Form 10-Q
Table of Contents

 

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 QUARTERLY PERIOD ENDED March 31, 2005

 

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 incorporation or organization)   (I.R.S. Employer Identification 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  x    NO  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class


 

Outstanding at April 30, 2005


Common Stock, $2.50 Par Value

  145,721,956

 



Table of Contents

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

INDEX

 

          Page
Number


PART I. FINANCIAL INFORMATION

    

Item 1.

   Financial Statements (Unaudited)    4
    

Condensed Consolidated Statements of Condition—March 31, 2005 and December 31, 2004

   4
    

Condensed Consolidated Statements of Income—Three months ended March 31, 2005 and March 31, 2004

   5
    

Condensed Consolidated Statements of Comprehensive Income—Three months ended March 31, 2005 and March 31, 2004

   6
    

Condensed Consolidated Statement of Changes in Shareholders’ Equity—Three months ended March 31, 2005

   7
    

Condensed Consolidated Statements of Cash Flows—Three months ended March 31, 2005 and March 31, 2004

   8
    

Notes to the Unaudited Condensed Consolidated Financial Statements—March 31, 2005

   9

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   21

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   34

Item 4.

  

Controls and Procedures

   34

PART II. OTHER INFORMATION

    

Item 1.

  

Legal Proceedings

   35

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   35

Item 3.

  

Defaults Upon Senior Securities

   35

Item 4.

  

Submission of Matters to a Vote of Security Holders

   35

Item 5.

  

Other Information

   35

Item 6.

  

Exhibits

   35

SIGNATURE

   36

 

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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

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) an inability of the company to realize elements of its strategic plans for 2005 and beyond; (ii) increases in competitive pressure in the banking industry or other factors that may reduce non-interest income; (iii) economic conditions affecting real estate values and transactions in BancGroup’s market and/or general economic conditions, either nationally or regionally, that are less favorable than expected; (iv) expected cost savings from recent acquisitions are not fully realized; (v) adverse changes in the interest rate environment which may reduce or expand margins or adversely affect critical estimates as applied and projected returns on investments; (vi) management’s assumptions and estimates underlying critical accounting policies prove to be inadequate or materially incorrect or are not borne out by subsequent events; and (vii) changes which may occur in the regulatory environment. When used in this report, the words “believes,” “estimates,” “plans,” “expects,” “should,” “may,” “might,” “outlook,” “anticipates,” and similar expressions as they relate to BancGroup (including its subsidiaries) or its management are intended to identify forward-looking statements. Forward-looking statements speak only as to the date they are made. BancGroup does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION

(Unaudited)

 

     March 31,
2005


    December 31,
2004


 
     (Dollars in thousands)  
ASSETS                 

Cash and due from banks

   $ 413,969     $ 334,470  

Interest bearing deposits in banks

     23,585       23,407  

Federal funds sold and securities purchased under agreements to resell

     505,937       246,491  

Securities available for sale

     3,689,652       3,647,402  

Investment securities (market value: 2005, $5,229; 2004, $6,503)

     4,952       6,152  

Loans held for sale

     648,643       678,496  

Total loans, net of unearned income:

                

Mortgage warehouse loans

     663,619       1,114,923  

All other loans

     12,759,922       11,742,888  

Less:

                

Allowance for loan losses

     (153,634 )     (148,802 )
    


 


Loans, net

     13,269,907       12,709,009  

Premises and equipment, net

     278,791       270,236  

Goodwill

     499,722       352,536  

Other intangibles, net

     60,800       41,604  

Other real estate owned

     8,229       9,865  

Bank-owned life insurance

     335,353       315,739  

Accrued interest and other assets

     261,669       261,743  
    


 


Total

   $ 20,001,209     $ 18,897,150  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY                 

Deposits:

                

Noninterest bearing transaction accounts

   $ 2,953,146     $ 2,464,817  

Interest bearing transaction accounts

     5,063,866       4,866,150  
    


 


Total transaction accounts

     8,017,012       7,330,967  

Time

     4,713,230       4,315,645  
    


 


Total deposits

     12,730,242       11,646,612  

Short-term borrowings

     3,461,118       3,523,624  

Subordinated debt

     266,551       273,598  

Junior subordinated debt

     308,952       313,213  

Other long-term debt

     1,509,474       1,631,617  

Accrued expenses and other liabilities

     99,675       114,871  
    


 


Total liabilities

     18,376,012       17,503,535  

Commitments and contingencies (Notes B and H)

                

Common Stock, $2.50 par value; 200,000,000 shares authorized; 145,627,339 and 133,823,776 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively

     364,068       334,559  

Additional paid in capital

     561,701       343,694  

Retained earnings

     757,061       725,039  

Unearned compensation

     (7,329 )     (449 )

Accumulated other comprehensive loss, net of taxes

     (50,304 )     (9,228 )
    


 


Total shareholders’ equity

     1,625,197       1,393,615  
    


 


Total

   $ 20,001,209     $ 18,897,150  
    


 


 

See Notes to the Unaudited Condensed Consolidated Financial Statements

 

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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
March 31,


     2005

    2004

     (In thousands, except per
share amounts)

Interest Income:

              

Interest and fees on loans

   $ 207,255     $ 158,236

Interest and dividends on securities

     43,466       35,439

Interest on federal funds sold and other short-term investments

     3,143       79
    


 

Total interest income

     253,864       193,754
    


 

Interest Expense:

              

Interest on deposits

     44,457       32,400

Interest on short-term borrowings

     20,002       7,047

Interest on long-term debt

     22,763       21,200
    


 

Total interest expense

     87,222       60,647
    


 

Net Interest Income

     166,642       133,107

Provision for loan losses

     5,929       7,934
    


 

Net Interest Income After Provision for Loan Losses

     160,713       125,173
    


 

Noninterest Income:

              

Service charges on deposit accounts

     13,632       14,185

Financial planning services

     3,892       3,124

Electronic banking

     3,499       2,812

Mortgage banking

     2,021       1,990

Securities (losses) gains, net

     (1,155 )     7,442

Bank-owned life insurance

     3,404       2,231

Other income

     9,306       5,919
    


 

Total noninterest income

     34,599       37,703
    


 

Noninterest Expense:

              

Salaries and employee benefits

     60,988       50,700

Occupancy expense of bank premises, net

     13,815       11,938

Furniture and equipment expenses

     9,714       9,259

Amortization of intangible assets

     2,305       1,123

Merger related expenses

     1,138       82

Net losses on the early extinguishment of debt

     2,290       6,183

Other expenses

     26,365       24,327
    


 

Total noninterest expense

     116,615       103,612
    


 

Income before income taxes

     78,697       59,264

Applicable income taxes

     26,206       20,150
    


 

Net Income

   $ 52,491     $ 39,114
    


 

Earnings per share:

              

Basic

   $ 0.38     $ 0.31

Diluted

   $ 0.37     $ 0.31

Average number of shares outstanding:

              

Basic

     138,683       127,066

Diluted

     140,280       128,029

Dividends declared per share

   $ 0.1525     $ 0.145

 

 

See Notes to the Unaudited Condensed Consolidated Financial Statements

 

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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,


 
     2005

    2004

 
     (Dollars in thousands)  

Net income

   $ 52,491     $ 39,114  

Other comprehensive income, net of taxes:

                

Unrealized (losses) gains on securities available for sale arising during the period, net of income taxes of $(22,522) and $18,187 in 2005 and 2004, respectively

     (41,827 )     34,046  

Reclassification adjustments for net losses/(gains) included in net income, net of income taxes of $(404) and $2,530 in 2005 and 2004, respectively

     751       (4,912 )
    


 


Comprehensive income

   $ 11,415     $ 68,248  
    


 


 

See Notes to the Unaudited Condensed Consolidated Financial Statements

 

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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

    Common Stock

  Additional
Paid In
Capital


  Retained
Earnings


    Unearned
Compensation


    Accumulated
Other
Comprehensive
Loss


    Total
Shareholders’
Equity


 
    Shares

  Amount

         
    (Dollars in thousands, except per share amounts)  

Balance, December 31, 2004

  133,823,776   $ 334,559   $ 343,694   $ 725,039     $ (449 )   $ (9,228 )   $ 1,393,615  

Shares issued under:

                                               

Directors plan

  39,895     100     585                             685  

Stock option plans

  92,941     232     865                             1,097  

Stock bonus plan, net

  359,600     899     6,339             (7,217 )             21  

Employee Stock Purchase Plan

  7,725     19     138                             157  

Settlement of forward equity sales agreement

  8,400,000     21,000     158,580                             179,580  

Issuance of shares for business combination

  2,903,402     7,259     51,500                             58,759  

Amortization of unearned compensation

                            337               337  

Net income

                    52,491                       52,491  

Cash dividends ($.1525 per share)

                    (20,469 )                     (20,469 )

Change in unrealized loss on securities available for sale, net of taxes

                                    (41,076 )     (41,076 )
   
 

 

 


 


 


 


Balance, March 31, 2005

  145,627,339   $ 364,068   $ 561,701   $ 757,061     $ (7,329 )   $ (50,304 )   $ 1,625,197  
   
 

 

 


 


 


 


 

 

