
or agreement in this Agreement or any other Loan Document, or the occurrence of
any other default under any Loan Document, and the expiration of any applicable
grace period provided in such Loan Document for the cure of that failure or
default; (ii) the sale
8
<PAGE> 9
or further voluntary or involuntary encumbrancing of any of the Collateral;
(iii) if any levy, attachment, execution, charging order, garnishment or other
process shall be issued, or any involuntary lien or encumbrance shall be filed,
against any portion of the Collateral; (iv) with respect to Colonial Bank, if
any event shall occur which, in the reasonable judgment of Secured Party,
represents or constitutes a material adverse change in the business or financial
condition or prospects of such bank; (v) if any representation, warranty,
affidavit, certificate or statement made or delivered to Secured Party by Debtor
or on Debtor's behalf from time to time in connection with the Loan Documents or
the Obligations shall prove false, incorrect or misleading in any material
respect; (vi) the dissolution or merger or consolidation or termination of
existence of Debtor or of Colonial Bank, or the failure or cessation or
liquidation of the business of Debtor or Colonial Bank; (vii) if Debtor or
Colonial Bank shall default in the payment of any indebtedness for borrowed
money (whether direct or contingent and whether matured or accelerated) to
Secured Party, or to any other person whomsoever in an amount of not less than
One Million United States Dollars (U.S. $1,000,000.00), or if Debtor or Colonial
Bank shall become insolvent or unable to pay its debts as they become due;
(viii) the anticipatory repudiation by Debtor of any of its obligations under
any Loan Document, or any declaration by Debtor of intention not to perform any
such obligations as and when the same become due; (ix) the disposition, transfer
or exchange of all or substantially all of Debtor's or Colonial Bank's assets
for less than fair market value; (x) the failure to obtain any permit, license,
approval or consent from, or to make any filing with, any governmental authority
(or the lapse or revocation or rescission thereof once obtained or made) which
is necessary in connection with the execution or delivery or enforcement of any
Loan Document or the performance of Debtor's obligations under any Loan
Document; (xi) if it shall become unlawful for Secured Party to extend credit to
Debtor, or to maintain any credit so extended, or for the Debtor to perform any
of the Debtor's obligations under any Loan Document; and (xii) if any
governmental authority (or any person acting or purporting to act under
governmental authority) shall take any action to condemn, assume custody or
control of, seize or appropriate all or any substantial part of Debtor's or
Colonial Bank's property or to displace the management of Debtor's or Colonial
Bank's business.
8. RIGHTS AND REMEDIES ON DEFAULT. If any of the foregoing Events
of Default shall occur, then Secured Party, in its sole discretion and without
prior notice to Debtor, may at any time and from time to time during the
continuation thereof take any or all of the following actions:
(a) declare any or all of the Obligations immediately due
and payable;
(b) declare any or all other liabilities of Debtor to
Secured Party immediately due and payable;
(c) terminate any obligation which Secured Party may have
at that time to make further loans or extensions of credit or other financial
accommodations to the Debtor;
(d) foreclose Secured Party's security interest(s) in any
or all of the Collateral as provided by law;
9
<PAGE> 10
(e) sell, re-sell, discount or dispose of all or any
portion of the Collateral, or endorse, assign and convey the same to any third
party;
(f) require Debtor to assemble Debtor's books, records,
files, papers and other data pertaining to the Collateral and deliver them to
Secured Party at Debtor's expense to a place designated by Secured Party;
(g) enter the premises of Debtor and take possession of
any Collateral not then in Secured Party's possession and any books, records,
files and papers pertaining to the Collateral (Debtor hereby waiving and
releasing Secured Party to the fullest extent permitted by law from any and all
claims which Debtor might otherwise have against Secured Party in connection
therewith or arising therefrom); and/or
(h) exercise any and all other rights and remedies with
respect to the Collateral which Secured Party may enjoy under the Loan
Documents, the Florida Uniform Commercial Code or any other applicable law.
All rights, remedies and powers granted to Secured Party in
this Agreement or in any other Loan Document or by applicable law shall be
cumulative and may be exercised singly or concurrently on one or more occasions.
No delay in exercising or failure to exercise any of Secured Party's rights or
remedies shall constitute a waiver thereof, nor shall any single or partial
exercise of any right or remedy by Secured Party preclude any other or further
exercise of that or any other right or remedy. No waiver of any right or remedy
by Secured Party shall be effective unless made in writing and signed by Secured
Party, nor shall any waiver on one occasion apply to any future occasion, but
shall be effective only with respect to the specific occasion addressed in that
signed writing. Debtor shall not be subrogated to any rights of Secured Party
against any other party or any Collateral until all sums due to Secured Party
under the Obligations shall have been paid in full, and if any of the
Obligations shall remain unpaid after the exercise of any or all of Secured
Party's rights and remedies, then Debtor shall remain liable for such
deficiency.
9. SALE OF THE COLLATERAL. With respect to any sale or
disposition of any of the Collateral provided for under this Agreement, whether
made under the power of sale in this Agreement, under any applicable provisions
of the Florida Uniform Commercial Code or other applicable law, or under
judgment or order or decree in any judicial proceeding for the foreclosure of
Secured Party's security interest or involving the enforcement of this
Agreement:
(a) The Collateral may be sold, resold, assigned or
delivered in one or more parcels, at the same or at different times, in whole or
in part, at public or private sale or at any broker's board or on any securities
exchange, for cash or on credit or for other property, for immediate or future
delivery, and at such price(s) and on such terms as Secured Party may determine
in its sole discretion, so long as such disposition is commercially reasonable.
Without precluding any other methods of sale, the sale of the Collateral shall
be deemed made in a commercially reasonable manner if conducted in conformity
with reasonable commercial practices of banks or other financial institutions
when disposing of similar property.
10
<PAGE> 11
(b) Debtor hereby waives any and all demand,
advertisement or notice (except as required by law), and any notification
required by law with respect to the time and place of such sale or disposition
shall be deemed reasonable if given at least fifteen (15) days before the time
thereof, but notice given in any other reasonable manner shall also be
sufficient. In the case of any sale at a broker's board or on a securities
exchange, the notice shall identify the board or exchange at which such sale is
to be made and the day on which the Collateral (or a portion thereof) will first
be offered for sale. Any public sale of any of the Collateral shall be held at
such time or times within ordinary business hours at such place or places as
Secured Party may state in the notice or publication (if any) of such sale.
(c) Secured Party shall not be obligated to sell any of
the Collateral if it determines not to do so, notwithstanding that notice of a
sale of such Collateral may have been given. Secured Party may, without notice
or publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made, without further notice, at the time and place
identified in such announcement. In case of any sale of all or any part of the
Collateral on credit or for future delivery, Secured Party may retain the
Collateral sold until the sales price is paid by the purchaser(s) thereof, but
Secured Party shall not incur any liability if any such purchaser shall fail to
take up and pay for the Collateral so sold, in which case such Collateral may
again be sold upon like notice.
(d) Debtor understands that applicable federal and state
laws restricting and imposing requirements and restrictions on and the sales of
bank securities to the general public (the "Banking and Securities Laws") may
affect the disposition of any Securities and that Secured Party's concern that
its sale or disposition of any such Securities be in compliance with the Banking
and Securities Laws may very strictly limit Secured Party's course of conduct in
disposing or attempting to dispose of all or any part of such Securities, and
may also limit the extent to which or the manner in which any subsequent
transferee may dispose of the same. Consequently, Debtor agrees that Secured
Party may, in selling or disposing of any such Securities proceed in such manner
and under such circumstances as it may deem reasonably necessary or advisable to
assure compliance with the Banking and Securities Laws. Without limiting the
generality of the foregoing, the Secured Party may, in its sole and absolute
discretion: (i) sell privately any such Securities notwithstanding that such
Securities may be qualified or registered for sale to the general public; (ii)
approach and negotiate with a restricted number of potential purchasers to
effect such sale; and (iii) restrict such sale to purchasers as to their number,
nature of business and investment intention (including, without limitation, to
purchasers each of whom will represent and agree to the satisfaction of Secured
Party that such purchaser is purchasing for its own account, for investment, and
not with a view to the distribution or sale of such Securities or part thereof),
it being understood that Secured Party may require Debtor, and Debtor hereby
authorizes Secured Party, to cause a legend or legends to be placed on the
certificates or Instruments to be delivered to such purchasers to the effect
that the Securities represented thereby have not been registered under the
Banking and Securities Laws and setting forth or referring to restrictions on
the transferability of such Securities.
11
<PAGE> 12
(e) Debtor agrees, if requested by Secured Party, at
Debtor's sole expense to, and to cause Colonial Bank to, render such reasonable
assistance as Secured Party or its legal counsel may request in connection with
the private or public sale of such Securities. Debtor agrees to indemnify and
hold harmless Secured Party and any underwriter against all loss, liability,
expenses or claims (including the reasonable cost of any investigation) which
any of them may incur in connection with the sale of such Securities to the
extent that such loss, liability, expense or claim arises out of or is based
upon any alleged untrue statement of a material fact contained in any
registration statement, prospectus (or any amendment or supplement thereto) or
in any notification or offering circular, or arises out of or is based upon any
intentional omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, except to the extent
due to the gross negligence or willful misconduct of Secured Party or any such
underwriter.
(f) Secured Party may, to the fullest extent permitted by
applicable law, bid for and purchase the Collateral in a commercially reasonable
manner, and upon compliance with the terms of sale may hold, retain and possess
and dispose of the same in its own absolute right without further
accountability. Secured Party may credit all or any part of the Obligations
against the purchase price(s) so bid, and may deliver any notes or instruments
evidencing any of the Obligations in payment of such purchase price(s); if the
amounts then owing under any such notes or instruments exceed such purchase
price(s), then the same shall be returned to Secured Party after due notation of
the partial discharge thereof.
(g) Upon consummation of any sale, Secured Party shall
have the right to assign, transfer, endorse, convey and deliver to the
respective purchaser(s) the Collateral or portion thereof so sold. Secured Party
is hereby irrevocably appointed Debtor's true and lawful attorney-in-fact (which
appointment is coupled with an interest) in Debtor's name and stead, with power
of substitution, to make all necessary bills of sale, endorsements and
instruments of assignment and transfer of the Collateral thus sold, and for such
other purposes as Secured Party may deem necessary or desirable to effectuate
the provisions of this Agreement or any other Loan Document. If so requested by
Secured Party or by any other person, Debtor shall ratify and confirm the acts
of Secured Party (and/or any substitute) as Debtor's attorney-in-fact.
(h) Such sale shall divest all right, title, interest,
equity, redemption, claim and demand whatsoever of Debtor in and to the
Collateral sold and shall be a perpetual bar both at law and in equity against
Debtor and Debtor's successors and assigns, and against any and all persons
claiming or who may claim all or any part of the Collateral from, through or
under any of them.
(i) A receipt given by Secured Party (or its designated
agent) shall be a sufficient discharge to the purchaser(s) at such sale for his
or their purchase money, and none of them shall, after such payment and receipt,
be obliged to see to the application of such purchase money or be answerable for
any loss, misapplication or non-application thereof.
(j) Secured Party shall have no obligation whatsoever to
resort first to any other security which Secured Party may hold for the
Obligations. Secured Party shall not incur
12
<PAGE> 13
any liability to Debtor as a result of the sale of any Collateral at any private
sale conducted in a commercially reasonable manner, or as a result of any
failure to sell or offer for sale any Collateral for any reason whatsoever or to
exercise any other right, privilege, option or power to the fullest extent
permitted by law granted to Secured Party hereunder. Debtor hereby waives to the
fullest extent permitted by law any claims against Secured Party arising with
respect to any decrease in the market value of any Collateral during the period
held for sale, or arising by reason of the fact that the price at which the
Collateral may have been sold was less than the price that might have been
obtained had the sale been otherwise effected, even if Secured Party accepts the
first offer received and does not offer the Collateral to more than one offeree.
(k) A written agreement to sell any Collateral, which
agreement Secured Party in good faith deems itself bound to perform, shall be
treated as a sale of such Collateral and Secured Party shall be free to carry
out such agreement. If such an agreement is then effective, Debtor shall not be
entitled to the return of any Collateral subject thereto, even if after the date
of such agreement all Events of Default shall have been cured or the Obligations
shall have been fully paid and performed.
(l) After deducting all costs and expenses of every kind
for taking, retaking, care, safekeeping, collecting, holding, preparing for
sale, selling, delivering and the like (including legal costs, insurance,
commission for sale, and reasonable attorney's fees and expenses) and all other
charges against the Collateral, Secured Party shall apply the residue of the
proceeds of any such sale or other disposition against any and all amounts
remaining unpaid under the Obligations, all in such order of priority as Secured
Party may determine in its sole discretion. Debtor shall remain liable for any
deficiency remaining after such application, and any surplus shall be returned
to Debtor.
10. WAIVER OF RIGHTS. Except for the written notice required under
Section 7 hereof, to the fullest extent permitted by law, Debtor hereby waives
notice, demand, presentment, protest, notice of dishonor, suit against or
joinder of any other person, and all other requirements necessary to charge or
hold Debtor liable with respect to the Obligations. Until Secured Party receives
all sums due with respect to the Obligations in immediately available funds,
Debtor shall not be released from liability unless Secured Party expressly
releases Debtor in a writing signed by Secured Party.
11. ACTIONS OR PROCEEDINGS. With respect to any legal action or
proceeding arising under this Agreement or any other Loan Document or concerning
the Obligations and/or the Collateral, Debtor to the fullest extent permitted by
law: (a) submits to the jurisdiction of the state and federal courts in the
State of Florida; (b) agrees that the venue of any such action or proceeding may
be laid in Dade County and waives any claim that the same is an inconvenient
forum; (c) stipulates that service of process in any such action or proceeding
shall be properly made if made on its registered service agent in the State of
Florida; and (d) WAIVES TRIAL BY JURY (as does Secured Party by virtue of its
acceptance of this Security Agreement). No provision of this Agreement or of the
Note shall limit Secured Party's right to serve legal process in any other
manner permitted by law or to bring any such action or proceeding in any other
competent jurisdiction.
13
<PAGE> 14
12. NOTICES. Except as otherwise provided in this Agreement for
service of legal process, any notice to Debtor shall be in writing and shall be
deemed sufficiently made when received by Debtor at the address set forth in
Section 4(g) hereof to the attention of W. Flake Oakley, IV, Chief Financial
Officer of Debtor. Any notice to Secured Party shall be directed to the
attention of a Vice-President or higher ranking officer of Secured Party and
shall be made in writing in the foregoing manner and shall be deemed sufficient
when received by Secured Party at the following address: Barclays Bank PLC,
Latin America Regional Office, 801 Brickell Avenue, Miami, Florida 33131. Any
party may change its address for notice by giving written notice of the change
in accordance with this paragraph.
13. BUSINESS ENTITY. If Debtor is a corporation, partnership or
other business entity, then Debtor hereby further represents and warrants to
Secured Party that: (a) Debtor is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its creation and is duly
qualified to do business in those jurisdictions where the nature of its business
requires it to be so qualified; (b) Debtor has all requisite power and authority
(corporate or otherwise) to conduct its business, to own its properties, to
execute and deliver this Agreement and all other Loan Documents, and to perform
its obligations under the same; (c) the execution, delivery and performance of
this Agreement and all other Loan Documents have been duly authorized by all
necessary actions (corporate or otherwise) and do not require the consent or
approval of Debtor's stockholders (if a corporation) or of any other person
whose consent has not been obtained; and (d) the execution, delivery and
performance of this Agreement and all other Loan Documents do not and shall not
conflict with any provision of Debtor's by-laws or articles of incorporation (if
a corporation), partnership agreement (if a partnership) or trust agreement or
other document pursuant to which Debtor was created and exists or any other
agreement by which Debtor is bound.
14. INTEREST. All Obligations of Debtor to Secured Party arising
under this Agreement shall bear interest, from the date when due until paid in
full, at the rate then applicable under the Note. All such interest is and shall
be secured by the Collateral.
15. BINDING EFFECT; ASSIGNABILITY. The terms of this Agreement
shall inure to the benefit of Secured Party and its permitted successors and
assigns and shall be binding upon Debtor and Debtor's executors, personal
representatives, heirs and permitted successors and assigns. Without the prior
written consent of Secured Party (which it may grant or withhold in its sole
discretion), Debtor shall not assign this Agreement nor delegate any of Debtor's
duties hereunder.
16. TERM. This Agreement shall take effect when signed by Debtor
and delivered to Secured Party. This Agreement is a continuing agreement and
shall remain in full force and effect until all the Obligations shall have been
paid in full, unless earlier terminated by Secured Party in writing. After
termination of this Agreement and the full payment of the Obligations, Secured
Party shall turn over to Debtor any Proceeds of the Collateral received or held
by Secured Party and shall reassign the Collateral to Debtor without recourse to
Secured Party and without any representation or warranty or agreement of any
kind on the part of Secured Party.
14
<PAGE> 15
17. INTERPRETATION. Whenever used in this Agreement, the term
"person" means any individual, firm, corporation, trust or other organization or
association or other enterprise or any governmental or political subdivision,
agency, department or instrumentality thereof. Whenever used in this Agreement,
the terms "written" or "in writing" mean any form of written communication and
any communication by means of telex, telecopier device, telegraph or cable. Any
reference in this Agreement to a sum expressed in dollars or with the symbol
"U.S. $" or "$" means the lawful currency of the United States of America,
unless such reference expressly identifies another dollar-denominated currency.
Captions and paragraph headings contained in this Agreement are for convenience
only and shall not affect its interpretation. Whenever used in this Agreement
and unless the context otherwise requires, words in the plural include the
singular, words in the singular include the plural, and pronouns of any gender
include the other genders.
18. MISCELLANEOUS. Time is of the essence with respect to the
provisions of this Agreement. This Agreement may be amended but only by an
instrument in writing executed by the party to be burdened thereby. Any
provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction only, be ineffective only to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction. To the extent that Debtor may lawfully
waive any law that would otherwise invalidate any provision of this Agreement,
Debtor hereby waives the same, to the end that this Agreement shall be valid and
binding and enforceable against Debtor in accordance with all its terms. This
Agreement shall be governed by, and construed and enforced in accordance with,
the laws of the State of Florida, except that federal law shall govern to the
extent that it may permit Secured Party to charge, from time to time, interest
on the Obligations at a rate higher than may be permissible under Florida law.
WITNESS THE DUE EXECUTION HEREOF by Debtor as of the 30th day of
December, 1998.
Witnesses: THE COLONIAL BANCGROUP, INC.
/s/ William A. McCrary By: /s/ W. Flake Oakley, IV
- ----------------------------------- -----------------------------------
Name: William A. McCrary, Esq. Name: W. Flake Oakley, IV
Title: Chief Financial Officer
/s/ Hugh C. Nickson, III
- -----------------------------------
Name: Hugh Nickson, Esq.
15
<PAGE> 16
PROMISSORY NOTE
(TERM)
U.S. $25,000,000.00 MONTGOMERY, ALABAMA
DECEMBER 30, 1998
FOR VALUE RECEIVED, THE COLONIAL BANCGROUP, INC., a Delaware
corporation, with its principal address at One Commerce Street, Montgomery,
Alabama 36104 ("Borrower"), promise(s) to pay to the order of BARCLAYS BANK PLC,
a United Kingdom public limited company, with offices at 801 Brickell Avenue,
Miami, Florida 33131 ("Bank"), or at such other place as may be designated from
time to time by Bank, the principal amount of Twenty-Five Million United States
Dollars (U.S. $25,000,000.00), together with interest as provided in this
promissory note ("Note"), at the Interest Rate described in Section II below
until full and final payment of all sums, whether of principal and/or interest
and full satisfaction of all Obligations (as hereinafter defined) due and owing
to the Bank.
I. DISBURSEMENT AND MATURITY:
The loan hereunder (the "Loan") shall be disbursed on or before close
of business on December 30, 1998 in a single advance by payment of such amount
by Bank by wire transfer on behalf of Borrower to: SunTrust Bank, Central
Florida, N.A.; ABA #063102152; Beneficiary: Commercial Loan Operations;
Beneficiary Account Number: 9215004320; Re: For Further Credit to The Colonial
BancGroup, Inc. Commercial Loan #1774434801/83; Attention: Sharon Kalish,
Financial Institutions Group. The Loan shall mature on June 30, 1999.
II. INTEREST:
The unpaid principal balance hereunder shall bear interest at a rate
per annum equal to LIBOR plus 100 basis points (the "Interest Rate"). "LIBOR"
shall mean the rate (rounded, if necessary, up to the nearest 1/16 of 1%) at
which deposits in United States Dollars in an amount comparable to the Loan and
for a period equal to the interest period are available to the Bank in the
London Interbank Eurodollar Market two (2) London business days prior to the
first day of such interest period.
Principal shall be repaid in full upon maturity together with all
accrued interest and any and all other sums due under any Loan Document (as
defined below). Interest shall be paid on that day which falls thirty (30) days
from the date of this Note and on each and every successive date which falls
thirty (30) consecutive days thereafter (each, an "Interest Payment Date") until
repaid upon maturity or accelerated pursuant to the provisions hereof and of the
other Loan Documents, until all amounts required to be paid have been paid in
full.
Simultaneously herewith Borrower is executing a Security Agreement
(together with this Note, individually, a "Loan Document", and collectively, the
"Loan Documents"). Capitalized terms used and not otherwise defined in this Note
shall have the meanings respectively assigned to them in the Security Agreement.
Each use of a neuter, masculine, feminine or plural pronoun shall be deemed to
refer to the form of pronoun appropriate to the circumstance.
This Note evidences any and all principal amounts outstanding from time
to time (including future advances) in respect of the Loan and all other amounts
advanced from time to time or on behalf of Borrower by Bank pursuant to this
Note or any other Loan Document, together with all accrued and unpaid interest
thereon (including, without limitation, any and all interest and other amounts
accrued during the pendency of any bankruptcy, insolvency, receivership or other
similar proceedings, irrespective of whether such interest and other amounts are
allowed or allowable as claims in such proceedings), and all of the other
amounts to be paid by Borrower under this Note and performance of all
Obligations herein set forth or contained in any of the other Loan Documents and
any renewals, extensions or modifications of the same (collectively the
"Obligations"). All advances and payments made pursuant to this Note and the
other Loan Documents may be recorded by Bank on its books and records, and such
books and records, or any statement or certificate of Bank based upon such books
and records, shall be conclusive as to the existence and amounts thereof absent
manifest error.
III. PREPAYMENTS:
Unless otherwise provided for herein, the Borrower may prepay the Loan
in part or in whole without penalty on any Interest Payment Date.
IV. LOAN INSTRUMENTS AND COLLATERAL:
As security for the timely payment of the Obligations, Borrower
simultaneously with the execution of this Note and by means of the Security
Agreement, is granting to Bank a first-ranking and perfected security interest
in all of the issued and outstanding stock of Colonial Bank, a bank organized
under the laws of the State of Alabama and the wholly-owned bank subsidiary of
the Borrower ("Colonial Bank").
<PAGE> 17
V. GENERAL TERMS:
1. The occurrence of one or more of the following events,
circumstances or conditions shall constitute a default hereunder (each an "Event
of Default"):
(a) the failure of Borrower to pay to Bank, promptly when the
same shall become due (whether at scheduled maturity, upon acceleration
or otherwise) any portion of the Obligations including, but not limited
to, any installment of principal or of interest due under this Note or
any fees due and owing to Bank under or in connection with the terms of
this Note or any other Loan Documents; or
(b) the following events which have not been cured by Borrower
within fifteen (15) calendar days after Borrower has learned of the
event or which have not been cured by Borrower within fifteen (15)
calendar days after Bank gives notice to Borrower of the occurrence of
the event, whichever occurs first: (i) the occurrence of any other
default under any Loan Document between Bank and Borrower; (ii) the
occurrence of any default under any other agreement, loan or credit
facility which may be entered into between Bank and Borrower; (iii) the
failure of Borrower to perform any agreement, term, covenant or
provision hereunder; (iv) the filing of any petition under the United
States Bankruptcy Code or any similar federal or state statute by
Borrower, or the filing of an involuntary petition by any individual or
entity against Borrower pursuant to the United States Bankruptcy Code
or any similar federal or state statute, which petition is not
dismissed within sixty (60) days of the date of filing thereof; (v) the
appointment of a receiver for Borrower or Colonial Bank; (vi) the
making of a general assignment for the benefit of creditors by, or the
insolvency of, Borrower or Colonial Bank; (vii) the entry of a judgment
against the Borrower or Colonial Bank by any court, tribunal or
administrative agency, in an amount of not less than U.S. $50,000,000,
which is not vacated or bonded within thirty (30) days following the
entry or issuance thereof; (viii) the issuance of any writ of
attachment or writ of garnishment against any substantial portion of
the property of Borrower or Colonial Bank which is not vacated within
thirty (30) days following issuance; (ix) the dissolution, merger,
consolidation or reorganization of Borrower or Colonial Bank without
the prior written consent of Bank; (x) the reasonable determination by
Bank that a material adverse change has occurred in the financial
condition, affairs or prospects of Borrower or Colonial Bank which is
not cured or corrected to the reasonable satisfaction of Bank within
thirty (30) days following notice by Bank; and (xi) any representation
or warranty made by Borrower in connection the Loan proves to have been
false or materially misleading when made.
2. Upon or at any time after the occurrence of any Event of
Default, the indebtedness evidenced by this Note and all other Obligations of
Borrower to Bank, however created and existing, under this Note and any other
Loan Document shall at the option of Bank, accelerate and immediately become due
and payable, without demand upon or notice to Borrower, and Bank shall be
entitled to exercise any of the other remedies set forth herein and in the other
Loan Documents or as otherwise provided by law. Any delay or failure by Bank to
exercise any remedy hereunder or any forbearance by Bank in the exercise or
partial exercise of any remedy hereunder shall not be deemed to constitute a
waiver of any such remedy nor to preclude Bank from any further exercise of any
such remedy or any other remedy provided hereunder or by law.
3. Upon the occurrence and during the continuance of any Event of
Default, Bank is authorized and may, at its sole discretion, exercise or
otherwise enforce, at any time and from time to time, any one or more of Bank's
rights, privileges and/or remedies, at law or in equity, or as provided under
this Note or any Loan Document, without exhausting, pursuing or enforcing any
other right and without regard to any act or omission of Bank, without notice
(except as set forth in Section V.1.(b) above) to or demand upon Borrower to the
fullest extent permitted by applicable law (the giving of notice or demand being
expressly waived by Borrower); and Bank may, in addition to all other rights and
remedies set off and apply any indebtedness owing by Bank or any agency, branch
or affiliate of Bank to Borrower against the indebtedness evidenced by this
Note, although then contingent or unmatured, and may apply directly or through
any agency, branch, office or affiliate any and all deposits, whether general or
special, time or demand, provisional or final, individual or joint, and other
assets and properties at any time held by, under the control or custody or
otherwise in possession of Bank or any agency, branch, office, or affiliate of
Bank for the credit, account or benefit of Borrower against any and all of the
Obligations hereunder or under any other Loan Document, whether or not demand
for payment has been made. Borrower hereby grants Bank a continuing security
interest in and to all such deposits, assets, properties and indebtedness in the
possession of Bank, its branches, agencies, offices and affiliates and
authorizes each such person in the case of an Event of Default to so set off and
apply such amounts at such time and in such manner as Bank may direct as if each
such person were a direct creditor of Borrower in the full amount of all
Obligations hereunder. Bank agrees to notify Borrower after any such setoff and
application; provided, however, that the failure to give such notice shall not
affect the validity of such setoff and application; and Bank shall be deemed to
have exercised such right of setoff and to have made a charge against any such
money immediately upon the occurrence of such Event of Default even though such
setoff, application and charge is made or entered on the books of Bank
subsequent thereto. Bank, in its sole discretion, may proceed against Borrower
without first executing against any Collateral held as security for Borrower's
Obligations hereunder and Borrower hereby expressly waives any defense it may
have against Bank for failure to execute against the Collateral.
4. From and after an Event of Default, Bank may transfer this
Note and any other Loan Document and deliver to the transferee(s) all or any of
the property, if any, then held by Bank as security or collateral for the
indebtedness evidenced by this Note and the transferee(s) shall thereupon become
vested with all the rights and
2
<PAGE> 18
powers given to Bank under the Loan Documents with respect thereto; and, Bank
shall thereafter be forever relieved and fully discharged from any liability or
responsibility to Borrower, but shall retain all rights and powers hereby
conferred with respect to any rights or property not so transferred.
