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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





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FORM 10-Q





QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





FOR THE QUARTER ENDED JUNE 30, 2002

COMMISSION FILE NUMBER 1-13508





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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 the number of shares outstanding of each of the issuers classes of common stock, as of the
latest practical date.





Class

Outstanding at July 31, 2002Common Stock, $2.50 Par Value

117,493,072





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##### Table of Contents




THE COLONIAL BANCGROUP, INC.





INDEX





Page NumberPART I.    FINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)Consolidated Statements of ConditionJune 30, 2002, December 31, 2001 and June 30, 2001

4Consolidated Statements of IncomeSix months ended June 30, 2002 and June 30, 2001, and three months ended June 30, 2002 and June 30, 2001

5Consolidated Statements of Comprehensive IncomeSix months ended June 30, 2002 and June 30, 2001, and three months ended June 30, 2002 and June 30, 2001

6Consolidated Statements of Cash FlowsSix months ended June 30, 2002 and June 30, 2001

7-8Notes to Consolidated Financial StatementsJune 30, 2002

9Item 2.

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

14PART II.    OTHER INFORMATIONItem 1.

Legal Proceedings

35Item 6.

Exhibits and Reports on Form 8-K

35SIGNATURES

36




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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 2002 and beyond; (ii) increases in competitive
pressure in the banking industry; (iii) general economic conditions, either nationally or regionally, that are less favorable than expected; (iv) expected cost savings from recent and pending acquisitions are not fully realized; (v) changes in the
interest rate environment which reduce margins; (vi) managements assumptions regarding allowance for loan losses may not be 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, and 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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THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CONDITION


(Unaudited)


(Dollars in thousands, except per share amounts)





June 30, 2002


December 31, 2001


June 30, 2001ASSETS:Cash and due from banks

$
291,261


$
373,024


$
320,091Interest-bearing deposits in banks and federal funds sold


20,571



15,084



103,475Securities available for sale


2,317,982



1,852,439



1,621,917Investment securities


24,917



30,055



38,062Mortgage loans held for sale


31,079



35,453



29,273Loans, net of unearned income


10,369,823



10,367,665



10,003,391Less: Allowance for loan losses


(132,326
)


(122,200
)


(116,642
)Loans, net


10,237,497



10,245,465



9,886,749Premises and equipment, net


232,623



198,983



190,359Intangible assets, net


190,396



113,898



91,881Other real estate owned


21,767



15,553



10,823Accrued interest and other assets


304,741



305,149



277,639TOTAL ASSETS:

$
13,672,834


$
13,185,103


$
12,570,269LIABILITIES AND SHAREHOLDERS EQUITY:Deposits

$
8,653,567


$
8,322,979


$
8,539,571Short term borrowings


2,105,037



2,128,133



1,524,737Subordinated debt


270,361



265,550



260,058Trust preferred securities


183,039



70,000



73,000FHLB long term debt


1,390,413



1,361,938



1,162,168Other long term debt


28,100



88,652



89,064Other liabilities


81,320



83,077



95,480Total liabilities


12,711,837



12,320,329



11,744,078SHAREHOLDERS EQUITY:Common Stock, $2.50 par value; 200,000,000 shares authorized; 120,196,874, 115,244,185, and 114,831,838 shares issued at
June 30, 2002, December 31, 2001, and June 30, 2001, respectively


300,492



288,110



287,080Treasury stock (2,000,000 shares and 2,376,746 shares at June 30, 2002 and June 30, 2001, respectively)


(30,721
)






(22,571
)Additional paid in capital


163,495



102,980



125,206Retained earnings


506,794



467,163



432,824Unearned compensation


(2,975
)


(3,159
)


(4,027
)Accumulated other comprehensive income, net of taxes


23,912



9,680



7,679Total shareholders equity


960,997



864,774



826,191TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

$
13,672,834


$
13,185,103


$
12,570,269





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)


(Dollars in thousands, except per share amounts)





Six Months Ended June 30,

Three Months Ended June 30,2002

2001

2002

2001INTEREST INCOME:Interest and fees on loans

$
329,187

$
421,875

$
166,338

$
208,398Interest and dividends on securities


55,315


49,517


28,590


23,626Other interest


390


1,798


168


862Total interest income


384,892


473,190


195,096


232,886INTEREST EXPENSE:Interest on deposits


94,191


182,691


45,844


87,165Interest on short-term borrowings


15,798


42,823


8,084


19,373Interest on long-term debt


49,152


40,156


25,073


21,431Total interest expense


159,141


265,670


79,001


127,969NET INTEREST INCOME


225,751


207,520


116,095


104,917Provision for loan losses


17,974


16,942


8,496


7,478Net Interest Income After Provision for Loan Losses


207,777


190,578


107,599


97,439NONINTEREST INCOME:Service charges on deposit accounts


21,654


20,184


11,051


10,687Financial Planning Services


5,094


4,524


2,434


2,282Electronic banking


3,998


3,200


2,125


1,645Mortgage origination


5,027


3,518


2,872


2,062Securities gains (losses), net


663


1,945


664


756Other income


9,922


9,671


4,285


4,769Total noninterest income


46,358


43,042


23,431


22,201NONINTEREST EXPENSE:Salaries and employee benefits


77,509


71,596


40,142


36,675Occupancy expense of bank premises, net


18,792


17,095


9,442


8,794Furniture and equipment expenses


14,573


14,674


7,451


7,352Amortization of intangible assets


875


3,288


713


1,648Other expenses


35,159


33,536


18,653


17,358Total noninterest expense


146,908


140,189


76,401


71,827INCOME BEFORE INCOME TAXES


107,227


93,431


54,629


47,813Applicable income taxes


36,993


33,702


18,573


17,280NET INCOME

$
70,234

$
59,729

$
36,056

$
30,533EARNINGS PER SHARE:NET INCOMEBasic

$
0.59

$
0.52

$
0.30

$
0.27Diluted

$
0.59

$
0.52

$
0.30

$
0.26





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)


(Dollars in thousands, except per share amounts)





Six Months Ended June 30,


Three Months Ended June 30,2002


2001


2002


2001NET INCOME

$
70,234


$
59,729


$
36,056


$
30,533OTHER COMPREHENSIVE INCOME, NET OF TAXES:Unrealized gains (losses) on securities available for sale arising during the period, net of taxes


14,666



14,730



19,112



(1,047
)Less: reclassification adjustment for net (gains) losses included in net income


(434
)


(1,244
)


(435
)


(484
)COMPREHENSIVE INCOME

$
84,466


$
73,215


$
54,733


$
29,002





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)


(Dollars in thousands, except per share amounts)





Six Months Ended June 30,2002


2001NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES

$
96,573


$
(11,304
)Cash flows from investing activities:Proceeds from maturities and calls of securities available for sale


329,578



242,360Proceeds from sales of securities available for sale


63,210



52,993Purchase of securities available for sale


(804,018
)


(353,854
)Proceeds from maturities of investment securities


5,157



8,774Net decrease (increase) in loans


255,071



(324,728
)Cash received in bank acquisitions


13,091



33,298Capital expenditures


(37,324
)


(11,418
)Proceeds from sale of other real estate owned


5,595



1,829Other, net


2,509



173NET CASH (USED) IN INVESTING ACTIVITIES


(167,131
)


(350,573
)Cash flows from financing activities:Net increase in demand, savings, and time deposits