See Notes to the Unaudited Condensed Consolidated Financial Statements

 

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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

    Three Months Ended
March 31,


 
    2005

    2004

 
    (Dollars in thousands)  

Net cash flows from operating activities

  $ 65,540     $ 42,865  

Cash flows from investing activities:

               

Proceeds from maturities and calls of securities available for sale

    105,717       73,028  

Proceeds from sales of securities available for sale

    417,121       737,805  

Purchases of securities available for sale

    (319,004 )     (667,928 )

Proceeds from maturities of investment securities

    1,204       1,658  

Net increase in loans

    (347,617 )     (237,207 )

Proceeds from sale of interests in mortgage warehouse loans

    434,976       —    

Acquisition, net of cash acquired

    (152,987 )     —    

Capital expenditures

    (6,586 )     (14,948 )

Proceeds from sale of other real estate owned

    2,385       1,212  

Proceeds from sale of premises and equipment and other assets

    1,845       10  
   


 


Net cash flows from investing activities

    137,054       (106,370 )
   


 


Cash flows from financing activities:

               

Net increase in demand, savings, and time deposits

    453,428       281,180  

Net (decrease) increase in federal funds purchased, repurchase agreements and other short-term borrowings

    (366,144 )     102,797  

Proceeds from issuance of long-term debt

    250,000       200,000  

Repayment of long-term debt

    (361,120 )     (517,643 )

Proceeds from issuance of common stock

    1,254       1,866  

Proceeds from settlement of forward equity sales agreement

    179,580       —    

Dividends paid ($0.1525 and $0.145 per share for 2005 and 2004, respectively)

    (20,469 )     (18,418 )
   


 


Net cash flows from financing activities

    136,529       49,782  
   


 


Net increase (decrease) in cash and cash equivalents

    339,123       (13,723 )

Cash and cash equivalents at beginning of year

    604,368       345,717  
   


 


Cash and cash equivalents at March 31

  $ 943,491     $ 331,994  
   


 


Supplemental disclosure of cash flow information:

               

Cash paid during the year for:

               

Interest

  $ 86,401     $ 63,406  

Income taxes

    300       —    

Non-cash investing and financing activities:

               

Transfer of loans to other real estate

  $ 1,258     $ 2,582  

Assets (non-cash) acquired in business combination

    1,159,590       —    

Liabilities assumed in business combination

    947,844       —    

 

See Notes to the Unaudited Condensed Consolidated Financial Statements

 

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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note A: Accounting Policies

 

The accounting and reporting policies of The Colonial BancGroup, Inc. and its subsidiaries (variously referred to herein as “BancGroup”, “Colonial”, or the “Company”) are as stated in the 2004 Annual Report on Form 10-K. The Company adopted additional policies as noted below with respect to Sales and Servicing of Financial Assets and Loans Held for Sale as a result of 2005 business activities. These unaudited interim financial statements should be read in conjunction with the audited financial statements and footnotes included in BancGroup’s 2004 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 BancGroup’s financial position as of March 31, 2005 and December 31, 2004 and the results of operations and cash flows for the interim periods ended March 31, 2005 and 2004. All 2005 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.

 

Sales and Servicing of Financial Assets

 

The Company has a facility in which it sells certain mortgage warehouse loans and mortgage loans held for sale to a wholly-owned special purpose entity (SPE) which then sells interests in those assets to third-party commercial paper conduits. These transactions provide a source of liquidity for the Company and allow the Company to utilize its balance sheet capacity and capital for higher-yielding assets while continuing to manage the customer relationships.

 

Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 140, any retained interests resulting from sales of financial assets should be recognized at the time of sale. Retained interests include such items as servicing assets or liabilities, subordinated tranches, interest-only strips, and cash reserve accounts. The previous carrying amount of the assets sold should be allocated between the retained interests and the assets sold based on each component’s fair value in relation to the total fair value at the date of sale. Any gain or loss recognized from the sale would depend in part on the allocation of value to the assets sold and interests retained.

 

Based on the structure of these transactions, the Company’s only retained interest is the assets retained in the SPE as a first risk of loss position. The Company does retain servicing responsibilities for the assets sold and receives a servicing fee as compensation. However, due to the short-term nature of these assets and the Company’s conclusion that the fee represents adequate compensation as a servicer, no servicing asset or liability is recorded. At the time of sale, the previous carrying amount of the assets is allocated between the interests sold and interests retained based on their relative fair values, which approximate cost because of the short-term and floating-rate nature of these assets. The sales price equals the Company’s carrying amount for the assets sold, thus no gain or loss is recorded at the time of sale.

 

The Company provides credit enhancements to these transactions by maintaining assets in the SPE as a first risk of loss position to the interests sold to the commercial paper conduits. This credit risk is reviewed quarterly, and a reserve for loss exposure is maintained in the allowance for loan losses. The Company also provides a liquidity backstop facility to the commercial paper conduits. The Company, under this facility, may be required to purchase assets from the conduits in certain limited circumstances, including the conduit’s inability to place commercial paper. Colonial includes this liquidity risk in its liquidity risk analysis to ensure that it would have sufficient sources of liquidity.

 

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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

Loans Held for Sale

 

Effective January 1, 2005, the Company began using forward sales commitments as fair value hedges of its short-term participations in mortgage loans which are included in loans held for sale on the consolidated balance sheet. Prior to January 1, 2005, all loans held for sale were carried at the lower of aggregate cost or market. After January 1, 2005, the carrying values of these hedged short-term participations are adjusted for changes in fair value. The fair values are calculated based on changes in market interest rates during the periods that the participations have been on the balance sheet. See Note I for discussion of the derivatives associated with this hedging strategy.

 

Note B: Contingencies

 

BancGroup and its subsidiaries are from time to time defendants in legal actions from normal business activities. Management does not anticipate that the ultimate liability arising from litigation outstanding at March 31, 2005 will have a materially adverse effect on BancGroup’s financial condition.

 

Note C: Recent Accounting Standards

 

In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment. This SOP prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The changes required by this SOP are not expected to have a material impact on the Company’s financial statements. With respect to the acquisition of Union Bank discussed in Note D, there were no loans which fell within the scope of this SOP.

 

In March 2004, the Emerging Issues Task Force (EITF) reached a final consensus on Issue 03-1, The Meaning of Other-Than-Temporary and Its Application to Certain Investments. The Issue applies to debt and equity securities within the scope of SFAS 115, certain debt and equity securities within the scope of SFAS 124, and equity securities that are not subject to the scope of SFAS 115 and not accounted for under the equity method of accounting (i.e., cost method investments). Issue 03-1 outlines a three-step model for assessing other-than-temporary impairment. The model involves first determining whether an investment is impaired, then evaluating whether the impairment is other-than-temporary, and if it is, recognizing an impairment loss equal to the difference between the investment’s cost and its fair value. The model was to be applied prospectively to all current and future investments in interim or annual reporting periods beginning after June 15, 2004. However, in

 

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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

September 2004 the Financial Accounting Standards Board (FASB) staff issued FASB Staff Position (FSP) EITF Issue 03-1-1 which delayed the effective date for the measurement and recognition guidance contained in Issue 03-1. The guidance for analyzing securities for impairment will be effective with the final issuance of FSP EITF Issue 03-1-a. The disclosure guidance of Issue 03-1 remains effective and requires quantitative and qualitative disclosures for investments accounted for under SFAS 115 and SFAS 124 for the first annual reporting period ending after December 15, 2003. In addition, disclosures related to cost method investments are effective for annual reporting periods ending after June 15, 2004. Comparative information for the periods prior to the period of initial application is not required. See Note L for BancGroup’s disclosures under Issue 03-1. The changes required by this EITF Issue are not expected to have a material impact on the Company’s financial statements.

 

On December 16, 2004, the FASB issued SFAS 123(R), Share-Based Payment, which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB Opinion 25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. SFAS 123(R) was originally effective for interim or annual periods beginning after June 15, 2005. However, in April 2005 the Securities and Exchange Commission (SEC) amended this requirement allowing companies to adopt the standard at the beginning of their next fiscal year that begins after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

 

    A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

 

    A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

 

The Company plans to adopt SFAS 123(R) on January 1, 2006 using the modified prospective method.

 

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method will have an impact on the Company’s results of operations, although it will have no material impact on its overall financial position. The impact of adopting SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would likely have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share included in Note J.

 

In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, which provides interpretive guidance on various issues in SFAS 123(R), particularly valuation methodologies and the selection of assumptions. This SAB also discusses the SEC staff’s expectations regarding disclosures in Management’s Discussion and Analysis related to share-based payment transactions, as well as the interaction of SFAS 123(R) with existing SEC guidance, such as that dealing with disclosure of non-GAAP financial measures.

 

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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

Note D: Business Combinations

 

Union Bank Acquisition

 

BancGroup completed the acquisition of UB Financial Corporation’s wholly-owned subsidiary, Union Bank of Florida (Union), a Florida state chartered bank, on February 10, 2005. The acquisition enhances BancGroup’s geographic position and expands BancGroup’s banking operations within existing locations in Florida, primarily the Dade, Broward and Palm Beach markets. Union’s results of operations were included in BancGroup’s consolidated financial results beginning February 11, 2005.