5. Except as otherwise set forth herein, the Borrower hereby
waives presentment for payment, demand, notice of demand, notice of non-payment
or dishonor, protest and notice of protest, notice of renewal, modification or
extension of time and all other notices except as otherwise specified in this
Note and agrees that none of the terms or provisions hereof may be waived,
altered, modified or amended without the written consent of Bank. Any waiver of
any provision hereof shall be effective only in the specific instance and for
the specific purpose for which such waiver is granted.
6. Borrower agrees to on demand pay all reasonable out-of-pocket
costs and expenses, including reasonable attorneys' fees and related costs,
incurred by the Bank in the collection of the indebtedness evidenced by this
Note or any other Loan Document and any modification hereof or thereof, or in
enforcing or protecting any of the rights, powers, remedies and privileges of
the Bank hereunder or under any of the Loan Documents.
7. Both principal and interest evidenced by this Note shall be
payable in lawful currency of the United States of America to Bank at its
offices at 801 Brickell Avenue, Miami, Florida 33131 or such other offices as
Bank may specify to Borrower in writing, or at such other place designated by
Bank, from time to time, in writing, in immediately available (same day) funds
without deduction for or on account of any present or future taxes, duties or
other charges levied or imposed on this Note, the proceeds hereof, or on
Borrower or holder hereof by any government, or any instrumentality, authority
or political subdivision thereof and without any other setoff or deduction
whatsoever. Borrower agrees, upon the request of Bank, to immediately pay all
such taxes (other than taxes on income of the holder hereof), duties and other
charges, in full, in addition to the principal and interest evidenced by this
Note.
8. Borrower shall indemnify and hold Bank harmless against, and
reimburse Bank for, any loss or expenses reasonably incurred by Bank (including
without limitation any loss or expenses incurred to liquidate or re-employ
deposits or other funds acquired by Bank to fund or maintain a loan hereunder)
as a result of any payment or prepayment (whether or not authorized or required
hereunder) of the Loan on any day other than the last day of the relevant
interest period.
If it shall become unlawful for Bank to fund or continue to maintain
the Loan evidenced hereby or to perform Bank's obligations hereunder, upon
Bank's demand, Borrower shall prepay in full all principal outstanding hereunder
together with accrued interest thereon and all other amounts payable hereunder
and upon such demand Bank shall have no further obligation to make the Loan.
If by reason of the introduction of any law, regulation or other legal
requirement or any change in any law, regulation or other legal requirement or
the interpretation or administration of any law, regulation or other legal
requirement or in compliance with any request or requirement from any central
bank or any fiscal, monetary or other authority whatsoever (whether or not
having the force of law) (a) Bank shall become subject to any tax (other than
any tax based on Bank's net income) with respect to the indebtedness
contemplated herein and or payment of all or any part of the indebtedness
contemplated herein; or (b) the basis of taxation of payments to Bank in respect
of all or any part of the indebtedness contemplated herein shall be changed or
any additional taxes or an increase in existing taxes shall be imposed (other
than any increase in any tax based on Bank's net income); or (c) any reserve
requirements (not reflected in the calculation of the Eurodollar Rate) shall be
imposed, modified or deemed applicable against assets held by or deposits in or
for the account of loans by the lending office of the Bank; or (d) the manner in
which the Bank allocates capital resources to its obligations hereunder or any
ratio (whether cash, capital adequacy, liquidity or otherwise) which the Bank is
required or requested to maintain shall be affected; and the result of any of
the foregoing shall be to increase the cost to the Bank of maintaining the Loan
or to cause the Bank to suffer a reduction in the rate of return on the Loan by
an amount that the Bank deems to be material, then (i) the Bank will, as soon as
reasonably practicable, notify the Borrower of the amount which Bank shall
reasonably deem necessary to compensate Bank in respect of the Loan as a result
of such event, and (ii) the Borrower shall within thirty (30) days after such
notice pay such amount to the Bank, but shall also have the right to prepay the
whole (but not part only) of the Loan subject to the provisions of this
paragraph.
9. Nothing contained in this Note or any other agreement between
the parties hereto shall be deemed to establish or require the payment of a rate
of interest in excess of the rate that may be legally charged on loans or
extensions of credit made by the Bank under the laws of the State of Florida or
of the United States, whichever is applicable and higher as such rate now exists
or may hereafter be increased or the ceiling, if any, on the legal rate of
interest eliminated, by legislation or otherwise ("Maximum Rate"). In the event
that the rate of interest so contracted should exceed the Maximum Rate, whether
as a result of its fluctuation, acceleration of the maturity hereof or
otherwise, the rate of interest to be paid hereunder shall be automatically
reduced to the Maximum Rate and so much of any interest reserved, charged or
taken as would cause the same to exceed the Maximum Rate shall be deemed not to
be a credit against interest but rather a prepayment on account of and be
automatically credited against outstanding principal evidenced hereby regardless
of how the same may appear on Bank's or Borrower's books or records; provided,
however, no such application shall operate to cure or as a waiver of any Event
of Default occasioning acceleration.
10. All amounts outstanding hereunder shall bear interest during
the continuance of any Event of Default hereunder or under any Loan Document
until paid in full, to the extent permitted by law, at an annual
3
<PAGE> 19
effective rate of simple interest (computed on the basis of actual days elapsed
in a 360-day year) equal to four percent (4 %) in excess of the otherwise
applicable Interest Rate.
11. All payments by Borrower shall be applied, first, to the
payment of any indemnities or reimbursements owed to the Bank under the Loan
Documents; second, to the payment of past-due interest; third, to accrued and
unpaid interest; and finally, to the payment (or prepayment, if permitted) of
the Loan.
12. TIME IS OF THE ESSENCE IN THE PAYMENT AND PERFORMANCE OF THIS
PROMISSORY NOTE. WHENEVER, HOWEVER, A PAYMENT HEREUNDER BECOMES DUE ON A DATE ON
WHICH BANKS ARE NOT OPEN FOR THE CONDUCT OF A GENERAL COMMERCIAL BANKING
BUSINESS IN MONTGOMERY, ALABAMA AND MIAMI, FLORIDA (A "BUSINESS DAY"), THE DUE
DATE FOR SUCH PAYMENT SHALL BE EXTENDED TO THE NEXT SUCCEEDING BUSINESS DAY, AND
INTEREST APPLICABLE TO SUCH AMOUNT SHALL ACCRUE DURING ANY SUCH EXTENSION AND
SHALL BE DUE AND PAYABLE ON SUCH NEXT SUCCEEDING BUSINESS DAY.
13. Any notice herein required or permitted to be given or service
of process in any suit, action or other proceeding to enforce this Note or any
of the other Loan Documents shall be made to Borrower by delivery to Borrower at
the address set forth on page one hereof or as then specified on Bank's records,
and shall be deemed to have been given when so delivered to the attention of W.
Flake Oakley, IV, Chief Financial Officer of the Borrower. It shall be
Borrower's sole responsibility to notify Bank of any change in Borrower's
address and Bank is authorized to rely solely on its records, without any
independent investigation, for purposes of giving notice as specified in this
paragraph 13.
14. Borrower agrees that this Note has been made under and shall
be governed by the laws of the State of Florida, without giving effect to the
choice of law provisions thereof, in all respects (except as to interest rates
which are or may be preempted by the federal laws of the United States),
including matters of construction, validity and performance, and further
consents that jurisdiction and venue in respect of any dispute arising out of or
otherwise in connection with this Note shall be in Dade County, Florida and
waives any and all objections thereto.
15. If any provision of this Note shall be deemed unenforceable
under applicable law, such provision shall be ineffective but only to the extent
of such unenforceability, without invalidating the remainder of such provision
or the remaining provisions of this Note.
16. Borrower shall pay or reimburse on demand any and all
reasonable costs and expenses incurred by Bank in connection with the
preparation, execution and delivery of this Note and any other Loan Document,
including, without limitation, the reasonable fees and disbursements of the
Bank's legal counsel.
17. The Bank may sell participations in the Loan to other
financial institutions and, in connection therewith, deliver to such institution
any information which the Bank may have in its possession concerning the
Borrower or Colonial Bank.
18. TO THE FULL EXTENT ALLOWED BY APPLICABLE LAW, IN ANY DISPUTE
WITH BANK BORROWER AGREES THAT IT WILL NOT SEEK, RECOVER OR RETAIN ANY AND
HEREBY WAIVES ANY RIGHT IT MAY HAVE TO RECEIVE SPECIAL, EXEMPLARY, PUNITIVE
AND/OR CONSEQUENTIAL DAMAGES.
19. BANK AND BORROWER AND OTHER OBLIGOR(S) HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR OTHERWISE IN
CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR BANK EXTENDING CREDIT TO BORROWER.
IN WITNESS WHEREOF, the undersigned has/have executed this Note on the
30th day of December, 1998.
Witnesses THE COLONIAL BANCGROUP, INC.
/s/ William A. McCrary By: /s/ W. Flake Oakley, IV
- ----------------------------------- -----------------------------------
Name: William A. McCrary, Esq. Name: W. Flake Oakley, IV
Title: Chief Financial Officer
/s/ Hugh C. Nickson, III
- -----------------------------------
Name: Hugh Nickson, Esq.
4
<PAGE> 1
EXHIBIT 11
THE COLONIAL BANCGROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C>
A. Net income............................................. $ 55,196 $ 90,362 $ 61,849
B. Interest expense on convertible debentures............. 270 470 689
C. Tax effect of (B) above................................ 102 175 244
D. Average basic shares outstanding....................... 110,062 105,010 97,246
E. Dilutive potential common shares(1).................... 2,369 3,386 3,882
EARNINGS PER COMMON SHARE:
Net income:
Basic (A/D)............................................ $ 0.50 $ 0.86 $ 0.64
Diluted (A-B--(")/(D+E)................................ $ 0.49 $ 0.84 $ 0.62
</TABLE>
- ---------------
(1) Includes the effect of the average contingent shares from BancGroup's issue
of convertible subordinated debentures; computed by dividing the outstanding
balance of the convertible debentures by the conversion price. Also includes
the effect of stock options.
18
<PAGE> 1
EXHIBIT 12
THE COLONIAL BANCGROUP, INC.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
In thousands
<S> <C> <C> <C> <C> <C>
A. Income before income taxes,
extraordinary items and the
cumulative effect of a change in
accounting for income taxes................. $ 86,602 $141,776 $ 94,931 $ 84,291 $ 59,235
Fixed charges:
Interest expense............................. 350,441 284,771 232,126 192,521 119,983
1/3 Rent expense............................. 6,212 4,216 3,589 3,348 2,865
-------- -------- -------- -------- --------
B. Total fixed charges........................... 356,653 288,987 235,715 145,869 122,848
-------- -------- -------- -------- --------
C. Sum of A and B................................ $443,255 $430,763 $330,646 230,160 182,083
======== ======== ======== ======== ========
Ratio of earnings to fixed charges (C/B)...... 1.24 1.49 1.40 1.58 1.48
</TABLE>
19
<PAGE> 1
EXHIBIT 13
Portions of the 1998 Annual Report to Security Holders
(Such annual report, except for those portions expressly incorporated by
reference in this report, is furnished solely for the information of the
Commission and is not deemed to be filed as part of this report.)
20
<PAGE> 2
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
EXHIBIT 13
For the years ended
December 31, 1998, 1997, 1996, 1995 and 1994
(In thousands, except per share amounts)
1998 1997* 1996* 1995* 1994*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Interest income $693,542 $583,637 $481,478 $403,701 $300,039
Interest expense 350,441 284,771 232,126 192,521 119,983
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 343,101 298,866 249,352 211,180 180,056
Provision for possible loan losses 26,345 16,321 14,442 10,989 9,673
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 316,756 282,545 234,910 200,191 170,383
Noninterest income 125,258 100,945 77,511 65,341 58,405
Noninterest expense 329,260 234,819 200,818 179,503 168,205
SAIF special assessment(1) -- -- 4,754 -- --
Acquisition, restructuring and Y2K expense(2) 26,152 6,895 11,918 1,738 1,348
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 86,602 141,776 94,931 84,291 59,235
Applicable income taxes 31,406 51,414 33,082 29,671 19,499
Net income $ 55,196 $ 90,362 $ 61,849 $ 54,620 $ 39,736
- ---------------------------------------------------------------------------------------------------------------------------
Income excluding SAIF special assessment,
acquisition, restructuring and Y2K expense(1)(2) $ 72,715 $ 95,801 $ 74,474 $ 56,010 $ 40,814
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Income excluding SAIF special assessment, acquisition
and restructuring costs and Y2K expenses:(1)(2)
Basic** $ 0.66 $ 0.91 $0.76 $ 0.62 $ 0.48
Diluted** $ 0.65 $ 0.89 $0.74 $ 0.58 $ 0.45
Net income:
Basic** $ 0.50 $ 0.86 $0.64 $ 0.60 $ 0.46
Diluted** $ 0.49 $ 0.84 $0.62 $ 0.57 $ 0.44
Average shares outstanding:
Basic** 110,062 105,010 97,246 90,785 85,826
Diluted** 112,431 108,396 101,128 98,505 93,089
Cash dividends per common share:
Common** $ 0.34 $ 0.30 $ 0.27 $ 0.1688 --
Class A** -- -- -- $ 0.0563 $ 0.20
Class B** -- -- -- $ 0.0313 $ 0.10
===========================================================================================================================
</TABLE>
(1)Legislation approving a one-time special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") resulted in $4,754,000 in expense
before income taxes and $3,091,000 net of applicable income taxes in 1996.
(2)Acquisition expenses reflect costs associated with the business combinations
discussed in Note 2 to the Consolidated Financial Statements. Restructuring
charges are discussed in Note 18 to the Consolidated Financial Statements.
* Restated to give retroactive effect to the 1998 mergers with United American,
First Central, South Florida Banking Corp., Commercial Bank of Nevada,
FirstBank, Prime Bank of Central Florida, First Macon Bank & Trust and
InterWest Bancorp.
** Prior periods have been restated to reflect the impact of a two-for-one stock
split in the form of a 100% stock dividend paid August 14, 1998.
24
<PAGE> 3
<TABLE>
<CAPTION>
For the years ended
December 31, 1998, 1997, 1996, 1995 and 1994
(In thousands, except per share amounts)
1998 1997* 1996* 1995* 1994*
============================================================================================================================
<S> <C> <C> <C> <C> <C>
STATEMENT OF CONDITION DATA
At year-end:
Total assets $10,456,285 $8,061,566 $6,630,642 $5,724,025 $4,500,231
Loans, net of unearned income 7,110,295 5,951,067 4,835,274 4,130,126 3,112,937
Mortgage loans held for sale 692,042 238,540 167,993 131,114 68,878
Deposits 7,446,153 6,325,690 5,135,215 4,520,739 3,626,692
Long-term debt 746,447 315,281 39,092 49,756 90,309
Shareholders' equity 639,807 590,017 483,717 421,433 325,381
Average balances:
Total assets 9,195,895 7,432,493 6,132,367 5,068,998 4,294,350
Interest-earning assets 8,300,873 6,804,087 5,610,184 4,636,115 3,887,838
Loans, net of unearned income 6,451,427 5,497,737 4,488,023 3,553,499 2,806,605
Mortgage loans held for sale 407,672 158,966 135,135 109,995 143,518
Deposits 6,750,880 5,902,179 4,797,516 4,054,063 3,502,314
Shareholders' equity 642,287 547,886 458,807 368,680 319,418
Book value per share** $5.77 $5.55 $4.71 $4.47 $3.75
Tangible book value per share** $5.00 $4.90 $4.41 $4.15 $3.52
============================================================================================================================
SELECTED RATIOS
Income excluding SAIF special assessment, acquisition
and restructuring costs and Y2K expense to:(1)(2)
Average assets 0.79% 1.29% 1.21% 1.10% 0.95%
Average shareholders' equity 11.32 17.49 16.23 15.19 12.78
Net income to:
Average assets 0.60 1.22 1.01 1.08 0.93
Average shareholders' equity 8.59 16.49 13.48 14.82 12.44
Efficiency ratio excluding SAIF, acquisition
and restructuring costs and Y2K expenses(1)(2) 69.72 58.28 62.13 64.91 70.54
Efficiency ratio 75.38 59.99 67.19 65.54 71.10
Dividend payout ratio 68.00 34.88 42.86 37.50 43.48
Average equity to average total assets 6.98 7.37 7.48 7.27 7.44
Total nonperforming assets to
net loans, other real estate and repossessions(3) 0.60 0.74 0.80 0.90 1.34
Net charge-offs to average loans 0.26 0.23 0.16 0.17 0.11
Allowance for possible loan losses to
total loans (net of unearned income) 1.18 1.21 1.28 1.30 1.53
Allowance for possible loan losses to
nonperforming loans(3) 245% 247% 234% 243% 212%
============================================================================================================================
</TABLE>
(1)Legislation approving a one-time special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF") resulted in $4,754,000 in expense
before income taxes and $3,091,000 net of applicable income taxes in 1996.
(2)Acquisition expenses reflect costs associated with the business combinations
discussed in Note 2 to the Consolidated Financial Statements. Restructuring
charges are discussed in Note 18 to the Consolidated Financial Statements.
(3)Nonperforming loans and nonperforming assets are shown as defined in
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Nonperforming Assets on page 42.
* Restated to give retroactive effect to the 1998 mergers with United American,
First Central, South Florida Banking Corp., Commercial Bank of Nevada,
FirstBank, Prime Bank of Central Florida, First Macon Bank & Trust and
InterWest Bancorp.
** Prior periods have been restated to reflect the impact of a two-for-one stock
split in the form of a 100% stock dividend paid August 14, 1998.
25
<PAGE> 4
SELECTED QUARTERLY FINANCIAL DATA
1998-1997
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1998* 1997*
- ----------------------------------------------------------------------------------------------------------------------------
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 $182,717 $180,459 $170,209 $160,157 $154,482 $149,796 $143,031 $136,328
Interest expense 94,434 92,176 85,203 78,628 75,154 73,163 69,708 66,746
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 88,283 88,283 85,006 81,529 79,328 76,633 73,323 69,582
Provision for loan losses 14,343 4,087 3,964 3,951 5,442 3,160 4,214 3,505
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 73,940 84,196 81,042 77,578 73,886 73,473 69,109 66,077
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (3,896) $ 11,445 $ 26,849 $ 20,798 $ 23,427 $ 24,345 $ 21,833 $ 20,757
- ----------------------------------------------------------------------------------------------------------------------------
Income excluding acquisition
and restructuring costs
and Y2K expense(1) $ 3,534 $ 14,413 $ 28,358 $ 26,410 $ 26,095 $ 25,001 $ 23,342 $ 21,363
- ----------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Net income (loss):
Basic** $ (0.04) $ 0.10 $ 0.24 $ 0.20 $ 0.22 $ 0.23 $ 0.22 $ 0.19
Diluted** $ (0.04) $ 0.10 $ 0.24 $ 0.19 $ 0.21 $ 0.22 $ 0.22 $ 0.19
============================================================================================================================
</TABLE>
(1)Acquisition expenses reflect costs associated with the business combinations
discussed in Note 2 to the Consolidated Financial Statements. Restructuring
charges are discussed in Note 18 to the Consolidated Financial Statements.
* All quarterly amounts have been restated to give effect to the
pooling-of-interests business combinations consummated in 1998 and 1997. Any
differences between the above amounts and those previously reported in
BancGroup's Form 10-Q filings is a result of restatement for pooling-of
interests business combinations consummated subsequent to those filings.
** Prior periods have been restated to reflect the impact of a two-for-one stock
split in the form of a 100% stock dividend paid August 14, 1998.
26
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management's Discussion and Analysis of Financial Condition and Results
of Operations is presented on the following pages. The principal purpose of this
review is to provide the user of the attached financial statements and
accompanying footnotes with a detailed analysis of the financial results of The
Colonial BancGroup, Inc. and subsidiaries ("BancGroup" or the "Company"). Among
other things, this discussion provides commentary on BancGroup's history,
operating philosophies, the components of net interest margin and balance sheet
strength as measured by the quality of assets, the composition of the loan
portfolio and capital adequacy. The following discussion reflects the effect of
the poolings-of-interests business combinations which occurred during 1998 as
listed below:
<TABLE>
<CAPTION>
Institution Date Consummated
- ----------- ----------------
<S> <C>
United American Holding
Corporation February 2, 1998
First Central Bank February 11, 1998
South Florida Banking Corp. February 12, 1998
Commercial Bank of Nevada June 15, 1998
FirstBank August 31, 1998
First Macon Bank & Trust October 1, 1998
Prime Bank of Central Florida October 6, 1998
InterWest Bancorp October 15, 1998
</TABLE>
- --------------------------------------------------------------------------------
STRATEGY
BancGroup was established in 1981 with one bank and $166 million in
assets. Through 57 business combinations and strong internal growth, BancGroup
has grown to a $10.5 billion multi-state bank holding company with 15 operating
regions in six states.
The foundation of BancGroup is built upon a community banking
philosophy which allows local autonomy in lending decisions and customer
relationships. This operating philosophy has been important in making
acquisitions, retaining skilled and highly motivated local management teams and
developing a strong customer base, particularly with respect to lending
relationships.
BancGroup's performance goals are: 1) an annual earnings per share
growth rate in excess of 10%, 2) a 17.5% return on equity, 3) a 1.45% return on
assets and 4) a consistently increasing dividend. The strategies employed to
achieve these results are outlined below. They represent the foundation upon
which BancGroup operates and the basis for achieving the Company's goals.
GROWTH
Over the past three years, BancGroup completed twenty-five acquisitions
establishing operations in Florida, Georgia, Nevada and Texas.
Following a strategy of expanding into high growth markets, BancGroup
entered Florida with the acquisition of a $232 million bank in Orlando in July
1996. During 1997 and 1998, BancGroup acquired 13 banks in Florida and
established additional operating regions in Miami, Tampa and Ft. Myers/Bonita
Springs. At the end of 1998, BancGroup had assets of over $2.6 billion in
Florida.
Given BancGroup's focus on high growth markets, the Company looked west
to Texas and Nevada, which are two of the fastest growing states in the country.
In 1998, BancGroup took the opportunity to acquire two banks in Dallas, Texas, a
bank in Las Vegas, Nevada and another in Reno, Nevada.
The following table illustrates BancGroup's growth in assets by state
over the past three years (as originally reported, prior to restatements for
poolings-of-interest).
<TABLE>
<CAPTION>
December 31,
(In millions) 1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Alabama $ 3,813 $3,393 $3,068
CMC* 937 390 280
Corporate** 1,736 881 135
Georgia 703 484 398
Florida 2,602 1,600 291
Tennessee 101 103 98
Texas 287
Nevada 277
--------------------------------------
$10,456 $6,851 $4,270
--------------------------------------
</TABLE>
* Assets are geographically disbursed in 45 states.
**Assets consist primarily of investment portfolio less corporate eliminations.
REGIONAL BANK COMPETITIVENESS
Loan and deposit growth are emphasized in each market area through the
Company's regional banks. BancGroup has been very successful in competing for
loans against larger financial institutions, due primarily to the Company's
local lending strategy which includes direct involvement by local management and
directors. The success of the local market lending strategy is evidenced by 15%
internal loan growth in 1998 and a net charge-off ratio of .26%.
The regional banks have additional growth opportunities through the
development of customer relationships by cross-selling a variety of bank
products and services. Strong regional bank management supported by BancGroup's
asset/liability and products and services management teams provide the Company
with resources to remain competitive in its deposit markets. Through this
group's efforts, the Company has established a strategy to grow and retain its
deposit base while remaining competitive in deposit pricing and meeting the
Company's funding and liquidity goals.
OPERATIONAL CONSOLIDATION AND EFFICIENCIES
During the fourth quarter of 1998, management shifted the Company's
focus from bank acquisition activity to
27
<PAGE> 6
streamlining operations and emphasizing profitable business units.
An operational and organizational infrastructure established in prior
years has allowed the Company to grow significantly and improve efficiency
through streamlining its operations. The operating structure is built around
centralized back-shop operations in areas that do not have direct customer
contact. By shifting its focus, the Company has made its resources available to
proceed with its plans to incorporate into this structure six acquired banks in
Florida and five in other markets.
In order to alleviate further conversion delays and the resulting
delays in cost savings, the Company is establishing an item processing facility
in Florida. This action became necessary when the prior item processor, Barnett
Bank, delayed the Company's conversion schedule and became unable to meet the
Company's other needs after Barnett's acquisition by NationsBank.
EMPHASIZING PROFITABLE BUSINESS UNITS
The Company has developed a strategic restructuring plan that
encompasses its retail market base. Strategies were developed to close certain
unprofitable branches, sell certain super-market branches and to relocate and
upgrade other branches. As a part of this plan, the headquarters for the South
Florida region was moved to downtown Miami and the trust department was
consolidated into the South Florida headquarters to better serve its customer
base.
EXPANSION OF SERVICES
Customer needs are constantly changing, and BancGroup continues to
investigate methods of improving customer service through new services, product
enhancements and technological advances. The Company created or augmented
various services in 1998 that will expand its sources of noninterest income and
provide better customer service.
The international banking department became fully operational in July
1998. The department engages in confirming letters of credit, primarily with
top-tier banks in Latin America, and direct disbursements to those banks from
U.S. customers.
Also during 1998, BancGroup established a private banking function and
expanded the investment sales force within the regional bank structure to
emphasize relationship banking and to generate income from sales of securities
and annuities.
Colonial Asset Management, Inc., an asset management group, was
established under the former head of Barnett Bank's asset management group. This
group has over $170 million in assets under management and is projected to have
over $300 million in assets under management by the end of 1999.
RISK MANAGEMENT OF MORTGAGE SERVICING RIGHTS
During October of 1998, the Company, with the assistance of a third
party advisor that specializes in analyzing mortgage servicing rights and
hedging activities, developed a strategy to hedge a portion of its servicing
portfolio and related mortgage servicing rights asset against risk associated
with future fluctuations in interest rates and the resulting impact on
prepayment estimates. This program has been aggressively implemented, and
includes a daily system of monitoring the hedge position and servicing assets.
The Company has established a committee to set policies and guidelines to
monitor activities and to evaluate performance of the hedge program. The
committee will also determine the appropriate levels of servicing rights and
related risk that should be maintained by the Company. There is no guarantee
that significant declines in interest rates will not have a material impact on
the Company's MSRs or that this hedge program will be successful in protecting
against such a decline. (Refer to more detailed discussions of the hedging
activities included in Management's Discussion under Mortgage Servicing Rights
and Servicing Hedge and Notes 6 and 7 to the Consolidated Financial Statements.)
FUNDING CAPACITY
BancGroup has developed plans to meet the Company's funding
requirements. These plans include implementation of a system-wide retail deposit
strategy, the establishment of short and long term credit facilities with the
Federal Home Loan Bank, increased Fed Fund lines, brokered money market
programs, brokered certificate of deposit programs and reverse repurchase
arrangements. BancGroup has an asset generating capability that can effectively
utilize these funds. This capability is most evident in 1998 by BancGroup's
acquisition activities and its 15% internal loan growth.
ASSET QUALITY
Maintaining high asset quality is at the forefront of the Company's
strategy to allow for consistent earnings growth. BancGroup's asset quality is
demonstrated by its charge-off history and nonperforming asset levels, which
compare favorably to its peer group.
Nonperforming assets as a percentage of loans and other real estate was
reduced to .60% at December 31, 1998, its lowest level in five years, primarily
through the sales of other real estate and a lower percentage of nonperforming
loans to total loans. Net charge-offs over the past five years have consistently
compared favorably with national averages and were only .26% of average loans in
1998 and .23% in 1997.
Obviously, the Company cannot guarantee its success in implementing the
initiatives or reaching the goals set out previously. The following analysis of
financial condition and results of operations provide details with respect to
this summary material and demonstrates trends concerning the initiatives taken
in 1998.
28
<PAGE> 7
- --------------------------------------------------------------------------------
BUSINESS COMBINATIONS
A principal part of BancGroup's growth strategy has been to merge other
financial institutions into BancGroup in order to increase the Company's market
share in existing markets, expand into other growth markets, more efficiently
absorb the Company's overhead and add profitable new lines of business.