28,121



79,806Net decrease in federal funds purchased,repurchase agreements and other short-term borrowings


(80,715
)


(217,824
)Proceeds from issuance of long-term debt


142,646



588,450Repayment of long-term debt


(136,270
)


(169,563
)Proceeds from issuance of trust preferred securities


100,000



150,000Proceeds from issuance of common stock


1,825



3,534Purchase of treasury stock


(30,721
)


Dividends paid ($0.13 and $0.12 per share for 2002 and 2001, respectively)


(30,604
)


(26,516
)NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES


(5,718
)


407,887Net (decrease) increase in cash and cash equivalents


(76,276
)


46,010Cash and cash equivalents at beginning of year


388,108



377,556Cash and cash equivalents at June 30,

$
311,832


$
423,566





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)


(Dollars in thousands, except per share amounts)





SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Six Months Ended June 30,2002

2001Cash paid during the year for:Interest

$
169,442

$
271,704Income taxes


36,993


33,702Non-cash investing activities:Transfer of loans to other real estate

$
11,631

$
10,909Assets (non-cash) acquired in business combination


342,855


70,450Liabilities assumed in business combination


331,094


104,523Origination of loans for the sale of other real estate





169Non-cash financing activities:Reissuance of treasury stock for stock plans

$


$
3,405Conversion of subordinated debentures


75


177





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 Colonial BancGroup, Inc. and its subsidiaries (BancGroup or the Company) have not changed their
accounting and reporting policies from those stated in the 2001 annual report on Form 10-K. These unaudited interim financial statements should be read in conjunction with the audited financial statements and footnotes included in BancGroups
2001 annual report on Form 10-K.





In the opinion of BancGroup, the accompanying unaudited condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of June 30, 2002 and 2001 and the results of operations and cash flows for the interim periods ended June 30, 2002 and 2001.
All 2002 interim amounts are subject to year-end audit, and the results of operations for the interim period herein are not necessarily indicative of the results of operations to be expected for the year.





NOTE B: 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 June 30, 2002 will have a materially adverse effect on
BancGroups financial statements.





NOTE C: BUSINESS COMBINATIONS





BancGroup completed the acquisition of Mercantile Bancorp, Inc. (Mercantile) and its wholly owned subsidiary bank, First Mercantile Bank, N.A. (Mercantile Bank), on
March 28, 2002. Mercantile Bank operated four branch offices in Dallas, Texas and one in Austin, Texas. At March 28, 2002, Mercantile had $354 million in assets, $284 million in loans and mortgage loans held for sale, and $302 million in deposits.
BancGroup issued 4,652,809 shares of its common stock to shareholders of Mercantile. As a result of this transaction, BancGroup recorded $69.8 million of total intangibles including $11.4 million in core deposits.





NOTE D: RECENT ACCOUNTING PRONOUNCEMENTS





On June 29, 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations. This statement is effective for all business combinations initiated after June 30, 2001. This statement supercedes
Accounting Principles Board Opinion No. 16, Business Combinations. SFAS No. 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001, establishes specific criteria for the
recognition of intangible assets separately from




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goodwill, and requires unallocated negative goodwill to be written off immediately as an extraordinary gain instead of being deferred and amortized.





On June 29, 2001, the Financial Accounting Standards Board issued SFAS No. 142, Intangible Assets. This statement is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 requires that goodwill and indefinite lived intangible assets no longer be amortized, that goodwill will be tested for impairment at least annually, that intangible assets deemed to have an indefinite
life will be tested for impairment at least annually, and that the amortization period of intangible assets with finite lives will no longer be limited to forty years. Colonial adopted SFAS 142 on January 1, 2002. (See additional discussion in Note
J).





In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting for Asset Retirement Obligations.
This statement is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. SFAS No. 143 addresses the recognition and measurement of obligations associated with the retirement of tangible long-lived assets resulting
from acquisition, construction, development, or the normal operation of a long-lived asset. SFAS No. 143 requires that the fair value of an asset retirement obligation be recognized as a liability in the period in which it is incurred. The asset
retirement obligation is to be capitalized as part of the carrying amount of the long-lived asset and the expense is to be recognized over the useful life of the long-lived asset. Management is currently evaluating the impact that SFAS No. 143 will
have on BancGroups financials, but does not expect the adoption will have a material effect.





In August 2001, the Financial
Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The effective date for this statement is January 1, 2002 and supersedes SFAS No. 121. SFAS No. 144 carries forward from SFAS
No. 121 the fundamental guidance related to the recognition and measurement of an impairment loss related to assets to be held and used and provides guidance related to the disposal of long-lived assets to be abandoned or disposal by sale. Colonial
adopted SFAS No. 144 on January 1, 2002. The implementation of SFAS No. 144 did not have a material effect on BancGroups financials.





In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Management is currently
evaluating the impact that SFAS No. 145 will have on BancGroups financials, but as a result of very limited applicability, does not expect the adoption will have a material effect.




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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:





(Dollars in thousands, except per share amounts)

Six Months Ended June 30,

Three Months Ended June 30,2002

Income

Shares

Per Share Amount

Income

Shares

Per Share AmountBasic EPSNet Income

$
70,234

117,554

$
0.59

$
36,056

119,702

$
0.30Effect of dilutive securities:Options




699







764Convertible debentures


77

494





42

490Diluted EPS

$
70,311

118,747

$
0.59

$
36,098

120,956

$
0.302001Basic EPSNet income

$
59,729

114,598

$
0.52

$
30,533

114,711

$
0.27Effect of dilutive securitiesOptions




556







606Convertible debentures


97

577





49

569Diluted EPS

$
59,826

115,731

$
0.52

$
30,582

115,886

$
0.26





NOTE F: SEGMENT INFORMATION





Through its wholly owned subsidiary, Colonial Bank, BancGroup has one distinct line of business, Commercial Banking. Colonial Bank provides general banking services in 261 branches
throughout 6 states.





NOTE G: LONG TERM BORROWINGS





During March 2002, Colonial Bank issued $100 million in Trust Preferred Securities. These securities bear interest of 8.32% and are subject to redemption by BancGroup, in whole or in part, at any time
after March 2007, until maturity in April 2032. In connection with this issuance, BancGroup executed an interest rate swap whereby BancGroup will receive a fixed rate and pay a floating rate, effectively converting the fixed rate notes to floating.
The result of this interest rate swap created an effective floating rate on the notes of 3 month LIBOR + 1.40%. As of June 30, 2002, the net effective floating rate was 3.26%. The proceeds from this issuance are being used for general corporate
purposes as well as stock repurchase.




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NOTE H: ACQUISITIONS





During the second quarter of 2002, BancGroup announced the signing of a definitive agreement to acquire Palm Beach National Holding Company in a stock for stock exchange resulting in a total value of
approximately $98 million ($105.5 million including additional capital from the exercise of stock options). As of June 30, 2002, Palm Beach National had approximately $356 million in assets with $286 million in loans and $315 million in deposits,
27% of which are noninterest bearing demand deposits. The acquisition is expected to close late in the third quarter of 2002. Core deposit valuation is estimated to be approximately $14.5 million, and expected to be amortized over 8 years using the
straight-line method.





NOTE I: DERIVATIVES:





Colonial maintains positions in derivative financial instruments to manage interest rate risk and facilitate asset/liability management strategies. Currently, the only derivative instruments being
utilized are interest rate swaps. All of these interest rate swaps qualify for shortcut accounting according to Statement of Financial Accounting Standards No. 133 and are designated as fair value hedges.





