Edgar Filing: COLONIAL BANCGROUP INC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __ to _

Commission File #0-07945

THE COLONIAL BANCGROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware 63-0661573
(State of Incorporation) (IRS Employer
Identification No.)
One Commerce Street
Suite 800
Montgomery, AL 36104 (334) 240-5000
(Address of principal (Telephone No.)
executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, Par Value $2.50 Registered on the New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

7 1/2% Convertible Subordinated Debentures, due 2011
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [X]

The aggregate market value of the voting stock of the registrant held by
non-affiliates as of February 20, 2002 based on the closing price of $14.15 per
share for Common Stock was $1,504,858,952. (For purposes of calculating this
amount, all directors, officers and principal shareholders of the registrant
are treated as affiliates).

Shares of Common Stock outstanding at February 20, 2002 were 115,395,315.

DOCUMENTS INCORPORATED BY REFERENCE

Document Part of Form 10-K
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Portions of Definitive Proxy Statement for 2001 Part III
Annual Meeting as specifically referred to
herein.
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PART I

Item 1. Business

General

The Registrant, The Colonial BancGroup, Inc. ("BancGroup") is a Delaware
corporation organized in 1974 as a bank holding company under the Bank Holding
Act of 1956, as amended (the "BHCA"). BancGroup was originally organized as
Southland Bancorporation, and its name was changed in 1981. In 1997, pursuant
to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
BancGroup consolidated its banking subsidiaries located in Georgia, Florida and
Tennessee into Colonial Bank, its banking subsidiary in Alabama.

The principal activity of BancGroup is to supervise and coordinate the
business of its subsidiaries and to provide them with capital and services.
BancGroup derives substantially all of its income from dividends received from
Colonial Bank. Various statutory provisions and regulatory policies limit the
amount of dividends Colonial Bank may pay without regulatory approval. In
addition, federal statutes restrict the ability of Colonial Bank to make loans
to BancGroup.

Bank Subsidiary

As of December 31, 2001 Colonial Bank had a total of 261 branches, with 123
branches in Alabama, 98 branches in Florida, 23 branches in Georgia, three
branches in Tennessee, three branches in Texas and 11 branches in Nevada (as of
March 28, 2002 BancGroup is expected to have 263 branches). Colonial Bank
conducts a general commercial banking business in its respective service areas.
Colonial Bank offers a variety of demand, savings and time deposit products as
well as extensions of credit through personal, commercial and mortgage loans
within each of its market areas. Colonial Bank also provides additional
services to its markets through cash management services, electronic banking
services, credit card and merchant services and wealth management services.
Wealth management services include trust services and the sales of various
types of investment products such as mutual funds, annuities, stocks, municipal
bonds and U.S. government securities. Colonial Bank exited the mortgage
servicing business in December 2000.

Colonial Bank encounters intense competition in its commercial banking
business, generally from other banks located in its respective metropolitan and
service areas. Colonial Bank competes for interest bearing funds with other
banks and with many issuers of commercial paper and other securities, which are
not banks. In the case of larger customers, competition exists with banks in
other metropolitan areas of the United States, many of, which are larger in
terms of capital resources and personnel. In the conduct of certain aspects of
its commercial banking business, Colonial Bank competes with savings and loan
associations, credit unions, mortgage banks, factors, insurance companies and
other financial institutions. At December 31, 2001, Colonial Bank accounted for
approximately 99.9% of BancGroup's consolidated assets.

The competitive environment for both Colonial Bank and BancGroup has been
affected by the enactment of the Gramm-Leach-Bliley Financial Services
Modernization Act ("Gramm-Leach") in 1999. This law, which became effective on
March 11, 2000, eliminated many barriers between investment banking, commercial
banking and insurance underwriting and sales. (See "Certain Regulatory
Matters.") Elimination of these barriers has created the potential for greater
competition for BancGroup and its subsidiaries, including Colonial Bank, by
increasing the number and type of competitors and by encouraging increased
consolidation within the financial services industry.

Nonbanking Subsidiaries

BancGroup has the following directly and wholly owned nonbanking
subsidiaries that are currently active. The Colonial BancGroup Building
Corporation, an Alabama corporation, was established primarily to own and lease
certain buildings and land used by Colonial Bank. Colonial Capital II, a
Delaware business trust, issued $70 million in trust preferred securities in
1997, which are guaranteed by BancGroup. Colonial Brokerage, Inc., a Delaware
Corporation, provides broker/dealer services and investment advice and became a
member of the National Association of Securities Dealers ("NASD") in September
2001.

Colonial Bank controls the following significant subsidiaries: CBG, Inc., a
Nevada corporation, owns certain trade names and trademarks which it licenses
to BancGroup and Colonial Bank for use in their businesses. CBG Investments,
Inc., a Nevada corporation, owns and manages investment securities. Colonial
Investment Services, Inc., an Alabama corporation; Colonial Investments
Services of Florida, Inc., a Florida corporation; Colonial Investment Services
of Tennessee, Inc., a Tennessee corporation and Colonial Investment Services of
Georgia, Inc., a Georgia corporation; Colonial Investment Services of Nevada,
Inc., a Nevada corporation, all of which offer various insurance products and
annuities for sale to the public. Colonial Asset Management, Inc., an Alabama
corporation, is an investment advisor registered under the Investment Advisors
Act of 1940.

At December 31, 2001, BancGroup and its subsidiaries employed 3,296 persons.
BancGroup's principal offices are located at and its mailing address is: One
Commerce Street, Post Office Box 1108, Montgomery, Alabama 36101. Its telephone
number is (334) 240-5000.

Certain Regulatory Considerations

BancGroup is a registered bank holding company subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). As such, it is subject to the BHCA and many of the Federal
Reserve's regulations promulgated thereunder.

Colonial Bank, an Alabama state chartered bank that is a member of the
Federal Reserve System, is subject to supervision and examination by the
Federal Reserve and the Alabama State Banking Department (the "Department").
The deposits of Colonial Bank are insured by the FDIC to the extent provided by
law. The FDIC assesses deposit insurance premiums the amount of which may, in
the future, depend in part on the condition of Colonial Bank. Moreover, the
FDIC may terminate deposit insurance of Colonial Bank under certain
circumstances. Both the Federal Reserve and the Department have jurisdiction
over a number of the same matters, including lending decisions, branching and
mergers.

One limitation under the BHCA and the Federal Reserve's regulations requires
that BancGroup obtain prior approval of the Federal Reserve before BancGroup
acquires, directly or indirectly, more than 5% of any class of voting
securities of another bank. Prior approval also must be obtained before
BancGroup acquires all or substantially all of the assets of another bank, or
before it merges or consolidates with another bank holding company. BancGroup
may not engage in "non-banking" activities unless it demonstrates to the
Federal Reserve's satisfaction that the activity in question is closely related
to banking and a proper incident thereto. Because BancGroup is a registered
bank holding company, persons seeking to acquire 25% or more of any class of
its voting securities must receive the approval of the Federal Reserve.
Similarly, under certain circumstances, persons seeking to acquire between 10%
and 25% also may be required to obtain prior Federal Reserve approval.

As a result of enactment in 1991 of the FDIC Improvement Act, banks are
subject to increased reporting requirements and more frequent examinations by
the bank regulatory agencies. The agencies also have the authority to dictate
certain key decisions that formerly were left to management, including
compensation standards, loan underwriting standards, asset growth, and payment
of dividends. Failure to comply with these standards, or failure to maintain
capital above specified levels set by the regulators, could lead to the
imposition of penalties or the forced resignation of management. If a bank
becomes critically undercapitalized, the banking agencies have the authority to
place an institution into receivership or require that the bank be sold to, or
merged with, another financial institution.

In September 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994. This legislation, among other things, amended
the BHCA to permit bank holding companies, subject to certain limitations, to
acquire either control or substantial assets of a bank located in states other
than that bank holding company's home state regardless of state law
prohibitions. This legislation became effective on

September 29, 1995. In addition, this legislation also amended the Federal
Deposit Insurance Act to permit, beginning on June 1, 1997 (or earlier where
state legislatures provided express authorization), the merger of insured banks
with banks in other states.

The officers and directors of BancGroup and Colonial Bank are subject to
numerous insider transaction restrictions, including limits on the amount and
terms of transactions involving Colonial Bank. There are a number of other laws
that govern the relationship between Colonial Bank and its customers. For
example, the Community Reinvestment Act is designed to encourage lending by
banks to persons in low and moderate-income areas. The Home Mortgage Disclosure
Act and the Equal Credit Opportunity Act attempt to minimize lending decisions
based on impermissible criteria, such as race or gender. The Truth-in-Lending
Act and the Truth-in-Savings Act require banks to provide certain disclosure of
relevant terms related to loans and savings accounts, respectively. Anti-tying
restrictions (which prohibit, for instance, conditioning the availability or
terms of credit on the purchase of another banking product) further restrict
Colonial Bank's relationships with its customers.

The bank regulatory agencies have broad enforcement powers over depository
institutions under their jurisdiction, including the power to terminate deposit
insurance, to impose fines and other civil and criminal penalties, and to
appoint a conservator or receiver if any of a number of conditions are met. The
Federal Reserve has broad enforcement powers over bank holding companies,
including the power to impose substantial fines and civil penalties.

In 1999, Gramm-Leach was signed into law and it became effective on March
11, 2000. The primary purpose of Gramm-Leach was to eliminate barriers between
investment banking and commercial banking and to permit, within certain
limitations, the affiliation of financial service providers. Generally,
Gramm-Leach (1) repealed the historical restrictions against, and eliminated
many federal and state law barriers to affiliations among banks, securities
firms, insurance companies and other financial service providers, (2) provided
a uniform framework for the activities of banks, savings institutions and their
holding companies, (3) broadened the activities that may be conducted by and
through national banks and other banking subsidiaries of bank holding
companies, (4) provided an enhanced framework for protecting the privacy of
consumers' information, (5) adopted a number of provisions related to the
capitalization, membership, corporate governance and other measures designed to
modernize the Federal Home Loan Bank System, (6) modified the laws governing
the implementation of the Community Reinvestment Act, and (7) addressed a
variety of other legal and regulatory issues affecting both day-to-day
operations and long-term activities of financial institutions.

More specifically, under Gramm-Leach, bank holding companies, such as
BancGroup, that meet certain management, capital, and Community Reinvestment
Act standards, are permitted to become financial holding companies and, by
doing so, to affiliate with securities firms and insurance companies and to
engage in other activities that are financial in nature, incidental to such
financial activities, or complementary to such activities. A bank holding
company may become a financial holding company if each of its subsidiary banks
is well capitalized under the FDIC Improvement Act prompt corrective action
provisions, is well managed and has at least a satisfactory rating under the
Community Reinvestment Act. The required filing is a declaration that the bank
holding company wishes to become a financial holding company and meets all
applicable requirements. BancGroup became a financial holding company on May
12, 2000.

No prior regulatory approval will be required for a financial holding
company to acquire a company, other than a bank or savings association, engaged
in activities permitted under Gramm-Leach. Activities cited by Gramm-Leach as
being financial in nature include:

.. securities underwriting, dealing and market making;

.. sponsoring mutual funds and investment companies;

.. insurance underwriting and agency;

.. merchant banking activities; and

.. activities that the Federal Reserve has determined to be closely related to
banking.

Other Subsidiary Regulation

Certain subsidiaries of Colonial Bank currently sell insurance products in
Alabama, Georgia, Florida, Tennessee, Texas, and Nevada. The sale of insurance
products is conducted in Colonial Bank branches, but, in accordance with
applicable law, are segregated from banking activities. Those states where
products are currently being sold allow the sale of insurance products by bank
subsidiaries, subject to regulation by each state's Department of Insurance
and/or each state's Banking Department. The extent of regulation varies
materially from state to state. However, the enactment of Gramm-Leach requires
all states to allow the sale of insurance by financial institutions.

Colonial Asset Management, Inc., a Colonial Bank subsidiary, is a registered
investment adviser under the Investment Advisers Act of 1940. It is regulated
by the Securities Exchange Commission (SEC).

Colonial Brokerage, Inc., a BancGroup subsidiary, was awarded membership
with the National Association of Securities Dealers (NASD) in September 2001
and operates as a securities broker dealer. It is regulated by the SEC and NASD.

Privacy Laws

In 2000, the federal banking regulators issued final regulations
implementing certain provisions of Gramm-Leach governing the privacy of
consumer financial information. The regulations, which were effective
November 13, 2000 but were not mandatory until July 1, 2001, limit the
disclosure by financial institutions such as Colonial Bank of nonpublic
personal information about individuals who obtain financial products or
services for personal, family, or household purposes. Subject to certain
exceptions allowed by law, the regulations cover information sharing between
financial institutions and nonaffiliated third parties. More specifically, the
regulations require financial institutions to i) provide initial notices to
customers about their privacy policies, describing the conditions under which
they may disclose nonpublic personal financial information to nonaffiliated
third parties and affiliates; ii) provide annual notices of their privacy
policies to their current customers; and iii) provide a reasonable method for
consumers to "opt out" of disclosures to nonaffiliated third parties.

Protection of Customer Information

In February 2001, the federal banking regulators issued final regulations
implementing the provisions of Gramm-Leach relating to the protection of
customer information. The effective date of these regulations was July 1, 2001.
The regulations, applicable to state member banks, like Colonial Bank, and
certain of their nonbank subsidiaries, and to bank holding companies, like
BancGroup, and certain of their nonbank subsidiaries or affiliates, relate to
administrative, technical, and physical safeguards for customer records and
information. These safeguards are intended to: insure the security and
confidentiality of customer records and information; protect against any
anticipated threats or hazards to the security or integrity of such records;
and protect against unauthorized access to or use of such records or
information that could result in substantial harm or inconvenience to any
customer.

Payment of Dividends and Other Restrictions

BancGroup is a legal entity separate and distinct from its subsidiaries,
including Colonial Bank. There are various legal and regulatory limitations on
the extent to which BancGroup's subsidiaries can, among other things, finance,
or otherwise supply funds to, BancGroup. Specifically, dividends from Colonial
Bank are the principal source of BancGroup's cash funds and there are certain
legal restrictions under federal and state law on the payment of dividends by
banks. The relevant regulatory agencies also have authority to prohibit
Colonial Bank from engaging in what, in the opinion of such regulatory body,
constitutes an unsafe or unsound banking practice. The payment of dividends
could, depending upon the financial condition of Colonial Bank, be deemed to
constitute such an unsafe or unsound practice.

In addition, Colonial Bank and its subsidiaries are subject to limitations
under Section 23A of the Federal Reserve Act with respect to extensions of
credit to, investments in, and certain other transactions with, BancGroup and
its other subsidiaries. Furthermore, loans and extensions of credit are also
subject to various collateral requirements.

Capital Adequacy

The Federal Reserve has adopted minimum risk-based and leverage capital
guidelines for bank holding companies. The minimum required ratio of total
capital to risk-weighted assets (including certain off-balance- sheet items,
such as standby letters of credit) is 8%, of which 4% must consist of Tier 1
capital. As of December 31, 2001, BancGroup's total risk-based capital ratio
was 10.91%, including 7.39% of Tier 1 capital. The minimum required leverage
capital ratio (Tier 1 capital to average total assets) is 3% for banking
organizations that meet certain specified criteria, including that they have
the highest regulatory rating. A minimum leverage ratio of an additional 100 to
200 basis points is required for banking organizations not meeting these
criteria. As of December 31, 2001, BancGroup's leverage capital ratio was
6.24%. Failure to meet capital guidelines can subject a banking organization to
a variety of enforcement remedies, including restrictions on its operations and
activities.

As regards depository institutions, federal banking statutes establish five
capital categories ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized"), and impose significant restrictions on the operations of an
institution that is not at least adequately capitalized. Under certain
circumstances, an institution may be downgraded to a category lower than that
warranted by its capital levels, and subjected to the supervisory restrictions
applicable to institutions in the lower capital category. As of December 31,
2001, Colonial Bank was "well capitalized" under the regulatory framework for
prompt corrective action.

An undercapitalized depository institution is subject to restrictions in a
number of areas, including capital distributions, payments of management fees
and expansion. In addition, an undercapitalized depository institution is
required to submit a capital restoration plan. A depository institution's
holding company must guarantee the capital plan up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount needed to restore the capital of the institution
to the levels required for the institution to be classified as adequately
capitalized at the time the institution fails to comply with the plan. A
depository institution is treated as if it is significantly undercapitalized if
it fails in any material respect to implement a capital restoration plan.

Significantly undercapitalized depository institutions may be subject to a
number of additional significant requirements and restrictions, including
requirements to sell sufficient voting stock to become adequately capitalized,
to improve management, to restrict asset growth, to prohibit acceptance of
correspondent bank deposits, to restrict senior executive compensation and to
limit transactions with affiliates. Critically undercapitalized depository
institutions are further subject to restrictions on paying principal or
interest on subordinated debt, making investments, expanding, acquiring or
selling assets, extending credit for highly-leveraged transactions, paying
excessive compensation, amending their charters or bylaws and making any
material changes in accounting methods. In general, a receiver or conservator
must be appointed for a depository institution within 90 days after the
institution is deemed to be critically undercapitalized.

Support of Subsidiary Bank

Under Federal Reserve Board policy, BancGroup is expected to act as a source
of financial strength to, and to commit resources to support, Colonial Bank.
This support may be required at times when, absent such Federal Reserve Board
policy, BancGroup might not otherwise be inclined to provide it. In the event
of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.

FDIC Insurance Assessments

The FDIC is an independent federal agency established originally to insure
the deposits, up to prescribed statutory limits, of federally insured banks and
to preserve the safety and soundness of the banking industry. The FDIC
maintains two separate insurance funds: the BIF and the SAIF. Colonial Bank's
deposit accounts are insured by the FDIC under the BIF to the maximum extent
permitted by law. Colonial Bank pays deposit insurance premiums to the FDIC
based on a risk-based assessment system established by the FDIC for all
BIF-member institutions.

Under FDIC regulations, institutions are assigned to one of three capital
groups for insurance premium purposes (well capitalized, adequately capitalized
and undercapitalized). Well capitalized and adequately capitalized institutions
are defined in the same manner as the regulations establishing the prompt
corrective action system, as discussed previously. Undercapitalized
institutions are those that do not qualify as either well capitalized or
adequately capitalized. These three groups are then divided into subgroups,
which are based on supervisory evaluations by the institution's primary federal
regulator, resulting in nine assessment classifications. Assessment rates vary
depending upon the assessment classification. In addition, regardless of the
potential risk to the insurance fund, federal law requires the FDIC to
establish assessment rates that will maintain each insurance funds ratio of
reserves to insured deposits at 1.25%. During 2001 and for the first semiannual
assessment period of 2002, assessment rates for BIF-insured institutions ranged
from 0% of insured deposits for well-capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns. The assessment rate
schedule is subject to change by the FDIC and, accordingly, the assessment rate
could increase or decrease in the future.

In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Finance
Corporation ("AFICO") to service FICO debt incurred in the 1980s. The FICO
assessment rate is adjusted quarterly. The average annual assessment rate in
2001 was 1.90 cents per $100 for BIF-insured deposits. For the first quarter of
2002, the FICO assessment rate for such deposits will be 1.82 cents per $100.

The Bank's assessment expense for the year ended December 31, 2001 equaled
$1,586,000.

It should be noted that supervision, regulation, and examination of
BancGroup and Colonial Bank are intended primarily for the protection of
depositors, not security holders.

Additional Information

Additional information, including statistical information concerning the
business of BancGroup, is set forth herein. See "Selected Financial Data and
Selected Quarterly Financial Data 2001-2000" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Executive Officers and Directors

Pursuant to general instruction G, information regarding executive officers
of BancGroup is contained herein at Item 10.

Item 2. Properties

BancGroup leases operation centers in Birmingham and Orlando and maintains
regional executive offices in Alabama, Florida, Georgia, Nevada, and Texas.

As of December 31, 2001, Colonial Bank owned 184 and leased 77 of their
full-service banking offices. See Notes to the Consolidated Financial
Statements included herein.

Item 3. Legal Proceedings

In the opinion of BancGroup, based on review and consultation with legal
counsel, the outcome of any litigation presently pending is not anticipated to
have a material adverse effect on BancGroup's consolidated financial statements
or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable

PART II

Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters

BancGroup's Common Stock is traded on the New York Stock Exchange under the
symbol "CNB." This trading commenced on February 24, 1995. As of March 1, 2002,
BancGroup had outstanding 115,398,654 shares of Common Stock, with 9,731
shareholders of record.

The following table indicated the high and low closing prices for and
dividends paid on Common Stock during 2001 and 2000.

Sale Price of
Common Stock Dividends Declared
- -------------- On Common Stock
High Low (per share)
------- ------ ------------------

2001
1st Quarter $ 13.12 $10.75 $.12
2nd Quarter 14.75 12.05 .12
3rd Quarter 14.94 12.02 .12
4th Quarter 14.98 12.07 .12
2000
1st Quarter 10.750 8.625 .11
2nd Quarter 11.250 9.000 .11
3rd Quarter 10.750 9.688 .11
4th Quarter 11.125 8.313 .11

BancGroup has historically paid dividends each quarter. The restrictions
imposed upon Colonial Bank in regard to its ability to pay dividends to
BancGroup, which in turn limit BancGroup's ability to pay dividends are
described herein. See "Payments of Dividends and Other Restrictions".

Item 6. Selected Financial Data

The following table sets forth selected financial data for the last five
years:

2001 2000 1999 1998 1997
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(In thousands, except per share amounts)
Statement of Income
Interest Income................................................ $902,167 $918,076 $766,038 $676,456 $581,831
Interest expense............................................... 480,238 517,754 384,891 339,765 284,925
-------- -------- -------- -------- --------
Net interest income............................................ 421,929 400,322 381,147 336,691 296,906
Provision for loan losses/(4)/................................. 39,573 29,775 29,177 27,511 16,786
-------- -------- -------- -------- --------
Net interest income after provision for loan losses............ 382,356 370,547 351,970 309,180 280,120
Noninterest income............................................. 93,709 77,885 75,341 60,243 50,291
Noninterest expense/(4)/....................................... 281,119 258,691 238,048 237,905 197,904
Merger related and Y2K expense/(1)/............................ 3,049 -- 1,867 26,152 6,895
-------- -------- -------- -------- --------
Income from continuing operations before
income taxes.................................................. 191,897 189,741 187,396 105,366 125,612
Applicable income taxes........................................ 69,181 69,556 69,360 38,527 45,300
-------- -------- -------- -------- --------
Income from continuing operations.............................. 122,716 120,185 118,036 66,839 80,312
-------- -------- -------- -------- --------
Discontinued Operations:/(2)/
Income/(Loss) from discontinued operations, net of income taxes
of ($371), ($450), $2,134, ($6,384), and $6,698 for the year
ended December 31, 2001, 2000, 1999, 1998, and 1997,
respectively.................................................. (613) (743) 3,527 (10,448) 11,138
Loss on disposal of discontinued operations (net of income tax
benefit of ($2,616)........................................... -- (4,322) -- -- --
-------- -------- -------- -------- --------
Net Income..................................................... $122,103 $115,120 $121,563 $ 56,391 $ 91,450
======== ======== ======== ======== ========
Income from continuing operations excluding merger related
and certain other nonrecurring items*/(1) (2) (3) (4)/........ $125,728 $120,185 $112,872 $ 84,358 $ 85,751
Earnings Per Common Share:
Income from Continuing Operations excluding merger related
expenses and certain other nonrecurring items*:
Basic........................................................ $ 1.10 $ 1.05 $ 0.98 $ 0.74 $ 0.79
Diluted...................................................... 1.09 1.04 0.96 0.73 0.77
Income from continuing operations:/(2)/
Basic........................................................ $ 1.07 $ 1.05 $ 1.02 $ 0.59 $ 0.74
Diluted...................................................... $ 1.06 1.04 1.01 0.58 0.72
Average shares outstanding:
Basic........................................................ 114,811 114,760 115,579 113,905 108,189
Diluted...................................................... 115,881 115,653 117,393 116,547 111,575
Cash dividends per common share................................ $ 0.48 $ 0.44 $ 0.38 $ 0.34 $ 0.30

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(1) Merger related expenses include external costs associated with various
business combinations and restructuring charges of $8,800,000 ($5,632,000
net of income taxes). Y2k expenses of $560,000, $4,617,000 and $432,000
($353,000, $2,955,000 and $276,000 net of income taxes) were incurred in
1999, 1998 and 1997.
(2) In December 2000, the company exited the mortgage servicing business. The
financial results for this line of business have been separately reported
as Discontinued Operations in all periods presented.
(3) Gain on the sale of certain branches and other one time miscellaneous
income of $10,167,000 before tax and $6,405,000 after tax has been excluded
from 1999.
(4) 2001 includes a merger related expense of $1,000,000 ($640,000 net of
income taxes) in additional provision for loan losses to align provisions
of an acquired bank with company standards and $658,000 ($421,000 net of
income taxes) in personnel costs to complete the mergers which is included
in noninterest expense.
* Income from continuing operations excluding merger related and certain other
nonrecurring items is a non-GAAP measurement that is provided to enhance the
understanding of BancGroup's results of operations. This additional
disclosure is not provided as an alternative to or as being more meaningful
information than GAAP measurements, but rather as supplement to them. Our
definition of income from continuing operations excluding merger related and
certain other nonrecurring items may not be the same as that of other
companies.

2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ----------

(In thousands, except per share amounts)
Statement of Condition Data
At year end:
Total assets....................................... $13,185,103 $11,999,621 $11,097,823 $10,621,238 $8,201,195
Loans, net of unearned income...................... 10,367,665 9,642,954 8,419,225 7,235,057 6,041,025
Mortgage loans held for sale....................... 35,453 9,866 33,150 692,042 238,540
Deposits........................................... 8,322,979 8,355,849 8,172,810 7,585,991 6,450,479
Long-term debt..................................... 1,786,140 862,247 911,071 746,447 315,281
Shareholders' equity............................... 864,774 775,100 711,625 653,552 602,567
Average balances:
Total assets....................................... 12,592,300 11,591,168 10,788,691 9,347,401 7,572,165
Interest-earning assets............................ 11,881,184 10,723,803 9,793,524 8,442,520 6,912,786
Loans, net of unearned income...................... 10,119,185 9,030,529 7,771,884 6,561,770 5,587,695
Mortgage loans held for sale....................... 22,941 14,711 341,692 407,672 158,966
Deposits........................................... 8,432,980 8,252,352 7,747,414 6,879,821 6,022,626
Shareholders' equity............................... 826,081 727,495 688,474 655,304 560,436
Book value per share................................. 7.50 6.93 6.26 5.82 5.59
Tangible book value per share........................ 6.52 7.59 6.96 6.57 6.22
Selected Ratios
Income from continuing operations excluding merger
related and certain other nonrecurring items
to:/*(1)(2)(3) (4)/.................................
Average assets..................................... 1.00% 1.04% 1.05% 0.90% 1.13%
Average shareholders' equity....................... 15.22 16.52 16.39 12.87 15.30
Efficiency ratio from continuing operations
excluding merger related and certain other
nonrecurring items*/(1)(2)(3)(4)/................... 55.03 53.85 52.92 53.35 55.01
Dividend payout ratio................................ 45.28 44.00 36.19 68.00 35.29
Average equity to average total assets............... 6.56 6.28 6.38 7.01 7.40
Total nonperforming assets to net loans, other real
estate and repossessions/(5)/....................... 0.64 0.53 0.54 0.59 0.73
Net charge-offs to average loans..................... 0.28 0.21 0.22 0.26 0.23
Allowance for loan losses to total loans (net of
unearned income).................................... 1.18 1.14 1.18 1.18 1.21
Allowance for loan losses to nonperforming loans/(5)/ 239% 258% 275% 248% 250%

--------
(1) Merger related expenses include external costs associated with various
business combinations and restructuring charges of $8,800,000 ($5,632,000
net of income tax) in 1988. Y2k expenses of $560,000, $4,617,000 and
$432,000 ($353,000, $2,955,000 and $276,000 net of income taxes) were
incurred in 1999, 1998 and 1997.
(2) Gain on the sale of certain branches and other one time miscellaneous
income of $10,167,000 before tax and $6,405,000 after tax have been
excluded from 1999.
(3) In December 2000, the company exited the mortgage servicing business. The
financial results for this line of business have been separately reported
as Discontinued Operations in all periods presented.
(4) 2001 includes a merger related expense of $1,000,000 ($640,000 net of
income taxes), in additional provision for loan losses to align provisions
of an acquired bank with company standards and $658,000 ($421,000 net of
income taxes) in personnel costs to complete the mergers which is included
in noninterest expense
(5) Non-performing loans and nonperforming assets are shown as defined in
Management's Discussion and Analysis of Financial condition and Results of
Operations -- Nonperforming Assets.
* Income from continuing operations excluding merger related and certain other
nonrecurring items is a non-GAAP measurement that is provided to enhance the
understanding of BancGroup's results of operations. This additional
disclosure is not provided as an alternative to or as being more meaningful
information than GAAP measurements, but rather as supplement to them. Our
definition of income from continuing operations excluding merger related and
certain other nonrecurring items may not be the same as that of other
companies.

