<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER 1-13508
(THE COLONIAL BANCGROUP LOGO)
THE COLONIAL BANCGROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0661573
------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
ONE COMMERCE STREET
MONTGOMERY, ALABAMA 36104
------------------------------------------
(Address of principle executive offices)
(334) 240-5000
------------------------------------------
(Registrant's telephone number)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO THE FILING REQUIREMENTS FOR
AT LEAST THE PAST 90 DAYS.
YES [ X ] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE.
Class Outstanding at October 31, 1999
---------------------------------- ----------------------------------
Common Stock, $2.50 Par Value 111,938,331
<PAGE> 2
THE COLONIAL BANCGROUP, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Condition - September 30, 1999, December 31, 1998 and September 30, 1998......... 1
Consolidated Statements of Income - Nine months ended September 30, 1999 and September 30, 1998 and
three months ended September 30, 1999 and September 30, 1998................................................ 2
Consolidated Statements of Comprehensive Income - Nine months ended September 30, 1999
and September 30, 1998 and three months ended September 30, 1999 and September 30, 1998..................... 3
Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and September 30, 1998......... 4
Notes to Consolidated Financial Statements - September 30, 1999............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................... 21
Item 6. Exhibits and Reports on Form 8-K............................................................................ 21
SIGNATURES .......................................................................................................... 22
</TABLE>
<PAGE> 3
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities: (i) deposit attrition, customer loss, or revenue loss in the
ordinary course of business; (ii) increases in competitive pressure in the
banking industry; (iii) costs or difficulties related to the integration of the
businesses of BancGroup and acquired institutions are greater than expected;
(iv) changes in the interest rate environment which reduce margins; (v) changes
in mortgage servicing rights prepayment assumptions; (vi) changes which may
occur in the regulatory environment; (vii) a significant rate of inflation
(deflation); (viii) changes in the securities markets; and (ix) 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.
iii
<PAGE> 4
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998*
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 324,015 $ 437,719 $ 383,420
Interest-bearing deposits in banks and federal funds sold 17,355 57,247 34,011
Securities held for trading 709 -- --
Securities available for sale 1,475,364 1,414,218 1,264,896
Investment securities (market value: September 30, 1999, $103,542;
December 31, 1998, $173,542; September 30, 1998, $200,512) 103,294 170,954 197,370
Mortgage loans held for sale 182,093 692,042 453,566
Loans, net of unearned income 7,856,226 7,110,295 6,703,538
Less: Allowance for possible loan losses (91,752) (83,562) (77,400)
------------ ------------ -----------
Loans, net 7,764,474 7,026,733 6,626,138
Premises and equipment 194,557 181,617 182,445
Excess of cost over tangible and identified intangible
assets acquired, net 80,892 84,893 78,073
Mortgage servicing rights 270,428 183,469 173,655
Other real estate owned 6,196 8,728 10,028
Accrued interest and other assets 201,547 198,665 146,761
------------ ------------ -----------
TOTAL ASSETS $ 10,620,924 $ 10,456,285 $ 9,550,363
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits $ 7,601,210 $ 7,446,153 $ 6,837,736
FHLB short-term borrowings 370,000 769,987 480,000
Other short-term borrowings 912,600 740,981 655,197
Subordinated debt 112,440 12,542 12,633
Trust preferred securities 70,000 70,000 70,000
FHLB long-term debt 645,515 528,163 473,308
Other long-term debt 135,167 135,742 219,824
Other liabilities 93,249 112,910 142,183
------------ ------------ -----------
Total liabilities 9,940,181 9,816,478 8,890,881
SHAREHOLDERS' EQUITY
Preference Stock $2.50 par value; 1,000,000 shares
authorized, none issued -- -- --
Common Stock, $2.50 par value; 200,000,000 shares authorized
111,920,707, 110,962,365 and 110,754,274 shares issued at
Sept. 30, 1999, Dec. 31, 1998 and Sept. 30, 1998, respectively 279,802 277,406 276,886
Treasury shares (26,501 shares at December 31, 1998) -- (355) --
Additional paid in capital 118,103 113,469 113,052
Retained earnings 306,462 249,297 262,626
Unearned compensation (1,839) (2,348) (2,774)
Accumulated other comprehensive income (loss), net of taxes (21,785) 2,338 9,692
------------ ------------ -----------
Total shareholders' equity 680,743 639,807 659,482
------------ ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,620,924 $ 10,456,285 $ 9,550,363
============ ============ ===========
</TABLE>
*See Note A.
See Notes to the Unaudited Condensed Consolidated Financial Statements
-1-
<PAGE> 5
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998* 1999 1998*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $499,044 $446,350 $169,995 $155,828
Interest on investments 74,573 59,554 25,542 23,320
Other interest income 1,840 4,922 620 1,312
-------- -------- -------- --------
Total interest income 575,457 510,826 196,157 180,460
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 200,900 191,329 68,945 65,447
Interest on short-term borrowings 51,340 37,753 16,000 15,142
Interest on long-term debt 41,943 26,925 15,401 11,587
-------- -------- -------- --------
Total interest expense 294,183 256,007 100,346 92,176
-------- -------- -------- --------
Net Interest Income 281,274 254,819 95,811 88,284
Provision for possible loan losses 19,468 12,003 7,014 4,088
-------- -------- -------- --------
Net Interest Income After Provision for
Possible Loan Losses 261,806 242,816 88,797 84,196
-------- -------- -------- --------
NONINTEREST INCOME:
Mortgage servicing and origination fees 37,889 32,299 13,146 11,330
Service charges on deposit accounts 28,660 27,457 9,739 9,515
Other charges, fees and commissions 7,587 7,312 2,336 2,647
Securities gains (losses), net 499 1,076 490 72
Other income 30,811 26,366 11,723 8,873
-------- -------- -------- --------
Total noninterest income 105,446 94,510 37,434 32,437
-------- -------- -------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits 91,772 88,629 31,459 30,929
Occupancy expense, net 22,572 20,572 7,744 7,198
Furniture and equipment expenses 20,661 18,364 7,188 6,297
Other expense 91,210 116,885 31,452 54,143
-------- -------- -------- --------
Total noninterest expense 226,215 244,450 77,843 98,567
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 141,037 92,876 48,388 18,066
Applicable income taxes 52,190 33,784 17,952 6,622
-------- -------- -------- --------
NET INCOME $ 88,847 $ 59,092 $ 30,436 $ 11,444
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.80 $ 0.54 $ 0.27 $ 0.10
Diluted $ 0.79 $ 0.53 $ 0.27 $ 0.10
</TABLE>
*See Note A.
See Notes to the Unaudited Condensed Consolidated Financial Statements.
