Edgar Filing: COLONIAL BANCGROUP INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER: 1-13508

THE COLONIAL BANCGROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

63-0661573

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

100 Colonial Bank Blvd.

Montgomery, AL

36117

(Address of principal executive offices)

(Zip Code)

(334) 676-5000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer: in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

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


Class		Outstanding at April 30, 2008
Common Stock, $2.50 Par Value		201,831,202

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

INDEX


		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
	Consolidated Statements of Condition—March 31, 2008 and December 31, 2007	4
	Consolidated Statements of Income—Three months ended March 31, 2008 and March 31, 2007	5
	Consolidated Statements of Comprehensive Income—Three months ended March 31, 2008 and March 31, 2007	6
	Consolidated Statement of Changes in Shareholders’ Equity—Three months ended March 31, 2008	7
	Consolidated Statements of Cash Flows—Three months ended March 31, 2008 and March 31, 2007	8
	Notes to the Unaudited Consolidated Financial Statements—March 31, 2008	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
SIGNATURE		51

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS

OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:

FORWARD-LOOKING STATEMENTS

This report and the information incorporated by reference contain “forward-looking statements” within the meaning of the federal securities laws. Words such as “believes”, “estimates”, “plans”, “expects”, “should”, “may”, “might”, “outlook”, “potential” and “anticipates”, the negative of these terms and similar expressions as they relate to BancGroup (including its subsidiaries and its management), are intended to identify forward-looking statements. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements.

In addition to factors mentioned elsewhere in this report or previously disclosed in BancGroup’s Securities and Exchange Commission (the “SEC”) reports (accessible on the SEC’s website at www.sec.gov or on BancGroup’s website at www.colonialbank.com), the following factors, among others, could cause actual results to differ materially from forward-looking statements, and future results could differ materially from historical performance. These factors are not exclusive:

•

losses in our loan portfolio are greater than estimated or expected;

•

an inability to raise additional capital on terms and conditions that are satisfactory;

•

the impact of current economic conditions on our ability to borrow additional funds to meet our liquidity needs;

•

economic conditions affecting real estate values and transactions in BancGroup’s market and/or general economic conditions, either nationally or regionally, that are less favorable than expected;

•

changes in the interest rate environment which expand or reduce margins or adversely affect critical estimates as applied and projected returns on investments;

•

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

•

increases in competitive pressure in the banking industry and from non-banks;

•

costs or difficulties related to the integration of Bancgroup’s businesses and institutions it acquires are greater than expected;

•

Bancgroup’s inability to realize elements of its strategic plans for 2008 and beyond;

•

natural disasters in BancGroup’s primary market areas result in prolonged business disruption or materially impair the value of collateral securing loans;

•

management’s assumptions and estimates underlying critical accounting policies prove to be inadequate or materially incorrect or are not borne out by subsequent events;

•

the impact of recent and future federal and state regulatory changes;

•

current or future litigation, regulatory investigations, proceedings or inquiries;

•

strategies to manage interest rate risk may yield results other than those anticipated;

•

changes which may occur in the regulatory environment;

•

a significant rate of inflation (deflation);

•

unanticipated litigation or claims;

•

acts of terrorism or war; and

•

changes in the securities markets.

Many of these factors are beyond BancGroup’s control. The reader is cautioned not to place undue reliance on any forward looking statements made by or on behalf of BancGroup. Any such statement speaks only as of the date the statement was made or as of such date that may be referenced within the statement. BancGroup does not undertake any obligation to update or revise any forward-looking statements.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(Unaudited)


	March 31, 2008			December 31, 2007
	(In thousands, except share amounts)
ASSETS
Cash and due from banks	$	400,880		$	474,948
Interest bearing deposits in banks		1,375			28,993
Federal funds sold		9,821			71,167
Securities purchased under agreements to resell		2,106,205			2,049,664
Securities available for sale		3,493,454			3,681,282
Held to maturity securities (fair value: 2008, $1,360; 2007, $1,361)		1,200			1,228
Loans held for sale		2,951,777			1,544,222
Total loans, net of unearned income:		16,094,478			15,923,178
Less: Allowance for loan losses		(240,795	)		(238,845	)

Loans, net		15,853,683			15,684,333
Premises and equipment, net		509,164			500,558
Goodwill		1,005,211			1,008,168
Other intangible assets, net		59,274			63,437
Other real estate owned		19,717			15,760
Bank-owned life insurance		480,722			475,593
Accrued interest and other assets		460,264			376,636

Total	$	27,352,747		$	25,975,989

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing transaction accounts	$	3,050,729		$	2,988,457
Interest bearing transaction accounts		6,526,822			6,783,116

Total transaction accounts		9,577,551			9,771,573
Time deposits		7,828,384			7,317,108
Brokered time deposits		1,865,393			1,455,586

Total deposits		19,271,328			18,544,267
Repurchase agreements		540,589			568,721
Federal funds purchased		639,000			—
Subordinated debt		632,346			386,434
Junior subordinated debt		108,248			108,256
Other long-term debt		3,429,345			3,529,146
Accrued expenses and other liabilities		266,816			272,536

Total liabilities		24,887,672			23,409,360

Minority interest/REIT preferred securities		293,058			293,058

Contingencies and commitments (Note 8)
Preferred stock, $2.50 par value; 50,000,000 shares authorized and none issued at both March 31, 2008 and December 31, 2007		—			—
Preference stock, $2.50 par value; 1,000,000 shares authorized and none issued at both March 31, 2008 and December 31, 2007		—			—
Common stock, $2.50 par value; 400,000,000 shares authorized; 168,063,887 and 167,407,169 shares issued and 158,097,161 and 157,440,442 shares outstanding at March 31, 2008 and December 31, 2007, respectively		420,160			418,518
Additional paid in capital		1,005,651			1,004,888
Retained earnings		1,089,011			1,094,916
Treasury stock, at cost (9,966,727 shares at March 31, 2008 and December 31, 2007)		(240,336	)		(240,336	)
Accumulated other comprehensive loss, net of taxes		(102,469	)		(4,415	)

Total shareholders’ equity		2,172,017			2,273,571

Total	$	27,352,747		$	25,975,989

See Notes to the Unaudited Consolidated Financial Statements

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended March 31,
	2008		2007
	(In thousands, except per share amounts)
Interest Income:
Interest and fees on loans	$	301,640	$	315,309
Interest and dividends on securities		52,646		42,435
Interest on federal funds sold and other short-term investments		29,251		19,136

Total interest income		383,537		376,880

Interest Expense:
Interest on deposits		137,506		133,085
Interest on short-term borrowings		15,297		23,832
Interest on long-term debt		49,110		40,018

Total interest expense		201,913		196,935

Net Interest Income		181,624		179,945
Provision for loan losses		35,543		2,250

Net Interest Income After Provision for Loan Losses		146,081		177,695

Noninterest Income:
Service charges on deposit accounts		19,228		17,679
Electronic banking		5,004		4,401
Other retail banking fees		2,548		3,612

Retail banking fees		26,780		25,692
Financial planning services		4,812		3,822
Mortgage banking origination and sales		6,760		3,187
Mortgage warehouse fees		995		6,955
Bank-owned life insurance		5,120		4,955
Securities gains, net		6,075		981
Securities restructuring losses		—		(36,006	)
Gain on sale of mortgage loans		—		3,850
Other income		7,205		1,783

Total noninterest income		57,747		15,219

Noninterest Expense:
Salaries and employee benefits		73,667		69,554
Occupancy expense of bank premises, net		23,055		18,505
Furniture and equipment expenses		14,703		13,122
Professional services		5,638		4,100
FDIC insurance and other regulatory fees		4,562		1,213
Electronic banking and other retail banking expenses		4,157		4,212
Amortization of intangible assets		4,163		3,051
Communications		2,819		2,991
Loss on equity investments		2,747		255
Loan and real estate related costs		2,649		338
Postage and Courier		2,622		2,639
Advertising		2,603		2,215
Travel		1,439		1,739
Severance expense		236		3,025
Merger related expenses		—		429
Net losses related to the early extinguishment of debt		5,932		4,396
Other expenses		12,986		6,357