The aforementioned interest rate swaps were executed in order to convert fixed rate subordinated debt, trust-preferred debt and certain fixed rate loans to
floating rates. As a result, Colonials asset sensitive position is somewhat offset thus providing a better fit with the overall balance sheet risk position. Because each swap meets all of the requirements for shortcut accounting, Colonial
assumes no ineffectiveness. Therefore, no net gains or losses were recognized in 2002 as the gain/(loss) on the underlying asset was offset by an equal amount related to the market value of the associated swap.





NOTE J: INTANGIBLE ASSETS





Under SFAS No.
142 goodwill and other intangible assets with indefinite useful lives will no longer be amortized, but instead are tested for impairment as of the date of adoption and at least annually. The standard also requires that intangible assets with finite
useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment if a triggering event occurs, as described by SFAS No. 121.





Amortizable intangible assets at June 30, 2002 are as follows (in thousands):


Gross Carrying Amount

Accumulated Amortization


Net Carrying AmountCore deposits and other intangibles

$
19,697

$
(914
)

$
18,783




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Aggregate amortization expense for the six months ended June 30, 2002 was $875,000. Aggregate annual
amortization expense of currently recorded core deposits and other intangibles for December 31, 2002 is estimated to be $2.1 million and $2.4 million for years ended December 31, 2003 through 2006.





The changes in the carrying amount of goodwill for the six months ended June 30, 2002 are as follows (in thousands):





Balance at January 1, 2002

$
112,704Acquisitions, primarily First Mercantile


58,909Balance at June 30, 2002

$
171,613





The following table presents net income and earnings per share as reported and adjusted to
exclude tax effected amortization of goodwill that is no longer being amortized (in thousands, except per share amounts).





Three Months Ended June 30,

Six Months Ended June
30,2002

2001

2002

2001Reported net income

$
36,056

$
30,533

$
70,234

$
59,729Goodwill amortization, net of tax




$
1,486




$
2,968Adjusted net income

$
36,056

$
32,019

$
70,234

$
62,697Reported basic earnings per share

$
0.30

$
0.27

$
0.59

$
0.52Goodwill amortization, net of tax




$
0.01




$
0.03Adjusted basic earnings per share

$
0.30

$
0.28

$
0.59

$
0.55Reported diluted earnings per share

$
0.30

$
0.26

$
0.59

$
0.52Goodwill amortization, net of tax




$
0.02




$
0.02Adjusted diluted earnings per share

$
0.30

$
0.28

$
0.59

$
0.54




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


CRITICAL ACCOUNTING POLICIES:





Accounting policies
involving significant judgements and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact comprehensive income, are considered critical accounting policies. BancGroup recognizes
the following as critical accounting policies: Accounting for Acquisitions, Allowance for Loan Losses, and Income Taxes.





Accounting
for Acquisitions.BancGroups growth in business, profitability and market share over the past several years has been enhanced significantly by mergers and acquisitions. BancGroups acquisition strategy has
historically utilized the pooling-of-interest and purchase business combination methods of accounting. Effective July 1, 2001, BancGroup adopted SFAS No. 141, Business Combinations, which allows only the use of the purchase combination method of
accounting. For acquisitions under the purchase method, BancGroup is required to record assets acquired and liabilities assumed at their fair value, which in many instances involves estimates based on third party, internal, or other valuation
techniques. These estimates also include the establishment of various reserves based on planned facilities dispositions and employee benefit related considerations, among other acquisition-related items. In addition, purchase acquisitions typically
result in goodwill or other intangible assets, which are subject to ongoing periodic impairment tests. These tests, based on the fair value of net assets acquired compared to the carrying value of goodwill and other intangibles, also contain
estimates such as discount rate and time periods in their calculations. Furthermore, the determination of which intangible assets have finite lives is subjective, as well as the determination of the amortization period for such intangible assets.





Allowance for Loan Losses.Managements ongoing evaluation of the adequacy of the allowance for loan
losses considers both impaired and unimpaired loans and takes into consideration the Banks past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, estimated
value of any underlying collateral, the views of regulators, and an analysis of current economic conditions. While management believes that it has exercised judgement and applied assumptions which have resulted in the establishment of an allowance
presented in accordance with generally accepted accounting principles, there can be no assurance that in the future, adverse economic conditions, increased nonperforming loans, regulatory concerns, or other factors will not require further increases
in the allowance.





Income Taxes.    BancGroup uses the asset and liability method of accounting for income
taxes. Determination of the deferred and current provision requires analysis by management of certain transactions and the related tax laws and regulations. Management exercises significant judgement in




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evaluating the amount and timing of recognition of the resulting tax liabilities and assets. Those judgements and estimates are re-evaluated on a continual basis as regulatory and business
factors change.





FINANCIAL CONDITION:





Ending balances of total assets, securities, mortgage loans held for sale, net loans, deposits, and long and short term debt changed for the three months and twelve months ended June 30, 2002, respectively, as follows:





(Dollars in thousands)

December 31, 2001 to June 30, 2002 Increase (Decrease)


June 30, 2001 to June 30, 2002
Increase (Decrease)Amount


%


Amount

%Assets:Total Assets

487,731


3.7
%

1,102,565

8.8
%Securities

460,405


24.5
%

682,920

41.1
%Mortgage loans held for sale

(4,374
)

(12.3
%)

1,806

6.1
%Loans, net of unearned income

2,158





366,432

3.7
%Total Deposits

330,588


4.0
%

113,996

1.3
%Short-term debt

(23,096
)

(1.1
%)

580,300

38.1
%Long-term debt

85,773


4.8
%

287,623

18.2
%





Assets:





BancGroups assets have increased 8.8% since June 30, 2001 and 3.7% since December 31, 2001. The growth from June 30, 2001 is primarily the result of increases in securities, internal loan growth
throughout BancGroups banking regions, the purchase of 13 branches from Union Planters, and the acquisition of Mercantile Bancorp in Texas. The growth from December 31, 2001 is primarily the result of increases in securities and to the
Mercantile acquisition.





Securities:





Investment securities and securities available for sale have increased $682.9 million (41.1%) and $460.4 million (24.5%) from June 30, 2001 and December 31, 2001, respectively. Selectively purchasing short average life
securities has enabled BancGroup to take advantage of historically wide spreads to short term funding costs. The short funding of investment purchases improves the overall risk position as it partially mitigates the risk to falling rates associated
with the banks asset sensitivity (See Interest Rate Sensitivity Section and discussion of net interest income).




15




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##### Table of Contents




Loans and Mortgage Loans Held for Sale:





Loans, net of unearned income, have increased $366.4 million (3.7%) from June 30, 2001 but have remained relatively flat since December 31, 2001. The increase in loans from June 30, 2001 was
primarily due to a $859.2 million increase in Real Estate Construction loans partially offset by a $296.6 million decrease in Real Estate Residential loans and a $120.4 million decrease in Real Estate Commercial loans.





As identified in the table below, there was a change in the loan mix from December 31, 2001. Although growth in the overall loan portfolio remained relatively
flat, Real Estate Construction loans increased $336.5 million while Mortgage Warehouse Lending loans decreased $357.0 million. Volume in the mortgage warehouse lending unit had been abnormally high at December 31, 2001 due to increases in mortgage
refinancing activity occasioned by all time lows in mortgage rates for a period during the fourth quarter of 2001.