 

Total consideration for the transaction was $233.5 million, consisting of 2,903,402 shares of BancGroup common stock valued at $58.8 million and $174.7 million in cash. This consideration along with other direct acquisition costs and liabilities incurred led to a total acquisition cost of approximately $240.0 million. The value of the common stock issued was determined based on the average market price of BancGroup’s shares over the five day period beginning two days before and ending two days after February 3, 2005, the measurement date for this transaction. The purchase price was preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The final allocation of the purchase price will be adjusted after completion of additional analysis relating to the fair values of Union’s tangible and identifiable intangible assets and liabilities.

 

The following table presents unaudited proforma results of operations for the three months ended March 31, 2005 and 2004, as if the acquisition had occurred at January 1, 2004. Since no consideration is given to operational efficiencies and expanded products and services, the proforma summary information does not necessarily reflect the results of operations as they actually would have been, if the acquisition had occurred at January 1, 2004:

 

     Three Months Ended
March 31,


     2005

   2004

     (unaudited)
     (In thousands, except
per share amounts)

Net Interest Income

   $ 170,729    $ 140,881

Net Income

     52,850      42,614

Basic EPS

     0.38      0.33

Diluted EPS

     0.37      0.32

 

First Federal Savings Bank of Lake County Acquisition

 

On January 18, 2005, Colonial announced the signing of a definitive agreement to acquire First Federal Savings Bank of Lake County (FFLC) for approximately $232 million. Under the terms of the agreement, FFLC shareholders will elect either two shares of Colonial stock or $42 in cash for each FFLC share they own. The cash consideration will be capped at approximately 35% of the transaction. FFLC is headquartered in Leesburg, Florida, and had total assets of $1.1 billion, total deposits of $835 million and total loans of $919 million at March 31, 2005. FFLC currently operates 16 full-service offices in Lake, Sumter, Citrus and Marion counties in Central Florida. The transaction is expected to close during the second quarter of 2005.

 

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Table of Contents

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

Note E: 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:

 

     Three Months Ended March 31,

     Net
Income


   Shares

   Per Share
Amount


     (in thousands, except
per share amounts)

2005

                  

Basic EPS

   $ 52,491    138,683    $ 0.38

Effect of dilutive instruments:

                  

Options

          1,597       
    

  
  

Diluted EPS

   $ 52,491    140,280    $ 0.37
    

  
  

2004

                  

Basic EPS

   $ 39,114    127,066    $ 0.31

Effect of dilutive instruments:

                  

Options

          963       
    

  
  

Diluted EPS

   $ 39,114    128,029    $ 0.31
    

  
  

 

The above calculations exclude options that could potentially dilute basic EPS in the future but were antidilutive for the periods presented. The number of such options excluded was 492,000 and 16,000 at March 31, 2005 and 2004, respectively.

 

Note F: Segment Information

 

The Company has six reportable segments for management reporting. Each regional bank segment consists of commercial lending and full service branches in its geographic region with its own management team. The branches provide a full range of traditional banking products as well as financial planning and mortgage banking services. The mortgage warehouse segment headquartered in Orlando, Florida provides funding to mortgage origination companies that is collateralized by residential mortgage loans. The Company reports Corporate/Treasury/Other which includes the investment securities portfolio, wholesale funding activities including long-term debt, short term liquidity and balance sheet risk management including derivative hedging activities, the parent company’s activities, intercompany eliminations, certain support activities not currently allocated to the aforementioned segments and income taxes. In addition, Corporate/Treasury/Other includes income from bank owned life insurance, income and expenses from various nonbank subsidiaries, joint ventures and equity investments, merger related expenses and the unallocated portion of the Company’s financial planning business.

 

The results for these segments are based on our management reporting process, which assigns balance sheet and income statement items to each segment. Unlike financial reporting there is no authoritative guidance for management reporting equivalent to generally accepted accounting principles. Colonial uses an internal funding methodology to assign funds costs to assets and earning credits to liabilities as well as an internal capital allocation methodology with an offset in Corporate/Treasury/Other. The provision for loan losses included in each segment is based on each segment’s share of the Company’s loan loss reserve. Certain back office support functions are allocated to each segment on the basis most applicable to the function being allocated. The management accounting process measures the performance of the defined segments based on our management structure and is not necessarily comparable with similar information for other financial services companies. If the management structure and/or allocation process changes, allocations, transfers and assignments may change. Results for prior periods have been restated for comparability.

 

 

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Table of Contents

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

    Florida
Regional
Bank


 

Florida
Mortgage

Warehouse


    Alabama
Regional
Bank


  Georgia
Regional
Bank


    Nevada
Regional
Bank


    Texas
Regional
Bank


   

Corporate/
Treasury

Other


    Consolidated
BancGroup


    (Dollars in thousands)

Three Months Ended March 31, 2005

                                                         

Net interest income before intersegment income / expense

  $ 71,737   $ 23,359     $ 30,472   $ 15,597     $ 11,339     $ 13,950     $ 188     $ 166,642

Intersegment interest income / expense

    1,664     (8,486 )     8,258     (3,051 )     (1,135 )     (3,344 )     6,094       —  
   

 


 

 


 


 


 


 

Net interest income

    73,401     14,873       38,730     12,546       10,204       10,606       6,282       166,642

Provision for loan losses

    3,520     (1,063 )     1,702     150       426       570       624       5,929

Noninterest income

    10,895     1,176       11,453     2,045       1,162       1,179       6,689       34,599

Noninterest expense

    45,771     1,593       26,968     6,813       5,746       6,643       23,081       116,615
   

 


 

 


 


 


 


 

Income/(loss)before income taxes

  $ 35,005   $ 15,519     $ 21,513   $ 7,628     $ 5,194     $ 4,572     $ (10,734 )     78,697
   

 


 

 


 


 


 


     

Income taxes

                                                        26,206
                                                       

Net Income

                                                      $ 52,491
                                                       

Total Assets

  $ 7,988,907   $ 1,727,435     $ 3,991,503   $ 1,354,484     $ 781,147     $ 1,112,352     $ 3,045,381     $ 20,001,209

Total Deposits

  $ 6,587,729   $ 377,521     $ 3,750,714   $ 724,877     $ 527,596     $ 459,966     $ 301,839     $ 12,730,242

Three Months Ended March 31, 2004

                                                         

Net interest income before intersegment income / expense

  $ 51,694   $ 12,984     $ 29,405   $ 13,343     $ 9,782     $ 10,517     $ 5,382     $ 133,107

Intersegment interest income / expense

    2,224     (1,944 )     8,932     (875 )     (982 )     (1,562 )     (5,793 )     —  
   

 


 

 


 


 


 


 

Net interest income

    53,918     11,040       38,337     12,468       8,800       8,955       (411 )     133,107

Provision for loan losses

    3,540     219       2,300     338       376       470       691       7,934

Noninterest income

    9,082     612       11,791     1,868       1,227       1,440       11,683       37,703

Noninterest expense

    35,342     1,443       28,451     6,758       5,569       6,363       19,686       103,612
   

 


 

 


 


 


 


 

Income/(loss) before income taxes

  $ 24,118   $ 9,990     $ 19,377   $ 7,240     $ 4,082     $ 3,562     $ (9,105 )     59,264
   

 


 

 


 


 


 


     

Income taxes

                                                        20,150
                                                       

Net Income

                                                      $ 39,114
                                                       

Total Assets

  $ 5,518,763   $ 1,467,983     $ 3,839,772   $ 1,319,676     $ 741,546     $ 952,432     $ 2,658,826     $ 16,498,998

Total Deposits

  $ 4,416,525   $ 233,748     $ 3,601,690   $ 700,631     $ 403,335     $ 445,916     $ 247,927     $ 10,049,772

 

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Table of Contents

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

Note G: Long-Term Borrowings

 

In March 2005, Colonial prepaid $200 million in long-term Federal Home Loan Bank advances bearing interest at a weighted average rate of 4.98% resulting in a prepayment fee for the early extinguishment of debt of $2.29 million. The advances were refinanced with shorter term borrowings at lower rates.

 

Note H: Guarantees

 

Standby letters of credit are contingent commitments issued by Colonial Bank generally to guarantee the performance of a customer to a third party. A financial standby letter of credit is a commitment by Colonial Bank to guarantee a customer’s repayment of an outstanding loan or debt instrument. In a performance standby letter of credit, Colonial Bank guarantees a customer’s performance under a contractual nonfinancial obligation for which it receives a fee. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary. FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires the fair value of these commitments to be recorded on the balance sheet. The fair value of the commitment typically approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The amount recorded for deferred fees as of March 31, 2005 was not material to the Company’s consolidated balance sheet. At March 31, 2005, Colonial Bank had standby letters of credit outstanding with maturities ranging from less than one year up to 16 years. The maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit was $203 million.

 

Note I: Derivatives

 

BancGroup maintains positions in derivative financial instruments to manage interest rate risk and facilitate asset/liability management strategies. The fair value of derivatives are recorded in other assets or other liabilities.