Total noninterest expense		163,978		138,141
Minority interest expense/REIT preferred dividends		5,336		—

Income before income taxes		34,514		54,773
Applicable income taxes		9,717		18,294

Net Income	$	24,797	$	36,479

Earnings per share:
Basic	$	0.16	$	0.24
Diluted		0.16		0.24
Average number of shares outstanding:
Basic		156,956		152,309
Diluted		157,528		153,450
Dividends declared per share	$	0.19	$	0.1875

See Notes to the Unaudited Consolidated Financial Statements

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended March 31,
	2008			2007
	(In thousands)
Net income	$	24,797		$	36,479
Other comprehensive income, net of taxes:
Available for sale securities:
Unrealized (losses) gains arising during the period, net of income taxes of $64,567 and $(5,276) in 2008 and 2007, respectively		(96,001	)		9,798
Less: reclassification adjustment for net (gains) losses included in net income, net of income taxes of $2,437 and $(12,259) in 2008 and 2007, respectively		(3,638	)		22,766
Cash flow hedging instruments:
Reclassification adjustment for losses included in net income, net of income taxes of $(853) in 2008 and 2007		1,585			1,585

Comprehensive (loss) income	$	(73,257	)	$	70,628

See Notes to the Unaudited Consolidated Financial Statements

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


	Common Stock			Additional Paid In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares	Amount		Additional Paid In Capital			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	(In thousands, except shares and per share amounts)
Balance, December 31, 2007	157,440,442	$	418,518	$	1,004,888		$	(240,336	)	$	1,094,916		$	(4,415	)	$	2,273,571
Adoption of EITF 06-4 and 06-10											(671	)					(671	)
Shares issued under:
Directors plan	12,339		31		286												317
Stock option plans	50,700		127		489												616
Restricted stock plan, net	577,091		1,443		(1,443	)											—
Employee stock purchase plan	16,589		41		174												215
Tax benefit shortfall from stock based compensation					(31	)											(31	)
Stock-based compensation expense					1,288												1,288
Net income											24,797						24,797
Cash dividends ($0.19 per share)											(30,031	)					(30,031	)
Change in unrealized loss on securities available for sale, net of taxes and reclassification adjustments														(99,639	)		(99,639	)
Reclassification of cash flow hedging losses, net of taxes														1,585			1,585

Balance, March 31, 2008	158,097,161	$	420,160	$	1,005,651		$	(240,336	)	$	1,089,011		$	(102,469	)	$	2,172,017

See Notes to the Unaudited Consolidated Financial Statements

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2008			2007
	(In thousands)
Cash flows from operating activities:
Net income	$	24,797		$	36,479
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion		14,626			9,785
Provision for loan losses		35,543			2,250
Deferred taxes		506			(11,520	)
Securities gains, net		(6,075	)		(981	)
Securities restructuring losses		—			36,006
Gain on sale of mortgage loans		—			(3,850	)
(Gain) loss on sale of other assets		(3,099	)		86
Net (increase) decrease in loans held for sale		(1,407,555	)		360,002
Decrease in interest and other receivables		11,646			213
Decrease (increase) in prepaids		4,821			(7,143	)
Increase in other assets		(12,403	)		(4,845	)
Increase in accrued expenses & accounts payable		2,991			9,831
(Decrease) increase in accrued income taxes		(8,086	)		17,234
Increase in interest payable		4,859			8,283
Excess tax benefit from stock based compensation		(17	)		(237	)
Other, net		(1,050	)		(2,102	)

Total adjustments		(1,363,293	)		413,012

Net cash from operating activities		(1,338,496	)		449,491

Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale		26,289			49,492
Proceeds from sales of securities available for sale		227,491			163,829
Purchases of securities available for sale		(225,955	)		(420,583	)
Proceeds from maturities of held to maturity securities		28			304
Increase in securities purchased under agreements to resell		(56,541	)		(721,673	)
Net (increase) decrease in loans excluding proceeds from sale of mortgage loans		(210,572	)		68,562
Proceeds from sale of mortgage loans		—			493,101
Capital expenditures		(24,180	)		(31,569	)
Proceeds from bank owned life insurance		—			319
Proceeds from sale of other assets		5,784			2,887
Net (contributions to) return of investment in affiliates		(7,726	)		558

Net cash from investing activities		(265,382	)		(394,773	)

Cash flows from financing activities:
Net increase in demand, savings and time deposits		726,938			291,054
Net increase (decrease) in federal funds purchased, repurchase agreements and other short-term borrowings		610,868			(685,891	)
Proceeds from issuance of long-term debt, net		242,273			600,000
Repayment of long-term debt		(110,050	)		(72,279	)
Purchase of common stock		—			(7,490	)
Proceeds from issuance of common stock		831			2,985
Excess tax benefit from stock-based compensation		17			237
Dividends paid		(30,031	)		(28,678	)

Net cash from financing activities		1,440,846			99,938

Net (decrease) increase in cash and cash equivalents		(163,032	)		154,656
Cash and cash equivalents at the beginning of the year		575,108			442,682

Cash and cash equivalents at March 31	$	412,076		$	597,338

See Notes to the Unaudited Consolidated Financial Statements

THE COLONIAL BANCGROUP, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Accounting Policies and Basis of Presentation

The accounting and reporting policies of The Colonial BancGroup, Inc. and its subsidiaries (referred to herein as BancGroup, Colonial, or the Company) are detailed in the Company’s 2007 Annual Report on Form 10-K. As discussed more fully below, effective January 1, 2008 Colonial changed certain of those policies as a result of the adoption of new accounting standards. These unaudited interim financial statements should be read in conjunction with the audited financial statements and footnotes included in BancGroup’s 2007 Annual Report on Form 10-K.

In the opinion of BancGroup’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly BancGroup’s financial position as of March 31, 2008 and December 31, 2007 and the results of operations and cash flows for the interim periods ended March 31, 2008 and 2007. All 2008 interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year.

During the first quarter of 2008, inadvertent errors relating to prior year financial statements, principally relating to the accounting for derivatives and the carrying value of loans held for sale, were identified. The effect of these errors, individually and in the aggregate, is not material to any previously issued financial statements and is not expected to be material to our expected results of operations, financial position or cash flows for fiscal 2008. As a result, no adjustments to prior period amounts have been made. Adjustments for the quarter ended March 31, 2008 were recorded that reduced net income by $4.0 million ($6.6 million pretax) and earnings per share by $0.02, representing the cumulative effect of these errors on prior periods.

Certain reclassifications were made to prior periods in order to conform to the current period presentation.

Fair Value Measurements

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. The definition of fair value in SFAS 157 retains the notion of exchange price; however, it focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), rather than the price that would be paid to acquire the asset or received to assume the liability (an entry price). Under the Statement, a fair value measure should reflect all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. To increase consistency and comparability in fair value measures, SFAS 157 establishes a three-level fair value hierarchy to prioritize the inputs used in valuation techniques between observable inputs that reflect quoted prices in active markets (Level 1), inputs other than quoted prices that are directly or indirectly observable for the asset or liability (Level 2) and unobservable data (Level 3). The Statement does not expand the use of fair value accounting in any new circumstances.

On February 12, 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) SFAS 157-2, Effective Date of FASB Statement No. 157. This FSP permits delayed application of the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008.