GROSS LOANS BY CATEGORY (Dollars in thousands)

June 30, 2002

December 31, 2001

June 30, 2001Commercial, financial, and agricultural

$
1,088,901

$
1,145,409

$
1,245,957Real estate-commercial


3,504,157


3,417,517


3,624,522Real estate-construction


2,632,196


2,295,675


1,773,029Real estate-residential


1,887,384


1,942,821


2,183,981Installment and consumer


243,323


240,836


259,948Mortgage warehouse lending


929,432


1,286,399


857,450Other


84,650


39,019


58,526Total Loans

$
10,370,043

$
10,367,676

$
10,003,413





Residential real estate loans represent 18.2% of total loans at June 30, 2002 compared to
18.7% at December 31, 2001 and 21.8% at June 30, 2001. This decrease is primarily due to a drop in demand for adjustable rate mortgages as more borrowers are looking for long-term fixed rate loans, which the Company originates, but sells in the
secondary market. Substantially all of these loans are adjustable rate first mortgages on single-family, owner-occupied properties, and therefore, have minimal credit risk and lower interest rate sensitivity. BancGroup has a history of successfully
lending in the residential real estate market and its quality ratios remain favorable in this portfolio segment. Annualized year to date net charge-offs to average loans for the residential real estate portfolio were 0.06% at June 30, 2002 compared
to 0.11% for all of 2001.




16




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Commercial loans collateralized by real estate and construction loans increased approximately $86.6
million and $336.5 million, respectively from December 31, 2001. Commercial loans collateralized by real estate decreased $120.4 million from June 30, 2001 while construction loans increased $859.2 million from the same period.





Management believes that any existing distribution of loans, whether geographically, by industry, or by borrower, does not expose BancGroup to
unacceptable levels of risk. The current distribution of loans remains diverse in location, size, and collateral function. Our diversity, in addition to our emphasis on quality underwriting, serves to reduce the risk of losses. The following chart
reflects the geographic diversity and industry distribution of Construction and Commercial Real Estate loans as of June 30, 2002.




17




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CONSTRUCTION & COMMERCIAL REAL ESTATE


GEOGRAPHIC DIVERSITY AND INDUSTRY DISTRIBUTION


JUNE 30, 2002





(Dollars in thousands)



Construction





CommercialReal EstateAverage Loan Size



$
522





$
508Geographic DiversityAlabama



$
336,386





$
881,640Georgia




423,371






463,856Florida




1,254,392






1,528,443Texas




344,897






197,105Nevada




155,085






162,805Other




118,065






270,308Total



$
2,632,196





$
3,504,157





Industry Distribution

% of Industry Distribution
to




% of Industry Distribution
toConstruction Portfolio


Total Portfolio




Commercial Real Estate Portfolio


Total PortfolioLand Only

21
%

5
%

Retail

18
%

6
%1-4 Family Residential

21
%

5
%

Office

16
%

5
%Development

19
%

5
%

Multi-Family

13
%

5
%Condominium

13
%

3
%

Lodging

11
%

4
%Multi-Family

7
%

2
%

Office/Warehouse

7
%

2
%Office

5
%

1
%

Nursing Home

5
%

2
%Other (13 types)

14
%

4
%

Other (11 types)

30
%

10
%Total Construction

100
%

25
%

Total Commercial Real Estate

100
%

34
%





Characteristics of the 75 Largest Construction and Commercial Real Estate Loans


Construction


Commercial Real Estate75 Largest Loans Total







$
1,027,163


$
775,562% of 75 largest loans to category total








39.0
%


22.1
%Average Loan to Value Ratio (75 largest loans)








67
%


71
%Debt Coverage Ratio (75 largest loans)








N/A



1.35x





Substantially all Construction and Commercial Real Estate loans have personal guarantees
of the principals involved. Owner-occupied Commercial Real Estate portfolio totals represented 23% of the total Commercial Real Estate portfolio at June 30, 2002.




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BancGroup does not have a syndicated lending department; however, the Company has 27 credits with
commitments (funded and unfunded) of $554 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 under $75 million (which is a mortgage warehouse facility), with the smallest credit being approximately $108,000. As of June 30, 2002, $350 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 each of these borrowers. These commitments are comprised of the following:





|· |  | 22% - commercial real estate projects located within existing markets
|- |  | ---------------------------------------------------------------------

|· |  | 10%- international credits which are primarily unfunded short-term commitments to tier one correspondent banks
|- |  | --------------------------------------------------------------------------------------------------------------

|· |  | 59% - mortgage warehouse lines to eight large institutions (the mortgage warehouse lending department conducts its own audits of these borrowers)
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|· |  | 9% - operating facilities to two large national corporations headquartered in the Florida markets and one large Alabama corporation headquartered in Montgomery,
Alabama
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Management believes that these are sound participations involving credits that fit within Colonials
lending philosophy and meet its conservative underwriting guidelines.




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ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES





Allocations of the allowance for loan losses are made on an individual loan basis for all loans rated less than satisfactory with a percentage allocation for the remaining portfolio. The
allocation of the remaining allowance represents an approximation of the reserves for each category of loans based on managements evaluation of the respective historical charge-off experience and risk within each loan type.





(Dollars in thousands)

June 30, 2002

Percent of Loans to Total Loans


December 31, 2001

Percent of Loans to Total Loans


June 30, 2001

Percent of Loans to Total LoansBalance at end of periodApplicable to:Commercial, financial, and agricultural

$
35,850

10.5
%

$
33,326

11.1
%

$
34,502

12.5
%Real estate-commercial


54,783

33.8
%


50,393

33.0
%


47,265

36.2
%Real estate-construction


23,075

25.4
%


17,256

22.1
%


14,679

17.7
%Real estate-mortgage


9,437

18.2
%


9,714

18.7
%


10,920

21.8
%Installment and consumer


2,881

2.3
%


2,390

2.3
%


3,022

2.6
%Mortgage warehouse lending


2,324

9.0
%


3,216

12.4
%


2,144

8.6
%Other


3,976

0.8
%


5,905

0.4
%


4,110

0.6
%TOTAL

$
132,326

100.0
%

$
122,200

100.0
%

$
116,642

100.0
%





The ratio of annualized net charge-offs to average loans was 0.19%, 0.34%, and 0.28% for
the second quarter of 2002, the fourth quarter of 2001, and the second quarter of 2001, respectively. The ratio of annualized net charge-offs to average loans was 0.22% year to date at June 30, 2002 compared to 0.28% for all of 2001 and 0.22% year
to date at June 30, 2001, respectively. As a result of the Companys localized lending strategies and early identification of potential problem loans, BancGroups net charge-offs have been consistently low compared to industry and peer
data.




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##### Table of Contents

SUMMARY OF LOAN LOSS EXPERIENCE





(Dollars in thousands)

June 30, 2002


December 31, 2001


June 30, 2001Allowance for loan lossesJanuary 1

$
122,200


$
110,055


$
110,055Charge-offs:Commercial, financial, and agricultural


5,989



14,731



7,093Real estate-commercial


3,161



9,354



2,578Real estate-construction


731



292



45Real estate-residential


1,787



3,148



1,488Installment and consumer


1,565



4,049



1,553Other


418



1,155



443Total charge-offs


13,651



32,729



13,200Recoveries:Commercial, financial, and agricultural


434



698



409Real estate-commercial


440



404



250Real estate-construction


61



9



8Real estate-residential


355



565



297Installment and consumer


912



1,999



1,206Other


164



330



108Total recoveries


2,366



4,005



2,278Net charge-offs


11,285



28,724



10,922Allowance added from bank acquisitions


3,437



1,296



567Addition to allowance charged to operating expense


17,974



39,573



16,942Allowance for loan losses-end of period

$
132,326


$
122,200


$
116,642Net charge-offs as a percent of average net loans(annualized basis):Quarter to date


0.19
%


0.34
%


0.28
%Year to date


0.22
%


0.28
%


0.22
%





The following schedule reflects BancGroups 325% coverage of nonperforming loans
(nonaccrual and renegotiated) by the allowance for loan losses. While management has not targeted any specific coverage ratio in excess of 100%, management is committed to maintaining adequate reserve levels to absorb estimated losses present in the
loan portfolio.




