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, 2001 COMMISSION FILE NUMBER 1-13508
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 No.)
incorporation or organization)
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, 2001
--------------------------------------- -------------------------------------
Common Stock, $2.50 Par Value 115,202,034
THE COLONIAL BANCGROUP, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Condition - September 30, 2001,
December 31, 2000 and September 30, 2000 4
Consolidated Statements of Income - Nine months ended September 30,
2001 and September 30, 2000 and Three months ended September 30, 2001 and September 30, 2000 5
Consolidated Statements of Comprehensive Income - Nine months ended September 30, 2001 and September 30 6
2000 and Three months ended September 30, 2001 and September 30, 2000
Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and September 30, 2000 7-8
Notes to Consolidated Financial Statements - September 30, 2001 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 32
2
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) changes in the interest rate environment which reduce
margins; (iv) costs or difficulties related to the integration of the
institutions and businesses recently acquired or to be acquired by BancGroup are
greater than expected; (v) general economic conditions, either nationally or
regionally, that are less favorable then expected, resulting in, among other
things, a deterioration in credit quality, (vi) changes which may occur in the
regulatory environment; (vii) a significant rate of inflation or deflation; and
(viii) changes in the securities markets. When used in this Report, the words
"believes," "estimates," "plans," "expects," "should," "may," "might,"
"outlook," and "anticipates," and similar expressions as they relate to
BancGroup (including its subsidiaries), or its management are intended to
identify forward-looking statements.
3
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
(Dollars in thousands, except per share amounts)
September 30, December 31, September 30,
2001 2000 2000
--------------------------------------------
ASSETS:
Cash and due from banks $ 265,420 $ 348,891 $ 280,628
Interest-bearing deposits in banks and federal funds sold 96,799 15,855 61,122
Securities available for sale 1,888,081 1,449,386 1,482,962
Investment securities 32,076 44,310 47,814
Mortgage loans held for sale 24,668 9,866 9,940
Loans, net of unearned income 9,725,389 9,416,770 9,107,393
Less: Allowance for loan losses (112,074) (107,165) (103,861)
--------------------------------------------
Loans, net 9,613,315 9,309,605 9,003,532
Premises and equipment, net 183,381 184,831 186,239
Excess of cost over tangible and identified intangible
assets acquired, net 89,491 74,393 75,691
Other real estate owned 12,805 8,928 6,510
Accrued interest and other assets 282,984 281,572 321,090
--------------------------------------------
TOTAL ASSETS: $12,489,020 $11,727,637 $11,475,528
============================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits $ 8,048,183 $ 8,143,017 $ 8,043,850
FHLB short-term borrowings 50,000 425,000 475,000
Other short-term borrowings 1,821,788 1,463,328 1,475,526
Subordinated debt 274,047 111,900 111,929
Trust preferred securities 70,000 70,000 70,000
FHLB long-term debt 1,196,603 547,022 347,136
Other long-term debt 88,062 102,325 134,475
Other liabilities 101,052 108,193 94,036
--------------------------------------------
Total liabilities 11,649,735 10,970,785 10,751,952
--------------------------------------------
SHAREHOLDERS' EQUITY:
Common Stock, $2.50 par value; 200,000,000 shares
authorized; 113,147,165, 113,081,198, and 113,083,937
shares issued at September 30, 2001, December 31, 2000,
and September 30, 2000, respectively 282,868 282,703 282,710
Treasury stock (2,423,512, 2,773,782, and 2,788,420 at
September 30, 2001, December 31, 2000, and September 30,
2000, respectively) (25,506) (26,467) (26,607)
Additional paid in capital 122,093 118,600 118,650
Retained earnings 439,308 390,442 374,361
Unearned compensation (3,661) (2,541) (2,942)
Accumulated other comprehensive income (loss),
net of taxes 24,183 (5,885) (22,596)
--------------------------------------------
Total shareholders' equity 839,285 756,852 723,576
--------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,489,020 $11,727,637 $11,475,528
============================================
See Notes to the Unaudited Condensed Consolidated Financial Statements
4
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------------------------------
2001 2000 2001 2000
--------- -------- -------- --------
INTEREST INCOME:
Interest and fees on loans $599,849 $579,127 $188,058 $202,489
Interest on investments 75,815 81,234 27,060 27,227
Other interest and dividends income 1,809 1,967 374 712
---------------------------------------------------
Total interest income 677,473 662,328 215,492 230,428
---------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 254,281 256,576 75,647 92,718
Interest on short-term borrowings 55,455 68,375 12,987 26,870
Interest on long-term debt 63,850 44,564 24,764 14,674
---------------------------------------------------
Total interest expense 373,586 369,515 113,398 134,262
---------------------------------------------------
NET INTEREST INCOME 303,887 292,813 102,094 96,166
Provision for possible loan losses 24,498 21,822 7,601 8,861
---------------------------------------------------
Net Interest Income After Provision for Possible Loan
Losses 279,389 270,991 94,493 87,305
---------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 30,254 28,354 10,493 9,676
Wealth management 6,499 6,842 1,975 1,900
Electronic banking 4,783 4,086 1,636 1,393
Mortgage origination 5,414 4,516 1,896 2,106
Securities gains (losses), net 1,899 (40) - 21
Other income 13,879 13,848 4,416 5,553
---------------------------------------------------
Total noninterest income 62,728 57,606 20,416 20,649
---------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 103,313 94,509 34,264 32,158
Occupancy expense of bank premises, net 25,257 22,479 8,578 7,788
Furniture and equipment expenses 21,497 21,521 7,142 7,277
Amortization of intangibles 5,363 3,898 2,093 1,297
Other expense 47,173 45,668 14,775 14,456
---------------------------------------------------
Total noninterest expense 202,603 188,075 66,852 62,976
---------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 139,514 140,522 48,057 44,978
Applicable income taxes 50,225 51,305 17,301 16,417