Selected Quarterly Financial Data 2001-2000

2001 2000
-------------------------------------- ---------------------------------------

Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
-------- --------- -------- --------- -------- --------- -------- ---------
(In thousands, except per share amounts)

Interest income.................... $207,937 $ 221,041 $232,886 $ 240,303 $240,858 $ 235,599 $228,627 $ 212,992
Interest expense................... 98,597 115,972 127,969 137,700 141,106 136,814 126,693 113,141
-------- --------- -------- --------- -------- --------- -------- ---------
Net interest income................ 109,340 105,069 104,917 102,603 99,752 98,785 101,934 99,851
Provision for loan losses.......... 14,730 7,901 7,478 9,464 7,857 8,886 7,464 5,568
-------- --------- -------- --------- -------- --------- -------- ---------
Net interest income after provision
for loan loss..................... 94,610 97,168 97,439 93,139 91,895 89,899 94,470 94,283
Income from continuing operations.. 31,919 31,067 30,534 29,196 29,277 29,103 30,724 31,081
Discontinued operations/(1)/....... -- (613) -- -- (366) -- (4,107) (592)
-------- --------- -------- --------- -------- --------- -------- ---------
Net Income (loss).................. $ 31,919 $ 30,454 $ 30,534 $ 29,196 $ 28,911 $ 29,103 $ 26,617 $ 30,489
======== ========= ======== ========= ======== ========= ======== =========
Earnings Per Share:
Income from continuing operations
excluding merger related and
certain other nonrecurring
items*/(1)/:
Basic............................ $ .30 $ .27 $ .27 $ .26 $ .26 $ .25 $ .27 $ .27
Diluted.......................... $ .30 $ .27 $ .26 $ .25 $ .26 $ .25 $ .27 $ .27
Income from continuing
operations: /(1)/
Basic............................ $ .28 $ .27 $ .27 $ .26 $ .26 $ .25 $ .27 $ .27
Diluted.......................... $ .28 $ .26 $ .26 $ .25 $ .26 $ .25 $ .27 $ .27
Net Income.........................
Basic............................ $ .28 $ .27 $ .27 $ .26 $ .25 $ .25 $ .23 $ .27
Diluted.......................... $ .28 $ .26 $ .26 $ .25 $ .25 $ .25 $ .23 $ .26

--------
(1) In December 2000, the company exited the mortgage servicing business. The
financial results for this line of business have been separately reported
as Discontinued Operations in all periods presented.
* Income from continuing operations excluding merger related and certain other
nonrecurring items is a non-GAAP measurement that is provided to enhance the
understanding of BancGroup's results of operations. This additional
disclosure is not provided as an alternative to or as being more meaningful
information than GAAP measurements, but rather as supplement to them. Our
definition of income from continuing operations excluding merger related and
certain other nonrecurring items may not be the same as that of other
companies.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

INTRODUCTION

Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented on the following pages. The principal purpose of this
review is to provide the reader of the attached financial statements and
accompanying footnotes with a detailed analysis of the financial results of The
Colonial BancGroup, Inc. and subsidiaries (for the purposes of this Item 7,
"BancGroup" or the "Company"). Among other things, this discussion provides
commentary on BancGroup's history, operating philosophies, the components of
net interest margin and balance sheet strength as measured by the quality of
assets, the composition of the loan portfolio and capital adequacy.

STRATEGY

Colonial was organized in 1981 as a holding company with one bank and $166
million in assets. Over the last 20 years, Colonial has followed a systematic,
evolutionary process which has produced one of the top 50 banks in asset size
in the nation with $13.2 billion in assets and 263 branch sales offices in 11
operating regions in six states. These operating regions are sometimes referred
to in this discussion as "regional banks".

Colonial's success continues to evolve through the achievement of several
key strategies. These strategies include:

. Building a strong foundation based on a community banking philosophy which
provides local responsibility for customer relationships and a focus on
sound asset quality;

. Establishing and expanding our presence in high growth markets with this
same philosophy;

. Streamlining our operational structure to produce corporate synergies and
efficiencies;

. Forming a sales culture in our branches that focuses on providing the best
in customer service through the sales of appropriate products and services
to meet customer needs;

. Continuing expansion of consistent and competitive product offerings;

. Providing tools to employees to allow them to further the sales culture
and enhance customer service through efficient operations;

. Continuing to build upon our foundation by expanding our established
philosophy and structure in markets that provide the best opportunities
for increasing shareholder value.

Building a strong foundation. Colonial's foundation is built upon a
community banking philosophy that promotes local responsibility for customer
relationships. This operating philosophy has been important in developing a
strong customer base, particularly with respect to lending relationships,
retaining skilled and highly motivated local management teams, involving local
boards of directors and in making acquisitions. Colonial's community banking
philosophy requires a fundamental understanding of the marketplace it serves
and the very best in customer service.

Attention to creating personal relationships with quality borrowers while
maintaining sound and conservative underwriting standards is the backbone of
our philosophy, and has allowed Colonial to effectively manage its asset
quality throughout its history. Local expertise with established customer
relationships combined with independent oversight of credit decisions and
conservative underwriting standards are keys to the maintenance of high asset
quality. The senior credit administration function provides the primary
oversight of the credit review process. This administration function reviews
large credits prior to approval and also provides an independent review of
credits on a continual basis. In addition, the Company has established regional
bank loan committees made up of local officers and directors that approve loans
up to certain levels. These committees provide local business and market
expertise while Colonial's senior management provides independent oversight
through their participation in the state loan committees. By involving many
individuals in the decision-making process, including the regional directors,
management is able to stay on top of market trends. Maintaining high asset
quality will always be a primary focus. Colonial's asset quality is
demonstrated by its charge-off history and nonperforming asset levels, which
for the past ten years have been among the lowest for southeastern regional
banks. Nonperforming assets as a percentage of loans and other real estate were
0.64% at December 31, 2001. Net charge-offs were 0.28% of average loans in 2001
and 0.21% in 2000, which compares favorably to the southern regional banks as
defined by Keefe, Bruyette and Woods, which were 0.35% in 2001 and 0.32% in
2000, respectively.

Establishing and expanding our presence in high growth markets. Colonial's
growth market expansion has been concentrated in Florida, Georgia, Texas and
Nevada. These areas represent four of the seven highest population growth
states in the country. As of December 31, 2001, Colonial has a well-established
presence in these areas through seven of its regional banks as reflected in the
following table.

Number
Asset Size of
($000) Branches
---------- --------

Florida:
Central FL (Orlando).................... $1,512,834 43
South FL (Miami, West Palm Beach)....... 1,593,112 20
Bay Area (Tampa, St. Petersburg)........ 758,167 20
Southwest FL (Naples, Ft. Myers)........ 418,059 14
---------- --
Total Florida..................... 4,282,172 97

Georgia (Atlanta, Macon, Columbus)....... 1,112,950 23

Texas (Dallas) pro forma with Mercantile* 641,496 8

Nevada (Las Vegas, Reno)................. 533,081 11

--------
* assumes the consummation of a merger with Mercantile Bancorp, Inc. which is
expected to close on March 28, 2002.

Colonial has continued its expansion by selectively filling in these high
growth markets through strategic placement of new branch locations and branch
acquisitions that expanded our ability to provide additional customer service
in the market. This growth was accomplished through opening nine new sales
offices and the acquisition of 11 sales offices. In addition to the branch
acquisitions, in October 2001 Colonial completed the acquisition of a community
bank headquartered in Tampa with four branches and expects to acquire another
community bank headquartered in Dallas with five branches in late first quarter
2002.

As Colonial enters new markets, it sets its foundation in its strong lending
strategy. To promote its community banking philosophy, Colonial establishes
regional banks with local responsibility for customer relationships through the
hiring and retention of skilled and highly motivated management teams. Loan and
deposit growth is emphasized in each market area through these regional banks.
Because markets and communities differ widely, customers require different
answers and solutions to their financial needs. As a result, our local lending
strategy includes direct involvement by local management and directors. We
believe customers appreciate the knowledge of their business needs and the
local environment that local banking officers can provide. This strategy has
proven successful in competing for loans against other larger institutions.
Colonial's goal is to meet these needs of retail and commercial banking
customers in each market area through its regional bank structure.

Due to the success of these efforts Colonial's geographic mix of loans and
deposits has significantly changed. Loans in Alabama represented 84% of total
loans in 1996 while in 2001 the percentage is 32%. During the same time,
Florida loans represented 5% of total loans in 1996 and 35% in 2001. Regional
bank deposits in Alabama represented 82% of total regional bank deposits in
1996 while in 2001 the percentage is 43%. Florida regional bank deposits
represented 8% of total regional bank deposits in 1996 and 43% in 2001.
Internal loan growth from these high growth areas was 10% and 15% for 2001 and
2000, respectively, while average deposits from these areas grew 12% in 2001
and 9% in 2000. Colonial expects to continue its successful growth by building
on these local relationships.

The following table illustrates the loan contribution of each state and
reflects the significant impact of the high growth markets on consolidated
loans.

% to Total
At
December 31,
-----------
2001 1996
- ---- ----

Loans by state:
Alabama................... 32% 84%
Florida................... 35 5
Georgia................... 12 11
Texas..................... 3 --
Nevada.................... 4 --
Mortgage warehouse lending 14 --
--- ---
100% 100%
--- ---

The following table illustrates the deposit contribution of each state and
reflects the significant impact of the high growth markets on consolidated
regional bank deposits.

% to Total
At
December 31,
-----------
2001 1996
- ---- ----

Regional bank deposits by state:
Alabama......................... 43% 82%
Florida......................... 43 8
Georgia......................... 8 10
Texas........................... 3 --
Nevada.......................... 3 --
--- ---
100% 100%
--- ---

Streamlining the operational structure. With acquisitions in place
establishing a geographic footprint and primary regional bank structure, the
next logical step was to support the expertise in each local market with
centralized operations and credit review functions. Part of the process of each
acquisition is to fold the acquired institution or branch completely into
Colonial's established regional bank reporting structure and processes. By
centralizing these functions the local banking officers have been allowed to
concentrate on the customer and service their needs.

This structure of local customer relationship responsibility and centralized
operations gives the local banks decision making capability and an effective
operational structure to service the customer in the most cost effective and
efficient manner. Centralized operations provide an advantage in servicing the
customer base across our enterprise. It allows for continuity in operational
processes and enhances product-offering capability.

Forming a sales culture. Over the last two years we have taken several steps
to promote a more sales-focused environment. We redefined branch personnel
roles and responsibilities to align our organization for more efficient sales
management. We streamlined branch sales office operational tasks to allow sales
office personnel to focus on selling customer services. To continue forging our
proactive, sales and service culture, we implemented and enhanced SCORE
(Selling Customer on Relationships Effectively), our ongoing retail banking
sales and relationship-building training program. Management has established
measurements to evaluate results and has tied compensation to those results.
One of the measurements is a customer service rating through the use of an
independent company to "shop" the sales offices to test their level of product
knowledge and customer service. Loan officers also participate in production
oriented incentive compensation programs. We believe that all of these efforts
have contributed to growth in loans, deposits and noninterest income as well as
the effective containment of noninterest expenses. In addition, we expect these
efforts to enhance cross selling of products and services.

Expanding consistent and competitive product offerings. Colonial's goal is
to be our customers' number-one provider of financial services -- from demand,
savings, time deposit, and investment products to consumer, commercial, or
mortgage loans. The regional banks have additional growth opportunities through
the development of customer relationships by cross selling a variety of bank
products and services. As market demographics change, products and services are
structured to meet the needs of particular regions or customers. These products
and services include various deposit products as well as other services such as
wealth management, cash management, electronic banking, credit card and
merchant services.

Strong regional bank management supported by Colonial's asset/liability and
product and services management teams provide Colonial with the resources to
remain competitive in its deposit markets by identifying and implementing
products and services with attractive pricing to meet customer needs. Colonial
has established a strategy to grow and retain its deposit base while remaining
competitive in deposit pricing and meeting funding and liquidity goals through
the monitoring of both our markets and customer needs and the expansion of
sales efforts in the local branch sales office network.

Because of our markets and the customers we serve, we expect wealth
management products and services to play a major role in future growth. Income
from wealth management services has increased 56.4% in the last two years.
Through Colonial's investment services, we offer discount brokerage, investment
sales, asset management, trust services and insurance including term,
universal, whole life and long-term care. In 2001 Colonial took many steps to
enhance our wealth management services. First, we established Colonial
Brokerage, Inc. which is a member of the NASD. This membership will allow
Colonial to perform additional broker/dealer activities in order to better
service our customers. Second, we implemented free financial planning services
that should provide in-depth financial plans for customers who might benefit
from a complete review of their financial objectives. This financial profile
has been an excellent starting point in helping customers implement their
agreed-upon financial strategy. Third, we affiliated with two highly respected
trust companies. Fiduciary Trust International, through its Miami office,
promotes and solicits trust business in our four Florida regional banks and
international markets. Founders Trust Company, in Birmingham, Alabama, focuses
on our customers in the other regional banks. Finally, during 2001 we launched
the Colonial Premier account. This account is a combined checking, money market
and brokerage account which enables us to provide our high net-worth customers
with a robust financial services product that enables them to effectively
manage their funds in a combined account. Management continuously monitors
these services to ensure that our product offerings remain competitive in our
markets.

Colonial offers a complete package of cash management services, which
include lock box services, sweep accounts, zero balance accounts, electronic
data interchange, automated clearinghouse, and Business Banker Plus(TM), an
online tool for bank account reporting services. Revenue from cash management
services increased 87.2% in the last two years. Colonial expects continued
growth in cash management services by expanding these services to existing
customers through cross sell opportunities and enhanced sales efforts in our
growth markets. In 2002, the cash management sales force expects to begin
offering an updated wire service to its cash management customer base. This new
service is designed to provide a more expedient solution to the time- sensitive
transactions of wire customers.

In the Miami office of our South Florida regional bank Colonial has in place
an experienced management team with expertise in international banking. Through
the efforts of this management team, international banking revenues have
increased 36.9% in the last three years. The Company provides letters of credit
to top tier institutions, pre-export financing, import financing, funds
transfer and check clearing services, trade syndication, merchant banking
services and other miscellaneous services. The Company also services
international customers through its private and executive banking group in
Miami.

To meet customers' demands for banking when and where they want it, Colonial
continues to expand its electronic banking services. In 2001, we introduced the
Colonial Business Check Card, which like the personal check card, allows
business customers to make purchases directly from their business checking
accounts, track business spending and save time. Colonial plans to continue to
install ATMs strategically in the most convenient

and high traffic locations in order to provide better customer service and
complement Colonial's retail branch sales office network. In 2002, as part of
the Eagle project discussed below, Colonial has plans to implement a new
internet banking solution. Several new features, including recurring and
future-dated transfers, certain loan payment capability and enhanced account
inquiry are expected to be offered to the customer, which should provide them
more flexibility to manage their finances in a real time environment. Revenue
generated by electronic banking services has increased 39.1% in the last two
years.

Colonial plans to continue to expand resources to ensure that all products
and services are among the most competitive in our markets. As we expand our
offerings throughout our six-state organization, it is our objective that our
customers, regardless of where they live, recognize the single Colonial brand
as a symbol of trustworthiness and service-mindedness. It is our goal that the
power of our brand plainly invites and encourages customers to choose us for
their banking and investment needs.

Providing tools to employees. Colonial continues to expand and enhance the
tools available to our employees to further our sales culture, improve customer
service and enhance operational efficiencies. Many of these are tools are being
utilized but continue to change as a result of technology, regulation or
customer demand.

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. Eagle epitomizes
our philosophy that banking is a people business. We recognize that while
investing in technology is important, it matters most how you deploy that
technology to better enable our people to serve our customers. We expect to
implement this project throughout 2002 and 2003. It includes additional
Internet banking capabilities, an enhanced call center, as well as new branch
service delivery and loan delivery systems. Eagle combines the advances in
technology with the reengineering of processes to eliminate nonvalue added
procedures while improving customer service through enhanced product and
service delivery.

Continuing to build. By taking advantage of population growth trends, we
have established and bolstered our presence in key markets with strategic
acquisitions. Our overall strategy of operating in fast-growing, economically
vibrant markets underscores our acquisition philosophy. We plan to continue to
seek opportunities that add either mass in our existing markets or market share
in similar markets that expand our current geographic footprint in Florida,
Georgia, Texas and Nevada.

We feel our strategy has positioned us in the best markets for growth both
internally and with additional strategic acquisitions. We expect to deepen our
market coverage internally by benefiting from the population growth in these
markets, differentiating ourselves by providing excellent customer service and
through competitive product offerings. Since these are growing markets, we
believe we have the ability to establish a strong customer base by continuing
our successful community banking strategy. This strategy consists of providing
strong lending expertise in the local markets, accompanied by competitive
deposit products and other financial services such as wealth management, cash
management and electronic banking. By focusing on sales and customer service,
these locally developed and maintained customer relationships should continue
to grow.

Colonial cannot guarantee its success in implementing the initiatives or
reaching the goals outlined in this discussion. The following analysis of
financial condition and results of operations provides details with respect to
this summary material and identifies trends concerning the initiatives taken in
2001.

BUSINESS COMBINATIONS

BancGroup continued its expansion into high growth areas by selectively
filling in existing markets with three acquisitions in 2001.

In January 2001, BancGroup acquired two branches in Nevada from First
Security Bank in a branch divestiture resulting from their merger with Wells
Fargo. Through this acquisition, BancGroup purchased certain assets,
approximately $50 million in loans, and assumed certain liabilities,
approximately $103 million in deposits.

In October 2001, BancGroup purchased certain assets, approximately $68
million in loans and assumed certain liabilities, primarily deposits of
approximately $302 million in the acquisition of 13 branches from Union
Planters Bank. Nine of the branches are located in Tampa and Naples area of
Florida and four in the central part of Alabama.

The acquisition of Manufacturers Bancshares, Inc ("Manufacturers") was
consummated on October 25, 2001. Manufacturers operated four branches in the
Tampa, Florida area and had $297.4 million in total assets, $253.7 million in
total loans, and $212.9 million in total deposits at the date of consummation.
BancGroup issued 4,458,437 shares of its common stock to shareholders of
Manufacturers, including shares issued pursuant to the exercise of
Manufacturers stock options. This transaction was accounted for as a pooling of
interests and all periods prior to 2001 have been restated to include results
on a combined basis.

BancGroup has one pending acquisition of Mercantile Bancorp, Inc.
("Mercantile") and its wholly owned subsidiary bank, First Mercantile Bank,
N.A. ("Mercantile Bank"), which is expected to close on March 28, 2002.
Mercantile Bank operates four branch offices in Dallas, Texas and one in
Austin, Texas. At December 31, 2001 Mercantile had $360 million in assets, $265
million in loans and mortgage loans held for sale and $313 million in deposits.
BancGroup expects to issue approximately 5,500,000 shares of its common stock
to shareholders of Mercantile.

REVIEW OF RESULTS OF OPERATIONS

Overview

BancGroup's primary line of business is commercial banking through its
wholly owned subsidiary Colonial Bank. The following summary of BancGroup's
results of operations discusses the related impact of this line of business on
the earnings of the Company.

Line of Business Results

Continuing Operations Discontinued
- ------------------------------ Operations
Commercial Corporate/ Mortgage Consolidated
Banking Other* Total Banking/(1)/ BancGroup
- ---------- ---------- -------- ------------ ------------
(In thousands)

Year Ended December 31, 2001
Net interest income........................... $429,350 $ (7,421) $421,929 $421,929
Provision for loan losses..................... 39,573 -- 39,573 39,573
Noninterest income............................ 93,739 (30) 93,709 93,709
Amortization and depreciation................. 32,825 (439) 32,386 32,386
Noninterest expense........................... 245,724 6,058 251,782 251,782
-------- -------- -------- ------- --------
Income from continuing operations before
income taxes................................ 204,967 (13,070) 191,897 191,897
Income taxes.................................. 72,639 (3,458) 69,181 69,181
-------- -------- -------- ------- --------
Income from continuing operations............. 132,328 (9,612) 122,716 122,716
Income (loss) from discontinued operations
(net of taxes).............................. -- -- -- (613) (613)
-------- -------- -------- ------- --------
Net Income (loss)...................... $132,328 $ (9,612) $122,716 $ (613) $122,103
======== ======== ======== ======= ========
Year Ended December 31, 2000
Net interest income........................... $407,343 $ (7,021) $400,322 $400,322
Provision for loan losses..................... 29,775 -- 29,775 29,775
Noninterest income............................ 77,849 36 77,885 77,885
Amortization and depreciation................. 31,483 (418) 31,065 31,065
Noninterest expense........................... 223,325 4,301 227,626 227,626
-------- -------- -------- ------- --------
Income from continuing operations before
income taxes................................ 200,609 (10,868) 189,741 189,741
Income taxes.................................. 72,420 (2,864) 69,556 69,556
-------- -------- -------- ------- --------
Income from continuing operations............. 128,189 (8,004) 120,185 120,185
Income (loss) from discontinued operations and
loss on disposal (net of taxes)............. -- -- -- (5,065) (5,065)
-------- -------- -------- ------- --------
Net Income (loss)...................... $128,189 $ (8,004) $120,185 $(5,065) $115,120
======== ======== ======== ======= ========
Year Ended December 31, 1999
Net interest income........................... $388,412 $ (7,265) $381,147 $381,147
Provision for loan losses..................... 29,177 -- 29,177 29,177
Noninterest income............................ 75,128 213 75,341 75,341
Amortization and depreciation................. 27,928 (408) 27,520 27,520
Noninterest expense........................... 209,041 3,354 212,395 212,395
-------- -------- -------- ------- --------
Income from continuing operations before
income taxes................................ 197,394 (9,998) 187,396 187,396
Income taxes.................................. 73,041 (3,681) 69,360 69,360
-------- -------- -------- ------- --------
Income from continuing operations............. 124,353 (6,317) 118,036 118,036
Income (loss) from discontinued operations
(net of taxes).............................. -- -- -- 3,527 3,527
-------- -------- -------- ------- --------
Net Income (loss)...................... $124,353 $ (6,317) $118,036 $ 3,527 $121,563
======== ======== ======== ======= ========

--------
* Includes elimination of certain intercompany transactions.
(1) In December 2000, the Company exited the mortgage servicing business. The
financial results for this line of business have been separately reported
as Discontinued Operations in all periods presented.

The most significant factors affecting income for 2001, 2000 and 1999 are
highlighted below and discussed in greater detail in subsequent sections. All
results discussed are in reference to continuing operations, unless otherwise
noted.

. An increase of 10.8% in average earning assets in 2001. This follows an
increase of 9.5% in 2000 and 16.0% in 1999.

. Internal loan growth of 9.8% from December 31, 2000 to December 31, 2001,
following an increase of 15.0% from December 31, 1999 to December 31, 2000.

. Maintenance of high asset quality and reserve coverage ratios. Net
charge-offs were $28.7 million or 0.28% of average net loans in 2001 and
$18.7 million or 0.21% of average net loans in 2000.

. Increase in loan loss reserve percent to total loans to 1.18% at December
31, 2001 as compared to 1.14% at December 30, 2000.

. Net interest margin decreased to 3.57% in 2001 from 3.76% in 2000
primarily due to repricing as a result of rapidly decreasing interest
rates and balance sheet mix changes.

. Average retail deposit growth was 12% from December 31, 2000 to December
31, 2001 and 9% from December 31, 1999 to December 31, 2000.

. An increase of $7.7 million or 10% and $12.7 million or 20% in
non-interest income in 2001 and 2000, respectively (excluding gain on sale
of securities, gain on sale of certain branches, and other one time
miscellaneous income from 1999).

. Non-interest expense, excluding merger related expenses, remained 2.23% of
average assets for both 2001 and 2000.

. In 2000, the Company exited the mortgage servicing business. The financial
results for this line of business have been separately reported as
Discontinued Operations.

NET INTEREST INCOME:

Net interest income is the difference between interest and fees earned on
loans, securities and other interest earning assets and interest paid on
deposits and borrowed funds (interest expense). Three-year comparisons of net
interest income in dollars and yields on a tax equivalent basis are reflected
on the average volume and rates table. This schedule is presented on a
consolidated basis that includes the now discontinued mortgage operations. Net
interest income on a tax equivalent basis increased 5% or $21.6 million to
$424.7 million for the year ended December 31, 2001 from $403.1 million for the
year ended December 31, 2000. The principal factors affecting the Company's
yields and net interest income are discussed on the following pages.

Level of Interest Rates

The Federal Reserve lowered the target fed funds rate 11 times in 2001, a
total of 475 basis points, to 1.75% at year-end, its lowest level in over 40
years. Such a series of rate cuts by the Federal Reserve has not been observed
since the last recession which occurred in 1991. The average targeted fed funds
rate was 3.90% in 2001 versus 6.37% in 2000 and 5.21% in 1999. Although at
December 31, 2000 BancGroup appeared positioned to benefit from declining
rates, the position presented assumed an immediate rate shock with the
opportunity for the balance sheet to reprice to the lower levels. Because the
rate changes were so frequent over the course of the year, BancGroup's balance
sheet has not yet fully repriced all liabilities to the lower levels.

The outlook for rates in 2002 is once again much different than for the
previous year. The Federal Reserve did not lower rates at their meeting in
January and signaled that rate declines may be finished as there are signs the
economy may be moving out of the recession that officially began in March 2001.
The market is expecting rates to increase in the second half of 2002.

Growth in Earning Assets

One of the most significant factors in the Company's increase in income has
been the 10.8%, 9.5% and 16.0% increase in average interest-earning assets in
2001, 2000, and 1999, respectively. This strong growth in earning assets in
2001 was due in large part to the loan growth in the mortgage warehouse lending
division, spurred by low mortgage rates. The growth in loans in this division
contributed 49% of the $1.2 billion overall increase in earning assets in 2001.
The division also contributed $10.3 million or 48% of the increase in net
interest income in 2001. Earning assets as a percentage of total average assets
were 94.4%, 92.5% and 90.8% in 2001, 2000 and 1999, respectively. However, the
impact on net interest income from the growth in average earning assets was
reduced by the compression in the net interest margin as discussed below.

Net Interest Margin

The net interest margin declined from 3.76% in 2000 to 3.57% in 2001 due to
a change in the balance sheet mix, as well as the impact of significant and
rapid rate declines. Mortgage warehouse loans are 100% secured by newly created
residential mortgage loans and therefore have a lower spread then other types
of lending. Excluding the mortgage warehouse loans, the net interest margin for
2001 would have been 13 basis points higher at 3.70% versus 3.57% and in 2000
would have been 3.80%, four basis points above the 3.76% reported. Therefore,
growth in this division accounted for nine of the 19 basis points decline in
the net interest margin.

The other significant shift in the balance sheet was the $565.6 million
increase in long term debt. As rates declined BancGroup extended the term of
its borrowings to take advantage of the lower rates. It is estimated that the
addition of this long-term debt lowered the 2001 net interest margin by as much
as 6 basis points in 2001. However this extension of the term of liabilities
will serve to improve net interest income in future periods if rates were to
increase.