-2-
<PAGE> 6
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998* 1999 1998*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME $ 88,847 $ 59,092 $ 30,436 $ 11,444
OTHER COMPREHENSIVE INCOME, NET OF TAXES:
Unrealized gains (losses) on securities available for sale
arising during the period, net of taxes (24,176) 9,113 (7,806) 5,976
Less: reclassification adjustment for net (gains)
losses included in net income, net of taxes 53 (1,644) 58 (1,120)
-------- -------- -------- --------
(24,123) 7,469 (7,748) 4,856
COMPREHENSIVE INCOME $ 64,724 $ 66,561 $ 22,688 $ 16,300
======== ======== ======== ========
</TABLE>
*See Note A.
See Notes to the Unaudited Condensed Consolidated Financial Statements.
-3-
<PAGE> 7
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
--------- -----------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 545,480 $ (111,105)
--------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 279,217 183,610
Proceeds from sales of securities available for sale 168,264 334,892
Purchase of securities available for sale (545,040) (1,056,195)
Proceeds from maturities of investment securities 68,115 161,184
Purchase of investment securities (643) (64,691)
Net increase in loans (770,373) (594,418)
Cash received in bank acquisitions/dispositions -- 20,566
Capital expenditures (34,892) (33,467)
Proceeds from sale of other real estate owned 13,559 9,393
Other, net 4,778 1,292
--------- -----------
NET CASH USED IN INVESTING ACTIVITIES (817,015) (1,037,834)
--------- -----------
Cash flows from financing activities:
Net increase in demand, savings, and time deposits 155,058 292,440
Net (decrease) increase in federal funds purchased, repurchase agreements
and other short-term borrowings (303,089) 379,332
Proceeds from issuance of long-term debt 349,976 480,453
Repayment of long-term debt (58,477) (2,010)
Proceeds from issuance of common stock 6,154 5,849
Dividends paid (31,682) (26,945)
--------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 117,940 1,129,119
--------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (153,595) (19,820)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 494,966 437,251
--------- -----------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 341,371 $ 417,431
========= ===========
Supplemental disclosure of cash flow information:
Cash paid during nine months for:
Interest $ 296,952 $ 254,873
Income taxes 54,825 32,441
Non-cash investing activities:
Transfer of loans to other real estate $ 10,823 $ 5,283
Origination of loans for the sale of other real estate -- 438
Non-cash financing activities:
Conversion of subordinated debentures to common stock $ 102 $ 1,179
Assets acquired in business combinations -- 166,824
Liabilities assumed in business combinations -- 145,562
</TABLE>
See Notes to the Unaudited Condensed Consolidated Financial Statements.
-4-
<PAGE> 8
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES/RESTATEMENT
The Colonial BancGroup, Inc. ("BancGroup") and its subsidiaries have not
changed their accounting and reporting policies from those stated in the 1998
annual report. These unaudited interim financial statements should be read in
conjunction with the audited financial statements and footnotes included in
BancGroup's 1998 annual report on Form 10-K. The September 30, 1998 financial
statements have been restated to give retroactive effect to the
pooling-of-interests business combinations with First Macon Bank & Trust, Prime
Bank of Central Florida and InterWest Bancorp.
In the opinion of BancGroup, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the financial positions
as of September 30, 1999 and 1998 and the results of operations and cash flows
for the interim periods ended September 30, 1999 and 1998. All 1999 interim
amounts are subject to year-end audit, and the results of operations for the
interim periods herein are not necessarily indicative of the results of
operations to be expected for the year.
NOTE B - BUSINESS COMBINATIONS
The Company did not enter into or consummate any business combinations for
the nine months ended September 30, 1999. Business combinations in fiscal year
1998 resulted in the restatement of September 30, 1998 financial statements.
Presented below is BancGroup's summary of operating information for the nine
months ended September 30, 1998, showing the effect of business combinations
previously reported:
<TABLE>
<CAPTION>
As Originally Effect of Currently
Reported Poolings Reported
------------- --------- ---------
<S> <C> <C> <C>
Net interest income $242,586 $12,233 $254,819
Noninterest income 88,044 6,466 94,510
Net income 56,275 2,817 59,092
</TABLE>
NOTE C - COMMITMENTS AND CONTINGENCIES
BancGroup and its subsidiaries are from time to time defendants in legal
actions arising from normal business activities. Management does not anticipate
that the ultimate liability arising from litigation outstanding at September 30,
1999 will have a materially adverse effect on BancGroup's financial statements.
NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS
On September 23, 1999, the Financial Accounting Standards Board issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133," an amendment to delay the
effective date of FASB statement 133. SFAS 133 requires that all derivatives be
recognized as assets and liabilities and measured at fair value. The effective
date for this statement will be delayed from fiscal years beginning after
September 15, 1999 to fiscal years beginning after September 15, 2000.
Management is currently evaluating the impact that SFAS No. 133 and SFAS No. 137
will have on BancGroup's financial statements.
On October 12, 1998, the Financial Accounting Standards Board issued SFAS
No. 134 "Accounting for Mortgage-Backed Securities after the Securitization of
Mortgage Loans Held For Sale by a Mortgage Banking Enterprise." This statement
is effective for the first fiscal quarter beginning after December 15, 1998. The
Company is not currently involved in these activities and therefore the adoption
of SFAS No. 134 will have no impact on BancGroup's financial statements.
-5-
<PAGE> 9
NOTE E - MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights and the related valuation reserve
is as follows:
<TABLE>
<CAPTION>
(In thousands) SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- --------------
<S> <C> <C>
MORTGAGE SERVICING RIGHTS
Balance, January 1 $ 221,798 $ 143,401
Additions, net 60,331 72,944
Scheduled amortization (28,329) (16,555)
Hedge losses applied 49,164 --
--------- ---------
Balance, September 30 $ 302,964 $ 199,790
========= =========
VALUATION RESERVE
Balance, January 1 $ (38,329) $ (1,361)
Reduction
6,078 --
Additions (285) (24,774)
--------- ---------
Balance, September 30 (32,536) (26,135)
--------- ---------
MORTGAGE SERVICING RIGHTS, NET $ 270,428 $ 173,655
========= =========
</TABLE>
The estimated fair value of mortgage servicing rights was $283,595,831 at
September 30, 1999. As of September 30, 1999, Colonial Mortgage services
approximately $16.9 billion of loans for third parties.
NOTE F - 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>
NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ----------------------------------------
(DOLLARS IN THOUSANDS, PER SHARE PER SHARE
EXCEPT PER SHARE AMOUNTS) INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
1999
Basic EPS
Net Income $88,847 111,580 $0.80 $30,436 111,815 $0.27
Effect of dilutive securities
Options 978 951
Convertible
debentures 164 671 54 667
------- ------- ------- -------
Diluted EPS $89,011 113,229 $0.79 $30,490 113,433 $0.27
======= ======= ======= =======
1998
Basic EPS
Net Income $59,092 109,955 $0.54 $11,444 110,467 $0.10
Effect of dilutive securities
Options 1,935 1,665
Convertible debentures 179 743 54 698
------- ------- ------- -------
Diluted EPS $59,271 112,633 $0.53 $11,498 112,830 $0.10
======= ======= ======= =======
</TABLE>
-6-
<PAGE> 10
NOTE G - 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
241 offices throughout 6 states. As both an originator and servicing agent of
mortgage loans, CMC provides services in 45 states.