The Company has elected to delay application of the provisions of SFAS 157 to nonfinancial assets and liabilities under FSP SFAS 157-2. The major categories of assets and liabilities that are recognized or disclosed at fair value for which the provisions of SFAS 157 have not been applied include reporting units measured at fair

value in the first step of a goodwill impairment test under SFAS 142, Goodwill And Other Intangible Assets, and nonfinancial long-lived assets measured at fair value for an impairment assessment under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

The Company’s adoption of SFAS 157 did not have an impact on BancGroup’s financial statements.

See Note 4, Fair Value Measurements, for disclosures related to fair value measurements.

Loans Held for Sale

Loans held for sale include originated loans and acquired short-term participations in mortgage loans. Prior to January 1, 2008, loans held for sale were carried at the lower of aggregate cost or market. As a result of adopting SFAS 157 on January 1, 2008, loans held for sale are now carried at the lower of aggregate cost or fair value. This change did not have a material impact on the Company’s financial statements.

Other Accounting Standards

The following is a list of other accounting standards which became effective as of January 1, 2008 but did not have a material impact on BancGroup and did not change the accounting and reporting policies detailed in the Company’s 2007 Annual Report on Form 10-K:

•

SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities—SFAS 159 permits companies to elect to measure certain eligible items at fair value. Subsequent unrealized gains and losses on those items will be reported in earnings. Upfront costs and fees related to those items will be reported in earnings as incurred and not deferred. As the Company did not elect to apply SFAS 159 to any of its existing eligible items as of January 1, 2008, the adoption of SFAS 159 did not have an impact on BancGroup’s financial statements. The Company may elect to apply SFAS 159 to certain newly recognized eligible items in the future.

•

FSP FIN 39-1, Amendment of FASB Interpretation No. 39—FSP FIN 39-1 amends Interpretation No. 39 to permit a reporting entity to offset the right to reclaim cash collateral (a receivable), or the obligation to return cash collateral (a payable), against derivative instruments executed with the same counterparty under the same master netting arrangement. The adoption of FSP FIN 39-1 did not have a material impact on BancGroup’s financial statements.

•

Emerging Issues Task Force (EITF) 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements—EITF 06-4 stipulates that an agreement by the employer to share a portion of the proceeds of a life insurance policy with the employee during the postretirement period is a postretirement benefit arrangement for which a liability must be recorded. As a result of adopting EITF 06-4 on January 1, 2008, BancGroup recognized an increase of $539,000 to the balance of other liabilities and a corresponding decrease to beginning retained earnings.

•

EITF 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements—EITF 06-10 stipulates that a liability should be recognized for a postretirement benefit obligation associated with a collateral assignment arrangement if, on the basis of the substantive agreement with the employee, the employer has agreed to maintain a life insurance policy during the postretirement period or provide a death benefit. The employer also must recognize and measure the associated asset on the basis of the terms of the collateral assignment arrangement. As a result of adopting EITF 06-10 on January 1, 2008, BancGroup recognized an increase of $257,000 to the balance of other liabilities, an increase of $125,000 to the balance of other assets and a decrease of $132,000 to beginning retained earnings.

•

Statement 133 Implementation Issue E23, Hedging—General: Issues Involving the Application of the Shortcut Method under Paragraph 68—Issue E23 amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, to explicitly permit use of the shortcut method for hedging

relationships in which: the interest rate swaps have a nonzero fair value at the inception of the hedging relationship, provided that this value is attributable solely to a bid-ask spread; the settlement date of the hedged item is after the swap trade date, provided that these dates differ because of generally established conventions in the marketplace in which the transaction is executed. The adoption of Issue E23 did not have an impact on BancGroup’s financial statements.

•

SEC Staff Accounting Bulletin (SAB) No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings—SAB 109 requires that the expected net future cash flows related to servicing of a loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The adoption of SAB 109 did not have a material impact on BancGroup’s financial statements.

Note 2: Recent Accounting Standards

In December 2007, the FASB issued SFAS 141(R), Business Combinations, which is a revision of SFAS 141, Business Combinations. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination: recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and discloses information to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement is effective for fiscal years beginning after December 15, 2008, and is to be applied prospectively. The Company is currently assessing the potential impact SFAS 141(R) will have on the financial statements.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 amends ARB 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be clearly reported as equity in the consolidated financial statements. Additionally, SFAS 160 requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. The provisions of this Statement are effective for fiscal years beginning on or after December 15, 2008, and earlier application is prohibited. Prospective application of this Statement is required, except for the presentation and disclosure requirements which must be applied restrospectively. The Company is currently assessing the potential impact SFAS 160 will have on the financial statements.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS 161 amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, by requiring expanded disclosures about an entity’s derivative instruments and hedging activities, but does not change SFAS 133’s scope or accounting. This Statement requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. To meet those objectives, this Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures in a tabular format about fair value amounts of and gains and losses on derivative instruments including specific disclosures regarding the location and amounts of derivative instruments in the financial statements, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 also amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to clarify that derivative instruments are subject to the SFAS 107 concentration of credit-risk disclosures. The provisions of this Statement are effective for fiscal years beginning after November 15, 2008, and earlier application is permitted.

Note 3: Supplemental Disclosure of Cash Flow Information


	Three Months Ended March 31,
	2008		2007
	(In thousands)
Cash paid during the year for:
Interest	$	194,926	$	183,726
Income taxes		5,896		—
Non-cash investing and financing activities:
Transfer of loans to other real estate	$	11,036	$	4,848
Assets acquired under capital leases		—		2,117
Capital leases terminated		—		2,191

Note 4: Fair Value Measurements

BancGroup adopted the provisions of SFAS 157 on January 1, 2008. In February 2008, the FASB issued an FSP which permits delayed application of the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. Since the Company has elected to delay application of the provisions of SFAS 157 to nonfinancial assets and liabilities in scope of this FSP, the information disclosed below does not consider the impact that SFAS 157 would have on such nonfinancial assets and liabilities. The major categories of assets and liabilities that are recognized or disclosed at fair value for which the provisions of SFAS 157 have not been applied include reporting units measured at fair value in the first step of a goodwill impairment test under SFAS 142 and nonfinancial long-lived assets measured at fair value for an impairment assessment under SFAS 144.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

Directly or indirectly observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates); or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities would include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Assets and liabilities measured at fair value on a recurring basis are summarized below:


			Fair value measurements using:
	Fair value at March 31, 2008		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
Assets:
Securities available for sale(1)	$	3,253,480	$	2,890	$	3,250,590	$	—
Derivative assets		6,147		—		6,147		—

Total	$	3,259,627	$	2,890	$	3,256,737	$	—

Liabilities:
Derivative liabilities	$	10,733	$	—	$	10,733	$	—

(1)

Securities available for sale as of March 31, 2008 per the Consolidated Statements of Condition include $240 million in nonmarketable equity securities (Federal Reserve Bank and Federal Home Loan Bank stock). As these securities are accounted for under the cost method, they are not included in the table above.

The valuation techniques used to measure fair value for the items in the table above are as follows:

•

Securities available for sale—The fair value of securities available for sale equals quoted market prices, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange. Level 2 securities include mortgage-backed securities, other pass-through securities and collateralized mortgage obligations of government sponsored entities (GSE’s) and private issuers and obligations of states and political subdivisions.

•

Derivative assets and liabilities—For derivatives traded in over-the-counter markets where quoted market prices are not readily available, fair value is measured using models that primarily use market observable inputs, such as yield curves and option volatilities. For derivatives arising in the course of BancGroup’s commercial banking and mortgage origination activities, fair value is based on changes in market prices of comparable securities traded in the market. Accordingly, these are classified as Level 2.

Certain other assets are measured at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. For assets measured at fair value on a nonrecurring basis in the first quarter of 2008 that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets at quarter end.


	Carrying value at March 31, 2008:
	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
Loans held for sale	$	2,839,385	$	—	$	2,839,385	$	—
Loans		136,054		—		7,519		128,535

The valuation techniques used to measure fair value for the items in the table above are as follows:

•

Loans held for sale—Loans held for sale are carried at the lower of cost or fair value based on product pools. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. Therefore, loans held for sale subjected to nonrecurring fair value adjustments are classified as Level 2.