BancGroup recently completed the following business combinations with
other financial institutions. These business combinations have been reflected in
the financial statements at December 31, 1998. The balances reflected below are
as of the date of consummation.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCOUNTING DATE BANCGROUP TOTAL TOTAL TOTAL
FINANCIAL INSTITUTIONS TREATMENT CONSUMMATED SHARES ASSETS LOANS DEPOSITS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996*
Commercial Bancorp of Georgia, Inc. (GA) Pooling 07/03/96 4,612,920 $232,555 $145,429 $207,641
Southern Banking Corporation (FL) Pooling 07/03/96 5,716,988 232,461 160,864 205,602
Dothan Federal Savings Bank (AL) Purchase 07/08/96 309,380 48,366 36,497 39,931
- -----------------------------------------------------------------------------------------------------------------------------
1997
Jefferson Bancorp, Inc. (FL) Pooling 01/03/97 7,709,904 472,732 322,857 405,836
Tomoka Bancorp, Inc. (FL) Pooling 01/03/97 1,323,984 76,700 51,600 68,200
First Family Financial Corp. (FL) Purchase 01/09/97 661,128 167,300 117,500 156,700
D/W Bankshares, Inc. (GA) Pooling 01/31/97 2,033,096 138,686 71,317 124,429
Shamrock Holdings, Inc. (AL) Purchase 03/05/97 -- 54,500 19,300 46,400
Fort Brooke Bancorporation (FL) Pooling 04/22/97 3,199,946 208,800 141,500 185,800
Great Southern Bancorp (FL) Pooling 07/01/97 1,855,622 121,009 98,100 106,673
First Commerce Banks of Florida, Inc. (FL) Purchase 07/01/97 1,371,390 97,093 64,472 88,302
Dadeland BancShares, Inc. (FL) Purchase 09/15/97 -- 169,946 103,199 145,491
First Independence Bank of Florida (FL) Pooling 10/01/97 1,007,864 65,048 50,699 58,283
- -----------------------------------------------------------------------------------------------------------------------------
1998*
United American Holding Corp. (FL) Pooling 02/02/98 4,226,412 275,263 197,623 236,773
ASB Bancshares, Inc. (AL) Purchase 02/05/98 934,514 158,656 110,093 135,940
First Central Bank (FL) Pooling 02/11/98 1,377,368 62,897 40,451 52,048
South Florida Banking Corp. (FL) Pooling 02/12/98 3,864,458 255,769 172,992 226,999
Commercial Bank of Nevada (NV) Pooling 06/15/98 1,684,314 129,577 86,251 117,749
CNBHolding Corporation (FL) Pooling 08/12/98 1,767,562 89,893 58,456 81,445
FirstBank (TX) Pooling 08/31/98 2,782,038 187,445 59,664 163,254
First Macon Bank & Trust (GA) Pooling 10/01/98 4,643,025 199,525 135,651 174,774
Prime Bank of Central Florida (FL) Pooling 10/06/98 1,173,019 74,502 42,547 66,955
InterWest Bancorp (NV) Pooling 10/15/98 1,748,338 131,590 83,689 114,516
TB&T, Inc. (TX) Purchase 12/01/98 1,248,499 110,986 42,689 101,335
- -----------------------------------------------------------------------------------------------------------------------------
</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. On June 18, 1998,
BancGroup purchased certain assets totaling $8,168,000 and assumed certain
liabilities, primarily deposits, totaling $8,871,000 of the Wade Green branch
of Premier Bank in Atlanta, Georgia.
The 1996 combinations with Southern and Commercial, the 1997
combinations with Jefferson, D/W Bankshares and Fort Brooke and the 1998
combinations with United American, First Central, South Florida, Commercial Bank
of Nevada, FirstBank, First Macon, Prime Bank and InterWest were accounted for
using the pooling-of-interests method. Accordingly, all financial statement
amounts have been restated to reflect the financial condition and results of
operations as if the combinations had occurred at the beginning of the earliest
period presented. The 1997 combinations with Tomoka, Great Southern and First
Independence and the 1998 combination with CNB Holding were accounted for using
the pooling-of-interests method; however, due to immateriality, the prior year
financial statements were not restated. The remaining business combinations were
accounted for as purchases, and the operations and income of the combined
institutions are included in the income of BancGroup from the date of purchase.
Each of the combined institutions that were accounted for as purchases was
merged into BancGroup or one of its subsidiaries as of the listed dates, and the
income and expenses have not been separately accounted for since the respective
mergers. For this reason and due to the fact that significant changes have been
made to the cost structure of each combined institution, a separate
determination of the impact after combination on the earnings of BancGroup for
1997 and 1998 cannot reasonably be determined.
The combinations have had an impact on the comparisons of operating
results for 1997 and 1998 with prior years. Where such information is
determinable it has been identified and discussed in the discussion of results
of operations and financial condition that follows.
29
<PAGE> 8
- --------------------------------------------------------------------------------
REVIEW OF RESULTS OF OPERATIONS
OVERVIEW
BancGroup is involved in two primary lines of business: commercial
banking and mortgage banking, through its wholly owned subsidiary Colonial Bank
and Colonial Bank's subsidiary Colonial Mortgage Company ("CMC"). The following
summary of BancGroup's results of operations discusses the related impact of
each line of business to the earnings of the Company.
LINE OF BUSINESS RESULTS
(Dollars in thousands)
<TABLE>
<CAPTION>
COMMERCIAL MORTGAGE CORPORATE/ CONSOLIDATED
YEAR ENDED DECEMBER 31, 1998 BANKING BANKING OTHER* BANCGROUP
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $336,970 $12,900 $ (6,769) $343,101
Provision for possible loan losses 26,345 -- -- 26,345
Noninterest income 60,055 66,306 (1,103) 125,258
Amortization and depreciation 25,227 64,025 (283) 88,969
Noninterest expense 230,548 33,444 2,451 266,443
- ----------------------------------------------------------------------------------------------------------------------------
Pretax income 114,905 (18,263) (10,040) 86,602
Income taxes 40,760 (6,384) (2,970) 31,406
- ----------------------------------------------------------------------------------------------------------------------------
Net income 74,145 (11,879) (7,070) 55,196
Acquisition and restructuring expenses, net of taxes 14,520 -- 124 14,644
Y2K expenses, net of taxes 1,986 889 -- 2,875
- ----------------------------------------------------------------------------------------------------------------------------
Income excluding acquisition,
restructuring and Y2K expenses $ 90,651 $(10,990) $ (6,946) $ 72,715
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $297,691 $ 7,199 $ (6,024) $298,866
Provision for possible loan losses 16,321 -- -- 16,321
Noninterest income 50,200 51,319 (574) 100,945
Amortization and depreciation 18,768 17,972 9 36,749
Noninterest expense 178,497 22,710 3,758 204,965
- ----------------------------------------------------------------------------------------------------------------------------
Pretax income 134,305 17,836 (10,365) 141,776
Income taxes 47,605 6,698 (2,889) 51,414
- ----------------------------------------------------------------------------------------------------------------------------
Net income 86,700 11,138 (7,476) 90,362
Acquisition expenses, net of taxes 4,483 -- 687 5,170
Y2K expense, net of taxes 194 75 -- 269
- ----------------------------------------------------------------------------------------------------------------------------
Income excluding acquisition and Y2K expenses $ 91,377 $ 11,213 $ (6,789) $ 95,801
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $244,687 $ 6,307 $ (1,642) $249,352
Provision for possible loan losses 14,442 -- -- 14,442
Noninterest income 35,635 42,774 (898) 77,511
Amortization and depreciation 16,181 13,182 31 29,394
Noninterest expense 159,099 22,586 6,411 188,096
- ----------------------------------------------------------------------------------------------------------------------------
Pretax income 90,600 13,313 (8,982) 94,931
Income taxes 30,744 4,952 (2,614) 33,082
- ----------------------------------------------------------------------------------------------------------------------------
Net income 59,856 8,361 (6,368) 61,849
SAIF assessment, net of taxes 3,091 -- -- 3,091
Acquisition expenses, net of taxes 8,567 -- 967 9,534
- ----------------------------------------------------------------------------------------------------------------------------
Income excluding SAIF special assessment
and acquisition expenses $ 71,514 $ 8,361 $ (5,401) $ 74,474
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes eliminations of certain intercompany transactions.
30
<PAGE> 9
The most significant factors affecting income for 1998, 1997 and 1996
are highlighted below and discussed in greater detail in subsequent sections.
- An increase of 22.0% in average earning assets in 1998. This
follows an increase of 21.3% in 1997.
- An increase of $24.3 million (24%) and $23.4 million (30%) in
noninterest income in 1998 and 1997, respectively.
- Maintenance of high asset quality and reserve coverage ratios.
Net charge-offs were $16.7 million or .26% of average net
loans in 1998 and $12.8 million or .23% of average net loans
in 1997.
- Loan growth, excluding acquisitions, of 15.1% in 1998
following an increase of 9.75% in 1997.
- Noninterest expense for 1998 included $37.0 million in
impairment of mortgage servicing rights, $21.5 million in
acquisition and restructuring charges and $4.6 million in Y2K
expenses.
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned
on loans, securities and other interest earning assets (interest income) and
interest paid on deposits and borrowed funds (interest expense). Three year
comparisons of net interest income in dollars and the yields on a tax equivalent
basis are reflected on the following schedule. The net yield on interest-earning
assets is 4.17% in 1998 compared to 4.44% in 1997 and 4.49% in 1996. Over this
period net interest income on a fully tax equivalent basis increased to $346
million for 1998 from $302 million for 1997 and $252 million for 1996. The
principal factors affecting the Company's yields and net interest income are
discussed on the following pages.
LEVELS OF INTEREST RATES
The primary factor affecting net interest margin in 1998 was the
dramatic change in interest rates that began in September and continued through
the remainder of the year. The average fed funds rate for overnight borrowings
was at 5.50% in March 1997 where it remained until September 1998 when it
decreased to 5.25% and then continued to decline to 4.75% by the end of the
year. The Company's prime rate increased to 8.50% in March 1997 where it
remained until September 1998 when it decreased to 8.25% and continued to
decrease to 7.75% in November where it remained through the end of the year.
As a result of declining rates, the Company's yield on earning assets
decreased to 8.39% from 8.62% in 1997 and 8.63% in 1996. Interest-bearing
liabilities do not re-price as quickly as earning assets due to the competition
for certain types of deposits. The yield on interest bearing liabilities
remained constant at 4.94% for 1998 and 1997 both of which are slightly higher
than the 4.89% for 1996.
The Florida expansion resulted in improved margins from the originally
reported 4.31% for 1997 and 4.24% for 1996 to 4.44% and 4.49%, respectively. The
Florida institutions acquired in 1997 had an average cost of funds of 4.47%
compared to the 5.08% originally reported in 1996.
INTEREST-EARNING ASSETS
- Growth in Earning Assets
One of the most significant factors in the Company's increase in income
has been the 22.0% and 21.3% increase in average interest-earning
assets in 1998 and 1997, respectively. In addition and equally
significant, average net loans (including mortgage loans held for sale)
increased $1.2 billion (21.3%) from December 31, 1997 to December 31,
1998. Earning assets as a percentage of total average assets was 90.3%
and 91.5% in 1998 and 1997, respectively.
- Mortgage Loans Held for Sale
The level and direction of long-term interest rates has a dramatic
impact on the volume of mortgage loan originations from new
construction and refinancings. Low rates in 1998 resulted in an
increase in new home sales and refinancings. As a result of this
increased activity, average mortgage loans held for sale increased to
$408 million in 1998 from $159 million in 1997 and $135 million in
1996. Mortgage loans held for sale represent single family residential
mortgage loans originated or acquired by CMC, then packaged and sold in
the secondary market. CMC incurs gains or losses associated with rate
fluctuations. CMC limits its risk associated with the sale of these
loans through an active hedging program which generally provides for
sales commitments on all loans funded. Mortgage loans held for sale are
funded primarily with short-term borrowings.
- Loan Mix
At December 31, 1998 the Company's mix of loans reflected an increase
in commercial loans to 15.5% of the total portfolio from 12.6% at
December 31, 1997. Residential real estate loans decreased to 34.3% of
the total portfolio at December 31, 1998 from 40.0% at December 31,
1997. The increase in the commercial loan portfolio is a result of loan
growth in the Georgia, Florida, Texas and Nevada Regions which are
located in higher growth areas of the country. The residential real
estate loans are predominantly adjustable rate mortgages which have a
low level of credit risk and accordingly have lower yields than other
loans.
31
<PAGE> 10
AVERAGE VOLUME AND RATES
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- ------------------------------ ------------------------------
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) $6,451,427 $575,851 8.93% $5,497,737 $500,801 9.11% $4,488,023 $412,500 9.19%
Mortgage loans held for sale 407,672 29,585 7.26 158,966 12,437 7.82 135,135 10,577 7.83
Investment securities and
securities available for sale:
Taxable 1,152,624 73,829 6.41 895,083 57,107 6.38 766,440 46,852 6.11
Nontaxable (2) 93,721 6,981 7.45 88,490 6,689 7.56 80,807 5,925 7.33
Equity securities (3) 88,920 4,775 5.37 43,044 3,154 7.33 34,826 2,508 7.20
- ---------------------------------------------------- --------------------- --------------------
Total securities 1,335,265 85,585 6.41% 1,026,617 66,950 6.52% 882,073 55,285 6.27%
Federal funds sold and
securities purchased under
resale agreements and
other short-term investments 106,509 5,641 5.30 120,767 6,575 5.44 104,953 5,530 5.27
- ---------------------------------------------------- --------------------- --------------------
Total interest-earning
assets 8,300,873 696,662 8.39% 6,804,087 586,763 8.62% 5,610,184 483,892 8.63%
- ---------------------------------------------------- --------------------- --------------------
Allowance for loan losses (76,683) (69,314) (57,264)
Cash and due from banks 331,680 238,776 200,693
Premises and equipment, net 175,492 144,281 104,950
Other assets 464,533 314,663 273,804
- ----------------------------------------- ---------- ----------
TOTAL ASSETS $9,195,895 $7,432,493 $6,132,367
- ----------------------------------------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand
deposits $1,493,490 $ 44,330 2.97% $1,208,266 $ 33,708 2.79% $ 965,180 $ 26,763 2.77%
Savings deposits 531,032 16,872 3.18 485,376 16,134 3.32 422,432 13,241 3.13
Time deposits 3,428,448 195,244 5.69 3,185,125 183,056 5.75 2,570,393 148,934 5.79
Short-term borrowings 1,004,372 54,866 5.46 727,790 40,825 5.61 743,795 40,388 5.43
Long-term debt 641,367 39,129 6.10 158,529 11,048 6.97 41,285 2,800 6.78
- ---------------------------------------------------- --------------------- ----------- --------
Total interest-bearing
liabilities 7,098,709 350,441 4.94% 5,765,086 284,771 4.94% 4,743,085 232,126 4.89%
- ---------------------------------------------------- --------------------- ----------- --------
Noninterest-bearing demand
deposits 1,297,910 1,023,412 839,511
Other liabilities 156,989 96,109 90,964
- ----------------------------------------- ---------- ----------
Total liabilities 8,553,608 6,884,607 5,673,560
Shareholders' equity 642,287 547,886 458,807
- ----------------------------------------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $9,195,895 $7,432,493 $6,132,367
- -------------------------------------------------------------------------------------------------------------------------------
RATE DIFFERENTIAL 3.45% 3.68% 3.74%
NET INTEREST INCOME AND
NET YIELD ON INTEREST-
EARNING ASSETS (4) $346,221 4.17% $301,992 4.44% $251,766 4.49%
- -------------------------------------------------------------------------------------------------------------------------------
</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 on preferred stock are
actual dividends times 137.7%. Tax equivalent average rate is tax equivalent
dividends divided by average volume.
(4)Net interest income divided by average total interest-earning assets.
32
<PAGE> 11
ANALYSIS OF INTEREST INCREASES (DECREASES)
<TABLE>
<CAPTION>
1998 CHANGE FROM 1997 1997 CHANGE FROM 1996
------------------------------------------- -------------------------------------------
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 $ 16,722 $ 16,431 $ 226 $ 65 $ 10,255 $ 7,864 $2,047 $ 344
Nontaxable securities (2) 292 395 (98) (5) 764 563 183 18
Dividends on preferred
stocks (3) 1,621 3,362 (843) (898) 646 592 44 10
- ------------------------------------------------------------------------------------------------------------------------------
Total securities 18,635 20,188 (715) (838) 11,665 9,019 2,274 372
Total loans (net of unearned
income) 75,050 86,874 (10,076) (1,748) 88,301 92,804 (3,676) (827)
Mortgage loans held for sale 17,148 19,458 (901) (1,409) 1,860 1,865 (4) (1)
Federal funds sold and
securities purchased
under resale agreements and
other short-term investments (934) (771) (189) 26 1,045 833 178 34
- ------------------------------------------------------------------------------------------------------------------------------
Total 109,899 125,749 (11,881) (3,969) 102,871 104,521 (1,228) (422)
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand
deposits 10,622 7,957 2,156 509 6,945 6,740 163 42
Savings deposits 738 1,518 (713) (67) 2,893 1,973 801 119
Time deposits 12,188 13,984 (1,669) (127) 34,122 35,619 (1,208) (289)
Short-term borrowings 14,041 15,515 (1,068) (406) 437 (869) 1,335 (29)
Long-term debt 28,081 33,649 (1,376) (4,192) 8,248 7,952 77 219
- ------------------------------------------------------------------------------------------------------------------------------
Total 65,670 72,623 (2,670) (4,283) 52,645 51,415 1,168 62
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 44,229 $ 53,126 $(9,211) $ 314 $ 50,226 $ 53,106 $(2,396) $(484)
==============================================================================================================================
</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 is actual interest earned times 145%. Tax equivalent average rate is
tax equivalent interest earned divided by average volume.
(3)Dividends earned and average rates on preferred stock are reflected on a tax
equivalent basis. Tax equivalent dividends earned on preferred stock are
actual dividends times 137.7%. Tax equivalent average rate is tax equivalent
dividends divided by average volume.
INTEREST-BEARING LIABILITIES
- - Cost of Funds
The average cost of funds remained fairly constant at 4.94% in 1998,
4.94% in 1997 and 4.89% in 1996. Competitive pressures on new time
deposits and variable interest deposits remained strong. Due to these
pressures the Company's funding mix has shifted to a higher
concentration of borrowings, primarily through credit facilities with
the Federal Home Loan Bank. The percentage of average total borrowings
to total funding sources is 20% for 1998 compared to 13% for 1997 and
14% for 1996. These borrowings are an excellent funding source since
they are at rates lower than or comparable to what the market demands
for new time deposit funds. As discussed under Liquidity and Interest
Sensitivity, BancGroup's management considers these sources of funds to
be adequate to fund future loan growth.
33
<PAGE> 12
NONINTEREST INCOME
One of BancGroup's primary strategies over the last three years has been to
expand its sources of noninterest income. The Company recently established
international banking and asset management services and expanded its electronic
banking services. These services provide a broader base of revenue generation
capabilities. Noninterest income increased $24 million or 24% from 1997 to 1998
and $23 million or 30% from 1996 to 1997.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997
---------------------------------- COMPARED COMPARED
(IN THOUSANDS) 1998 1997 1996 TO 1997 % TO 1996 %
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest income:
Mortgage servicing fees $ 44,308 $ 38,352 $28,106 $ 5,956 16% $10,246 36%
Service charges on deposit
accounts 39,090 32,709 27,020 6,381 20 5,689 21
Other charges, fees, and
commissions 7,398 6,919 6,616 479 7 303 5
Other income 33,595 21,440 15,592 12,155 57 5,848 38
- ------------------------------------------------------------ ------- ------- -------
Subtotal 124,391 99,420 77,334 24,971 25 22,086 29
Other noninterest income items:
Securities gains, net 1,449 669 431 780 238
Gain (loss) on disposal of other
real estate and repossessions (582) 856 (254) (1,438) 1,110
- -------------------------------------------------------------------------- ------- -------
Total noninterest income $125,258 $100,945 $77,511 $24,313 24% $23,434 30%
- -------------------------------------------------------------------------- ------- -------
</TABLE>
Noninterest income from deposit accounts is significantly affected by
competitive pricing on these services and the volume of noninterest-bearing
accounts. During 1998 and 1997 average noninterest-bearing demand accounts
(excluding CMC custodial deposits) increased 19% and 23%, respectively. This
increase in volume and increases in service fee rates resulted in a 20% increase
in service charge income in 1998 and a 21% increase in 1997.
Other charges, fees, and commissions increased $479,000 or 7% in 1998 and
$303,000 or 5% in 1997. The increase is primarily from credit card related fees
and official check commissions.
The Company has created or expanded various sources of other noninterest
income in 1998. The international banking department that became fully
operational in July 1998 generated $392,000 of income in 1998. Also, during
1998, a private banking function was established and the investment sales force
and asset management services were expanded. At December 31, 1998 the Company
had $375 million in assets under management through its trust department and
Colonial Asset Management and is projecting a $150 million increase by the end
of 1999. Income generated from these services was approximately $3,539,000,
$2,387,000 and $2,039,000 for 1998, 1997 and 1996, respectively.
As shown in the table above, securities gains and losses in each of the three
years were $1,449,000, $669,000 and $431,000, respectively. While certain
securities are considered available for sale, BancGroup currently intends to
hold substantially all of its securities portfolio for investment purposes.
Realized gains or losses in this portfolio are generally the result of calls of
securities or sales of securities within the six months prior to maturity.
CMC serviced 186,000, 157,000, and 132,000 customers in December 31, 1998,
1997, and 1996, respectively. These customers are located in 45 states and the
District of Columbia. The outstanding balance of the servicing portfolio was
$16.3 billion, $13.1 billion and $10.6 billion at December 31, 1998, 1997 and
1996, respectively. Income from loan servicing increased 16% from 1997 to 1998
and 36% from 1996 to 1997.
CMC currently originates residential mortgages in 35 states through four
division offices and six region offices. Production volume fluctuates with
interest rates. Low rates in 1998 resulted in an increase in new home sales and
refinancings. Through its wholesale and retail offices, CMC originated $3.9
billion, $1.6 billion and $1.5 billion in residential real estate loans in 1998,
1997, and 1996, respectively. These loans are primarily fixed rate loans sold
into the secondary markets. Due to this increased activity, gains on the sales
of loans increased $9.3 million in 1998 to $20.4 million and $3.3 million in
1997 to $11.3 million. These increases are reflected in other income in the
accompanying table.
34
<PAGE> 13
NONINTEREST EXPENSE
Noninterest expenses in 1998 included $37.0 million of impairment of mortgage
servicing rights, $21.5 million in acquisition and restructuring charges and
$4.6 million in Y2K expense.(Refer to the discussion of Acquisition expense and
Restructuring charges and Year 2000 following this section.) Excluding these
charges as well as the SAIF special assessment in 1996, noninterest expense to
average assets was 3.18%, 3.16% and 3.27% in 1998, 1997, and 1996, respectively.
The impact of the acquisitions is reflected most noticeably in the increase
in net interest income, discussed previously, as well as the increase in
noninterest expense (excluding the aforementioned charges) of 24% in 1998 and
14% in 1997.
One of the primary reasons for the increase in noninterest expense to average
assets in 1998 compared to 1997 is the delay in conversion efforts of the banks
acquired in Florida. As previously mentioned, in order to alleviate further
conversion delays and the resulting delays in cost savings, the Company is
establishing an item processing facility in Florida. This action became
necessary when the prior item processor, Barnett Bank, delayed the Company's
conversion schedule and became unable to meet the Company's other needs after
Barnett's acquisition by NationsBank.
During the fourth quarter of 1998, management made the decision to shift the
Company's focus from bank acquisitions to streamlining operations. The Company's
plans include incorporating into its existing structure six acquired banks in
Florida and five in other markets. The foundation for these efficiencies is the
current operating structure where the regional banks are supported by
centralized back shop operations.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997
----------------------------------- COMPARED COMPARED
(IN THOUSANDS) 1998 1997 1996 TO 1997 % TO 1996 %
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest expense:
Salaries and employee benefits $121,445 $105,287 $ 88,346 $ 16,158 15% $16,941 19%
Net occupancy expense 28,291 23,821 18,797 4,470 19 5,024 27
Furniture and equipment expense 24,787 20,086 15,727 4,701 23 4,359 28
Amortization and impairment of
mortgage servicing rights 62,909 17,123 13,634 45,786 267 3,489 26
Amortization of intangible assets 4,927 3,206 2,151 1,721 54 1,055 49
Acquisition and restructuring
expense 21,535 6,463 11,918 15,072 233 (5,455) (46)
Year 2000 expense 4,617 432 -- 4,185 969 432 --
FDIC assessment 2,221 1,822 2,582 399 22 (760) (29)
SAIF assessment -- -- 4,754 -- -- (4,754) (100)
Advertising and public relations 7,835 7,574 7,083 261 3 491 7
Stationery, printing, and supplies 6,551 5,525 5,028 1,026 19 497 10
Telephone 7,276 5,510 5,291 1,766 32 219 4
Legal fees 4,663 2,949 3,350 1,714 58 (401) (12)
Postage 7,185 6,001 3,187 1,184 20 2,814 88
Insurance 1,644 2,095 2,360 (451) (22) (265) (11)
Professional Services 13,739 9,945 6,841 3,794 38 3,104 45
Travel 4,695 4,035 3,118 660 16 917 29
Other 31,092 19,840 23,323 11,252 57 (3,483) (15)
- -------------------------------------------------------------------------- -------- -------
Total noninterest expense $355,412 $241,714 $217,490 $113,698 47% $24,224 11%
- -------------------------------------------------------------------------- -------- -------
Noninterest expense, excluding
acquisition, restructuring and Y2K
expense to Average Assets 3.58% 3.16% 3.27%*
- --------------------------------------------------------------------------
</TABLE>
* Excluding one-time SAIF special assessment
Salaries and benefits increased $16.2 million or 15% in 1998 and $16.9
million or 19% in 1997. These increases are primarily due to increased staffing
levels as a result of acquisitions as well as normal salary rate increases. As
discussed in Note 1 to BancGroup's Consolidated Financial Statements, BancGroup
defers certain salary and benefit costs associated with loan originations and
amortizes these costs as yield adjustments over the life of the related loans.
The amount of costs deferred remained relatively constant from 1996 to 1998.
Net occupancy and furniture and equipment expense increases are primarily due
to acquisition activities and improvements to the Company's computer and
communications technology. These improvements in technology give the company the
ability to enhance customer service and continue to improve back shop
efficiencies. There were also increased occupancy costs related to the reloca-
35
<PAGE> 14
tion of certain facilities. These relocations should allow for expansion of its
customer base and provide better customer service.
In 1998, CMC recorded $37 million in additional write-downs to its mortgage
servicing rights (MSRs). This write-down was caused primarily by anticipated
prepayments of mortgages in the servicing portfolio being greater than
previously expected. The write-down increased the valuation allowance against
loss occasioned by future prepayments to $38.3 million at December 31, 1998 from
$1.4 million at December 31, 1997. The remaining increase in MSR amortization of
$8.8 million in 1998 and $3.5 million in 1997 is primarily a result of the
growth in the servicing portfolio and higher estimates of mortgage prepayments.
The net balance of MSRs was $183 million and $142 million at December 31, 1998
and 1997, respectively.
Amortization of intangible assets primarily increased due to the acquisitions
in 1998 of ASB and TB&T and in 1997 of Shamrock, First Commerce and Dadeland
which were accounted for as purchases and therefore required the recording of
goodwill and core deposit intangibles. Increases in supplies, postage and other
expenses are primarily due to additional branches, customers and other
acquisition related activities.
The Company's deposits are insured by the Federal Deposit Insurance
Corporation in two separate funds: the Bank Insurance Fund (BIF) and the Savings
Association Insurance Fund (SAIF). In 1996, legislation was approved in Congress
to recapitalize the SAIF with a special one-time charge of 65.7 basis points,
after adjusting for certain allowances. The assessment resulted in a pre-tax
charge of $4.8 million in 1996 and allowed a reduction in the annual premium
rate in future years.
ACQUISITION EXPENSE & RESTRUCTURING CHARGES
In the first quarter of 1998, BancGroup reorganized executive management of
its Florida regions. The reorganization resulted in a restructuring charge of
$2.5 million. During the fourth quarter of 1998, the Company developed a plan
to:
- close certain unprofitable branches
- sell certain super-market branches
- relocate and upgrade other branches
- move the headquarters of the South Florida Region to downtown Miami and to
consolidate the trust department into the South Florida headquarters to
better serve its customer base.
As a result of these actions, BancGroup recognized a fourth quarter
restructuring charge of $6.3 million which is net of $902,000 in reversal of
unused reserves.
The following is a summary of restructuring charges for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998
- ---------------------------------------------------------
<S> <C>
Reduction of asset values $4,395
Lease termination liabilities 2,878
Accrued severance & other 1,512
- ---------------------------------------------------------
Net Expense $8,785
- ---------------------------------------------------------
</TABLE>
Employee severance consists primarily of employment contract buy-outs of
executives that were replaced in the reorganization during the first quarter.
BancGroup plans to discontinue operations in fourteen supermarket branches.