-----------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 89,289 89,217 30,756 28,561
DISCONTINUED OPERATIONS:
Net loss from discontinued operations and loss on
disposal, net of income taxes of ($371), ($2,844),
($371), and $0 for the nine months ended and for
the three months ended September 30, 2001
and 2000, respectively (613) (4,699) (613) -
-----------------------------------------------------
NET INCOME $ 88,676 $ 84,518 $ 30,143 $ 28,561
=====================================================
EARNINGS PER SHARE:
INCOME FROM CONTINUING OPERATIONS:
Basic $ 0.81 $ 0.80 $ 0.28 $ 0.26
Diluted $ 0.80 $ 0.80 $ 0.28 $ 0.26
NET INCOME
Basic $ 0.80 $ 0.76 $ 0.27 $ 0.26
Diluted $ 0.80 $ 0.76 $ 0.27 $ 0.26
See Notes to the Unaudited Condensed Consolidated Financial Statements
5
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------- -----------------------------
2001 2000 2001 2000
-------- ------- ------- -------
NET INCOME $ 88,676 $84,518 $30,143 $28,561
OTHER COMPREHENSIVE INCOME, NET OF TAXES:
Unrealized gains (losses) on securities
available for sale arising during the
period, net of taxes 31,284 6,194 16,698 9,681
Less: reclassification adjustment for net
(gains) losses included in net income (1,216) (18) - (13)
-------- ------- ------- -------
COMPREHENSIVE INCOME $118,744 $90,694 $46,841 $38,229
======== ======= ======= =======
See Notes to the Unaudited Condensed Consolidated Financial Statements
6
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended
September 30,
---------------------------------
2001 2000
---------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 37,819 $ 299,002
---------------------------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale 366,037 146,520
Proceeds from sales of securities available for sale 55,998 178,835
Purchase of securities available for sale (740,595) (308,162)
Proceeds from maturities of investment securities 12,033 13,834
Net increase in loans (288,597) (895,359)
Cash received in bank acquisitions 33,298 -
Capital expenditures (20,294) (16,319)
Proceeds from sale of other real estate owned 6,648 9,009
Other, net 3,666 2,100
---------------------------------
NET CASH USED IN INVESTING ACTIVITIES (571,806) (869,542)
---------------------------------
Cash flows from financing activities:
Net (decrease) increase in demand, savings, and time deposits (197,848) 75,872
Net increase in federal funds purchased, repurchase agreements
and other short-term borrowings 188,455 632,092
Proceeds from issuance of long-term debt 650,000 50,000
Repayment of long-term debt (219,677) (150,908)
Proceeds from issuance of subordinated debt 150,000 -
Proceeds from sale of treasury stock 7,380 -
Proceeds from issuance of common stock 1,732 5,366
Purchase of treasury stock (8,772) (32,317)
Dividends paid ($0.24 and $0.22 per share for
2001 and 2000, respectively) (39,810) (36,733)
---------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 531,460 543,372
---------------------------------
Net decrease in cash and cash equivalents (2,527) (27,168)
Cash and cash equivalents at beginning of year 364,746 368,918
---------------------------------
Cash and cash equivalents at September 30 $ 362,219 $ 341,750
=================================
See Notes to the Unaudited Condensed Consolidated Financial Statements
7
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands, except per share amounts)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Nine Months Ended
September 30,
----------------------------------
2001 2000
----------------------------------
Cash paid during the year for:
Interest $388,293 $374,348
Income taxes 50,225 58,000
Non-cash investing activities:
Transfer of loans to other real estate $ 8,399 $ 6,931
Securitization of residential mortgage loans 307,523 -
Origination of loans for the sale of other real estate 169 3,085
Non-cash financing activities:
Conversion of subordinated debentures $ 643 $ 119
See Notes to the Unaudited Condensed Consolidated Financial Statements.
8
THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: ACCOUNTING POLICIES
The Colonial BancGroup, Inc. and its subsidiaries ("BancGroup" or the "Company")
have not changed their accounting and reporting policies from those stated in
the 2000 annual report on Form 10-K. These unaudited interim financial
statements should be read in conjunction with the audited financial statements
and footnotes included in BancGroup's 2000 annual report on Form 10-K.
In the opinion of BancGroup, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 2001 and 2000 and the results of operations and cash flows for the
interim periods ended September 30, 2001 and 2000. All 2001 interim amounts are
subject to year-end audit, and the results of operations for the interim period
herein are not necessarily indicative of the results of operations to be
expected for the year.
NOTE B: 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, 2001
will have a materially adverse effect on BancGroup's financial statements.
NOTE C: BUSINESS COMBINATIONS AND ACQUISITIONS
On January 13, 2001, Colonial Bank acquired two branches in Nevada from First
Security Bank in a branch divestiture resulting from its merger with Wells
Fargo. Through this acquisition, the Company purchased $49.5 million in loans
and assumed $102.9 million in deposits.
The previously announced acquisition of Manufacturers Bancshares, Inc.
("Manufacturers") and its wholly owned subsidiary, Manufacturers Bank of Florida
("Manufacturers Bank") was closed October 25, 2001. Manufacturers Bank operated
four branches in the Tampa area and had $297.4 million in assets as of September
30, 2001. BancGroup issued 4,458,437 shares of its common stock to shareholders
of Manufacturers, including shares issued pursuant to the exercise of
Manfacturers stock options. This transaction was accounted for as a pooling of
interests with prior periods restated to include results on a combined basis and
will be fully reflected in BancGroup's 2001 Annual Report on Form 10-K. This
restatement during the fourth quarter of 2001 is expected to dilute Colonial's
previously reported earnings per share for the first three quarters of 2001 by
$.01 to $.02 per share.
9
The previously announced branch purchase and assumption agreement with Union
Planters Corporation to acquire 13 Union Planters offices was completed on
October 11, 2001. This transaction was accounted for as a purchase with
approximately $21 million in intangible assets.
NOTE D: RECENT ACCOUNTING PRONOUNCEMENTS
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 entities 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.