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##### Table of Contents




NONPERFORMING ASSETS ARE SUMMARIZED BELOW





(Dollars in thousands)

June 30, 2002


December 31, 2001


June 30, 2001Aggregate loans for which interest is not being accrued

$
39,452


$
49,675


$
59,019Aggregate loans renegotiated to provide a reduction or deferral of interest or principle because of deterioration in the
financial condition of the borrower


1,206



1,507



1,137Total nonperforming loans *


40,658



51,182



60,156Other real estate owned and repossessions


21,767



15,553



10,823Total nonperforming assets *

$
62,425


$
66,735


$
70,979Aggregate loans contractually past due 90 days for which interest is being accrued

$
15,583


$
28,249


$
20,080Net charge-offs quarter-to-date

$
4,952


$
8,602


$
7,366Net charge-offs year-to-date

$
11,285


$
28,724


$
10,922Total nonperforming assets as a percent of net loans and other real estate


0.60
%


0.64
%


0.71
%Allowance as a percent of net loans


1.28
%


1.18
%


1.17
%Allowance as a percent of nonperforming assets *


212
%


183
%


164
%Allowance as a percent of nonperforming loans *


325
%


239
%


194
%





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




Nonperforming assets decreased to $62.4 million or 0.60% of net loans and other real estate at June 30, 2002, compared to $66.7 million or 0.64% at December 31,
2001. Management continuously monitors and evaluates recoverability of problem assets and adjusts loan loss reserves accordingly. The loan loss reserve was 1.28% of loans at June 30, 2002 compared to 1.18% at December 31, 2001 and 1.17% at June 30,
2001. 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 $1,000,000) individual credits.





Management, through its loan officers, internal credit review
staff and external examinations by regulatory agencies, has identified approximately $288 million of loans, which have been placed, on a watch list. The status of these loans is reviewed at least monthly by loan officers and annually by
BancGroups centralized credit review function and by regulatory agencies. In connection with such reviews, collateral values are updated where considered necessary. If collateral values are judged insufficient or other sources of repayment
inadequate, the loans are reduced to estimated recoverable amounts through increases in reserves allocated to the loans or charge-offs. As of June 30, 2002, substantially all of these loans are current with their existing repayment terms. Management
believes that classification of such loans as watch list well in advance of their reaching a delinquent status allows the




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Company the greatest flexibility in correcting problems and providing adequate reserves. Given the
reserves and the ability of the borrowers to comply with the existing repayment terms, management believes any exposure from these loans has been adequately addressed at the present time.





Nonperforming loans represent all material credits for which management has serious doubts as to the ability of the borrowers to comply with the loan repayment terms. Management also expects
that the resolution of these problem credits as well as other performing loans will not materially impact future operating results, liquidity or capital resources. The recorded investment in impaired loans at June 30, 2002 was $34.0 million and
these loans had a corresponding valuation allowance of $13.0 million.





LIQUIDITY:





BancGroup has addressed its liquidity and interest rate sensitivity through its policies and structure for asset/liability management. It has created the
Asset/Liability Management Committee (ALMCO), the objective of which is to optimize the net interest margin while assuming reasonable business risks. ALMCO annually establishes operating constraints for critical elements of
BancGroups business, such as liquidity and interest rate sensitivity. ALMCO constantly monitors performance and takes action in order to meet its objectives.





A prominent focus of ALMCO is maintenance of adequate liquidity. Liquidity is the ability of an organization to meet its financial commitments and obligations on a timely basis. These commitments and
obligations include credit needs of customers, withdrawals by depositors, repayment of debt when due and payment of operating expenses and dividends.





Core deposit growth is a primary focus of BancGroups funding and liquidity strategy. Efforts to emphasize relationship deposit growth are having a positive impact. Average retail deposits in the second quarter 2002, excluding
broker and time deposits, grew 21% over the same quarter in 2001, 12% growth excluding acquisitions. The non-interest bearing portion of these retail deposits grew 15% excluding acquisitions over the same period and improved the non-interest
bearing deposit mix from 14% to 17% of total retail deposits. As there was a decreased emphasis on higher cost time deposits versus more core deposits, average retail time deposits decreased 10% compared to second quarter 2001, a 15%
decrease excluding acquisitions. This improved the non-time deposit share of retail deposits to 51% in second quarter 2002 from 44% in second quarter 2001.





In addition to funding growth through core deposits, BancGroup has worked to expand the availability of short and long term wholesale funding sources. As of June 30, 2002 the Bank utilized 58% of the total wholesale funding
sources estimated to be available. Management believes its liquidity sources and funding strategies are adequate given the nature of its asset base and current loan demand.




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##### Table of Contents




INTEREST RATE SENSITIVITY:





ALMCOs goal is to minimize volatility in the net interest margin from changes in interest rates by taking an active role in managing the level, mix, repricing characteristics and maturities of
assets and liabilities and by analyzing and taking action to manage mismatch and basis risk. ALMCO monitors the impact of changes in interest rates on net interest income using several tools, including static rate sensitivity reports, or Gap
reports, and income simulation modeling under multiple rate scenarios.





The following table represents the output from the Companys
most recent simulation model, when the Fed Funds Rate was 1.75%, and measures the impact on net interest income of an immediate and sustained change in interest rates in 100 basis point increments for the 12 calendar months following the date of the
change. This twelve month projection of Net Interest Income under these scenarios is compared to both the twelve month Net Interest Income projection with rates unchanged and the first half 2002 net interest income annualized.





Percentage Change in 12 Month Projected (1):Fed Funds Rate


Net Interest Income


Net Interest Income Versus 1st Half 2002 Net Interest Income AnnualizedBasis Points change+200

3.75
%

4
%

10
%+100

2.75


2


7No Change

1.75





5100

.75


(2
)

3


---

|(1) |  | The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions BancGroup could undertake in response to changes in interest rates.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




This table shows that under these rate shock scenarios, net interest income would be expected to improve versus
recent results, and would benefit most from rising rates. Although the benefit to rising rates is greater, the risk to declining rates is within company guidelines. The projections in the table are based on rate shocks where all rate indices are
changed by the same amount. Therefore these simulations do not take into account the risk of yield curve shifts or change in the basis risk or spread between various rate indices.




24




---

##### Table of Contents




The following table summarizes BancGroups Maturity / Rate Sensitivity or Gap at June 30, 2002.