•

Loans—Nonrecurring fair value adjustments to loans reflect full or partial write-downs that are based on the loan’s observable market price or current appraised value of the collateral in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan. Since the market for impaired loans is not active, loans subjected to nonrecurring fair value adjustments based on the loan’s observable market price are generally classified as Level 2. Loans subjected to nonrecurring fair value adjustments based on the current appraised value of the collateral may be classified as Level 2 or Level 3 depending on the type of asset and the inputs to the valuation. When appraisals are used to determine impairment and these appraisals are based on a market approach incorporating a dollar-per-square-foot multiple, the related loans are classified as Level 2. If the appraisals require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows to measure fair value, the related loans subjected to nonrecurring fair value adjustments are typically classified as Level 3 due to the fact that Level 3 inputs are significant to the fair value measurement.

During the first quarter of 2008, BancGroup recognized losses related to certain assets that are measured at fair value on a nonrecurring basis (i.e. loans and loans held for sale). Approximately $38 million of losses related to loans were recognized as either charge-offs or specific allocations of the allowance for loan losses. During the first quarter, the Company also recognized approximately $30 million of losses related to loans held for sale accounted for at the lower of cost or fair value. The losses on loans held for sale were substantially offset by $28 million of gains on related call options and forward sales commitments that are measured at fair value on a recurring basis.

Note 5: Securities

The composition of the Company’s securities portfolio is reflected in the following table:


	Carrying Value at March 31, 2008		Carrying Value at December 31, 2007
	(In thousands)
Securities available for sale:
Mortgage-backed securities and other pass-through securities of GSE’s	$	648,008	$	655,636
Collateralized mortgage obligations		2,236,593		2,404,914
Obligations of state and political subdivisions		361,998		371,930
Federal Reserve and FHLB stock and other		246,855		248,802

Total securities available for sale		3,493,454		3,681,282

Held to maturity securities:
U.S. Treasury securities and obligations of GSE’s		500		500
Mortgage-backed securities of GSE’s		458		486
Collateralized mortgage obligations		9		9
Obligations of state and political subdivisions		233		233

Total held to maturity securities		1,200		1,228

Total securities	$	3,494,654	$	3,682,510

During the first quarter of 2008, the Company sold approximately $217 million in securities and purchased approximately $219 million in new securities, excluding transactions in Federal Home Loan Bank of Atlanta (FHLB) stock.

The following table reflects gross unrealized losses and fair values of available for sale and held to maturity securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2008:


	Less than 12 months					12 months or more					Total
	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses
	(In thousands)
Mortgage-backed and other pass-through securities of GSE’s	$	23,133	$	(204	)	$	12,886	$	(156	)	$	36,019	$	(360	)
Collateralized mortgage obligations		1,151,337		(133,968	)		418,406		(59,716	)		1,569,743		(193,684	)
Obligations of state and political subdivisions		208,725		(2,929	)		—		—			208,725		(2,929	)
Other		999		(1	)		—		—			999		(1	)

Subtotal, debt securities		1,384,194		(137,102	)		431,292		(59,872	)		1,815,486		(196,974	)
Equity securities		2,606		(2,624	)		—		—			2,606		(2,624	)

Total temporarily impaired securities	$	1,386,800	$	(139,726	)	$	431,292	$	(59,872	)	$	1,818,092	$	(199,598	)

The debt securities above consist of collateralized mortgage obligations (CMO’s) and mortgage-backed securities of Government Sponsored Entities, AAA-rated private CMO’s, obligations of state and political subdivisions and corporate bonds. As of March 31, 2008, there were 166 securities with an unrealized loss relating to the level of interest rates prevailing in the market. Illiquid capital markets have negatively impacted the Company’s highly-rated investment securities portfolio, which do not reflect the portfolio’s underlying performance. Because of the creditworthiness of the issuers and because the future direction of interest rates is unknown, the impairments are deemed to be temporary. The severity and duration of such impairments are determined by the level of interest rates as well as the illiquid capital markets. Additionally, BancGroup has the ability to retain these securities until recovery of unrealized loss or maturity when full repayment would be received.

The following table reflects gross unrealized losses and market values of BancGroup’s portfolio of securities, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2007.


	Less than 12 months					12 months or more					Total
	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses
	(In thousands)
Mortgage-backed and other pass-through securities of GSE’s	$	105	$	—		$	44,720	$	(597	)	$	44,825	$	(597	)
Collateralized mortgage obligations		900,225		(17,757	)		584,327		(12,190	)		1,484,552		(29,947	)
Obligations of state and political subdivisions		71,518		(496	)		—		—			71,518		(496	)

Subtotal, debt securities		971,848		(18,253	)		629,047		(12,787	)		1,600,895		(31,040	)
Equity securities		3,670		(1,560	)		—		—			3,670		(1,560	)

Total temporarily impaired securities	$	975,518	$	(19,813	)	$	629,047	$	(12,787	)	$	1,604,565	$	(32,600	)

The securities above consist of collateralized mortgage obligations (CMO’s) and mortgage-backed and other pass-through securities of Government Sponsored Entities (GSE’s), AAA-rated private CMO’s, and obligations of state and political subdivisions. As of December 31, 2007, there were 129 securities carried at an unrealized loss relating to the level of interest rates prevailing in the market. Because of the creditworthiness of the issuers

and because the future direction of interest rates is unknown, the impairments are deemed to be temporary. The severity and duration of such impairments are determined by the level of interest rates set by the market. Additionally, BancGroup has the ability to retain these securities until recovery of the unrealized loss or maturity when full repayment would be received. There are also no known current funding needs which would require their liquidation.

Note 6: Loans

A summary of the major categories of loans outstanding is shown in the table below:


	March 31, 2008			December 31, 2007
	(In thousands)
Commercial, financial and agricultural	$	1,792,340		$	1,506,986
Commercial real estate		5,054,001			5,012,773
Real estate construction		6,179,380			6,296,262
Residential real estate		2,653,791			2,673,823
Consumer and other		434,006			452,642

Total loans		16,113,518			15,942,486
Less: unearned income		(19,040	)		(19,308	)

Total loans, net of unearned income	$	16,094,478		$	15,923,178

Note 7: Allowance for Loan Losses

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


	Three Months Ended March 31, 2008
	(In thousands)
Balance, January 1	$	238,845
Provision charged to income		35,543
Loans charged off		(35,090	)
Recoveries		1,497

Balance, March 31	$	240,795

Note 8: Commitments and Contingent Liabilities

Guarantees

Standby letters of credit are contingent commitments issued by Colonial Bank, N.A. (Colonial Bank or the Bank) generally to guarantee the performance of a customer to a third party. A financial standby letter of credit is a commitment by Colonial Bank to guarantee a customer’s repayment of an outstanding loan or debt instrument. In a performance standby letter of credit, Colonial Bank guarantees a customer’s performance under a contractual nonfinancial obligation for which the Bank receives a fee. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The Bank holds various assets as collateral supporting those commitments for which collateral is deemed necessary. FIN 45 requires the fair value of these commitments to be recorded on the balance sheet. The fair value of the commitment typically approximates the fee received from the customer for issuing such commitments. These fees are deferred and are recognized over the commitment period. The amounts recorded for deferred fees as of March 31, 2008 and December 31, 2007 were $788,000 and $823,000, respectively. At March 31, 2008, Colonial Bank had standby letters of credit outstanding with maturities of generally one year or less. The maximum potential amount of future undiscounted payments the Bank could be required to make under outstanding standby letters of credit at March 31, 2008 was $276 million.

Contingencies

BancGroup and its subsidiaries are, from time to time, defendants in legal actions arising from normal business activities. Management does not anticipate that the outcome of any litigation presently pending at March 31, 2008 will have a material adverse effect on BancGroup’s consolidated financial statements or results of operations.