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 SFAS No. 133. The effective date for this statement was
delayed from fiscal years beginning after June 15, 1999 to fiscal years
beginning after June 15, 2000. BancGroup adopted SFAS No. 133 and SFAS No. 137
on January 1, 2001 and as of the date of these financial statements, all of
BancGroup's hedging relationships qualified for hedge accounting treatment per
these statements. The effect of these statements is immaterial to the financials
statements presented.
On September 29, 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a Replacement of FASB Statement No. 125." This
statement is effective for transfers after April 1, 2001. The implementation of
SFAS No. 140 did not have a material impact on BancGroup's financial statements.
10
On June 29, 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations". The effective date for this statement is effective for
all business combinations initiated after June 30, 2001. This statement
supercedes Accounting Principles Board Opinion No. 16, "Business Combinations".
SFAS No. 141 requires the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain instead of being deferred and amortized.
On June 29, 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Intangible Assets". The effective date for this statement is effective for
fiscal years beginning after December 15, 2001. SFAS No. 142 requires that
goodwill and indefinite lived intangible assets no longer be amortized, that
goodwill will be tested for impairment at least annually, that intangible assets
deemed to have an indefinite life will be tested for impairment at least
annually, and that amortization period of intangible assets with finite lives
will no longer be limited to forty years. Management is currently evaluating the
impact that SFAS No. 142 will have on BancGroup's financials.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". The effective date for this
statement is January 1, 2003, with early adoption permitted. SFAS No. 143
addresses the recognition and measurement of obligations associated with the
retirement of tangible long-lived assets resulting from acquisition,
construction, development, or the normal operation of a long-lived asset. SFAS
No. 143 requires that the fair value of an asset retirement obligation be
recognized as a liability in the period in which it is incurred. The asset
retirement obligation is to be capitalized as part of the carrying amount of the
long-lived asset and the expense is to be recognized over the useful life of the
long-lived asset. Management is currently evaluating the impact that SFAS No.
143 will have on BancGroup's financials.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". The effective
date for this statement is January 1, 2002 and supersedes SFAS No. 121. SFAS No.
144 carries forward from SFAS No. 121 the fundamental guidance related to the
recognition and measurement of an impairment loss related to assets to be held
and used and provides guidance related to the disposal of long-lived assets to
be abandoned or disposal by sale. Management is currently evaluating the impact
that SFAS No. 144 will have on BancGroup's financials.
11
NOTE E: DISCONTINUED OPERATIONS
As noted in prior quarters, in July 2000 the Company decided to exit the
mortgage servicing business and discontinue the operations of mortgage servicing
as a separate business unit. As of December 31, 2000, all loan transfers were
completed and the mortgage servicing rights removed from the Company's balance
sheet. In addition, the escrow and custodial deposits related to those
servicing rights have been transferred out of Colonial Bank resulting in a $209
million reduction in average noninterest bearing deposits from September 30,
2000 to September 30, 2001. At September 30, 2001, the balance sheet of the
Company includes approximately $5.4 million in receivables and other advances
related to the various transfers of servicing. These receivable and advance
balances represent the expected recoverable amounts once all documentation
supporting the transferred loans is provided to the new servicer. The
anticipated costs of providing the necessary documents have been accrued.
However, due to the volume of loans transferred and the costs and complexity in
providing certain documentation, the Company revised its estimate of the cost to
complete the disposition of this business resulting in a $613,000 after-tax
expense in the third quarter of 2001. Current estimates of recoverable amounts
or costs may be revised for future periods.
12
NOTE F: MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights and the related valuation reserve is as
follows: (in thousands)
Nine Months Ended
September 30
------------------
2001 2000
------------------
MORTGAGE SERVICING RIGHTS
Balance, January 1 $ - $ 265,888
Additions, net - 981
Sales - (203,712)
Scheduled amortization - (13,432)
Hedge losses applied - (49,725)
----- ---------
Balance, September 30 - -
----- ---------
VALUATION RESERVE
Balance, January 1 - 27,483
Reductions - (27,783)
Additions - 300
----- ---------
Balance, September 30 - -
----- ---------
Mortgage Servicing Rights, net $ - $ -
===== =========
As a result of the exit of the mortgage servicing business, all hedges related
to MSR's were liquidated during the third quarter of 2000.
13
NOTE G: EARNINGS PER SHARE
The following table reflects a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS
computation:
(Dollars in
thousands, except per
share amounts) Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------------------ --------------------------------------------------
Per Share Per Share
2001 Income Shares Amount Income Shares Amount
------------ ------------- --------------- ------------- -------------- ---------------
Basic EPS
Net Income $88,676 110,643 $0.80 $30,143 110,738 $0.27
Effect of dilutive
securities:
Options 458 616
Convertible 136 552 39 504
debentures
-----------------------------------------------------------------------------------------------------------------------------
Diluted EPS $88,812 111,653 $0.80 $30,182 111,858 $0.27
-----------------------------------------------------------------------------------------------------------------------------
2000
Basic EPS
Net income $84,518 110,917 $0.76 $28,561 110,260 $0.26
Effect of dilutive
securities
Options 135 112
Convertible 143 598 48 593
debentures
-----------------------------------------------------------------------------------------------------------------------------
Diluted EPS $84,661 111,650 $0.76 $28,609 110,965 $0.26
-----------------------------------------------------------------------------------------------------------------------------
NOTE H: SEGMENT INFORMATION
Through its wholly owned subsidiary Colonial Bank, BancGroup has previously
segmented its operations into two distinct lines of business: Commercial Banking
and Mortgage Banking. Mortgage Banking was discontinued as a line of business in
2000 (See Note E to the Consolidated Financial Statements). Colonial Bank
operates 259 branches throughout 6 states.