The Company expects to close nine supermarket branches in the second quarter of
1999. The Company plans to buy-out its service contracts and lease commitments
and has written-off the related leasehold improvements of those branches based
on discounted operating cash flow calculations. All equipment should be
redeployed to other branch locations. By closing these branches, the Company
expects to save approximately $2 million per year in operating expenses. The
Company also plans to sell five other supermarket branches. This sale is
expected to close in March 1999.
To better serve its customers in South Florida, management moved its regional
headquarters to downtown Miami and relocated the trust department to the same
building in the fourth quarter of 1998. The region also plans to consolidate two
branches into a new location in 1999. As a result of these decisions, certain
facilities have been vacated by the Company and are expected to be subleased to
third parties and certain related leasehold improvements have been written-off.
BancGroup has accrued the costs of the leases for the vacated properties net of
the estimated sub-lease revenue.
At December 31, 1998, $3.5 million in restructuring accruals remained for
activities expected to occur in 1999.
Additionally, the Company has recognized acquisition related expenses
totaling $12,750,000, $6,463,000 and $11,918,000 for each of the years ended
December 31, 1998, 1997 and 1996, respectively. These expenses relate primarily
to transaction costs such as legal and accounting fees and incremental charges
related to the integration of acquired banks, such as system conversion
(including contract buy-outs and write-off of equipment) and employee severance.
YEAR 2000 READINESS DISCLOSURE
Most computer software programs and processing systems, including those used
by BancGroup and its subsidiaries in their operations, were not originally
designed to accommodate entries beyond the year 1999 in date fields. Failure to
address the anticipated consequences of this design deficiency could have
material adverse effects on the business and operations of any business,
including BancGroup, that relies on computers and associated technologies.
36
<PAGE> 15
BancGroup has aggressively addressed the challenges that Year 2000 presents
to its operations. Management has completed its remediation efforts and has
tested the core business applications which are customer related. Therefore
management does not anticipate significant disruptions in its operations as a
result of entering the new millennium. BancGroup expects to finish the remainder
of its testing, primarily involving non-mission critical applications and
testing with service providers during the first quarter of 1999. As a final
check to ensure that BancGroup will be ready for the new millennium, management
plans to perform additional Year 2000 testing during the fourth quarter of 1999.
Year 2000 compliant applications of BancGroup are currently being used in
production thereby minimizing risk factors relating to implementing new software
applications.
Throughout 1998, BancGroup has been assessing Year 2000 readiness of vendors,
business partners and other counter-parties focusing on those considered
critical to BancGroup operations. BancGroup began assessing the Year 2000
readiness of loan customers, depositors and other funds providers during the
third quarter of 1998. BancGroup will continue to monitor and evaluate the Year
2000 readiness of third parties whose Year 2000 noncompliance could have a
material adverse impact on the operations of BancGroup. BancGroup is taking
appropriate measures including development of contingency plans to mitigate the
risk to the company of Year 2000 noncompliance by third parties. However, the
impact of Year 2000 noncompliance by all third parties with which BancGroup
transacts business cannot be assessed at this time.
BancGroup has a customer awareness program in place designed to keep our
customers informed of our Year 2000 progress. The awareness program is expected
to minimize customer anxiety as we approach the new millennium. However,
management recognizes that a customer awareness program will not completely
eliminate such customer concerns. BancGroup is working closely with the Federal
Reserve to provide increased liquidity in our branches to meet the anticipated
increase in the cash needs of our customers.
BancGroup expects to spend approximately $15 million on the Year 2000
project. To date, BancGroup has incurred approximately $11.4 million of those
expenditures, $11 million in 1998 and $0.4 million in 1997. During 1998,
BancGroup purchased equipment and software totaling $5.7 million, paid third
parties approximately $2.8 million and wrote-off non-compliant equipment
totaling $2.7 million of which approximately $0.9 million was charged to
operations. Year 2000 project costs of approximately $4.6 million were expensed
during the year ended December 31, 1998 and $432,000 was expensed during the
year ended December 31, 1997. BancGroup expects to purchase approximately $3
million in equipment and pay third parties approximately $0.6 million during
1999.
Although presently not anticipated, regulators require that management
disclose what could happen if BancGroup's systems fail as a result of entering
the new millennium. A possible worst case scenario could include interruption in
the normal servicing of customers as well as the funds management of the
Company. Management is currently developing a contingency plan to minimize the
impact of a failure on our customers and/or shareholders.
Management's evaluation of Year 2000 compliance and technological upgrades is
an on-going process involving continual evaluation. Unanticipated problems could
develop and alternative solutions may be available that could cause current
solutions to be more difficult or costly than anticipated.
INCOME TAXES
The provision for income taxes and related items are as follows:
<TABLE>
<CAPTION>
Tax Provision
---------------------------------
<S> <C>
1998 $31,406,000
1997 51,414,000
1996 33,082,000
</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, nondeductible amortization of goodwill, and
certain nondeductible acquisition expenses.
Management's goal is to minimize income tax expense and maximize cash yield
on earning assets by increasing or decreasing its tax exempt securities and/or
investment in preferred and common stock. Accordingly, BancGroup's investment in
tax exempt securities was adjusted in 1996, 1997 and 1998.
37
<PAGE> 16
REVIEW OF FINANCIAL CONDITION
OVERVIEW
Changes in ending asset balances of the company's segments and changes in
selected components of the Company's balance sheet from December 31, 1997 to
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Increase (Decrease)
---------------------
(In thousands) Amount %
- -----------------------------------------------------------
<S> <C> <C>
Assets:
Commercial Banking $1,852,170 24.2%
Mortgage Banking 542,976 138.0
Corporate/Other(1) (427) (3.4)
----------
Total assets $2,394,719 29.7
----------
Other Balance Sheet
components:
Securities available for sale
and investment securities 616,168 63.6
Mortgage loans held for sale 453,502 190.1
Loans, net of unearned income 1,159,228 19.5
Mortgage servicing rights 41,429 29.2
Deposits 1,120,463 17.7
Long-term debt 431,166 136.8
- ----------------------------------------------------------
</TABLE>
(1) Includes eliminations of certain intercompany transactions.
Management continually monitors the financial condition of BancGroup in order
to protect depositors, increase shareholder value and protect current and future
earnings.
The most significant factors affecting BancGroup's financial condition from
1996 through 1998 have been:
- Internal loan growth of 15% in 1998 excluding acquisitions.
- Loan mix changed to reflect an increase in commercial loans to 15.5% of the
total portfolio from 12.6% in 1997. BancGroup continues to consider
residential mortgage loans as a consistent product line which has a
relatively low loss ratio. Residential mortgage loans were 34.3% and 40.1%
of total loans as of December 31, 1998 and 1997, respectively.
- A 26.8% increase in 1998 in average noninterest bearing demand deposits with
11.1% attributable to CMC escrow deposits and the remainder attributable to
acquisitions and internal growth.
- Maintenance of high asset quality and reserve coverage of nonperforming
assets. Nonperforming assets were .60% and .74% of related assets at
December 31, 1998 and 1997. Net charge-offs were .26% and .23% of average
loans during 1998 and 1997. The allowance for possible loan losses was 1.18%
of loans at December 31, 1998, providing a 245% coverage of non-performing
loans (nonaccrual and renegotiated).
- A loan to deposit ratio of 95.5% and 94.1% at December 31, 1998 and 1997,
respectively. Federal Home Loan Bank borrowings continue to be a major
source of funding allowing the Company greater funding flexibility.
- Increase of $454 million in CMC's mortgage loans held for sale during 1998
due primarily to increased refinancing activities and new home sales
resulting from lower interest rates.
- Increase of $41.4 million in mortgage servicing rights due to the net
increase in CMC's servicing portfolio to $16.3 billion in 1998. The Company
has hedged approximately 52% of its servicing portfolio and the related
mortgage servicing rights asset at December 31, 1998.
These items, as well as a more detailed analysis of BancGroup's financial
condition, are discussed in the following sections.
LOANS
Growth in loans and maintenance of a high quality loan portfolio are the
principal ingredients to improved earnings. This goal is achieved in various
ways as outlined below:
- Management's emphasis, within all of BancGroup's banking regions, is on loan
growth in accordance with local market demands and the lending experience
and expertise in the regional banks. Management believes that its strategy
of meeting local demands and utilizing local lending expertise has proven
successful. Management also believes that any existing concentrations of
loans, whether geographically, by industry or by borrower do not expose
BancGroup to unacceptable levels of risk.
- BancGroup has a significant concentration of residential real estate loans
representing 34.3% of total loans. Substantially all of these loans are
adjustable rate mortgages on single-family, owner occupied properties and
therefore, have minimal credit risk and lower interest rate sensitivity. A
portion of these loans were acquired through bank acquisitions.
- BancGroup also has a significant concentration in loans collateralized by
commercial real estate as shown on the following table. BancGroup's
commercial real estate loans are spread geographically throughout Alabama
and Florida and other areas including metropolitan Atlanta, Georgia, Dallas,
Texas and Reno and Las Vegas, Nevada with no more than 25% of these loans in
any one geographic region. The Alabama economy experiences a generally slow
but steady rate of growth, while Georgia, Florida, Texas and Nevada are
experiencing higher rates of growth with the Las Vegas metropolitan area
experiencing significant growth. Real estate in BancGroup's lending areas
have not experienced significantly inflated values due to excessive
inflation or speculation. BancGroup's real estate related loans continue to
perform at acceptable levels.
- CMC holds mortgage loans on a short-term basis (generally less than ninety
days) while these loans are
38
<PAGE> 17
being packaged for sale in the secondary market. These loans are classified
as mortgage loans held for sale with balances totaling $692 million, $239
million, and $168 million, at December 31, 1998, 1997, and 1996,
respectively. There is minimal credit risk associated with these loans. The
increases in mortgage loans held for sale are directly related to the
fluctuation in long-term interest rates and its related impact on mortgage
loan refinancing and new home sales. These loans are funded principally with
short-term borrowings, providing a relatively high margin for these funds.
- BancGroup's international banking department became fully operational in
July 1998. The department engages in confirming letters of credit, primarily
with top-tier banks in Latin America, and direct disbursements to those
banks from U.S. customers. Loans outstanding to Latin American banks at
December 1998 totalled approximately $97 million. However, due to the
immaterial balance of these loans in relation to total loans, these amounts
will not be reported separately.
- As discussed more fully in subsequent sections, management has established
policies and procedures to ensure maintenance of adequate liquidity and
liquidity sources. BancGroup has arranged funding sources in addition to
customer deposits which provide the capability for the Company to exceed a
100% loan to deposit ratio and maintain adequate liquidity.
- Internal loan growth has been a major factor in the Company's increasing
earnings with growth rates of 15.1% in 1998, 9.75% in 1997, 16.4% in 1996,
and 24.1% in 1995, excluding acquisitions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
GROSS LOANS BY CATEGORY
December 31
--------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 1,102,446 $ 751,375 $ 692,761 $ 609,683 $ 518,513
Real estate--commercial 2,006,851 1,673,505 1,217,175 1,031,146 906,209
Real estate--construction 1,028,471 734,239 545,681 449,542 295,238
Real estate--residential 2,438,236 2,382,324 2,010,420 1,719,537 1,112,121
Installment and consumer 344,860 329,136 315,143 276,097 240,464
Other 189,934 81,181 58,607 49,727 46,477
- ----------------------------------------------------------------------------------------------------------------------------
Total loans $ 7,110,798 $ 5,951,760 $ 4,839,787 $ 4,135,732 $ 3,119,022
- ----------------------------------------------------------------------------------------------------------------------------
</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
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------- ------------------- ------------------ --------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
(IN THOUSANDS) AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
- ------------------------------------------------- ------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Commercial, financial,
and agricultural $19,068 15.5% $13,955 12.6% $12,932 14.3% $11,153 14.7% $10,182 16.6%
Real estate--commercial 30,382 28.2 25,979 28.1 19,792 25.1 17,353 24.9 15,410 29.1
Real estate--construction 14,681 14.5 13,854 12.3 10,886 11.3 8,277 10.9 4,236 9.5
Real estate--residential 12,191 34.3 11,912 40.1 11,303 41.5 10,034 41.6 10,974 35.7
Installment and consumer 4,930 4.8 5,079 5.5 4,673 6.5 4,099 6.7 3,722 7.7
Other 2,310 2.7 1,328 1.4 2,146 1.3 2,854 1.2 3,249 1.4
- --------------------------------------------------------------------------------- --------------------------------------------------
Total $83,562 100.0% $72,107 100.0% $61,732 100.0% $53,770 100.0% $47,773 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As discussed in a subsequent section, BancGroup seeks to maintain adequate
liquidity and minimize exposure to interest rate volatility. The goals of
BancGroup with respect to loan maturities and rate sensitivity continue to focus
on shorter term maturities and floating or adjustable rate loans.
At December 31, 1998, approximately 50.9% of loans were floating rate loans.
Contractual maturities may vary significantly from actual maturities due to
loan extensions, early payoffs
39
<PAGE> 18
due to refinancing and other factors. Fluctuations in interest rates are also a
major factor in early loan pay-offs. The uncertainties of future events,
particularly with respect to interest rates, make it difficult to predict the
actual maturities. BancGroup has not maintained records related to trends of
early pay-off since management does not believe such trends would present any
significantly more accurate estimate of actual maturities than the contractual
maturities presented.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
LOAN MATURITY/RATE SENSITIVITY
DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
RATE SENSITIVITY,
LOANS MATURING
MATURING RATE SENSITIVITY OVER 1 YEAR
---------------------------------------------------------------------------------------------
WITHIN 1-5 OVER
(IN THOUSANDS) 1 YEAR YEARS 5 YEARS FIXED FLOATING FIXED FLOATING
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 507,719 $ 406,490 $ 188,237 $ 405,363 $ 697,083 $ 274,327 $ 320,400
Real estate--commercial 486,225 1,069,500 451,126 1,371,993 634,858 1,152,046 368,580
Real estate--construction 588,494 384,375 55,602 362,541 665,930 193,096 246,881
Real estate--residential 348,035 375,398 1,714,803 973,334 1,464,902 775,647 1,314,554
Installment and consumer 127,815 198,837 18,208 297,098 47,762 201,726 15,319
Other 77,679 89,705 22,550 81,913 108,021 54,472 57,783
- --------------------------------------------------------------------------------------------------------------------------------
$2,135,967 $2,524,305 $ 2,450,526 $ 3,492,242 $ 3,618,556 $ 2,651,314 $ 2,323,517
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOAN QUALITY
A major key to long-term earnings growth is maintenance of a high quality
loan portfolio. BancGroup's directive in this regard is carried out through its
policies and procedures for review of loans and through a company wide senior
credit administration function. This function reviews larger credits prior to
approval and also provides an independent review of credits on a continued
basis.
BancGroup has standard policies and procedures for the evaluation of new
credits, including debt service evaluations and collateral guidelines.
Collateral guidelines vary with the credit worthiness of the borrower, but
generally require maximum loan-to-value ratios of 85% for commercial real estate
and 90% for residential real estate. Commercial non-real estate, financial and
agricultural loans are generally collateralized by business inventory, accounts
receivables or new business equipment at 50%, 80% and 90% of estimated value,
respectively. Installment and consumer loan collateral where required is based
on 90% or lower loan to value ratios.
Based on the credit review process and loan grading system, BancGroup
determines its allowance for possible loan losses and the amount of provision
for loan losses. The allowance for possible loan losses is maintained at a level
which, in management's opinion, is adequate to absorb potential losses on loans
present in the loan portfolio. The amount of the allowance is affected by: (1)
loan charge-offs, which decrease the allowance; (2) recoveries on loans
previously charged-off, which increase the allowance; (3) the provision for
possible loan losses charged to income, which increases the allowance, and (4)
the allowance for loan losses of acquired banks. In determining the provision
for possible loan losses, it is necessary for management to monitor fluctuations
in the allowance resulting from actual charge-offs and recoveries and to
periodically review the size and composition of the loan portfolio in light of
historical loss experience and current economic conditions.
The overall goal and result of these policies and procedures is to provide a
sound basis for new credit extensions and an early recognition of problem assets
to allow increased flexibility in their timely disposition.
LOAN LOSS EXPERIENCE
During 1998 the ratio of net charge-offs to average loans increased to .26%
from .23% in 1997 and .16% in 1996. As a result of the Company's localized
lending strategies and early identification of potential problem loans,
BancGroup's net charge-offs have been consistently low. In addition, the current
concentration of loans in residential real estate loans has had a favorable
impact on net charge-offs.
The following schedule reflects greater than 100% coverage of nonperforming
loans (nonaccrual and renegotiated) by the allowance for loan losses. Management
has not targeted any specific coverage ratio in excess of 100%, and the coverage
ratio may fluctuate significantly as larger loans are placed into or removed
from nonperforming status. Management's focus has been on establishing reserves
related to an early identification of potential problem loans. Management is
committed to maintaining adequate reserve levels to absorb losses present in the
loan portfolio.
40
<PAGE> 19
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF LOAN LOSS EXPERIENCE
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses--
January 1 $ 72,107 $ 61,732 $ 53,770 $ 47,773 $ 40,733
Charge-offs:
Commercial, financial, and agricultural 6,001 5,577 3,627 4,044 2,944
Real estate--commercial 3,273 2,972 2,389 1,299 1,666
Real estate--construction 1,731 433 1,803 44 2
Real estate--residential 3,380 1,765 911 499 539
Installment and consumer 6,803 5,695 3,482 2,984 2,001
Other 1,469 694 239 166 169
- ---------------------------------------------------------------------------------------------------------------------------
Total charge-offs 22,657 17,136 12,451 9,036 7,321
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 1,206 1,001 1,452 1,252 2,249
Real estate--commercial 1,399 1,024 1,533 48 251
Real estate--construction 43 91 1 11 12
Real estate--residential 545 244 697 201 104
Installment and consumer 1,945 1,820 1,589 1,358 1,527
Other 789 137 82 46 44
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 5,927 4,317 5,354 2,916 4,187
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs 16,730 12,819 7,097 6,120 3,134
Addition to allowance charged to
operating expense 26,345 16,321 14,442 10,989 9,673
Allowance added from bank acquisitions 1,840 6,873 617 1,128 501
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses--
December 31 $ 83,562 $ 72,107 $ 61,732 $ 53,770 $ 47,773
- ---------------------------------------------------------------------------------------------------------------------------
Loans (net of unearned income)
December 31 $7,110,295 $5,951,067 $4,835,274 $4,130,126 $3,112,937
Ratio of ending allowance to ending loans
(net of unearned income) 1.18% 1.21% 1.28% 1.30% 1.53%
Average loans (net of unearned income) $6,451,427 $5,497,737 $4,488,023 $3,553,499 $2,806,605
Ratio of net charge-offs to average loans
(net of unearned income) .26% .23% .16% .17% .11%
Allowance for loan losses as a percent
of nonperforming loans
(nonaccrual and renegotiated) 245% 247% 234% 243% 212%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 20
NONPERFORMING ASSETS
BancGroup classifies problem loans into four categories: nonaccrual, past
due, renegotiated and other potential problems. When management determines a
loan no longer meets the criteria for performing loans and collection of
interest appears doubtful, the loan is placed on nonaccrual status. Loans are
generally placed on nonaccrual if full collection of principal and interest
becomes unlikely (even if all payments are current) or if the loan is delinquent
in principal or interest payments for 90 days or more, unless the loan is well
secured and in the process of collection. BancGroup's policy is also to charge
off installment loans 120 days past due unless they are in the process of
foreclosure and are adequately collateralized. Management closely monitors all
loans which are contractually 90 days past due, renegotiated or nonaccrual.
These loans are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
DECEMBER 31
-----------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate loans for which interest is
not being accrued $32,823 $28,209 $24,729 $20,201 $18,963
Aggregate loans renegotiated to
provide a reduction or deferral
of interest or principal because of
a deterioration in the financial
condition of the borrower 1,334 1,014 1,683 1,882 3,541
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans* 34,157 29,223 26,412 22,083 22,504
Other real estate and in-substance foreclosure 8,164 14,044 11,834 14,884 19,387
Repossessions 564 796 338 171 81
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets* $42,885 $ 44,063 $38,584 $37,138 $41,972
- ----------------------------------------------------------------------------------------------------------------------------
Aggregate loans contractually past due 90
days for which interest is being accrued $ 8,992 $ 7,335 $ 7,860 $ 3,532 $ 4,399
Total nonperforming loans as a
percent of net loans 0.48% 0.49% 0.55% 0.53% 0.72%
Total nonperforming assets as a percent of
net loans, other real estate and repossessions 0.60% 0.74% 0.80% 0.90% 1.34%
Total nonperforming and 90 day past due
loans for which interest is being accrued
as a percent of total loans 0.61% 0.61% 0.71% 0.62% 0.86%
Allowance for loan loss as a percent of
nonperforming loans (nonaccrual
and renegotiated) 245% 247% 234% 243% 212%
- ----------------------------------------------------------------------------------------------------------------------------
</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. The
decrease in the Company's nonperforming ratio from 1994 to 1995 was primarily
due to the disposition of assets from the 1993 acquisition of First AmFed.
Management, through its loan officers, internal loan review staff and
external examinations by regulatory agencies, has identified approximately $158
million of potential problem loans not included above. The status of these loans
is reviewed at least quarterly by loan officers and the centralized loan review
function and annually by regulatory agencies. In connection with such reviews,
collateral values are updated where considered necessary. If collateral values
are judged insufficient or other sources of repayment inadequate, the loans are
reduced to estimated recoverable amounts through increases in reserves allocated
to the loans or charge-offs. As of December 31, 1998 substantially all of these
loans are current with their existing repayment terms. Management believes that
classification of such loans as potential problem loans well in advance of their
reaching a delinquent status allows the Company the greatest flexibility in
correcting problems and providing adequate reserves. Given the reserves and the
ability of the borrowers to comply with the existing repayment terms, management
believes any exposure from these potential problem loans has been adequately
addressed at the present time.
The above nonperforming loans and potential problem loans represent all
material credits for which management has serious doubts as to the ability of
the borrowers to comply with the loan repayment terms.
42
<PAGE> 21
Management also expects that the resolution of these problem credits as well as
other performing loans will not materially impact future operating results,
liquidity or capital resources.
Interest income recognized and interest income foregone on nonaccrual loans
was not significant for the years ended December 31, 1998, 1997, 1996, 1995 and
1994.
The recorded investment in impaired loans at December 31, 1998 and 1997 was
$18,640,000 and $16,462,000, respectively and these loans had a corresponding
valuation allowance of $4,813,000 and $5,381,000, respectively. The average
investment in impaired loans during 1998 and 1997 totaled $20,014,000 and
$18,853,000, respectively.
SECURITIES
BancGroup determines on a daily basis the funds available for short-term
investment. Funds available for long-term investment are projected based upon
anticipated loan and deposit growth, liquidity needs, pledging requirements and
maturities of securities, as well as other factors. Based on these factors and
management's interest rate and income tax forecast, an investment strategy is
determined. Significant elements of this strategy as of December 31, 1998
include:
- BancGroup's investment in U.S. Treasury securities and obligations of U.S.
government agencies is substantially all pledged against public funds
deposits or used as collateral for repurchase agreements.
- BancGroup is required to carry Federal Home Loan Bank (FHLB) Stock in
connection with its borrowings with FHLB. BancGroup is also required to
carry Federal Reserve Stock since its subsidiary bank became a member bank
of the Federal Reserve system in June 1997.
- Investment alternatives which maximize the after-tax net yield are
considered.
- Management has also attempted to increase the investment portfolio's overall
yield by investing funds in excess of pledging requirements in high-grade
corporate notes and mortgage-backed securities.
- The investment strategy also incorporates high-grade preferred stocks when
the tax equivalent yield on these investments provides an attractive
alternative. The yields on these preferred stocks are adjusted on a
short-term basis and provide tax advantaged income without long-term
interest rate risk.
- The maturities of investment alternatives are determined in consideration of
the yield curve, liquidity needs and the Company's asset/liability gap
position.
- The risk elements associated with the various types of securities are also
considered in determining investment strategies. U.S. Treasury and U.S.
government agency obligations are considered to contain virtually no default
or prepayment risk. Mortgage-backed securities have varying degrees of risk
of impairment of principal. Impairment risk is primarily associated with
accelerated prepayments, particularly with respect to longer maturities
purchased at a premium and interest-only strip securities. BancGroup's
mortgage backed security portfolio as of December 31, 1998 does not include
any interest-only strips and the amount of unamortized premium on mortgage
backed securities is approximately $2,973,000. The recoverability of
BancGroup's investment in mortgage-backed securities is reviewed
periodically, and where necessary, appropriate adjustments are made to
income for impaired values.
- Obligations of state and political subdivisions, as well as other
securities, have varying degrees of credit risk associated with the
individual borrowers. The credit ratings and the credit worthiness of these
securities are reviewed periodically and appropriate reserves are
established when necessary.
Investment securities are those securities which management has the ability
and intent to hold until maturity. The decline in investment securities is due
to maturities and calls in the portfolio.
Securities available for sale represent those securities that BancGroup
intends to hold for an indefinite period of time or that may be sold in response
to changes in interest rates, prepayment risk and other similar factors. These
securities are recorded at market value with unrealized gains or losses, net of
any tax effect, added or deducted from shareholders' equity. The balance in
securities available for sale increased from $656 million at December 31, 1997
to $1,414 million at December 31, 1998. At December 31, 1998, BancGroup had $310
million in mortgage backed securities purchased under a reverse repurchase
agreement. These securities are collateral for $317 million in debt outstanding
in connection with the purchase of these securities. Other securities available
for sale increased $164 million primarily as a result of investments in
Corporate notes, FHLB stock and preferred stocks.
At December 31, 1998, there was no single issuer, with the exception of U.S.
government and U.S. government agencies, where the aggregate book value of these
securities exceeded ten percent of shareholders' equity ($64.0 million).
The changes noted above are reflected on the following table.
43
<PAGE> 22
SECURITIES BY CATEGORY
<TABLE>
<CAPTION>
CARRYING VALUE
AT DECEMBER 31
-----------------------------
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Investment securities:
U.S. Treasury securities
and obligations of
U.S. government
agencies $ 83,322 $172,065 $192,468
Mortgage-backed
securities 45,037 85,298 91,445
Obligations of state
and political
subdivisions 41,185 54,036 52,069
Other 1,410 1,741 7,652
- -------------------------------------------------------------
Total $170,954 $313,140 $343,634
- -------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CARRYING VALUE
AT DECEMBER 31
--------------------------------
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasury securities
and obligations of
U.S. government
agencies $ 152,162 $350,398 $332,114
Mortgage-backed
securities 1,030,801 256,396 216,921
Obligations of state
and political
subdivisions 58,316 40,233 32,071
Other 172,939 8,837 13,710
- ------------------------------------------------------------------
Total $1,414,218 $655,864 $594,816
- ------------------------------------------------------------------
</TABLE>
The carrying value of securities at December 31, 1998 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 $ 70,573 5.90% $12,249 6.66% $ -- -- $ 500 7.24%
Mortgage-backed securities 5,510 6.63 21,712 6.94 5,685 7.05% 12,130 7.65
Obligations of state and
political subdivisions (1) 4,321 4.74 19,898 5.13 9,716 5.30 7,250 6.19
Other 70 5.22 1,340 6.49 -- -- -- --
-------------------------------------------------------------------------------------------
Total $ 80,474 5.89% $55,199 6.21% $15,401 5.95% $19,880 7.11%
- -------------------------------------------------------------------------------------------------------------------------------
Securities available for sale (2):
U.S. Treasury securities
and obligations of U.S.
government agencies $ 152,162 6.07%
Mortgage-backed securities 1,030,801 6.43
Obligations of state and political
subdivisions (1) 58,316 4.94
Other 83,302 6.81
-------------------------------------------------------------------------------------------
Total $1,324,581 6.35%
- -------------------------------------------------------------------------------------------------------------------------------
</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.
- ------------------------------------------------------------------------------
MORTGAGE SERVICING RIGHTS (MSRS) AND SERVICING HEDGE
The balances of MSRs were $183 million and $142 million at December 31, 1998
and 1997, respectively. In 1998, the Company recorded $37 million of impairment
to its unhedged MSRs. This write-down was caused primarily by anticipated
prepayments of mortgages in the servicing portfolio being greater than
previously expected. The write-down increased the valuation allowance against
loss occasioned by future prepayments to $38.3 million at December 31, 1998. The
Company, with the assistance of a third party advisor, developed a strategy to
hedge against future decreases in interest rates through the use of Treasury
futures and options. In October 1998, the Company began to hedge a portion of
its servicing portfolio and related mortgage servicing rights asset. At December
31, 1998 the Company had hedged approximately 52% of its servicing portfolio and
44
<PAGE> 23
related MSRs asset. The hedge positions are designated to specific portions of
the servicing asset and are monitored daily and adjusted as necessary for
changes in the market and projected interest rate movement. The objective of
this strategy is to achieve a high degree of correlation between changes in
value associated with the hedged asset (the servicing portfolio and the related
servicing rights) and the servicing hedge. The servicing hedge is designed to
rise in value when interest rates fall and decline in value when interest rates
rise, in contrast to the expected movements in value of the servicing asset,
therefore reducing earnings volatility caused by interest rate movements.