 

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Table of Contents

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

Fair Value Hedges

 

At March 31, 2005, BancGroup had interest rate swap positions on subordinated debt, junior subordinated debt, brokered CD’s, long-term FHLB advances and fixed rate loans, which effectively converted their fixed rates to floating. The critical terms of the interest rate swaps match the terms of the corresponding hedged items. There were no hedging gains and losses resulting from hedge ineffectiveness recognized for the three months ended March 31, 2005 and 2004. The related balances of all interest rate swaps by category as of March 31, 2005 are shown below:

 

Derivative Type


   Notional Amount

   Fair Value

   

Asset or Liability Hedged


     (In thousands)      

Interest rate swaps

   $ 270,000    $ 6,570     Fixed Rate Junior Subordinated Debt

Interest rate swaps

     575,000      (2,126 )   Fixed Rate Long-Term FHLB Advances

Interest rate swaps

     250,000      8,826     Fixed Rate Subordinated Debt

Interest rate swaps

     145,000      (3,720 )   Fixed Rate Brokered CD’s

Interest rate swaps

     5,802      137     Fixed Rate Commercial Loans

 

Commitments to Originate and Sell Mortgage Loans

 

BancGroup, as part of its retail mortgage loan production activities, routinely enters into short-term commitments to originate loans. Most of the loans will be sold to third parties upon closing. For those loans, the Company enters into individual forward sales commitments at the same time the commitment to originate is finalized. While the forward sales commitments function as an economic offset and effectively eliminate the Company’s financial risk of rate changes during the rate lock period, both the commitment to originate mortgage loans that will be sold and the commitment to sell the mortgage loans are derivatives, the fair values of which are essentially equal and offsetting. The fair values are calculated based on changes in market interest rates after the commitment date. The notional amounts of these mortgage loan origination commitments and the related forward sales commitments were $24.1 million at March 31, 2005. The unrealized gains/losses of the origination and sales commitments were not material at March 31, 2005.

 

BancGroup has also executed individual forward sales commitments related to short-term participations in mortgage loans and retail mortgage loans, which are all classified as loans held for sale. The forward sales commitments related to the short-term participations allow the Company to sell the loan participations to investor institutions for an amount equal to the Company’s original acquisition cost. The Company has designated these commitments as fair value hedges of the short-term participations. The forward sales commitments on retail mortgage loans function as an economic offset and mitigate the Company’s market risk on these loans. The notional values of the forward sales commitments on short-term participations and retail mortgage loans at March 31, 2005 were $611.1 million and $26.1 million, respectively. The fair value of the forward sales commitments on the short-term participations was a loss of $248,000 at March 31, 2005, which was offset by a gain of $248,000 on the short-term participations. The fair value of the sales commitments on retail mortgage loans was immaterial.

 

Options

 

BancGroup occasionally enters into over-the-counter option contracts on bonds in its securities portfolio. SFAS 133 requires that the fair value of these option contracts be recorded in the financial statements. However, there were no option contracts outstanding at March 31, 2005.

 

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Table of Contents

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

Note J: Stock-Based Compensation

 

SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value based method of accounting for an employee stock option or similar equity instrument. However, SFAS No. 123 allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. BancGroup has elected to continue to measure compensation cost for its stock option plans under the provisions in Opinion No. 25 and has calculated the fair value of outstanding options for purposes of pro forma disclosure utilizing the Black-Scholes method.

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

 

The majority of the Company’s options granted vest ratably over a period of five years; therefore for purposes of pro forma disclosures, the compensation expense related to these options has been allocated over the vesting period.

 

The Company’s actual and pro forma information follows (in thousands except per share data):

 

     Three Months Ended
March 31,


 
     2005

    2004

 

Net income:

                

As reported

   $ 52,491     $ 39,114  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax

     (395 )     (359 )
    


 


Pro forma net income

   $ 52,096     $ 38,755  
    


 


 

     Three Months
Ended March 31,


     2005

   2004

Basic earnings per share:

             

As reported

   $ 0.38    $ 0.31

Pro forma

   $ 0.38    $ 0.30

Diluted earnings per share

             

As reported

   $ 0.37    $ 0.31

Pro forma

   $ 0.37    $ 0.30

 

17


Table of Contents

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

Note K: Pension Plan

 

BancGroup and subsidiaries are participants in a pension plan that covers most employees who have met certain age and length of service requirements. The plan provides benefits based on final average earnings, covered compensation, and years of benefit service. Actuarial computations for financial reporting purposes are based on the projected unit credit method. The measurement date is March 31. Based on current actuarial projections, BancGroup will not be required to make a contribution to the plan in 2005. However, BancGroup assesses the funded status of the plan quarterly and may, at its discretion, make contributions even when not required. Currently, BancGroup does not expect to make a material contribution during 2005.

 

Employee pension benefit plan status at March 31:

 

     Three Months Ended
March 31,


 
     2005

    2004

 
     (In thousands)  

Components of net periodic benefit cost

                

Service cost

   $ 1,845     $ 1,414  

Interest cost

     1,156       936  

Expected return on plan assets

     (1,220 )     (1,011 )

Amortization of transition asset

     —         (1 )

Amortization of prior service cost

     2       2  

Amortization of actuarial loss

     312       187  
    


 


Net quarterly benefit cost

   $ 2,095     $ 1,527  
    


 


 

18


Table of Contents

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

Note L: Securities

 

The following table reflects gross unrealized losses and market value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2005.

 

    Less than 12 months

    12 months or more

    Total

 

Description of Securities


  Market
Value


  Unrealized
Losses


    Market
Value


  Unrealized
Losses


    Market
Value


  Unrealized
Losses


 
    (In thousands)  

U.S. Treasury obligations and direct obligations of U.S. Government agencies

  $ 17,688   $ (381 )   $ 165,833   $ (9,332 )   $ 183,521   $ (9,713 )

Federal Agency mortgage-backed securities

    65,300     (1,049 )     191,915     (10,886 )     257,215     (11,935 )

Federal Agency collateralized mortgage obligations

    989,114     (20,433 )     80,296     (2,904 )     1,069,410     (23,337 )

Private collateralized mortgage obligations

    1,617,120     (29,279 )     249,495     (7,906 )     1,866,615     (37,185 )

Corporate notes

    2,021     (8 )     —       —         2,021     (8 )
   

 


 

 


 

 


Total temporarily impaired securities

  $ 2,691,243   $ (51,150 )   $ 687,539   $ (31,028 )   $ 3,378,782   $ (82,178 )
   

 


 

 


 

 


 

The securities above consist of Treasury notes and government agency debentures, agency collateralized mortgage obligations (CMO’s) and mortgage-backed securities, AAA-rated private CMO’s, and corporate notes. As of March 31, 2005, there were 178 securities carried at an unrealized loss relating to the level of interest rates prevailing in the market. Because of the creditworthiness of the issuers and because the future direction of interest rates is unknown, the impairments are deemed to be temporary. The severity and duration of such impairments are determined by the level of interest rates set by the market. Additionally, BancGroup has the ability to retain these securities until maturity when full repayment would be received. There are also no known current funding needs which would require their liquidation.

 

Note M: Sales and Servicing of Financial Assets

 

During the first quarter of 2005, the Company structured a facility in which it sold certain mortgage warehouse loans and mortgage loans held for sale to a wholly-owned SPE which then sold interests in those assets to third-party commercial paper conduits. Refer to Note A for further information regarding accounting for these transactions.

 

Total cash proceeds from the sales of interests in these assets to the conduits during the first quarter of 2005 were $750 million, attributable to $435 million of mortgage warehouse loans and $315 million of loans held for sale. Based on the structure of these transactions, the Company’s only retained interest is the assets retained in the SPE as a first risk of loss position. No gain or loss was recorded at the time of sale. The Company receives servicing income based on a percentage of the outstanding balance of assets sold. During the first quarter of 2005, the Company accrued approximately $400,000 of noninterest income related to these transactions, of which $188,000 was servicing income, but no cash was received.

 

19


Table of Contents

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

The following table presents a summary of the components of managed financial assets, representing both owned and sold assets, along with quantitative information about delinquencies and net credit losses:

 

     As of March 31, 2005

   Three Months Ended
March 31, 2005


     Principal
Balance


   Loans past due
30 days or more


   Average
Balance


   Net Credit
Losses


     (In thousands)

Loans

                           

Assets managed

   $ 13,858,517    $ 62,795    $ 13,225,137    $ 7,015

less: interests sold

     434,976      —        38,712      —  
    

  

  

  

Assets held in portfolio

   $ 13,423,541    $ 62,795    $ 13,186,425    $ 7,015
    

  

  

  

Loans held for sale

                           

Assets managed

   $ 963,667    $ —      $ 756,110    $ —  

less: interests sold

     315,024      —        36,288      —  
    

  

  

  

Assets held in portfolio

   $ 648,643    $ —      $ 719,822    $ —  
    

  

  

  

 

Note N: Variable Interest Entities

 

As discussed in Note M, the Company sells certain financial assets to a wholly-owned SPE which then sells interests in those assets to third-party commercial paper conduits. While the Company has a variable interest in these conduits, it is not considered to be the primary beneficiary, as the Company does not retain the majority of the expected losses or returns. The third-party conduits had approximately $27.4 billion in capital outstanding at March 31, 2005. The Company’s maximum exposure to loss at March 31, 2005 as a result of its involvement with these non-consolidated conduits is $50 million, which is the amount that would be paid by the Company in the event of credit-related defaults.