14
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, 2001, respectively, as follows
(Dollars in thousands):
December 31, 2000 September 30, 2000
to September 30, to September 30,
2001 2001
Increase Increase
(Decrease) (Decrease)
---------------------------------------------------------------------------
Amount % Amount %
---------------------------------------------------------------------------
Assets:
Bank $788,408 6.8% $1,101,541 9.7%
Mortgage Banking (27,489) -78.4% (88,539) -92.1%
Other 464 3.7% 490 3.9%
---------------------------------------------------------------------------
Total Assets 761,383 6.5% 1,013,492 8.8%
Securities 426,461 28.6% 389,381 25.4%
Loans, net of unearned income 308,618 3.3% 617,996 6.8%
Deposits:
Bank (82,557) -1.0% 122,846 1.6%
Mortgage Banking (12,277) -98.7% (118,513) -99.9%
---------------------------------------------------------------------------
Total Deposits (94,834) -1.2% 4,333 0.1%
Short-term debt (16,540) -0.9% (78,738) -4.0%
Long-term debt 797,465 95.9% 965,172 145.5%
Assets:
BancGroup's assets have increased 8.8% and 6.5% since September 30, 2000 and
December 31, 2000, respectively. This growth resulted primarily from increases
in investment securities and internal loan growth throughout BancGroup's banking
regions partially offset by the decline in mortgage banking assets due to the
discontinuance of this line of business, as discussed in Note E to the
consolidated financial statements.
Securities:
Investment securities and securities available for sale have increased $389.4
million (25.4%) and $426.5 million (28.6%) from September 30, 2000 and December
31, 2000, respectively. In addition to normal business activities, in June
2001, BancGroup securitized and retained as investments $307 million of single-
family real estate loans. BancGroup retained substantially all of the
securitized assets which are reflected as mortgage backed securities in the
investment portfolio.
15
Loans and Mortgage Loans Held for Sale:
Loans, net of unearned income, have increased $618.0 million (6.8%) and $308.6
million (3.3%) from September 30, 2000 and December 31, 2000, respectively. Loan
growth was partially offset by the securitization of $307 million of single-
family real estate loans which were transferred to securities in the investment
portfolio as mortgage backed securities during the second quarter of 2001. The
Mortgage Warehouse Lending unit, which provides lines of credit secured by
single-family residential loans in the process of being sold, contributed $550.2
million and $470.5 million of this growth from September 30, 2000 and December
31, 2000, respectively. In addition to internal growth, $49.5 million of the
increase in loans was the result of the acquisition of two branches in Nevada,
as discussed in Note C of the consolidated financial statements.
GROSS LOANS BY CATEGORY September 30, December 31, September 30,
(Dollars in thousands) 2001 2000 2000
------------------------------------------------------
Commercial, financial, and agricultural $1,145,169 $1,221,131 $1,164,525
Real estate-commercial 3,298,273 3,174,483 2,962,514
Real estate-construction 2,128,974 1,693,958 1,706,198
Real estate-residential 2,017,017 2,562,708 2,546,494
Installment and consumer 246,773 272,124 285,284
Mortgage warehouse lending 847,448 376,995 297,297
Other 41,751 115,413 145,146
------------------------------------------------------
Total Loans $9,725,405 $9,416,812 $9,107,458
======================================================
Commercial loans collaterialized by real estate and construction loans increased
approximately $123.8 million and $435.0 million, respectively from December 31,
2000 and $335.8 million and $422.8 million, respectively, from September 30,
2000. Mortgage Warehouse Lending's loan growth was due primarily to declines in
mortgage interest rates which significantly increased the volume of mortgage
loan applications for new and refinanced borrowing. The decrease in Residential
Real Estate is primarily due to the second quarter securitization previously
discussed. The remaining decrease in Residential Real Estate is due to a shift
from portfolio adjustable rate products to fixed rate products which are sold in
the secondary market. BancGroup's loans are concentrated in various areas of
Alabama, the metropolitan Atlanta market in Georgia as well as its markets in
Florida, Nevada, and Texas.
BancGroup does not have a syndicated lending department; however, the Company
has commitments (including unfunded amounts) that fall within the regulatory
definition of a "shared national credit". These commitments total approximately
$552 million, up from $193 million at December 31, 2000. Substantially all of
this increase was attributed to the growth within our Mortgage Warehouse Lending
unit.
16
Management believes that any existing distribution of loans, whether
geographically, by industry, or by borrower, does not expose BancGroup to
unacceptable levels of risk. The current distribution of loans remains diverse
in location, size, and collateral function. These differences, in addition to
our emphasis on quality underwriting, serve to reduce the risk of losses. The
following chart reflects the geographic diversity and industry distribution of
Construction and Commercial Real Estate loans as of September 30, 2001.
17
CONSTRUCTION & COMMERCIAL REAL ESTATE
GEOGRAPHIC DIVERSITY AND INDUSTRY DISTRIBUTION
SEPTEMBER 30, 2001
(Dollars in thousands) Construction Commercial Real Estate
--------------- -----------------------
Average Loan Size $ 416 $ 487
Geographic Diversity
Alabama $ 348,475 $ 851,795
Georgia 388,523 473,195
Florida 996,289 1,415,022
Texas 179,476 120,986
Nevada 121,495 136,189
Other 94,716 301,086
--------------- -------------------------
Total $2,128,974 $3,298,273
-------------------------------------------------------------------------------------------------------------------------------
Industry Distribution % of Industry Distribution to % of Industry Distribution to
----------------------------- ------------------------------
Construction Total Commercial Real Total
Portfolio Portfolio Estate Portfolio Portfolio
------------- --------- ---------------- ----------
1-4 Family Residential 26% 6% Retail 18% 6%
Developments 20% 4% Office 17% 6%
Land Only 17% 4% Multi-Family 13% 4%
Multi-Family 8% 2% Lodging 11% 4%
Retail 6% 1% Nursing Home 6% 2%
Condominium 6% 1% Warehouse 5% 2%
Other (13 types) 17% 4% Other (11 types) 30% 10%
--- ----- ----- ---
Total Commercial
Total Construction 100% 22% Real Estate 100% 34%
---- ----- ---- ---
-------------------------------------------------------------------------------------------------------------------------------
Characteristics of the 75 Largest Loans
Construction Commercial Real Estate
-------------------- ----------------------
75 Largest Loans Total $758,195 $745,322
% of 75 largest loans to category 35.6% 22.6%
total
Average Loan to Value Ratio (75
largest loans) 70% 70%
Debt Coverage Ratio (75 largest loans) N/A 1.33x
----------------------------------------------------------------------------------------------------------------------------------
Substantially all Construction and Commercial Real Estate loans have personal
guarantees of the principals involved. Owner occupied Commercial Real Estate
portfolio totals represented 30% of the total Commercial Real Estate portfolio
at September 30, 2001.