These risk-management activities do not eliminate interest-rate risk in the
MSRs. Treasury rates, to which the MSR hedges are indexed, may not move in
tandem with mortgage interest rates. As mortgage interest rates change, actual
prepayments may not respond exactly as anticipated. Other pricing factors, such
as the volatility of the market yields, may affect the value of the option
hedges without similarly impacting the MSRs. (Refer to Notes 6 and 7 to the
Consolidated Financial Statements for additional information.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DEPOSITS
BancGroup's deposit structure consists of the following:
DECEMBER 31 % OF TOTAL
-------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $1,548,082 $1,147,280 20.8% 18.1%
Interest-bearing demand deposits 1,747,321 1,416,404 23.4 22.6
Savings deposits 560,308 501,857 7.5 7.9
Certificates of deposits less than $100,000 2,222,301 2,127,176 29.8 33.6
Certificates of deposits more than $100,000 1,002,503 787,187 13.5 12.4
IRAs 316,844 300,289 4.3 4.7
Open time deposits 48,794 45,497 0.7 0.7
- --------------------------------------------------------------------------------------------------------------------------
Total deposits $7,446,153 $6,325,690 100.0% 100.0%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The growth in deposits and the mix of deposits has been most significantly
impacted in 1997 and 1998 by the acquisitions accounted for under the purchase
method of accounting. Noninterest-bearing demand deposits have increased $401
million (35%) from December 31, 1997 to December 31, 1998, of which 16% was due
to the aforementioned acquisitions and 6% was due to CMC custodial deposits. The
remaining increase is attributable to the development of customer relationships
and sales efforts.
BancGroup has attempted through its acquisitions and branch expansion
programs to increase its market presence into high growth markets in the
country. Prior to 1998 the expansion was concentrated in Florida and the Atlanta
metropolitan area. In 1998, Colonial continued its efforts by moving west into
Dallas, Texas and Reno and Las Vegas, Nevada. The principal goal is to provide
the Company's retail customer base with convenient access to branch locations
while enhancing the Company's potential for future increases in profitability.
Primarily through acquisitions, the number of retail branches increased to 250
in 1998 from 219 in 1997. In an effort to continue improving customer service,
the Company has established asset management services, international banking and
electronic banking (which includes home banking, business banking, automatic
teller, credit card and check card services). Through asset management services,
BancGroup is continuing its sales of investment products, such as mutual funds
and annuities to customers seeking alternatives to deposit products. The overall
goal of these steps has been to efficiently provide customers with the financial
products they need and desire.
The Company has an established brokered Certificate of Deposit (CD) program
to offer CD's in increments of $1,000 to $99,000 to out of market customers at
competitive rates and maturities. At December 31, 1998 and 1997, $188 million
and $78 million, respectively were outstanding under this program.
In 1997, the Company initiated a brokered money market program. Funds are
transferred daily to meet short-term funding fluctuations. At December 31, 1998
and 1997, $249 million and $147 million were outstanding, respectively.
45
<PAGE> 24
SHORT-TERM BORROWINGS
Short-term borrowings were comprised of the following at December 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Federal Funds purchased
and securities sold
under repurchase
agreements $ 480,008 $284,740 $154,927
Federal Home Loan
Bank borrowings 769,987 420,000 715,000
Reverse repurchase
agreements 184,834 12,695 --
Current Maturities
of FHLB Advances 50,840 1,345 983
Other short-term
borrowings 25,299 12,579 1,322
- ----------------------------------------------------------
Total $1,510,968 $731,359 $872,232
- ----------------------------------------------------------
</TABLE>
BancGroup has available additional Federal Funds lines from upstream banks
including the Federal Home Loan Bank (FHLB) totaling $190 million at December
31, 1998. In addition, correspondent banks and customers with repurchase
agreements have provided a consistent base of short-term funds. BancGroup is a
member of the FHLB which provides availability of up to $2 billion from the FHLB
on either a short or long-term basis excluding funds available through the
Federal Funds line. At December 31, 1998, the FHLB unused line of credit was
$651 million of which $158 million was available based on current collateral.
This credit facility is collateralized by the Company's residential real estate
loans.
Short-term borrowings, including FHLB borrowings, have been used to fund
short-term assets, primarily mortgage loans held for sale, and loans. FHLB
borrowings have been used during 1998 and 1997 to fund loan growth. As discussed
more fully in the "Liquidity and Interest Sensitivity" section of this report,
the line of credit with FHLB is considered a primary source of funding for the
Company's asset growth.
Colonial Bank has an additional $500 million available through a warehouse
line with FHLB that is collateralized by mortgage loans held for sale with no
balance outstanding at December 31, 1998.
BancGroup entered into reverse repurchase arrangements under which it
purchased mortgage backed securities. These securities are collateral for the
$185 million in short-term debt as well as the $132 million in long-term debt.
In December 1998, the Company entered into a term note with an unaffiliated
financial institution for $25 million. This note is scheduled to mature in June
1999.
LIQUIDITY AND INTEREST SENSITIVITY
BancGroup has addressed its liquidity and interest rate sensitivity through
its policies and structure for asset/liability management. It has created the
Asset/Liability Management Committee ("ALMCO"), the objective of which is to
optimize the net interest margin while assuming reasonable business risks. ALMCO
annually establishes operating constraints for critical elements of BancGroup's
business, such as liquidity and rate sensitivity. ALMCO constantly monitors
performance and takes action in order to meet its objectives.
Of primary concern to ALMCO, is maintaining adequate liquidity. Liquidity is
the ability of an organization to meet its financial commitments and obligations
on a timely basis. These commitments and obligations include credit needs of
customers, withdrawals by depositors, repayment of debt when due and payment of
operating expenses and dividends.
The consolidated statement of cash flows identifies the three major sources
and uses of cash (liquidity) as operating, investing and financing activities.
Operating activities reflect cash generated from operations. Management views
cash flow from operations as a major source of liquidity. Investing activities
represent a primary usage of cash with the major net increase being attributed
to loan growth. When securities mature they are generally reinvested in new
securities or assets held for sale. Financing activities generally provide
funding for the growth in loans and securities with increased deposits.
Short-term borrowings are used to provide funding for temporary gaps in the
funding of long-term assets and deposits, as well as to provide funding for
mortgage loans held for sale and loan growth. BancGroup has the ability to tap
other markets for certificates of deposits and to utilize established lines for
Federal funds purchased and FHLB advances. BancGroup maintains and builds
diversified funding sources in order to provide flexibility in meeting its
requirements.
From 1996 through 1998 the significant changes in BancGroup's cash flows have
centered around loan growth and fluctuations in mortgage loans held for sale.
Loan growth of $974 million in 1998 and $651 million in 1997 has been one of the
principal uses of cash in both years. Mortgage loans held for sale increased in
1998 and 1997, using $454 million and $71 million, respectively, in funds.
Deposit growth, excluding acquisitions, of $800 million in 1998 and $526 million
in 1997 provided the primary source of funding for internal loan growth.
Short-term borrowings excluding acquisitions increased $646 million in 1998 and
$72 million in 1997 and were also used to fund loan growth. Management has
chosen to fund short-term fluctuations in the volume of mortgage loans held for
sale with short-term borrowings as opposed to increasing rate sensitive
deposits.
BancGroup had $2.4 billion of residential real estate loans at both December
31, 1998 and 1997. These loans provide collateral for the current $2.0 billion
credit facility at the FHLB. At December 31, 1998, the FHLB unused line of
credit was $651 million of which $158 million was available based on current
collateral. This line provides the Company significant flexibility in asset/
liability management, liquidity and deposit pricing.
46
<PAGE> 25
During 1998 and in connection with the ASB acquisition, BancGroup issued
$7.73 million of variable rate subordinated debentures. The debentures bear
interest equal to the New York Prime Rate minus 1% (but not less than 7%).
BancGroup entered into reverse repurchase arrangements under which it purchased
mortgage backed securities. These securities are collateral for the $185 million
in short-term debt as well as the $132 million in long-term debt. BancGroup had
an outstanding term note with an unaffiliated financial institution in the
amount of $25 million at December 31, 1998. The term note is payable in full
upon maturity on June 30, 1999 and bears an interest rate of 1% above LIBOR.
Management believes its liquidity sources and funding strategies are adequate
given the nature of its asset base and current loan demand.
In January 1997, BancGroup issued $70 million in Trust Preferred Securities.
These securities qualify as Tier I Capital and carry an 8.92% interest rate. A
portion of the proceeds of the offering were utilized to pay off a term note and
revolving debt outstanding. The remainder of the proceeds were used for
acquisitions and other business purposes.
In January 1996, the Company called $7.5 million of its 1985 subordinated
debentures which had a maturity date of 2000. As a result, 1,613,196 shares of
BancGroup stock were issued and cash was paid for the remaining debentures. In
December 1996, BancGroup entered into a two year revolving line of credit for
$35 million and a term loan with a maximum principal amount of $15.5 million.
This line of credit expired in 1998.
The primary uses of funds as reflected in BancGroup's parent only statement
of cash flows (Note 24) were $7 million for the payment of interest on debt, $17
million to purchase treasury stock which was subsequently issued in the TB&T
acquisition, $25 million advanced to Colonial Bank for acquisition related
activities and $36 million for the payment of dividends. The parent company's
primary sources of funds were $49.5 million in dividends received from its
subsidiaries and $12 million from the increase in short-term borrowings.
Dividends payable by national and state banks in any year, without prior
approval of the appropriate regulatory authorities, are limited to the bank's
net profits (as defined) for that year combined with its retained net profits
for the preceding two years. Under these limitations, approximately $107 million
of retained earnings plus certain 1999 earnings would be available for
distribution to BancGroup, from its subsidiaries, as dividends in 1999 without
prior approval from the respective regulatory authorities. BancGroup anticipates
that the cash flow needs of the parent company are well below the regulatory
dividend restrictions of its subsidiary banks.
At December 31, 1998, BancGroup's liquidity position was adequate with loan
maturities of $2.1 billion, or 30% of the total loan portfolio, due within one
year. Securities totaling $1.5 billion or 94% of the total portfolio also had
maturities within one year or have been classified as available for sale. As of
December 31, 1998 there were, however, no current plans to dispose of any
significant portion of these securities. In addition BancGroup has $158 million
in additional borrowing capacity at the FHLB, $500 million available through a
warehouse line with FHLB and $190 million from Fed Fund lines.
BancGroup's asset/liability management policy has also established targets
for interest rate sensitivity. Changes in interest rates will necessarily lead
to changes in the net interest margin. It is ALMCO's goal to minimize volatility
in the net interest margin by taking an active role in managing the level, mix
and maturities of assets and liabilities and by analyzing and taking action to
manage mismatch and basis risk. The interest sensitivity schedule reflects a
11.4% negative gap at 12 months; therefore, BancGroup has a greater exposure to
net income if interest rates increase.
BancGroup's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest earning
assets and interest bearing liabilities do not change at the same speed, to the
same extent or on the same basis. The Company monitors the impact of changes in
interest rates on its net interest income using several tools. One measure of
the Company's exposure to differential changes in interest rates between assets
and liabilities is shown in the Company's Maturity and Rate Sensitivity
Analysis. The following table measures the impact on net interest income and on
net portfolio value of an immediate change in interest rates in 100 basis point
increments. Net portfolio value is defined as the net present value of
interest-earning assets, interest-bearing liabilities, and off-balance sheet
contracts. Following are the estimated impacts of immediate changes in interest
rates at the specified levels at December 31, 1998.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN:
BASIS NET INTEREST NET PORTFOLIO
POINTS INCOME(1) VALUE(2)
- ------------------------------------------------------------
<S> <C> <C>
+400 (7)% (26)%
+300 (4) (17)
+200 (2) (11)
+100 (1) (5)
-100 (3) 4
-200 (7) 7
-300 (14) 9
-400 (22) 11
- ------------------------------------------------------------
</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
47
<PAGE> 26
BancGroup could undertake in response to changes in interest rates.
Management has managed the asset/liability position of the bank through
traditional sources. BancGroup does, however, use off balance sheet financial
instruments for hedging purposes to limit its risk associated with the sale of
mortgage loans by providing sales commitments on all loans funded and held for
sale. As previously discussed, the Company has developed a strategy to hedge its
servicing portfolio against future declines in interest through the use of
Treasury futures and options. The objective of this strategy is to maintain a
correlation over time between the value of servicing rights and the servicing
hedge. At December 31, 1998, the Company had hedged approximately 52% of its
servicing portfolio. (Refer to more detailed discussions of the hedging
activities included in Management's Discussion under Mortgage Servicing Rights
and Servicing Hedge and Notes 6 and 7 to the Consolidated Financial Statements.)
In December 1997 BancGroup purchased $30 million of Bank-Owned Life Insurance
("BOLI"). This long-term asset represents life insurance purchased from highly
rated insurance companies on certain employees with the bank named as the
beneficiary. The Company considers these funds available for the future payment
of benefits due the employee's beneficiaries from group benefit plans.
The following table summarizes BancGroup's interest rate sensitivity at
December 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------------------------------------------------------------
INTEREST SENSITIVE WITHIN
-----------------------------------------------------------------------------------
TOTAL 0-90 91-180 181-365 1-5 OVER
(IN THOUSANDS) BALANCE DAYS DAYS DAYS YEARS 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Federal Funds sold and resale
agreements $ 57,247 $ 57,247 $ -- $ -- $ -- $ --
Investment securities 170,954 7,582 11,320 66,558 53,907 31,587
Securities available for sale 1,414,218 254,463 14,380 42,505 173,949 928,921
Mortgage loans held for sale 692,042 692,042 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 7,110,295 2,456,658 355,537 509,978 2,634,297 1,153,825
Allowance for possible loan losses (83,562) (28,871) (4,179) (5,993) (30,960) (13,559)
- ----------------------------------------------------------------------------------------------------------------------------
Net loans 7,026,733 2,427,787 351,358 503,985 2,603,337 1,140,266
Nonearning assets 1,095,091 -- -- -- -- 1,095,091
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $10,456,285 $3,439,121 $ 377,058 $ 613,048 $2,831,193 $3,195,865
- ----------------------------------------------------------------------------------------------------------------------------
Rate Sensitive Liabilities:
Interest-bearing demand deposits $ 1,747,321 $ 997,719 $ -- $ -- $ -- $ 749,602
Savings deposits 560,308 246,660 13 498 -- 313,137
Certificates of deposits less than
$100,000 2,222,301 712,004 385,140 530,989 586,778 7,390
Certificates of deposits more than
$100,000 1,002,503 339,590 208,491 217,971 236,251 200
IRAs 316,844 90,844 44,613 64,683 116,280 424
Open time deposits 48,794 44,608 424 636 3,126 --
Short-term borrowings 1,510,968 1,485,128 -- 25,840 -- --
Long-term debt 746,447 122,091 52,888 50,074 377,687 143,707
Noncosting liabilities & equity 2,300,799 -- -- -- -- 2,300,799
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities & Equity $10,456,285 $4,038,644 $ 691,569 $ 890,691 $1,320,122 $3,515,259
- ----------------------------------------------------------------------------------------------------------------------------
Gap $ -- $ (599,523) $(314,511) $ (277,643) $1,511,071 $ (319,394)
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative Gap $ -- $ (599,523) $(914,034) $(1,191,677) $ 319,394 $ 0
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 27
At the bottom of the table is the interest rate sensitivity gap which is the
difference between rate sensitive assets and rate sensitive liabilities.
In reviewing the table, it should be noted that the balances are shown for a
specific point in time and, because the interest sensitivity position is
dynamic, it can change significantly over time. For all interest earning assets
and interest bearing liabilities, variable rate assets and liabilities are
reflected in the time interval of the assets or liabilities' earliest repricing
date. Fixed rate assets and liabilities have been allocated to various time
intervals based on contractual repayment. Furthermore, the balances reflect
contractual repricing of the deposits and management's position on repricing
certain deposits where management discretion is permitted. Prepayment
assumptions are applied at a constant rate based on the Company's historical
experience. Certain demand deposit accounts and regular savings accounts have
been classified as repricing beyond one year in accordance with regulatory
guidelines. While these accounts are subject to immediate withdrawal, experience
has shown them to be relatively rate insensitive. If these accounts were
included in the 0 - 90 day category, the gap in that time frame would be a
negative $1.7 billion with a corresponding cumulative gap at one year of
negative $2.3 billion.
CAPITAL ADEQUACY AND RESOURCES
Management is committed to maintaining capital at a level sufficient to
protect shareholders and depositors, provide for reasonable growth and fully
comply with all regulatory requirements. Management's strategy to achieve these
goals is to retain sufficient earnings while providing a reasonable return to
shareholders in the form of dividends and return on equity. The Company's
dividend pay-out ratio target range is 30-45%. Dividend rates are determined by
the Board of Directors in consideration of several factors including: current
and projected capital ratios, liquidity and income levels and other bank
dividend yields and payment ratios.
The amount of a cash dividend, if any, rests with the discretion of the Board
of Directors of BancGroup as well as upon applicable statutory constraints such
as the Delaware law requirement that dividends may be paid only out of capital
surplus or net profits for the fiscal year in which the dividend is declared or
the preceeding fiscal year.
BancGroup also has access to equity capital markets through both public and
private issuances. Management considers these sources and related return in
addition to internally generated capital in evaluating future expansion or
acquisition opportunities.
The Federal Reserve Board has issued guidelines identifying minimum Tier I
leverage ratios relative to total assets and minimum capital ratios relative to
risk-adjusted assets. The minimum leverage ratio is 3% but is increased from 100
to 200 basis points based on a review of individual banks by the Federal
Reserve. The minimum risk adjusted capital ratios established by the Federal
Reserve are 4% for Tier I and 8% for total capital. BancGroup's actual capital
ratios and the components of capital and risk adjusted asset information
(subject to regulatory review) as of December 31, 1998 are stated below:
<TABLE>
<S> <C>
Capital (thousands):
Tier I Capital:
Shareholders' equity
(excluding unrealized gain
on securities available
for sale and intangibles
plus Trust Preferred Securities) $ 607,110
Tier II Capital:
Allowable loan loss reserve 83,562
Subordinated debt 12,542
------------
Total Capital $ 703,214
Risk Adjusted Assets (thousands) $ 7,140,985
Total Assets (thousands) $ 10,456,285
<CAPTION>
1998 1997
- -----------------------------------------------------------
<S> <C> <C>
Tier I leverage ratio 6.08% 7.56%
Risk Adjusted Capital
Ratios:
Tier I Capital Ratio 8.50% 10.07%
Total Capital Ratio 9.85% 11.41%
</TABLE>
BancGroup has increased capital gradually through normal earnings retention
as well as through stock registrations to capitalize acquisitions. The decline
in the ratios is primarily due to rapid asset growth and the charges recorded in
1998 related to acquisition, restructuring and mortgage servicing rights write
downs. These charges are discussed in the "Noninterest Expense" and "Acquisition
Expense and Restructuring Charges" sections of Management's Discussion and
Analysis.
In January 1997, BancGroup issued $70 million of Trust Preferred Securities
which qualify as Tier 1 Capital.
REGULATORY RESTRICTIONS
As noted previously, dividends payable by national and state banks in any
year, without prior approval of the appropriate regulatory authorities, are
limited.
The subsidiary banks are also required by law to maintain noninterest-bearing
deposits with the Federal Reserve Bank to meet regulatory reserve requirements.
At December 31, 1998, these deposits totaled $52.6 million.
FINANCIAL ACCOUNTING STANDARDS BOARD RELEASES
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting of Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of financial statements. This statement also
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
49
<PAGE> 28
statements. On January 1, 1998 BancGroup adopted SFAS No. 130.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement requires the reporting of
financial and descriptive information about an enterprise's reportable operating
segments. On January 1, 1998 BancGroup adopted SFAS No. 131. Under SFAS No. 131,
BancGroup is reporting two segments, commercial banking and mortgage banking.
In February, 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
which revises employers' disclosures about pension costs and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans but standardizes the disclosure requirements for pension and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair value of plan assets
that will facilitate financial analysis and eliminates certain disclosures no
longer useful. On January 1, 1998, BancGroup adopted this statement. (See note
14 to the Consolidated Financial Statements.)
In June 1998, the Financials Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation.
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of this
Statement. Earlier application of all of the provisions of this Statement is
encouraged, but it is permitted only as of the beginning of any fiscal quarter
that begins after issuance of the Statement. This Statement should not be
applied retroactively to financial statements of prior periods. Management is
currently in the process of assessing the impact that SFAS No. 133 will have on
BancGroup's financial statements.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities: (i) deposit attrition, customer loss, or revenue loss in the
ordinary course of business; (ii) increases in competitive pressure in the
banking industry; (iii) costs or difficulties related to the integration of the
businesses of BancGroup and the institutions acquired are greater than expected;
(iv) changes in the interest rate environment which reduce margins; (v) changes
in mortgage servicing rights prepayment assumptions; (vi) general economic
conditions, either nationally or regionally, that are less favorable than
expected, resulting in, among other things, a deterioration in credit quality;
(vii) changes which may occur in the regulatory environment; (viii) a
significant rate of inflation (deflation); (ix) changes in the securities
markets; and (x) specifically relating to Year 2000 readiness disclosure, vendor
representations, technological advancements, and economic factors including
liquidity availability. When used in this Report, the words "believes,"
"estimates," "plans," "expects," "should," "may," "might," "outlook," and
"anticipates," and similar expressions as they relate to BancGroup (including
its subsidiaries), or its management are intended to identify forward-looking
statements.
50
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders
The Colonial BancGroup, Inc.
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of The Colonial BancGroup, Inc. and subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Montgomery, Alabama
February 26, 1999
51
<PAGE> 30
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31, 1998 and 1997
(Dollars in thousands)
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 437,719 $ 337,079
Interest-bearing deposits in banks and federal funds sold 57,247 100,172
Securities available for sale (Note 3) 1,414,218 655,864
Investment securities (market value: 1998, $173,542; 1997, $315,787) 170,954 313,140
Mortgage loans held for sale 692,042 238,540
Loans, net of unearned income (Note 4) 7,110,295 5,951,067
Less:
Allowance for possible loan losses (83,562) (72,107)
- --------------------------------------------------------------------------------------------------------
Loans, net 7,026,733 5,878,960
Premises and equipment, net (Note 8) 181,617 161,387
Excess of cost over tangible and identified intangible assets
acquired, net 84,893 69,250
Mortgage servicing rights 183,469 142,040
Other real estate owned 8,728 14,840
Accrued interest and other assets 198,665 150,294
- --------------------------------------------------------------------------------------------------------
Total $ 10,456,285 $ 8,061,566
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing demand $ 1,548,082 $ 1,147,280
Interest-bearing demand 1,747,321 1,416,404
Savings 560,308 501,857
Time 3,590,442 3,260,149
- --------------------------------------------------------------------------------------------------------
Total deposits 7,446,153 6,325,690
FHLB short-term borrowings (Note 9) 769,987 420,000
Other short-term borrowings (Note 9) 740,981 311,359
Subordinated debt (Note 10) 12,542 6,088
Trust preferred securities (Note 10) 70,000 70,000
FHLB long-term debt (Note 10) 528,163 234,831
Other long-term debt (Note 10) 135,742 4,362
Other liabilities 112,910 99,219
- --------------------------------------------------------------------------------------------------------
Total liabilities 9,816,478 7,471,549
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6, 13, 16)
Shareholders' equity (Notes 2,11)
Common Stock, $2.50 par value; 200,000,000 shares authorized;
110,962,365 and 106,282,975 shares issued and outstanding
at December 31, 1998 and December 31, 1997, respectively* 277,406 265,707
Treasury Stock (26,501 shares) (355) --
Additional paid in capital* 113,469 97,324
Retained earnings 249,297 226,513
Unearned compensation (2,348) (1,750)
Accumulated other comprehensive income, net of taxes 2,338 2,223
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 639,807 590,017
- --------------------------------------------------------------------------------------------------------
Total $ 10,456,285 $ 8,061,566
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
*Prior year has been restated to reflect the impact of a two-for-one stock split
in the form of a 100% stock dividend paid August 14, 1998.
52
<PAGE> 31
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended
December 31, 1998, 1997 and 1996
(In thousands, except per share amounts)
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $604,493 $512,213 $421,922
Interest and dividends on securities:
Taxable 73,829 57,107 46,852
Nontaxable 4,815 4,601 4,702
Dividends 4,764 3,141 2,472
Interest on federal funds sold and securities purchased under
resale agreements 4,661 5,738 4,597
Other interest 980 837 933
- --------------------------------------------------------------------------------------------------------
Total interest income 693,542 583,637 481,478
- --------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 256,446 232,898 188,938
Interest on short-term borrowings 54,866 40,825 40,388
Interest on long-term debt 39,129 11,048 2,800
- --------------------------------------------------------------------------------------------------------
Total interest expense 350,441 284,771 232,126
- --------------------------------------------------------------------------------------------------------
Net Interest Income 343,101 298,866 249,352
Provision for possible loan losses (Notes 1, 5) 26,345 16,321 14,442
- --------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan Losses 316,756 282,545 234,910
- --------------------------------------------------------------------------------------------------------
Noninterest Income:
Mortgage servicing fees 44,308 38,352 28,106
Service charges on deposit accounts 39,090 32,709 27,020
Securities gains, net (Note 3) 1,449 669 431
Other charges, fees and commissions 7,398 6,919 6,616
Other income 33,013 22,296 15,338
- --------------------------------------------------------------------------------------------------------
Total noninterest income 125,258 100,945 77,511
- --------------------------------------------------------------------------------------------------------
Noninterest Expense:
Salaries and employee benefits 121,445 105,287 88,346
Occupancy expense of bank premises, net 28,291 23,821 18,797
Furniture and equipment expenses 24,787 20,086 15,727
Amortization and impairment of mortgage servicing rights 62,909 17,123 13,634
Amortization of intangible assets 4,927 3,206 2,151
Year 2000 expense 4,617 432 --
Acquisition and restructuring expense 21,535 6,463 11,918
SAIF special assessment -- -- 4,754
Other expense (Note 18) 86,901 65,296 62,163
- --------------------------------------------------------------------------------------------------------
Total noninterest expense 355,412 241,714 217,490
- --------------------------------------------------------------------------------------------------------
Income before income taxes 86,602 141,776 94,931
Applicable income taxes (Note 20) 31,406 51,414 33,082
- --------------------------------------------------------------------------------------------------------
Net Income $ 55,196 $ 90,362 $ 61,849
========================================================================================================
Earnings per share (Note 21):
Basic* $ .50 $ .86 $ .64
Diluted* .49 .84 .62
Average number of shares outstanding:
Basic* 110,062 105,010 97,246
Diluted* 112,431 108,396 101,128
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
*Prior years have been restated to reflect the impact of a two-for-one stock
split in the form of a 100% stock dividend paid August 14, 1998.
53
<PAGE> 32
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended
December 31, 1998, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 55,196 $ 90,362 $ 61,849
Other comprehensive income, net of taxes:
Unrealized gains on securities available for sale
arising during the period, net of taxes 1,880 2,398 940
Less reclassification adjustment for net (gains)
losses included in net income, net of taxes (1,784) (429) (285)
- ------------------------------------------------------------------------------------------------------
Comprehensive income $ 55,292 $ 92,331 $ 62,504
- ------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to the Consolidated Financial Statements.