Operating results of the two segments reflect those 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
revenues, expense, and assets for the quarters and nine months ended September
30, for each segment:
<TABLE>
<CAPTION>
LINE OF BUSINESS RESULTS
(In thousands)
COMMERCIAL MORTGAGE CORPORATE/ CONSOLIDATED
QUARTER ENDED SEPTEMBER 30, 1999 BANKING BANKING OTHER* BANCGROUP
---------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Net interest income $96,274 $ 1,172 $(1,635) $95,811
Provision for possible loan losses 7,014 -- -- 7,014
Noninterest income 25,939 11,681 (186) 37,434
Amortization and depreciation 6,950 10,184 (101) 17,033
Noninterest expense 53,819 6,905 86 60,810
------- -------- ------- -------
Pretax income 54,430 (4,236) (1,806) 48,388
Income taxes 20,574 (1,601) (1,021) 17,952
------- -------- ------- -------
Net Income (loss) $33,856 $ (2,635) $ (785) $30,436
<CAPTION>
COMMERCIAL MORTGAGE CORPORATE/ CONSOLIDATED
QUARTER ENDED SEPTEMBER 30, 1998 BANKING BANKING OTHER* BANCGROUP
---------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Net interest income $ 86,257 $ 3,677 $ (1,650) $ 88,284
Provision for possible loan losses 4,088 -- -- 4,088
Noninterest income 15,146 17,556 (265) 32,437
Amortization and depreciation 6,456 29,373 (83) 35,746
Noninterest expense 53,492 8,387 942 62,821
-------- -------- -------- --------
Pretax income 37,367 (16,527) (2,774) 18,066
Income taxes 13,639 (6,268) (749) 6,622
-------- -------- -------- --------
Net Income (loss) $ 23,728 $(10,259) $ (2,025) $ 11,444
======== ======== ======== ========
</TABLE>
* Includes eliminations of certain intercompany transactions.
-7-
<PAGE> 11
<TABLE>
<CAPTION>
LINE OF BUSINESS RESULTS (CONTINUED)
(In thousands)
COMMERCIAL MORTGAGE CORPORATE CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30, 1999 BANKING BANKING /OTHER* BANCGROUP
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Net interest income $279,758 $ 7,185 $ (5,669) $281,274
Provision for possible loan losses 19,468 -- -- 19,468
Noninterest income 59,167 46,724 (445) 105,446
Amortization and depreciation 20,246 25,526 (306) 45,466
Noninterest expense 153,518 27,210 21 180,749
-------- -------- -------- --------
Pretax income 145,693 1,173 (5,829) 141,037
Income taxes 54,441 409 (2,660) 52,190
-------- -------- -------- --------
Net Income (loss) $ 91,252 $ 764 $ (3,169) $ 88,847
======== ======== ======== ========
<CAPTION>
COMMERCIAL MORTGAGE CORPORATE CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30, 1998 BANKING BANKING /OTHER* BANCGROUP
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Net interest income $250,577 $ 9,233 $ (4,991) $254,819
Provision for possible loan losses 12,003 -- -- 12,003
Noninterest income 44,941 50,425 (856) 94,510
Amortization and depreciation 18,671 41,755 (196) 60,230
Noninterest expense 158,793 23,520 1,907 184,220
-------- -------- -------- --------
Pretax income 106,051 (5,617) (7,558) 92,876
Income taxes 37,925 (2,162) (1,979) 33,784
-------- -------- -------- --------
Net Income (loss) $ 68,126 $ (3,455) $ (5,579) $ 59,092
======== ======== ======== ========
</TABLE>
* Includes eliminations of certain intercompany transactions.
-8-
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION:
Ending balances of total assets, securities, mortgage loans held for
sale, net loans, mortgage servicing rights, deposits, and long term debt changed
for the nine months and twelve months ended September 30, 1999, respectively, as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
to September 30, 1999 to September 30, 1999
-------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
-------------------------- ----------------------------
AMOUNT % Amount %
--------- ---- ----------- ----
<S> <C> <C> <C> <C>
Assets
Colonial Bank $ 612,637 6.4% $ 1,218,271 13.7%
CMC (448,259) (47.9) (145,859) (23.0)
Other 261 2.1 (1,851) (13.0)
--------- ---- ----------- ----
Total assets 164,639 1.6 1,070,561 11.2
Securities (5,805) (0.4) 117,100 8.0
Mortgage loans held for sale (509,948) (73.7) (271,473) (59.9)
Loans, net of unearned income 745,931 10.5 1,152,688 17.2
Mortgage Servicing Rights 86,959 47.4 96,773 55.7
Deposits 155,058 2.1 763,474 11.2
Long term debt 216,675 29.0 187,357 24.2
</TABLE>
ASSETS:
BancGroup's assets as restated have increased 11.2% and 1.6% since
September 30, 1998 and December 31, 1998, respectively. The Company's strategy
has been to increase its asset size both internally and through acquisition
efforts. BancGroup has concentrated on expanding into growth markets by merging
with banks that have strong local management. BancGroup has been most successful
with this strategy in Florida. With the mergers of FirstBank and TB&T in Dallas,
Texas, InterWest in Reno, Nevada and CNB in Las Vegas, Nevada, BancGroup has
expanded into growth markets outside the Southeast. Asset growth in Colonial
Bank of $613 million or 6.4% during the first nine months of 1999 has resulted
from internal loan growth since there were no acquisitions during this period.
The decrease of $448 million in CMC assets is primarily due to the decline in
mortgage loans held for sale, which is discussed further below.
SECURITIES:
Investment securities and securities available for sale have increased
$117 million (8.0%) from September 30, 1998. The increase was due to normal
business growth.
LOANS AND MORTGAGE LOANS HELD FOR SALE:
Loans, net of unearned income, have increased $1.2 billion (17.2%) and $746
million (10.5%) from September 30, 1998, and December 31, 1998, respectively.
These increases are primarily due to internal growth. The success of
management's strategy to expand into higher growth markets is evident in that
approximately 66% and 62% of the growth from December 31, 1998 and September 30,
1998, respectively, came from the Company's Florida, Georgia and western
markets.