Loan Mix

At December 31, 2001, the Company's mix of loans reflected an increase in
construction loans to 22.1% of the total portfolio from 17.6%, at December 31,
2000. The increase in the construction loans is primarily the result of loan
growth in the Georgia, Florida, Nevada and Texas regions. Residential real
estate loans decreased to 18.7% of the total portfolio at December 31, 2001
compared to 28.0%, at December 31, 2000. The residential real estate loans are
predominantly adjustable rate first mortgages that have a low level of credit
risk and accordingly have lower yields than other types of loans. Demand for
this type of loan has declined as more borrowers are looking for fixed rate
loans, which the Company originates but sells in the secondary market. This
decrease was also due to the second quarter 2001 securitization of $307 million
single-family real estate loans.

Mortgage warehouse lending is a self-contained lending division that funds
mortgage loans held for sale in the secondary market by various independent
mortgage companies. The significant drop in mortgage rates between August and
November 2001 resulted in large increases in funding of mortgage warehouse
lines. Mortgage warehouse lending represented 12.4% of the Company's total loan
portfolio at December 31, 2001 compared to 3.9% at December 31, 2000.

The average rate on loans was 7.84% for 2001, a decline of 110 basis points
compared to 8.94% for 2000.

Mortgage Loans Held for Sale

Mortgage loans held for sale represent single family residential mortgage
loans originated or acquired then packaged and sold. The level and direction of
long-term interest rates have a dramatic impact on the volume of mortgage loan
originations from new construction and refinancings. As a result of decreasing
mortgage interest rates, average mortgage loans held for sale increased to
$22.9 million in 2001 from $14.7 million in 2000. In 1999 the average volume of
$341.7 million included volume generated by the wholesale production unit prior
to its sale in the fourth quarter. Also as a result of the sale of the
wholesale production unit, the Company has entered into a third party
correspondent relationship for the sale of its retail production of fixed rate
mortgage loans, which substantially eliminates the need to hedge interest rate
risk associated with new production.

Noninterest earning assets

The decline in average noninterest-earning assets of $ 156.2 million from
2000 to 2001 is primarily due to the sale of the mortgage servicing rights as a
result of the Company's exit from that line of business and more efficient cash
management. Average cash balances declined by $9.8 million in 2001 and $27.0
million in 2000, as a result of specific programs aimed at improving the
Company's cash management efficiency.

Cost of Funds

The average cost of funds decreased to 4.61% in 2001, compared to 5.48% in
2000 and 4.71% in 1999. The lower average cost of funds in 2001 is primarily
the result of the previously discussed decrease in interest rates that began
January 2001 and continued throughout the year. BancGroup funds loan growth
primarily with customer deposits.

The average rate on interest bearing deposits, excluding time deposits
dropped 108 basis points to 2.34% for 2001 compared to 3.42% for 2000. Time
deposits reprice much slower than other interest bearing deposits resulting in
a decline of just 36 basis points in 2001 to an average of 5.64% versus 6.00%
for 2000. As of December 31, 2001 time deposit balances totaled $4.7 billion at
an average rate of 5.64% and an average remaining term to maturity of 8 months.
Posted CD rates as of year-end for 6 to 12 month terms ranged from 1.85%-2.75%.
Competitive pressures on new time deposits and variable interest deposits
remained strong. Due to these pressures, the Company's funding mix has shifted
during the past two years to a higher concentration of borrowings, primarily
through credit facilities with the Federal Home Loan Bank. The percentage of
average total borrowings to total assets is 26% for 2001, 22% for 2000, and 21%
for 1999. These borrowings are an excellent funding source since they are at
rates lower than or comparable to what the market rates are for new time
deposit funds. In addition to these sources, the Company has initiated
strategies to increase deposits through its retail branch network. As discussed
under Liquidity, BancGroup's management considers these sources of funds to be
adequate to fund future loan growth.

Noninterest-Bearing Deposits

Average noninterest-bearing deposits increased by $120.7 million from 2000
to 2001 excluding the transfer of mortgage custodial deposits linked to the
mortgage servicing rights sold during late 1999 and 2000 as part of the
Company's decision to exit the mortgage servicing business. This increase was
due to the Company's continuing effort to increase low cost or no cost deposits
throughout its regions.

Average Volume and Rates

2001 2000 1999
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
Volume Interest Rate Volume Interest Rate Volume Interest Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(In thousands)

ASSETS:
Interest-earning assets:
Loans, net of unearned
income/(1)/.................... $ 9,303,798 $746,274 8.02% $ 8,779,877 $786,675 8.94% $ 7,655,634 $655,209 8.56%
Mortgage warehouse lending...... 815,387 46,858 5.75% 250,652 20,866 8.32% 116,250 8,410 7.23%
----------- -------- ---- ----------- -------- ---- ----------- -------- ----
Total Loans..................... 10,119,185 793,132 7.84% 9,030,529 807,541 8.94% 7,771,884 663,619 8.54%
Mortgage loans held for sale.... 22,941 1,439 6.27% 14,711 1,168 7.94% 341,692 25,229 7.38%
Investment securities and
securities available for sale:
Taxable........................ 1,481,671 94,291 6.36% 1,443,077 95,540 6.62% 1,438,193 89,814 6.24%
Nontaxable/(2)/................ 110,316 7,992 7.24% 110,639 8,221 7.43% 92,335 6,729 7.29%
Equity securities.............. 90,639 5,903 6.51% 77,960 5,647 7.24% 83,709 5,670 6.77%
----------- -------- ----------- -------- ----------- --------
Total securities............ 1,682,626 108,186 6.43% 1,631,676 109,408 6.71% 1,614,237 102,213 6.33%
Federal funds sold, securities
purchased under resale
agreements and other short-
term investments................. 56,432 2,620 4.64% 46,887 3,657 7.80% 65,711 3,252 4.95%
----------- -------- ----------- -------- ----------- --------
Total interest-earning assets..... 11,881,184 $905,377 7.62% 10,723,803 $921,774 8.60% 9,793,524 $794,313 8.11%
----------- -------- ----------- -------- ----------- --------
Allowance for loan losses......... (117,536) (104,824) (91,783)
Cash and due from banks........... 282,500 292,287 319,290
Premises and equipment, net....... 193,793 196,211 194,317
Other assets...................... 352,359 483,691 573,343
----------- ----------- -----------
Total Assets...................... $12,592,300 $11,591,168 $10,788,691
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Interest-bearing demand
deposits....................... $ 2,024,000 $ 48,581 2.40% $ 1,737,129 $ 59,785 3.44% $ 1,619,018 $ 44,345 2.74%
Savings deposits................ 470,509 9,894 2.10% 515,728 17,329 3.36% 582,402 17,668 3.03%
Time deposits................... 4,700,236 265,024 5.64% 4,705,950 282,346 6.00% 4,128,030 217,153 5.26%
Short-term borrowings........... 1,695,628 66,471 3.92% 1,534,283 97,002 6.32% 1,306,255 66,765 5.11%
Long-term debt.................. 1,538,027 90,729 5.90% 972,426 62,259 6.40% 954,848 58,545 6.13%
----------- -------- ----------- -------- ----------- --------
Total interest-bearing
liabilities.................... 10,428,400 480,699 4.61% 9,465,516 518,721 5.48% 8,590,553 404,476 4.71%
----------- -------- ----------- -------- ----------- --------
Noninterest-bearing demand
deposits....................... 1,237,272 1,116,535 1,112,931
Mortgage Custodial Deposits..... 963 177,010 305,033
Other liabilities............... 99,584 104,612 91,700
----------- ----------- -----------
Total liabilities............... 11,766,219 10,863,673 10,100,217
Shareholders' equity............ 826,081 727,495 688,474
----------- ----------- -----------
Total liabilities and
shareholders' equity............. $12,592,300 $11,591,168 $10,788,691
=========== =========== ===========
Rate differential................. 3.01% 3.12% 3.40%
Net interest income and net yield
on interest-earning assets/(3)/.. $424,678 3.57% $403,053 3.76% $389,837 3.98%
======== ======== ========

--------
(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 earned for loans. Tax equivalent interest earned is actual
interest earned times 145%.
(2) Interest earned and average rates on obligations of states and political
subdivisions are reflected on a tax equivalent basis. Tax equivalent
interest earned is actual interest earned times 145%. Tax equivalent
average rate is tax equivalent interest earned divided by average volume.
(3) Net interest income divided by average total interest-earning assets.

An Analysis of Interest Increases (Decreases)

2001 Change From 2000 2000 Change From 1999
---------------------------- ----------------------------
Attributed To/(1)/ Attributed To/(1)/
Amount Volume Rate Amount Volume Rate
-------- ------- --------- -------- -------- --------
(In thousands)

Interest income:
Taxable securities..................... $ (1,249) $ 2,515 $ (3,764) $ 5,726 $ 306 $ 5,420
Nontaxable securities/(2)/............. (229) (24) (205) 1,492 1,358 134
Equity securities...................... 256 861 (605) (23) (402) 379
-------- ------- --------- -------- -------- --------
Total securities....................... (1,222) 3,352 (4,574) 7,195 1,262 5,933
Total loans (net of unearned income)... (40,401) 45,198 (85,599) 131,466 99,731 31,735
Mortgage warehouse lending............. 25,992 34,189 (8,197) 12,456 11,019 1,437
Mortgage loans held for sale........... 271 553 (282) (24,061) (25,828) 1,767
Federal funds sold and securities
purchased under resale agreements and
Other short-term investments......... (1,037) 643 (1,680) 405 (1,110) 1,515
-------- ------- --------- -------- -------- --------
Total............................ (16,397) 83,935 (100,332) 127,461 85,074 42,387
-------- ------- --------- -------- -------- --------
Interest expense:
Interest-bearing demand deposits....... (11,204) 8,818 (20,022) 15,440 3,419 12,021
Savings deposits....................... (7,435) (1,411) (6,024) (339) (2,135) 1,796
Time deposits.......................... (17,322) (343) (16,979) 65,193 32,533 32,660
Short-term borrowings.................. (30,531) 9,361 (39,892) 30,237 12,827 17,410
Long-term debt......................... 28,470 33,704 (5,234) 3,714 1,092 2,622
-------- ------- --------- -------- -------- --------
Total............................ (38,022) 50,129 (88,151) 114,245 47,736 66,509
-------- ------- --------- -------- -------- --------
Net interest income.............. $ 21,625 $33,806 $ (12,181) $ 13,216 $ 37,338 $(24,122)
======== ======= ========= ======== ======== ========

--------
(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.

Noninterest Income

One of BancGroup's primary strategies has been to expand its noninterest
income. The Company continues to emphasize growth in wealth management
services, international banking, electronic banking services and cash
management services. These services provide a broad base of revenue generation
capabilities. Noninterest income increased $15.8 million or 20.3% from 2000 to
2001 and $2.5 million or 3.4% from 1999 to 2000. Non-interest income from
continuing operations excluding nonrecurring income from the gain on sale of
certain branches, securities gains and other miscellaneous items increased 10%
in 2001 and 20% in 2000.

Increase (Decrease)
------------------------------
Years Ended December 31, 2001 2000
------------------------ Compared Compared
2001 2000 1999 to 2000 % to 1999 %
------- ------- ------- -------- ---- -------- ------
(In thousands)

Noninterest income:
Service charges on deposit accounts $42,032 $38,596 $39,305 $ 3,436 8.9% $ (709) (1.8)%
Wealth Management.................. 8,670 8,530 5,544 140 1.6 2,986 53.9
Electronic Banking................. 6,918 5,639 4,973 1,279 22.7 666 13.4
Mortgage Origination............... 8,287 5,892 340 2,395 40.6 5,552 1632.9
Securities Gains, net.............. 8,701 538 497 8,163 -- 41 8.2
Other Income....................... 19,101 18,690 24,682 411 2.2 (5,992) (24.3)
------- ------- ------- ------- ---- ------- ------
Total noninterest income......... $93,709 $77,885 $75,341 $15,824 20.3% $ 2,544 3.4%
======= ======= ======= ======= ==== ======= ======

Non-interest income from service charges on deposit accounts is
significantly affected by competitive pricing on these services and the volume
of non-interest bearing accounts. The average non-interest bearing retail
deposits increased 10.8% in 2001 and .3% in 2000, while service charges on the
accounts increased 8.9% in 2001 and decreased 1.8% in 2000. The increase of
8.9% in 2001 is primarily the result of increased service fee rates and the
acquisitions completed in 2001. The decrease of 1.8% in 2000 was due to
competitive pressures and increasing interest rates resulting in a shift to
other deposit products.

Service charges on deposit accounts through account analysis fees include
income from the sale of cash management products. These products include lock
box services, sweep accounts, zero balance accounts, electronic data
interchange, automated clearing house and Business Banker Plus (TM), an online
tool for bank account reporting services. Cash management revenues increased
32.7% and 41% in 2001 and 2000, respectively. Colonial continues to enhance and
actively promote these products in its regional banks through a dedicated sales
force. Colonial expects continued growth in cash management services by
expanding these services to existing customers through cross-sell opportunities.

Wealth management services include discount brokerage, investment sales,
asset management, trust services and insurance including term, universal, whole
life and long-term care. Sales of these products are directly affected by
changes in the economy and the stock market as well as the perception of
investors of the future impact of these changes. 2001 presented many unique
situations including the terrorist attack of September 11, multiple, rapid
drops in interest rates and a recession that impacted the stock market. As a
result income from wealth management services was $8.7 million in 2001 as
compared to $8.5 million in 2000, a 1.6% increase during a very tough year in
the market.

Electronic banking services continue to expand to meet customer demands for
banking when and where they want it. These services are provided through our
ATM network, business and personal check cards and our internet banking
product. In 2001 Colonial increased the number of customers it serviced in ATM,
check card and internet banking products. It also introduced its business check
card product. As a result, electronic banking fees increased 22.7% in 2001 when
compared to 2000.

Mortgage origination is available in all of Colonial's regional banks. A
central mortgage-processing unit that facilitates the production and sale of
mortgage products supports each region except Texas. With the acquisition of
Mercantile Bank in Dallas, TX, the Texas region will obtain an established
mortgage production unit. Colonial offers both adjustable and fixed rate
products. Adjustable rate products are generally retained in Colonial's loan
portfolio while fixed rate products are sold in the secondary market. Income
from loans originated and subsequently sold in the secondary market are
reflected in noninterest income. Mortgage origination volume and product mix is
directly affected by changes in mortgage interest rates. Mortgage origination
income from secondary market loans increased 40.6% to $8.3 million in 2001 as
compared to $5.9 million in 2000 due to the decrease in mortgage rates in late
2000 and throughout 2001. This decrease in rates created increased demand for
fixed rate products due to an increase in home purchases and refinancing
activity.

As shown in the table above, securities gains in each of the three years
were $8,701,000, $538,000, and $497,000, respectively. In 2001 sales of
securities were undertaken in a realignment of the Company's mix of earnings
assets.

Other income of $10 million was recorded in 1999 as a result of gains on the
sales of five supermarket branches in Florida and the company's Dalton, Georgia
branches as well as other one-time miscellaneous income. Excluding these
nonrecurring items, other income in 2000 increased approximately $4.0 million
primarily due to increases in bank owned life insurance income, merchant
services income, and check commissions.

Non-interest Expense

Non-interest expense to average assets was 2.23%, 2.23%, and 2.21% in 2001,
2000, and 1999 respectively (from continuing operations excluding merger
related expenses).

The company completed the conversion of branches purchased in Nevada during
the first quarter of 2001, and branches purchased in Alabama and Florida during
the fourth quarter of 2001. BancGroup also completed the conversion of
Manufacturers Bank during the fourth quarter of 2001. In July 2000, the company
announced definitive plans to exit the mortgage servicing business. As a result
of the sale, 13 retail mortgage offices were merged into the regional bank
structure of Colonial Bank. The company completed the conversion of an acquired
bank in Texas in the first quarter of 2000, and conversions of banks acquired
in Nevada in the second quarter of 2000. The company completed the sale of five
supermarket branches in the first quarter of 1999, closed several unprofitable
branches in the second quarter of 1999, completed the sale of its Dalton,
Georgia branches in the third quarter of 1999, and sold the wholesale mortgage
production unit in the fourth quarter of 1999. The expenses related to
discontinued operations are not reflected in the following table. Each of these
initiatives resulted in a reduction in operating expenses after its completion.

Years Ended December 31, Increase (Decrease)
---------------------------- ------------------------------

2001 2000
Compared Compared
2001 2000 1999 to 2000 % to 1999 %
-------- -------- -------- --------- --- --------- ---
(In thousands)
Noninterest expense:
Salaries and employee benefits..... $151,319 $137,311 $117,815 $ 14,008 10% $ 19,496 17%
Occupancy expense, net............. 35,036 31,572 29,484 3,464 11 2,088 7
Furniture and equipment expenses... 29,289 29,493 25,633 (204) (1) 3,860 15
Amortization of intangible assets.. 6,251 5,226 5,241 1,025 20 (15) --
Merger related expenses............ 3,049 -- 1,307 3,049 -- (1,307) --
FDIC and state assessments......... 2,150 2,005 1,677 145 7 328 20
Advertising and public relations... 6,093 7,908 7,863 (1,815) (23) 45 1
Stationery, printing and supplies.. 4,602 4,974 5,730 (372) (7) (756) (13)
Telephone.......................... 6,920 6,554 6,221 366 6 333 5
Legal fees......................... 5,749 4,707 4,634 1,042 22 73 2
Postage and courier................ 7,052 6,867 6,795 185 3 72 1
Insurance.......................... 1,594 1,451 1,507 143 10 (56) (4)
Professional services.............. 6,863 6,309 7,058 554 9 (749) (11)
Travel............................. 3,787 3,575 3,636 212 6 (61) (2)
Other.............................. 14,414 10,739 15,314 3,675 34 (4,575) (30)
-------- -------- -------- --------- --- --------- ---
Total noninterest expense...... $284,168 $258,691 $239,915 $ 25,477 10% $ 18,776 8%
======== ======== ======== ========= === ========= ===
Noninterest expense, from
continuing operations excluding,
merger related expenses to average
assets............................ 2.23% 2.23% 2.21%

In support of the Company's sales culture, BancGroup continues to make
strategic investments in its product and service offerings, technology systems,
incentives and branch network to enhance the Company's competitive presence in
existing markets. BancGroup's philosophy is to make strategic investments in
the tools employees need to optimize its customers' financial success.
Accordingly, noninterest expense increased 10% in 2001 as compared to 2000.

Salaries and benefits increased by $14.0 million in 2001 and $19.5 million
in 2000. These salary increases are due to additional employees resulting from
branch and bank acquisitions, additional branch openings, normal salary
increases, additional incentive related compensation and increased pension cost.

Net occupancy expense increased $3.5 and $2.1 million for 2001 and 2000,
respectively, primarily due to new branch construction, improvements to
existing branch locations, the purchase of additional branches and the
relocation of certain branches and regional headquarters for better market
presence.

Furniture and equipment expense remained flat during 2001 when compared to
2000, this follows a 15% increase in 2000 over 1999 primarily due to
improvements to the Company's computer and communication equipment and the
conversions completed in 2000 discussed above.

Amortization of intangible assets increased 20% over 2000 due to additional
goodwill and core deposit intangibles resulting from branch purchases during
2001. With the implementation of SFAS No. 142, goodwill and indefinite lived
intangible assets will no longer be amortized. Instead, impairment testing will
be performed at least annually on all goodwill and indefinite lived intangible
assets. See "Financial Accounting Standards Board Releases" located in the
management discussion and analysis section of this report for more detailed
information.

FDIC assessments increased slightly in 2001 due to an increase in
BancGroup's deposits. The 20% increase in 2000 was due to a waiver of the state
assessment in the first and second quarters of 1999.

The $1.8 million decrease in advertising and public relations in 2001 was
due to the expense reduction strategy initiated in the last half of the year as
a result of economic conditions. Decreases in supplies were primarily due to
operating efficiencies gained through technological advancements specifically
related to the imaging of internal reports in 2000 and to the expense reduction
initiative in 2001. The increase in 2001 of professional services and travel
was primarily the result of the completion of the conversion process in 2001.

The increase in legal expenses in 2001 was primarily the result of
additional activities related to asset quality as well as other normal business
issues. The increases in other expenses were due to normal expenses resulting
from the Company's growth.

Merger Related Expenses

In 2001, BancGroup completed the acquisition of two branches in Nevada from
First Security Bank, 13 branches from Union Planters in Alabama and Florida,
and the merger with Manufacturers Bank of Florida in Tampa, Florida. The
results for 2001 include pretax costs associated with these mergers and
acquisitions totaling $4.7 million. These costs are composed of a $1.0 million
additional loan loss provision to align Manufacturer's loan provisions with
Company standards, $658,000 in personnel costs to complete the mergers, and
transaction costs of $3.0 million such as legal and accounting fees, brokerage
commissions, and incremental charges related to the integration of acquired
banks, such as system conversions (including contract buy-outs and write offs
of equipment) and employee severance.

Income Taxes

The provision for income taxes is as follows:

2001 2000 1999
------- ------- -------
(In thousands)

Continuing operations....... $69,181 $69,556 $69,360
Discontinued operations..... (371) (3,066) 2,134
------- ------- -------
Total................ $68,810 $66,490 $71,494
======= ======= =======

BancGroup is subject to federal and state taxes at combined rates of
approximately 36% for regular tax purposes and 23% for alternative minimum tax
purposes. These rates are reduced or increased for certain nontaxable income or
nondeductible expenses, primarily consisting of tax exempt interest income,
partially taxable dividend income, nondeductible amortization of goodwill, and
certain nondeductible acquisition expenses.

Discontinued Operations

In July 2000 BancGroup announced its definitive plans to exit the mortgage
servicing business and discontinue the operations of mortgage servicing as a
separate business unit and recorded a loss on disposal of discontinued
operations of $4.3 million after tax in 2000. As of December 31, 2000, all loan
servicing transfers were completed and the mortgage servicing rights removed
from the Company's balance sheet. In addition, the escrow and custodial
deposits related to those servicing rights have been transferred out of
Colonial Bank resulting in a $176 million reduction in average noninterest
bearing deposits from December 31, 2000 to December 31, 2001. At December 31,
2001, the balance sheet of the Company includes approximately $3.6 million in
receivables and other advances, which represent the expected recoverable
amounts once all documentation supporting the transferred loans is provided to
the new servicer. Due to the volume of loans transferred and the costs and
complexity in providing certain documentation, the Company revised its estimate
of the cost to complete the disposition of this business resulting in a
$613,000, net of tax expense in 2001. The loss from discontinued operations for
the year ended December 31, 2000 was $743,000, net of tax.

REVIEW OF FINANCIAL CONDITION

Overview

Changes in ending asset balances of the company's segments and changes in
selected components of the Company's balance sheet from December 31, 2000 to
December 31, 2001 are as follows:

Increase Increase
(Decrease) (Decrease)
Amount %
---------- ----------

(In thousands)
Assets:
Commercial Banking..................................... $1,214,464 10.2%
Mortgage Banking/(1)/.................................. (29,050) (82.9)
Corporate/Other/(2)/................................... 68 .1
---------- -----
Total Assets..................................... $1,185,482 9.9%
Other Balance Sheet Components:
Securities available for sale and investment securities $ 365,762 24.1
Mortgage loans held for sale........................... 25,587 259.3
Loans, net of unearned income.......................... 724,711 7.5
Deposits............................................... (20,443) (.2)
Mortgage custodial deposits............................ (12,427) (99.9)
Short-term borrowings.................................. 230,575 12.2
Long-term debt......................................... $ 923,893 107.2%

--------
(1) The mortgage banking segment was discontinued in 2000.
(2) Includes eliminations of certain intercompany transactions.

Management continually monitors the financial condition of BancGroup in
order to protect depositors, increase shareholder value and protect current and
future earnings. The most significant factors affecting BancGroup's financial
condition from 2000 through 2001 have been:

. Internal loan growth of 9.8% in 2001 following 15.0% growth in 2000.

. Loan mix changed to reflect a decrease in residential real estate loans to
18.7% of the total loan portfolio from 28.0% in 2000 and an increase in
mortgage warehouse lending to 12.4% of the total loan portfolio in 2001
from 3.9% in 2000.

. The mortgage warehouse lending division experienced loan growth of 241.5%,
increasing loans outstanding to $1.3 billion at December 31, 2001 from
$376.6 million at December 31, 2000.

. Maintenance of high asset quality and reserve coverage of nonperforming
assets. Nonperforming assets were 0.64% and 0.53% of related assets at
December 31, 2001 and 2000, respectively. Net charge-offs were 0.28% of
average loans during 2001 and 0.21% in 2000. The allowance for loan losses
was 1.18% of loans at December 31, 2001, providing a 239% coverage of
nonperforming loans (nonaccrual and renegotiated).

. A loan to deposit ratio of 124.6% and 115.4% at December 31, 2001 and
2000, respectively. Federal Home Loan Bank borrowings, correspondent fed
funds lines and brokered CD's continue to be a source of funding allowing
the Company funding flexibility.

. Increase of $25.6 million in mortgage loans held for sale during 2001 due
primarily to the decline in mortgage rates throughout 2001, which
increased new home purchases and refinancing activities.

. Issuance of $150 million subordinated notes in 2001, which qualifies as
Tier II Capital.

These items, as well as a more detailed analysis of BancGroup's financial
condition, are discussed in the following sections.

Loans

Growth in loans and maintenance of high asset quality are the principal
ingredients for improved earnings. Management's emphasis, within all of
BancGroup's banking regions, is on loan growth in accordance with local market
demands and in reliance upon the lending experience and expertise in the
regional banks and our specialized lending division such as mortgage warehouse.
Management believes that its strategy of meeting local demands and utilizing
local lending expertise has proved successful. This success is evident in
internal loan growth of 9.8% in 2001, 15.0% in 2000, 16.0% in 1999 and 15.1% in
1998, excluding acquisitions. Internal loan growth continues to be a major
factor in BancGroup's increasing earnings. This local customer relationship
responsibility combined with independent oversight of credit decisions and
conservative underwriting standards are key to the maintenance of the Company's
high asset quality.

BancGroup has a significant concentration of commercial real estate and
construction loans representing 33.0% and 22.1% of total loans, respectively.
BancGroup's commercial real estate and construction loans are spread
geographically throughout Alabama and Florida and other areas including
metropolitan Atlanta, Georgia, Dallas, Texas and Reno and Las Vegas, Nevada
with no more than 18% of total loans in any one of these geographic regions.
The Alabama economy experiences a generally slow but steady rate of growth,
while Georgia, Florida, Texas and Nevada are experiencing higher rates of
growth. Real estate in BancGroup's lending areas has not experienced
significantly inflated values due to excessive speculation or inflationary
pressures. The collateral held in the commercial real estate and construction
portfolios consists of various property types with no one property type
constituting a concentration. For BancGroup, these property types are primarily
multi-family housing, lodging, office buildings, warehouses, shopping centers,
amusement/recreational facilities, one-to-four family residential housing
developments, and health service facilities. The relatively small average loan
size and the application of conservative underwriting guidelines further reduce
risk. BancGroup's commercial real estate and construction loans continue to
perform at acceptable levels. Net charge-offs to average loans for the
commercial real estate portfolio were 0.26% and 0.09% for 2001 and 2000,
respectively. Net charge-offs to average loans for the construction portfolio
were 0.01% and 0.03% for 2001 and 2000, respectively.

Residential real estate loans represent 18.7% of total loans in 2001
compared to 28% in 2000. A portion of this decline is due to the second quarter
2001 securitization of approximately $307 million in single-family real estate
loans which were 100% received back into BancGroup's securities portfolio as
mortgage backed securities. Also, demand for this type of loan has declined as
more borrowers are looking for 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. Net charge-offs to
average loans for the residential real estate portfolio was 0.11% for both 2001
and 2000.

Loans classified as commercial, financial, and agricultural, representing
11.1% of total loans, consist of secured and unsecured credit lines and
equipment loans for various industrial, agricultural, commercial, financial,
retail, or service businesses. The risk associated with loans in the category
are generally related to earnings capacity of, and the cash flows generated
from, the individual business activities of the borrowers.

Consumer loans, representing 2.3% of total loans, are loans to individuals
for various purposes. Automobile loans and unsecured loans makeup the majority
of these loans. The principle source of repayment is the earning capacity of
the individual borrower, as well as the value of the collateral for secured
loans.

Outstanding loans in our international division, located in our South
Florida Region, represent 0.72% of our total outstanding loans at December 31,
2001. This exposure is spread among approximately 30 banking institutions in
ten Latin American / Caribbean countries. The banks are primarily top tier
institutions. These transactions are trade related involving letters of credit
as well as participations in commercial paper back up lines.