Note 9: Derivatives

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

Interest Rate Swaps

Fair Value Hedges

During the first quarter of 2008, BancGroup entered into interest rate swaps with an aggregate notional amount of $250 million to hedge fixed rate subordinated debt. The fair value of these swaps as of March 31, 2008 was approximately $5.1 million. There were no hedging gains or losses resulting from hedge ineffectiveness recognized during the three months ended March 31, 2008 or March 31, 2007.

Cash Flow Hedges

During the second quarter of 2006, the Company terminated interest rate swaps which were used as cash flow hedges of loans. The hedged forecasted transactions are still considered probable of occurring, therefore the net loss will remain in accumulated other comprehensive loss and be reclassified into earnings in the same periods during which the hedged forecasted transactions affect earnings (ending in June of 2008). The estimated amount of losses to be reclassified into earnings within the next three months is $1.6 million. There were no cash flow hedging gains or losses resulting from hedge ineffectiveness recognized for the three months ended March 31, 2008 or March 31, 2007.

Commitments to Originate and Sell Mortgage Loans

In connection with its retail mortgage loan production activities, the Company routinely enters into short-term commitments to fund residential mortgage loans (commonly referred to as interest rate locks). The Company utilizes forward sales commitments to economically mitigate the risk of potential decreases in the value of the loans that would result from the exercise of the loan commitments. The notional amounts of these mortgage loan origination commitments and the related forward sales commitments were approximately $41.6 million at March 31, 2008. The fair value of the origination commitments was a gain of approximately $603,000 at March 31, 2008, which was offset by a loss of approximately $603,000 on the related sales commitments.

BancGroup has executed individual forward sales commitments on the retail portion of loans held for sale. The notional value of these forward sales commitments at March 31, 2008 was $68.8 million, none of which was designated as a hedge. The fair value of the sales commitments was a gain of approximately $395,000 at March 31, 2008.

Options

Colonial sells call options related to its interests in short-term participations in mortgage loans. Generally, the change in fair value of the participation interests offsets the change in fair value of the call options. The notional value of the call options at March 31, 2008 was $2.9 billion. The call options are not designated as hedges of the participation interests. The fair value of the call options was a loss of $10.1 million as of March 31, 2008.

BancGroup occasionally enters into over-the-counter option contracts on bonds in its securities portfolio. However, there were no such option contracts outstanding at March 31, 2008.

Note 10: Short-Term Borrowings

Short-term borrowings are summarized as follows:


	March 31, 2008		December 31, 2007
	(In thousands)
Federal funds purchased	$	639,000	$	—
Repurchase agreements (retail)		540,589		568,721

Total	$	1,179,589	$	568,721

Note 11: Long-Term Debt

Long-term debt is summarized as follows:


	March 31, 2008		December 31, 2007
	(In thousands)
Variable rate subordinated debentures	$	—	$	7,725
Subordinated notes		632,346		378,709
Junior subordinated debt		108,248		108,256
FHLB borrowings		3,414,450		3,513,997
Capital lease obligations		14,895		15,149

Total	$	4,169,939	$	4,023,836

During the first quarter of 2008, the Company issued $250 million of 8.875% subordinated notes due March 15, 2038. The notes qualify as Tier II regulatory capital. Colonial may redeem the notes in whole or in part on or after March 15, 2013 in accordance with Federal Reserve guidelines. Colonial also paid off a $100 million FHLB borrowing at a rate of 4.68%; redeemed $7.7 million of variable rate subordinated debentures; and repurchased $2 million of its 8% subordinated notes due March 15, 2009.

There have been no other material changes in BancGroup’s long-term debt. Refer to the Company’s 2007 Annual Report on Form 10-K for additional information.

Note 12: Pension Plan

BancGroup and its subsidiaries sponsor a pension plan that covers most employees who have met certain age and length of service requirements. The plan provides benefits based on final average earnings, covered compensation, and years of benefit service. On December 31, 2005, BancGroup closed the pension plan to new employees and set the compensation amount and years of service for the future benefits calculation for participants. Actuarial computations for financial reporting purposes are based on the projected unit credit method. The measurement date is December 31. Based on current actuarial projections, BancGroup will not be required to make a contribution to the plan in 2008.

The following table reflects the components of net periodic benefit income:


	Three Months Ended March 31,
	2008			2007
	(In thousands)
Components of net periodic benefit income:
Interest cost	$	929		$	727
Expected return on plan assets		(1,529	)		(1,105	)

Net periodic benefit income	$	(600	)	$	(378	)

Note 13: Stock-Based Compensation

Total compensation cost for stock-based compensation awards (both stock options and restricted stock awards) for the three months ended March 31, 2008 and 2007 was $1.3 million and $1.4 million, respectively. The related income tax benefit was $445,000 and $367,000, respectively.

The following table summarizes BancGroup’s stock option activity since December 31, 2007:


	Options		Weighted Average Exercise Price
Outstanding at December 31, 2007	3,578,070		$	19.12

Granted	1,055,301			11.37
Exercised	(50,700	)		12.14
Cancelled	(170,767	)		17.26

Outstanding at March 31, 2008	4,411,904		$	17.42

The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:


		Three months ended March 31, 2008
Expected option term		5.33 years
Weighted average expected volatility		30.94%
Weighted average risk-free interest rate		3.08%
Weighted average expected annual dividend yield		4.50%

The following table summarizes BancGroup’s restricted stock activity since December 31, 2007:


	Restricted Stock		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2007	518,166		$	23.21

Granted	596,303			11.29
Vested	—			—
Cancelled	(19,212	)		13.27

Nonvested at March 31, 2008	1,095,257		$	16.90

Note 14: Earnings Per Share

The following table reflects a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation:


	Three Months Ended March 31,
	Income		Shares	Per Share Amount
	(In thousands, except per share amounts)
2008
Basic EPS
Income from continuing operations	$	24,797	156,956	$	0.16
Effect of dilutive instruments:
Options and nonvested restricted stock			572

Diluted EPS	$	24,797	157,528	$	0.16

2007
Basic EPS
Income from continuing operations	$	36,479	152,309	$	0.24
Effect of dilutive instruments:
Options and nonvested restricted stock			1,141

Diluted EPS	$	36,479	153,450	$	0.24

The above calculations exclude awards that could potentially dilute basic EPS in the future but were antidilutive for the periods presented. The number of such awards excluded was approximately 3,692,000 and 1,692,000 for the three months ended March 31, 2008 and 2007, respectively.

Note 15: Income Taxes

In accordance with FIN 48, BancGroup has recorded a liability for unrecognized tax benefits and the related interest and penalties at March 31, 2008 totaling $28.6 million compared to $26.6 million at December 31, 2007. While the Company expects to settle various state tax audits within the next twelve months, the change in the unrecognized tax benefit is not expected to be material to the financial statements.