(Dollars in millions)





0-90 days


0-365 daysRate Sensitive Assets (RSA)

$
6,807


$
8,290Rate Sensitive Liabilities (RSL)


4,347



7,016Cumulative Gap (RSA-RSL)


2,460



1,263Cumulative Gap Ratio(Cum. Gap / Total Assets)


18
%


9
%





The last two lines of the proceeding table represents interest rate sensitivity gap which
is the difference between rate sensitive assets and rate sensitive liabilities. BancGroups somewhat asset-sensitive position is primarily the result of growth in floating rate loans, run off in fixed rate loans and extension of the CD
portfolios weighted average term.





In reviewing the table, it should be noted that the balances are shown for a specific point in
time and, because the interest sensitivity position is dynamic, it can change significantly over time. For all interest earning assets and interest bearing liabilities, variable rate assets and liabilities are reflected in the time interval of the
assets or liabilities earliest repricing date. Fixed rate assets and liabilities have been allocated to various time intervals based on contractual repayment and prepayment assumptions. Furthermore, the balances reflect contractual repricing
of the deposits and managements position on repricing certain deposits where management discretion is permitted. Certain demand deposit accounts and regular savings accounts have been classified as repricing beyond one year in accordance with
regulatory guidelines. While these accounts are subject to immediate withdrawal, experience and analysis have shown them to be relatively rate insensitive.





CAPITAL 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 ratio target range is 30-45%. Dividend rates are determined by the Board of Directors in consideration of several factors including current and projected
capital ratios, liquidity and income levels and other bank dividend yields and payment ratios.





The amount of a cash dividend, if any,
rests within 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




25




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##### Table of Contents

paid only out of capital surplus or net profits for the fiscal year in which the dividend is declared or the preceding fiscal year.





BancGroup also has access to equity capital markets through both public and private issuances. Management considers these sources and
related return in addition to internally generated capital in evaluating future expansion or acquisition opportunities.





The Federal
Reserve Board has issued guidelines identifying minimum Tier I leverage ratios relative to total assets and minimum capital ratios relative to risk-adjusted assets. The minimum leverage ratio is 3% but is increased from 100 to 200 basis points based
on a review of individual banks by the Federal Reserve. The minimum risk adjusted capital ratios established by the Federal Reserve are 4% for Tier I and 8% for total capital. BancGroups actual capital ratios and the components of capital and
risk adjusted asset information (subject to regulatory review) as of June 30, 2002 are stated below:





Capital (in thousands):Tier I Capital:Shareholders equity (excluding unrealized gain on securities available for sale and intangibles, plus Trust
Preferred Securities)

$     924,689Tier II Capital:Allowable loan loss reserve

132,326Subordinated debt

261,17045% of net unrealized gains on available for sale equity securities

206Total Capital

$  1,318,391Risk Adjusted Assets (in thousands)

$10,956,363Total Assets (in thousands)

$13,672,834





June 30, 2002

December 31, 2001Tier I leverage ratio

7.10%

6.24%Risk Adjusted Capital Ratios:Tier I Capital Ratio

8.44%

7.39%Total Capital Ratio

12.03%

10.91%





BancGroup has increased capital gradually through normal earnings retention as well as
through stock registrations to capitalize acquisitions. The increase in the Tier I Capital Ratio and Total Capital Ratio is primarily due to the issuance of $100 million of Trust Preferred Securities during the first quarter of 2002. These
securities provide additional flexibility for liquidity, capital management and growth.




26




---

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Management continuously monitors its capital levels in order to ensure it is taking the necessary steps
to support future internally generated growth and fund the quarterly dividend rates that are anticipated to be $0.13 per share each quarter.




27




---

##### Table of Contents




AVERAGE VOLUME AND RATE


(UNAUDITED)


(Dollars in thousands)

Three Months Ended June 30,2002


2001Average Volume

Interest

Rate


Average Volume

Interest

RateASSETSLoans, net (1)

$
9,402,534

$
157,061

6.70
%

$
9,499,614

$
194,882

8.22
%Mortgage warehouse lending


828,127


9,136

4.36
%


862,074


13,306

6.11
%Mortgage loans held for sale


20,129


326

6.48
%


22,788


381

6.69
%Investment securities and securities available for sale and other interest-earning assets (2)


2,143,556


29,336

5.47
%


1,513,085


25,116

6.64
%Total interest-earning assets (1)


12,394,346

$
195,859

6.33
%


11,897,561

$
233,685

7.87
%Non-earning assets


850,526








698,965Total assets

$
13,244,872







$
12,596,526LIABILITIES AND SHAREHOLDERS EQUITY:Interest-bearing non-time deposits

$
2,901,762

$
9,701

1.34
%

$
2,494,349

$
15,777

2.54
%Time deposits


4,218,130


36,261

3.45
%


4,816,324


71,388

5.94
%Short-term borrowings


1,743,501


7,964

1.83
%


1,719,105


19,373

4.52
%Long-term debt


1,940,231


25,071

5.18
%


1,447,793


21,546

5.97
%Total interest-bearing liabilities


10,803,624

$
78,997

2.93
%


10,477,571

$
128,084

4.90
%Noninterest-bearing demand deposits


1,394,292








1,209,693Other liabilities


77,394








98,574Total liabilities


12,275,310








11,785,838Shareholders equity


969,562








810,688Total liabilities and shareholders equity

$
13,244,872







$
12,596,526RATE DIFFERENTIAL







3.40
%







2.97
%NET INTEREST INCOME AND NET YIELD ON INTEREST-EARNING ASSETS (3)




$
116,862

3.77
%




$
105,601

3.55
%





| | (1) |  | Loans classified as non-accruing are included in the average volume calculation. Interest earned and average rates on non-taxable loans are reflected on a tax
equivalent basis. This interest is included in the total interest for loans. Tax equivalent interest earned is actual interest earned times 145%.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is
equal to actual interest earned times 145%. Tax equivalent average rate is tax equivalent interest earned divided by average volume.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | Net interest income divided by average total interest-earning assets.
| | --- |  | ---------------------------------------------------------------------



28




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##### Table of Contents




AVERAGE VOLUME AND RATE


(UNAUDITED)


(Dollars in thousands)

Six Months Ended June 30,2002


2001Average Volume

Interest

Rate


Average Volume

Interest

RateASSETSLoans, net (1)

$
9,249,691

$
310,335

6.76
%

$
9,442,372

$
399,351

8.52
%Mortgage warehouse lending


849,226


18,516

4.34
%


683,843


22,278

6.48
%Mortgage loans held for sale


20,375


678

6.66
%


17,417


577

6.63
%Investment securities and securities available for sale and other interest-earning assets (2)


2,050,716


56,861

5.55
%


1,552,829


52,588

6.83
%Total interest-earning assets (1)


12,170,008

$
386,390

6.39
%


11,696,461

$
474,794

8.16
%Non-earning assets


807,817








708,803Total assets

$
12,977,825







$
12,405,264LIABILITIES AND SHAREHOLDERS EQUITY:Interest-bearing non-time deposits

$
2,792,918

$
18,090

1.31
%

$
2,463,154

$
35,662

2.92
%Time deposits


4,193,988


76,101

3.66
%


4,841,376


147,029

6.12
%Short-term borrowings


1,737,054


15,797

1.83
%


1,678,893


42,823

5.14
%Long-term debt


1,872,272


49,153

5.28
%


1,348,135


40,156

6.00
%Total interest-bearing liabilities


10,596,232

$
159,141

3.03
%


10,331,558

$
265,670

5.18
%Noninterest-bearing demand deposits


1,372,553








1,168,293Other liabilities


86,181








105,789Total liabilities


12,054,966








11,605,640Shareholders equity


922,859








799,624Total liabilities and shareholders equity

$
12,977,825







$
12,405,264RATE DIFFERENTIAL







3.36
%







2.98
%NET INTEREST INCOME AND NET YIELD ON INTEREST-EARNING ASSETS (3)