BancGroup established a mortgage warehouse lending division in 1998. This
department provides lines of credit collateralized by residential mortgage
loans to top tier mortgage companies, predominantly in the southeast. Loans
outstanding at December 31, 2001 and 2000 were $1.3 billion and $376.6 million,
respectively, with unfunded commitments of $497 million and $213 million at
December 31, 2001 and 2000, respectively.

BancGroup does not have a syndicated lending department; however, the
Company has 29 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 $190,000. Total fundings under these
commitments total $278 million. Substantially all of the increase in these
loans was attributed to the growth within our mortgage warehouse lending
division.

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:

. 25%--commercial real estate projects located within existing markets
. 13%--international credits which are primarily unfunded short-term
commitments to tier one correspondent banks
. 56%--mortgage warehouse lines to eight large institutions (the mortgage
warehouse lending department conducts its own audits of these borrowers)
. 6%--operating facilities to two large national corporations headquartered
in the Florida markets

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

As discussed more fully in subsequent sections, management has established
policies and procedures to ensure maintenance of adequate liquidity and
liquidity sources. BancGroup has arranged funding sources in addition to
customer deposits that provide the company the capability to exceed a 100% loan
to deposit ratio and maintain adequate liquidity.

Gross Loans by Category

December 31,
-------------------------------------------------------

2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- ----------
(In thousands)
Commercial, financial and agricultural $ 1,145,409 $1,264,281 $1,171,157 $1,049,397 $ 839,944
Real estate -- commercial............. 3,417,517 3,208,911 2,543,532 2,300,483 1,945,768
Real estate -- construction........... 2,295,675 1,700,281 1,435,783 1,273,751 1,111,868
Real estate -- residential............ 1,942,821 2,697,934 2,658,922 2,149,456 1,746,357
Installment and consumer.............. 240,836 278,739 306,593 275,015 253,796
Mortgage warehouse lending............ 1,286,399 376,638 172,425 84,894 --
Other................................. 39,019 116,518 131,223 104,228 145,026
----------- ---------- ---------- ---------- ----------
Total loans.................... $10,367,676 $9,643,302 $8,419,635 $7,237,224 $6,042,759
=========== ========== ========== ========== ==========

Management believes that any existing distribution of loans, whether
geographically, by industry, or by borrower, does not expose BancGroup to
unacceptable levels of risk. The current distribution of loans remains diverse
in location, size, and collateral function. These differences, in addition to
our emphasis on quality underwriting, serve to reduce the risk of losses. The
following chart reflects the geographic diversity and industry distribution of
Construction and Commercial Real Estate loans as December 31, 2001.

Construction Commercial Real Estate
------------ ----------------------
(In thousands)

Average Loan Size... $ 445 $ 488

Geographic Diversity
Alabama............ $ 383,168 $ 892,191
Georgia............ 419,695 445,676
Florida............ 1,052,080 1,546,139
Texas.............. 224,299 100,750
Nevada............. 136,744 138,140
Other.............. 79,689 294,621
---------- ----------
Total........ $2,295,675 $3,417,517
========== ==========

--------------------------------------------------------------------------------

Industry Distribution % of Industry Distribution to % of Industry Distribution to
--------------------- ---------------------------- ----------------------------
Construction Total Commercial Real Total
Portfolio Portfolio Estate Portfolio Portfolio
------------ --------- ---------------- ---------

Development.............. 23% 5% Retail.......... 18% 6%
1-4 Family Residential... 22% 5% Office.......... 16% 5%
Land Only................ 17% 4% Multi-Family.... 12% 4%
Multi-Family............. 8% 2% Lodging......... 11% 4%
Condominium.............. 8% 2% Office/Warehouse 11% 3%
Retail................... 5% 1% Nursing Home.... 5% 2%
Other (13 types)......... 17% 3% Other (9 types). 27% 9%
--- -- --- --
Total Total Commercial
Construction...... 100% 22% Real Estate..... 100% 33%
--- -- --- --

--------------------------------------------------------------------------------

Characteristics of the 75 Largest Construction and Commercial Real Estate Loans

Construction Commercial Real Estate
- ------------ ----------------------
- (In thousands)

75 Largest Loans Total $801,079 $733,872
% of 75 largest loans to category total....... 34.9% 21.5%
Average Loan to Value Ratio (75 largest loans) 68% 71%
Debt Coverage Ratio (75 largest loans)........ N/A 1.34x

Allocation of Allowance for Loan Losses

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

Allocation of the Allowance for Loan Losses

December 31,
----------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------- ------------------- ------------------ ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
-------- ----------- -------- ----------- ------- ----------- ------- ----------- ------- -----------
(In thousands)

Balance at end of period
Applicable to:
Commercial, financial, and
agricultural............. $ 33,326 11.1% $ 28,411 13.1% $23,629 13.9% $19,357 14.5% $14,134 13.9%
Real estate commercial.... 50,393 33.0% 45,017 33.3% 35,961 30.2% 30,998 31.8% 26,361 32.2%
Real estate construction.. 17,256 22.1% 16,089 17.6% 17,096 17.1% 14,775 17.6% 13,913 18.4%
Real estate -- residential 9,714 18.7% 13,705 28.0% 13,577 31.6% 12,659 29.7% 12,202 28.9%
Installment and consumer.. 2,390 2.3% 3,021 2.9% 4,091 3.6% 4,979 3.8% 5,110 4.2%
Other..................... 9,121 12.8% 3,812 5.1% 4,673 3.6% 2,311 2.6% 1,327 2.4%
-------- ----- -------- ----- ------- ----- ------- ----- ------- -----
Total................. $122,200 100.0% $110,055 100.0% $99,027 100.0% $85,079 100.0% $73,047 100.0%
======== ===== ======== ===== ======= ===== ======= ===== ======= =====

Loan Maturity/Rate Sensitivity

As discussed in a subsequent section, BancGroup seeks to maintain adequate
liquidity and minimize exposure to interest rate volatility. The goals of
BancGroup with respect to loan maturities and rate sensitivity continue to
focus on shorter-term maturities and floating or adjustable rate loans. At
December 31, 2001, approximately 62.2% of loans were floating rate loans.

Contractual maturities may vary significantly from actual maturities due to
loan extensions, early payoffs due to refinancing and other factors.
Fluctuations in interest rates are also a major factor in early loan pay-offs.
The uncertainties of future events, particularly with respect to interest
rates, make it difficult to predict the actual maturities. The following table
represents the contractual maturity at December 31, 2001.

Loan Maturity/Rate Sensitivity

December 31, 2001
- ------------------------------------------------------------------------------
Rate Sensitivity, Loans
Maturing Rate Sensitivity Maturing Over 1 Year
-------------------------------- --------------------- -----------------------
Within Over
1 Year 1-5 Years 5 Years Fixed Floating Fixed Floating
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)

Commercial, financial, and agricultural $ 635,758 $ 394,912 $ 156,053 $ 484,466 $ 702,257 $ 221,436 $ 329,529
Real estate -- commercial.............. 780,027 1,908,732 728,758 2,093,968 1,323,549 1,791,578 845,912
Real estate -- construction............ 1,387,819 859,967 47,889 289,338 2,006,337 142,763 765,093
Real estate -- residential............. 260,041 522,790 1,159,990 787,508 1,155,313 665,234 1,017,546
Installment and consumer............... 124,379 105,355 11,102 216,619 24,217 106,148 10,309
Other.................................. 1,232,106 34,764 17,234 49,237 1,234,867 25,575 26,423
---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals........................... $4,420,130 $3,826,520 $2,121,026 $3,921,136 $6,446,540 $2,952,734 $2,994,812
========== ========== ========== ========== ========== ========== ==========

Loan Quality

A major key to long-term earnings growth is maintenance of a high quality
loan portfolio. BancGroup's directive in this regard is carried out through its
policies and procedures for the underwriting and ongoing review of loans and
through a company wide senior credit administration function. This function
reviews larger credits prior to approval and also provides an independent
review of credits on a continual basis. In addition, the Company has
established regional bank loan committees made up of local officers and
directors that approve loans up to certain levels. These committees provide
local business and market expertise while BancGroup's senior management
provides independent oversight by participating in the state loan committees.

BancGroup has standard policies and procedures for the evaluation of new
credits, including debt service evaluations and collateral guidelines.
Collateral guidelines vary with the credit worthiness of the borrower, but
generally require maximum loan-to-value ratios of 85% for commercial real
estate and 90% for residential real estate. Commercial non-real estate,
financial and agricultural loans are generally collateralized by business
inventory, accounts receivables or new business equipment at 50%, 80% and 90%
of estimated value, respectively. Installment and consumer loan collateral,
where required, is based on 90% or lower loan to value ratios. Collateral
values referenced above are monitored and estimated by loan officers through
inspections, reference to broad measures of market values, and current
experience with similar properties or collateral. Loans with loan-to-value
ratios in excess of 80% have potentially higher risks which are offset by other
factors including the borrowers or guarantors' credit worthiness, the
borrowers' other banking relationships, the bank's lending experience with the
borrower, and any other potential sources of repayment.

Based on the credit review process and loan grading system, BancGroup
determines its allowance for loan losses and the amount of provision for loan
losses. The allowance for loan losses is maintained at a level which, in
management's opinion, is adequate to absorb probable losses on loans present in
the loan portfolio. The amount of the allowance is affected by: (1) loan
charge-offs, which decrease the allowance; (2) recoveries on loans previously
charged-off, which increase the allowance; (3) the provision for loan losses
charged to income, which increases the allowance, and (4) the allowance for
loan losses of acquired banks. In determining the provision for loan losses, it
is necessary for management to monitor fluctuations in the allowance resulting
from actual charge-offs and recoveries and to periodically review the size and
composition of the loan portfolio in light of historical loss experience and
current economic conditions.

The overall goal and result of these policies and procedures is to provide a
sound basis for new credit extensions and an early recognition of problem
assets to allow increased flexibility in their timely disposition.

Loan Loss Experience

The ratio of net charge-offs to average loans was 0.28%, 0.21%, and 0.22% in
2001, 2000, and 1999, 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.

The following schedule reflects greater than 100% coverage of nonperforming
loans (nonaccrual and renegotiated) by the allowance for loan losses.
Management has not targeted any specific coverage ratio in excess of 100%, and
the coverage ratio may fluctuate significantly as larger loans are placed into
or removed from nonperforming status. Management's focus has been on
establishing reserves related to an early identification of potential problem
loans. Management is committed to maintaining adequate reserve levels to absorb
losses present in the loan portfolio.

Summary of Loan Loss Experience

Years Ended December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- ----------
(In thousands)

Allowance for loan losses --
January 1................................. $ 110,055 $ 99,027 $ 85,079 $ 73,047 $ 62,319
Charge-offs:
Commercial, financial and
agricultural............................ 14,731 10,650 10,162 6,543 5,632
Real estate -- commercial................. 9,354 3,399 3,348 3,355 2,994
Real estate -- construction............... 292 529 1,190 1,744 436
Real estate -- residential................ 3,148 3,260 2,673 3,443 1,782
Installment and consumer.................. 4,049 4,492 5,351 6,882 5,728
Other..................................... 1,155 1,117 1,711 1,468 695
----------- ---------- ---------- ---------- ----------
Total charge-offs................... 32,729 23,447 24,435 23,435 17,267
----------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and
agricultural............................ 698 1,272 2,519 1,278 1,016
Real estate -- commercial................. 404 745 633 1,456 1,026
Real estate -- construction............... 9 62 59 52 91
Real estate -- residential................ 565 440 873 589 246
Installment and consumer.................. 1,999 1,898 2,702 1,953 1,820
Other..................................... 330 283 385 788 137
----------- ---------- ---------- ---------- ----------
Total recoveries.................... 4,005 4,700 7,171 6,116 4,336
----------- ---------- ---------- ---------- ----------
Net charge-offs............................ 28,724 18,747 17,264 17,319 12,931
Addition to allowance charged to
operating expense........................ 39,573 29,775 29,177 27,511 16,786
Allowance added from bank
acquisitions............................. 1,296 -- 2,035 1,840 6,873
----------- ---------- ---------- ---------- ----------
Allowance for loan losses --
December 31.............................. $ 122,200 $ 110,055 $ 99,027 $ 85,079 $ 73,047
=========== ========== ========== ========== ==========
Loans (net of unearned income)
December 31.............................. $10,367,665 $9,642,954 $8,419,225 $7,235,057 $6,041,025
Ratio of ending allowance to ending
loans (net of unearned income)........... 1.18% 1.14% 1.18% 1.18% 1.21%
Average loans (net of unearned
income).................................. $10,119,185 $9,030,529 $7,771,884 $6,561,770 $5,587,695
Ratio of net charge-offs to average
loans (net of unearned income)........... 0.28% 0.21% 0.22% 0.26% 0.23%
Allowance for loan losses as a percent
of nonperforming loans (nonaccrual
and renegotiated)........................ 239% 258% 275% 248% 250%

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
also 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:

Nonperforming Assets

December 31,
-------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(In thousands)

Aggregate loans for which interest is not being
accrued.............................................. $49,675 $41,419 $34,765 $32,911 $28,209
Aggregate loans renegotiated to provide a
reduction or deferral of interest or principal
because of deterioration in the financial
condition of the borrower............................ 1,507 1,161 1,265 1,334 1,014
------- ------- ------- ------- -------
Total nonperforming loans*..................... 51,182 42,580 36,030 34,245 29,223
Other real estate and in-substance foreclosure......... 15,198 8,680 9,009 8,164 14,345
Repossessions.......................................... 355 298 206 564 796
------- ------- ------- ------- -------
Total nonperforming assets*.................... $66,735 $51,558 $45,245 $42,973 $44,364
------- ------- ------- ------- -------
Aggregate loans contractually past due 90 days
for which interest is being accrued.................. $28,249 $ 9,842 $11,204 $ 9,015 $ 7,346
Total nonperforming loans as a percent of net
loans................................................ 0.49% 0.44% 0.43% 0.47% 0.48%
Total nonperforming assets as a percent of net
loans, other real estate and repossessions........... 0.64% 0.53% 0.54% 0.59% 0.73%
Total nonperforming loans and 90 day past due
loans for which interest is being accrued as a
percent of net loans................................. 0.77% 0.54% 0.56% 0.60% 0.61%
Allowance for loan loss as a percent of
nonperforming loans (nonaccrual and
renegotiated)........................................ 239% 258% 275% 248% 250%

--------
* Total does not include loans contractually past due 90 days or more which are
still accruing interest

Fluctuations from year to year in the balances of nonperforming assets are
attributable to several factors including changing economic conditions in
various markets, nonperforming assets obtained in various acquisitions and the
disproportionate impact of larger (over $500,000) individual credits.

Management, through its loan officers, internal credit review staff and
external examinations by regulatory agencies, has identified approximately $258
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
December 31, 2001, 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 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.

The above 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.

Interest income recognized and interest income foregone on nonaccrual loans
was not significant for the years ended December 31, 2001, 2000, 1999, 1998,
and 1997.

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 The recorded investment in impaired loans at December 31,
2001 and 2000 was $46.2 million and $29.5 million, respectively and these loans
had a corresponding valuation allowance of $19.7 million and $14.5 million,
respectively. The average investment in impaired loans during 2001 and 2000
totaled $47.7 million and $29.1 million, respectively.

Securities

On a daily basis, Colonial BancGroup determines the funds available for
short-term investment while funds available for long-term investment are
projected based upon anticipated loan and deposit growth, liquidity needs,
pledging requirements and maturities of securities, as well as other factors.
Based on these factors, the Company's interest rate risk position and
management's interest rate and income tax forecasts, an investment strategy is
determined.

All securities are either classified as held to maturity or available for
sale. Held to maturity securities are those securities which management has the
ability and intent to hold until maturity. The carrying value of held to
maturity investments was $30.1 million at the end of 2001 compared to $47
million at year end 2000. The aforementioned decline was due to maturities and
calls in the portfolio. Securities classified as held to maturity consisted
primarily of U.S. Treasury bonds, agency mortgage backed securities and state,
county and municipal obligations. Overall, the stated maturity of these
securities was 5.13 years with an average life of 3.5 years.

Securities available for sale represent those securities that the company
intends to hold for an indefinite period of time or that may be sold in
response to changes in interest rates, prepayment risk or other similar
factors. These securities are recorded at market value with unrealized gains or
losses, net of any tax effect, added or deducted from shareholders' equity. At
December 31, 2001, available-for-sale securities totaled $1.9 billion or 98% of
the total portfolio versus $1.5 billion or 97% at the end of 2000. The increase
of $400 million in 2001 resulted from the investment of excess liquidity during
a period of slowing loan growth and the $307 million securitization of
single-family real estate loans in the second quarter of 2001 of which $96
million remains in the securities portfolio at December 31, 2001. Securities
available for sale at year-end 2001 consisted of U.S. Treasury and federal
agency notes (3%), variable and fixed rate agency mortgage-backed securities
(79%), state, county and municipal securities (5%), other private issuer
mortgage-backed and trust preferred securities (8%), and equities (5%) which
consist primarily of Federal Home Loan Bank stock and Federal Reserve Bank
stock. Overall, the stated maturity of these securities was 20.92 years with an
average life of 3.25 years. Stated maturities differ from average lives because
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. BancGroup's mortgage-backed security portfolio as of
December 31, 2001 does not include any interest-only strip securities and the
amount of unamortized premium on mortgage-backed securities is approximately
$7,400,000.

Colonial's policy requires all securities purchased for the securities
portfolio, except state, county and local municipal obligations, to be rated
investment grade or better. The purchase of non-rated municipal securities is
limited by policy to those bonds in the general market served by BancGroup
which provide opportunities for additional banking business. Securities backed
by the U.S. Government and its agencies, both on a direct and indirect basis,
represented approximately 82% of the total portfolio at December 31, 2001.

At December 31, 2001, there was no single issuer, with the exception of the
U.S. government and U.S. government agencies, where the aggregate book value of
these securities exceeded 10% of shareholders equity ($86.5 million).

The changes noted above are reflected in the following table.

Securities by Category

Carrying Value at December 31,
--------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)

Investment securities:
U.S. Treasury securities and obligations of U.S. government agencies $ 500 $ 3,138 $ 4,153
Mortgage-backed securities.......................................... 6,584 15,132 24,833
Obligations of state and political subdivisions..................... 21,846 27,143 33,620
Other............................................................... 1,125 1,635 1,648
---------- ---------- ----------
Total......................................................... $ 30,055 $ 47,048 $ 64,254
========== ========== ==========
Securities available for sale:.......................................
U.S. Treasury securities and obligations of U.S. government agencies $ 59,332 $ 244,974 $ 183,189
Mortgage-backed securities.......................................... 1,470,533 902,204 1,091,364
Obligations of state and political subdivisions..................... 89,497 93,435 71,652
Other............................................................... 233,077 229,071 163,663
---------- ---------- ----------
Total......................................................... $1,852,439 $1,469,684 $1,509,868
========== ========== ==========

The carrying value of securities at December 31, 2001 mature as follows:

Maturity Distribution of Securities/(3)/

Within 1 Year 1-5 Years 5-10 Years Over 10 Years
----------------- -------------- ------------- -------------
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------- ------- ------- ------- ------ ------- ------ -------
(In thousands)

Investment securities:
U.S. Treasury securities.......... $ -- --% $ -- --% $ -- --% $ 500 7.25%
Obligations of U.S. government
agencies and mortgage backed
securities...................... 521 6.95% 1,671 6.86% 2,058 7.46% 2,334 7.25%
Obligations of state and political
subdivisions/(1)/............... 4,735 8.14% 11,350 8.02% 4,353 7.88% 1,408 8.42%
Other............................. 100 2.50% 1,025 4.15% -- --% -- --%
---------- ---- ------- ---- ------ ---- ------ ----
Total....................... $ 5,356 7.92% $14,046 7.60% $6,411 7.75% $4,242 7.64%
---------- ---- ------- ---- ------ ---- ------ ----
Securities available for sale/(2):/
U.S. Treasury securities and
obligations of U.S.
government agencies............. $ 59,332 5.80%
Mortgage-backed securities........ 1,470,533 6.05%
obligations of state and political
subdivisions/(1)/............... 89,497 7.46%
Other............................. 233,077 5.91%
---------- ----
Total....................... $1,852,439 6.09%
========== ====

--------
(1) The weighted average yields are calculated on the basis of the cost and
effective yield weighted for the scheduled maturity of each security. The
taxable equivalent adjustment represents the annual amounts of income from
tax exempt obligations multiplied by 145%.
(2) Securities available for sale are shown as maturing within one year
although BancGroup intends to hold these securities for an indefinite
period of time. (See Contractual Maturities in Note 3 to the consolidated
financial statements.) This category excludes all corporate common and
preferred stock since these instruments have no maturity date.
(3) Expected and actual maturities could differ from contractual maturities
because borrowers may have the right to call or pre-pay obligations without
call or pre-payment penalties.

Mortgage Servicing Rights and Servicing Hedge

In July 2000, the Company announced definitive plans to exit the mortgage
servicing business. As of December 31, 2000, all sales of the servicing rights
and transfers of underlying loans were completed. For this reason, MSR's were
$0 at December 31, 2001 and 2000 compared to $238 million at December 31, 1999.
(See Note 6 to the Consolidated Financial Statements for details on
discontinued operations)

As a result of the previously discussed plans to exit the mortgage servicing
business, all hedges related to MSR's were liquidated during the third quarter
of 2000.

Deposits

BancGroup's deposit structure consists of the following:

December 31, % of Total
--------------------- ------------
2001 2000 2001 2000
---------- ---------- ----- -----
(In thousands)

Noninterest-bearing demand deposits............. $1,439,200 $1,205,267 17.3% 14.4%
Mortgage Custodial Deposits..................... 17 12,444 -- 0.2
Interest-bearing demand deposits................ 2,231,166 1,883,509 26.8 22.5
Savings deposits................................ 443,666 464,489 5.3 5.6
Certificates of deposits less than $100,000..... 2,363,607 2,976,997 28.4 35.6
Certificates of deposits more than $100,000..... 1,456,684 1,442,978 17.5 17.3
IRA's........................................... 334,380 318,479 4.0 3.8
Open time deposits.............................. 54,259 51,686 0.7 0.6
---------- ---------- ----- -----
Total deposits........................... $8,322,979 $8,355,849 100.0% 100.0%
========== ========== ===== =====

BancGroup, through its acquisitions and branch expansion programs, has
increased its market presence into high growth areas in the country. The
principal goal is to provide the Company's retail customer base with convenient
access to branch locations while enhancing the Company's potential for future
increases in profitability. The growth of deposits continues to be a primary
strategic initiative of BancGroup, although competition for deposits remains
strong within the banking industry as well as increased competition from other
business sectors.

BancGroup is continuing initiatives to grow deposits throughout its market.
The high growth areas of Florida are a primary focus due to the lower cost of
funds in that market. Average retail deposits (excluding mortgage custodial and
brokered deposits) increased $553.1 million in 2001 which represents a 7%
growth over 2000's average. BancGroup's retail deposit base is currently 43% in
Alabama, 43% in Florida, 8% in Georgia, 3% in Texas and 3% in Nevada. As market
demographics change, products and services are structured to meet the needs of
a particular region or customer base. Strong regional management supported by
BancGroup's asset/liability and product and services management teams provide
the Company with resources to remain competitive in its deposit markets.

The growth in retail deposits in 2001 provided funds which allowed for the
reduction in the brokered deposits of $313 million as well as off-setting the
reduction in mortgage custodial deposits of $12 million. The reduction in
mortgage custodial deposits is a result of the Company's exit from the mortgage
servicing business as discussed previously. The Company's brokered Certificate
of Deposit (CD) program offers CD's in increments of $1,000 to $99,000 to out
of market customers at competitive rates and maturities. At December 31, 2001
and 2000, $112 million and $425 million, respectively were outstanding under
this program. The Company has a brokered money market program that attracts
deposits from out-of-market customers. At December 31, 2001 and 2000, $74
million and $66 million were outstanding, respectively.

Interest Rate Sensitivity

The Federal Reserve has lowered the target fed funds rate 11 times in 2001,
a total of 475 basis points, to 1.75% at year-end, its lowest level in over 40
years. Such a series of rate cuts by the Federal Reserve has not been observed
since the last recession which occurred in 1991. Despite the significant and
rapid decline in rates, BancGroup's net interest margin when adjusted for the
significant growth in low margin mortgage warehouse loan declined just 9 basis
points.

BancGroup has an 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, including interest rate sensitivity.
The goal of ALMCO is to minimize the volatility in the net interest margin
caused by 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. One of
the actions taken by ALMCO in 2001 was to extend the duration of its
liabilities to take advantage of lower long-term rates and to provide
protection from rates eventually rising.

ALMCO monitors the impact of changes in interest rates on net interest
income using several tools, including static rate sensitivity reports, or Gap
reports, and income simulations modeling under multiple rate scenarios.

The following table represents the output from the Company's simulation
model based on the starting balance sheet as of December 31,2001, when the Fed
Funds Rate was 1.75%. The table 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 fourth quarter 2001 Net Interest Income annualized.

Percentage Change in 12 Month Projected
Net Interest Income/ (1)/:
Versus Projected Versus
Net Interest Income Under 4th Qtr. 2001 Net Interest
Basis Points change Fed Funds Rate No Rate Change Income Annualized
------------------- -------------- ------------------------- --------------------------

+200.......... 3.75 (1)% 7%
+100.......... 2.75 (1)% 7%
No change..... 1.75 -- 8%
-100.......... 0.75 0% 8%

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

This table shows that under all rate shock scenarios, net interest income is
expected to improve 7% to 8% versus recent results. The improvements in net
interest income is due largely to the downward repricing of the CD portfolio.
As of December 31, 2001, $2.7 billion of BancGroup's CD portfolio will mature
and reprice within the next six months at rates that are expected to be
approximately 2% below their current cost.

The following table represents the output of the simulation model for the
net portfolio value (NPV), which is defined as the net present value of
interest rate sensitive assets, interest rate sensitive liabilities and
off-balance sheet contracts. The table represents the percentage change in the
NPV under 100 basis point rate shocks versus the NPV assuming rates as of
December 31, 2001.

% Change in Net Portfolio Value vs. NPV under
Basis Points Change Fed Funds Rates No Rate Change
------------------- --------------- ---------------------------------------------

+200............... 3.75 1.5%
+100............... 2.75 1.0%
No Change in Rates. 1.75 0.0%
-100............... 0.75 (3.9)%

The following table summarizes BancGroup's Maturity / Rate Sensitivity or
Gap at December 31, 2001.

At December 31, 2001
-----------------------------------------------------------------------
Interest Sensitive Within
-----------------------------------------------------------------------
Total 0-90 91-180 181-365 1-5 Over 5
Balance Days Days Days Years Years
----------- ---------- ----------- -------- ---------- -----------
(In thousands)

Rate Sensitive Assets:
Federal Funds sold and
resale Agreements........... $ 15,084 $ 15,084 $ -- $ -- $ -- $ --
Investment securities......... 30,055 1,216 681 3,563 13,050 11,545
Securities available for sale. 1,852,439 237,445 79,744 204,486 901,475 429,289
Mortgage loans held for
sale........................ 35,453 35,453 -- -- -- --
----------- ---------- ----------- -------- ---------- -----------
Loans, net of unearned
income...................... 10,367,665 6,107,767 412,353 688,295 2,476,054 683,196
Allowances for loan losses.... (122,200) (71,579) (4,900) (8,179) (29,423) (8,119)
----------- ---------- ----------- -------- ---------- -----------
Net loans..................... 10,245,465 6,036,188 407,453 680,116 2,446,631 675,077
Nonearning assets............. 1,006,607 -- -- -- -- 1,006,607
----------- ---------- ----------- -------- ---------- -----------
Total Assets............ $13,185,103 $6,325,386 $ 487,878 $888,165 $3,361,156 $ 2,122,518
=========== ========== =========== ======== ========== ===========
Rate Sensitive Liabilities:
Interest-bearing demand
deposits.................... $ 2,231,166 $ 647,648 $ 439,179 $ -- $1,126,919 $ 17,420
Savings deposits.............. 443,666 136,434 88,733 -- 197,149 21,350
Certificates of deposits less
than $100,000............... 2,363,607 929,901 565,809 490,819 377,012 66
Certificates of deposits
more than $100,000.......... 1,456,684 645,826 348,400 287,015 174,538 905
IRAs.......................... 334,380 103,674 64,087 64,435 101,968 216
Open time deposits............ 54,259 49,164 477 4,618 -- --
Short-term borrowings......... 2,128,133 2,113,871 14,262 -- -- --
Long-term debt................ 1,786,140 161,247 -- -- 859,375 765,518
Noncosting liabilities &
equity...................... 2,387,068 -- -- -- -- 2,387,068
Total Liabilities &
Equity................ $13,185,103 $4,787,765 $ 1,520,947 $846,887 $2,836,961 $ 3,192,543
=========== ========== =========== ======== ========== ===========
Gap............................ $ -- $1,537,621 $(1,033,069) $ 41,278 $ 524,195 $(1,070,025)
=========== ========== =========== ======== ========== ===========
Cumulative Gap................. $ -- $1,537,621 $ 504,552 $545,830 $1,070,025 $ --
=========== ========== =========== ======== ========== ===========

The last two lines of the preceding table represents the interest rate
sensitivity gap which is the difference between rate sensitive assets and rate
sensitive liabilities. The interest rate sensitivity gap schedule reflects a
4.14% positive gap at 12 months; therefore as of December 31, 2001 BancGroup
generally has a greater exposure to net income if interest rates decrease.