Note 16: Segment Information

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

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


	Florida Regional Bank			Florida Mortgage Warehouse			Alabama Regional Bank		Georgia Regional Bank			Nevada Regional Bank			Texas Regional Bank			Corporate/ Treasury Other			Consolidated BancGroup
	(In thousands)
Three Months Ended March 31, 2008
Net interest income before intersegment income / expense	$	74,223		$	66,269		$	12,150	$	15,710		$	12,541		$	22,961		$	(22,230	)	$	181,624
Intersegment interest income / expense		2,548			(34,536	)		18,991		(6,542	)		(3,105	)		(9,599	)		32,243			—

Net interest income		76,771			31,733			31,141		9,168			9,436			13,362			10,013			181,624
Provision for loan losses		23,122			192			3,340		5,898			99			492			2,400			35,543
Noninterest income		17,890			2,671			13,456		5,857			1,611			1,450			14,812			57,747
Noninterest expense		61,015			7,573			21,874		9,561			6,841			8,400			48,714			163,978
Minority interest expense/REIT preferred dividends		—			—			—		—			—			—			5,336			5,336

Income/(loss) before income taxes	$	10,524		$	26,639		$	19,383	$	(434	)	$	4,107		$	5,920		$	(31,625	)		34,514

Income taxes																						9,717

Net Income																					$	24,797

Total Assets	$	11,824,346		$	5,206,211		$	4,284,929	$	1,391,314		$	1,052,215		$	1,685,262		$	1,908,470		$	27,352,747
Total Deposits	$	10,232,132		$	730,536		$	4,198,142	$	743,497		$	667,697		$	758,171		$	1,941,153		$	19,271,328

Three Months Ended March 31, 2007
Net interest income before intersegment income / expense	$	85,275		$	36,976		$	20,712	$	20,147		$	13,324		$	22,659		$	(19,148	)	$	179,945
Intersegment interest income / expense		(409	)		(20,508	)		14,837		(7,588	)		(1,894	)		(9,616	)		25,178			—

Net interest income		84,866			16,468			35,549		12,559			11,430			13,043			6,030			179,945
Provision for loan losses		445			(336	)		531		1,060			27			165			358			2,250
Noninterest income		17,998			7,484			12,758		2,296			1,894			1,649			(28,860	)		15,219
Noninterest expense		51,331			2,102			20,620		5,997			6,042			7,322			44,727			138,141

Income/(loss) before income taxes	$	51,088		$	22,186		$	27,156	$	7,798		$	7,255		$	7,205		$	(67,915	)		54,773

Income taxes																						18,294

Net Income																					$	36,479

Total Assets	$	10,774,886		$	2,223,589		$	4,196,828	$	1,433,901		$	997,609		$	1,458,246		$	1,986,843		$	23,071,902
Total Deposits	$	8,839,647		$	603,247		$	4,127,336	$	825,143		$	748,835		$	671,145		$	567,370		$	16,382,723

Note 17: Subsequent Events

Common Stock Offering

On April 25, 2008, the Company completed a public common stock offering of 43.75 million shares at $8.00 per share for $350 million. The Company received proceeds of $333 million, which is net of all expenses, commissions and underwriters’ discounts. The Company will use the proceeds for general corporate purposes as well as investments in subsidiaries.

Dividend Reinvestment and Common Stock Purchase Plan

The Company has a dividend reinvestment and common stock purchase plan under which shareholders may automatically reinvest their cash dividends in shares of common stock as well as make optional cash purchases of common stock. On April 16, 2008, the Company’s Board of Directors approved the registration of 10 million additional shares that may be issued under this plan, bringing the total authorized for issuance to 12 million shares. On May 2, 2008, the Company filed the related registration statement with the Securities and Exchange Commission, registering the new shares and amending the plan.

401(k) Plan

BancGroup also has a 401(k) savings plan which 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 make elective contributions into a number of available investment options through payroll deductions, including the option to purchase BancGroup common stock. On April 16, 2008, the Company’s Board of Directors approved the registration of 10 million additional shares of the Company’s common stock that may be issued under this plan. On May 5, 2008, the Company filed the related registration statement with the Securities and Exchange Commission, registering the new shares.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

Forward-Looking Statements

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

CRITICAL ACCOUNTING POLICIES

Those accounting policies involving significant estimates and assumptions by management which have, or could have, a material impact on the reported financial results are considered critical accounting policies. BancGroup recognizes the following as critical accounting policies: Allowance for Loan Losses, Purchase Accounting and Goodwill, Income Taxes, Consolidations and Stock-Based Compensation. Information concerning these policies is included in the Critical Accounting Policies section of Management’s Discussion and Analysis in BancGroup’s 2007 Annual Report on Form 10-K.

EXECUTIVE OVERVIEW

The Colonial BancGroup, Inc. is a $27.4 billion financial services company providing diversified services including retail and commercial banking, wealth management services, mortgage originations and insurance through its branch network, private banking offices or officers, ATMs and the internet as well as other distribution channels to consumers and businesses. At March 31, 2008, BancGroup’s branch network consisted of 342 offices in Florida, Alabama, Georgia, Nevada and Texas.

Colonial reported net income of $24.8 million for the quarter ended March 31, 2008, compared to $36.5 million for the quarter ended March 31, 2007. The Company also reported earnings per diluted share of $0.16 for the quarter ended March 31, 2008 compared to $0.24 for the quarter ended March 31, 2007.

REVIEW OF RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the Company’s primary source of revenue. Net interest income represents the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Interest rate volatility, which impacts the volume and mix of earning assets and interest bearing liabilities as well as their rates, can significantly impact net interest income. The net interest margin is fully tax equivalent net interest income expressed as a percentage of average earning assets for the period being measured. The net interest margin is presented on a fully tax equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities.

Beginning in late 2007 and early 2008, the yield curve returned to a more normalized level, although short-term Treasury yields remained below the Federal Reserve’s overnight borrowing rate for banks (the Federal Funds rate). The Federal Funds rate for banks remained constant at 5.25% from June 2006 to September 2007. The Federal Reserve lowered the Federal Funds rate 300 basis points between September 2007 and March 2008 as follows: 50 basis points on September 18, 2007; 25 basis points on October 31, 2007; 25 basis points on December 11, 2007; 75 basis points on January 22, 2008; 50 basis points on January 30, 2008 and 75 basis points on March 18, 2008. The following table shows the Federal Funds rate and U.S. Treasury yield curve at each quarter end during the past five quarters.

LOGO

The Company’s net interest income, on a tax equivalent basis, increased $3.1 million, or 1.7%, for the three months ended March 31, 2008, as compared to the same period of the prior year. The increase in net interest income was primarily caused by an increase of $4 billion, or 19% in average earning assets. The yield on average earning assets decreased 39 basis points more than the decrease in the rate on average interest bearing liabilities causing net interest margin to contract 52 basis points. The rapid reductions in the prime and LIBOR rates in the first quarter of 2008 repriced approximately half of the Company’s loan portfolio since the fourth quarter of 2007. Deposit costs did not decline in tandem with the decline in prime and LIBOR rates due to intense competition for deposit dollars from financial services companies.

Interest Earning Assets

Average earning assets, as shown below, consist primarily of loans, securities and loans held for sale. For the three months ended March 31, 2008, approximately 64% of BancGroup’s average earning assets were variable, adjustable or short-term in nature, and the rate of earnings on those assets change when market rates change.

LOGO

Average Funding

Average funding, as shown below, consists primarily of deposits and wholesale borrowings. Average funding grew $4.6 billion, or 20%, for the three months ended March 31, 2008, as compared to the same period of the prior year.

LOGO

Average Volume and Rates

(Unaudited)


	Three Months Ended March 31,
	2008							2007
	Average Volume		Interest			Rate		Average Volume		Interest			Rate
	(Dollars in thousands)
ASSETS:
Loans, net of unearned income(2)	$	15,994,073	$	261,438		6.57	%	$	15,349,322	$	293,474		7.74	%
Loans held for sale(2)		3,160,736		40,397		5.14	%		1,287,027		21,981		6.93	%
Securities(2)		3,677,145		54,612		5.94	%		3,265,920		43,005		5.27	%
Securities purchased under agreements to resell		2,115,209		28,259		5.37	%		1,058,496		17,964		6.87	%
Other interest earning assets		120,231		992		3.32	%		97,005		1,171		4.90	%

Total interest earning assets(3)		25,067,394	$	385,698		6.18	%		21,057,770	$	377,595		7.25	%

Nonearning assets(2)		2,582,448							1,996,179

Total assets	$	27,649,842						$	23,053,949

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Interest bearing non-time deposits	$	6,609,657	$	32,634		1.99	%	$	6,313,784	$	48,481		3.11	%
Time deposits(2)		9,080,876		104,872		4.64	%		6,872,764		84,603		4.99	%