$
227,249

3.75
%




$
209,124

3.59
%


| | (1) |  | Loans classified as non-accruing are included in the average volume calculation. Interest earned and average rates on non-taxable loans are reflected on a tax
equivalent basis. This interest is included in the total interest for loans. Tax equivalent interest earned is actual interest earned times 145%.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned is
equal to actual interest earned times 145%. Tax equivalent average rate is tax equivalent interest earned divided by average volume.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | Net interest income divided by average total interest-earning assets.
| | --- |  | ---------------------------------------------------------------------



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##### Table of Contents




ANALYSIS OF INTEREST INCREASES/(DECREASES)


(UNAUDITED)


(Dollars in thousands)

Three Months Ended June 30, 2002Change from 2001Increase/(Decrease) Attributed
to (1)Total


Volume


RateINTEREST INCOME:Loans, net

$
(37,821
)

$
(2,252
)

$
(35,569
)Mortgage Warehouse Lending


(4,170
)


(515
)


(3,655
)Mortgage loans held for sale


(55
)


(43
)


(12
)Investment securities and securities for sale and other interest-earning assets


4,220



27,905



(23,685
)Total interest income(2)


(37,826
)


25,095



(62,921
)INTEREST EXPENSE:Interest-bearing deposits

$
(41,203
)

$
(2,718
)

$
(38,485
)Short-term borrowings


(11,409
)


1,778



(13,187
)Long-term debt


3,525



19,005



(15,480
)Total interest expense


(49,087
)


18,065



(67,152
)Net interest income

$
11,261


$
7,030


$
4,231





| | (1) |  | Increases (decreases) are attributed to volume changes and rate changes on the following basis: Volume Change = change in volume times old rate. Rate Change =
change in rate times old volume. The Rate/Volume Change = change in volume times change in rate, and it is allocated between Volume Change and Rate Change at the ratio that the absolute value of each of those components bear to the absolute value of
their total.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned
is: actual interest earned times 145%. Tax equivalent average rate is: tax equivalent interest earned divided by average volume.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents




ANALYSIS OF INTEREST INCREASES/(DECREASES)


(UNAUDITED)


(Dollars in thousands)

Six Months Ended June 30, 2002Change from 2001Increase/(Decrease) Attributed
to (1)Total


Volume


RateINTEREST INCOME:Loans, net

$
(89,016
)

$
(7,993
)

$
(81,023
)Mortgage Warehouse Lending


(3,762
)


10,782



(14,544
)Mortgage loans held for sale


101



98



3Investment securities and securities for sale and other interest-earning assets


4,273



27,796



(23,523
)Total interest income(2)


(88,404
)


30,683



(119,087
)INTEREST EXPENSE:Interest-bearing deposits

$
(88,500
)

$
(7,280
)

$
(81,220
)Short-term borrowings


(27,026
)


4,267



(31,293
)Long-term debt


8,997



21,763



(12,766
)Total interest expense


(106,529
)


18,750



(125,279
)Net interest income

$
18,125


$
11,933


$
6,192


|(1) |  | Increases (decreases) are attributed to volume changes and rate changes on the following basis: Volume Change = change in volume times old rate. Rate Change =
change in rate times old volume. The Rate/Volume Change = change in volume times change in rate, and it is allocated between Volume Change and Rate Change at the ratio that the absolute value of each of those components bear to the absolute value of
their total.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Interest earned and average rates on obligations of states and political subdivisions are reflected on a tax equivalent basis. Tax equivalent interest earned
is: actual interest earned times 145%. Tax equivalent average rate is: tax equivalent interest earned divided by average volume.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NET INTEREST INCOME:





Net interest income is the foremost component of Colonials earnings and 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 $11.3 million to $116.9 million for
the quarter ended June 30, 2002 from $105.6 million for the quarter ended June 30, 2001. Net interest income on a tax equivalent basis increased $18.1 million to $227.2 million for the six months ended June 30, 2002 from $209.1 million for the same
period in 2001. The net interest margin improved 22 basis points to 3.77% for the second quarter of 2002 versus 3.55% for the second quarter of 2001. Year to date net interest margin improved 16 basis points to 3.75% at June 30, 2002 from 3.59% at
June 30, 2001. This reflects the margins adjustment to a more stable rate environment after the rapid rate declines in 2001, when the Federal Reserve cut the funds rate 11 times by a total of 475 basis points. The last reduction in the fed
funds rate by the Federal Reserve was on December 11, 2001 to 1.75%.




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##### Table of Contents




The Companys average loan yields for the quarter declined 152 basis points while interest bearing
liabilities declined 197 basis points as compared to the second quarter of 2001. The decline in interest bearing liabilities was driven by a 249 basis point decline in the average rate on time deposits to 3.45% from 5.94% in the second quarter of
2001. Average year to date loan yields have decreased 176 basis points while interest bearing liabilities declined 215 basis points as compared to the same period in 2001. The decline in interest bearing liabilities was driven by a 246 basis point
decline in the average rate on time deposits to 3.66% from 6.12%. Growth in core deposits also provided an improved mix of funding costs.





While the securities portfolio has increased, its yield has decreased 117 basis points from 6.64% for the second quarter of 2001 to 5.47% for the second quarter of 2002. Yields on new investments are lower than those of securities
running off and the existing portfolio. Additionally, long term rates, including mortgage rates, have declined since the end of the first quarter resulting in increased prepayments of Mortgage Backed Securities (MBS). Since most MBS were purchased
at a premium, faster than expected pre-payments accelerate the amortization of that premium and cause downward pressure on yields in the portfolio.





The net interest margin may have peaked and may fall to a lower level than previously expected. The reasons for this are tied closely to the slope of the yield curve. Most of the CD (certificate of deposit) portfolio has now repriced
from the higher rate levels of a year ago. However, as CDs have matured, customers have been attracted to the higher rates available on longer maturities. This has increased the rollover rate on CDs and lengthened the average remaining
term on the CD portfolio to 11.8 months at June 30, 2002 compared to 7.5 months at December 31, 2001. Another factor slowing additional margin improvement, which is also a function of the steep yield curve, is a continued shift in customer
preferences for floating rate loans.





As long term rates have declined since the end of the first quarter, refinancing activity has
increased. Mortgage warehouse volumes are expected to increase, and as this low risk line of business has a lower margin, this will increase net interest income while having a negative impact on the net interest margin ratio. Lower mortgage rates
are expected to result in continued increase of prepayments on mortgage backed loans and securities, thus lowering the yield on both portfolios.





LOAN LOSS PROVISION:





The provision for loan losses for the quarter ended June 30, 2002 was $8,496,000 compared to
$7,478,000 for the same period in 2001. Year to date loan loss provision was $17,974,000 and $16,942,000 for the six months ended June 30, 2002 and 2001, respectively. The Company continues to focus its efforts on relationship based lending to known
customers in its local market areas.





The current allowance for loan losses provides a 325% coverage of nonperforming loans compared to
239% at December 31, 2001 and 194% at June 30, 2001. See managements discussion of loan quality and the allowance for loan losses presented in the Financial Condition section of this report.