18
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Allocations of the allowance for loan losses are made on an individual loan
basis for all identified potential problem loans with a percentage allocation
for the remaining portfolio. The allocation of the remaining allowance
represents 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.
Percent of Percent of Percent of
September 30, Loans to December 31, Loans to September 30, Loans to
(Dollars in thousands) 2001 Total Loans 2000 Total Loans 2000 Total Loans
-------------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 33,280 11.8% $ 27,861 13.0% $ 25,660 12.8%
Real estate-commercial 43,907 33.9% 43,843 33.7% 40,767 32.5%
Real estate-construction 16,086 21.9% 15,909 18.0% 17,439 18.7%
Real estate-mortgage 10,085 20.7% 12,814 27.2% 12,732 28.0%
Installment and consumer 2,544 2.5% 2,927 2.9% 3,276 3.1%
Mortgage warehouse lending 2,119 8.7% 942 4.0% 743 3.3%
Other 4,053 0.5% 2,869 1.2% 3,244 1.6%
-------------------------------------------------------------------------------------
TOTAL $112,074 100.0% $107,165 100.0% $103,861 100.0%
=====================================================================================
SUMMARY OF LOAN LOSS EXPERIENCE
September 30, December 31, September 30,
(Dollars in thousands) 2001 2000 2000
---------------------------------------------------
Allowance for loan losses - January 1 $107,165 $ 95,993 $ 95,993
Charge-offs:
Commercial, financial, and agricultural 9,317 10,493 8,513
Real estate-commercial 8,255 3,240 2,557
Real estate-construction 45 529 117
Real estate-residential 2,275 3,260 2,208
Installment and consumer 2,380 4,345 3,189
Other 651 1,119 882
---------------------------------------------------
Total charge-offs 22,923 22,986 17,466
---------------------------------------------------
Recoveries:
Commercial, financial, and agricultural 465 1,210 1,083
Real estate-commercial 310 627 375
Real estate-construction 8 62 61
Real estate-residential 326 440 397
Installment and consumer 1,508 1,856 1,340
Other 151 283 256
---------------------------------------------------
Total recoveries 2,768 4,478 3,512
---------------------------------------------------
19
September 30, December 31, September 30,
2001 2000 2000
---------------------------------------------------
Net charge-offs 20,155 18,508 13,954
Addition to allowance for branch acquisition 566 - -
Addition to allowance charged to operating expense 24,498 29,680 21,822
---------------------------------------------------
Allowance for loan losses-end of period $112,074 $107,165 $103,861
===================================================
Based on softening economic conditions, nonperforming assets increased to 0.74%
of net loans and other real estate at September 30, 2001. Nonperforming assets
have increased $21.0 million from December 31, 2000. Most of this increase was
from one loan relationship. Annualized net charge-offs remained relatively low
at .27% of loans year to date. Management continuously monitors and evaluates
recoverability of problem assets and adjusts loan loss reserves accordingly.
Loan loss reserve was 1.15% of loans at September 30, 2001 compared to 1.14% at
December 31, 2000 and 1.14% at September 30, 2000.
NONPERFORMING ASSETS ARE SUMMARIZED BELOW
September 30, December 31, September 30,
(Dollars in thousands) 2001 2000 2000
-------------------------------------------------------------------
Nonaccrual loans $57,743 $40,624 $43,179
Restructured loans 1,125 1,161 1,174
-------------------------------------------------------------------
Total nonperforming loans* 58,868 41,785 44,353
Other real estate owned and in substance
foreclosures 12,805 8,928 6,510
-------------------------------------------------------------------
Total nonperforming assets* $71,673 $50,713 $50,863
===================================================================
Aggregate loans contractually past due 90 days
for which interest is being accrued $21,091 $ 9,841 $10,161
Net charge-offs quarter-to-date $ 9,233 $ 4,998 $ 6,390
Net charge-offs year-to-date $20,155 $18,508 $13,954
RATIOS
PERIOD END:
Total nonperforming assets as a percent of net
loans and other real estate 0.74% 0.54% 0.56%
Allowance as a percent of net loans 1.15% 1.14% 1.14%
Allowance as a percent of nonperforming assets* 156% 211% 204%
Allowance as a percent of nonperforming loans* 190% 256% 234%
FOR THE PERIOD ENDED:
Net charge-offs as a percent of average net loans-
(annualized basis): 0.38% 0.25% 0.29%
Quarter to date
Year to date 0.27% 0.21% 0.21%
* Does not include loans contractually past due 90 days or more which are
still accruing interest.
20
In addition to the monitoring of the nonperforming Assets identified above,
management, through its loan officers, internal credit review staff and external
examinations by regulatory agencies, regularly monitors selected accruing loans
for which general economic conditions or changes within a particular industry
could cause the borrower financial difficulties. This continuous monitoring of
the loan portfolio and the related identification of loans with a high degree of
credit risk are essential parts of the BancGroup's credit management. 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.
Nonperforming loans and selected 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. 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.
The recorded investment in impaired loans at September 30, 2001 was $54.0
million and these loans had a corresponding valuation allowance of $22.6
million.
LIQUIDITY:
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 interest rate sensitivity. ALMCO constantly
monitors performance and takes action in order to meet its objectives.
A prominent focus of 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.
Core deposit growth is a primary focus of BancGroup's funding and liquidity
strategy. Average retail deposits excluding broker and time deposits grew at an
annualized rate of 11% for the nine months ended September 30, 2001. Core
deposit growth continues to be a primary strategic objective of the Company.
In addition to funding growth through core deposits, BancGroup has worked to
expand the availability of long and short term wholesale funding sources. As of
September 30, 2001 the Bank utilized just 49% of the total wholesale funding
sources estimated to be available to them. Management believes its liquidity
sources and funding strategies are adequate given the nature of its asset base
and current loan demand.