 

There has been no material change in the Company’s other variable interest entities. Refer to the Company’s 2004 Annual Report on Form 10-K for additional information.

 

20


Table of Contents
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

 

Forward-Looking Statements

 

This discussion and analysis contains statements that are considered “forward-looking statements” within the meaning of the federal securities laws. See page 3 for additional information regarding forward-looking statements.

 

Critical Accounting Policies

 

Accounting policies considered relatively more critical due to either the subjectivity involved in the estimate and/or the potential impact that changes in the estimates can have on the reported financial results include the accounting for the allowance for loan losses and the assessment of goodwill impairment. Information concerning these policies is included in the “Critical Accounting Policies” section of Management’s Discussion and Analysis in BancGroup’s 2004 Annual Report on Form 10-K. There were no significant changes in these accounting policies during the first three months of 2005.

 

Overview

 

The Colonial BancGroup, Inc. is a $20 billion financial services company providing diversified services including retail and commercial banking, wealth management services, mortgage banking and insurance through its branch network, private banking offices or officers, ATMs and the internet as well as other distribution channels to consumers and businesses. At March 31, 2005, BancGroup’s branch network consisted of 306 offices in Florida, Alabama, Georgia, Nevada, Tennessee and Texas.

 

BancGroup is primarily a Florida bank with more of its assets in Florida than in any other state. The following is a summary of approximate assets, deposits and branches by state as of March 31, 2005 on a pro forma basis with the FFLC acquisition which is anticipated to close in the second quarter of 2005.

 

    

% of total

Assets


  

% of total

Deposits


   Branches

Florida

   52%    58%    159

Alabama

   19%    28%    115

Georgia

   6%    5%    20

Texas

   5%    3%    12

Nevada

   4%    4%    13

Corporate/Other

   14%    2%    3
    
  
  

Total

   100%    100%    322
    
  
  

 

BancGroup reported record net income for the quarter ended March 31, 2005 of $52.5 million, a 34% increase over the $39.1 million recorded for the same period of the previous year. Diluted earnings per share for the quarter ended March 31, 2005 were $0.37 per share compared to $0.31 per share for the quarter ended March 31, 2004, a 19% increase.

 

21


Table of Contents

Financial Condition

 

Changes in selected components of the Company’s balance sheet from December 31, 2004 to March 31, 2005 are as follows:

 

     December 31, 2004
to March 31, 2005 Increase
(Decrease)


     Amount

   %

     (Dollars in thousands)

Securities available for sale and investment securities

   $ 41,050     1.1% 

Loans held for sale

     (29,853)    (4.4)%

Total loans, net:

           

Mortgage warehouse loans

     (451,304)    (40.5)%

All other loans, net of unearned income

     1,017,034     8.7% 
    

  

Total loans, net of unearned income

     565,730     4.4% 

Total assets

     1,104,059     5.8% 

Non-time deposits

     686,045     9.4% 

Total deposits

     1,083,630     9.3% 

Short-term borrowings

     (62,506)    (1.8)%

Long-term debt

     (133,451)    (6.0)%

Shareholders’ equity

     231,582     16.6% 

 

Securities

 

Securities available for sale and investment securities totaled $3.69 billion or 18.5% of total assets at March 31, 2005 compared to $3.65 billion or 19.3% of total assets at December 31, 2004. At March 31, 2005, the Company’s securities had an effective duration of 3.98 years. Approximately $40.6 million in securities were sold during the quarter at a net realized loss of approximately $1.2 million. Unrealized net losses on securities available for sale changed from a pretax loss of $14.2 million at December 31, 2004 to a pretax loss of $77.4 million at March 31, 2005 due to increases in market rates.

 

Loans and Loans Held for Sale

 

To increase sources of liquidity, Colonial entered into a transaction during the first quarter of 2005 whereby interests in certain assets generated by its mortgage warehouse lending unit are sold to third-party conduits financed by the issuance of asset backed commercial paper. This transaction allows Colonial to continue to manage its customer relationships while increasing balance sheet capacity for higher yielding assets. At March 31, 2005, Colonial had sold interests in its mortgage warehouse loans and loans held for sale of $435 million and $315 million, respectively, and had unused funding capacity of $250 million. Mortgage warehouse loans ended the quarter at $664 million compared to $1.1 billion at the end of 2004.

 

Loans held for sale is made up of three components: mortgage warehouse, retail mortgages, and non-mortgage loans held for sale. Total loans held for sale decreased $30 million from December 31, 2004 primarily due to a decrease of $45 million in the mortgage warehouse component as a result of the previously discussed sale. The purpose of the mortgage warehouse component of loans held for sale is to accommodate the funding needs of mortgage company customers, therefore these balances as well as the retail mortgage balances fluctuate as demand for residential mortgages changes.

 

Total loans, excluding mortgage warehouse lending, increased by $1.0 billion from the end of 2004. Excluding the Union Bank acquisition and mortgage warehouse lending, total loans grew $366 million or 12.5% annualized from the end of 2004. This growth was spread geographically with 48% from Florida, 24% from

 

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Alabama, 14% from Georgia, 15% from Texas, 3% from other offset by a 4% decline in Nevada. The Nevada region experienced unusually large payoffs in commercial real estate in the first quarter.

 

The following table reflects the Company’s loan mix.

 

Gross Loans By Category

 

     March 31,
2005


   December 31,
2004


     (Dollars in thousands)

Commercial, financial, and agricultural

   $ 1,079,178    $ 1,007,686

Real estate-commercial

     4,465,887      4,265,700

Real estate-construction

     4,535,815      3,925,972

Residential-real estate

     2,376,828      2,223,889

Consumer

     188,042      187,315

Mortgage warehouse

     663,619      1,114,923

Other

     114,172      132,326
    

  

Total loans, net of unearned income

   $ 13,423,541    $ 12,857,811
    

  

 

Management believes that its existing distribution of commercial real estate and construction loans, whether grouped geographically, by industry, or by borrower, reduces BancGroup’s risk exposure. The current distribution of commercial real estate and construction loans remains diverse in location, size, and collateral function. This diversification, in addition to our emphasis on quality underwriting, serves to reduce the risk of losses. The following charts reflect the geographic diversity and property type distribution of construction and commercial real estate loans at March 31, 2005.

 

     Construction

   % of
Total


   Commercial
Real Estate


   % of
Total


     (Dollars in thousands)

Average Loan Size

   $ 675         $ 622     

Geographic Diversity

                       

Florida

   $ 2,450,539    54.0%    $ 2,394,194    53.6%

Alabama

     525,877    11.6%      771,021    17.3%

Georgia

     510,016    11.2%      472,236    10.6%

Texas

     497,638    11.0%      266,617    6.0%

Nevada

     340,794    7.5%      223,740    5.0%

Other

     210,951    4.7%      338,079    7.5%
    

  
  

  

Total

   $ 4,535,815    100.0%    $ 4,465,887    100.0%
    

  
  

  

 

    % of Property Type
Distribution to


       % of Property Type
Distribution to


    Construction
Portfolio


  Total
Portfolio


       Commercial
Real Estate


  Total
Portfolio


Residential Development and Lots

  26.7%   9.0%   

Retail

  25.6%   8.4%

Land Only

  19.6%   6.6%   

Office

  18.9%   6.3%

Residential Home Construction

  17.4%   5.9%   

Multi-Family

  12.3%   4.1%

Condominium

  11.5%   3.9%   

Warehouse

  11.9%   4.0%

Retail

  8.1%   2.7%   

Other*

  9.0%   3.0%

Other*

  5.8%   2.0%   

Healthcare

  7.1%   2.4%

Commercial Development

  4.5%   1.5%   

Lodging

  7.0%   2.3%

Office

  3.9%   1.3%   

Church or School

  3.8%   1.3%

Multi-Family

  2.5%   0.9%   

Recreation

  2.9%   1.0%
   
 
            
            

Industrial

  1.5%   0.5%
                
 

Total Construction

  100.0%   33.8%   

Total Commercial Real Estate

  100.0%   33.3%
   
 
      
 

* Other includes all loans in categories smaller than the lowest percentages shown above.

 

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Table of Contents

Selected Characteristics of the 75 Largest Construction and Commercial Real Estate Loans

 

     Construction

    Commercial
Real Estate


 

75 Largest Loans Total (in thousands)

   $ 1,205,073     $ 780,699  

% of 75 largest loans to category total

     26.6 %     17.5 %

Average Loan to Value Ratio (75 largest loans)

     69.1 %     67.7 %

Average Debt Coverage Ratio (75 largest loans)

     N/A       1.38 x

 

Commercial real estate and construction loans combined had growth, excluding acquisitions, of $332 million or 4.1% from December 31, 2004 to March 31, 2005. Geographically, the Florida locations continue to contribute most of the growth in these particular portfolios. The acquisition of Union in Florida in February 2005 contributed an additional $478 million to these portfolios. Colonial continues to focus its commercial real estate and construction growth efforts on high quality properties owned and/or developed by experienced customers with whom we have established relationships. Substantially all construction and commercial real estate loans have personal guarantees of the principals involved.