54
<PAGE> 33
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended
December 31, 1998, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Paid Retained Unearned
Shares Amount In Capital Earnings Compensation
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 41,455,939 $103,640 $ 170,115 $117,309 $ (1,849)
Two-for-one stock split 41,455,939 103,640 (103,640)
Adjustments for pooling-of-interests
business combinations 9,203,226 23,008 488 9,050
- ----------------------------------------------------------------------------------------------------------------------------------
Restated Beginning Balance 92,115,104 230,288 66,963 126,359 (1,849)
- ----------------------------------------------------------------------------------------------------------------------------------
Shares issued under:
Directors Plan 63,420 159 169
Stock Option Plans 1,011,640 2,529 623
Dividend Reinvestment 120,272 301 746
Stock Bonus Plan 96,680 242 712 246
Employee Stock Purchase Plan 20,528 51 129
Issuance of common stock by
pooled banks prior to merger 3,068,032 7,670 (2,384) (2,479)
Issuance of shares for business combinations 309,380 773 1,827
Net income 61,849
Cash dividends: ($0.27 per share) (16,175)
Cash dividends by pooled banks prior to merger (4,291)
Treasury stock activity by pooled banks prior to merger (145,988) (365) (304) (207)
Conversion of 7 1/2% convertible
subordinated debentures 349,852 874 1,574
Conversion of 12 3/4% convertible
subordinated debentures 1,613,196 4,033 3,327
Change in unrealized gain (loss) on
securities available for sale, net of taxes
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 98,622,116 246,555 73,382 165,056 (1,603)
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of shares for immaterial poolings:
Tomoka Bancorporation 1,323,984 3,310 (27) 3,043
Great Southern Bancorp 1,855,622 4,639 2,968 2,514
First Independence Bank of Florida 1,007,864 2,520 4,374 (1,430)
Shares issued under:
Directors Plan 62,164 155 348
Stock Option Plans 1,339,778 3,349 2,054
Dividend Reinvestment 84,398 211 737
Stock Bonus Plan 46,024 115 385 (78)
Employee Stock Purchase Plan 32,784 82 344
Issuance of common stock by pooled
banks prior to merger 902,296 2,256 6,514 (4,905) (69)
Purchase of treasury stock for issuance
in business combination (1,342,330) (3,356) (12,531)
Issuance of shares for business combinations 2,032,518 5,081 17,177
Net income 90,362
Cash dividends: ($0.30 per share) (24,957)
Cash dividends by pooled banks prior to merger (3,170)
Treasury stock activity by pooled banks
prior to merger (40,913) (102) (24)
Conversion of 7 1/2% convertible
subordinated debentures 326,328 816 1,469
Conversion of 7% convertible
subordinated debentures 30,342 76 154
Change in unrealized gain on
securities available for sale, net of taxes
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 106,282,975 265,707 97,324 226,513 (1,750)
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of shares for immaterial poolings:
CNB Holding Company 1,767,562 4,419 (4,125) 7,965
Shares issued under:
Directors Plan 79,092 198 621
Stock Option Plans 1,513,701 3,784 794
Stock Bonus Plans 94,080 235 1,506 (598)
Employee Stock Purchase Plan 47,221 118 571
Issuance of common stock by pooled
banks prior to merger 88,714 222 5,341 (4,000)
Purchase of treasury stock for issuance
in a business combination (1,275,000) (3,188) (13,912)
Issuance of shares for business combinations 2,183,013 5,458 24,185
Net income 55,196
Cash dividends: ($0.34 per share) (35,869)
Cash dividends by pooled banks prior to merger (508)
Conversion of 7 1/2% convertible
subordinated debentures 181,007 453 809
Change in unrealized gain on
securities available for sale, net of taxes
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 110,962,365 $277,406 $113,114 $249,297 $(2,348)
==================================================================================================================================
<CAPTION>
Accumulated Total
Other Comprehensive Shareholders'
Income Equity
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1996 $ (445) $ 388,770
Two-for-one stock split
Adjustments for pooling-of-interests
business combinations 117 32,663
- ---------------------------------------------------------------------------------------------------
Restated Beginning Balance (328) 421,433
- ---------------------------------------------------------------------------------------------------
Shares issued under:
Directors Plan 328
Stock Option Plans 3,152
Dividend Reinvestment 1,047
Stock Bonus Plan 1,200
Employee Stock Purchase Plan 180
Issuance of common stock by
pooled banks prior to merger 2,807
Issuance of shares for business combinations 2,600
Net income 61,849
Cash dividends: ($0.27 per share) (16,175)
Cash dividends by pooled banks prior to merger (4,291)
Treasury stock activity by pooled banks prior to merger (876)
Conversion of 7 1/2% convertible
subordinated debentures 2,448
Conversion of 12 3/4% convertible
subordinated debentures 7,360
Change in unrealized gain (loss) on
securities available for sale, net of taxes 655 655
- ---------------------------------------------------------------------------------------------------
Balance, December 31, 1996 327 483,717
- ---------------------------------------------------------------------------------------------------
Issuance of shares for immaterial poolings:
Tomoka Bancorporation (23) 6,303
Great Southern Bancorp (25) 10,096
First Independence Bank of Florida (25) 5,439
Shares issued under:
Directors Plan 503
Stock Option Plans 5,403
Dividend Reinvestment 948
Stock Bonus Plan 422
Employee Stock Purchase Plan 426
Issuance of common stock by pooled
banks prior to merger 3,796
Purchase of treasury stock for issuance
in business combination (15,887)
Issuance of shares for business combinations 22,258
Net income 90,362
Cash dividends: ($0.30 per share) (24,957)
Cash dividends by pooled banks prior to merger (3,170)
Treasury stock activity by pooled banks
prior to merger (126)
Conversion of 7 1/2% convertible
subordinated debentures 2,285
Conversion of 7% convertible
subordinated debentures 230
Change in unrealized gain on
securities available for sale, net of taxes 1,969 1,969
- ---------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,223 590,017
- ---------------------------------------------------------------------------------------------------
Issuance of shares for immaterial poolings:
CNB Holding Company 19 8,278
Shares issued under:
Directors Plan 819
Stock Option Plans 4,578
Stock Bonus Plans 1,143
Employee Stock Purchase Plan 689
Issuance of common stock by pooled
banks prior to merger 1,563
Purchase of treasury stock for issuance
in a business combination (17,100)
Issuance of shares for business combinations 29,643
Net income 55,196
Cash dividends: ($0.34 per share) (35,869)
Cash dividends by pooled banks prior to merger (508)
Conversion of 7 1/2% convertible
subordinated debentures 1,262
Change in unrealized gain on
securities available for sale, net of taxes 96 96
- ---------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $2,338 $639,807
===================================================================================================
</TABLE>
55
<PAGE> 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 55,196 $ 90,362 $ 61,849
Adjustments to reconcile net income:
Depreciation, amortization and accretion 28,721 22,840 17,034
Amortization and impairment of mortgage servicing rights 62,909 17,123 13,634
Provision for loan loss 26,345 16,321 14,442
Deferred taxes (17,459) 612 (1,720)
Gain on sale of securities, net (1,449) (669) (431)
Loss (gain) on sale and disposal of other assets 10,627 (1,548) (766)
Additions to mortgage servicing rights (104,338) (52,315) (32,264)
Net increase in mortgage loans held for sale (453,502) (70,679) (41,632)
Increase in interest receivable (22,216) (12,814) (2,272)
Increase in prepaids and other receivables (12,604) (303) (729)
Decrease in accrued expenses & accounts payable (13) (203) (889)
Increase (decrease) in accrued income taxes 5,009 1,145 (183)
Increase in interest payable 7,558 10,060 4,541
Other, net 5,274 (11,727) 1,733
- --------------------------------------------------------------------------------------------------------------
Total adjustments (465,138) (82,157) (29,493)
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (409,942) 8,205 32,356
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 243,325 171,207 154,810
Proceeds from sales of securities available for sale 716,574 55,729 80,215
Purchase of securities available for sale (1,667,591) (178,824) (229,771)
Proceeds from maturities of investment securities 207,136 230,947 166,225
Purchase of investment securities (65,045) (171,892) (159,810)
Net decrease in short-term investment securities -- -- 5,460
Net increase in loans (974,465) (651,318) (775,145)
Purchase of bank owned life insurance -- (30,000) --
Cash received in bank acquisitions 80,682 28,242 8,465
Capital expenditures (46,865) (46,281) (33,546)
Purchase of treasury stock for issuance in a business combination (17,100) (16,013) (876)
Proceeds from sale of other real estate owned 16,204 3,619 11,542
Other, net 516 3,478 102
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,506,629) (601,106) (772,329)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand, savings and time deposits 799,522 525,507 565,333
Net increase in federal funds purchased,
repurchase agreements and other short-term borrowings 646,386 72,366 236,988
Proceeds from issuance of long-term debt 560,232 70,029 6,394
Repayment of long-term debt (2,307) (16,996) (6,132)
Proceeds from issuance of common stock 6,830 10,573 7,186
Dividends paid (36,377) (28,127) (20,466)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,974,286 633,352 789,303
- --------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 57,715 40,451 49,330
Cash and cash equivalents at beginning of year 437,251 396,800 347,470
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 494,966 $ 437,251 $ 396,800
==============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 342,883 $ 274,711 $ 227,585
Income taxes 37,881 49,657 34,985
Non-cash investing activities:
Transfer of loans to other real estate $ 10,865 $ 15,657 $ 10,150
Origination of loans for the sale of other real estate 399 643 1,610
Securitization of mortgage loans -- -- 99,276
Non-cash financing activities:
Conversion of subordinated debentures to common stock $ 1,262 $ 2,515 $ 9,808
Assets acquired in business combinations 277,810 488,839 79,794
Liabilities assumed in business combinations 247,464 526,741 76,760
==============================================================================================================
</TABLE>
See notes to consolidated financial statements
56
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended
December 31, 1998, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The Colonial BancGroup, Inc. ("BancGroup") and its subsidiaries operate
predominantly in the domestic commercial and mortgage banking industry. The
accounting and reporting policies of BancGroup and its subsidiaries conform to
generally accepted accounting principles and to general practice within the
banking industry. The following summarizes the most significant of these
policies.
BASIS OF PRESENTATION--The consolidated financial statements of BancGroup
have been restated to give retroactive effect to the 1998 pooling-of-interests
method business combinations with United American Holding Corporation ("United
American"), First Central Bank ("First Central"), South Florida Banking Corp.
("South Florida"), Commercial Bank of Nevada ("CBN"), FirstBank, First Macon
Bank & Trust ("First Macon"), InterWest Bancorp. ("InterWest") and Prime Bank of
Central Florida ("Prime") and the 1997 pooling-of-interests method business
combinations with Fort Brooke Bancorporation ("Fort Brooke"), Jefferson Bancorp,
Inc. ("Jefferson") and D/W Bankshares, Inc. ("Bankshares"). (See Note 2)
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements and notes
to consolidated financial statements include the accounts of BancGroup and its
subsidiaries, all of which are wholly owned. All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS--BancGroup considers cash and highly liquid
investments with maturities of three months or less when purchased as cash and
cash equivalents. Cash and cash equivalents consist primarily of cash and due
from banks, interest-bearing deposits in banks and Federal funds sold.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE--Securities are
classified as either held to maturity, available for sale or trading.
Held to maturity or investment securities are securities for which
management has the ability and intent to hold on a long-term basis or until
maturity. These securities are carried at amortized cost, adjusted for
amortization of premiums, and accretion of discount to the earlier of the
maturity or call date.
Securities available for sale represent those securities intended to be held
for an indefinite period of time, including securities that management intends
to use as part of its asset/liability strategy, or that may be sold in response
to changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital or other similar factors. Securities available-for-sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.
Securities carried in trading accounts are carried at market value with
unrealized gains and losses reflected in income.
Realized and unrealized gains and losses are based on the specific
identification method.
MORTGAGE LOANS HELD FOR SALE--Mortgage loans held for sale are carried at
the lower of aggregate cost or market. The cost of mortgage loans held for sale
is the mortgage note amount plus certain net origination costs less discounts
collected. The cost of mortgage loans is adjusted by gains and losses generated
from corresponding hedging transactions, principally using forward sales
commitments, entered into to protect the inventory value of the loans from
increases in interest rates. Hedge positions are also used to protect the
pipeline of commitments to originate and purchase loans from changes in interest
rates. Gains and losses resulting from changes in the market value of the
inventory, pipeline and open hedge positions are netted. Any net gain that
results is deferred; any net loss that results is recognized when incurred.
Hedging gains and losses realized during the commitment and warehousing period
related to the pipeline and mortgage loans held for sale are deferred. Hedging
losses are recognized currently if deferring such losses would result in
mortgage loans held for sale and the pipeline being valued in excess of their
estimated net realizable value. The aggregate cost of mortgage loans held for
sale at December 31, 1998 and 1997 is less than their aggregate net realizable
value. Gains or losses on the sale of Federal National Mortgage Association
mortgage-backed securities are recognized on the earlier of the date settled or
the date that a forward commitment to deliver a security to a dealer is
effectively offset by a commitment to buy a similar security (paired off). These
gains or losses are included in other income.
LOANS--Loans are stated at face value, net of unearned income and allowance
for possible loan losses. Interest income on loans is recognized under the
"interest" method except for certain installment loans where interest income is
recognized under the "Rule of 78's" (sum-of-the-months digits) method, which
does not produce results significantly different from the "interest" method.
Nonrefundable fees and costs associated with originating or acquiring loans are
recognized under the interest method as a yield adjustment over the life of the
corresponding loan.
ALLOWANCE FOR POSSIBLE LOAN LOSSES--A loan is considered impaired, based on
current information and events, if it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan
57
<PAGE> 36
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Smaller balance
homogeneous loans which consist of residential mortgages and consumer loans are
evaluated collectively and reserves are established based on historical loss
experience.
The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Increases and decreases in the
allowance due to changes in the measurement of the impaired loans are included
in the provision for loan losses. Loans continue to be classified as impaired
unless they are brought fully current and the collection of scheduled interest
and principal is considered probable. When a loan or portion of a loan is
determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.
Management's periodic evaluation of the adequacy of the allowance is based
on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrowers' ability to repay,
estimated value of any underlying collateral, and an analysis of current
economic conditions. While management believes that it has established the
allowance in accordance with generally accepted accounting principles and has
taken into account the views of its regulators and the current economic
environment, there can be no assurance that in the future the Bank's regulators
or its economic environment will not require further increases in the allowance.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS--Loans, including
impaired loans, are generally classified as nonaccrual if they are past due as
to maturity or payment of principal or interest for a period of more than 90
days, unless such loans are well collateralized and in the process of
collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged off, the loan is generally classified as nonaccrual. Loans
that are on a current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectibility of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan has been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge offs have been fully recovered. Interest income recognized on a
cash basis was immaterial for the years ended December 31, 1998, 1997 and 1996.
PREMISES AND EQUIPMENT--Bank premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed generally
using the straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is shorter.
Estimated useful lives range from five to forty years for bank buildings and
leasehold improvements and three to ten years for furniture and equipment.
Expenditures for maintenance and repairs are charged against earnings as
incurred. Costs of major additions and improvements are capitalized. Upon
disposition or retirement of property, the asset account is relieved of the cost
of the item and the allowance for depreciation is charged with accumulated
depreciation. Any resulting gain or loss is reflected in current income.
OTHER REAL ESTATE OWNED--Other real estate owned includes real estate
acquired through foreclosure or deed taken in lieu of foreclosure. These amounts
are recorded at the lower of the loan balance prior to foreclosure, plus certain
costs incurred for improvements to the property ("cost") or market value less
estimated costs to sell the property. Any write-down from the cost to market
value required at the time of foreclosure is charged to the allowance for
possible loan losses. Subsequent write-downs and gains or losses recognized on
the sale of these properties are included in noninterest income or expense.
INTANGIBLE ASSETS--Intangible assets acquired in acquisitions of banks are
stated at cost, net of accumulated amortization. Amortization is provided over a
period up to twenty-five years for the excess of cost over tangible and
identified intangible assets acquired using the straight-line method or an
accelerated method, as applicable, and ten years for deposit core base
intangibles using an accelerated method. The recoverability of intangible assets
is reviewed periodically based on the current earnings of acquired entities. If
warranted, analysis, including undiscounted income projections, are made to
determine if adjustments to carrying value or amortization periods are
necessary.
MORTGAGE SERVICING RIGHTS, AMORTIZATION AND IMPAIRMENT--BancGroup recognizes
as separate assets the rights to service mortgage loans for others, whether the
servicing rights are acquired through a separate purchase or through loan
origination activities. The total cost of mortgage loans held for sale is
allocated to mortgage loans held for sale and mortgage servicing rights, based
on their relative fair values at date of sale. Amortization of mortgage
servicing rights ("MSRs") is
58
<PAGE> 37
based on the ratio of net servicing income received in the current period to
total net servicing income projected to be realized from the MSRs. Projected net
servicing income is based on the estimated remaining life of the underlying
mortgage loan portfolio, which declines over time from prepayments and scheduled
loan amortization. The Company estimates future prepayments rates based on
current interest rate levels, other economic conditions and market forecasts, as
well as relevant characteristics of the servicing portfolio, such as loan types,
interest rate stratification and recent prepayment experience. The carrying
value of MSRs is evaluated for impairment, which is recognized in the statement
of income during the period in which impairment occurs as an adjustment to a
valuation allowance. For purposes of performing its impairment evaluation, the
Company stratifies its portfolio on the basis of certain risk characteristics
including loan type (fixed or adjustable) and note rate and determines the fair
value of MSRs based on market prices for similar MSRs and estimates of future
net servicing income, considering market concensus loan prepayment predictions,
interest rates, service costs and other economic factors.
HEDGING OF MORTGAGE SERVICING RIGHTS--BancGroup acquires derivative contacts
that are expected to change in value inversely to the movement of interest rates
("Servicing Hedges"). These derivatives include Treasury options and futures.
The Servicing Hedges are designed to protect the value of the hedged MSRs from
the effects of increased prepayment activity that generally results from
declining interest rates. The value of the Treasury futures and options is
derived from an underlying instrument; however, the notional or contractual
amount is not recognized in the balance sheet. The carrying value of the MSRs is
adjusted for realized and unrealized gains and losses in the derivative
financial instruments that qualify for hedge accounting. For the year ended
December 31, 1998, the unrealized loss on the Servicing Hedges was $4,339,000
and was included in the carrying value of MSRs.
To qualify for hedge accounting, net changes in value of the Servicing
Hedges are expected to be highly correlated with changes in the value of the
hedged MSRs throughout the hedge period, and the Servicing Hedges must be
designated to specific pools of MSRs. The Company measures initial and ongoing
correlation by statistical analysis and dollar value offset comparison of the
relative movements of the Servicing Hedges and related MSRs. If correlation were
to cease on the derivatives hedging MSRs, they would then be accounted for as
trading instruments. If a derivative contract hedging MSRs is terminated, the
gain or loss is treated as an adjustment to the carrying value of the hedged
MSRs and amortized over its remaining life.
The servicing portfolio is geographically disbursed throughout the United
States with a concentration in the southern states.
Mortgage servicing fees are deducted from the monthly payments on mortgage
loans and are recorded as income when earned. Fees from investors for servicing
their portfolios of residential loans generally range from 1/4 of 1% to 1/2 of
1% per year on the outstanding principal balance.
LONG LIVED ASSETS--BancGroup reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If the future undiscounted cash flows expected to result from the
use of the asset and its eventual disposition are less than the carrying amount
of the asset, an impairment loss is recognized. Long-lived assets and certain
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell.
INCOME TAXES--BancGroup uses the asset and liability method of accounting
for income taxes (See Note 20). Under the asset and liability method, deferred
tax assets and liabilities are recorded at currently enacted tax rates
applicable to the period in which assets or liabilities are expected to be
realized or settled. Deferred tax assets and liabilities are adjusted to reflect
changes in statutory tax rates resulting in income adjustments in the period
such changes are enacted.
STOCK-BASED COMPENSATION--SFAS No. 123, "Accounting for Stock-Based
Compensation," defines a fair value based method of accounting for an employee
stock option or similar equity instrument. However, SFAS No. 123 allows an
entity to continue to measure compensation costs for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees. Entities electing to remain with the
accounting in Opinion No. 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS No. 123 had been applied. Under the fair value based method, compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period. Under
the intrinsic value based method, compensation cost is the excess, if any, of
the quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. BancGroup has elected
to continue to measure compensation cost for its stock option plans under the
provisions in APB Opinion 25.
EARNINGS PER SHARE--BancGroup presents basic and diluted earnings per share
(EPS). All prior year earnings per share data has been restated to reflect the
presentation required under SFAS No. 128 as well as a two-for-one stock split
effected in the form of a 100 percent stock dividend distributed on August 14,
1998.
ADVERTISING COSTS--Advertising costs are expensed as incurred.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1997
financial statements to conform to the 1996 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting of Comprehensive Income,"
59
<PAGE> 38
which establishes standards for reporting and display of comprehensive income
and its components (revenues expenses, gains, and losses) in a full set of
financial statements. This statement also requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
BancGroup adopted SFAs No. 130 effective January 1, 1998. Prior period
financial statements have been reclassified for comparative purposes.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement requires the reporting of
financial and descriptive information about an enterprise's reportable operating
segments.
BancGroup adopted SFAS No. 131 effective January 1, 1998. Prior period
comparative information is included herein. Pursuant to SFAS No. 131, BancGroup
reports two segments: commercial banking and mortgage banking.
In February, 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
which revises employers' disclosures about pension costs and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans but standardizes the disclosure requirements for pension and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair value of plan assets
that will facilitate financial analysis and eliminates certain disclosures no
longer useful. BancGroup adopted this statement effective January 1, 1998 and
the required disclosures are included herein.
In June 1998, the Financials Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation.
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this Statement should be
as of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of this Statement. Earlier application of all of the provisions of this
Statement is encouraged, but it is permitted only as of the beginning of any
fiscal quarter that begins after issuance of this Statement. This Statement
should not be applied retroactively to financial statements of prior periods.
Management has not fully determined the impact that SFAS No. 133 will have on
BancGroup's financial statements.
60
<PAGE> 39
- --------------------------------------------------------------------------------
2. BUSINESS COMBINATIONS
A principal part of BancGroup's strategy is to merge other financial
institutions into BancGroup in order to increase the Company's market share in
existing markets, expand into other growth markets, more efficiently absorb the
Company's overhead and add profitable new lines of business.
BancGroup recently completed the following business combinations with other
financial institutions. These business combinations have been reflected in the
financial statements at December 31, 1998. The balances reflected are as of the
date of consummation.
(Dollars in thousands)
<TABLE>
<CAPTION>
Accounting Date BancGroup Cash Total Total Total
Financial Institutions Treatment Consummated Shares Paid(2) Assets Loans Deposits
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996*
Commercial Bancorp of Georgia, Inc. (GA) Pooling 07/03/96 4,612,920 $232,555 $145,429 $207,641
Southern Banking Corporation (FL) Pooling 07/03/96 5,716,988 232,461 160,864 205,602
Dothan Federal Savings Bank (AL) Purchase 07/08/96 309,380 $2,600 48,366 36,497 39,931
- ---------------------------------------------------------------------------------------------------------------------------
1997
Jefferson Bancorp, Inc. (FL) Pooling 01/03/97 7,709,904 472,732 322,857 405,836
Tomoka Bancorp, Inc. (FL) Pooling(1) 01/03/97 1,323,984 76,700 51,600 68,200
First Family Financial Corp. (FL) Purchase 01/09/97 661,128 6,492 167,300 117,500 156,700
D/W Bankshares, Inc. (GA) Pooling 01/31/97 2,033,096 138,686 71,317 124,429
Shamrock Holdings, Inc. (AL) Purchase 03/05/97 -- 11,813 54,500 19,300 46,400
Fort Brooke Bancorporation (FL) Pooling 04/22/97 3,199,946 208,800 141,500 185,800
Great Southern Bancorp (FL) Pooling(1) 07/01/97 1,855,622 121,009 98,100 106,673
First Commerce Banks of Florida, Inc. (FL) Purchase 07/01/97 1,371,390 97,093 64,472 88,302
Dadeland BancShares, Inc. (FL) Purchase 09/15/97 -- 38,000 169,946 103,199 145,491
First Independence Bank of Florida (FL) Pooling(1) 10/01/97 1,007,864 65,048 50,699 58,283
- ---------------------------------------------------------------------------------------------------------------------------
1998*
United American Holding Corp. (FL) Pooling 02/02/98 4,226,412 275,263 197,623 236,773
ASB Bancshares, Inc. (AL) Purchase 02/05/98 934,514 158,656 110,093 135,940
First Central Bank (FL) Pooling 02/11/98 1,377,368 62,897 40,451 52,048
South Florida Banking Corp. (FL) Pooling 02/12/98 3,864,458 255,769 172,992 226,999
Commercial Bank of Nevada (NV) Pooling 06/15/98 1,684,314 129,577 86,251 117,749
CNB Holding Corporation (FL) Pooling(1) 08/12/98 1,767,562 89,893 58,456 81,445
FirstBank (TX) Pooling 08/31/98 2,782,038 187,445 59,664 163,254
First Macon Bank & Trust (GA) Pooling 10/01/98 4,643,025 199,525 135,651 174,774
Prime Bank of Central Florida (FL) Pooling 10/06/98 1,173,019 74,502 42,547 66,955
InterWest Bancorp (NV) Pooling 10/15/98 1,748,338 131,590 83,689 114,516
TB&T, Inc. (TX) Purchase 12/01/98 1,248,499 110,986 42,689 101,335
- ---------------------------------------------------------------------------------------------------------------------------
</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. On June 18, 1998,
BancGroup purchased certain assets totaling $8,168,000 and assumed certain
liabilities, primarily deposits, totaling $8,871,000 of the Wade Green
branch of Premier Bank in Atlanta, Georgia.
(1) Due to the immaterial impact on BancGroup's Financial Statements, prior
years have not been restated to include these poolings of interests.
(2) Does not include immaterial amounts paid in lieu of fractional shares.
The 1996 combinations with Southern and Commercial, the 1997 combinations
with Jefferson, D/W Bankshares, and Fort Brooke and the 1998 combinations with
United American, South Florida, First Central, Commercial Bank, FirstBank, First
Macon, Prime, and Interwest Bancorp were accounted for using the
pooling-of-interests method. Accordingly, all financial statement amounts have
been restated to reflect the financial condition and results of operations as if
these combinations had occurred at the beginning of the earliest period
presented. For the purchase method business combinations, the operations and
income of the combined institutions are included in the income of BancGroup from
the date of purchase. The proforma impact of the purchase method business
combinations on BancGroup's financial statements for periods prior to
acquisition is not significant.
The following is summary operating information for BancGroup showing the
effect of the business combinations described in the preceding paragraphs (years
prior to consummation).
<TABLE>
<CAPTION>
As Originally Effect of Currently
(In thousands) Reported Poolings Reported
- -----------------------------------------------------------------------
<S> <C> <C> <C>
1997:
Net interest income $248,499 $50,367 $298,866
Noninterest income 87,759 13,186 100,945
Net income 77,191 13,171 90,362
1996:
Net interest income $169,678 $79,674 $249,352
Noninterest income 65,982 11,529 77,511
Net income 53,608 8,241 61,849
- -----------------------------------------------------------------------
</TABLE>
61
<PAGE> 40
3. SECURITIES
The carrying and market values of investment securities are summarized as
follows:
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- ------------------------------------------
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
and obligations of U.S.
government agencies $ 83,322 $ 574 $ (2) $ 83,894 $172,065 $ 1,029 $ (74) $173,020
Mortgage-backed
securities 45,037 704 (221) 45,520 85,298 1,089 (635) 85,752
Obligations of state and
political subdivisions 41,185 1,548 (4) 42,729 54,036 1,415 (45) 55,406
Other 1,410 1 (12) 1,399 1,741 115 (247) 1,609
- -------------------------------------------------------------------- ------------------------------------------
Total $170,954 $ 2,827 $ (239) $173,542 $313,140 $ 3,648 $(1,001) $315,787
- -------------------------------------------------------------------- ------------------------------------------
</TABLE>
The carrying and market values of securities available for sale are
summarized as follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- -------------------------------------------
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
and obligations of U.S.
government agencies $ 151,333 $ 871 $ (42) $ 152,162 $349,214 $1,759 $ (575) $350,398
Mortgage-backed
securities 1,028,796 4,755 (2,750) 1,030,801 256,162 2,019 (1,785) 256,396
Obligations of state and
political subdivisions 56,559 1,768 (11) 58,316 38,938 1,299 (4) 40,233
Other 173,722 1,256 (2,039) 172,939 7,840 998 (1) 8,837
- -------------------------------------------------------------------------- ------------------------------------------
Total $1,410,410 $8,650 $(4,842) $1,414,218 $652,154 $6,075 $(2,365) $655,864
- -------------------------------------------------------------------------- ------------------------------------------
</TABLE>
The market values of obligations of states and political subdivisions were
established with the assistance of an independent pricing service. They were
based on available market data reflecting transactions of relatively small size
and not necessarily indicative of the prices at which large amounts of
particular issues could be readily sold or purchased.
Included within securities available for sale is $79,122,000 and $77,295,000
in Federal Home Loan Bank stock at December 31, 1998 and 1997, respectively.
Securities with a carrying value of approximately $1,060,554,000 and
$647,839,000 at December 31, 1998 and 1997 respectively, were pledged for
various purposes as required or permitted by law.