Total interest bearing deposits		15,690,533		137,506		3.52	%		13,186,548		133,084		4.09	%
Repurchase agreements		544,218		3,705		2.74	%		763,461		8,555		4.54	%
Federal funds purchased and other short-term borrowings		1,379,961		11,592		3.38	%		1,164,191		15,277		5.32	%
Long-term debt(2)		4,084,015		49,110		4.83	%		2,925,030		40,018		5.53	%

Total interest bearing liabilities		21,698,727	$	201,913		3.74	%		18,039,230	$	196,934		4.42	%

Noninterest bearing demand deposits		3,067,214							2,780,374
Other liabilities(2)		309,546							166,607

Total liabilities		25,075,487							20,986,211
Minority interest/REIT preferred securities		293,058							0
Shareholders’ equity		2,281,297							2,067,738

Total liabilities and shareholders’ equity	$	27,649,842						$	23,053,949

RATE DIFFERENTIAL						2.44	%						2.83	%
NET INTEREST INCOME AND NET YIELD ON INTEREST EARNING ASSETS ON A TAX EQUIVALENT BASIS(3)			$	183,785		2.94	%			$	180,661		3.46	%

Taxable equivalent adjustments(1):
Loans				(195	)						(146	)
Securities				(1,966	)						(570	)

Total taxable equivalent adjustments				(2,161	)						(716	)

Net interest income			$	181,624						$	179,945

TOTAL AVERAGE DEPOSITS:
Total interest bearing deposits	$	15,690,533	$	137,506		3.52	%	$	13,186,548	$	133,084		4.09	%
Noninterest bearing demand deposits		3,067,214		—		—			2,780,374		—		—

Total average deposits	$	18,757,747	$	137,506		2.95	%	$	15,966,922	$	133,084		3.38	%

(1)	Interest earned and average rates on securities and loans exempt from income taxes are reflected on a fully tax equivalent basis using a federal income tax rate of 35%, net of nondeductible interest expense.

(2)	Unrealized gains (losses) on available for sale securities, the adjustments for mark to market valuations on hedged assets and liabilities and lower of cost or fair value adjustments have been classified in either other assets or other liabilities.

(3)	Net yield on interest earning assets is calculated by taking annualized fully tax equivalent net interest income divided by average total interest earning assets.

Analysis of Interest Increases (Decreases)

(Unaudited)


	Three Months Ended March 31, 2008 Change from March 31, 2007
				Attributed to(1)
	Total			Volume			Rate
	(In thousands)
INTEREST INCOME:
Loans, net of unearned income	$	(32,036	)	$	12,246		$	(44,282	)
Loans held for sale		18,416			24,097			(5,681	)
Securities		11,607			6,137			5,470
Securities purchased under agreements to resell		10,295			14,210			(3,915	)
Other interest earning assets		(179	)		199			(378	)

Total interest income		8,103			56,889			(48,786	)

INTEREST EXPENSE:
Interest bearing non-time deposits		(15,847	)		1,589			(17,436	)
Time deposits		20,269			26,200			(5,931	)
Repurchase agreements		(4,850	)		(1,461	)		(3,389	)
Federal funds purchased and other short-term borrowings		(3,685	)		1,884			(5,569	)
Long-term debt		9,092			14,141			(5,049	)

Total interest expense		4,979			42,353			(37,374	)

Net interest income	$	3,124		$	14,536		$	(11,412	)

(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 is allocated to Volume Change.

Analysis of Average Rates


	Three Months Ended March 31,
	2008		2007		Increase/ (Decrease)
Loans, net of unearned income	6.57	%	7.74	%	(1.17	)%
Loans held for sale	5.14	%	6.93	%	(1.79	)%
Securities	5.94	%	5.27	%	0.67	%
Other earning assets	5.26	%	6.70	%	(1.44	)%
Interest bearing deposits	3.52	%	4.09	%	(0.57	)%
Total deposits	2.95	%	3.38	%	(0.43	)%
Wholesale borrowings	4.31	%	5.33	%	(1.02	)%
Federal Funds rate	3.22	%	5.25	%	(2.03	)%
30-day LIBOR	3.31	%	5.32	%	(2.01	)%
Wall Street Journal prime	6.22	%	8.25	%	(2.03	)%

Interest income increased $8.1 million for the three months ended March 31, 2008, as compared to the same period of the prior year. Average earning assets increased $4 billion while the yield earned on those assets decreased 107 basis points. The drivers of these changes are more fully described below.

For the three months ended March 31, 2008, interest income on loans decreased $32 million, as compared to the same period of the prior year. The decrease was primarily due to the lowering of the Federal Funds, LIBOR and Treasury rates which resulted in the average yield earned on loans decreasing 117 basis points.

Interest income on loans held for sale increased $18.4 million for the three months ended March 31, 2008, as compared to the same period of the prior year. Loans held for sale is comprised of three elements: short-term participations in mortgage loans, retail mortgage loans and other loans held for sale. The primary driver of the increase in interest income on loans held for sale was an average volume increase of $1.9 billion, or 146%, primarily from growth in the Company’s mortgage warehouse division. The yield on loans held for sale is influenced by the prevailing market rates which were lower in the three months ended March 31, 2008 than they were in the same period of the prior year.

Interest income on securities increased $11.6 million for the three months ended March 31, 2008, as compared to the same period of the prior year. The increase was primarily the result of a 67 basis point increase in yield on the average balances as well as a $411 million, or 12.6%, increase in average volume. The Company restructured its securities portfolio at the beginning of the second quarter of 2007, selling approximately one-third of the total portfolio and reinvesting into higher yielding securities.

For the three months ended March 31, 2008, interest income from securities purchased under agreements to resell increased $10 million, as compared to the same period of the prior year. The primary driver of the increase was a $1 billion, or 100%, increase in average volume. The growth in average volume was the result of growth in the Company’s mortgage warehouse division. The yield on securities purchased under agreements to resell is influenced by the prevailing market rates which were lower in the three months ended March 31, 2008 than they were in the same period of the prior year.

Interest expense increased approximately $5.0 million for the three months ended March 31, 2008, as compared to the same period of the prior year. The increase in interest expense was primarily caused by an increase of $3.7 billion, or 20%, in total interest bearing liabilities which was partially offset by a 68 basis point decrease in the Company’s average funding costs for interest bearing liabilities to 3.74%. Including the impact of noninterest bearing deposits, which increased $287 million, average funding costs decreased 55 basis points to 3.28%. The drivers of the increase in funding costs are described below.

For the three months ended March 31, 2008, interest expense on interest bearing non-time deposits decreased $15.8 million while interest expense on time deposits increased $20 million, as compared to the same period of the prior year. The decrease in interest expense for non-time deposits was due to a rate reduction of 112 basis points while the increase in interest expense on time deposits was due to an increase in average volume of $2.2 billion. The growth of time deposits is attributable to customer preference for higher rate products, increased competition for deposits and increased use of brokered time deposits as a funding source.

For the three months ended March 31, 2008, interest expense on wholesale borrowings increased $557,000, as compared to the same period of the prior year. The increase in interest expense was primarily caused by an increase of $1.2 billion in average wholesale borrowings which was mitigated by a decrease of 102 basis points in the average rate on wholesale borrowings. The decline in the cost of average wholesale borrowings was the result of the Company replacing higher rate short-term and long-term borrowings with lower cost long-term debt and the repricing of variable rate wholesale borrowings.

Loan Loss Provision

The real estate markets in the U.S. have deteriorated at an accelerated pace over the past two quarters, resulting in increased credit losses for many financial institutions. Many banks, including Colonial, have taken steps to increase reserve levels in response to these changing market conditions. Colonial’s provision for loan losses of $35.5 million for the three months ended March 31, 2008, exceeded net charge-offs by $2 million, increasing the Company’s loan loss reserve to $241 million, or 1.50% of period end loans at March 31, 2008. The Company recorded $2.3 million in provision for loan losses for the three months ended March 31, 2007, compared to $2.2 million in net charge-offs. Colonial’s loan loss reserve was $173 million, or 1.16% of period end loans at March 31, 2007.