 

Residential real estate loans represent approximately 18% and 17% of total loans at March 31, 2005 and December 31, 2004, respectively. These loans are primarily adjustable rate first and second mortgages on single-family, owner-occupied properties.

 

BancGroup’s mortgage warehouse lending division provides lines of credit collateralized by residential mortgage loans to mortgage origination companies. Mortgage warehouse loans outstanding at March 31, 2005 and December 31, 2004 were $664 million and $1.1 billion with unfunded commitments of $702 million and $771 million, respectively.

 

The Company has 46 credits with commitments (funded and unfunded) of $885 million that fall within the bank regulatory definition of a “Shared National Credit” (generally defined as a total loan commitment in excess of $20 million that is shared by three or more lenders). The largest outstanding amount to any single borrower is $81 million (which is a mortgage warehouse lending credit), with the smallest credit being approximately $20,000. At March 31, 2005, $550 million of these commitments were funded.

 

Although by definition these commitments are considered Shared National Credits, BancGroup’s loan officers have established long-term relationships with most of these borrowers. These commitments are comprised of the following:

 

    65% - mortgage warehouse lines to 19 large institutions,

 

    33% - 26 commercial real estate credit facilities to companies with headquarters located within Colonial’s existing markets, and

 

    2% - one operating facility to a large national insurance company.

 

Management believes that these are sound participations involving credits that are consistent with Colonial Bank’s lending philosophy and meet its conservative underwriting guidelines.

 

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Table of Contents

Summary Of Loan Loss Experience

 

     Three Months Ended

 
     March 31,
2005


    March 31,
2004


 
     (Dollars in thousands)  

Allowance for loan losses—January 1

   $ 148,802     $ 138,549  

Charge-offs:

                

Commercial, financial, and agricultural

     5,425       1,627  

Real estate—commercial

     2,253       2,450  

Real estate—construction

     1,372       86  

Real estate—residential

     577       696  

Consumer

     541       540  

Other

     361       1,898  
    


 


Total charge-offs

     10,529       7,297  
    


 


Recoveries:

                

Commercial, financial, and agricultural

     1,741       483  

Real estate—commercial

     886       135  

Real estate—construction

     1       50  

Real estate—residential

     151       125  

Consumer

     341       283  

Other

     394       214  
    


 


Total recoveries

     3,514       1,290  
    


 


Net charge-offs

     7,015       6,007  

Provision for loan losses

     5,929       7,934  

Allowance added from bank acquisitions

     5,918       —    
    


 


Allowance for loan losses—end of period

   $ 153,634     $ 140,476  
    


 


Net charge-offs as a percentage of average net loans—(annualized basis):

                

Quarter to date

     0.21 %     0.21 %

Year to date

     0.21 %     0.21 %

 

Nonperforming Assets

 

BancGroup classifies problem loans into four categories: nonaccrual, past due, renegotiated and other potential problems. When management determines that a loan no longer meets the criteria for a performing loan and collection of interest appears doubtful, the loan is placed on nonaccrual status. Loans are generally placed on nonaccrual if full collection of principal and interest becomes unlikely (even if all payments are current) or if the loan is delinquent in principal or interest payments for 90 days or more, unless the loan is well secured and in the process of collection. BancGroup’s policy is to charge off consumer installment loans 120 days past due unless they are in the process of foreclosure and are adequately collateralized. Management closely monitors all loans that are contractually 90 days past due, renegotiated or nonaccrual. These loans are summarized as follows:

 

     March 31,
2005


    December 31,
2004


 
     (Dollars in thousands)  

Aggregate loans for which interest is not being accrued

   $ 28,996     $ 26,983  

Aggregate loans renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower

     182       191  
    


 


Total nonperforming loans*

     29,178       27,174  

Other real estate owned and repossessions

     8,229       9,865  

Loans held for sale

     1,262       —    
    


 


Total nonperforming assets*

   $ 38,669     $ 37,039  
    


 


Allowance as a percent of nonperforming assets*

     397 %     402 %

 

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Table of Contents
     March 31,
2005


    December 31,
2004


 
     (Dollars in thousands)  

Aggregate loans contractually past due 90 days for which interest is being accrued

   $ 5,651     $ 8,096  

Net charge-offs quarter-to-date

   $ 7,015     $ 3,644  

Net charge-offs year-to-date

   $ 7,015     $ 23,598  

Total nonperforming assets as a percent of net loans and other real estate

     0.29 %     0.29 %

Allowance as a percent of net loans

     1.14 %     1.16 %

Allowance as a percent of nonperforming loans*

     527 %     548 %

* Does not include loans contractually past due 90 days or more which are still accruing interest.

 

Fluctuations from year to year in the balances of nonperforming assets are attributable to several factors including changing economic conditions in various markets, nonperforming assets obtained in various acquisitions and the disproportionate impact of larger (over $5,000,000) individual credits.

 

In addition to the loans reported as nonperforming loans above, management, through its loan officers, internal credit review staff and external examinations by regulatory agencies, has identified approximately $252.7 million of loans, which have been placed on a classified loan list excluding nonaccrual, other real estate, repossessions and loans that are contractually 90 days past due. The status of all material classified loans is reviewed at least monthly by loan officers, quarterly by BancGroup’s centralized credit administration function and annually by regulatory agencies. In connection with such reviews, collateral values are updated where considered necessary as loans are deemed impaired. If collateral values are judged insufficient or other sources of repayment are deemed inadequate, the amount of reserve held is increased or the loan is reduced to estimated recoverable amounts. As of March 31, 2005, substantially all of these classified loans are current with their existing repayment terms. Management believes that classification of such loans well in advance of their reaching a delinquent status allows the Company the greatest flexibility in correcting problems and providing adequate reserves. Given the reserves and the demonstrated ability of the borrowers to comply with the existing repayment terms, management believes any exposure from these loans has been adequately addressed at the present time.

 

The above nonperforming loans represent all material credits for which management has significant 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.

 

A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. As mentioned previously, Colonial’s credit risk management area performs detailed verification and testing to ensure appropriate identification of impaired loans and that proper reserves are held on these loans. The recorded investment in impaired loans at March 31, 2005 and December 31, 2004 was $25.4 million and $24.8 million, respectively, and these loans had a corresponding valuation allowance of $4.5 million and $8.0 million, respectively.

 

Asset/Liability Management

 

Asset/liability management involves the evaluation, monitoring and management of interest rate risk, liquidity and funding. The Board of Directors has overall responsibility for Colonial’s asset/liability management policies. To ensure adherence to these policies, the Asset and Liability Committee (ALCO) establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. The guidelines apply to both on and off-balance sheet positions. The goal of the ALCO process is to maximize earnings while carefully controlling interest rate risk.

 

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Table of Contents

Interest Rate Sensitivity

 

Interest rate risk, and its potential effects on earnings, are inherent in the operations of a financial institution. We are subject to interest rate risk because:

 

    Assets and liabilities may mature or re-price at different times (for example, if assets re-price faster than liabilities and interest rates are generally falling, earnings will initially decline);

 

    Assets and liabilities may re-price at the same time but by different amounts (for example, when the general level of interest rates is falling, we may reduce rates paid on checking and savings deposit accounts by an amount that is less than the general decline in market interest rates;

 

    Short-term and long-term market interest rates may change by different amounts (i.e., the shape of the yield curve may affect new loan yields and funding costs differently); or

 

    The remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, if long-term mortgage interest rates decline sharply, mortgage-backed securities held in the securities available for sale portfolio may prepay significantly earlier than anticipated—which could reduce portfolio income). In addition, interest rates may have an indirect impact on loan demand, credit losses, mortgage origination volume, the value of the pension liability and other sources of earnings.

 

Asset/liability management activities include lending, accepting and placing deposits, investing in securities, issuing debt and mitigating interest rate risk. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest cost on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed so that movements of interest rates on assets and liabilities are highly correlated in a manner intended to allow Colonial’s interest bearing assets and liabilities to contribute to earnings even in periods of volatile interest rates.

 

Colonial employs the following measurement techniques in the management of interest rate risk: simulation of earnings and simulation of the economic value of equity. These techniques are complementary and are used in concert to provide a comprehensive interest rate risk management capability.

 

Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer modeling techniques, Colonial is able to measure the potential impact of different interest rate assumptions on pre-tax earnings. All on-balance sheet positions, including derivative financial instruments, are included in the model simulation.

 

The following table represents the output from the Company’s simulation model based on the balance sheet at March 31, 2005, when the Fed Funds Rate was 2.75%. The table measures the impact on net interest income of an immediate and sustained change in all market interest rates in 100 basis point increments for the twelve calendar months following the date of the change. This twelve-month projection of net interest income under these scenarios is compared to the twelve-month net interest income projection with rates unchanged.