Gross gains of $2,961,000, $760,000 and $935,000 and gross losses of
$1,512,000, $91,000 and $504,000 were realized on sales of securities for 1998,
1997, and 1996, respectively. The amortized cost and market value of debt
securities at December 31, 1998, by contractual maturity, are as follows (equity
securities are not included as they have no maturity). Expected maturities
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available
Investment Securities For Sale
Amortized Market Amortized Market
(In thousands) Cost Value Cost Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year $ 74,964 $ 75,364 $ 68,240 $ 68,453
or less
Due after one year 33,487 34,244 88,654 89,776
through five years
Due after five years 9,716 10,209 39,445 40,046
through ten years
Due after ten years 7,750 8,205 96,391 95,505
- -----------------------------------------------------------------------------------
Total 125,917 128,022 292,730 293,780
- -----------------------------------------------------------------------------------
Mortgage-backed
securities 45,037 45,520 1,028,796 1,030,801
- ------------------------------------------------------------------------------------
Total $170,954 $173,542 $1,321,526 $1,324,581
- ------------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 41
4. LOANS
A summary of loans follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -------------------------------------------------------
<S> <C> <C>
Commercial, financial,
and agricultural $1,102,446 $ 751,375
Real estate--commercial 2,006,851 1,673,505
Real estate--construction 1,028,471 734,239
Real estate--residential 2,438,236 2,382,324
Installment and consumer 344,860 329,136
Other 189,934 81,181
- -------------------------------------------------------
Subtotal 7,110,798 5,951,760
Unearned income (503) (693)
- -------------------------------------------------------
Total $7,110,295 $5,951,067
- -------------------------------------------------------
</TABLE>
BancGroup's lending is concentrated throughout Alabama, southern Tennessee,
central Georgia, central, southwest and south Florida, central Texas and Nevada
and repayment of these loans is in part dependent upon the economic conditions
in the respective regions of the states. Management does not believe the loan
portfolio contains concentrations of credits either geographically or by
borrower which would expose BancGroup to unacceptable amounts of risk.
Management continually evaluates the potential risk in all segments of the
portfolio in determining the adequacy of the allowance for possible loan losses.
Other than concentrations of credit risk in commercial real estate and
residential real estate loans in general, management is not aware of any
significant concentrations.
BancGroup evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by BancGroup upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, residential houses and
income-producing commercial properties. No additional credit risk exposure,
relating to outstanding loan balances, exists beyond the amounts shown in the
consolidated statement of condition at December 31, 1998.
In the normal course of business, loans are made to officers, directors,
principal shareholders and to companies in which they own a significant
interest. Loan activity to such parties with an aggregate loan balance of more
than $60,000 during the year ended December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Balance Balance
1/1/98 Additions Reductions 12/31/98
- ---------------------------------------------------------------
<S> <C> <C> <C>
$51,720 17,229 43,202 $25,747
- ---------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the recorded investment in loans for which
impairment has been recognized totaled approximately $18,640,000 and
$16,462,000, respectively, and these loans had a corresponding valuation
allowance of $4,813,000 and $5,381,000, respectively. The impaired loans were
measured for impairment based primarily on the value of underlying collateral.
For the years ended December 31, 1998 and 1997, the average recorded investment
in impaired loans was approximately $20,014,000 and $18,853,000. The amount of
interest recognized on impaired loans during the portion of the year that they
were impaired was not significant for either 1998 or 1997.
BancGroup uses several factors in determining if a loan is impaired.
Generally, nonaccrual loans as well as loans classified by internal loan review
are reviewed for impairment. The internal asset classification procedures
include a thorough review of significant loans and lending relationships and
include the accumulation of related data. This data includes loan payment
status, borrower's financial data, collateral value and borrower's operating
factors such as cash flows, operating income or loss, etc.
As mentioned previously, BancGroup's international banking department became
fully operational in July 1998. The department engages in confirming letters of
credit with top-tier banks in Latin America and direct disbursements to those
banks from U.S. customers. Loans outstanding at December 1998 totalled
approximately $97 million. However, due to the immaterial balance of these loans
in relation to total loans, these amounts will not be disclosed separately.
5. ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses is as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 72,107 $ 61,732 $ 53,770
Addition due to
acquisitions 1,840 6,873 617
Provision charged
to income 26,345 16,321 14,442
Loans charged off (22,657) (17,136) (12,451)
Recoveries 5,927 4,317 5,354
- --------------------------------------------------------
Balance, December 31 $ 83,562 $ 72,107 $ 61,732
- --------------------------------------------------------
</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 and
to manage interest rate risk. These financial instruments include loan
commitments, standby letters of credit, obligations to deliver and sell mortgage
loans, options on interest rate futures and interest rate futures. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the financial statements.
BancGroup's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
63
<PAGE> 42
credit and obligations to deliver and sell mortgage loans is represented by the
contractual amount of those instruments. BancGroup uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. BancGroup has no significant concentrations of credit risk
with any individual counterparty to originate loans. The total amounts of
financial instruments with off-balance sheet risk as of December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
-----------------------
Contract Amount
-----------------------
(In thousands) 1998 1997
- --------------------------------------------------------
<S> <C> <C>
Financial instruments whose
contract amounts represent
credit risk:
Loan commitments $2,541,231 $1,422,070
Standby letters of credit 99,378 59,589
Mortgage sales commitments 927,750 287,395
</TABLE>
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash requirements.
The credit risk involved in issuing letters of credit and funding loan
commitments is essentially the same as that involved in extending loan
facilities to customers.
Obligations to sell loans at specified dates (typically within ninety days of
the commitment date) and at specified prices are intended to hedge the interest
rate risk associated with the time period between the initial offer to lend and
the subsequent sale to a permanent investor. BancGroup's policy generally
requires hedging for substantially all of its held for sale inventory and the
estimated portion of the committed pipeline that is expected to close. The
correlation between the price performance of the inventory being hedged and the
sales commitments is high due to the similarity of the asset and the related
hedge instrument. BancGroup is exposed to the risk that the portion of loans
from the committed pipeline that actually closes is less than or more than the
estimated amount of closing in the event of a decline or rise in rates during
the commitment period. Changes in the market value of the sales commitments are
included in the measurement of the gain or loss on mortgage loans held for sale.
The current loss in market value of these commitments was approximately
$2,104,000 and $1,149,000 at December 31, 1998 and 1997, respectively.
For options on interest rate futures and interest rate futures, BancGroup's
exposure to interest rate risk is mitigated by the expected inverse relationship
these instruments have with mortgage servicing rights. BancGroup's exposure to
credit risk in the event of nonperformance by the other party to the financial
instrument has been minimized from guaranties by BancGroup's broker as well as
the Chicago Board of Trade.
The following summarizes the notional amounts of BancGroup's derivative
contracts:
<TABLE>
<CAPTION>
(In thousands) Call Options Put Options Futures
- ---------------------------------------------------------
<S> <C> <C> <C>
Balance,
January 1, 1998 $ -- $ -- $ --
Additions 369,000 426,000 648,000
Dispositions/
Expirations (170,500) (123,000) (305,000)
- ---------------------------------------------------------
Balance,
December 31,1998 $ 198,500 $ 303,000 $ 343,000
- ---------------------------------------------------------
</TABLE>
These instruments are used by BancGroup to protect the value of its
investment in mortgage servicing rights from the effects of increased prepayment
activity that generally results from declining interest rates. As interest rates
increase, the value of the mortgage servicing rights increases while the value
of the hedge instruments declines.
There can be no assurance that, in periods of increasing interest rates, the
increase in value of hedged mortgage servicing rights will offset the loss in
value of the Servicing Hedges; or, in periods of declining interest rates, that
the Company's Servicing Hedges will generate gains, or if gains are generated,
that they will fully off-set impairment of the hedged mortgage servicing rights.
7. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights and the related valuation reserve is
as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Mortgage Servicing Rights
Balance, January 1 $143,401 $106,848
Additions 99,999 52,315
Scheduled amortization (25,941) (15,762)
Hedge losses applied 4,339 --
- ----------------------------------------------------------
Balance, December 31 $221,798 $143,401
- ----------------------------------------------------------
Valuation Reserve
Balance, January 1 $ 1,361 $ --
Additions 36,968 1,361
- ----------------------------------------------------------
Balance, December 31 $ 38,329 $ 1,361
- ----------------------------------------------------------
Mortgage Servicing Rights, Net $183,469 $142,040
- ----------------------------------------------------------
</TABLE>
The estimated fair value of mortgage servicing rights was $186,669,000 and
$163,948,000 at December 31, 1998 and 1997, respectively. As of December 31,
1998, 1997 and 1996, Colonial Mortgage services approximately $14.7 billion,
$11.4 billion and $9.3 billion, respectively of loans for third parties.
64
<PAGE> 43
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -----------------------------------------------------
<S> <C> <C>
Land $ 38,743 $ 36,307
Bank premises 113,726 98,030
Equipment 109,852 97,713
Leasehold improvements 21,708 19,208
Construction in progress 15,112 13,494
Automobiles 804 1,232
- -----------------------------------------------------
Total 299,945 265,984
Less accumulated depreciation
and amortization (118,328) (104,597)
- -----------------------------------------------------
Premises and equipment, net $ 181,617 $ 161,387
- -----------------------------------------------------
</TABLE>
9. SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased
and securities sold
under repurchase
agreements $ 480,008 $284,740 $154,927
FHLB borrowings 769,987 420,000 715,000
Reverse Repurchase
Agreements 184,834 12,695 --
Current maturities of
FHLB advances 50,840 1,345 983
Term notes 25,000 10,000 1,033
Other short-term
borrowings 299 2,579 289
- ----------------------------------------------------------
Total $1,510,968 $731,359 $872,232
- ----------------------------------------------------------
</TABLE>
BancGroup had an outstanding term note with an unaffiliated financial
institution in the amount of $25 million at December 31, 1998. The term note is
payable in full upon maturity on June 30, 1999, and bears interest at a rate of
1% above LIBOR. All of the capital stock of BancGroup's subsidiary, Colonial
Bank, is pledged as collateral.
In 1997, BancGroup had a line of credit with an unaffiliated financial
institution totaling $35 million of which $10 million was outstanding and is
included in short-term borrowings at December 31, 1997. The line of credit bore
interest at a rate of 1.5% above LIBOR. All of the capital stock of BancGroup's
subsidiary, Colonial Bank, was pledged as collateral. This line of credit
expired in 1998 and all amounts outstanding were paid in full.
At December 31, 1998 and 1997, BancGroup had reverse repurchase agreements
outstanding in the amount of $185 million and $13 million, respectively. This
debt corresponds to securities purchased under resale agreements with other
financial institutions (Note 10).
BancGroup is a member of the Federal Home Loan Bank (FHLB). At December 31,
1998 and 1997, $1.3 billion and $656 million was outstanding of which $528
million and $235 million, respectively, (Note 10) is included in long-term debt
with the remaining portion included in short-term borrowings, leaving credit
availability at December 31, 1998 of $158 million based on current collateral.
FHLB has a blanket lien on BancGroup's 1-4 family mortgage loans in the amount
of the outstanding debt. Colonial Bank has a warehouse line of credit with $500
million of availability from FHLB, of which none was outstanding at December 31,
1998. This warehouse line is collateralized by mortgage loans held for sale.
Additional details regarding short-term borrowings (excluding current
maturities of long-term debt) are shown below:
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
- ------------------------------------------------------------------------------
Maximum Average
Outstanding Average Interest
At Any Average Interest Rate At
Month End Balance Rate Year End
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
FHLB borrowings $ 901,149 $ 554,629 5.62% 5.29%
Other short-term borrowings 598,813 449,743 5.26% 4.96%
- ------------------------------------------------------------------------------
$1,499,962 $1,004,372 5.46% 5.15%
- ------------------------------------------------------------------------------
1997
FHLB borrowings $ 652,000 $ 539,587 5.74% 5.92%
Other short-term borrowings 311,360 188,203 5.14% 5.49%
- ------------------------------------------------------------------------------
$ 963,360 $ 727,790 5.61% 5.74%
- ------------------------------------------------------------------------------
1996
FHLB borrowings $ 715,000 $ 565,243 5.56% 5.57%
Other short-term borrowings 252,591 178,552 4.95% 4.91%
- ------------------------------------------------------------------------------
$ 967,591 $ 743,795 5.43% 5.53%
- ------------------------------------------------------------------------------
</TABLE>
65
<PAGE> 44
10. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -----------------------------------------------------------
<S> <C> <C>
7 1/2% Convertible Subordinated
Debentures $ 3,672 $ 4,893
7% Convertible Subordinated
Debentures 1,145 1,195
Variable Rate Subordinated
Debentures 7,725 --
Trust Preferred Securities 70,000 70,000
FHLB Advances 528,163 234,831
Reverse Repurchase Agreements 132,356 --
REMIC Bonds 3,386 4,333
Other -- 29
- -----------------------------------------------------------
Total $746,447 $315,281
- -----------------------------------------------------------
</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 $7.00 principal amount of 1986
Debentures, subject to adjustment upon the occurrence of certain events, for
each share of stock received. The 1986 Debentures are redeemable at the option
of BancGroup at the face amount plus accrued interest. In the event all of the
remaining 1986 Debentures are converted into shares of BancGroup Common Stock in
accordance with the 1986 Indenture, approximately 524,500 shares of such Common
Stock would be issued.
The 7% Convertible Subordinated Debentures due December 31, 2004 ("1994
Debentures"), were issued by D/W Bankshares prior to being merged into
BancGroup. The 1994 Debentures are convertible into BancGroup Common Stock, at
the conversion price of $7.58 principal amount of the 1994 Debentures, subject
to adjustment upon occurrence of certain events, for each share of stock
received. In the event all of the remaining 1994 Debentures are converted into
shares of BancGroup Common Stock in accordance with the 1994 Indenture,
approximately 151,000 shares of such Common Stock would be issued.
In connection with the ASB acquisition, on February 5, 1998, BancGroup issued
$7,725,000 of variable rate subordinated debentures due February 5, 2008 ("1998
Debentures"). The 1998 Debentures bear interest equal to the New York Prime Rate
minus 1% (but in no event less than 7% per annum).
On January 29, 1997, BancGroup issued, through a special purpose trust, $70
million of Trust Preferred Securities. The securities bear interest at 8.92% and
are subject to redemption by BancGroup, in whole or in part at any time after
January 29, 2007 until maturity in January 2017. Circumstances are remote that
redemption will occur prior to maturity.
The subordinated debentures and Trust Preferred Securities described above
are subordinate to substantially all remaining liabilities of BancGroup.
BancGroup had long-term Federal Home Loan Bank (FHLB) Advances (Note 9)
outstanding of $528,163,000 and $234,831,000 at December 31, 1998 and 1997,
respectively. These advances bear interest rates of 4.90% to 5.89% and mature
from 2000 to 2013.
BancGroup has received funds under reverse repurchase agreements with Morgan
Stanley, Salomon Brothers and First Boston. At December 31, 1998, BancGroup had
long-term reverse repurchase agreements outstanding of $132 million. These
agreements, which are collateralized by mortgage-backed securities, bear
interest rates of 5.66% to 6.03% and mature from 2001 to 2003.
BancGroup, with the acquisition of First AmFed in 1993, also assumed the real
estate mortgage investment conduit (REMIC) bonds through a conduit, Service
Financial Corporation, a subsidiary of Colonial Bank. These bonds were series A
(four classes) with an original principal amount of $28,123,000 and a coupon
interest rate of 7.875%. As of December 31, 1998, only the Class A-4 bonds due
September 1, 2017 remain outstanding with an outstanding balance of $3,386,000
and are collateralized by FNMA mortgaged-backed securities with a carrying value
of $3,403,000. The collections on these securities are used to pay interest and
principal on the bonds.
At December 31, 1998, long-term debt, including the current portion, is
scheduled to mature as follows:
<TABLE>
<CAPTION>
Consolidated
(In thousands) Parent Only BancGroup
- -----------------------------------------------
<S> <C> <C>
1999 $134,567
2000 175,000
2001 55,000
2002 114,293
2003 167,845
Thereafter $82,542 234,309
- -----------------------------------------------
Total $82,542 $881,014
- -----------------------------------------------
</TABLE>
11. CAPITAL STOCK
On July 15, 1998, BancGroup's Board of Directors declared a two-for-one stock
split which was effected in the form of a 100 percent stock dividend distributed
on August 14, 1998. The stated par value was not changed from $2.50 per share.
Accordingly, all prior period information has been restated to reflect the
reclassification from additional paid in capital to common stock. Additionally,
all share and per share amounts in earnings per share calculations have been
restated to retroactively reflect the stock split.
The Board of Directors is authorized to issue shares of the preference stock
in one or more series, and in connection with such issuance, to establish the
relative rights, preferences, and limitations of each such series. Stockholders
of BancGroup may not act by written consent or call special meetings.
12. REGULATORY MATTERS AND RESTRICTIONS
During 1997, BancGroup became a member of the Federal Reserve and merged its
subsidiary banks into one bank, Colonial Bank.
Dividends payable by national and state banks in any year, without prior
approval of the appropriate regulatory
66
<PAGE> 45
authorities, are limited to the bank's net profits (as defined) for that year
combined with its retained net profits for the preceding two years. Under these
limitations, approximately $107 million of retained earnings plus certain 1999
earnings would be available for distribution to BancGroup, from its
subsidiaries, as dividends in 1999 without prior approval from the respective
regulatory authorities.
Colonial Bank is required by law to maintain noninterest-bearing deposits
with the Federal Reserve Bank to meet regulatory reserve requirements. At
December 31, 1998, these deposits totaled $52.6 million.
BancGroup and Colonial Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on BancGroup's financial position. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
BancGroup and Colonial Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. BancGroup's and
Colonial Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require BancGroup and Colonial Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998 and 1997, that
BancGroup and Colonial Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized Colonial Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized BancGroup and Colonial Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed BancGroup's category.
Actual capital amounts and ratios for BancGroup and Colonial Bank are also
presented in the following table:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31,1998
Total Capital (to Risk Weighted Assets)
Consolidated $703,549 9.85% $571,279 >8.0% $714,099 >10.0%
- -
Colonial Bank 727,764 10.20% 570,911 >8.0% 713,638 >10.0%
- -
Tier I Capital (to Risk Weighted Assets)
Consolidated 607,110 8.50% 285,639 >4.0% 428,459 >6.0%
- -
Colonial Bank 643,867 9.02% 285,455 >4.0% 428,183 >6.0%
- -
Tier I Capital (to average assets)
Consolidated 607,110 6.08% 399,717 >4.0% 499,646 >5.0%
- -
Colonial Bank 643,867 6.44% 399,670 >4.0% 499,625 >5.0%
- -
As of December 31,1997
Total Capital (to Risk Weighted Assets)
Consolidated $665,648 11.41% $465,701 >8.0% $583,595 >10.0%
- -
Colonial Bank 662,681 11.28% 470,136 >8.0% 587,670 >10.0%
- -
Tier I Capital (to Risk Weighted Assets)
Consolidated 587,613 10.07% 233,438 >4.0% 350,157 >6.0%
- -
Colonial Bank 590,734 10.05% 235,068 >4.0% 352,602 >6.0%
Tier I Capital (to average assets) - -
Consolidated 587,613 7.56% 310,341 >4.0% 387,926 >5.0%
- -
Colonial Bank 590,734 7.62% 310,157 >4.0% 387,696 >5.0%
- -
- ----------------------------------------------------------------------------------------------------------
*These ratios are subject to regulatory review.
</TABLE>
13. LEASES
BancGroup and its subsidiaries have entered into certain noncancellable
leases for premises and equipment used in connection with its operations. The
majority of these noncancellable lease agreements contain renewal options for
varying periods at the same or renegotiated rentals, and several contain
purchase options at fair value. Future minimum lease payments under all
noncancellable operating leases with initial or remaining terms (exclusive of
renewal options) of one year or more at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------
<S> <C>
1999 $12,999
2000 11,339
2001 8,289
2002 5,910
2003 3,785
Thereafter 15,137
- ---------------------------------------
Total $57,459
- ---------------------------------------
</TABLE>
67
<PAGE> 46
Rent expense for all leases amounted to $18,635,000 in 1998,
$12,649,000 in 1997 and $10,766,000 in 1996.
14. EMPLOYEE BENEFIT PLANS
BancGroup and subsidiaries are participants in a pension plan which
covers most employees who have met certain age and length of service
requirements. BancGroup's policy is to contribute annually an amount that can
be deducted for federal income tax purposes using the frozen entry age
actuarial method. Actuarial computations for financial reporting purposes are
based on the projected unit credit method.
Employee pension benefit plan status at December 31:
<TABLE>
<CAPTION>
Change in benefit obligation: 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Benefit obligation at January 1 $ 17,348 $ 13,279
Service cost 2,095 1,407
Interest cost 1,370 1,199
Actuarial loss 1,287 1,766
Benefits paid (559) (303)
- ----------------------------------------------------------------------------
Benefit obligation at December 31 21,541 17,348
- ----------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1 18,486 13,729
Actual return on plan assets 1,150 4,286
Employer contributions 1,578 774
Benefits paid (559) (303)
- ----------------------------------------------------------------------------
Fair value of plan assets at December 31 20,655 18,486
- ----------------------------------------------------------------------------
Funded status at December 31 (886) 1,138
Unrecognized net actuarial gain (1,774) (3,824)
Unrecognized prior service cost 19 18
- ----------------------------------------------------------------------------
Accrued benefit cost at December 31 $(2,641) $(2,668)
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Weighted-average assumptions
as of December 31: 1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.75% 7.25% 7.75%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.00% 4.25% 4.75%
Components of net periodic benefit
cost for the year ended
December 31: 1998 1997 1996
- ------------------------------------------------------------------------------------
Service cost $ 2,095 $ 1,407 $ 1,099
Interest cost 1,370 1,199 1,029
Expected return on plan assets (1,691) (1,246) (1,058)
Actuarial gain (163)
- ------------------------------------------------------------------------------------
Net annual benefit cost $ 1,611 $ 1,360 $ 1,070
- ------------------------------------------------------------------------------------
</TABLE>
At both December 31, 1998 and 1997, the pension plan assets included
investments of 164,520 shares of BancGroup Common Stock representing 10% and
14% of pension plan assets, respectively. At December 31, 1998, BancGroup
Common Stock included in pension plan assets had a cost and market value of
approximately $616,500 and $1,974,000, respectively. Pension plan assets are
distributed approximately 5% in U.S. Government and agency issues, 21% in
Corporate bonds, 63% in equity securities (including BancGroup Common Stock)
and 11% in money market funds.
BancGroup also has an incentive savings plan (the "Savings Plan") for
all of the employees of BancGroup and its subsidiaries. The Savings Plan
provides certain retirement, death, disability and employment benefits to all
eligible employees and qualifies as a deferred arrangement under Section 401(k)
of the Internal Revenue Code. Participants in the Savings Plan make basic
contributions and may make supplemental contributions to increase benefits.
BancGroup contributes a minimum of 50% of the basic contributions made by the
employees and may make an additional contribution from profits on an annual
basis. An employee's interest in BancGroup's contributions becomes 100% vested
after five years of participation in the Savings Plan. Participants have
options as to the investment of their Savings Plan funds, one of which includes
purchase of Common Stock of BancGroup. Charges to operations for this plan and
similar plans of combined banks amounted to approximately $1,794,000,
$1,561,000 and $1,146,000 for 1998, 1997 and 1996, respectively.
Prior to the merger, Jefferson maintained a retirement and severance
plan for certain senior officers and directors of Jefferson. The plan provided
cash payments to the effected personnel in the event of retirement or a change
in control (whether or not their employment is terminated). During the year
ended December 31, 1996, expense recognized under the plan totaled $4,333,000.
15. STOCK PLANS
The 1992 Incentive Stock Option Plan ("the 1992 Plan") provides an
incentive to certain officers and key management employees of BancGroup and its
subsidiaries. Options granted under the 1992 Plan must be at a price not less
than the fair market value of the shares at the date of grant. All options
expire no more than ten years from the date of grant, or three months after an
employee's termination. An aggregate of 4,200,000 shares of Common Stock are
reserved for issuance under the 1992 Plan. At December 31, 1998 and 1997,
approximately 1,814,500 and 1,404,000, respectively, remained available for the
granting of options under the 1992 Plan.
The 1992 Nonqualified Stock Option Plan ("the 1992 Nonqualified Plan")
provides an incentive to directors, officers and employees of BancGroup and its
subsidiaries. Options granted under the 1992 Nonqualified Plan must be at a
price not less than 85% of the fair market value of the shares at the date of
grant. All options expire no more than ten years after the date of grant, or
three months after an employee's termination. An aggregate of 3,200,000 shares
of Common Stock are reserved for issuance under the 1992 Nonqualified Plan. At
December 31, 1998 and 1997, approximately 2,712,000 and 2,814,000 shares,
respectively remained available for the granting of options under the 1992
Nonqualified Plan.
68
<PAGE> 47
Prior to 1992, BancGroup had both a qualified incentive stock option
plan ("Plan") under which options were granted at a price not less than fair
market value and a nonqualified stock option plan ("Nonqualified Plan") under
which options were granted at a price not less than 85% of fair market value.
All options under the plans expire ten years from the date of grant, or three
months after the employee's termination. Although options previously granted
under these plans may be exercised, no further options may be granted.
Pursuant to the various business combinations, BancGroup assumed
qualified stock options and non-qualified stock options according to the
respective exchange ratios.
Certain of the options issued during 1998 and 1997 under the 1992
Nonqualified Plan and the 1992 Plan have vesting requirements. The option
recipients are required to remain in the employment of BancGroup (subject to
certain exemptions) for periods of between one and five years to fully vest in
the options granted. These options become exercisable on a pro-rata basis over
a period of one to five years.
Following is a summary of the transactions in Common Stock under these
plans for the years ended December 31, 1998, 1997 and 1996.
<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, 1995 1,049,722 $ 3.913 3,381,363 $ 2.845
Granted (at $7.29-$9.97 per share) 584,332 8.948 180,000 7.357
Exercised (at $1.54-$4.56 per share) (196,194) 4.108 (815,446) 2.939
Cancelled (at $5.58 per share) (125,264) 5.580 -- --
- ---------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 1,312,596 5.966 2,745,917 3.113
Assumed in business combinations
(at $6.20-$13.78 per share) 127,652 3.660 505,948 4.800
Granted (at $9.578-$13.86 per share) 226,200 11.477 117,000 10.609
Exercised (at $1.54-$8.658 per share) (617,362) 3.548 (722,416) 3.093
Cancelled (at $8.578-$13.60 per share) (85,788) 9.596 (3,228) 3.690
- ---------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 963,298 8.181 2,643,221 3.773
Assumed in business combinations
(at $2.378-$5.9758 per share) 578,339 4.234 226,700 4.419
Granted (at $7.585-$18.20315 per share) 1,695,000 13.821 132,000 12.366
Exercised (at $1.54-$12.125 per share) (567,459) 4.913 (946,242) 3.426
Cancelled (at $8.578-$17.1875 per share) (105,280) 13.778 (30,000) 9.995
- ---------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 2,563,898 $ 11.513 2,025,679 $ 4.475
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) This table includes those plans assumed pursuant to various business
combinations according to the respective exchange ratios.
At December 31, 1998, the total shares outstanding and exercisable
under these option plans were as follows:
<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 12/31/98 Contractual Life Price Price at 12/31/98 Price Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1.54-$1.813 455,432 1.95 years $ 1.552 $ 706,664 455,432 $ 1.552 $ 706,664
$1.863-$1.94 190,910 3.60 years 1.927 367,823 190,910 1.927 367,823
$2.378-$4.223 402,997 4.45 years 3.499 1,409,979 402,997 3.499 1,409,979
$4.313-$4.56 696,582 2.46 years 4.499 3,134,178 696,582 4.499 3,134,178
$4.625-$5.4965 222,445 5.44 years 4.909 1,091,932 222,445 4.909 1,091,932
$5.85-$8.658 521,411 7.39 years 7.855 4,095,875 419,333 7.831 3,283,801
$9.5775-$13.86 1,359,800 9.45 years 11.335 15,413,102 106,720 10.413 1,111,235
$14.45-$18.203 740,000 9.15 years 16.857 12,473,944 2,000 14.450 28,900
- ----------------------------------------------------------------------------------------------------------------------------
Total 4,589,577 6.49 years $ 8.431 $ 38,693,497 2,496,419 $ 4.460 $ 11,134,512
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 48
As permitted by Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (SFAS 123), BancGroup has chosen to apply APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its Plans. Accordingly, no compensation cost
has been recognized for options granted under the Incentive Plan. For the
Nonqualified Plan, compensation expense is recognized for the difference
between exercise price and fair market value of the shares at date of issue.