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. If
these accounts were included in the 0-90 day category, the gap in that time
frame would be a negative $353 million with a corresponding cumulative gap at
one year of $1.0 billion.

Liquidity

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

Core deposit growth is a primary focus of BancGroup's funding and liquidity
strategy. Average retail deposits excluding broker and time deposits grew at
rate of 11% in 2001 versus 2000. Core deposit growth continues to be a primary
strategic objective of the Company.

In November 2001, BancGroup introduced the Colonial Premier account, a
combined checking, money market and brokerage account that offers an FDIC
insured money market option to our private banking clients and brokerage
customers. At February 28, 2002 the balances in the FDIC insured money market
account had reached $80 million.

In addition to funding growth through core deposits, BancGroup has worked to
expand the availability of long and short term wholesale funding sources. The
most significant expansion of wholesale funding availability came from the
FHLB's expansion of acceptable collateral to include commercial real estate
loans. As of December 31, 2001 commercial real estate collateral accounted for
44% of the $2.3 billion in lendable collateral value pledged to the FHLB.
Overall BancGroup utilized 57% of the total wholesale funding sources estimated
to be available to them as of December 31, 2001. Management believes its
liquidity sources and funding strategies are adequate given the nature of its
asset base and current loan demand.

Borrowings

BancGroup utilizes a variety of funding sources to assist in meeting its
needs of funding loan growth, securities acquisition and deposit fluctuations.
Fed Funds lines and repurchase agreements are sources for short-term borrowings
and credit facilities with the FHLB are used for both short and long term
borrowings. Additionally, BancGroup has a $25 million revolving credit facility
with nothing outstanding at year end with an unaffiliated financial
institution. BancGroup has from time-to-time, issued subordinated debentures,
subordinated notes and trust preferred securities to provide both capital and
funding.

Over the course of 2001, BancGroup increased long-term borrowings from the
FHLB to fund long-term assets and increased short-term Fed Funds purchased and
repurchase agreements to fund the increase in mortgage warehouse loans that
reprice daily. The FHLB credit facility availability increased significantly in
2001 as commercial real estate loans and securities were pledged in addition to
the previously pledged 1 to 4 family residential loans.

FHLB borrowings increased by $188 million to $1.4 billion as of December 31,
2001, compared to the previous year-end. Net availability from FHLB at December
31, 2001 was $813 million an increase of $629 million versus the prior year
end, despite the $213 million increase in outstanding.

Similarly, Fed Funds purchased increased by $564 million to $1.4 billion as
of December 31, 2001 compared to the previous year-end. Fed Funds purchased
lines increased by $745 million during the year resulting in a $198 million net
increase in availability from Fed Funds at year-end. Subsequent to December 31,
2001 mortgage warehouse loans and the related funding source, Fed Funds
purchased both dropped back to September 30, 2001 levels as the surge in
mortgage refinancing receded.

On May 23, 2001, Colonial Bank issued $150 million in subordinated notes at
9.375% due June 1, 2011 for general corporate and banking purposes in the
ordinary course of business. This debt qualifies as Tier II capital. 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 + 3.28%.
As of December 31, 2001, the net effective floating rate was 5.39%.

Short-term borrowings were comprised of the following at December 31, 2001,
2000, and 1999:

2001 2000 1999
---------- ---------- ----------
(In thousands)

FHLB borrowings.............................. $ 50,534 $ 650,527 $ 590,521
Federal funds purchased...................... 1,393,521 829,386 210,032
Repurchase Agreements (Retail)............... 569,816 325,031 242,500
Repurchase Agreements (Wholesale)............ 114,262 89,144 150,571
Other short-term borrowings.................. -- 3,470 225
---------- ---------- ----------
Total Short Term Borrowings......... $2,128,133 $1,897,558 $1,193,849
========== ========== ==========

Long-term borrowings were comprised of the following at December 31, 2001,
2000, and 1999:

2001 2000 1999
---------- -------- --------
(In thousands)

FHLB borrowings............................. $1,361,938 $574,022 $591,549
Repurchase Agreements (Wholesale)........... 88,064 102,325 132,325
Subordinated Notes.......................... 254,305 100,000 100,000
Trust Preferred Securities.................. 70,000 73,000 72,500
Variable Rate Subordinated Debentures....... 7,725 7,725 7,725
Convertible Subordinated Debentures......... 3,520 4,175 4,323
Other....................................... 588 1,000 2,649
---------- -------- --------
Total Long Term Borrowings......... $1,786,140 $862,247 $911,071
========== ======== ========

Contractual Obligations and Commercial Commitments

At December 31, 2001, BancGroup had contractual obligations maturing as
follows:

Payments Due by Period
----------------------------
Less than 1-3 After 5
Contractual Obligations Total 1 Year Years 4-5 Years Years
----------------------- ---------- --------- -------- --------- ----------
(in thousands)

Long-Term Debt*.............. $1,868,906 $ 2,110 $631,961 $203,605 $1,031,230
Operating Leases............. 101,063 17,320 33,734 7,818 42,191
---------- ------- -------- -------- ----------
Total Contractual Obligations $1,969,969 $19,430 $665,695 $211,423 $1,073,421

--------
* Includes current maturity of long-term debt reported in short-term
borrowings.

Convertible subordinated debentures totaling approximately $3.5 million are
convertible at any time into shares of BancGroup common stock. Trust Preferred
Securities in the amount of $70 million are subject to redemption by BancGroup,
in whole or part any time after January 29, 2007 until maturity in January 2017.

BancGroup is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include loan commitments, standby letters of credit
and obligations to deliver and sell mortgage loans. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the financial statements.

BancGroup's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters
of credit and obligations to deliver and sell mortgage loans is represented by
the contractual amount of those instruments. BancGroup uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. BancGroup has no significant concentrations of
credit risk with any individual counter-party to originate loans. The total
amounts of financial instruments with off-balance sheet risk as of December 31,
2001 are as follows:

Amount of Commitment
Expiration Per Period
---------------------
Less than Over
Other Commercial Commitments Total 1 Year 1 Year
---------------------------- ---------- ---------- --------
(in thousands)

Loan Commitments........... $2,939,904 $1,965,734 $974,170
Standby letters of credit.. $ 243,873 $ 243,873 $ --

The $974 million in loan commitments with maturities over one year is 9.4%
of total outstanding loans. Less than 8% of these commitments (.7% of total
loans) are unsecured.

Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash
requirements. The credit risk involved in issuing letters of credit and funding
loan commitments is essentially the same as that involved in extending loan
facilities to customers.

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 with the discretion of the
Board of Directors of BancGroup as well as upon applicable statutory
constraints such as the Delaware law requirement that dividends may be paid
only out of capital surplus or net profits for the fiscal year in which the
dividend is declared or the 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 December
31, 2001 are stated below:

Capital (thousands)
Tier I Capital:
Shareholders' equity (excluding unrealized gain on securities available for sale, and intangibles
plus Trust Preferred Securities)...................................................................... $ 805,107
Tier II Capital:
Allowable loan loss reserve............................................................................. 122,200
Subordinated debt....................................................................................... 261,245
45% of net unrealized gains on available for sale equity securities..................................... 221
-----------
Total Capital................................................................................... $ 1,188,773

Risk Adjusted Assets (thousands)......................................................................... $10,893,242

Total Assets (thousands)................................................................................. $13,185,103

2001 2000
----- -----

Tier I leverage ratio................. 6.24% 6.66%
Risk Adjusted Capital Ratios:
Tier I Capital Ratio......... 7.39% 8.24%
Total Capital Ratio.......... 10.91% 10.59%

BancGroup has increased capital gradually through normal earnings retention
as well as through stock registrations to capitalize acquisitions. The
decreases in the risk adjusted tier one ratios shown above are primarily due to
asset growth. The increase in the total capital ratio is a result of the
issuance of $150 million in subordinated notes discussed previously, partially
offset by growth in assets.

Regulatory Restrictions

As noted previously, dividends payable by national and state banks in any
year, without prior approval of the appropriate regulatory authorities, are
limited.

Colonial Bank is also required by law to maintain noninterest-bearing
deposits with the Federal Reserve Bank to meet regulatory reserve requirements.
At December 31, 2001, these deposits were not material to BancGroup's funding
requirements.

Financial Accounting Standards Board Releases

In June 1998, the Financial Accounting Standard Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) hedge of the exposure to changes in the fair
value of recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, (c)
a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or
a foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of derivative (that is, gains and losses) depends on
the intended used of the derivative and the resulting designation.

Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk.

On September 23, 1999, the Financial Accounting Standards Board issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133," and amendment to delay the
effective date of SFAS No. 133. The effective date for this statement was
delayed from fiscal years beginning after June 15, 1999 to fiscal years
beginning after June 15, 2000. BancGroup adopted SFAS No. 133 and SFAS No. 137
on January 1, 2001, and as of that date and at December 31, 2001 BancGroup's
derivative instruments qualified for hedge accounting treatment per these
statements. The effect of adopting these statements is immaterial to the
financial statements presented.

On September 29, 2000, the Financial Accounting Standards Board issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a Replacement of FASB Statement No. 125." This
statement is effective for transfers after April 1, 2001. The implementation of
SFAS No. 140 did not have a material impact on BancGroup's financial statements.

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 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 amortization period of intangible assets with finite lives will no longer
be limited to forty years. Based on amortization expense recorded in 2001,
BancGroup estimates that the elimination of goodwill amortization expense will
increase net income by approximately $3.6 million after tax or $.03 per share.

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 of the pronouncement to 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. BancGroup has determined
that SFAS No. 144 will have no material effect.

Item 8. Financial Statements and Supplementary Data

The financial statements and supplementary data required by Regulation S-X
and by Item 302 of Regulation S-K are set forth in the pages listed below.

Page
----

Report of Independent Accountants........................................................... 47
Consolidated Statements of Condition as of December 31, 2001 and 2000....................... 48
Consolidated Statements of Income for the years ended December 31, 2001, 2000, and 1999..... 49
Consolidated Statements of Comprehensive Income for the years ended December 31, 2001,
2000, 1999................................................................................ 50
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000,
and 1999.................................................................................. 51
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999. 52
Notes to Consolidated Financial Statements.................................................. 53

REPORT OF INDEPENDENT ACCOUNTANTS

To The Board of Directors and Shareholders
The Colonial BancGroup, Inc.

In our opinion, the accompanying consolidated statements of condition and
the related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of The Colonial BancGroup, Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Montgomery, Alabama
February 28, 2002

THE COLONIAL BANCGROUP, INC.

CONSOLIDATED STATEMENTS OF CONDITION

December 31,
------------------------
2001 2000
----------- -----------
(Dollars in thousands)

ASSETS
Cash and due from banks...................................................... $ 373,024 $ 353,217
Interest-bearing deposits in banks and federal funds sold.................... 15,084 24,339
Securities available for sale................................................ 1,852,439 1,469,684
Investment securities (market value: 2001, $31,064; 2000, $47,871)........... 30,055 47,048
Mortgage loans held for sale................................................. 35,453 9,866
Loans, net of unearned income................................................ 10,367,665 9,642,954
Less:........................................................................
Allowance for loan losses................................................... (122,200) (110,055)
----------- -----------
Loans, net............................................................ 10,245,465 9,532,899
Premises and equipment, net.................................................. 198,983 192,344
Excess of cost over tangible and identified intangible assets acquired, net.. 113,898 74,708
Other real estate owned...................................................... 15,553 8,978
Accrued interest and other assets............................................ 305,149 286,538
----------- -----------
Total................................................................. $13,185,103 $11,999,621
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:....................................................................
Noninterest-bearing demand.................................................. $ 1,439,217 $ 1,217,711
Interest-bearing demand..................................................... 2,231,166 1,883,509
Savings..................................................................... 443,666 464,489
Time........................................................................ 4,208,930 4,790,140
----------- -----------
Total deposits........................................................ 8,322,979 8,355,849
FHLB short-term borrowings................................................... 50,534 425,000
Other short-term borrowings.................................................. 2,077,599 1,472,558
Subordinated debt............................................................ 265,550 111,900
Trust preferred securities................................................... 70,000 73,000
FHLB long-term debt.......................................................... 1,361,938 574,022
Other long-term debt......................................................... 88,652 103,325
Other liabilities............................................................ 83,077 108,867
----------- -----------
Total liabilities..................................................... 12,320,329 11,224,521
Commitments and contingencies (Notes 8, 14, 17)
Shareholders' equity
Common Stock, $2.50 par value; 200,000,000 shares authorized; 115,244,185
and 114,668,279 shares issued at December 31, 2001 and December 31, 2000,
respectively............................................................... 288,110 286,671
Treasury Stock (2,773,782 shares at December 31, 2000)....................... -- (26,467)
Additional paid in capital................................................... 102,980 123,272
Retained earnings............................................................ 467,163 399,972
Unearned compensation........................................................ (3,159) (2,541)
Accumulated other comprehensive income (loss), net of taxes.................. 9,680 (5,807)
----------- -----------
Total shareholders' equity............................................ 864,774 775,100
----------- -----------
Total................................................................. $13,185,103 $11,999,621
=========== ===========

See Notes to Consolidated Financial Statements

THE COLONIAL BANCGROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

Year ended December 31,
-------------------------------
2001 2000 1999
-------- -------- --------
(In thousands, except per share
Amounts)

Interest Income:
Interest and fees on loans...................................... $793,841 $807,598 $662,749
Interest and dividends on securities:
Taxable........................................................ 94,291 95,540 89,814
Nontaxable..................................................... 5,512 5,669 4,631
Dividends...................................................... 5,903 5,647 5,670
Interest on federal funds sold and securities purchased under
resale agreements.............................................. 2,172 2,891 2,464
Other Interest.................................................. 448 731 710
-------- -------- --------
Total interest income....................................... 902,167 918,076 766,038
-------- -------- --------
Interest Expense:
Interest on deposits............................................ 323,499 359,460 279,166
Interest on short-term borrowings............................... 66,471 97,002 51,386
Interest on long-term debt...................................... 90,268 61,292 54,339
-------- -------- --------
Total interest expense...................................... 480,238 517,754 384,891
-------- -------- --------
Net Interest Income............................................. 421,929 400,322 381,147
Provisions for loan losses...................................... 39,573 29,775 29,177
-------- -------- --------
Net Interest Income After Provision for Loan Losses............. 382,356 370,547 351,970
-------- -------- --------
Noninterest Income:
Service charges on deposit accounts............................. 42,032 38,596 39,305
Wealth Management............................................... 8,670 8,530 5,544
Electronic Banking.............................................. 6,918 5,639 4,973
Mortgage Origination............................................ 8,287 5,892 340
Securities gains, net........................................... 8,701 538 497
Other income.................................................... 19,101 18,690 24,682
-------- -------- --------
Total noninterest income.................................... 93,709 77,885 75,341
-------- -------- --------
Noninterest Expense:
Salaries and employee benefits.................................. 151,319 137,311 117,815
Occupancy expense of bank premises, net......................... 35,036 31,572 29,484
Furniture and equipment expenses................................ 29,289 29,493 25,633
Amortization of intangible assets............................... 6,251 5,226 5,241
Merger related expenses......................................... 3,049 -- 1,307
Other expenses.................................................. 59,224 55,089 60,435
-------- -------- --------
Total noninterest expense................................... 284,168 258,691 239,915
-------- -------- --------
Income from continuing operations before income taxes........... 191,897 189,741 187,396
Applicable income taxes (Note 22)............................... 69,181 69,556 69,360
-------- -------- --------
Income from Continuing Operations............................... 122,716 120,185 118,036
Discontinued Operations:
Income/(Loss) from discontinued operations, net of income taxes
of $(371), $(450) and $2,134 for the year ended December 31,
2001, 2000, and 1999, respectively............................. (613) (743) 3,527
Loss on disposal of discontinued operations, net of income tax
benefit of ($2,616)............................................ -- (4,322) --
-------- -------- --------
Net Income...................................................... $122,103 $115,120 $121,563
======== ======== ========
Earnings per share -- Income from continuing operations:
Basic.......................................................... $ 1.07 $ 1.05 $ 1.02
Diluted........................................................ 1.06 1.04 1.01
Earnings per share -- Net Income:
Basic.......................................................... $ 1.06 $ 1.00 $ 1.05
Diluted........................................................ 1.06 1.00 1.04
Average number of shares outstanding:
Basic.......................................................... 114,811 114,760 115,579
Diluted........................................................ 115,881 115,653 117,393

See Notes to Consolidated Financial Statements.

THE COLONIAL BANCGROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,
----------------------------

2001 2000 1999
-------- -------- --------
(In thousands)
Net income.................................................................... $122,103 $115,120 $121,563
Other comprehensive income, net of taxes:
Unrealized gains (losses) on securities available for sale arising during the
period, net of taxes....................................................... 21,056 23,190 (30,994)
Less: reclassification adjustment for net (gains) included in net income, net
of taxes................................................................... (5,569) (18) (323)
-------- -------- --------
Comprehensive income.......................................................... $137,590 $138,292 $ 90,246
======== ======== ========

See Notes to Consolidated Financial Statements

THE COLONIAL BANCGROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2001, 2000, and 1999

Accumulated
Common Stock Additional Other
--------------------- Paid In Treasury Retained Unearned Comprehensive
Shares Amount Capital Stock Earnings Compensation Income (Loss)
----------- -------- ---------- -------- -------- ------------ -------------
(In thousands, except per share amounts)

Balance, December 31, 1998............ 112,392,646. $280,982. $117,266. $ (355) $255,669. $(2,348).. $ 2,338..
Shares issued under:
Directors Plan...................... 60,435 151 860
Stock Option Plans.................. 774,878 1,937 1,791 355
Stock Bonus Plan.................... (380) (1) 20 726
Employee Stock Purchase Plan........ 57,519 144 551
401k Plan........................... 118,359 296 1,137
Dividend Reinvestment Plan.......... 62,923 158 582
Issuance of common stock by pooled
banks prior to merger................ 135,520 339 853
Net income............................ 121,563
Cash dividends ($.38 per share)....... (42,316)
Cash dividends by pooled banks prior
to merger............................ (250)
Conversion of 71/2% convertible debt.. 70,564 176 318
Change in unrealized gain (loss) on
securities available for sale, net of
taxes................................ (31,317)
----------- -------- -------- -------- -------- ------- --------
Balance, December 31, 1999............ 113,672,464 284,182 123,378 -- 334,666 (1,622) (28,979)
=========== ======== ======== ======== ======== ======= ========
Shares issued under:
Directors Plan...................... 88,643 222 838 19
Stock Option Plans.................. 760,755 1,902 (1,810) 5,192
Stock Bonus Plan.................... 75,400 188 543 19 (919)
Employee Stock Purchase Plan........ 28,601 71 206 237
Issuance of common stock by pooled
banks prior to merger................ 21,280 53 22
Purchase of treasury stock............ (31,934)
Net income............................ 115,120
Cash dividends ($.44 per share)....... (48,867)
Cash dividends by pooled banks prior
to merger............................ (947)
Conversion of 71/2% convertible debt.. 21,136 53 95
Change in unrealized gain (loss) on
securities available for sale, net of
taxes................................ 23,172
----------- -------- -------- -------- -------- ------- --------
Balance, December 31, 2000............ 114,668,279 286,671 123,272 (26,467) 399,972 (2,541) (5,807)
=========== ======== ======== ======== ======== ======= ========
Shares issued under:
Directors Plan...................... 41 1,167
Stock Option Plans.................. 167,597 419 737 1,526
Stock Bonus Plan.................... (21,975) (55) 975 1,545 (618)
Employee Stock Purchase Plan........ 6,879 17 163 248
Issuance of common stock by pooled
banks prior to merger................ 334,440 836 761
Purchase of treasury stock............ (8,773)
Sale of treasury stock................ 2,010 5,342
Issuance of shares for business
combination.......................... (25,412) 25,412
Net income............................ 122,103
Cash dividends ($.48 per share)....... (53,634)
Cash dividends by pooled banks prior
to merger............................ (1,278)
Conversion of 71/2% convertible debt.. 88,965 222 433
Change in unrealized gain (loss) on
securities available for sale, net of
taxes................................ 15,487
----------- -------- -------- -------- -------- ------- --------
Balance, December 31, 2001............ 115,244,185 $288,110 $102,980 $ -- $467,163 $(3,159) $ 9,680
=========== ======== ======== ======== ======== ======= ========

Total
Shareholders'
Equity
-------------

Balance, December 31, 1998............ $653,552..
Shares issued under:
Directors Plan...................... 1,011
Stock Option Plans.................. 4,083
Stock Bonus Plan.................... 745
Employee Stock Purchase Plan........ 695
401k Plan........................... 1,433
Dividend Reinvestment Plan.......... 740
Issuance of common stock by pooled
banks prior to merger................ 1,192
Net income............................ 121,563
Cash dividends ($.38 per share)....... (42,316)
Cash dividends by pooled banks prior
to merger............................ (250)
Conversion of 71/2% convertible debt.. 494
Change in unrealized gain (loss) on
securities available for sale, net of
taxes................................ (31,317)
--------
Balance, December 31, 1999............ 711,625
========
Shares issued under:
Directors Plan...................... 1,079
Stock Option Plans.................. 5,284
Stock Bonus Plan.................... (169)
Employee Stock Purchase Plan........ 514
Issuance of common stock by pooled
banks prior to merger................ 75
Purchase of treasury stock............ (31,934)
Net income............................ 115,120
Cash dividends ($.44 per share)....... (48,867)
Cash dividends by pooled banks prior
to merger............................ (947)
Conversion of 71/2% convertible debt.. 148
Change in unrealized gain (loss) on
securities available for sale, net of
taxes................................ 23,172
--------
Balance, December 31, 2000............ 775,100
========
Shares issued under:
Directors Plan...................... 1,208
Stock Option Plans.................. 2,682
Stock Bonus Plan.................... 1,847
Employee Stock Purchase Plan........ 428
Issuance of common stock by pooled
banks prior to merger................ 1,597
Purchase of treasury stock............ (8,773)
Sale of treasury stock................ 7,352
Issuance of shares for business
combination.......................... 0
Net income............................ 122,103
Cash dividends ($.48 per share)....... (53,634)
Cash dividends by pooled banks prior
to merger............................ (1,278)
Conversion of 71/2% convertible debt.. 655
Change in unrealized gain (loss) on
securities available for sale, net of
taxes................................ 15,487
--------
Balance, December 31, 2001............ $864,774
========

See Notes to Consolidated Financial Statements

THE COLONIAL BANCGROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
(In thousands)

Cash flows from operating activities:
Net income..................................................... $ 122,103 $ 115,120 $ 121,563
Adjustments to reconcile net income:
Loss on disposal of discontinued operations, net of taxes...... -- 4,322 --
Depreciation, amortization and accretion....................... 27,853 29,495 29,816
Amortization and impairment of mortgage servicing rights....... -- 13,432 34,478
Provision for loan loss........................................ 39,573 29,775 29,177
Deferred taxes................................................. 531 (4,128) 2,010
Gain on sale of securities, net................................ (8,701) (538) (497)
(Gain) on sale and disposal of other assets.................... -- (1,492) (1,107)
Decrease (increase) in mortgage servicing rights, net.......... -- 224,973 (89,413)
Net (increase) decrease in mortgage loans held for sale........ (25,587) 23,284 658,892
Decrease (increase) in interest receivable..................... 822 (15,522) (19,999)
Decrease (increase) in prepaids and other receivables.......... 2,163 1,765 (6,234)
Decrease in accrued expenses & accounts payable................ (6,878) (7,354) (9,011)
(Decrease) in accrued income taxes............................. (83) (23) (4,550)
(Decrease) increase in interest payable........................ (18,830) 7,805 11,241
Other, net..................................................... (2,912) (537) (7,321)
----------- ----------- -----------
Total adjustments............................................ 7,951 305,257 627,482
----------- ----------- -----------
Net cash provided by operating activities.................... 130,054 420,377 749,045
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale...... 541,185 214,235 332,641
Proceeds from sales of securities available for sale........... 521,756 209,429 201,051
Purchase of securities available for sale...................... (1,416,558) (346,384) (657,166)
Proceeds from maturities of investment securities.............. 23,418 17,333 109,795
Purchase of investment securities.............................. -- -- (742)
Net increase in loans.......................................... (656,931) (1,248,350) (1,197,909)
Purchase of bank owned life insurance.......................... (23,200) (33,218) (1,660)
Cash received in bank acquisitions............................. 249,240 -- 2,667
Capital expenditures........................................... (29,056) (22,077) (41,343)
Proceeds from sale of other real estate owned.................. 7,223 10,951 16,878
Other, net..................................................... 3,742 2,153 7,277
----------- ----------- -----------
Net cash used in investing activities........................ (779,181) (1,195,928) (1,228,511)
----------- ----------- -----------
Cash flows from financing activities:
Net (decrease) increase in demand, savings, and time deposits.. (439,513) 183,039 557,005
Net increase (decrease) in federal funds purchased, repurchase
agreements and other short- term borrowings.................. 485,568 578,703 (368,799)
Proceeds from issuance of long-term debt....................... 787,916 259,000 414,976
Repayment of long-term debt.................................... (272,667) (183,171) (211,675)
Proceeds from issuance of subordinated debt.................... 150,000 -- --
Purchase of treasury stock for issuance in a business
combination.................................................. (8,773) -- --
Purchase of treasury stock..................................... -- (31,934)
Proceeds from issuance of common stock......................... 4,707 6,084 7,629
Proceeds from sale of treasury stock........................... 7,352 -- --
Dividends paid................................................. (54,912) (49,347) (41,257)
----------- ----------- -----------
Net cash provided by financing activities.................... 659,678 762,374 357,879
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents............ 10,551 (13,177) (121,587)
Cash and cash equivalents at beginning of year.................. 377,556 390,733 512,320
----------- ----------- -----------
Cash and cash equivalents at December 31....................... $ 388,107 $ 377,556 $ 390,733
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest..................................................... $ 499,527 $ 510,341 $ 386,798
Income taxes................................................. 69,181 71,728 75,296
Non-cash investing activities:
Transfer of loans to other real estate......................... $ 8,399 $ 10,959 $ 17,249
Securitization of residential real estate loans................ 307,000 -- --
Non-cash financing activities:
Conversion of subordinated debentures to common stock.......... $ 643 $ 148 $ 494
Assets (non-cash) acquired in business combinations............ 159,801 -- --
Liabilities assumed in business combinations................... 409,041 -- --
Reissuance of treasury stock for business combinations......... 25,412
Reissuance of treasury stock for stock plans................... 3,319 5,448 --

See Notes to Consolidated Financial Statements

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting and Reporting Policies

The Colonial BancGroup, Inc. ("BancGroup" or the "Company") and its
subsidiaries operate predominantly in the domestic commercial banking industry.
The accounting and reporting policies of BancGroup and its subsidiaries conform
to generally accepted accounting principles in the United States of America and
to general practice within the banking industry. The following summarizes the
most significant of these policies.