 

     Fed
Funds
Rate


    Percentage Change
in 12 Month
Projected Net
Interest Income vs.
Net Interest
Income assuming
no rate change(1)


 

Basis Points change

            

+200

   4.75 %   1.8 %

+100

   3.75     1.5  

No Rate Change

   2.75     —    

-100

   1.75     (2.2 )

(1)

The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, estimates of rates on loans and deposits given these rate changes, the ability to maintain interest rate floors on

 

27


Table of Contents
 

loans as market rates decline, deposit decay rates and loan/investment prepayments. Further, the computations do not take into account changes to the slope of the yield curve, changes in the relative relationship of various market rates, changes in the volume or mix of asset and liabilities on the balance sheet nor do they contemplate any actions BancGroup could undertake in response to changes in interest rates.

 

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. Management of liquidity also includes management of funding sources and their utilization based on current, future and contingency needs. Maintaining and managing adequate liquidity and funding is another prominent focus of ALCO.

 

Deposit growth is a primary focus of BancGroup’s funding and liquidity strategy. Colonial’s average non-time deposits grew by $1.8 billion, or 31% (20% excluding acquisitions) over the first quarter of 2004. Total average deposits for the first quarter of 2005 increased $2.4 billion or 25% (16% excluding acquisitions) over the first quarter of 2004. These increases improved the percentage of total average deposits to total average liabilities to 67% for the first quarter of 2005 compared to 65% for the first quarter of 2004.

 

As part of its planning for future funding needs, BancGroup has worked to expand the availability of wholesale funding sources in addition to continued emphasis on deposit growth and the sale of interests in mortgage warehouse loans. Wholesale funding sources include availability from the Federal Home Loan Bank of Atlanta, borrowings collateralized by securities and loans, fed funds purchased and brokered CD’s. Of total wholesale funding sources estimated to be available to the Company, BancGroup utilized 50% at March 31, 2005 compared to 51% at March 31, 2004.

 

Capital Adequacy and Resources

 

Management is committed to maintaining capital at a level sufficient to protect shareholders and depositors, provide for reasonable growth and fully comply with all regulatory requirements. Management’s strategy to achieve these goals is to retain sufficient earnings while providing a reasonable return to shareholders in the form of dividends and return on equity. The Company’s dividend payout target range is 35-45% of net income. Dividend rates are determined by the Board of Directors in consideration of several factors including current and projected capital ratios, liquidity and income levels and other bank dividend yields and payment ratios.

 

The amount of a cash dividend, if any, rests with the discretion of the Board of Directors of BancGroup as well as upon applicable statutory constraints such as the Delaware law requirement that dividends may be paid only out of capital surplus and net profits for the fiscal year in which the dividend is declared and 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% for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. A minimum leverage ratio of 4% is required for all bank holding companies not meeting these criteria. Higher capital ratios may be required for any bank holding company if warranted by its particular circumstance or risk profile. The minimum risk adjusted capital ratios established by the Federal Reserve are 4% for Tier I and 8% for

 

28


Table of Contents

total capital. BancGroup’s actual capital ratios and the components of capital and risk adjusted asset information (subject to regulatory review) as of March 31, 2005 are stated below:

 

Capital (dollars in thousands):


    

Tier I Capital:

      

Shareholders’ equity (excluding unrealized gains/losses on securities available for sale and intangibles plus Trust Preferred Securities)(1)

   $ 1,406,599

Tier II Capital:

      

Allowable loan loss reserve

     153,634

Subordinated debt

     214,635

45% of net unrealized gains on available for sale equity securities

     522
    

Total Capital

   $ 1,775,390
    

Risk-Adjusted Assets

   $ 15,980,503

Quarterly average assets (excluding intangibles and unrealized gains/losses on securities available for sale)

   $ 19,063,947

 

     March 31,
2005


    December 31,
2004


 

Tier I Leverage Ratio

   7.38 %   7.14 %

Risk-Adjusted Capital Ratios:

            

Tier I Capital Ratio

   8.80 %   8.77 %

Total Capital Ratio

   11.11 %   11.36 %

(1) Due to the adoption of FIN 46, BancGroup no longer reflects trust preferred securities on its consolidated statement of condition, but rather reflects these securities as junior subordinated debentures. However, under current regulatory guidelines, these securities continue to qualify for Tier 1 Capital treatment.

 

Net Interest Income

 

Net interest income represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Interest rate volatility, which impacts the volume and mix of earning assets and interest-bearing liabilities as well as their rates, can significantly impact net interest income.

 

Net interest income on a tax-equivalent basis increased 25.0% or $33.4 million to $167.0 million for the quarter ended March 31, 2005 from $133.6 million for the quarter ended March 31, 2004.

 

The “Average Volume and Rates” and “Analysis of Interest Increases (Decreases)” tables present the individual components of net interest income and the net interest margin. Discussion of the changes in these components is provided following the tables.

 

 

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Table of Contents

Average Volume and Rate(1)

(unaudited)

 

     Three Months Ended March 31,

 
     2005

    2004

 
     Average
Volume


   Interest

   Rate

    Average
Volume


   Interest

   Rate

 
     (Dollars in thousands)  

ASSETS:

                                        

Interest earning assets:

                                        

All other loans, net of unearned income(3)(4)

   $ 12,216,381    $ 186,468    6.18 %   $ 10,590,340    $ 145,189    5.51 %

Mortgage warehouse loans

     970,044      11,367    4.75 %     883,301      8,631    3.93 %

Loans held for sale(4)

     719,822      9,531    5.29 %     335,875      4,512    5.37 %

Investment securities and securities available for sale(4)

     3,840,355      43,755    4.56 %     3,150,977      35,848    4.55 %

Other interest earning assets

     330,781      3,143    3.85 %     28,556      79    1.11 %
    

  

        

  

      

Total interest earning assets(2)

     18,077,383    $ 254,264    5.68 %     14,989,049    $ 194,259    5.20 %
           

               

      

Non-earning assets(4)

     1,516,553                   1,142,161              
    

               

             

Total assets

   $ 19,593,936                 $ 16,131,210              
    

               

             

LIABILITIES AND SHAREHOLDERS’ EQUITY:

                                        

Interest bearing liabilities:

                                        

Interest bearing non-time deposits

   $ 4,998,876    $ 12,974    1.05 %   $ 3,904,626    $ 7,949    0.82 %

Time deposits(4)

     4,539,549      31,483    2.81 %     3,921,025      24,451    2.51 %

Short-term borrowings

     3,468,687      20,002    2.34 %     2,834,371      7,047    1.00 %

Long-term debt(4)

     2,312,930      22,763    3.99 %     2,222,432      21,200    3.83 %
    

  

        

  

      

Total interest bearing liabilities

     15,320,042    $ 87,222    2.31 %     12,882,454    $ 60,647    1.89 %
           

               

      

Noninterest bearing demand deposits

     2,638,786                   1,931,116              

Other liabilities(4)

     116,463                   116,980              
    

               

             

Total liabilities

     18,075,291                   14,930,550              

Shareholders’ equity

     1,518,645                   1,200,660              
    

               

             

Total liabilities and shareholders’ equity

   $ 19,593,936                 $ 16,131,210              
    

               

             

RATE DIFFERENTIAL

                 3.37 %                 3.31 %

NET INTEREST INCOME AND NET YIELD ON INTEREST-EARNING ASSETS

          $ 167,042    3.72 %          $ 133,612    3.58 %
           

               

      

(1) Certain reclassifications have been made to prior period amounts to conform to current presentations.
(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.
(3) Loans, net of unearned income for the purpose of this presentation excludes mortgage warehouse lending.
(4) Unrealized gains(losses) on available for sale securities and the adjustments for mark to market valuations on hedged assets and liabilities have been classified in either nonearning assets or other liabilities. All quarters presented reflect this presentation.

 

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Table of Contents

Analysis of Interest Increases/(Decreases)

(Unaudited)

 

     Three Months Ended March 31,
2005 Change from March 31, 2004


          Attributed to(1)

     Total

   Volume

   Rate

     (Dollars in thousands)

INTEREST INCOME:

                    

All other loans, net of unearned income

   $ 41,279    $ 23,044    $ 18,235

Mortgage warehouse loans

     2,736      874      1,862

Loans held for sale

     5,019      4,999      20

Investment securities and securities available for sale

     7,907      7,854      53

Other interest earning assets

     3,064      2,484      580
    

  

  

Total interest income

     60,005      39,255      20,750
    

  

  

INTEREST EXPENSE:

                    

Interest bearing deposits

     5,025      2,489      2,536

Time deposits

     7,032      3,975      3,057

Short-term borrowings

     12,955      1,856      11,099

Long-term debt

     1,563      793      770
    

  

  

Total interest expense

     26,575      9,113      17,462
    

  

  

Net interest income

   $ 33,430    $ 30,142    $ 3,288
    

  

  


(1) Increases (decreases) are attributed to volume changes and rate changes on the following basis: Volume Change equals change in volume times old rate. Rate Change equals change in rate times old volume. The Rate/Volume Change equals 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.

 

For the first quarter 2005, as compared to the same period in 2004, average earning assets increased 20.6% or $3.1 billion to $18.1 billion compared to $15.0 billion for the first quarter 2004. This increase was due to a $1.7 billion increase in average loans, a $384 million increase in average loans held for sale and a $689.4 million increase in the average investment portfolio. Overall for the first quarter 2005 versus 2004, the increase in interest income was $60.0 million.