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##### Table of Contents




NONINTEREST INCOME:





Noninterest income excluding securities gains increased $1.3 million (6%) and $4.6 million (11%) for the three months and six months ended June 30, 2002 compared to the same period in 2001,
respectively. Sources of noninterest income include financial planning services services, electronic banking services, mortgage origination income, and cash management services included in service charges on deposit accounts.





Financial planning services experienced a $152,000 (7%) increase in fee income during the three months ended June 30, 2002 over the same period in
2001 and a $570,000 (13%) increase for the six months ended June 30, 2002 over 2001. As a result of investor uncertainty in the economy, the Company has experienced a decline in securities sales; however, this decline was more than offset by an
increase in fixed rate annuity sales.





BancGroup continues to expand electronic banking services through its ATM network, business and
personal check card services, and internet banking. Noninterest income from electronic banking services increased $480,000 (29%) for the three months ended June 30, 2002 when compared to the same period in 2001 and $798,000 (25%) for the six months
ended June 30, 2002 over 2001 through increased penetration of customer base and the introduction of the Colonial Bank Business Check Card.





Mortgage origination fees increased $810,000 (39%) for the three months ended June 30, 2002 compared to the three months ended June 30, 2001 and $1.5 million (43%) for the six months ended June 30, 2002 over 2001. These increases are
the result of additional production of one-to-four family mortgage loans sold in the secondary market as well as increased refinancing activity during the fourth quarter of 2001 that carried into the first half of 2002.





Service charges on deposit accounts increased $364,000 (3%) for the three months ended June 30, 2002 over the same period in 2001 and $1.5 million (7%) for the
six months ended June 30, 2002 over 2001. These increases are the result of normal deposit account related fees including an increase in cash management fees of approximately $169,000 (24%) for the second quarter and $352,000 (26%) year to date over
the same periods in 2001 and additional branches in operation for the three months and six months ended June 30, 2002 when compared to the same periods in 2001.





NONINTEREST EXPENSES:





In support of the Companys sales culture, BancGroup continues to make
strategic investments in its product and service offerings, technology systems, sales incentives and branch network to enhance the Companys competitive presence in existing markets. Some of these investments include improved automation of
branch delivery systems, enhanced internet banking and wire transfer systems and an image processing system. BancGroups philosophy is to make strategic investments in the tools




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##### Table of Contents




employees need to optimize its customers financial success. Accordingly, noninterest expense
excluding amortization of intangibles increased 8% for the quarter ended June 30, 2002 and 7% for the six months ended June 30, 2002 as compared to the same periods in 2001. This increase also includes approximately $2.6 million in additional
operating expenses from the First Mercantile acquisition.





BancGroups net overhead (total noninterest expense less noninterest
income, excluding security gains, and amortization of intangibles) was $52.9 million for the three months ended June 30, 2002 compared to $48.7 million for the three months ended June 30, 2001, respectively. Year to date net overhead was $100.3
million at June 30, 2002 compared to $95.8 million at June 30, 2001.





Total noninterest expense increased $4.6 million for the second
quarter of 2002 compared to the second quarter of 2001 and year to date noninterest expense increased $6.7 million over the same period in 2001. Annualized noninterest expense excluding amortization of intangibles to average assets was 2.29% for the
three months ended June 30, 2002 compared to 2.23% for the three months ended June 30, 2001. Year to date annualized noninterest expense excluding amortization of intangibles to average assets was 2.25% for the six months ended June 30, 2002
compared to 2.21% at June 30, 2001.





The increase in bank related expenses is primarily due to an increase of approximately $3.5 million
and $5.9 million for the three months and six months ended June 30, 2002 over the same periods in 2001, respectively, in salaries and employee benefits. These salary increases are the result of acquisitions completed during the current and previous
year, additional branches opened, normal salary increases, additional incentive related compensation, and increased pension costs.





In
order to improve the Companys market presence, three of its regional headquarters were relocated in 2001. The Company also acquired 13 branches from Union Planters in October 2001 and completed the acquisition of First Mercantile Bank with
five branches in March 2002. Primarily as a result of these efforts, occupancy and equipment expense for the three months and six months ended June 30, 2002 increased $747,000 and $1.6 million, respectively, when compared to the same periods in
2001.





Intangible asset amortization decreased $935,000 and $2.4 million for the three months and six months ended June 30, 2002,
respectively, over the same periods in 2001 due primarily to implementation of SFAS No. 142 discussed in Note J  Intangible Assets.





The remaining increases in other expense of $1.3 million and $1.6 million for the three months and six months ended June 30, 2002 over the same periods in 2001, respectively, are the result of the aforementioned acquisitions,
improvements to the data communications network, and other normal operating expenses.





In July of 2001 Colonial launched the Eagle
project. The objective of the Eagle project is to implement retail delivery solutions that should enhance our ability to produce sales, provide exceptional service and promote profitable customer relationships while gaining operational efficiencies.
We expect to begin implementation of new retail delivery systems in late third quarter 2002 with additional Internet banking capabilities and an enhanced call center, followed in late fourth quarter by new branch service delivery and loan delivery
systems. The new retail delivery system is expected to be fully implemented by the end of 2003.




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##### Table of Contents




PROVISION FOR INCOME TAXES:





BancGroups provision for income taxes is based on an approximate 34.5% and 36.0%, estimated annual effective tax rate for the years 2002 and 2001, respectively. The provision for income taxes for
the three months ended June 30, 2002 and 2001 was $18.6 million and $17.3 million, respectively. The year to date provision for income taxes ended June 30, 2002 and 2001 was $37.0 million and $33.7 million, respectively.





Item III    Quantitative and Qualitative Disclosures About Market Risk





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





Part II    Other Information





|ITEM |  | 1:    
Legal Proceedings  See Note B  COMMITMENTS AND CONTINGENCIES ATPART 1
|---- |  | ------------------------------------------------------------------------------




ITEM 2:    Changes in Securities and Use of Proceeds  N/A





ITEM
3:    Defaults Upon Senior Securities  N/A





ITEM
4:    Submission of Matters to a Vote of Security Holders 





BancGroup held its 2002
annual Shareholders Meeting on April 17, 2002. The results of this meeting were disclosed in BancGroups quarterly filing on Form 10-Q for the quarter ended March 31, 2002.





ITEM 5:    Other Information  None





|ITEM |  | 6:    
Exhibits and Reports on Form 8-K
|---- |  | ---------------------------------------




| | (a) |  | Exhibits required by Item 601 of Regulation S-K  None
| | --- |  | ------------------------------------------------------




| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------




| | 1. |  | Form 8-K  was furnished on July 16, 2002 as Regulation F-D Disclosure in regard to second quarter 2002 earnings.
| | -- |  | -----------------------------------------------------------------------------------------------------------------




| | 2. |  | Form 8-K  was furnished on May 28, 2002 as Regulation F-D Disclosure in regard to the signing of a definitive agreement to acquire Palm Beach National
Holding Company.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents




| | 3. |  | Form 8-K  was furnished on April 29, 2002 as Regulation F-D Disclosure in regard to a presentation made by management at the Gulf South Banking Conference
on second quarter 2001 earnings.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | Form 8-K  was furnished on April 16, 2002 as Regulation F-D Disclosure in regard to first quarter 2002 earnings.
| | -- |  | -----------------------------------------------------------------------------------------------------------------




SIGNATURE





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Date:    August 14, 2002

THE COLONIAL BANCGROUP, INC.   By:     /s/    Sheila Moody Sheila Moody Its Chief Accounting Officer







36