Basis of Presentation. The consolidated financial statements of BancGroup
for 2000 and 1999 have been previously restated to give retroactive effect to
the pooling-of-interests method business combination with Manufacturers
Bancshares, Inc. ("Manufacturers") on October 25, 2001 (See Note 2).

The consolidated financial statements and notes to consolidated financial
statements include the accounts of BancGroup and its subsidiaries, all of which
are wholly owned. All significant intercompany balances and transactions have
been eliminated.

Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Cash and Cash Equivalents. BancGroup considers cash and highly liquid
investments with maturities of three months or less when purchased as cash and
cash equivalents. Cash and cash equivalents consist primarily of cash and due
from banks, interest-bearing deposits in banks and Federal funds sold.

Investment Securities and Securities Available for Sale. Securities are
classified as either held to maturity, available for sale, or trading.

Held to maturity or investment securities are securities for which
management has the ability and intent to hold on a long-term basis or until
maturity. These securities are carried at amortized cost, adjusted for
amortization of premiums, and accretion of discount to the earlier of the
maturity or call date.

Securities available for sale represent those securities intended to be held
for an indefinite period of time, including securities that management intends
to use as part of its asset/liability strategy, or that may be sold in response
to changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital or other similar factors. Securities available for sale are
recorded at market value with unrealized gains and losses net of any tax
effect, added or deducted directly from shareholders' equity.

Securities carried in trading accounts are carried at market value with
unrealized gains and losses reflected in income.

Realized and unrealized gains and losses are based on the specific
identification method.

Mortgage Loans Held For Sale. Mortgage loans held for sale are carried at
the lower of aggregate cost or market. The cost of mortgage loans held for sale
is the mortgage note amount plus certain net origination costs less discounts
collected. Gains and losses resulting from changes in the market value of the
inventory are netted. Any net gain that results is deferred; any net loss that
results is recognized when incurred. The aggregate cost of mortgage loans held
for sale at December 31, 2001 and 2000 is less than their aggregate net
realizable value. Gains or losses on the sale of mortgage loans held for sale
are included in other income.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Loans. Loans are stated at face value, net of unearned income. Interest
income on loans is recognized under the "interest" method except for certain
installment loans where interest income is recognized under the "Rule of 78's"
(sum-of-the-months digits) method, which does not produce results significantly
different from the "interest" method. Nonrefundable fees and costs associated
with originating or acquiring loans are recognized under the interest method as
a yield adjustment over the life of the corresponding loan.

Allowance for Loan Losses. A loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Uncollateralized loans are
measured for impairment based on the present value of expected future cash
flows discounted at the historical effective interest rate, while all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. Smaller balance homogeneous loans that consist of
residential mortgages and consumer loans are evaluated collectively and
reserves are established based on historical loss experience.

The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. Increases and decreases in the
allowance due to changes in the measurement of the impaired loans are included
in the provision for loan losses. Loans continue to be classified as impaired
unless they are brought fully current and the collection of scheduled interest
and principal is considered probable. When a loan or portion of a loan is
determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.

Management's ongoing evaluation of the adequacy of the allowance also
considers 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, and an analysis of current economic conditions. While
management believes that it has established the allowance in accordance with
generally accepted accounting principles and has taken into account the views
of its regulators and the current economic environment, there can be no
assurance that in the future the Bank's regulators or its economic environment
will not require further increases in the allowance.

Income Recognition on Impaired and Nonaccrual Loans. Loans, including
impaired loans, are generally classified as nonaccrual if they are past due as
to maturity or payment of principal or interest for a period of more than 90
days, unless such loans are well collateralized and in the process of
collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged off, the loan is generally classified as nonaccrual. At
management's discretion, loans that are on a current payment status or past due
less than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.

Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower,
in accordance with the contractual terms of interest and principal.

While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and principal
are generally applied as a reduction to principal outstanding, except in the
case of loans with scheduled amortizations where the payment is generally
applied to the oldest payment due. When the future collectibility of the
recorded loan balance is expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan has been partially charged off,
recognition of interest on a cash basis is limited to that which would have
been recognized on the recorded loan balance at the contractual interest rate.
Receipts in excess of that amount are recorded as recoveries to the allowance
for loan losses until prior charge offs have been fully recovered. Interest
income recognized on a cash basis was immaterial for the years ended December
31, 2001, 2000 and 1999.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Premises and Equipment. Bank premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation is computed
generally using the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. Estimated useful lives range from five to forty years for bank
buildings and leasehold improvements and three to ten years for furniture and
equipment.

Expenditures for maintenance and repairs are charged against earnings as
incurred. Costs of major additions and improvements are capitalized. Upon
disposition or retirement of property, the asset account is relieved of the
cost of the item and the allowance for depreciation is charged with accumulated
depreciation. Any resulting gain or loss is reflected in current income.

Other Real Estate Owned. Other real estate owned includes real estate
acquired through foreclosure or deed taken in lieu of foreclosure. These
amounts are recorded at the lower of the loan balance prior to foreclosure,
plus certain costs incurred for improvements to the property ("cost") or market
value less estimated costs to sell the property. Any write-down from the cost
to market value required at the time of foreclosure is charged to the allowance
for loan losses. Subsequent write-downs and gains or losses recognized on the
sale of these properties are included in noninterest income or expense.

Intangible Assets. Intangible assets acquired in acquisitions of banks are
stated at cost, net of accumulated amortization. Amortization is provided over
a period up to twenty-five years for the excess of cost over tangible and
identified intangible assets acquired using the straight-line method or an
accelerated method, as applicable, and eight to ten years for deposit core base
intangibles using the straight-line method. The recoverability of intangible
assets is reviewed periodically based on the current earnings of acquired
entities. If warranted, analyses, including undiscounted income projections,
are made to determine if adjustments to carrying value or amortization periods
are necessary.

Mortgage Servicing Rights, Amortization and Impairment. Prior to the
discontinuation of mortgage servicing activities in 2000, BancGroup recognized
as separate assets the rights to service mortgage loans for others, whether the
servicing rights are acquired through a separate purchase or through loan
origination activities. The total cost of mortgage loans held for sale were
allocated to mortgage loans held for sale and mortgage servicing rights, based
on their relative fair values at date of sale. Amortization of mortgage
servicing rights ("MSR") was based on the ratio of net servicing income
received in the current period to total net servicing income projected to be
realized from the MSR. The carrying value of MSR was evaluated for impairment,
which was recognized in the statement of income during the period in which
impairment occurred as an adjustment to a valuation allowance.

Hedging of MSR. Prior to discontinuation of mortgage servicing activities
in 2000, BancGroup utilized derivative contacts that were expected to change in
value inversely to the movement of interest rates ("Servicing Hedges"). These
derivatives included Treasury options, futures, CMT floors, CMS floors, PO
strips and interest rate swaps. The Servicing Hedges were designed to protect
the value of the hedged MSR from the effects of increased prepayment activity
that generally resulted from declining interest rates. The value of the hedging
instruments and options was derived from underlying instruments; however, the
notional or contractual amount was not recognized in the balance sheet. The
carrying value of the MSR was adjusted for realized and unrealized gains and
losses in the derivative financial instruments that qualify for hedge
accounting. To qualify for hedge accounting, changes in net value of the
Servicing Hedges were expected to be highly correlated with changes in the
value of the hedged MSR throughout the hedge period. The Company measured
initial and ongoing correlation by statistical analysis and dollar value offset
comparison of the relative movements of the Servicing Hedges and related MSR.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Long Lived Assets. BancGroup reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If the future undiscounted cash flows expected to result from the
use of the asset and its eventual disposition are less than the carrying
amounts of the asset, an impairment loss is recognized. Long-lived assets and
certain intangibles to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell.

Income Taxes. BancGroup uses the asset and liability method of accounting
for income taxes (See Note 21). Under the asset and liability method, deferred
tax assets and liabilities are recorded at currently enacted tax rates
applicable to the period in which assets or liabilities are expected to be
realized or settled. Deferred tax assets and liabilities are adjusted to
reflect changes in statutory tax rates resulting in income adjustments in the
period such changes are enacted.

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

Derivative Instruments and Hedging Activities. The goal of BancGroup's
interest rate risk process is to minimize the volatility in the net interest
margin caused by changes in interest rates. Derivative instruments are
occasionally used to hedge specific assets or liabilities as a part of this
overall process. As a result of interest-rate fluctuations, hedged assets and
liabilities will appreciate or depreciate in market value. The effect of this
unrealized appreciation or depreciation will generally be offset by income or
loss on the derivative instruments that are linked to the hedged assets and
liabilities. BancGroup views this strategy as a prudent management of
interest-rate sensitivity, such that earning are not exposed to undue risk
presented by changes in interest rates.

Derivative instruments that are used as part of BancGroup's interest-rate
risk-management strategy consist primarily of interest-rate swaps.
Interest-rate swaps generally involve the exchange of fixed- and variable-rate
interest payments between two parties, based on a notional principal amount and
maturity date.

BancGroup is exposed to credit and market risk by using derivative
instruments. If the counterparty fails to perform, credit risk is equal to the
extent of the fair-value gain in a derivative. When the fair value of a
derivative contract is positive, this generally indicates that the counterparty
owes BancGroup, and, therefore, creates a repayment risk for BancGroup. When
the fair value of a derivative contract is negative, BancGroup owes the
counterparty and, therefore, it has no repayment risk. The Company minimizes
the credit (or repayment) risk in derivative instruments by entering into
transactions with high quality counterparties that are approved by ALCMCO.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Market risk is the adverse effect that a change in interest rates, or
implied volatility rates has on the value of a financial instrument. BancGroup
manages the market risk by using derivatives chiefly for hedging purposes, and
then monitoring the effectiveness of the hedges.

BancGroup's derivatives activities are monitored by ALMCO as part of that
committee's oversight of BancGroup's asset/liability and treasury functions.
ALMCO is responsible for implementing various hedging strategies that are
developed through its analysis of data from financial simulation models and
other internal and industry sources. The resulting hedging strategies are then
incorporated into BancGroup's overall interest-rate risk-management and
strategies.

Advertising Costs. Advertising costs are expensed as incurred.

Reclassifications. Certain reclassifications have been made to the 2000
financial statements to conform to the 2001 presentations.

Recently Issued Accounting Standards. In June 1998, the Financial
Accounting Standard Board issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) hedge of the exposure to changes in the fair
value of recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, (c)
a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or
a foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of derivative (that is, gains and losses) depends on
the intended used of the derivative and the resulting designation.

On September 23, 1999, the Financial Accounting Standards Board issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133," and amendment to delay the
effective date of SFAS No. 133. The effective date for this statement was
delayed from fiscal years beginning after June 15, 1999 to fiscal years
beginning after June 15, 2000. BancGroup adopted SFAS No. 133 and SFAS No. 137
on January 1, 2001 and as of that date and at December 31, 2001, all of
BancGroup's derivative instruments qualified for hedge accounting treatment per
these statements. The effect of adopting these statements is immaterial to the
financial statements presented.

On September 29, 2000, the Financial Accounting Standards Board issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a Replacement of FASB Statement No. 125". This
statement is effective for transfers after April 1, 2001. The implementation of
SFAS No. 140 did not have a material impact on BancGroup's financial statements.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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 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 amortization period of intangible assets with finite lives will no longer
be limited to forty years. Based on amortization expense recorded in 2001,
BancGroup estimates that the elimination of goodwill amortization expense will
increase net income by approximately $3.6 million after tax or $.03 per share.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The
effective date for this statement is January 1, 2002 and supersedes SFAS No.
121. SFAS No. 144 carries forward from SFAS No. 121 the fundamental guidance
related to the recognition and measurement of an impairment loss related to
assets to be held and used and provides guidance related to the disposal of
long-lived assets to be abandoned or disposal by sale. Management is currently
evaluating the impact that SFAS No. 144 will have on BancGroup's financials,
but does not expect the adoption of the pronouncement to have material effect.

2. Business Combinations

In October 2001, BancGroup purchased certain assets, approximately $68
million in loans, and assumed certain liabilities, primarily deposits of
approximately $302 million in the acquisition of 13 branches from Union
Planters Bank. Nine of the branches are located in Tampa and Naples area of
Florida and four in the central part of Alabama. As a result of this
transaction BancGroup recognized approximately $25.3 million of total
intangibles including $4.1 million core deposit premium.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The following is a summary of operating information for BancGroup showing
the effect of the pooling of interests business combination described in the
preceding paragraph (years prior to consummation).

As Originally Effect of Currently
Reported Poolings Reported
------------- --------- ---------
(In Thousands)

2000:
Net interest income $389,891 $10,431 $400,322
Noninterest income. 75,299 2,586 77,885
Net Income......... $112,731 $ 2,389 $115,120
1999:
Net interest income $372,422 $ 8,725 $381,147
Noninterest income. 74,087 1,254 75,341
Net Income......... $119,597 $ 1,966 $121,563

3. Securities

The carrying and market values of investment securities are summarized as
follows:

Investment Securities

2001 2000
--------------------------------------- ---------------------------------------
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ------- --------- ---------- ---------- -------

(In thousands)
U.S. Treasury securities
and obligations of U.S.
Government agencies.... $ 500 $ 79 $-- $ 579 $ 3,138 $122 $ -- $ 3,260
Mortgage-backed
securities............. 6,584 230 (8) 6,806 15,132 147 (26) 15,253
Obligations of state and
political subdivisions. 21,846 707 -- 22,553 27,143 587 (2) 27,728
Other................... 1,125 1 -- 1,126 1,635 -- (5) 1,630
------- ------ --- ------- ------- ---- ---- -------
Total............. $30,055 $1,017 $(8) $31,064 $47,048 $856 $(33) $47,871
======= ====== === ======= ======= ==== ==== =======

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The carrying and market values of securities available for sale are
summarized as follows:

Securities Available For Sale

2001 2000
------------------------------------------- -------------------------------------------
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)

U.S. Treasury
securities and
obligations of
U.S. government
agencies........... $ 57,563 $ 1,769 $ -- $ 59,332 $ 241,411 $3,957 $ (394) $ 244,974
Mortgage-backed
securities......... 1,455,493 17,846 (2,806) 1,470,533 909,223 2,672 (9,691) 902,204
Obligations of state
and political
subdivisions....... 87,083 2,467 (53) 89,497 91,929 1,675 (169) 93,435
Other............... 237,426 1,798 (6,147) 233,077 236,096 3 (7,028) 229,071
---------- ------- ------- ---------- ---------- ------ -------- ----------
Total......... $1,837,565 $23,880 $(9,006) $1,852,439 $1,478,659 $8,307 $(17,282) $1,469,684
========== ======= ======= ========== ========== ====== ======== ==========

The majority of the above securities are traded on national exchanges and as
such, the market values are based upon quotes from those exchanges. The market
values of certain obligations of states and political subdivisions were
established with the assistance of an independent pricing service. They were
based on available market data reflecting transactions of relatively small size
and not necessarily indicative of the prices at which large amounts of
particular issues could be readily sold or purchased.

Included within securities available for sale is $87,250,500 and $76,020,500
in Federal Home Loan Bank stock at December 31, 2001 and 2000, respectively.
Securities with a carrying value of approximately $1,299,748,000 and
$1,204,804,000 at December 31, 2001 and 2000 respectively, were pledged for
various purposes as required or permitted by law.

Gross gains of $8,701,000, $606,000 and $595,000 and gross losses of $0,
$68,000 and $98,000 were realized on sales of securities for 2001, 2000, and
1999, respectively.

The amortized cost and market value of debt securities at December 31, 2001,
by contractual maturity, are as follows. Expected maturities differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

Investment Securities Securities Available For Sale
--------------------- -----------------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------- ------- ---------- ----------
(In thousands)

2001
Due in one year or less............... $ 4,835 $ 4,880 $ 60,654 $ 62,268
Due after one year through five years. 12,375 12,811 43,158 44,560
Due after five years through ten years 4,353 4,497 36,269 37,274
Due after ten years................... 1,908 2,070 154,741 150,086
------- ------- ---------- ----------
Total.......................... 23,471 24,258 294,822 294,188
Mortgage-backed securities............ 6,584 6,806 1,455,493 1,470,532
Equity securities..................... -- -- 87,250 87,719
------- ------- ---------- ----------
Total.......................... $30,055 $31,064 $1,837,565 $1,852,439
======= ======= ========== ==========

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

4. Loans

A summary of loans follows:

2001 2000
----------- ----------

(In thousands)
Commercial, financial and agricultural $ 1,145,409 $1,264,281
Real estate-commercial................ 3,417,517 3,208,911
Real estate-construction.............. 2,295,675 1,700,281
Real estate-residential............... 1,942,821 2,697,934
Installment and consumer.............. 240,836 278,739
Mortgage Warehouse Lending............ 1,286,399 376,638
Other................................. 39,019 116,518
----------- ----------
Subtotal............................. 10,367,676 9,643,302
Unearned income....................... (11) (348)
----------- ----------
Total.......................... $10,367,665 $9,642,954
=========== ==========

BancGroup's lending is concentrated throughout Alabama, Georgia, Florida,
Texas and Nevada and repayment of these loans is in part dependent upon the
economic conditions in the respective regions of these states. Management does
not believe the loan portfolio contains concentrations of credits either
geographically or by borrower, which would expose BancGroup to unacceptable
amounts of risk. Management continually evaluates the potential risk in all
segments of the portfolio in determining the adequacy of the allowance for loan
losses. Other than concentrations of credit risk in commercial real estate and
residential real estate loans in general, management is not aware of any
significant concentrations.

Loans classified as commercial real estate loans are loans which are
collateralized by real estate and substantially dependent upon cash flow from
income-producing improvements attached to the real estate. For BancGroup, these
primarily consist of apartments, hotels, office buildings, warehouses, shopping
centers, amusement/recreational facilities, one-to-four family residential
housing developments, and health service facilities.

Commercial Real Estate loans are underwritten based on projected cash flows
and loan-to-appraised-value ratios of 80% or less. The risks associated with
commercial real estate loans primarily relate to real estate values in local
market areas, the equity investments of borrowers, and the borrowers'
experience and expertise. BancGroup has diversified its portfolio of commercial
real estate loans, resulting in less than 17% of its total commercial real
estate loan portfolio concentrated in any of the above-mentioned income
producing activities.

Residential Real Estate loans consist of loans made to finance one-to-four
family residences and home equity loans on residences. BancGroup may loan up to
90 to 95% of appraised value on these loans without other collateral or
security. The principal risks associated with one-to-four family residential
loans are the borrowers' debt coverage ratios and real estate values.

Real Estate Construction loans include loans to finance single family and
multi-family residential as well as nonresidential real estate. Loan-to-value
ratios for these loans typically do not exceed 80% to 85%. The principal risks
associated with these loans are related to the borrowers' ability to complete
the project, local market demand, the sales market, presales or preleasing, and
permanent loan commitments. BancGroup evaluates presale requirements,
preleasing rates, permanent loan take-out commitments, as well as other factors
in underwriting construction loans.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

In 1998, BancGroup established a mortgage warehouse lending department. This
department provides lines of credit collateralized by residential mortgage
loans to top tier mortgage companies, predominately in the Southeast. Loans
outstanding at December 31, 2001 and 2000 were $1,286 million and $377 million,
respectively

BancGroup's international banking department engages in confirming letters
of credit with top-tier banks in Latin America and direct disbursements to
those banks from U.S. customers. Loans outstanding at December 31, 2001 and
2000, totaled approximately $125 million for both years. However, due to the
immaterial balance of these loans in relation to total loans, these amounts are
not be disclosed in the table(s) separately.

BancGroup evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by BancGroup upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, residential houses and
income-producing commercial properties. No additional credit risk exposure,
relating to outstanding loan balances, exists beyond the amounts shown in the
consolidated statement of condition at December 31, 2001.

In the normal course of business, loans are made to officers, directors,
principal shareholders and to companies in which they own a significant
interest. Loan activity to such parties with an aggregate loan balance of more
than $60,000 during the year ended December 31, 2001 are summarized as follows:

Balance Balance
1/1/01 Additions Reductions 12/31/01
------- ---------- ----------- ---------
(In thousands)
$20,490 $ 43,029 $ 24,525 $ 38,994

At December 31, 2001 and 2000, the recorded investment in loans for which
impairment has been recognized totaled approximately $46,198,000 and
$29,455,000, respectively, and these loans had a corresponding valuation
allowance of $19,733,000 and $14,501,000, respectively. The impaired loans were
measured for impairment based primarily on the value of underlying collateral.
For the years ended December 31, 2001 and 2000, the average recorded investment
in impaired loans was approximately $47,728,000 and $29,144,000. The amount of
interest recognized on impaired loans during the portion of the year that they
were impaired was not significant for either 2001 or 2000.

BancGroup uses several factors in determining if a loan is impaired.
Generally, nonaccrual loans as well as loans classified as substandard by
internal loan review are reviewed for impairment. The internal asset
classification procedures include a thorough review of significant loans and
lending relationships, and include the accumulation of related data. This data
includes loan payment status, borrower's financial data, collateral value and
borrower's operating factors such as cash flows, operating income or loss.

During 2001, as a part of its normal asset liability management BancGroup
securitized $307 million of its single-family real estate loans with the
Federal Home Loan Mortgage Corporation ("FHLMC"), a government sponsored
agency. The Company received 100% of the securities backed by mortgage loans,
which are guaranteed by FHLMC and did not account for the securitization as a
sales transaction. At December 31, 2001 $96.3 million of these mortgage-back
securities remain in the available for sale securities portfolio and are
therefore carried at fair value based on quoted market prices. As it relates to
interest rate sensitivity, the fair value of these retained mortgage-backed
securities would be expected to react consistently with the other

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

mortgage-backed securities held in BancGroup's securities portfolio. The
Company continues to retain servicing rights for the related mortgage loans.
The related servicing asset was not recorded, as the amount was immaterial.

The following table represents information concerning 1-4 family mortgage
loan securitizations as of December 31, 2001:

Total Total 90 Days Net
Principal or More Past Due Credit
Amount (In Millions) Losses
---------- ---------------- ------
(In thousands)

Total residential real estate loans managed or securitized......... $2,223,779 $15,195 $2,583
Less:
Loans securitized................................................. 245,505 253 --
Loans held for sale............................................... 35,453 -- --
---------- ------- ------
Total residential real estate loans held for investment..... $1,942,821 $14,942 $2,583
Fair value of retained mortgage-backed securities.................. $ 96,320

5. Allowance for Loan Losses

An analysis of the allowance for loan losses is as follows:

2001 2000 1999
- -------- -------- --------
- (In thousands)

Balance, January 1........... $110,055 $ 99,027 $ 85,079
Addition due to acquisitions. 1,296 -- 2,035
Provision charged to income.. 39,573 29,775 29,177
Loans charged off............ (32,729) (23,447) (24,435)
Recoveries................... 4,005 4,700 7,171
-------- -------- --------
Balance, December 31......... $122,200 $110,055 $ 99,027
======== ======== ========

6. Discontinued Operations

On July 17, 2000, the Board of Directors of BancGroup approved a letter of
intent with a third party to sell the rights to service approximately $5
billion of mortgage loans serviced by Colonial Bank. This sale was completed on
August 28, 2000. Final transfer of servicing was completed in the fourth
quarter of 2000. With the completion of this transaction, along with previous
sales of mortgage servicing related to loans with outstanding balances of $9
billion and $3 billion at March 31, 2000 and December 31, 1999, respectively,
BancGroup exited the mortgage servicing business.

These non-recourse sales agreements provide for BancGroup to subservice
(generally for up to 90 days) the loans for fee designed to cover BancGroup's
cost of servicing. As of December 31, 2000, BancGroup has completed the
transfer of all servicing and subservicing to the purchasers thereof. As of
December 31, 2000 and 1999, $17 million and $27 million, respectively, of
amounts due from the aforementioned purchasers is included in Other Assets.

BancGroup recorded a loss on disposal of the discontinued operation of $4.3
million after tax. The results of the mortgage servicing business have been
classified as discontinued operations in the accompanying financial statements.
Loss from discontinued operations, net of income taxes, for the years ended
December 31, 2001 and 2000 were approximately $613,000 and $743,000.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

7. Mortgage Servicing Rights

An analysis of mortgage servicing rights and the related valuation reserve
is as follows:

2001 2000
- ----- ---------
- (In thousands)

Mortgage Servicing Rights Balance, January 1. $ -- $ 265,888
Additions.................................... -- 981
Scheduled amortization....................... -- (13,432)
Hedge losses applied, net.................... -- (49,725)
Sales........................................ -- (203,712)
----- ---------
Balance, December 31......................... $ -- $ --
===== =========
Valuation Reserve
Balance, January 1........................... -- $ 27,483
Additions/(Reductions), net.................. -- (27,483)
===== =========
Balance, December 31......................... -- --
Mortgage Servicing Rights, Net............... $ -- $ --
===== =========

As a result of the previously discussed plan to exit the mortgage servicing
business, all hedges related to MSR were liquidated during the third quarter of
2000.

8. Financial Instruments with Off-Balance-Sheet Risk

Contract Amount
- ---------------------
2001 2000
- ---------- ----------
- (In thousands)

Financial instruments whose contract amounts represent
Credit risk:
Loan commitments....................................... $2,939,904 $1,964,816
Standyby letters of credit............................. 243,873 258,962

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

BancGroup has entered into third party correspondent relationships for the
sale of its retail production of fixed rate mortgage loans which substantially
reduces the need to hedge the interest rate risk associated with the production
and sale of such loans. The correlation between the price of the inventory of
mortgage loans held for sale and the related sales agreements is high due to
the similarity of the asset and the related arrangements.

9. Derivatives

Fair Value Hedges:

All of BancGroup's fair value hedge positions have qualified for short cut
accounting treatment, therefore for the year ended December 31, 2001, BancGroup
recognized no profit or loss impact from gains or losses in value of these
fair-value hedges.

BancGroup has entered into an interest-rate swap to convert the $150 million
subordinated fixed rate long -term debt to floating rate debt, and, to convert
three fixed rate loans to variable rate loans. The related balances as of
December 31, 2001 are shown below:

Derivative Type Notional Amount Fair Value Asset or Liability Hedged
------------------ --------------- ---------- ---------------------------
(In thousands)

Interest rate swap $ 150,000 $154,306 Fixed Rate Long-Term Debt
Interest rate swap 12,571 12,065 Fixed Rate Commercial Loans

MSR Hedges:

For the financial contracts listed below, all of which expired or were
cancelled prior to the adoption of FASB 133, BancGroup's exposure to interest
rate risk was mitigated by the expected inverse relationship these instruments
have with mortgage servicing rights.

The following summarizes the notional amounts of BancGroup's derivative
contracts:

Interest
Call Put CMT Rate PO CMS
Options Options Futures Floors Strips Strips Floors
--------- --------- --------- ----------- --------- -------- ---------

(In thousands)
Balance, January 1, 1999............. $ 198,500 $ 303,000 $ 343,000 $ -- $ -- $ -- $ --
Additions............................ -- -- -- 1,730,000 176,000 75,000 293,000
Dispositions/Expirations/Amortization (198,500) (303,000) (343,000) (1,275,000) (176,000) (3,697) --
--------- --------- --------- ----------- --------- -------- ---------
Balance, December 31, 1999........... -- -- -- 455,000 -- 71,303 293,000
Additions............................ -- -- -- -- -- -- --
Dispositions/Expirations/Amortization -- -- -- (455,000) -- (71,303) (293,000)
--------- --------- --------- ----------- --------- -------- ---------
Balance, December 31, 2000........... -- -- -- -- -- -- --
Additions............................ -- -- -- -- -- -- --
Dispositions/Expirations/Amortization -- -- -- -- -- -- --
--------- --------- --------- ----------- --------- -------- ---------
Balance, December 31, 2001........... $ -- $ -- $ -- $ -- $ -- $ -- $ --
========= ========= ========= =========== ========= ======== =========

There can be no assurance that, in periods of increasing interest rates, the
increase in value of hedged mortgage servicing rights will offset the loss in
value of the Servicing Hedges; or, in periods of declining interest rates, that
the Company's Servicing Hedges will generate gains, or if gains are generated,
that they will fully offset impairment of the hedged mortgage servicing rights.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

10. Premises and Equipment

Premises and equipment are summarized as follows:

2001 2000
--------- ---------
(In thousands)

Land.......................................... $ 43,812 $ 42,611
Bank premises................................. 123,569 117,314
Equipment..................................... 110,920 105,591
Leasehold improvements........................ 30,862 27,397
Construction in progress...................... 15,165 6,350
Automobiles and airplane...................... 18,113 18,248
--------- ---------
Total...................................... 342,441 317,511
--------- ---------
Less accumulated depreciation and amortization (143,458) (125,167)
--------- ---------
Premises and equipment, net................... $ 198,983 $ 192,344
========= =========

11. Short-Term Borrowings

Short-term borrowings are summarized as follows:

2001 2000 1999
---------- ---------- ----------
(In thousands)

FHLB borrowings.................. $ 50,534 $ 650,527 $ 590,521
Federal funds purchased.......... 1,393,521 829,386 210,032
Repurchase agreements (retail)... 569,816 325,031 242,500
Repurchase agreements (wholesale) 114,262 89,144 150,571
Other short-term borrowings...... -- 3,470 225
---------- ---------- ----------
Total..................... $2,128,133 $1,897,558 $1,193,849
========== ========== ==========

At December 31, 2001 and 2000, BancGroup had wholesale repurchase agreements
outstanding in the amount of $114 million and $89 million, respectively. This
debt corresponds to securities purchased under resale agreements with other
financial institutions.