 

Net interest margin increased for the 6th consecutive quarter to 3.72% or 14 basis points over 3.58% in the first quarter of 2004. The average yield on interest earning assets increased 48 basis points, while the average cost of interest-bearing liabilities increased 42 basis points compared to the first quarter of 2004.

 

Between March of 2004 and March of 2005, the Federal Reserve raised the target federal funds rate seven times for a total increase of 175 basis points. Colonial raised its prime rate in conjunction with each increase in the target federal funds rate.

 

Approximately 80% of Colonial’s loan portfolio is variable or adjustable rate and increases in rate when market rates rise. As a result, loan yields, excluding mortgage warehouse loans and loans held for sale, increased 67 basis points during the first quarter of 2005 over the first quarter of 2004 while the yield on mortgage warehouse loans increased 82 basis points.

 

The yield on loans held for sale decreased 8 basis points due to the impact of demand on this product. The average yield on securities remained relatively constant at 4.56% in the first quarter of 2005 compared to 4.55% in the first quarter of 2004.

 

As discussed previously, in March 2005, Colonial sold interests in certain mortgage warehouse loans and loans held for sale to commercial paper conduits. As a result of this transaction, average mortgage warehouse

 

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loans decreased $39 million and loans held for sale decreased $36 million for the quarter. The transaction decreased net interest income by approximately $433,000, which was substantially offset by an increase in noninterest income of approximately $400,000. The transaction had minimal impact on net interest margin during the quarter due to the short duration it was outstanding, but is expected to be accretive to the margin during the rest of 2005.

 

The overall funding costs increase of 42 basis points from the first quarter 2004 was primarily due to a 134 basis point increase in the rate on short-term borrowings as a result of the previously mentioned increases in the target federal funds rate. The rates on long-term debt are tied to floating rates or are subject to floating rate interest rate swap agreements that resulted in a 16 basis point increase over the first quarter of 2004. The average rate on interest bearing deposits increased 22 basis points over the first quarter 2004.

 

Total average deposits growth of $2.4 billion or 24.8% ($1.5 billion or 15.7% excluding acquisitions) over the first quarter of 2004 has lessened the Company’s dependence on borrowings, which contributes favorably to Colonial’s risk profile and is expected to assist in containing funding costs in a rising rate environment.

 

In March 2005, Colonial prepaid $200 million in long-term Federal Home Loan Bank (FHLB) advances bearing interest at a weighted average rate of 4.98% resulting in a prepayment fee of $2.29 million reflected as net losses on the early extinguishment of debt. The advances were refinanced with shorter term borrowings at lower rates. In the first quarter of 2004, Colonial recognized $6.2 million in net losses on the early extinguishment of $462 million in FHLB advances which bore interest at an average rate of 4.37%.

 

Loan Loss Provision

 

The provision for loan losses for the three months ended March 31, 2005 was $5.9 million compared to $7.9 million for the same period in 2004. Net charge-offs were $7.0 million, or 0.21% annualized as a percent of average net loans, for the three months ended March 31, 2005 compared to $6.0 million, or 0.21% annualized as a percent of average net loans, for the same period in 2004. Less provision was required in the quarter due to the resolution of several impaired credits which had necessitated higher reserve levels.

 

Noninterest Income

 

Noninterest income, excluding securities losses/gains, increased $5.5 million, or 18.2%, for the three months ended March 31, 2005 compared to the same period in 2004. Sources of noninterest income include service charges on deposit accounts, financial planning services, electronic banking services, mortgage origination income and securities gains.

 

Service charges on deposit accounts decreased $553,000, or 3.9%, for the three months ended March 31, 2005 over the same period in 2004. These decreases are primarily the result of a reduction of non sufficient funds fees and a higher percentage of commercial deposit fees paid by balance in the first quarter of 2005 than in the prior year.

 

Financial planning services include discount brokerage, investment sales, asset management, trust services and insurance sales including term, universal, whole life and long-term care. Total financial planning services income increased $768,000, or 24.6%, for the three months ended March 31, 2005 from the same period in 2004. This increase is primarily due to increased sales of securities and annuity products, as well as increased revenues from trust services which more than offset declines in insurance sales.

 

Electronic banking services enable our customers to bank when and where they want. Electronic banking includes an ATM network, business and personal check cards and internet banking with bill pay service.

 

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Noninterest income from electronic banking services increased $687,000, or 24.4%, for the three months ended March 31, 2005, compared to the same period in 2004. This increase is primarily the result of deposit growth, increased check card activities and usage, an increase in Visa’s interchange fee rate, and an increase in usage of the Company’s internet banking product.

 

Net losses on the sale of securities for the quarter ended March 31, 2005 were $1.2 million compared to a net gain of $7.4 million for the same period in 2004.

 

Income from bank owned life insurance and other income increased $1.2 million and $3.4 million, respectively, for the three months ended March 31, 2005 as compared to the same period in 2004. The increase in other income was primarily from letter of credit fees, mortgage warehouse lending fees, customer and official check fees, the sale of the Company’s interest in the PULSE network and income from BancGroup’s joint ventures and Goldleaf Technologies subsidiary.

 

Noninterest Expense

 

Noninterest expense, excluding losses on the early extinguishment of debt of $2.3 million and $6.2 million for the first quarter of 2005 and 2004, respectively, increased $16.9 million or 17.3% for the quarter ended March 31, 2005 as compared to the same period in 2004. Annualized noninterest expense, excluding net losses on the early extinguishment of debt, to average assets reached its lowest level since the fourth quarter of 2002 at 2.33% for the three months ended March 31, 2005, as compared to 2.42% for the same period in 2004. From the first quarter of 2004 to the end of the first quarter of 2005, BancGroup added 42 new locations, nine new branches and 33 branches through acquisitions. The impact of new branches and acquisition related expenses increased total noninterest expense 8% from the first quarter of 2004. The remaining increase includes investments in our people, product and service offerings and technology.

 

Salaries and benefits increased $10.3 million for the three months ended March 31, 2005 over the same period in 2004. The salary and employee benefits increase resulted from new branches, normal salary increases, addition of employees in key strategic areas, increases in health benefit costs and increased incentive plan compensation.

 

Occupancy and equipment expense for the three months ended March 31, 2005 increased $2.3 million when compared to the same period in 2004. The increase was primarily the result of new branches, as well as additional occupancy and equipment expenses from expansion of operational support functions and continued technology enhancements.

 

The increase in amortization of intangible assets was due to the acquisition of Union Bank in February 2005 and P.C.B. Bancorp, Inc. in May 2004. Merger related expenses of $1.1 million for the quarter ended March 31, 2005 were also the result of the Union Bank acquisition. Refer to Note D for further discussion of the Union Bank acquisition.

 

The $2.3 million and $6.2 million in net losses on the early extinguishment of debt for the quarter ended March 31, 2005 and 2004, respectively, was a result of the early payoff of FHLB advances and other borrowings. Refer to the Net Interest Income section for further discussion.

 

The increase in other expense of $2.0 million for the three months ended March 31, 2005 over the same period in 2004 was primarily the result of new branches and expenses of various equity investments, as well as a net increase in normal operating expenses.

 

Provision For Income Taxes

 

BancGroup’s provision for income taxes is based on an approximate 33.5% and 34.0%, estimated annual effective tax rates for the years ended 2005 and 2004, respectively. The provisions for income taxes for the three months ended March 31, 2005 and 2004 were $26.2 million and $20.2 million, respectively.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The information required by this item is included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 4. Controls and Procedures

 

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in internal control over financial reporting (including any corrective actions with regard to significant deficiencies or material weaknesses in the Company’s internal controls) that could significantly affect the disclosure controls and procedures since the date of the evaluation. See the certifications by the Company’s Chief Executive Officer and Chief Financial Officer filed as Exhibits 31.1 and 31.2 to this Report.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings—See Notes to the Unaudited Condensed Consolidated Financial Statements— Note B—Contingencies

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds—N/A

 

        On February 10, 2005, BancGroup issued 2,903,402 shares of its common stock to UB Financial Corporation as partial consideration for all of the shares of Union Bank of Florida. When issued, these shares had not been registered with the Securities Exchange Commission or with any state securities department. The BancGroup common stock was issued pursuant to the exemption afforded under Section 4(2) of the Securities Act of 1933, as amended. The acquisition of Union Bank of Florida is more fully described in Note D to the Financial Statements included within this report. The BancGroup common stock was subsequently registered for a possible public distribution by UB Financial Corporation or its shareholders on a Registration Statement on Form S-3 (File No. 333-121707) which became effective on February 11, 2005.

 

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—N/A

 

Item 6. Exhibits.

 

Exhibits required by Item 601 of Regulation S-K

 

Exhibit

    
31.1    Rule 13a-14(a)/15d-14(a) Certifications of the Chief Executive Officer
31.2    Rule 13a-14(a)/15d-14(a) Certifications of the Chief Financial Officer
32.1    Rule 13a-14(b) Certifications of the Chief Executive Officer
32.2    Rule 13a-14(b) Certifications of the Chief Financial Officer

 

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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: May 5, 2005

     

By:

  /s/    SHEILA MOODY        
                Sheila Moody
                Its Chief Accounting Officer

 

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