Had compensation cost for BancGroup's Plans been determined based on the fair
value at the grant dates for awards under the Plan, BancGroup's net income and
net income per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
As Pro
Reported Forma
- -------------------------------------------------------------
<S> <C> <C> <C>
1998
Net income $ 55,196 $ 54,426
Earnings per share (basic) $ 0.50 $ 0.49
1997
Net income $ 90,362 $ 89,836
Earnings per share (basic) $ 0.86 $ 0.86
1996
Net income $ 61,849 $ 60,844
Earnings per share (basic) $ 0.64 $ 0.63
- -------------------------------------------------------------
</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 1998, 1997 and 1996,
respectively: dividend yield of 2.50%, 3.11%, and 3.15%; expected volatility of
25%, 23%, and 34% for 1998, 1997 and 1996; risk-free interest rates of 5.06%,
6.46%, and 6.04% for 1998, 1997 and 1996, respectively; and expected lives of
ten years. The weighted average fair values of options granted during 1998,
1997 and 1996 was $3.66, $4.81, and $6.51, respectively.
In 1987, BancGroup adopted the Restricted Stock Plan for Directors
("Directors Plan") whereby directors of BancGroup and its subsidiary banks may
receive Common Stock in lieu of cash director fees. The election to participate
in the Directors Plan is made at the inception of the director's term except
for BancGroup directors who make their election annually. Shares earned under
the plan for regular fees are issued quarterly while supplemental fees are
issued annually. All shares become vested at the expiration of the director's
term. During 1998, 1997 and 1996, respectively, 79,092, 62,164 and 63,420
shares of Common Stock were issued under the Directors Plan, representing
approximately $819,000, $503,000 and $328,000 in directors' fees for 1998, 1997
and 1996, respectively.
In 1992, BancGroup adopted the Stock Bonus and Retention Plan to
promote the long-term interests of BancGroup and its shareholders by providing
a means for attracting and retaining officers, employees and directors by
awarding Restricted Stock which shall vest 20% per year commencing on the first
anniversary of the award. A total of $1,123,000, $423,000 and $171,000 in
compensation expense was charged to operations under this plan for the years
ended December 31, 1998, 1997 and 1996, respectively. During 1998, 1997 and
1996 the Company awarded 123,960, 58,204 and 100,000 shares, respectively,
under the Stock Bonus and Retention Plan having weighted average fair value at
grant date of $17.19, $10.41 and $9.68, respectively. An aggregate of 3,000,000
shares have been reserved for issuance under this Plan. There were 385,364
shares outstanding of which 121,921 shares were vested at December 31, 1998.
In 1994, BancGroup adopted the Employee Stock Purchase Plan which
provides employees of BancGroup, who work in excess of 29 hours per week, with
a convenient way to become shareholders of BancGroup. The participant
authorizes a regular payroll deduction of not less than $10 or not more than
10% of salary. The participant may also contribute whole dollar amounts of not
less than $100 or not more than $1,000 each month toward the purchase of the
stock at market price. There are 600,000 shares authorized for issuance under
this Plan. An additional 400,000 may be acquired from time to time on the open
market for issuance under the Plan. There were 125,417 shares issued and
outstanding under this Plan at December 31, 1998.
16. CONTINGENCIES
BancGroup and its subsidiaries are from time to time defendants in
legal actions from normal business activities. Management does not anticipate
that the ultimate liability arising from litigation outstanding at December 31,
1998, will have a materially adverse effect on BancGroup's financial
statements.
17. RELATED PARTIES
Prior to 1998, insurance coverage for credit life, and accident and
health insurance was provided to customers of Colonial Bank by companies owned
by a principal shareholder and a director of BancGroup. Premiums collected from
customers and remitted to these companies on such insurance were approximately
$976,000 and $1,651,000 in 1997 and 1996, respectively.
BancGroup, Colonial Bank and CMC lease premises, including their
principal corporate offices, and airplane services from companies owned partly
or wholly by principal shareholders of BancGroup. Amounts paid under these
leases and agreements approximated $3,717,000, $3,475,000 and $3,252,000 in
1998, 1997 and 1996, respectively.
During 1998, 1997 and 1996, BancGroup and its subsidiaries paid or
accrued fees of approximately $1,198,000, $1,659,000 and $1,475,000,
respectively, for legal services required of law firms in which a partner of
the firm serves on the Board of Directors.
70
<PAGE> 49
18. ACQUISITION EXPENSE & RESTRUCTURING CHARGES
In the first quarter of 1998, BancGroup reorganized executive
management of its Florida regions. The reorganization resulted in a
restructuring charge of $2.5 million. During the fourth quarter of 1998, the
Company developed a plan to:
- Close certain unprofitable branches
- Sell five super-market branches
- Relocate and upgrade two other branches
- Move the headquarters of the South Florida Region to downtown Miami
and to consolidate the trust department into the South Florida
headquarters to better serve its customer base.
As a result of these actions BancGroup recognized a fourth quarter
restructuring charge of $6.3 million, which is net of $902,000 in reversals of
unused reserves.
The following is a summary of restructuring charges and activity for
the year ended December 31, 1998:
<TABLE>
<CAPTION>
Leasehold Accrued Lease
Reduction of Termination Severance
(In thousands) Asset Values Liabilities & Other Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Additions(expense) $ 4,395 $ 3,240 $ 2,052 $ 9,687
Reversal of unused reserves -- (362) (540) (902)
- ----------------------------------------------------------------------------------
Net expense 4,395 2,878 1,512 8,785
Write-off of assets (4,395) -- -- (4,395)
Reductions (payments) -- -- (914) (914)
- ----------------------------------------------------------------------------------
Balance at December 31, 1998 $ -- $ 2,878 $ 598 $ 3,476
- ----------------------------------------------------------------------------------
</TABLE>
Additionally, the Company has recognized acquisition related expenses
totaling $12,750,000, $6,463,000 and $11,918,000 for each of the years ended
December 31, 1998, 1997 and 1996, respectively. These expenses relate primarily
to transaction costs such as legal and accounting fees and incremental charges
related to the integration of acquired banks, such as system conversion
(including contract buy-outs and write off of equipment) and employee severance.
19. OTHER EXPENSE
The following amounts were included in Other Expense:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
FDIC assessment $ 2,221 $ 1,822 $ 2,582
Advertising and
public relations 7,835 7,574 7,083
Stationery, printing
and supplies 6,551 5,525 5,028
Telephone 7,276 5,510 5,291
Legal 4,663 2,949 3,350
Postage 7,185 6,001 3,187
Insurance 1,644 2,095 2,360
Professional services 13,739 9,945 6,841
Travel 4,695 4,035 3,118
Other 31,092 19,840 23,323
- -------------------------------------------------------------
Total $ 86,901 $ 65,296 $ 62,163
- -------------------------------------------------------------
</TABLE>
20. INCOME TAXES
The components of income taxes were as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 44,880 $ 46,395 $ 32,021
State 3,985 4,407 2,781
Deferred (17,459) 612 (1,720)
- ------------------------------------------------------------
Total $ 31,406 $ 51,414 $ 33,082
- ------------------------------------------------------------
</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:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate
on income from
operations $ 30,311 $ 49,622 $ 32,945
Add:
State income taxes, net
of federal tax benefit 1,259 3,067 2,290
Amortization of net
purchase accounting
adjustments 1,681 1,026 392
Other 367 (142) 668
- ------------------------------------------------------------------
Total 3,307 3,951 3,350
- ------------------------------------------------------------------
Deduct:
Nontaxable interest
income 1,622 2,116 3,111
Other 590 43 102
- ------------------------------------------------------------------
Total 2,212 2,159 3,213
- ------------------------------------------------------------------
Total income taxes $ 31,406 $ 51,414 $ 33,082
- ------------------------------------------------------------------
</TABLE>
71
<PAGE> 50
The components of BancGroup's net deferred tax asset as of December 31,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan
losses $31,670 $22,057
Pension accrual in excess
of contributions 497 1,078
Accumulated amortization
and valuation reserve for
mortgage servicing rights 7,642 1,348
Other real estate owned
write-downs 544 1,304
Other liabilities and reserves 7,709 2,100
Accelerated tax depreciation 655 37
Other 5,679 2,500
- ----------------------------------------------------------
Total deferred tax asset $54,396 $30,424
- ----------------------------------------------------------
Deferred tax liabilities:
Cumulative accretion/discount
on bonds 1,125 1,309
Differences between financial
reporting and tax bases of net
assets acquired 1,233 528
Loan loss reserve recapture 3,498 1,090
Unrealized gain on securities
available for sale 1,443 681
Deferred compensation 8,603 2,480
Other 1,033 1,231
- ----------------------------------------------------------
Total deferred tax liability 16,935 7,319
- ----------------------------------------------------------
Net deferred tax asset $37,461 $23,105
- ----------------------------------------------------------
</TABLE>
The net deferred tax asset is included as a component of accrued
interest and other assets in the Consolidated Statement of Condition.
BancGroup did not establish a valuation allowance related to the net
deferred tax asset due to taxes paid within the carryback period being
sufficient to offset future deductions resulting from the reversal of these
temporary differences.
21. EARNINGS PER SHARE
The following table reflects a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation:
<TABLE>
<CAPTION>
(Dollars in thousands, Per Share
except per share amounts) Income Shares Amount
- ------------------------------------------------------------------
<S> <C> <C> <C>
1998
Basic EPS
Net income $55,196 110,062 $0.50
Effect of dilutive securities
Options 1,640
Convertible debentures 168 729
- ------------------------------------------------------------------
Diluted EPS $55,364 112,431 $0.49
- ------------------------------------------------------------------
1997
Basic EPS
Net income $90,362 105,010 $0.86
Effect of dilutive securities
Options 2,422
Convertible debentures 295 964
- ------------------------------------------------------------------
Diluted EPS $90,657 108,396 $0.84
- ------------------------------------------------------------------
1996
Basic EPS
Net income $61,849 97,246 $0.64
Effect of dilutive securities
Options 2,642
Convertible debentures 445 1,240
- ------------------------------------------------------------------
Diluted EPS $62,294 101,128 $0.62
- ------------------------------------------------------------------
</TABLE>
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
- CASH AND CASH EQUIVALENTS -- For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
- INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE -- For debt
securities and marketable equity securities held either for investment
purposes or for sale, fair value equals quoted market price, if available.
If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
- MORTGAGE LOANS HELD FOR SALE -- For these short-term instruments, the fair
value is determined from quoted current market prices.
- DERIVATIVES -- Fair value is defined as the amount that the company would
receive or pay to terminate the contracts at the reporting date. Market or
dealer quotes were used to value the instruments.
- LOANS -- For loans, the fair value is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
- DEPOSITS -- The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand at December 31, 1998
and 1997. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining maturities.
- SHORT-TERM BORROWINGS -- Rates currently available to BancGroup for
borrowings with similar terms and remaining maturities are used to estimate
fair value of existing borrowings.
72
<PAGE> 51
- LONG-TERM DEBT -- Rates currently available to BancGroup for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
- COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT -- The value of
the unrecognized financial instruments is estimated based on the related fee
income associated with the commitments, which is not material to BancGroup's
financial statements at December 31, 1998 and 1997.
The estimated fair values of BancGroup's financial instruments at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 494,966 $ 494,966 $ 437,251 $ 437,251
Securities available for sale 1,414,218 1,414,218 655,864 655,864
Investment securities 170,954 173,542 313,140 315,787
Mortgage loans held for sale 692,042 692,099 238,540 240,584
Loans 7,110,295 5,951,067
Less: allowance for loan losses (83,562) (72,107)
- -----------------------------------------------------------------------------------------------------
Loans, net 7,026,733 7,150,559 5,878,960 5,793,793
- -----------------------------------------------------------------------------------------------------
Total $ 9,798,913 $ 9,925,384 $7,523,755 $7,443,279
- -----------------------------------------------------------------------------------------------------
Financial liabilities:
Deposits $ 7,446,153 $ 7,341,289 $6,325,690 $5,987,853
Short-term borrowings 1,510,968 1,510,131 731,359 728,739
Long-term debt 746,447 739,840 315,281 323,361
- -----------------------------------------------------------------------------------------------------
Total $ 9,703,568 $ 9,591,260 $7,372,330 $7,039,953
- -----------------------------------------------------------------------------------------------------
DERIVATIVES:
Options on Interest rate futures $ (4,234) $ (4,234)
Interest rate futures (2,730) (2,730)
- --------------------------------------------------------------------
$ (6,964) $ (6,964)
- --------------------------------------------------------------------
</TABLE>
73
<PAGE> 52
23. SEGMENT INFORMATION
Through its wholly owned subsidiary Colonial Bank and Colonial Bank's
wholly owned subsidiary Colonial Mortgage Company ("CMC"), BancGroup segments
its operations into two distinct lines of business: Commercial Banking and
Mortgage Banking. Colonial Bank provides general Commercial Banking services in
250 branches throughout 6 states. As both an originator and servicing agent of
mortgage loans, CMC provides services in 45 states.
Operating results and asset levels of the two segments reflect those
which are specifically identifiable or which are based on an internal allocation
method. The two segments are designed around BancGroup's organizational and
management structure, and while the assignments and allocations have been
consistently applied for all periods presented, the results are not necessarily
comparable to similar information published by other financial institutions.
The following table reflects the approximate amounts of consolidated
revenue, expense, and assets for the years ended December 31, for each segment:
SEGMENT DATA
(Dollars in thousands)
<TABLE>
<CAPTION>
COMMERCIAL MORTGAGE CORPORATE/ CONSOLIDATED
YEAR ENDED DECEMBER 31, 1998 BANKING BANKING OTHER* BANCGROUP
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 664,664 $ 28,897 $ (19) $ 693,542
Interest expense 327,694 15,997 6,750 350,441
Provision for possible loan loss 26,345 -- -- 26,345
Noninterest income 60,055 66,306 (1,103) 125,258
Amortization and depreciation 25,227 64,025 (283) 88,969
Noninterest expense 230,548 33,444 2,451 266,443
- -----------------------------------------------------------------------------------------------------------------
Pretax income 114,905 (18,263) (10,040) 86,602
Income taxes 40,760 (6,384) (2,970) 31,406
- -----------------------------------------------------------------------------------------------------------------
Net income $ 74,145 $ (11,879) $ (7,070) $ 55,196
- -----------------------------------------------------------------------------------------------------------------
Identifiable assets $9,507,563 $ 936,562 $ 12,160 $10,456,285
- -----------------------------------------------------------------------------------------------------------------
Capital expenditures $ 45,134 $ 1,636 $ 95 $ 46,865
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------
Interest income $ 571,784 $ 11,836 $ 17 $ 583,637
Interest expense 274,093 4,637 6,041 284,771
Provision for possible loan losses 16,321 -- -- 16,321
Noninterest income 50,200 51,319 (574) 100,945
Amortization and depreciation 18,768 17,972 9 36,749
Noninterest expense 178,497 22,710 3,758 204,965
- -----------------------------------------------------------------------------------------------------------------
Pretax income 134,305 17,836 (10,365) 141,776
Income taxes 47,605 6,698 (2,889) 51,414
- -----------------------------------------------------------------------------------------------------------------
Net income $ 86,700 $ 11,138 $ (7,476) $ 90,362
- -----------------------------------------------------------------------------------------------------------------
Identifiable assets $7,655,393 $ 393,586 $ 12,587 $ 8,061,566
- -----------------------------------------------------------------------------------------------------------------
Capital expenditures $ 44,313 $ 1,506 $ 462 $ 46,281
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------
Interest income $ 470,158 $ 11,044 $ 276 $ 481,478
Interest expense 225,471 4,737 1,918 232,126
Provision for possible loan losses 14,442 -- -- 14,442
Noninterest income 35,635 42,774 (898) 77,511
Amortization and depreciation 16,181 13,182 31 29,394
Noninterest expense 159,099 22,586 6,411 188,096
- -----------------------------------------------------------------------------------------------------------------
Pretax income 90,600 13,313 (8,982) 94,931
Income taxes 30,744 4,952 (2,614) 33,082
- -----------------------------------------------------------------------------------------------------------------
Net income $ 59,856 $ 8,361 $ (6,368) $ 61,849
- -----------------------------------------------------------------------------------------------------------------
Identifiable assets $6,339,750 $ 286,463 $ 4,429 $ 6,630,642
- -----------------------------------------------------------------------------------------------------------------
Capital expenditures $ 32,810 $ 612 $ 124 $ 33,546
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes eliminations of certain intercompany transactions.
74
<PAGE> 53
24. CONDENSED FINANCIAL INFORMATION OF THE COLONIAL BANCGROUP, INC.
(PARENT COMPANY ONLY)
STATEMENT OF CONDITION
<TABLE>
<CAPTION>
December 31
----------------------
(In thousands) 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash* $ 1,704 $ 12,270
Investment in subsidiaries* 742,047 660,096
Intangible assets 4,831 5,226
Other assets 4,834 7,983
- -----------------------------------------------------------------
Total assets $753,416 $685,575
- -----------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term borrowings $ 25,000 $ 13,140
Subordinated debt 82,542 76,088
Other liabilities 6,067 6,330
Shareholders' equity 639,807 590,017
- -----------------------------------------------------------------
Total liabilities and
shareholders' equity $753,416 $685,575
- -----------------------------------------------------------------
</TABLE>
*Eliminated in consolidation.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Cash dividends from
subsidiaries* $49,532 $43,827 $18,116
Interest and dividends
on short-term investments* 480 913 252
Other income 2,418 2,505 1,494
- --------------------------------------------------------------------
Total income 52,430 47,245 19,862
- --------------------------------------------------------------------
EXPENSES:
Interest 7,249 6,937 2,020
Salaries and
employee benefits 1,492 1,703 3,658
Occupancy expense 311 346 321
Furniture and
equipment expense 108 95 122
Amortization of
intangible assets 432 447 514
Other expenses 4,286 4,904 4,550
- --------------------------------------------------------------------
Total expenses 13,878 14,432 11,185
- --------------------------------------------------------------------
Income before income taxes
and equity in undistributed
net income of
subsidiaries 38,552 32,813 8,677
Income tax benefit 3,875 2,336 3,064
- --------------------------------------------------------------------
Income before equity in
undistributed net
income of subsidiaries 42,427 35,149 11,741
Equity in undistributed
net income of
subsidiaries* 12,769 55,213 50,108
- --------------------------------------------------------------------
Net income $55,196 $90,362 $61,849
- --------------------------------------------------------------------
</TABLE>
*Eliminated in consolidation.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES $ 46,927 $ 37,819 $ 10,026
- --------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures (95) (462) (124)
Purchase of securities -- -- (78)
Proceeds from maturities
of securities -- 506 295
Proceeds from sale
of premises and
equipment 2,389 -- 3,000
Net investment
in subsidiaries* (25,000) (56,865) (2,317)
- --------------------------------------------------------------------
Net cash (used in)
provided by investing
activities (22,706) (56,821) 776
- --------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase in short-term
borrowings 11,860 8,500 425
Proceeds from issuance
of subordinated debt -- 70,000 --
Repayment of
long-term debt -- (15,149) (3,410)
Proceeds from
issuance of
common stock 6,830 10,573 7,186
Purchase of treasury
stock (17,100) (16,013) (876)
Dividends paid (36,377) (28,127) (20,466)
Other, net (22) 1,377
- --------------------------------------------------------------------
Net cash (used in)
provided by financing
activities (34,787) 29,762 (15,764)
- --------------------------------------------------------------------
Net (decrease) increase
in cash and cash
equivalents (10,566) 10,760 (4,962)
Cash and cash
equivalents at
beginning of year 12,270 1,510 6,472
- --------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS AT END
OF YEAR* $ 1,704 $ 12,270 $ 1,510
- --------------------------------------------------------------------
Supplemental
disclosure of cash
flow information:
Cash paid (received)
during the year for:
Interest $ 7,350 $ 4,037 $ 1,910
Income taxes (3,565) (3,140) (2,493)
- --------------------------------------------------------------------
</TABLE>
*Eliminated in consolidation.
75
<PAGE> 54
COMMON STOCK INFORMATION
MARKET PRICE OF AND DIVIDENDS DECLARED ON COMMON STOCK
BancGroup's Common Stock is traded on the New York Stock Exchange
under the symbol "CNB." This trading commenced on February 24, 1995. Prior to
that time, BancGroup's Common Stock was traded on the over-the-counter market
and was quoted on NASDAQ under the symbol "CLBGA."
The following table indicates the high and low closing prices for
Common Stock during 1997 and 1998.
<TABLE>
<CAPTION>
Sale Price of
Common Stock* Dividends Declared
---------------------- on Common Stock*
High Low (per share)
- -------------------------------------------------------------------
<S> <C> <C> <C>
1997
1st Quarter
Common ........... $ 12 $ 9 1/3 $ .075
2nd Quarter
Common ........... 12 7/16 11 .075
3rd Quarter
Common ........... 14 5/8 12 1/8 .075
4th Quarter
Common ........... $ 17 9/16 $ 14 1/2 $ .075
- -------------------------------------------------------------------
1998
1st Quarter
Common ........... $ 18 1/8 $ 15 3/4 $ .085
2nd Quarter
Common ........... 18 13/16 14 3/4 .085
3rd Quarter
Common ........... 17 5/16 11 5/8 .085
4th Quarter
Common ........... $ 13 11/16 $ 10 3/8 $ .085
- -------------------------------------------------------------------
</TABLE>
*Restated to reflect the impact of two-for-one stock splits effected in the form
of 100% stock dividends paid February 11, 1997 and August 14, 1998.
VOTING SECURITIES AND SHAREHOLDERS
As of December 31, 1998, BancGroup had outstanding 110,962,365 shares
of Common Stock, with 9,754 shareholders of record.
76
<PAGE> 55
SHAREHOLDER INFORMATION
<TABLE>
<S> <C>
CORPORATE OFFICES FORM 10-K
Colonial Financial Center Form 10-K is BancGroup's annual report
One Commerce Street filed with the Securities and Exchange
Montgomery, Alabama 36104 Commission. A copy of this report is avail-
(334) 240-5000 able by writing to:
ANNUAL MEETING Steve Alexander
The Colonial BancGroup, Inc.
The annual meeting of shareholders of P.O. Box 1108
The Colonial BancGroup, Inc. will be Montgomery, Alabama 36101
held on Wednesday, April 21, 1999, at (888) 843-0622
10:00 a.m., in the corporate offices.
TRANSFER AND DIVIDEND
STOCK EXCHANGE LISTING DISBURSING AGENT
Common Stock is traded on the New SunTrust Bank, Atlanta
York Stock Exchange under symbol CNB. Stock Transfer Department
In many newspapers the stock is listed as P.O. Box 4625
ColBgp. Atlanta, Georgia 30302
(800) 568-3476
DIVIDEND REINVESTMENT AND
STOCK PURCHASE PLAN
Owners of BancGroup Common Stock
may participate in the Dividend
Reinvestment and Common Stock
Purchase Plan. Dividends are reinvested
and additional shares purchased at 100%
of the market price average, determined
as provided in the plan.
A quarterly dividend of $0.095 per share
was declared on January 21, 1999,
payable on February 12, 1999 to share-
holders of record on January 29, 1999.
Dividends have been paid every year
since the company was founded in 1981.
During those 17 years of uninterrupted
dividend payments, the annual dividend
rate has increased every year since 1990.
For further information, plus a prospec-
tus and enrollment card, contact:
Becky Murchison
The Colonial BancGroup, Inc.
Dividend Reinvestment Plan
P.O. Box 1108
Montgomery, Alabama 36101
(888) 843-0622
</TABLE>
77
<PAGE> 1
EXHIBIT 21
List of Subsidiaries of the Registrant
Colonial Bank, an Alabama banking corporation.
The Colonial BancGroup Building Corporation, an Alabama corporation.
Colonial Asset Management, Inc.
Colonial Capital II, a Delaware business trust.
Colonial Software Services, Inc., a Florida Corporation
TB&T Holdings, Inc.
ProImage, Inc.
21
<PAGE> 1
EXHIBIT 23.1
CONSENT OF PRICEWATERHOUSECOOPERS LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of The Colonial BancGroup, Inc. listed below of our report dated February 26,
1999 on our audits of the consolidated financial statements of The Colonial
BancGroup, Inc. and Subsidiaries, as of December 31, 1998 and 1997 and for each
of the three years in the period ended December 31, 1998, which report is
incorporated by reference in this annual report on Form 10-K for the year ended
December 31, 1998.
<TABLE>
<CAPTION>
Registration Statements on Form S-3
Registration Numbers:
<S> <C>
33-5665 333-25463
33-62071
Registration Statements on Form S-4
Registration Numbers:
333-26537 333-57763
333-32163 333-57935
333-39267 333-59403
333-39277 333-61875
333-39283 333-64721
333-50415 333-71841
Registration Statements on Form S-8
Registration Numbers:
2-89959 33-63347
33-11540 33-78118
33-13376 333-10475
33-41036 333-11255
33-47770 333-71841
Post-Effective Amendment No. 2 on Form
S-8 to Registration Statements on Form S-4
Registration Numbers:
333-14703 333-16481
333-14883 333-20291
</TABLE>
/s/ PricewaterhouseCoopers LLP
Montgomery, Alabama
March 5, 1998
22
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes Robert E. Lowder, Young J. Boozer, III, and W. Flake Oakley,
IV, and each of them, his or her true and lawful attorney-in-fact and agent,
with full power of substitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign on his or her behalf The Colonial
BancGroup, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1998.
Hereby executed by the following persons in the capacities indicated on
January 20, 1999, in Montgomery, Alabama.
/s/ Robert E. Lowder Chairman of the Board
- ------------------------------ and Chief Executive Officer
Robert E. Lowder
/s/ Lewis Beville Director
- ------------------------------
Lewis Beville
/s/ William Britton Director
- ------------------------------
William Britton
/s/ Jerry J. Chesser Director
- ------------------------------
Jerry J. Chesser
/s/ Augustus K. Clements, III Director
- ------------------------------
Augustus K. Clements, III
/s/ Robert Craft Director
- ------------------------------
Robert Craft
- ------------------------------ Director
Patrick F. Dye
/s/ James L. Hewitt Director
- ------------------------------
James L. Hewitt
23
<PAGE> 2
<TABLE>
<S> <C>
/s/Clinton Holdbrooks Director
- ---------------------------------
Clinton Holdbrooks
/s/Harold D. King Director
- ---------------------------------
Harold D. King
/s/John Ed Mathison Director
- ---------------------------------
John Ed Mathison
/s/Milton E. McGregor Director
- ---------------------------------
Milton E. McGregor
/s/John C. H. Miller, Jr.
- --------------------------------- Director
John C. H. Miller, Jr.
Director
- ---------------------------------
Joe D. Mussafer
/s/William B. Powell, III Director
- ---------------------------------
William B. Powell, III
/s/Jack H. Rainer Director
- ---------------------------------
Jack H. Rainer
/s/James W. Rane Director
- ---------------------------------
James W. Rane
/s/Frances B. Roper Director
- ---------------------------------
Frances B. Roper
</TABLE>
24
<PAGE> 3
/s/ Simuel Sippial Director
- ------------------
Simuel Sippial
/s/ Ed V. Welch Director
- ------------------
Ed V. Welch
25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COLONIAL BANCGROUP FOR THE YEAR ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 437,719
<INT-BEARING-DEPOSITS> 44,377
<FED-FUNDS-SOLD> 12,870
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,414,218
<INVESTMENTS-CARRYING> 170,954
<INVESTMENTS-MARKET> 173,542
<LOANS> 7,110,295
<ALLOWANCE> 83,562
<TOTAL-ASSETS> 10,456,285
<DEPOSITS> 7,446,153
<SHORT-TERM> 1,510,968
<LIABILITIES-OTHER> 112,910
<LONG-TERM> 746,447
0
0
<COMMON> 277,406
<OTHER-SE> 362,401
<TOTAL-LIABILITIES-AND-EQUITY> 10,456,285
<INTEREST-LOAN> 604,493
<INTEREST-INVEST> 88,069
<INTEREST-OTHER> 980
<INTEREST-TOTAL> 693,542
<INTEREST-DEPOSIT> 256,446
<INTEREST-EXPENSE> 350,441
<INTEREST-INCOME-NET> 343,101
<LOAN-LOSSES> 26,345
<SECURITIES-GAINS> 1,449
<EXPENSE-OTHER> 355,412
<INCOME-PRETAX> 86,602
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,196
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.49
<YIELD-ACTUAL> 4.17
<LOANS-NON> 32,823
<LOANS-PAST> 8,992
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 158,000
<ALLOWANCE-OPEN> 72,107
<CHARGE-OFFS> 22,657
<RECOVERIES> 5,927
<ALLOWANCE-CLOSE> 83,562
<ALLOWANCE-DOMESTIC> 83,562
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