BancGroup is a member of the Federal Home Loan Bank ("FHLB"). At both
December 31, 2001 and 2000, BancGroup had FHLB borrowings of $1.41 billion and
$1.22 billion outstanding of which $1.36 billion and $574 million,
respectively, are included in long-term debt with the remaining portion
included in short-term borrowings, leaving credit availability at December 31,
2001 of $813 million based on current collateral. FHLB has a blanket lien on
BancGroup's 1-4 family mortgage and commercial real estate loans.

BancGroup has a revolving credit facility with an unaffiliated financial
institution totaling $25 million of which $0 and $3 million was outstanding at
December 31, 2001 and 2000. This facility bears interest at 0.85% above LIBOR
and expires in July 2002. Other short-term borrowings consist of a $500,000
line of credit with an unaffiliated financial institution, of which $0 and
$470,000, respectively were outstanding at December 31, 2001 and 2000.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Additional details regarding short-term borrowings (excluding current
maturities of long-term debt) are shown below:

Maximum Average
Outstanding Average Interest
At Any Average Interest Rate At
Month End Balance Rate Year End
----------- ---------- -------- --------
(In thousands)

2001
FHLB borrowings............ $ 425,000 $ 155,685 5.87% 2.29%
Other short-term borrowings 2,169,071 1,539,943 3.72% 1.91%
---------- ---------- ---- ----
$2,594,071 $1,695,628 3.92% 1.91%
========== ========== ==== ====
2000
FHLB borrowings............ $ 550,000 $ 394,440 6.52% 6.86%
Other short-term borrowings 1,357,858 1,139,843 6.25% 6.49%
---------- ---------- ---- ----
$1,907,858 $1,534,283 6.32% 6.57%
========== ========== ==== ====
1999
FHLB borrowings............ $ 800,000 $ 530,685 5.27% 5.87%
Other short-term borrowings 830,056 775,570 5.00% 5.30%
---------- ---------- ---- ----
$1,630,056 $1,306,255 5.11% 5.54%
========== ========== ==== ====

12. Long-Term Borrowings

Long-term debt is summarized as follows:

2001 2000
---------- --------
(In thousands)

7 1/2% Convertible Subordinated Debentures $ 2,795 $ 3,030
7% Convertible Subordinated Debentures.... 725 1,145
Variable Rate Subordinated Debentures..... 7,725 7,725
Subordinated Notes........................ 254,305 100,000
Trust Preferred Securities................ 70,000 73,000
FHLB Borrowings........................... 1,361,938 574,022
Repurchase agreements (wholesale)......... 88,064 102,325
Promissory Note........................... 588 1,000
---------- --------
Total.............................. $1,786,140 $862,247
========== ========

The 7 1/2% Convertible Subordinated Debentures due March 31, 2011 ("1986
Debentures") issued in 1986 are convertible at any time into shares of
BancGroup Common Stock, at the conversion price of $7.00 principal amount of
1986 Debentures, subject to adjustment upon the occurrence of certain events,
for each share of stock received. The 1986 Debentures are redeemable at the
option of BancGroup at the face amount plus accrued interest. In the event all
of the remaining 1986 Debentures are converted into shares of BancGroup Common
Stock in accordance with the 1986 Indenture, approximately 399,000 shares of
such Common Stock would be issued.

The 7% Convertible Subordinated Debentures due December 31, 2004 ("1994
Debentures"), were issued by D/W Bancshares prior to being merged into
BancGroup. The 1994 Debentures are convertible into BancGroup

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Common Stock, at the conversion price of $7.58 principal amount of the 1994
Debentures, subject to adjustment upon occurrence of certain events, for each
share of stock received. In the event all of the remaining 1994 Debentures are
converted into shares of BancGroup Common Stock in accordance with the 1994
Indenture, approximately 96,000 shares of such Common Stock would be issued.

In connection with the ASB Bancshares, Inc. acquisition, on February 5,
1998, BancGroup issued $7,725,000 of variable rate subordinated debentures due
February 5, 2008 ("1998 Debentures"). These variable rate subordinated
debentures bear interest equal to the New York Prime Rate minus 1% (but in no
event less than 7% per annum).

On March 15, 1999, BancGroup issued $100 million of subordinated notes, due
March 15, 2009. The notes bears interest at 8.00% and are not subject to
redemption prior to maturity.

On May 23, 2001, Colonial Bank issued $150 million in 9.375% subordinated
notes due June 1, 2011, for general corporate and banking purposes, which
qualifies as Tier II capital. 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 of 3
month LIBOR plus 3.28% which as of December 31, 2001 was 5.39.

On January 29, 1997, BancGroup issued, through a special purpose trust, $70
million of Trust Preferred Securities. The securities bear interest at 8.92%
and are subject to redemption by BancGroup, in whole or in part at any time
after January 29, 2007 until maturity in January 2017. Circumstances are remote
that redemption will occur prior to maturity.

During 1999, Manufacturers Bancshares, Inc., prior to being merged in
BancGroup, issued 250 shares of variable rate cumulative trust preferred
securities through a special purpose trust, pursuant to a trust agreement dated
December 10, 1999. The preferred securities were sold at a price of $10,000 per
share. An additional 50 shares of preferred securities were sold during 2000.
Distribution on each preferred security is payable at the annual rate of 8.75%
through March 31, 2000 and LIBOR plus 2.5% after March 31, 2000. These
securities were redeemed in November 2001.

The subordinated debentures, notes and Trust Preferred Securities described
above are subordinate to substantially all remaining liabilities of BancGroup.

BancGroup had long-term FHLB Borrowings outstanding of $1,361,938,000 and
$574,022,000 at December 31, 2001 and 2000, respectively. These borrowings bear
interest rates of 1.72% to 7.53% and mature from 2003 to 2013.

At December 31, 2001, BancGroup had long-term repurchase agreements
outstanding of $88.1 million. These agreements, which are collateralized by
mortgage-backed securities, bear interest rates of 5.84% to 6.03% and mature in
2003.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

At December 31, 2001, long-term debt, including the current portion, is
scheduled to mature as follows:

Consolidated
Parent Only BancGroup
----------- ------------
(In thousands)

2002............. $ 988 $ 1,122
2003............. -- 218,842
2004............. 725 300,965
2005............. -- 111,429
2006............. -- 203,605
Thereafter....... 80,520 950,710
------- ----------
Total..... $82,233 $1,786,673
======= ==========

13. Capital Stock

In addition to the authorized BancGroup common stock currently outstanding,
the Board of Directors is authorized to issue shares of the preference stock in
one or more series, and in connection with such issuance, to establish the
relative rights, preferences, and limitations of each such series. Shareholders
of BancGroup may not act by written consent or call special meetings.

14. Regulatory Matters and Restrictions

Dividends payable by national and state banks in any year, without prior
approval of the appropriate regulatory authorities, are limited to the bank's
net profits (as defined) for that year combined with its retained net profits
for the preceding two years. Under these limitations, approximately $150
million of retained earnings plus certain 2002 earnings would be available for
distribution to BancGroup, from its subsidiaries, as dividends in 2002 without
prior approval from the respective regulatory authorities.

Colonial Bank is required by law to maintain noninterest-bearing deposits
with the Federal Reserve Bank to meet regulatory reserve requirements. At
December 31, 2001, these deposits were not material to BancGroup's funding
requirements.

BancGroup and Colonial Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on BancGroup's financial position. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
BancGroup and Colonial Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. BancGroup's and
Colonial Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.

Quantitative measures established by regulation to ensure capital adequacy
require BancGroup and Colonial Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2001 and
2000, that BancGroup and Colonial Bank meet all capital adequacy requirements
to which they are subject.

As of December 31, 2001, the most recent notification from the Federal
Deposit Insurance Corporation categorized Colonial Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as "well capitalized," BancGroup and Colonial Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

notification that management believes have changed BancGroup's category. Actual
capital amounts and ratios for BancGroup and Colonial Bank are also presented
in the following table:

For To Be Well
Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------- -------- -----------------------------
Amount Ratio* Amount Ratio Amount Ratio
- ---------- ------ -------- ----------------- ---------- ------------------
(In thousands)

As of December 31, 2001
Total Capital (to risk weighted assets)
Consolidated........................... $1,188,773 10.91% $871,459 (greater or =)8.0% $1,089,324 (greater or =)10.0%
Colonial Bank.......................... 1,189,809 10.92 871,601 (greater or =)8.0 1,089,501 (greater or =)10.0
Tier I Capital (to risk weighted assets)
Consolidated........................... 805,107 7.39 435,730 (greater or =)4.0 653,595 (greater or =)6.0
Colonial Bank.......................... 817,388 7.50 435,800 (greater or =)4.0 653,700 (greater or =)6.0
Tier I Capital (to average assets)
Consolidated........................... 805,107 6.24 520,875 (greater or =)4.0 651,093 (greater or =)5.0
Colonial Bank.......................... 817,388 6.38 520,309 (greater or =)4.0 650,386 (greater or =)5.0
As of December 31, 2000
Total Capital (to risk weighted assets)
Consolidated........................... $1,001,154 10.59% $756,428 (greater or =)8.0% $ 945,536 (greater or =)10.0%
Colonial Bank.......................... 1,001,906 10.60 756,024 (greater or =)8.0 945,030 (greater or =)10.0
Tier I Capital (to risk weighted assets)
Consolidated........................... 779,199 8.24 378,214 (greater or =)4.0 567,321 (greater or =)6.0
Colonial Bank.......................... 791,852 8.37 378,012 (greater or =)4.0 579,272 (greater or =)6.0
Tier I Capital (to average assets)
Consolidated........................... 779,199 6.66 464,022 (greater or =)4.0 580,028 (greater or =)5.0
Colonial Bank.......................... 791,852 6.77 463,417 (greater or =)4.0 579,272 (greater or =)5.0

--------
* These ratios are subject to regulatory review

15. Leases

BancGroup and its subsidiaries have entered into certain noncancellable
leases for premises and equipment used in connection with its operations. The
majority of these noncancellable lease agreements contain renewal options for
varying periods at the same or renegotiated rentals, and several contain
purchase options at fair value. Future minimum lease payments under all
noncancellable operating leases with initial or remaining terms (exclusive of
renewal options) of one year or more at December 31, 2001 were as follows:

(In thousands)

2001...... $ 17,320
2002...... 13,666
2003...... 10,279
2004...... 9,789
2005...... 7,818
Thereafter 42,191
--------
Total.. $101,063
========

Rent expense for all leases amounted to $19,317,000 in 2001, $16,982,000 in
2000 and $14,828,000 in 1999, respectively.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

16. Employee Benefit Plans

BancGroup and subsidiaries are participants in a pension plan that covers
most employees who have met certain age and length of service requirements.
BancGroup's policy is to contribute annually an amount that can be deducted for
federal income tax purposes using the frozen entry age actuarial method.
Actuarial computations for financial reporting purposes are based on the
projected unit credit method.

Employee pension benefit plan status at December 31:

2001 2000
------- -------
(In thousands)

Change in benefit obligation:
Benefit obligation at January 1......... $29,269 $24,769
Service cost............................ 3,174 2,932
Interest cost........................... 2,291 2,039
Plan Amendments......................... 54 --
Actuarial gain (loss)................... (1,231) 655
Benefits paid........................... (1,011) (1,126)
------- -------
Benefit obligation at December 31....... 32,546 29,269
------- -------
Change in plan assets:
Fair value of plan assets at January 1.. 21,130 22,927
Actual return on plan assets............ 173 (2,279)
Employer contributions.................. 3,279 1,608
Benefits paid........................... (1,011) (1,126)
------- -------
Fair value of plan assets at December 31 23,571 21,130
------- -------
Funded status at December 31............ (8,974) (8,139)
Unrecognized net actuarial loss (gain).. 2,976 2,413
Unrecognized prior service cost......... 75 20
------- -------
Accrued benefit cost at December 31..... $(5,923) $(5,706)
======= =======

2001 2000 1999
---- ---- ----

Weighted-average assumptions as of December 31:
Discount Rate................................. 7.25% 7.25% 7.25%
Expected return on plan assets................ 9.00 9.00 9.00
Rate of compensation increase................. 4.50 4.50 4.50

2001 2000 1999
------- ------- -------
(In thousands)

Components of net periodic benefit cost for the year ended December 31:
Service cost.......................................................... $ 3,174 $ 2,932 $ 2,951
Interest cost......................................................... 2,291 2,039 1,712
Expected return on plan assets........................................ (1,968) (2,081) (1,957)
Actuarial gain........................................................ (1) (1) (1)
------- ------- -------
Net annual benefit cost............................................... $ 3,496 $ 2,889 $ 2,705
------- ------- -------

At both December 31, 2001 and 2000, the pension plan assets included
investments of 164,520 shares of BancGroup Common Stock representing 10% and 8%
of pension plan assets, respectively. At December 31, 2001, BancGroup Common
Stock included in pension plan assets had a cost and market value of
approximately $616,429 and $2,318,087, respectively. Pension plan assets are
distributed with approximately 20% in Cash and

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Cash Equivalents, 13% in U.S. Government and agency issues, 14% in corporate
bonds, 49% in equity securities (including BancGroup Common Stock) and 4% in
mutual funds.

BancGroup also has an incentive savings plan (the "Savings Plan") for all of
the employees of BancGroup and its subsidiaries. The Savings Plan provides
certain retirement, death, disability and employment benefits to all eligible
employees and qualifies as a deferred arrangement under Section 401(k) of the
Internal Revenue Code. Participants in the Savings Plan make basic
contributions and may make supplemental contributions to increase benefits.
BancGroup contributes a minimum of 50% of the basic contributions made by the
employees and may make an additional contribution from profits on an annual
basis. An employee's interest in BancGroup's contributions becomes 100% vested
after five years of participation in the Savings Plan. Participants have
options as to the investment of their Savings Plan funds, one of which includes
purchase of Common Stock of BancGroup. Charges to operations for this plan and
similar plans of combined banks amounted to approximately $1,899,000,
$2,023,000 and $2,200,000 for 2001, 2000 and 1999, respectively.

17. Stock Plans

The 2001 Long Term Incentive Stock Option Plan ("the LTIP") provides for the
granting of various types of incentive stock-based awards including incentive
stock options, nonqualified stock options, stock appreciation rights,
restricted stock, and performance units, all of which may be issued only to key
employees, officers and directors of BancGroup. Shares authorized to be issued
under the LTIP total 10,000,000 of BancGroup common stock. All options expire
no more than ten years from the date of grant, or three months after an
employee's termination.

Incentive Stock Options issued under the LTIP are subject to a number of
additional limitations including, but not limited to: (i) the options cannot be
issued at less than the fair market value of BancGroup common stock on the date
they are granted, (ii) the aggregate fair market value (determined as of the
date of grant) of all shares of BancGroup common stock with respect to which
such options are first exercisable by a participant in any calendar year may
not exceed $100,000; and (iii) the exercise price of such options issued to any
individual who owns 10% or more of the combined voting power of BancGroup may
not be less than 110% of the fair market value of BancGroup common stock on the
date such options are granted and such options must expire not later than five
years from the date they are granted. At December 31, 2001, there were 691,497
incentive stock options issued under the LTIP.

Nonqualified stock options issued under the LTIP may be issued at an
exercise price of not less than 85% of the fair market value of BancGroup
common stock on the date of the grant. Stock appreciation rights issued under
the LTIP must not be less than the fair market value of BancGroup common stock
on the date of grant. At December 31, 2001, there were no nonqualified stock
options issued under the LTIP.

The LTIP also provides for the grant of awards in the form of performance
units. At the time of grant, performance objectives and other terms and
conditions to payment of the units are established. At December 31, 2001,
BancGroup has not granted any performance unit awards.

A restricted stock award under the LTIP consists of a grant of BancGroup's
common stock to the recipient subject to terms and conditions, including
provisions relating to transferability and forfeiture, as determined at the
time of the award. At December 31, 2001, BancGroup has not awarded any
restricted stock.

The LTIP also allows the grant of stock based awards in other forms and
establishes the terms and conditions of the award at the time of grant. At
December 31, 2001, BancGroup has not granted any other form of stock based
award.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

At December 31, 2001 approximately 9,432,000 remained available for the
granting of options under the LTIP.

Prior to the LTIP, BancGroup utilized the 1992 Incentive Stock Options Plan
("the 1992 Plan") and the 1992 Nonqualified Stock Option Plan ("the 1992
Nonqualified Plan") to provide an incentive to certain officers, key management
employees and directors. Options granted under the 1992 Plan must have been at
a price not less than the fair market value of the shares at the date of grant.
Options granted under the 1992 Nonqualified Plan must have been at a price not
less than 85% of the fair market value of the shares at the date of grant. All
options expire no more than ten years after the date of grant, or three months
after the employee's termination. Both of these plans were terminated on July
1, 2001 and replaced with the LTIP noted above. As of December 31, 2001,
754,500 were granted under the 1992 Plan and 82,500 options were issued under
the 1992 Nonqualified Plan. Although options previously granted under the 1992
Plan and the 1992 Nonqualified Plan may still be exercised, no further options
may be granted.

Pursuant to the various business combinations, BancGroup assumed qualified
stock options and non-qualified stock options according to the respective
exchange ratios.

Certain options issued during 2001 and 2000 under the Long Term Incentive
Plan, the 1992 Nonqualified Plan and the 1992 Plan have vesting requirements.
In order to fully vest in the options granted, the option recipients are
required to remain in the employment of BancGroup (subject to certain
exemptions) for periods of between one and five years (These options become
exercisable on a pro-rata basis over a period of one to five years) or attain
certain performance criteria.

Following is a summary of the transactions in Common Stock under these plans
for the years ended December 31, 2001, 2000 and 1999.

Qualified Plans(1) Nonqualified Plans(1)
---------------------------- ----------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
---------- ---------------- ---------- ----------------

Outstanding at December 31, 1998............ 2,905,738 $10.747 2,153,359 $ 4.469
Granted (at $10.50 -- $14.5625 per share)... 1,209,500 12.385 200,000 11.016
Exercised (at $1.54 -- $12.125 per share)... (458,295) 4.979 (430,418) 4.076
Cancelled (at $2.378 -- $18.2032 per share). (163,811) 12.863 (82,319) 8.184
---------- ----------
Outstanding at December 31, 1999............ 3,493,132 11.762 1,840,622 5.220
Granted (at $8.3438 -- $11.03 per share).... 480,225 10.055 276,024 9.757
Exercised (at $1.54 -- $10.50 per share).... (109,325) 5.499 (1,153,291) 3.318
Cancelled (at $5.00 -- $18.2032 per share).. (1,615,167) 14.290 (185,192) 8.994
---------- ----------
Outstanding at December 31, 2000............ 2,248,865 9.865 778,163 8.766
---------- ----------
Granted (at $5.00 -- $14.81 per share)...... 1,374,800 13.139 82,500 11.798
Exercised (at $3.025 -- $12.54 per share)... (498,223) 6.874 (163,004) 4.994
Cancelled (at $4.3430 -- $18.1560 per share) (253,108) 11.542 (2,572) 4.343
---------- ----------
Outstanding at December 31, 2001............ 2,872,334 $11.811 695,087 $10.026
========== ==========

--------
(1) This table includes those plans assumed pursuant to various business
combinations according to the respective exchange ratios.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

At December 31, 2001, the total shares outstanding and exercisable under
these option plans were as follows:

Options Outstanding Options Exercisable
------------------------------------------- --------------------------------
Weighted
Average Weighted
Number Remaining Average Aggregate Number Average Aggregate
Range of Exercise Outstanding Life Exercise Option Exercisable Exercise Option
Prices At 12/31/01 (in years) Price Price At 12/31/01 Price Price
------ ----------- ---------- -------- ----------- ----------- -------- -----------

$3.025 -- $4.223.. 31,122 1.97 $ 3.8582 $ 120,076 31,122 $ 3.8582 $ 120,076
$4.625 -- $7.358.. 102,590 3.97 6.6529 682,524 102,590 6.6529 682,524
$8.3438 -- $10.50. 1,319,559 7.14 10.0544 13,267,427 568,326 9.8908 5,621,178
$11.03 -- $12.25.. 822,750 7.45 11.5162 9,474,991 412,450 11.5572 4,766,754
$12.325 -- $14.810 1,291,400 9.56 13.4325 17,346,687 365,000 12.5929 4,596,420
--------- ----------- --------- -----------
Total........ 3,567,421 7.95 $11.4625 $40,891,705 1,479,488 $10.6706 $15,786,952
========= =========== ========= ===========

As permitted by Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" (SFAS 23), BancGroup has chosen to apply APB Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its Plans. Accordingly, no compensation cost
has been recognized for options granted under the Incentive Plan. For the
Nonqualified Plan, compensation expense is recognized for the difference
between exercise price and market price at grant date of the shares as the
shares become exercisable. Had compensation cost for BancGroup's Plans been
determined based on the fair value at the grant dates for awards under the
Plan, BancGroup's net income and net income per share would have been reduced
to the pro forma amounts indicated below:

As Pro
Reported Forma
-------- --------
(In thousands, except
per share amounts)

2001
Net income (basic).......... $122,103 $118,310
Earnings per share (basic).. 1.06 1.03
Net income (diluted)........ 121,925 118.132
Earnings per share (diluted) 1.05 1.02
2000
Net income (basic).......... $115,120 $113,720
Earnings per share (basic).. 1.00 0.99
Net income (diluted)........ 114,928 113,528
Earnings per share (diluted) 0.99 0.98
1999
Net income (basic).......... $121,563 $118,754
Earnings per share (basic).. 1.05 1.03
Net income (diluted)........ 121,344 118,535
Earnings per share (diluted) 1.03 1.01

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999, respectively: dividend
yield of 3.92%, 3.16%, and 3.13%; expected volatility of 34%, 42%, and 32% for
2001, 2000, and 1999; risk-free interest rates of 5.18%, 5.82%, and 5.43% for
2001, 2000, and 1999, respectively; and expected lives of ten years. The
weighted average fair values of options granted during 2001, 2000, and 1999
were $3.61, $3.52, and $3.89, respectively.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

In 1987, BancGroup adopted the Restricted Stock Plan for Directors
("Directors Plan") whereby directors of BancGroup and its subsidiary banks may
receive Common Stock in lieu of cash director fees. The election to participate
in the Directors Plan is made at the inception of the director's term except
for BancGroup directors who make their election annually. Shares earned under
the plan for regular fees are issued quarterly while supplemental fees are
issued annually. All shares become vested at the expiration of the director's
term. During 2001, 2000, and 1999, respectively, 119,019, 88,643, and 60,435
shares of Common Stock were issued under the
Directors Plan, representing approximately $1,218,000, $1,079,000, and $724,000
in directors' fees for 2001, 2000, and 1999, respectively.

In 1992, BancGroup adopted the Stock Bonus and Retention Plan to promote the
long-term interests of BancGroup and its shareholders by providing a means for
attracting and retaining officers, employees and directors by awarding
Restricted Stock which shall vest either over a stated time period or based
upon performance criteria. A total of $1,353,000, $1,099,000, and $745,000 in
compensation expense was charged to operations under this plan for the years
ended December 31, 2001, 2000, and 1999, respectively. During 2001, 2000, and
1999 the Company awarded 156,906, 251,000, and 20,100 shares, respectively,
under the Stock Bonus and Retention Plan having weighted average market value
at grant date of $11.46, $10.50, and $13.60, respectively. There were 361,999
shares outstanding under this plan at December 31, 2001.

In 1994, BancGroup adopted the Employee Stock Purchase Plan which provides
employees of BancGroup, who work in excess of 29 hours per week, with a
convenient way to become shareholders of BancGroup. The participant authorizes
a regular payroll deduction of not less than $10 or not more than 10% of
salary. The participant may also contribute whole dollar amounts of not less
than $100 or not more than $1,000 each month toward the purchase of the stock
at market price. There are 600,000 shares authorized for issuance under this
Plan from authorized but unissued shares. An additional 400,000 may be acquired
from time to time on the open market for issuance under the Plan. There were
221,798 shares issued and outstanding under this Plan at December 31, 2001.

On November 30, 2000, the subcommittee approved a proposal to offer
employees of BancGroup and its subsidiaries the opportunity to cancel certain
options and be granted replacement options at least six months after the
cancellation of the original options (the "Exchange Program"). Participation in
the Exchange Program was at the sole discretion of the employee. The
subcommittee included all employees with option exercise prices greater than
$13.00. Total Shares canceled under this agreement totaled 864,000. On June 18,
2001, 725,500 shares were reissued under this program at $12.54. The
subcommittee approved the Exchange Program with the goals of retaining valuable
employees and reinstating some value to a portion of BancGroup's compensation
and incentive strategy.

18. Contingencies

BancGroup and its subsidiaries are from time to time defendants in legal
actions from normal business activities. Management does not anticipate that
the ultimate liability arising from litigation outstanding at December 31, 2001
will have a materially adverse effect on BancGroup's financial statements.

19. Related Parties

BancGroup and Colonial Bank lease premises, including their principal
corporate offices, from companies partly owned by a principal shareholder of
BancGroup. Amounts paid under these leases and agreements approximated
$2,401,000, $2,271,000 and $2,925,000 in 2001, 2000 and 1999, respectively.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

During 2001, 2000 and 1999, BancGroup and its subsidiaries paid or accrued
fees of approximately $1,725,000, $1,416,000 and $1,196,000, respectively, for
legal services required of law firms in which a partner of the firm serves on
the Board of Directors.

20. Merger Related Expenses

The Company has recognized external merger related expenses totaling
$3,049,000, $0 and $1,307,000 for each of the years ended December 31, 2001,
2000 and 1999, respectively. These expenses relate primarily to
transaction costs such as legal fees and accounting fees, brokerage
commissions, and incremental charges related to the integration of acquired
banks, such as system conversion (including contract buy-outs and write offs of
equipment) and employee severance.