Mortgage loans held for sale are funded on a short-term basis (less than 90
days) while they are being packaged for sale in the secondary market by Colonial
Mortgage Company, a wholly owned subsidiary of Colonial Bank. Loans originated
amounted to approximately $2.5 billion and $2.7 billion and sales thereof
amounted to approximately $2.9 billion and $2.6 billion during the nine months
ended September 30, 1999 and 1998, respectively. Interest rates have increased
significantly since December 1998, primarily in the second and third quarters,
resulting in a reduction in originations and a corresponding reduction in loans
held for sale.
-9-
<PAGE> 13
<TABLE>
<CAPTION>
GROSS LOANS BY CATEGORY SEPT. 30, DEC. 31, SEPT. 30,
(In thousands) 1999 1998 1998
---------- ---------- ----------
<S> <C> <C> <C>
Commercial, financial, and agricultural $1,074,796 $1,102,446 $ 949,143
Real estate-commercial 2,459,944 2,006,851 1,939,540
Real estate-construction 1,297,822 1,028,471 908,809
Real estate-residential 2,440,681 2,438,236 2,473,146
Installment and consumer 304,286 344,860 325,296
Other 278,934 189,934 108,276
---------- ---------- ----------
Total loans $7,856,463 $7,110,798 $6,704,210
========== ========== ==========
</TABLE>
The majority of the $746 million in loan growth for 1999 has been in loans
collateralized by commercial real estate, which increased approximately $453
million from December 31, 1998. The increase of $1.2 billion from September 30,
1998, consisted primarily of Commercial loans ($126 million), Commercial real
estate loans ($520 million) and Construction loans ($389 million). Residential
real estate loans decreased $32 million from September 30, 1998. This decline in
residential real estate is primarily attributable to the refinancing of these
predominately adjustable rate (ARM) loans to fixed rate loans. The Company
generally sells fixed rate residential real estate loans in the secondary
markets resulting in net reductions in outstanding balances. These loans are
concentrated in various areas in Alabama, the metropolitan Atlanta market in
Georgia as well as the Company's Florida markets. Other loans includes a unit
established for loans to unaffiliated mortgage companies to provide warehouse
lines of credit while those companies' loans are being packaged for sale in the
secondary market. Loans outstanding under these warehouse lines were $143.38
million and $84.9 million, respectively for September 30, 1999 and December 31,
1998.
Allocations of the allowance for possible loan losses are made on an
individual loan basis for all identified potential problem loans with a
percentage allocation for the remaining portfolio. The allocations of the total
allowance represent an approximation of the reserves for each category of loans
based on management's evaluation of risk within each loan type.
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
PERCENT OF Percent of Percent of
SEPT. 30, LOANS TO Dec. 31, Loans to Sept. 30, Loans to
1999 TOTAL LOANS 1998 Total Loans 1998 Total Loans
-------- ----------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Commercial, financial,
and agricultural $22,085 13.7% $19,068 15.5% $15,859 14.1%
Real estate-commercial 32,930 31.3 30,382 28.2 27,895 28.9
Real estate-construction 17,634 16.5 14,681 14.5 15,581 13.6
Real estate-mortgage 12,203 31.1 12,191 34.3 12,366 36.9
Installment and consumer 4,101 3.9 4,930 4.8 4,165 4.9
Other 2,799 3.5 2,310 2.7 1,534 1.6
------- ----- ------- ----- ------- -----
TOTAL $91,752 100.0% $83,562 100.0% $77,400 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
-10-
<PAGE> 14
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
NINE MONTHS Year Nine Months
ENDED Ended Ended
(In thousands) SEPT. 30, 1999 Dec. 31, 1998 Sept. 30, 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Allowance for possible loan losses - January 1 $83,562 $72,107 $72,107
Charge-offs:
Commercial, financial, and agricultural 7,512 6,001 3,499
Real Estate-commercial 2,153 3,273 1,417
Real estate-construction 404 1,731 379
Real estate-residential 2,043 3,380 1,331
Installment and consumer 3,589 6,803 4,577
Other 1,274 1,469 738
------- ------- -------
Total charge-offs 16,975 22,657 11,941
------- ------- -------
Recoveries:
Commercial, financial, and agricultural 2,352 1,206 859
Real estate-commercial 340 1,399 537
Real estate-construction 42 43 16
Real estate-residential 797 545 521
Installment and consumer 1,848 1,945 1,496
Other 318 789 288
------- ------- -------
Total recoveries 5,697 5,927 3,717
------- ------- -------
Net charge-offs 11,278 16,730 8,224
Addition to allowance charged to operating expense 19,468 26,345 12,003
Allowance added from business combinations -- 1,840 1,514
------- ------- -------
Allowance for possible loan losses-end of period $91,752 $83,562 $77,400
======= ======= =======
</TABLE>
Asset quality as measured by nonperforming assets remains strong at 0.45%
of net loans and other real estate compared to 0.60% and 0.72% at December 31,
1998 and September 30, 1998, respectively. Nonperforming assets have decreased
$7.2 million from December 31, 1998. The decrease in nonperforming assets
primarily resulted from a $4.6 million decrease in nonperforming loans and a
$2.5 million decrease in other real estate and repossessions. Management
continuously monitors and evaluates recoverability of problem assets and adjusts
loan loss reserves accordingly. Loan loss reserve is 1.17% of loans at September
30, 1999 as compared to 1.18% at December 31, 1998 and 1.15% at September 30,
1998.
-11-
<PAGE> 15
NONPERFORMING ASSETS ARE SUMMARIZED BELOW
<TABLE>
<CAPTION>
(In thousands) SEPT. 30, 1999 Dec. 31, 1998 Sept. 30, 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Nonaccrual loans $28,255 $32,823 $36,676
Restructured loans 1,270 1,334 1,370
------- ------- -------
Total nonperforming loans* 29,525 34,157 38,046
Other real estate owned 5,956 8,164 9,235
Repossessions 240 564 793
------- ------- -------
Total nonperforming assets* $35,721 $42,885 $48,074
======= ======= =======
Aggregate loans contractually past due 90 days
For which interest is being accrued $ 8,750 $ 8,992 $ 6,583
Net charge-offs:
Quarter-to-Date $ 3,336 $ 8,504 $ 3,729
Year-to-Date $11,278 $16,730 $ 8,226
RATIOS
Period end:
Total nonperforming assets as a percent of net
Loans and other real estate 0.45% 0.60% 0.72%
Allowance as a percent of net loans 1.17% 1.18% 1.15%
Allowance as a percent of nonperforming assets* 257% 195% 161%
Allowance as a percent of nonperforming loans* 311% 245% 203%
For the period end:
Net charge-offs as a percent of average net loans-
(annualized basis)
Quarter-to-Date 0.17% 0.49% 0.23%
Year-to-Date 0.20% 0.26% 0.17%
</TABLE>
*Total does not include loans contractually past due 90 days or more, which are
still accruing interest.
