| COLONIAL BANCGROUP INC Item 1A Risk Factors Industry Factors As a financial services company, our earnings are significantly affected by general business and economic conditions |
| Our business and earnings are impacted by general business and economic conditions in the United States and abroad |
| These conditions include short-term and long-term interest rates, inflation, money supply, fluctuations in both debt and equity capital markets, and the strength of the US economy and the local economies in which we operate |
| For example, an economic downturn, increase in unemployment, or other events that negatively impact household and/or corporate incomes could decrease the demand for the Company’s loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans |
| Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies |
| The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States |
| Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which impact our net interest margin, and can materially affect the value of financial instruments we hold, such as debt securities |
| Its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans |
| Changes in Federal Reserve Board policies are beyond our control and difficult to predict or anticipate |
| The financial services industry is highly competitive |
| We operate in a highly competitive industry which could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation |
| Banks, securities firms and 8 ______________________________________________________________________ insurance companies can now merge by creating a financial services company called a “financial holding company,” which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking |
| A number of foreign banks have acquired financial services companies in the United States, further increasing competition in the US market |
| Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems |
| Many of our competitors have fewer regulatory constraints and some have lower cost structures |
| We are heavily regulated by federal agencies |
| The Company, its subsidiary bank and certain nonbank subsidiaries are heavily regulated by federal agencies |
| This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders |
| Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes |
| Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and/or increasing the ability of nonbanks to offer competing financial services and products |
| Also, our failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies and damage to our reputation |
| For more information, refer to discussions of regulatory considerations contained in Item 1 — Business and Note 16, Regulatory Matters and Restrictions |
| Future legislation could change our competitive position |
| Various legislation, including proposals to substantially change the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies, is from time to time introduced in the Congress |
| This legislation may change banking statutes and the operating environment of the Company and its subsidiaries in substantial and unpredictable ways |
| If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions |
| We cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries |
| We depend on the accuracy and completeness of information about customers and counterparties |
| In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information |
| We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors |
| For example, in deciding whether to extend credit, we may assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer |
| We also may rely on the audit report covering those financials statements |
| Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or that are materially misleading |
| Consumers may decide not to use banks to complete their financial transactions |
| Technology and other changes are allowing parties to complete financial transactions that historically have involved banks |
| For example, consumers can now pay bills and transfer funds directly without banks |
| The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits |
| 9 ______________________________________________________________________ Company Factors Maintaining or increasing our market share depends on market acceptance and regulatory approval of new products and services |
| Our success depends, in part, or our ability to adapt our products and services to evolving industry standards |
| There is increasing pressure on financial services companies to provide products and services at lower prices |
| This can reduce our net interest margin and revenues from our fee-based products and services |
| In addition, the widespread adoption of new technologies, including internet-based services, could require us to make substantial expenditures to modify or adapt our existing products and services |
| We might not successfully introduce new products and services, achieve market acceptance of our products and services, and/or develop and maintain loyal customers |
| The holding company relies on dividends from its subsidiaries for most of its revenue |
| The holding company is a separate and distinct legal entity from its subsidiaries |
| It receives substantially all of its revenue from dividends from its subsidiaries |
| These dividends are the principal source of funds to pay dividends on the holding company’s common stock and interest and principal on its debt |
| Various federal and/or state laws and regulations limit the amount of dividends that our bank and certain of our nonbank subsidiaries may pay to the holding company |
| Also, the holding company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors |
| For more information, refer to “Payment of Dividends and Other Restrictions” in Item 1 and Note 16, Regulatory Matters and Restrictions |
| Our accounting policies and methods determine how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain |
| Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations |
| Our management must exercise judgment in selecting and applying many of these accounting policies and methods so that not only do they comply with generally accepted accounting principles but also that they reflect management’s judgment as to the most appropriate manner in which to record and report our financial condition and results of operations |
| In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative |
| Note 1, Summary of Significant Accounting and Reporting Policies, to the Consolidated Financial Statements describes our significant accounting policies |
| We have identified four accounting policies as being “critical” to the presentation of our financial condition and results of operations because they require management to make particularly subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions |
| These critical accounting policies relate to: (1) allowance for loan losses, (2) purchase accounting and goodwill, (3) income taxes and (4) consolidations |
| For more information, refer in this report to “Critical Accounting Policies |
| ” We have businesses other than banking |
| We are a diversified financial services company |
| In addition to banking, we provide insurance, investments and mortgages |
| Although we believe our diversity helps mitigate the impact to the Company when downturns affect any one segment of our industry, it also means that our earnings could be subject to different risks and uncertainties |
| We discuss one example below |
| Mortgage Warehouse and Retail Mortgage Banking The impact of interest rates on our mortgage banking business can be large and complex |
| Changes in interest rates can impact the Company’s mortgage related revenues |
| A decline in mortgage rates generally 10 ______________________________________________________________________ increases the demand for mortgage loans as borrowers refinance, but also generally leads to accelerated payoffs |
| Conversely, in a constant or increasing rate environment, we would expect fewer loans to be refinanced and a decline in payoffs |
| Although the Company uses models to assess the impact of interest rates on mortgage related revenues, the estimates of net income produced by these models are dependent on estimates and assumptions of future loan demand, prepayment speeds and other factors which may overstate or understate actual subsequent experience |
| We have an active acquisition program |
| We regularly explore opportunities to acquire financial institutions and other financial services providers |
| We cannot predict the number, size or timing of future acquisitions |
| We typically do not comment publicly on a possible acquisition or business combination until we have signed a definitive agreement for the transaction |
| Our ability to successfully complete an acquisition generally is subject to regulatory approval, and we cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted |
| We might be required to divest banks or branches as a condition to receiving regulatory approval |
| Difficulty in integrating an acquired company may cause us not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition |
| Specifically, the integration process could result in higher than expected deposit attrition (run-off), loss of key employees, the disruption of our business or the business of the acquired company, or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition |
| Also, the negative impact of any divestitures required by regulatory authorities in connection with acquisitions or business combinations may be greater than expected |
| Our business could suffer if we fail to attract and retain skilled people |
| Our success depends, in large part, on our ability to attract and retain key people |
| Competition for the best people in most activities engaged in by the Company can be intense |
| Our stock price can fluctuate widely in response to a variety of factors including: • actual or anticipated variations in our quarterly operating results; • recommendations by securities analysts; • new technology used, or services offered, by our competitors; • significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; • failure to integrate our acquisitions or realize anticipated benefits from our acquisitions; • operating and stock price performance of other companies that investors deem comparable to us; • news reports relating to trends, concerns and other issues in the financial services industry; • changes in government regulations; and • geopolitical conditions such as acts or threats of terrorism or military conflicts |
| General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, also could cause our stock price to decrease regardless of our operating results |