21. Other Expense

The following amounts were included in Other Expense:

2001 2000 1999
------- ------- -------

(In thousands)
FDIC and state assessments........ $ 2,150 $ 2,005 $ 1,677
Advertising and public relations.. 6,093 7,908 7,863
Stationery, printing, and supplies 4,602 4,974 5,730
Telephone......................... 6,920 6,554 6,221
Legal............................. 5,749 4,707 4,634
Postage and courier............... 7,052 6,867 6,795
Insurance......................... 1,594 1,451 1,507
Professional services............. 6,863 6,309 7,058
Travel............................ 3,787 3,575 3,636
Other............................. 14,414 18,796 14,754
------- ------- -------
Total........................ $59,224 $63,146 $59,875
======= ======= =======

22. Income Taxes

The components of the provision for income taxes were as follows:

2001 2000 1999
------- ------- -------

(In thousands)
Currently payable
Federal......... $67,944 $69,308 $67,139
State........... 706 1,309 2,345
Deferred......... 531 (4,127) 2,010
------- ------- -------
Total....... $69,181 $66,490 $71,494
======= ======= =======

The provision for income taxes is presented in the income statement as
follows:

2001 2000 1999
------- ------- -------
(In thousands)

Continuing operations.. $69,552 $69,556 $69,360
Discontinued operations (371) (3,066) 2,134
------- ------- -------
Total............. $69,181 $66,490 $71,494
======= ======= =======

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The reasons for the difference between income tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income taxes are as follows:

2001 2000 1999
------- ------- -------

(In thousands)
Tax at statutory rate on pre-tax income............. $66,949 $63,791 $67,510
Add:
State income taxes, net of federal tax benefit..... 459 805 1,754
Amortization of net purchase accounting adjustments 1,735 1,724 1,705
Other.............................................. 4,084 4,256 3,097
------- ------- -------
Total.......................................... 73,227 70,576 74,066
------- ------- -------
Deduct:
Nontaxable interest income......................... 2,489 2,759 1,991
Other.............................................. 1,557 1,327 581
------- ------- -------
Total.......................................... 4,046 4,086 2,572
------- ------- -------
Total income taxes.................................. $69,181 $66,490 $71,494
======= ======= =======

The components of BancGroup's net deferred tax asset as of December 31, 2001
and 2000, were as follows:

2001 2000
------- -------

(In thousands)
Deferred tax assets:
Allowance for loan losses................................................... $43,992 $40,032
Pension accrual in excess of contributions.................................. 1,262 2,205
Other real estate owned write-downs......................................... 422 390
Other liabilities and reserves.............................................. 3,230 4,634
Differences between financial reporting and tax basis of net assets acquired 1,722 944
Accelerated tax depreciation................................................ 79 758
Unrealized loss on securities available for sale............................ -- 3,305
Other....................................................................... 2,660 1,438
------- -------
Total deferred tax asset................................................ $53,367 $53,706
======= =======
Deferred tax liabilities:
Unrealized gain on securities available for sale............................ $ 5,354 $ --
Cumulative accretion/discount on bonds...................................... 1,139 1,253
Loan loss reserve recapture................................................. -- 703
Other....................................................................... 5,405 1,510
------- -------
Total deferred tax liability............................................ 11,898 3,466
------- -------
Net deferred tax asset.................................................. $41,469 $50,240
======= =======

The net deferred tax asset is included as a component of accrued interest
and other assets in the Consolidated Statement of Condition.

BancGroup did not establish a valuation allowance related to the net
deferred tax asset due to taxes paid within the carryback period being
sufficient to offset future deductions resulting from the reversal of these
temporary differences.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

23. 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:

Per
Share
Income Shares Amount
-------- ------- ------

(Dollars in thousands, except per
share amounts)
2001
Basic EPS
Income from continuing Operations $122,716 114,811 $1.07
Effect of dilutive securities.... 531
Options........................
Convertible debentures......... 178 539
-------- -------
Diluted EPS....................... $122,894 115,881 $1.06
======== =======
2000
Basic EPS
Income from continuing Operations $120,185 114,760 $1.05
Effect of dilutive securities.... 296
Options........................
Convertible debentures......... 192 597
-------- -------
Diluted EPS....................... $120,377 115,653 $1.04
======== =======
1999
Basic EPS
Income from continuing Operations $118,036 115,579 $1.02
Effect of dilutive securities.... 1,147
Options........................
Convertible debentures......... 219 667
-------- -------
Diluted EPS....................... $118,255 117,393 $1.01
======== =======

24. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash and cash equivalents -- For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.

Investment securities and securities available for sale -- For debt
securities and marketable equity securities held either for investment purposes
or for sale, fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.

Mortgage loans held for sale -- For these short-term assets, the carrying
amount is a reasonable estimate of fair value.

Derivatives -- Fair value is defined as the amount that the company would
receive or pay to terminate the contracts at the reporting date. Market or
dealer quotes were used to value the instruments.

Loans -- For loans, the fair value is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Deposits -- The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand at December 31, 2001 and
2000. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.

Short-term borrowings -- Rates currently available to BancGroup for
borrowings with similar terms and remaining maturities are used to estimate
fair value of existing borrowings.

Long-term debt -- Rates currently available to BancGroup for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.

Commitments to extend credit and standby letters of credit -- The value of
the unrecognized financial instruments is estimated based on the related fee
income associated with the commitments, which is not material to BancGroup's
financial statements at December 31, 2001 and 2000.

The estimated fair values of BancGroup's financial instruments at December
31, 2001 and 2000 are as follows:

2001 2000
------------------------ ------------------------

Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
(In thousands)
Financial assets:
Cash and short-term investments. $ 388,107 $ 388,107 $ 377,556 $ 377,556
Securities available for sale... 1,852,439 1,852,439 1,469,684 1,469,684
Investment securities........... 30,055 31,065 47,048 47,871
Mortgage loans held for sale.... 35,453 35,453 9,866 9,866
Loans........................... 10,367,665 9,642,954
Less: allowances for loan losses (122,200) (110,055)
----------- ----------- ----------- -----------
Loans, net...................... 10,245,465 10,448,306 9,532,899 9,554,572
----------- ----------- ----------- -----------
Total..................... $12,551,519 $12,755,370 $11,437,053 $11,459,549
=========== =========== =========== ===========
Financial liabilities:
Deposits........................ $ 8,322,979 8,357,145 $ 8,355,849 $ 8,366,425
Short-term borrowings........... 2,128,133 2,128,133 1,897,558 1,898,669
Long-term debt.................. 1,786,140 1,846,358 862,247 851,543
----------- ----------- ----------- -----------
Total..................... $12,237,252 $12,331,636 $11,115,654 $11,116,637
=========== =========== =========== ===========
Derivatives:
Interest Rate SWAPS.............. $ 166,371 $ 166,371 $ 6,883 $ 6,883
=========== =========== =========== ===========

25. Segment Information

Through its wholly owned subsidiary, Colonial Bank, BancGroup had previously
segmented its operations into two distinct lines of business: Commercial
Banking and Mortgage Banking. In July 2000, the Company announced definitive
plans to exit the mortgage banking business. As of December 31, 2000, all sales
of mortgage servicing rights and transfers of underlying loans have been
completed.

Colonial Bank provides general banking services in 261 branches throughout 6
states.

Operating results and asset levels of the two segments reflect those which
are specifically identifiable or which are based on an internal allocation
method. The two segments are designed around BancGroup's organizational and
management structure, and while the assignments and allocations have been
consistently applied for all periods presented, the results are not necessarily
comparable to similar information published by other financial institutions.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The following table reflects the approximate amounts of consolidated
revenue, expense, and assets for the years ended December 31, for each segment:

Segment Data

Continuing Operations
------------------------------------

Discontinued
Operations
Commercial Corporate/ Mortgage Consolidated
Banking Other* Total Banking BancGroup
----------- ----------- ----------- ------------- -------------
(Dollars in thousands)
Year Ended December 31, 2001
Interest income....................................... $ 902,114 $ 53 $ 902,167 $ 902,167
Interest expense...................................... 472,764 7,474 480,238 480,238
Provision for loan losses............................. 39,573 -- 39,573 39,573
Noninterest income.................................... 93,739 (30) 93,709 93,709
Amortization and depreciation......................... 32,825 (439) 32,386 32,386
Noninterest expense................................... 245,724 6,058 251,782 251,782
----------- ----------- ----------- ------------- -------------
Income from continuing operations before income taxes. 204,967 (13,070) 191,897 191,897
Income taxes.......................................... 72,639 (3,458) 69,181 69,181
----------- ----------- ----------- ------------- -------------
Income from continuing operations..................... 132,328 (9,612) 122,716 122,716
Income (loss) from discontinued operations and loss on
disposal (net of taxes).............................. -- -- -- (613) (613)
----------- ----------- ----------- ------------- -------------
Net Income (loss).............................. $ 132,328 $ (9,612) $ 122,716 $ (613) $ 122,103
=========== =========== =========== ============= =============
Identifiable Assets................................... $13,166,328 $ 12,769 $13,179,097 $ 6,006 $ 13,185,103
Capital Expenditures.................................. $ 27,728 $ 0 $ 27,728 $ 27,728
Year Ended December 31, 2000
Interest income....................................... $ 918,076 $ -- $ 918,076 $ 918,076
Interest expense...................................... 510,733 7,021 517,754 517,754
Provision for loan losses............................. 29,775 -- 29,775 29,775
Noninterest income.................................... 77,849 36 77,885 77,885
Amortization and depreciation......................... 31,483 (418) 31,065 31,065
Noninterest expense................................... 223,325 4,301 227,626 227,626
----------- ----------- ----------- ------------- -------------
Income from continuing operations before income taxes. 200,609 (10,868) 189,741 189,741
Income taxes.......................................... 72,420 (2,864) 69,556 69,556
----------- ----------- ----------- ------------- -------------
Income from continuing operations..................... 128,189 (8,004) 120,185 120,185
Income (loss) from discontinued operations and loss on
disposal (net of taxes).............................. -- -- -- (5,065) (5,065)
----------- ----------- ----------- ------------- -------------
Net Income (loss).............................. $ 128,189 $ (8,004) $ 120,185 $ (5,065) $ 115,120
=========== =========== =========== ============= =============
Identifiable Assets................................... $11,951,864 $ 12,701 $11,964,565 $ 35,056 $ 11,999,621
Capital Expenditures.................................. $ 22,077 $ 0 $ 22,077 $ 22,077
Year Ended December 31, 1999
Interest income....................................... $ 766,038 $ -- $ 766,038 $ 766,038
Interest expense...................................... 377,626 7,265 384,891 384,891
Provision for loan losses............................. 29,177 -- 29,177 29,177
Noninterest income.................................... 75,128 213 75,341 75,341
Amortization and depreciation......................... 27,928 (408) 27,520 27,520
Noninterest expense................................... 209,041 3,354 212,395 212,395
----------- ----------- ----------- ------------- -------------
Income from continuing operations before income taxes. 197,394 (9,998) 187,396 187,396
Income taxes.......................................... 73,041 (3,681) 69,360 69,360
----------- ----------- ----------- ------------- -------------
Income from continuing operations..................... 124,353 (6,317) 118,036 118,036
Income (loss) from discontinued operations and loss on
disposal (net of taxes).............................. -- -- -- 3,527 3,527
----------- ----------- ----------- ------------- -------------
Net Income (loss).............................. $ 124,353 $ (6,317) $ 118,036 $ 3,527 $ 121,563
=========== =========== =========== ============= =============
Identifiable Assets................................... $10,743,914 $ 12,493 $10,756,407 $ 341,416 $ 11,097,823
Capital Expenditures.................................. $ 40,858 $ 34 $ 40,892 451 $ 41,343

--------
* Includes eliminations of certain intercompany transactions.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

26. Condensed Financial Information of the Colonial BancGroup, Inc. (Parent
Company Only)

Statement of Condition

December 31,
-----------------

2001 2000
-------- --------
(In thousands)
Assets:
Cash*................................................ $ 4,746 $ 7,522
Investment in subsidiaries*.......................... 942,996 856,932
Intangible assets.................................... 3,531 3,965
Other assets......................................... 3,524 5,108
-------- --------
Total assets................................... $954,797 $873,527
======== ========
Liabilities and Shareholders' Equity:
Short-term borrowings................................ $ -- $ 3,200
Subordinated debt.................................... 81,245 82,900
Other liabilities.................................... 8,777 12,327
Shareholders' equity................................. 864,775 775,100
-------- --------
Total liabilities and shareholders' equity..... $954,797 $873,527
======== ========

--------
* Eliminated in consolidation.

Statement of Operations

Year Ended December 31,
--------------------------
2001 2000 1999
-------- -------- --------
(In thousands)

Income:
Cash dividends from subsidiaries*.................................. $ 62,810 $ 64,866 $ 79,344
Interest and dividends on short-term investments*.................. 166 372 677
Other income....................................................... 2,646 2,849 2,490
-------- -------- --------
Total income................................................. 65,622 68,087 82,511
-------- -------- --------
Expenses:
Interest........................................................... 7,597 7,394 7,942
Salaries and employee benefits..................................... 3,297 1,696 1,263
Occupancy expense.................................................. 352 507 414
Furniture and equipment expense.................................... 71 100 137
Amortization of intangible assets.................................. 434 434 432
Other expenses..................................................... 2,486 2,262 1,816
-------- -------- --------
Total expenses............................................... 14,237 12,393 12,004
-------- -------- --------
Income before income taxes and equity in undistributed net income of
subsidiaries...................................................... 51,385 55,694 70,507
Income tax benefit.................................................. 3,942 3,314 3,278
-------- -------- --------
Income before equity in undistributed net income of subsidiaries.... 55,327 59,008 73,785
Equity in undistributed net income of subsidiaries*................. 66,776 56,112 47,778
-------- -------- --------
Net income................................................... $122,103 $115,120 $121,563
======== ======== ========

--------
* Eliminated in consolidation.

THE COLONIAL BANCGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Statement of Cash Flows

Year Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In thousands)

Cash flows from operating activities...................... $ 54,297 $ 61,744 $ 77,789
-------- -------- --------
Cash flows from investing activities:
Capital expenditures..................................... (2,853) (1,004) (34)
Increase (decrease) in loans............................. (375) (374) --
Net investment in subsidiaries*.......................... 981 (426) (2,700)
-------- -------- --------
Net cash provided (used) in investing activities......... (2,247) (1,804) (2,734)
-------- -------- --------
Cash flows from financing activities:.....................
Increase (decrease) in short-term borrowings............. (3,200) 4,245 (24,811)
Increase (decrease) in sale of trust preferred securities -- 500 2,500
Proceeds from issuance of common stock................... 4,707 6,266 6,437
Proceeds from sale of treasury stock..................... 7,352 -- --
Purchase of treasury stock............................... (8,773) (31,934) --
Dividends paid........................................... (54,912) (49,814) (42,566)
-------- -------- --------
Net cash used in financing activities.................... (54,826) (70,737) (58,440)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents..... (2,776) (10,797) 16,615
Cash and cash equivalents at beginning of year........... 7,522 18,319 1,704
-------- -------- --------
Cash and cash equivalents at end of year*................. $ 4,746 $ 7,522 $ 18,319
======== ======== ========
Supplemental Disclosure of cash flow information:
Cash paid (received) during the year for:
Interest................................................. $ 7,597 $ 7,638 $ 7,690
Income taxes............................................. (4,702) (1,440) (4,023)

--------
* Eliminated in consolidation
++

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

None

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item as to BancGroup's directors is
contained in BancGroup's proxy statement dated March 18, 2002, under the
captions "Election of Directors" and "Section 16 (a) Beneficial Ownership
Reporting Compliance," and is incorporated herein by reference.

EXECUTIVE OFFICERS OF THE REGISTRANT

Name, Age and Year Became Position and Offices Held with Present and Principal Occupation
Executive Officer BancGroup and Subsidiaries for the Last Five Years
------------------------- ------------------------------------ ------------------------------------

Robert E. Lowder......... Chairman of the Board, Chief Chairman of the Board and Chief
59, 1981 Executive Officer and President, Executive Officer (and President at
BancGroup; Chairman, Executive all relevant times except 1997-
Committee, BancGroup; Chairman 2000), BancGroup; Chairman of the
of the Board, Chief Executive Board, Chief Executive Officer,
Officer and President, Colonial (and President at all relevant times
Bank; Director, Central Alabama except 1997-2000) Colonial Bank;
Region; Director, Northern Region; Chairman of the Board and
Director, Gulf Coast Region; President, Colonial Broadcasting
Director, Montgomery Region; until July 1, 1998, Montgomery,
Director, Central Florida Region; AL; Chairman of the Board,
Director, South Florida Region; Colonial Mortgage Company until
Director, Bay Area Region; December 31, 1999.
Director, Southwest Florida Region;
Chairman of the Board, Georgia
Region; Director, Nevada Region;
Director, Texas Region;
Chairman of the Board, Colonial
Investment Services, Inc.; Chairman
of the Board, Chief Executive
Officer and President, Colonial
BancGroup Building Corporation.
W. Flake Oakley, IV...... Executive Vice President, Chief Executive Vice President, Chief
48, 1989 Financial Officer, Secretary, Financial Officer, and Secretary,
BancGroup; Executive Vice BancGroup and Colonial Bank;
President, Chief Financial Officer, Treasurer, BancGroup and Colonial
Cashier and Secretary, Colonial Bank until 1999.
Bank; Director and Vice President
Colonial Asset Management, Inc.;
Director Colonial Investment
Services, Inc.; Treasurer and
Director, Colonial BancGroup
Building Corporation; Vice
President and Director, CBG, Inc;
Vice President and Director, CBG,
Investments, Inc; Director, Colonial
Brokerage, Inc.

Sarah H. Moore........... Executive Vice President and
36, 1999 Chief Operations Officer, Executive Vice President and Chief
BancGroup and Colonial Bank; Operations Officer, BancGroup and
Vice President and Director, Colonial Bank 2000-Present;
Colonial BancGroup Building Executive Vice President and
Corporation; Vice President, CBG Treasurer, BancGroup and Colonial
Mortgage Insurance Inc. ; Vice Bank 1999-2000; Senior Vice
President and Director, CBG, Inc.; President, BancGroup and Colonial
Vice President, Colonial Investment Bank, 1996-1999.
Services, Inc.; Vice President, CBG
Investments, Inc.
Caryn Cope............... Executive Vice President and Chief Executive Vice President and Chief
38, 2001 Credit Officer Credit Officer, BancGroup and
Colonial Bank, 2001-present;
Executive Vice President, Credit
Quality and Policy, Colonial Bank,
1999-2000; Senior Vice President,
Large Loan Administration,
BancGroup and Colonial Bank,
1996-1999.

Item 11. Executive Compensation

The information required by this item is contained in BancGroup's proxy
statement dated March 18, 2002, under the caption "Executive Compensation" and
is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is contained in BancGroup's proxy
statement dated March 18, 2002, under the caption "Voting Securities and
Principal Stockholders" and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information required by this item is contained in BancGroup's proxy
statement dated March 18, 2002, under the captions "Compensation Committee
Interlocks and Insider Participation" and "Executive Compensation" and is
incorporated herein by reference.

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

Our annual report to our stockholders and our Annual Report on Form 10-K
contain "forward-looking statements" within the meaning of the federal
securities laws. Words such as "believes," "estimates," "plans," "expects,"
"should," "may," "might," "outlook," and "anticipates," and similar expressions
are intended to identify forward-looking statements. The forward-looking
statements in these reports 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:

. deposit attrition, customer loss, or revenue loss in the ordinary course
of business;

. increases in competitive pressure in the banking industry;

. costs or difficulties related to the integration of the businesses of
BancGroup and the institutions acquired are greater than expected;

. changes in the interest rate environment which reduce margins;

. general economic conditions, either nationally or regionally, that are
less favorable then expected, resulting in, among other things, a
deterioration in credit quality, vendor representations, technological
advancements, and economic factors including liquidity availability;

. changes which may occur in the regulatory environment;

. a significant rate of inflation (deflation);

. acts of terrorism or war; and

. changes in the securities markets.

Many of these factors are beyond our control. For a discussion of factors
that could cause our actual results to differ, please see the discussions in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Annual Report on Form 10-K for the
year ended December 31, 2001.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) 1. Financial Statements

The following financial statements are included herein at Item 8.

Consolidated Statements of Condition as of December 31, 2001 and 2000.

Consolidated Statements of Income for the years ended December 31, 2001,
2000, and 1999.

Consolidated Statements of Comprehensive Income for the years ended December
31, 2001, 2000, and 1999.

Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2001, 2000, and 1999.

Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000, and 1999.

Notes to Consolidated Financial Statements, including Parent Company only
information.

Report of Independent Accountants.

2. Financial Statements Schedules

The financial statement schedules required to be included pursuant to this
Item are not included herein because they are not applicable or the required
information is shown in the financial statements or notes thereto which are
incorporated by reference at subsection 1 of this Item, above.

3. Exhibits

Exhibits Description
-------- -----------

Exhibit 3 -- Articles of Incorporation and Bylaws:

3.1 -- Restated Certificate of Incorporation of the Registrant, filed as Exhibit 4.1 to the Registrant's
Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference.

3.2 -- Amendment to Article 4 of Registrant's Restated Certificate of Incorporation, dated May 15, 1998,
filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-4 (File No. 333-56241),
effective June 22, 1998, and incorporated herein by reference.

3.3 -- Bylaws of the Registrant, as amended, filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K, dated February 21, 1995, and incorporated herein by reference.

Exhibit 4 -- Instruments defining the rights of security holders:

4.1 -- Article 4 of the Restated Certificate of Incorporation of the Registrant filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by
reference.

4.2 -- Amendment to Article 4 of Registrant's Restated Certificate of Incorporation, dated May 15, 1998,
filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-4 (File No. 333-56241),
effective June 22, 1998, and incorporated herein by reference.

4.3 -- Article II of the Bylaws of the Registrant filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K, dated February 21, 1995, and incorporated herein by reference.

Exhibits Description
-------- -----------

4.4 -- Dividend Reinvestment and Common Stock Purchase Plan of the Registrant dated January 15,
1986, and Amendment No. 1 thereto dated as of June 10, 1986, filed as Exhibit 4(C) to the
Registrant's Registration Statement on Form S-4 (File No. 33-07015), effective July 15, 1986, and
incorporated herein by reference.

4.5 -- All instruments defining the rights of holders of long-term debt of the Corporation and its
subsidiaries. Not filed pursuant to clause 4(iii) of Item 601(b) of Regulation S-K; to be furnished
upon request of the Commission.
Exhibit 10 -- Material Contracts:

10.1 -- Second Amendment and Restatement of 1982 Incentive Stock Plan of the Registrant, filed as
Exhibit 4-1 to the Registrant's Registration Statement on Form S-8 (File No. 33-41036), effective
June 4, 1991, and incorporated herein by reference.

10.2 -- Second Amendment and Restatement to 1982 Nonqualified Stock Option Plan of the Registrant
filed as Exhibit 4-2 to the Registrant's Registration Statement on Form S-8 (File No. 33-41036),
effective June 4, 1991, and incorporated herein by reference.

10.3 -- 1992 Incentive Stock Option Plan of the Registrant, as amended, filed as Exhibit 10.1 to
Registrant's Registration Statement on Form S-8 (File No. 333-71841), effective February 5, 1999,
and incorporated herein by reference.

10.4 -- 1992 Nonqualified Stock Option Plan of the Registrant as amended, filed as Exhibit 10.2 to
Registrant's Registration Statement on Form S-8 (File No. 333-71841), effective February 5, 1999,
and incorporated herein by reference.

10.5 -- SunTrust Revolving Credit Facility Commitment Letter, filed as Exhibit 10.5 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by
reference.

10.6 -- The Colonial BancGroup, Inc. First Amended and Restated Restricted Stock Plan for Directors, as
amended, included as Exhibit 10(C)(1) to the Registrant's Registration Statement on Form S-4
(File No. 33-52952), and incorporated herein by reference.

10.7 -- The Colonial BancGroup, Inc. Stock Bonus and Retention Plan, Included as Exhibit 10(C)(2) to the
Registrant's Registration Statement as Form S-4 (File No. 33-52952), and incorporated herein by
reference.

10.8 -- Indenture dated as of January 29, 1997 between The Colonial BancGroup, Inc. and Wilmington
Trust Company, as Debenture Trustee dated as of, included as Exhibit 4(A) to Registrant's
Registration Statement on Form S-4 (File No. 333-22135), and incorporated herein by reference.

10.9 -- Management Incentive Plan of The Colonial BancGroup, Inc. filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated
herein by references.

10.10 -- The Colonial BancGroup 2001 Long-Term Incentive Plan, filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8 (File No. 333-64978), effective July 12, 2001, and
incorporated herein by reference.

Exhibit 11 -- Statement Regarding Computation of Earnings Per Share are included herein at footnote 23 to the
financial statements in Item 8.

Exhibit 12 -- Statement Regarding Computation of Ratio of Earnings to Fixed Charges.

Exhibit 21 -- List of subsidiaries of the Registrant.

Exhibit 23 -- Consents of experts and counsel:

23.1 -- Consent of PricewaterhouseCoopers LLP.

Exhibit 24 -- Power of Attorney.

(b) The Registrant filed no Current Reports on Form 8-K during the fourth
quarter of 2001. The Registrant furnished certain information as Regulation
F-D disclosure under Item 9 on a Current Report on Form 8-K, furnished on
October 16, 2001.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Montgomery, Alabama, on the 8th day of March, 2002.

THE COLONIAL BANCGROUP, INC.

By: /s/ ROBERT E. LOWDER
----------------------------------
Robert E. Lowder
Its Chairman of the Board of
Directors, Chief Executive
Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----
/s/ ROBERT E. LOWDER Chairman of the Board of **
----------------------------- Directors, Chief Executive
Officer and President
Robert E. Lowder

/s/ W. FLAKE OAKLEY, IV Chief Financial Officer and **
----------------------------- Secretary (Principal
Financial Officer and
Principal Accounting
Officer)
W. Flake Oakley, IV

* Director **
-----------------------------
Lewis Beville
* Director **
-----------------------------
William Britton
* Director **
-----------------------------
Jerry J. Chesser
* Director **
-----------------------------
Augustus K. Clements, III
* Director **
-----------------------------
Robert C. Craft
* Director **
-----------------------------
Patrick F. Dye
* Director **
-----------------------------
Clinton O. Holdbrooks
* Director **
-----------------------------
Harold D. King

Signature Title Date
--------- ----- ----
* Director **
-----------------------------
John Ed Mathison
* Director **
-----------------------------
Milton E. McGregor
* Director **
-----------------------------
John C. H. Miller, Jr.
* Director **
-----------------------------
Joe D. Mussafer
* Director **
-----------------------------
William E. Powell
* Director **
-----------------------------
Jimmy Rane
* Director **
-----------------------------
Frances E. Roper
* Director **
-----------------------------
Simuel Sippial
* Director **
-----------------------------
Ed V. Welch
--------
* The undersigned, acting pursuant to a power of attorney, has signed this
Annual Report on Form 10-K for and on behalf of the persons indicated above
as such persons' true and lawful attorney-in-fact and in their names, places
and stead, in the capacities indicated above and on the date indicated below.

/s/ W. FLAKE OAKLEY, IV
-------------------------------
W. Flake Oakley, IV
Attorney-in-Fact

** Dated: March 8, 2002

EXHIBIT INDEX

Exhibits Description
-------- -----------

Exhibit 3 -- Articles of Incorporation and Bylaws:

3.1 -- Restated Certificate of Incorporation of the Registrant, filed as Exhibit 4.1 to the Registrant's
Current Report on Form 8-K, dated February 21, 1995, and incorporated herein by reference.

3.3 -- Bylaws of the Registrant, as amended, filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K, dated February 21, 1995, and incorporated herein by reference.

Exhibit 4 -- Instruments defining the rights of security holders:

4.3 -- Article II of the Bylaws of the Registrant filed as Exhibit 4.2 to the Registrant's Current Report on
Form 8-K, dated February 21, 1995, and incorporated herein by reference.

4.5 -- All instruments defining the rights of holders of long-term debt of the Corporation and
itssubsidiaries. Not filed pursuant to clause 4(iii) of Item 601(b) of Regulation S-K; to be furnished
upon request of the Commission.

Exhibit 10 -- Material Contracts:

Exhibits Description
-------- -----------

10.7 -- The Colonial BancGroup, Inc. Stock Bonus and Retention Plan, Included as Exhibit 10(C)(2) to
the Registrant's Registration Statement as Form S-4 (File No. 33-52952), and incorporated herein
by reference.

Exhibit 11 -- Statement Regarding Computation of Earnings Per Share are included herein at footnote 23 to the
financial statements in Item 8.

Exhibit 12 -- Statement Regarding Computation of Ratio of Earnings to Fixed Charges.

Exhibit 21 -- List of subsidiaries of the Registrant.

Exhibit 23 -- Consents of experts and counsel:

23.1 -- Consent of PricewaterhouseCoopers LLP.

Exhibit 24 -- Power of Attorney.

(b) The Registrant filed no Current Reports on Form 8-K during the fourth
quarter of 2001. The Registrant furnished certain information as
Regulaton F-D disclosure under Item 9 on a Current Report on Form 8-K,
furnished on October 16, 2001.