Management, through its loan officers, internal loan review staff, and
external examinations by regulatory agencies has identified approximately $147
million of potential problem loans not included above. The status of these loans
is reviewed at least quarterly by loan officers and loan administration and
annually by regulatory agencies. In connection with such reviews, collateral
values are updated where considered necessary. If collateral values are judged
insufficient and other sources of repayment inadequate, the loans are reduced to
estimated recoverable amounts through increases in reserves allocated to the
loans or charge-offs. As of September 30, 1999, substantially all of these loans
are current with their existing repayment terms. Given the reserves and the
ability of the borrowers to comply with the existing repayment terms, management
believes any exposure from these potential problem loans has been adequately
addressed at the present time.
The above nonperforming loans and potential problem loans represent all
material credits for which management has doubts as to the ability of the
borrowers to comply with the loan repayment terms. The recorded investment in
impaired loans at September 30, 1999 was $17.6 million and these loans had a
corresponding valuation allowance of $6.7 million.
MORTGAGE SERVICING RIGHTS:
During the first nine months of 1999, long-term interest rates increased
significantly with the 10-year treasury yield increasing from 4.46% at December
31, 1998 to 5.89% at September 30, 1999. This increase resulted in an increase
in the market value of mortgage servicing rights (MSRs) as well as a loss on the
mortgage servicing hedges. As a result, BancGroup deferred $49.2 million of
hedge losses and reduced the MSR valuation allowance by $5.8 million.
The hedge positions of the servicing asset are monitored 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 specified percentage of
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, LIBOR rates and the constant maturity swap index, to which
the majority of 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 MSR hedges without similarly
impacting the MSRs.
-12-
<PAGE> 16
LIQUIDITY:
The maintenance of an adequate liquidity position and the constant
monitoring of rate sensitivity are principal components of BancGroup's
asset/liability management strategy. BancGroup's governing policy provides for
daily and longer term monitoring of both sources and uses of funds to properly
maintain the cash position. The policy also establishes the criteria for
monitoring the short and long term impact of interest rate fluctuations on these
funds. To assist in funding loan growth, BancGroup has credit facilities at the
Federal Home Loan Bank (FHLB). FHLB provides availability of up to $2 billion on
either a short or long-term basis excluding funds available through the Federal
Funds line. At September 30, 1999, the FHLB credit facility was $1.5 billion of
which $408 million was available based on current collateral. This credit
facility is collateralized by the Company's residential real estate loans. This
source of credit reduces BancGroup's dependency on deposits as a source of
liquidity resulting in a loan to deposit ratio of 103.4% at September 30, 1999
and 95.4% at December 31, 1998. BancGroup has a brokered Certificate of Deposit
(CD) program in conjunction with Merrill Lynch, Paine Webber, Dean Witter and
Oppenheimer Capital to offer CD's in increments of $1,000 to $99,000 to out of
market customers at competitive rates ranging from 4.85% to 6.30% maturing in 3
to 24 month periods. At September 30, 1999, $454 million is outstanding under
this program. BancGroup also has a brokered money market program with Merrill
Lynch. At September 30, 1999, $98 million is outstanding under this program at a
rate of 5.24%. Funds are transferred daily to meet short-term funding
fluctuations. Beginning in 1998, BancGroup received funds under reverse
repurchase arrangements with Morgan Stanley, Salomon Brothers and First Boston.
At September 30, 1999, there was $287 million in outstanding debt under this
agreement, which is collateralized by mortgage-backed securities. On March 16,
1999, the Company's subsidiary, Colonial Bank issued $100 million in 8%
Subordinated Notes due March 15, 2009. These notes are not subject to redemption
prior to maturity and pay interest semiannually on March 15 and September 15.
The Company entered into a revolving credit facility with an unaffiliated
financial institution totaling $25 million of which none was outstanding at
September 30, 1999. This facility bears interest at a rate of 0.85% above LIBOR
and expires in July 2000.
CAPITAL RESOURCES:
Management continuously monitors the Company's capital adequacy and
potential for future growth. BancGroup 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 capital resources.
The Federal Reserve has issued guidelines identifying Tier I and Tier II
capital components as well as minimum Tier I leverage ratios relative to total
assets and minimum capital ratios relative to risk-adjusted assets. The Company
issued $70 million in Trust Preferred Securities in 1997 that qualifies as Tier
I capital and Colonial Bank issued $100 million in 8% Subordinated Notes in
March 1999 that qualifies as Tier II capital. BancGroup's actual capital ratios
and the components of capital and risk adjusted asset information (subject to
regulatory review) as of September 30, 1999 are stated below:
<TABLE>
<S> <C>
Capital (in thousands):
Tier I Capital:
Shareholders' equity (as adjusted for unrealized loss on securities
available for sale, intangibles and disallowed mortgage servicing
rights plus Trust Preferred Securities) $ 676,445
Tier II Capital:
Allowable loan loss reserve 91,752
Subordinated debt 112,440
Unrealized gains on available for sale equity securities --
----------
Total Capital $ 880,637
==========
Risk Adjusted Assets (in thousands) $7,906,174
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Tier I leverage ratio (minimum 3%) 6.40% 6.08%
Risk Adjusted Capital Ratios:
Tier I Capital Ratio (minimum 4%) 8.56% 8.50%
Total Capital Ratio (minimum 8%) 11.14% 9.85%
</TABLE>
Management believes that capital levels are sufficient to support future
internally generated growth and fund the quarterly dividend rates that are
currently $0.095 per share each quarter.
-13-
<PAGE> 17
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, which relies on computers and associated technologies.
BancGroup has aggressively addressed the challenges that Year 2000 presents
to its operations. Management has completed its remediation efforts through the
testing of business applications and systems. BancGroup completed testing with
its mission critical 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. Therefore management does not anticipate significant
disruptions in its operations as a result of entering the new millennium.
Year 2000 compliant and tested mission critical applications are currently
being used in production at Colonial Bank and Colonial Mortgage Company.
BancGroup's contingency plans were substantially completed and tested at
September 30, 1999. The plans are designed to minimize Year 2000 inconveniences,
if any, to our customers. Colonial expects to operate as usual on January 3,
2000.
Throughout 1998 and during 1999, 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 takers and
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; therefore, the impact of Year 2000 noncompliance by third
parties with which BancGroup transacts business is not anticipated to have a
materially adverse impact on the operations of the Company.
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 possibility
of an increase in the cash needs of our customers.
BancGroup expects to spend approximately $12.5 million on the Year 2000
project. To date, BancGroup has incurred approximately $12.2 million of those
expenditures, $780,000 during the first nine months of 1999, $11 million in
1998, and $432,000 in 1997. The remaining expenditures primarily relate to
unbilled services, invoices not received for equipment purchased, customer
awareness programs and fourth quarter testing costs. Year 2000 project costs of
approximately $260,000 were expensed during the first nine months of 1999 while
$4.6 million and $432,000 were expensed during the years ended December 31, 1998
and 1997, respectively.