21
INTEREST RATE SENSITIVITY:
The Federal Reserve has lowered the target fed funds rate 10 times this year, a
total of 450 basis points, to 2.00% its lowest level in over 40 years. Such a
series of rate cuts by the Federal Reserve has not been observed since the last
recession of 1991.
ALMCO's goal is to minimize volatility in the net interest margin from changes
in interest rates by taking an active role in managing the level, mix, repricing
characteristics and maturities of assets and liabilities and by analyzing and
taking action to manage mismatch and basis risk. ALMCO monitors the impact of
changes in interest rates on net interest income using several tools, including
static rate sensitivity reports, or Gap reports, and income simulations modeling
under multiple rate scenarios.
The following table represents the output from the Company's most recent
simulation model when the fed funds rate was 2.50% and measures the impact on
net interest income of an immediate and sustained change in interest rates in
100 basis point increments for the 12 calendar months following the date of the
change. This twelve month projection of net interest income under these
scenarios is compared to both the twelve month net interest income projection
with rates unchanged and the third quarter 2001 net interest income annualized.
Percentage Change in 12 month projected (1):
---------------------------------------------------------------------------------
3rd Quarter Net Interest
Income Annualized Versus
Fed Funds Rate Net Interest Income Net Interest Income
----------------------- ------------------------- ----------------------------
Basis Points change from stable
-----------------------------------
+200............................... 4.50 2% 11%
+100............................... 3.50 1 11
No Change 2.50 - 10
- 100.............................. 1.50 (2) 8
- 200.............................. 0.50 (4) 5
--------------------------------------------------------------------------------------------------------------------
(1) The computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay rates, and should not be
relied upon as indicative of actual results. Further, the computations do
not contemplate any actions BancGroup could undertake in response to changes
in interest rates.
This table shows that under all rate shock scenarios, net interest income is
expected to improve versus recent results, although the expected benefit is less
if rates continue to decline. The improvement in margin is due largely to the
downward repricing of the CD portfolio. As of September 30, 2001, $2.5 billion
of BancGroup's CD Portfolio will mature and reprice within the next six months
at rates that are expected to be approximately 2.50% below their current cost.
The benefit is reduced if rates continue to decline due to compression, as many
deposit products are nearing natural floors.
22
The following table summarizes BancGroup's Maturity / Rate Sensitivity or Gap at
September 30, 2001.
(Dollars in millions)
0-90 days 0-365 days
---------- ------------
Rate Sensitive Assets (RSA) $5,972 $7,894
Rate Sensitive Liabilities (RSL) 4,114 6,927
Cumulative Gap (RSA-RSL) 1,858 967
Cumulative Gap Ratio
(Cum. Gap / Total Assets) 15 8%
The last two lines of the proceeding table represents 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 and prepayment assumptions.
Furthermore, the balances reflect contractual repricing of the deposits and
management's position on repricing certain deposits where management discretion
is permitted. 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
and analysis have shown them to be relatively rate insensitive.
CAPITAL 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 payout
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
23
paid only out of capital surplus or net profits for the fiscal year in which the
dividend is declared or the preceding fiscal year.
BancGroup also has access to equity capital markets through both public and
private issuances. Management considers these sources and related return in
addition to internally generated capital in evaluating future expansion or
acquisition opportunities.
The Federal Reserve Board has issued guidelines identifying minimum Tier I
leverage ratios relative to total assets and minimum capital ratios relative to
risk-adjusted assets. The minimum leverage ratio is 3% but is increased from 100
to 200 basis points based on a review of individual banks by the Federal
Reserve. The minimum risk adjusted capital ratios established by the Federal
Reserve are 4% for Tier I and 8% for total capital. BancGroup's actual capital
ratios and the components of capital and risk adjusted asset information
(subject to regulatory review) as of September 30, 2001 are stated below:
Capital (in thousands):
Tier I Capital $ 795,610
Tier II Capital 373,597
-----------
Total Capital $ 1,169,207
===========
Risk Adjusted Assets (in thousands) $10,234,046
Capital Ratios:
September 30, 2001 December 31, 2000
--------------------- -------------------
Tier I leverage ratio (minimum 3%) 6.56% 6.63%
Risk Adjusted Capital Ratios:
Tier I Capital Ratio (minimum 4%) 7.77% 8.21%
Total Capital Ratio (minimum 8%) 11.42% 10.58%
BancGroup has increased capital gradually through normal earnings retention as
well as through stock registrations to capitalize acquisitions. The decrease in
the Tier I Capital Ratio is primarily due to asset growth and a change in the
mix of assets. The increase in the Total Capital Ratio is due to the issuance on
May 23, 2001 of $150 million in subordinated debt by Colonial Bank that
qualifies as Tier II Capital.
Management continuously monitors its capital levels in order to ensure it is
taking the necessary steps to support future internally generated growth and
fund the quarterly dividend rates that are currently $0.12 per share each
quarter.
24
AVERAGE VOLUME AND RATE
(UNAUDITED)
(Dollars in thousands) Three Months Ended September 30,
--------------------------------
2001 2000
------------------------------------ ------------------------------------
Average Average
Volume Interest Rate Volume Interest Rate
------------------------------------ ------------------------------------
ASSETS
Loans, net $ 9,765,986 $187,921 7.64% $ 8,953,208 $202,640 9.01%
Mortgage loans held for sale 22,733 357 6.28% 7,820 169 8.64%
Investment securities and securities
available for sale and other interest-
earning assets 1,805,698 28,055 6.21% 1,674,933 28,591 6.80%
---------------------- ----------------------
Total interest-earning assets(1) 11,594,417 216,333 7.42% 10,635,961 231,400 8.67%
-------- --------
Nonearning assets 640,208 812,206
---------- -----------
Total assets $12,234,625 $11,448,167
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 6,947,488 75,647 4.32% $ 6,866,967 92,718 5.37%
Short-term borrowings 1,472,966 12,987 3.50% 1,626,957 26,870 6.57%
Long-term debt 1,663,935 24,861 5.93% 895,477 14,630 6.50%
-----------------------
Total interest-bearing liabilities 10,084,389 113,495 4.47% 9,389,401 134,218 5.69%
----------------------- ----------------------
Noninterest-bearing demand deposits 1,227,566 1,250,118
Other liabilities 104,043 95,156
----------- -----------
Total liabilities 11,415,998 10,734,675
Shareholders' equity 818,627 713,492
----------- ----------
Total liabilities and shareholders' equity $12,234,625 $11,448,167
========== ===========
RATE DIFFERENTIAL 2.95% 2.98%
NET YIELD ON INTEREST-EARNING ASSETS $102,838 3.53% $ 97,182 3.65%
======== ========
(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 equal to 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.