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 has developed contingency plans 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.
-14-
<PAGE> 18
AVERAGE VOLUME AND RATES
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1999 1998*
--------------------------------------- ------------------------------------
AVERAGE AVERAGE
VOLUME INTEREST RATE VOLUME INTEREST RATE
------ -------- ---- ------ -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $ 7,749,951 $ 166,034 8.51% $6,541,117 $ 147,774 8.98%
Mortgage loans held for sale 215,119 4,226 7.86% 450,574 8,297 7.37%
Investment securities and securities
available for sale and other 1,697,875 26,643 6.27% 1,578,333 25,173 6.37%
----------- --------- ---------- ----------
Total interest-earning assets(1) 9,662,945 196,903 8.10% 8,570,024 181,244 8.41%
----------- --------- ---------- ----------
Nonearning assets 979,842 897,840
----------- ----------
Total assets $10,642,787 $9,467,864
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 6,255,514 68,945 4.37% $5,473,728 65,447 4.74%
Short-term borrowings 1,245,135 16,000 5.10% 1,075,370 15,142 5.59%
Long-term debt 988,379 15,401 6.18% 758,898 11,587 6.06%
----------- --------- ---------- ----------
Total interest-bearing liabilities 8,489,028 100,346 4.69% 7,307,996 92,176 5.00%
----------- --------- ---------- ----------
Noninterest-bearing demand deposits 1,391,870 1,332,689
Other liabilities 82,719 166,787
----------- ----------
Total liabilities 9,963,617 8,807,472
Shareholders' equity 679,170 660,392
----------- ----------
Total liabilities and shareholders'
equity $10,642,787 $9,467,864
=========== ==========
RATE DIFFERENTIAL 3.41% 3.41%
NET YIELD ON INTEREST-EARNING ASSETS $ 96,557 3.98% $ 89,068 4.15%
========= ==========
</TABLE>
* Restated financial results above reflect the business combinations with
First Macon Bank & Trust, Prime Bank of Central Florida and InterWest
BanCorp. These mergers were accounted for as poolings of interests and
the financial results have been restated accordingly.
(1) Interest earned and average rates on obligations of states and
political subdivisions are reflected on a tax equivalent basis. Tax
equivalent interest earned is: actual interest earned times 145%. The
taxable equivalent adjustment has given effect to the disallowance of
interest expense deductions, for federal income tax purposes, related
to certain tax-free assets. Dividends earned and average rates for
preferred stocks are reflected on a tax equivalent basis. Tax
equivalent dividends are: actual dividends times 137.7%.
-15-
<PAGE> 19
AVERAGE VOLUME AND RATES
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
1999 1998*
----------------------------------- -----------------------------------
AVERAGE AVERAGE
VOLUME INTEREST RATE VOLUME INTEREST RATE
------ -------- ---- ------ -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $ 7,475,553 $ 476,633 8.52% $ 6,305,194 $ 426,165 9.03%
Mortgage loans held for sale 424,071 23,224 7.30% 379,851 20,894 7.33%
Investment securities and securities
available for sale and other 1,670,692 77,970 6.22% 1,382,370 66,107 6.38%
------------ --------- ------------ ---------
Total interest-earning assets(1) 9,570,316 577,827 8.07% 8,067,415 513,166 8.50%
------------ --------- ------------ ---------
Nonearning assets 983,040 850,191
------------ ------------
Total assets $ 10,553,356 $ 8,917,606
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 6,121,199 200,900 4.39% $ 5,390,244 191,329 4.75%
Short-term borrowings 1,364,971 51,340 5.03% 901,486 37,753 5.60%
Long-term debt 917,506 41,943 6.11% 585,122 26,925 6.15%
------------ --------- ------------ ---------
Total interest-bearing liabilities 8,403,676 294,183 4.68% 6,876,852 256,007 4.98%
------------ --------- ------------ ---------
Noninterest-bearing demand deposits 1,395,200 1,260,431
Other liabilities 87,185 141,726
------------ ------------
Total liabilities 9,886,061 8,279,009
Shareholders' equity 667,295 638,597
------------ ------------
Total liabilities and shareholders'
Equity $ 10,553,356 $ 8,917,606
============ ============
RATE DIFFERENTIAL 3.39% 3.52%
NET YIELD ON INTEREST-EARNING ASSETS $ 283,644 3.96% $ 257,159 4.25%
========= =========
</TABLE>
* Restated financial results above reflect the business combinations with
First Macon Bank & Trust, Prime Bank of Central Florida and InterWest
BanCorp. These mergers were accounted for as poolings of interests and
the financial results have been restated accordingly.
(1) Interest earned and average rates on obligations of states and
political subdivisions are reflected on a tax equivalent basis. Tax
equivalent interest earned is: actual interest earned times 145%. The
taxable equivalent adjustment has given effect to the disallowance of
interest expense deductions, for federal income tax purposes, related
to certain tax-free assets. Dividends earned and average rates for
preferred stocks are reflected on a tax equivalent basis. Tax
equivalent dividends are: actual dividends times 137.7%.
-16-
<PAGE> 20
ANALYSIS OF INTEREST INCREASES (DECREASES)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999 CHANGE FROM 1998*
---------------------------------------------------------------
ATTRIBUTED TO (1)
TOTAL VOLUME RATE MIX
-------- -------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Total loans, net $ 18,258 $ 27,343 ($7,488) ($1,597)
Mortgage loans held for sale (4,072) (4,351) 188 91
Investment securities and securities available
for sale and other interest-earning assets 1,468 1,903 783 (1,218)
-------- -------- ------- -------
Total interest income(2) 15,654 24,895 (6,517) (2,724)
-------- -------- ------- -------
INTEREST EXPENSE:
Interest bearing deposits $ 3,498 9,360 (5,232) (630)
Short-term borrowings 858 2,366 (1,383) (125)
Long-term debt 3,814 3,404 219 191
-------- -------- ------- -------
Total interest expense 8,170 15,130 (6,396) (564)
-------- -------- ------- -------
NET INTEREST INCOME $ 7,484 $ 9,765 $ (121) $(2,160)
======== ======== ======= =======
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 CHANGE FROM 1998*
--------------------------------------------------------------
ATTRIBUTED TO (1)
TOTAL VOLUME RATE MIX
------- -------- -------- -------
INTEREST INCOME:
Total loans, net $50,468 $ 79,045 ($24,051) ($4,526)
Mortgage loans held for sale 2,330 2,424 (85) (9)
Investment securities and securities available
for sale and other interest-earning
assets 11,863 13,758 (1,654) (241)
------- -------- -------- -------
Total interest income(2) 64,661 95,227 (25,790) (4,776)
------- -------- -------- -------
INTEREST EXPENSE:
Interest bearing deposits $ 9,571 25,969 (14,514) (1,884)
Short-term borrowings 13,587 19,413 (3,843) (1,983)
Long-term debt 15,018 15,289 (175) (96)
------- -------- -------- -------
Total interest expense 38,176 60,671 (18,532) (3,963)
------- -------- -------- -------
NET INTEREST INCOME $26,485 $ 34,556 ($ 7,258) ($ 813)
======= ======== ======== =======
</TABLE>
* Restated financial results above reflect the business combinations with
First Macon Bank & Trust, Prime Bank of Central Florida and InterWest
BanCorp. These mergers were accounted for as poolings of interests and
the financial results have been restated accordingly.