25
AVERAGE VOLUME AND RATE
(UNAUDITED)
(Dollars in thousands) Nine Months Ended September 30,
---------------------------------
2001 2000
------------------------------------ ------------------------------------
Average Average
Volume Interest Rate Volume Interest Rate
------------------------------------ ------------------------------------
ASSETS
Loans, net $ 9,849,752 $599,472 8.13% $ 8,692,852 $579,020 8.89%
Mortgage loans held for sale 19,209 933 6.48% 16,753 1,005 8.00%
Investment securities and securities
available for sale and other
interest-earning assets 1,636,833 79,518 6.48% 1,673,797 85,178 6.80%
----------------------- -----------------------
Total interest-earning assets(1) 11,505,794 679,923 7.89% 10,383,402 665,203 8.55%
----------- --------
Nonearning assets 651,158 894,220
----------- -----------
Total assets $12,156,952 $11,277,622
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits $ 7,062,345 254,281 4.81% $ 6,755,726 256,576 5.07%
Short-term borrowings 1,599,597 55,455 4.64% 1,466,470 68,375 6.23%
Long-term debt 1,428,009 64,250 6.01% 946,942 45,365 6.39%
----------------------- -----------------------
Total interest-bearing liabilities 10,089,951 373,986 4.95% 9,169,138 370,316 5.39%
----------------------- -----------------------
Noninterest-bearing demand deposits 1,170,231 1,301,962
Other liabilities 103,383 105,226
----------- -----------
Total liabilities 11,363,565 10,576,326
Shareholders' equity 793,387 701,296
----------- -----------
Total liabilities and shareholders' equity $12,156,952 $11,277,622
=========== ===========
RATE DIFFERENTIAL 2.94% 3.16%
NET YIELD ON INTEREST-EARNING ASSETS $305,937 3.55% $294,887 3.79%
======== ========
(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 equal to 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.
26
ANALYSIS OF INTEREST INCREASES / (DECREASES)
(UNAUDITED)
(Dollars in thousands) Three Months Ended September 30, 2001
Change from 2000
Attributed to (1)
Total Volume Rate
---------------- ---------------- --------------
INTEREST INCOME:
Total loans, net $(14,719) $ 17,583 $(32,302)
Mortgage loans held for sale 188 246 (58)
Investment securities and securities
for sale and other interest-earning
assets (536) 2,103 (2,639)
-------- -------- ---------
Total interest income(2) (15,067) 19,931 (34,998)
-------- -------- --------
INTEREST EXPENSE:
Interest-bearing deposits $ 17,071 $ (1,088) $ 18,159
Short-term borrowings 13,883 2,333 11,550
Long-term debt (10,231) (11,614) 1,383
-------- -------- ---------
Total interest expense 20,723 (10,369) 31,092
-------- -------- ---------
Net interest income $ 5,656 $ 9,563 $( 3,907)
======== ======== ========
(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. The Rate/Volume Change = change
in volume times change in rate, and it is allocated between Volume Change
and Rate Change at the ratio that the absolute value of each of those
components bear to the absolute value of their total.
(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.
27
ANALYSIS OF INTEREST INCREASES / (DECREASES)
(UNAUDITED)
(Dollars in thousands) Nine Months Ended September 30, 2001
Change from 2000
Attributed to (1)
Total Volume Rate
---------------- ---------------- --------------
INTEREST INCOME:
Total loans, net $ 20,452 $ 72,653 $(52,201)
Mortgage loans held for sale (72) 135 (207)
Investment securities and securities
for sale and other interest-earning
assets (5,660) (1,809) (3,851)
-------- -------- --------
Total interest income(2) 14,720 70,978 (56,258)
-------- -------- --------
INTEREST EXPENSE:
Interest-bearing deposits $ 2,295 $(11,264) $ 13,559
Short-term borrowings 12,920 (5,766) 18,686
Long-term debt (18,885) (21,727) 2,842
-------- -------- --------
Total interest expense (3,670) (38,757) 35,087
-------- -------- --------
Net interest income $ 11,050 $ 32,222 $(21,172)
======== ======== ========
(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. The Rate/Volume Change = change
in volume times change in rate, and it is allocated between Volume Change
and Rate Change at the ratio that the absolute value of each of those
components bear to the absolute value of their total.
(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.
NET INTEREST INCOME:
Net interest income from continuing operations on a tax equivalent basis
increased $5.9 million to $102.9 million for the quarter ended September 30,
2001 from $97.0 million for the quarter ended September 30, 2000. For the nine
months ended September 30, 2001, net interest income from continuing operations
on a tax equivalent basis increased $10.9 million to $306.3 as compared to
$295.4 million for the same period in 2000. Net interest margins remained
constant at 3.53% for the third quarter of 2001 compared to 3.53% for the second
quarter of 2001, and 3.65% for the third quarter of 2000. Net interest margins
decreased from 3.79% to 3.55% for the nine months ended September 30, 2000
compared to the same period in 2001.