(1) Increases (decreases) are attributable to volume changes and rate
changes on the following basis: Volume Change = change in volume times
old rate. Rate Change = change in rate times old volume. 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%. The
taxable equivalent adjustment has given effect to the disallowance of
interest expense deductions, for federal income tax purposes, related
to certain tax-free assets.
-17-
<PAGE> 21
NET INTEREST INCOME:
Net interest income on a tax equivalent basis increased $7.5 million to
$96.6 million for the quarter ended September 30, 1999, from $89.1 million for
the quarter ended September 30, 1998. The net yield on interest earning assets
decreased from 4.15% to 3.98% for the three months ended September 30, 1998 and
1999, respectively. For the first nine months of 1999, net interest income on a
tax equivalent basis increased $26.4 million to $283.7 million as compared to
$257.2 million for the same period in 1998. The net yield on interest earning
assets decreased from 4.25% to 3.96% for the nine months ended September 30,
1998 compared to the same period in 1999, while the rate differential decreased
from 3.52% to 3.39% for the nine months ended September 30, 1998 compared to
1999.
As reflected on the previous tables, the increase in net interest income
for the three and nine months was primarily attributable to loan growth, which
was partially offset by lower loan rates. During the first quarter of 1998, the
prime rate was 8.50% where it remained until September 1998 when it decreased to
8.25% and continued to decrease to 7.75% in November 1998 where it remained
through June 29, 1999. On June 30, 1999, the prime rate was increased to 8.00%,
where it remained at September 30, 1999.
LOAN LOSS PROVISION:
As previously discussed, the Company has experienced good loan growth since
last year. Allowance for loan losses as a percentage of net loans increased to
1.17% at September 30, 1999 compared to 1.15% at September 30, 1998. Net
charge-offs as a percentage of average net loans, on an annualized basis, were
0.20% at September 30, 1999 compared to 0.17% at September 30, 1998. The 1999
loan growth and increase in charge-offs contributed to the increase in the
provision for possible loan losses to $19.5 million for the first nine months of
1999 compared to $12.0 million for the same period in 1998. Asset quality
remains good. The current allowance for possible loan losses provides 311%
coverage of nonperforming loans compared to 245% at December 31, 1998 and 203%
at September 30, 1998. See further discussion on loan quality and the allowance
for possible loan losses presented in the Financial Condition section of this
report.
NONINTEREST INCOME:
Noninterest income increased $10.9 million for the nine months ended
September 30, 1999, compared to the same period in 1998. This increase is due to
increases in fees on deposit accounts of $1.2 million, fees from the sale of
investment products and other fee-based services of $4.0 million and $3.4
million from other miscellaneous income sources. Also during the third quarter
of 1999, the Company completed the sale of its Dalton, Georgia branches and
recognized a pre-tax gain of $6.0 million. These increases were partially offset
by the decline in mortgage banking noninterest income of $3.7 million.
The increase in noninterest income for the three months ended September 30,
1999 compared to the three months ended September 30, 1998 of $5.0 million is
primarily due to increases in fees on deposit accounts of $0.2 million, fees
from the sale of investment products and other fee-based services of $3.0
million, $6.0 million from the aforementioned Dalton sale and $3.1 million from
other miscellaneous income sources. These increases were partially offset by the
decline in mortgage banking noninterest income of $7.3 million.
Colonial Mortgage provides additional sources of noninterest income to
BancGroup through fees from its servicing portfolio as well as loan originations
from its four divisional offices. Colonial Mortgage purchases, originates and
services conventional, government, and jumbo mortgage products in 44 states and
the District of Columbia. Colonial Mortgage had noninterest income of $46.7
million for the nine months ended September 30, 1999, compared to $50.4 for the
nine months ended September 30, 1998.
During the third quarter of 1999, Colonial made several strategic decisions
regarding Colonial Mortgage Company. It was announced that the "wholesale
mortgage origination" division of Colonial Mortgage Company would be sold to
Union Planters Corporation and the sale was completed on October 8th. Colonial
Mortgage's 13 retail offices have been made part of the regional bank management
structure of Colonial Bank to increase the company's focus on providing a broad
range of mortgage products and services to retail bank customers. In order to
further streamline the operations of Colonial Mortgage, its other units such as
servicing, accounting, and secondary marketing will be combined into the
corresponding Colonial Bank areas such as operations, accounting and treasury.
BancGroup is continuing to expand its services through increased efforts in
private banking and additional service and product offerings including asset
management services, trust services and sales of mutual funds and annuities.
These services contributed $4.4 million to noninterest income for the nine
months ended September 30, 1999 compared to $2.6 million for the same period
last year. In addition, BancGroup established an international banking unit in
mid 1998 to service the needs of customers involved in international activities.
International banking activities resulted in $1.0 million in noninterest income
for the nine months ended September 30, 1999.
-18-
<PAGE> 22
NONINTEREST EXPENSES:
BancGroup's net overhead (total noninterest expense less noninterest
income, excluding security gains) was $40.9 million and $121.2 million for the
three and nine months ended September 30, 1999 compared to $66.2 million and
$151.0 million for the three and nine months ended September 30, 1998,
respectively.
Noninterest expense decreased $20.7 million and $18.2 million for the three
and nine months ended September 30, 1999, compared to the same periods in 1998.
The primary reasons for the decrease was the third quarter 1998 write-down of
mortgage servicing rights of $18.5 million and the decrease in other expenses of
$4.1 million and $7.1 million for the three and nine months, respectively. The
decrease in other expense results primarily from decreases in acquisition and
conversion and Year 2000 related expenses. (Refer to further discussion of
acquisition and conversion related expenses below and Year 2000 expenses under
management's Year 2000 readiness disclosure.) Other expenses related to normal
business activities also declined $0.4 million in the third quarter of 1999
compared to the same period in 1998.
The decreases noted above were offset by increases in salaries of $0.5
million and $3.1 million for the three and nine months ended September 30,1999,
compared to the same periods in 1998. These increases are the result of normal
wage increases. Increases in occupancy and furniture and equipment expenses of $
1.4 million and $4.1 million for the same periods are the result of normal
business activities.
As a result of the decline in expenses above, BancGroup's noninterest expense to
average assets declined to 2.86% for the nine months ended September 30, 1999
compared to 3.65% for the same period in 1998. The Company currently has four
banks that have not been converted to the Company's standard data processing
systems. These conversions are currently anticipated to be completed in April
2000. Conversions will allow the consolidation of back shop operational areas
into BancGroup's existing loan and deposit operations, accounting and data
processing departments.
ACQUISITION EXPENSE AND RESTRUCTURING CHARGES:
In the first quarter of 1998, BancGroup reorganized executive management of
its Florida regions, which 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 supermarket 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 was net of $902,000 in reversals of
unused reserves. The unused reserves of $902,000 reversed in the fourth quarter
of 1998, related to employee severance of $540,000 and lease liability accruals
of $362,000. With regard to the employee severance, $540,000 was reserved based
on the anticipated timing of termination of two senior regional officers.
However, after the reserves were determined, one of the officers voluntarily
terminated his employment, thus eliminating the obligation. The other officer
elected to remain with the Company in a different role, thus eliminating the
anticipated severance payment. The latter's compensation is being expensed to
operations as incurred.
With regard to the lease liability accruals, during the fourth quarter of
1998, Company management engaged a local real estate leasing agent to assist in
the review of the lease liability accrual for the various properties being
vacated in South Florida. Based on that review, the Company increased its
estimate for sub-lease income for certain of the offices for which lease
obligations were accrued in the first quarter, and thus reversed the excess
accrual in the amount of $362,000.
At each balance sheet date, Company management reviews payments and other
activity relating to the liability balances to ensure the amounts have been
properly applied to the accruals. Additionally, Company management reviews the
status of the restructuring plan to ensure that there has not been a significant
change which affects the accruals (i.e. delay in subleasing due to changes in
the market conditions or settlement of liability for an amount different from
the amount accrued). This evaluation includes obtaining updates, as needed, from
third parties (leasing agents).
-19-
<PAGE> 23
The following is a summary of the activity related to restructuring charges
for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
LEASE ACCRUED
REDUCTION OF TERMINATION SEVERANCE &
(In thousands) ASSET VALUES LIABILITIES OTHER TOTAL
------------ ----------- ----------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 0 $ 2,878 $ 598 $ 3,476
------- ------- ------- -------
Reductions (payments) -- (1,129) (595) ($1,724)
======= ======= ======= =======
Balance at September 30, 1999 $ 0 $ 1,749 $ 3 $ 1,752
======= ======= ======= =======
</TABLE>
BancGroup has discontinued operations in fourteen supermarket branches.
Nine supermarket branches were closed in the second quarter of 1999. The Company
bought out the service contracts and lease commitments of those branches. All
equipment will be redeployed to other branch locations. By closing these
branches, the Company saved approximately $0.8 million in operating expenses
from closing through the third quarter of 1999.
The outstanding lease termination liabilities of $1.7 million at September
30, 1999 related to the consolidation of two branches in South Florida to a new
location and the lease obligation net of any anticipated sublease income related
to the relocation of the South Florida Region headquarters and trust department.
The Company expects the branch consolidation to occur in the fourth quarter of
1999. Management in South Florida continues to pursue a resolution of the space
vacated from the relocation of its headquarters and trust department. Management
is in negotiations with its Lessor regarding the lease terms as well as pursuing
the possibility of subleasing the space. Management does not have a specific
date of completion at this time.
The results of the nine months reflect the continued implementation of the
Company's plan for 1999, to de-emphasize acquisitions, complete system
conversions, streamline operations and eliminate less profitable operations. As
a result of this focus, the Company recognized acquisition and conversion
related expenses of $1.2 million and $11.7 million for the nine months ended
September 30, 1999 and 1998, respectively and $0.6 million and $4.0 million for
the quarter ended September 30, 1999 and 1998, respectively. These expenses
related 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-offs of equipment) and
employee severance.
PROVISION FOR INCOME TAXES:
BancGroup's provision for income taxes is based on an approximately 37.0%
and 36.4%, estimated annual effective tax rate for the years 1999 and 1998,
respectively. The provision for income taxes for the nine months ended September
30, 1999, and 1998, was $52,190,000 and $33,784,000, respectively.
-20-
<PAGE> 24
PART II
OTHER INFORMATION
ITEM 1: Legal Proceedings - See Note C - COMMITMENTS AND CONTINGENCIES AT
PART 1 ITEM 1
ITEM 2: Changes in Securities - N/A
ITEM 3: Defaults Upon Senior Securities - N/A
ITEM 4: Submission of Matters to a Vote of Security Holders - N/A
ITEM 5: Other Events - N/A
ITEM 6: (a) Form 8-K - No reports on Form 8-K were filed during the three
months ended September 30, 1999.
(b) Exhibit 27 - Financial Data Schedule (for SEC use only)
-21-
<PAGE> 25
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE COLONIAL BANCGROUP, INC.
Date: November 12, 1999 By: /s/ W. Flake Oakley, IV
---------------------------
W. Flake Oakley, IV
Its Chief Financial Officer
-22-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 324,015
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 17,255
<TRADING-ASSETS> 709
<INVESTMENTS-HELD-FOR-SALE> 1,475,364
<INVESTMENTS-CARRYING> 103,294
<INVESTMENTS-MARKET> 103,542
<LOANS> 7,856,226
<ALLOWANCE> 91,752
<TOTAL-ASSETS> 10,620,924
<DEPOSITS> 7,601,210
<SHORT-TERM> 1,282,600
<LIABILITIES-OTHER> 93,249
<LONG-TERM> 963,122
0
0
<COMMON> 279,802
<OTHER-SE> 400,941
<TOTAL-LIABILITIES-AND-EQUITY> 10,620,924
<INTEREST-LOAN> 499,044
<INTEREST-INVEST> 74,573
<INTEREST-OTHER> 1,840
<INTEREST-TOTAL> 575,457
<INTEREST-DEPOSIT> 200,900
<INTEREST-EXPENSE> 294,183
<INTEREST-INCOME-NET> 281,274
<LOAN-LOSSES> 19,468
<SECURITIES-GAINS> 499
<EXPENSE-OTHER> 226,215
<INCOME-PRETAX> 141,037
<INCOME-PRE-EXTRAORDINARY> 141,037
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,847
<EPS-BASIC> 0.80
<EPS-DILUTED> 0.79
<YIELD-ACTUAL> 3.96
<LOANS-NON> 28,255
<LOANS-PAST> 8,750
<LOANS-TROUBLED> 1,270
<LOANS-PROBLEM> 147,000
<ALLOWANCE-OPEN> 83,562
<CHARGE-OFFS> 16,975
<RECOVERIES> 5,697
<ALLOWANCE-CLOSE> 91,752
<ALLOWANCE-DOMESTIC> 91,752
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