The average rate on loans was 7.64% for the third quarter of 2001 compared to
8.05% for the second quarter 2001 and 9.01% for the third quarter of 2000,
respectively. During this same time, the rate on
28
average interest bearing deposits was 4.32% for the third quarter of 2001
compared to 4.80% and 5.37% for the second quarter of 2001 and third quarter of
2000, respectively. Although rates on deposits have declined, they reprice more
slowly than loan rates primarily due to market competition and the natural lag
in the repricing of the CD's portfolio. Although Certificates of Deposits
represent approximately 50% of Interest Bearing Deposits as of September 30,
2001, $2.5 billion will mature and reprice within the next six months at rates
that are expected to be approximately 2.5% below their current cost.
LOAN LOSS PROVISION:
The provision for loan losses for the third quarter ended September 30, 2001 was
$7,601,000 compared to $8,861,000 for the same period in 2000. The Company
continues to focus its efforts on relationship based lending to known customers
in its local market areas.
The current allowance for loan losses provides a 190% coverage of nonperforming
loans compared to 256% at December 31, 2000 and 234% at September 30, 2000. See
management's discussion on loan quality and the allowance for possible loan
losses presented in the Financial Condition section of this report.
NONINTEREST INCOME:
Noninterest income increased $5.1 million (8.9%) for the nine months ended
September 30, 2001 compared to the same period in 2000 and decreased $233,000
(1.1%) for the three months ended September 30, 2001 over the three months ended
September 30, 2000. The year to date increase is primarily attributable to
service charges on deposit accounts, cash management services, mortgage
origination income, electronic banking fees and securities gains.
Mortgage origination fees increased $898,000 (19.9%) for the nine months ended
September 30, 2001 compared to the same period in 2000 and decreased $210,000
(10.0%) for the three months ended September 30, 2001 over the three months
ended September 30, 2000. The year-to-date increase is the result of additional
production of one-to-four family mortgage loans sold in the secondary market.
The increase in production is directly related to the decrease in mortgage rates
throughout 2001. Management believes that the decrease in production for the
quarter is due to uncertainty in the economy.
BancGroup continues to expand electronic banking services through its ATM
network, check card services, and internet banking. Non-interest income from
electronic banking services increased 17.1% for the nine months ended September
30, 2001 and 17.4% for the three months ended September 30, 2001 compared to the
same periods in 2000.
29
Service charges on deposit accounts increased $1.9 million (6.7%) for the nine
months ended September 30, 2001 over the same period in 2000 and $817,000 (8.4%)
for the three months ended September 30, 2001 when compared to the three months
ended September 30, 2000. This increase is the result of normal deposit account
related fees and an increase in cash management fees of approximately $585,000
(36.1%) and $185,000 (31.3%) for the six months and three months ended September
30, 2001, respectively.
Wealth management experienced a $343,000 decrease in fee income from security
sales for the nine months ended September 30, 2001 over the same period in 2000,
but increased $75,000 in the third quarter of 2001 when compared to the third
quarter of 2000. Management believes that the nine month decrease is due to the
volatility in the equity markets and the overall outlook on the economy by
investors.
NONINTEREST EXPENSES:
In support of the Company's sales culture, BancGroup continues to make strategic
investments in its product and service offerings, technology systems, incentives
and branch network to enhance the Company's competitive presence in existing
markets. BancGroup's philosophy is to make strategic investments in the tools
employees need to optimize its customers' financial success. Accordingly,
noninterest expense increased 6.2% for the quarter ended September 30, 2001 as
compared to the same period last year.
As a result of slowing loan demand, the company took initiatives in the third
quarter to reduce noninterest expenses. Accordingly, total noninterest expense
excluding amortization of intangibles and approximately $437,000 in merger
related expense has decreased $3.4 million (5%) as compared to the second
quarter of 2001.
BancGroup's net overhead (total noninterest expense less noninterest income,
excluding security gains) was $141.8 million for the nine months ended September
30, 2001 and $46.4 million for the three months ended September 30, 2001
compared to $130.4 million and $42.3 million for the nine months and three
months ended September 30, 2000, respectively.
Noninterest expense increased $14.5 million for the first nine months of 2001
compared to 2000 and $3.9 million for the third quarter of 2001 compared to the
third quarter of 2000. Noninterest expense to average assets decreased to 2.22%
for the nine months ended September 30, 2001 from 2.23% at September 30, 2000.
The increase in bank related expenses is primarily due to an increase of
approximately $8.8 million and $2.1 million for the nine months and three months
ended September 30, 2001 over the same periods in
30
2000, respectively, in salaries and employee benefits. These salary increases
during the year are due to additional branches operating, normal salary
increases, additional incentive related compensation, and increased pension
costs.
In order to improve the Company's market presence, three of its regional
headquarters were relocated in 2001. The Company also opened ten new branches
and two loan production offices since September 2000. Occupancy and equipment
expense for the nine months and third quarter of 2001 increased $2.8 million and
$655,000, respectively, when compared to the same periods in 2000. This increase
is also due to increased rent expense, higher utility cost, and improvements and
expansions of bank facilities. In addition to the changes in branch structure,
the Company continues to invest in improved technology equipment and software.
Intangible asset amortization increased $1.5 million and $796,000 for the nine
months and three months ended September 30, 2001, respectively, over the same
periods in 2000 due to the purchase of two branches in Nevada in January of 2001
(See Note C to the Consolidated Financial Statements).
PROVISION FOR INCOME TAXES:
BancGroup's provision for income taxes is based on an approximate 36.0% and
36.5%, estimated annual effective tax rate for the years 2001 and 2000,
respectively. The provision for income taxes for the nine months ended September
30, 2001 and 2000 was $50,225,000 and $51,305,000, respectively.
31
Item III Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in Item II. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Part II Other Information
ITEM 1: Legal Proceedings - See Note B - COMMITMENTS AND CONTINGENCIES AT
PART 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 Information - None
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K - None
(b) Reports on Form 8-K
1. Form 8-K - Was filed on July 17, 2001 in regard to second quarter 2001
earnings.
2. Form 8-K - Was filed on October 16, 2001 in regard to third quarter
2001 earnings.
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 14, 2001 By: /s/ W. Flake Oakley, IV
---------------------------
W. Flake Oakley, IV
its Chief Financial Officer
32