Noninterest Income

The following table shows the dollar and percentage change in noninterest income by category for the three months ended March 31, 2008, compared to the same period of the prior year. Core noninterest income increased $5.3 million, or 11.4%, for the three months ended March 31, 2008, as compared to the same period of the prior year.


	Three Months Ended March 31,					Increase (Decrease)
	2008		2007			$			%
	(Dollars in thousands)
Service charges on deposit accounts	$	19,228	$	17,679		$	1,549		8.8	%
Electronic banking		5,004		4,401			603		13.7
Other retail banking fees		2,548		3,612			(1,064	)	(29.5	)

Retail banking fees		26,780		25,692			1,088		4.2
Financial planning services		4,812		3,822			990		25.9
Mortgage banking origination and sales		6,760		3,187			3,573		112.1
Mortgage warehouse fees		995		6,955			(5,960	)	(85.7	)
Bank-owned life insurance		5,120		4,955			165		3.3
Other income		7,205		1,783			5,422		304.1

Core noninterest income		51,672		46,394			5,278		11.4
Securities gains, net		6,075		981			5,094		519.3
Securities restructuring charges		—		(36,006	)		36,006		100.0
Gain on sale of mortgage loans		—		3,850			(3,850	)	(100.0	)

Total noninterest income	$	57,747	$	15,219		$	42,528		279.4	%

The increase in retail banking fees was primarily in service charges on deposit accounts which is comprised of nonsufficient funds fees and service charges on consumer and commercial deposit accounts. Nonsufficient funds fees is the largest component of the increase and is primarily due to an increase in the number of customer accounts.

Electronic banking includes fees from Colonial’s ATM network, business and personal check card services and internet banking. Noninterest income from electronic banking services increased primarily because of an increase in the number of Colonial customer accounts as well as the Company’s focused efforts to increase customer check card usage and ATM network fees.

Other retail banking fees decreased for the three months ended March 31, 2008, compared to the same period of the prior year, primarily due to lower official check commissions and the Company’s sale of its merchant services contracts in April 2007. The decline in official check commissions was primarily due to a decrease in rate. Merchant services revenue declined due to the Company’s sale of contracts and the subsequent agent bank agreement with a third party service provider of merchant services. The outsourced relationship lowers Colonial’s inherent risk of providing merchant services while enabling the Company to continue to offer those services to its customer base. The referral fees for new contracts are less than the previous fee income, but the Company’s expenses and risks are also reduced.

Financial planning services include discount brokerage, investment sales, asset management, trust services and insurance sales including term, universal, whole life and long-term care. Financial planning services revenue increased primarily due to fixed annuity sales, partially offset by a decline in the volume of insurance products sold and a decline in trust revenue.

Mortgage banking origination and sales revenue is derived from mortgage loans originated and subsequently sold in the secondary market. The Company does not retain any servicing rights related to these loans. Mortgage banking origination and sales income increased 112.1% compared to the same period of the prior year, primarily

due to a team of experienced prime mortgage originators hired in late 2007. Sales volume in the first quarter of 2008 increased $80.3 million over the same period of the prior year. In addition, profit margins improved due to a shift to higher margin FHA and VA products from other products.

Mortgage warehouse fees are comprised of three revenue streams: servicing and other fees associated with interests in mortgage warehouse assets sold to third-party commercial paper conduits (conduits), custodial fees associated with mortgage document services for mortgage warehouse customers and syndication fees paid to the Company as agent or participant in mortgage warehouse syndicated loans. The decrease in mortgage warehouse fees for the three months ended March 31, 2008, as compared to the same period of the prior year, was primarily the result of lower servicing and other fees due to the discontinuation of sales of assets to third-party commercial paper conduits in early January 2008.

Income from bank-owned life insurance (BOLI) increased for the three months ended March 31, 2008, as compared to the same period of the prior year, primarily due to the increased value of the policies and an additional day of interest in 2008.

Other income reflects revenues from joint ventures, letter of credit fees, condo association coupon fees, gains on the sales of bank premises and several other small items. The increase for the three months ended March 31, 2008, as compared to the same period of the prior year, was primarily from a $2.1 million gain on the sale of Visa, Inc. stock from an initial public offering, $1.6 million amortization of gains on the 2007 sale-leaseback of 56 bank locations, and $1.4 million due to fair value adjustments to derivatives related to retail mortgages and short-term participations in mortgage loans held for sale portfolios.

The Company’s decision to buy and sell securities is based on its management of interest rate risk and projected liquidity and funding needs. In the first quarter of 2008, the Company recorded gains of $6.1 million from the sale of approximately $217 million in securities. In the first quarter of 2007, the Company recognized gains of $981,000 on the sale of $163 million in securities and recognized an impairment loss of $36.0 million as the Company declared its intent to restructure its securities portfolio by selling approximately $1.2 billion in available for sale securities. The securities were sold in April 2007.

The Company sold approximately $490 million of residential real estate loans in March 2007 and recognized a $3.9 million gain.

Noninterest Expense

The following table shows the dollar and percentage change in noninterest expense by category for the first quarter of 2008 compared to the same period in 2007. Core noninterest expense increased $27.5 million, or 21%, in the first quarter of 2008, as compared to the same period in 2007. Annualized core noninterest expense to average assets was 2.28% and 2.26% for the three months ended March 31, 2008 and 2007, respectively.


	Three Months Ended March 31,				Increase (Decrease)
	2008		2007		$			%
	(Dollars in thousands)
Salaries and employee benefits	$	73,667	$	69,554	$	4,113		5.9	%
Occupancy expense of bank premises, net		23,055		18,505		4,550		24.6
Furniture and equipment expenses		14,703		13,122		1,581		12.0
Professional services		5,638		4,100		1,538		37.5
FDIC insurance and other regulatory fees		4,562		1,213		3,349		276.1
Electronic banking and other retail banking expenses		4,157		4,212		(55	)	(1.3	)
Amortization of intangible assets		4,163		3,051		1,112		36.4
Communications		2,819		2,991		(172	)	(5.8	)
Loss on equity investments		2,747		255		2,492		977.3
Loan and other real estate related costs		2,649		338		2,311		683.7
Postage and courier		2,622		2,639		(17	)	(0.6	)
Advertising		2,603		2,215		388		17.5
Travel		1,439		1,739		(300	)	(17.3	)
Other expenses		12,986		6,357		6,629		104.3

Core noninterest expense		157,810		130,291		27,519		21.1
Severance expense		236		3,025		(2,789	)	(92.2	)
Merger related expenses		—		429		(429	)	(100.0	)
Net losses related to the early extinguishment of debt		5,932		4,396		1,536		34.9

Total noninterest expense	$	163,978	$	138,141	$	25,837		18.7	%

Salaries and employee benefits increased for the three months ended March 31, 2008, as compared to the same period of the prior year. The change was primarily due to increases in commissions and related benefits resulting from increased production in mortgage banking origination and sales as well as financial planning services.

The increases in occupancy and furniture and equipment expenses for the three months ended March 31, 2008, as compared to the same period of the prior year, were primarily the result of increased rent expense, repairs and maintenance and property taxes. These increases are attributable to the net addition of 34 branches, as well as increased lease expense resulting from the sale-leaseback of 56 properties in 2007. The increased occupancy expense from the sale-leaseback is more than offset by the amortization of deferred gains on the sales, which are included in noninterest income.

Professional fees increased for the three months ended March 31, 2008, as compared to the same period of the prior year, due to increased use of outsourced technology related services and higher legal fees associated with lending related activities.

FDIC insurance and other regulatory fees were higher for the three months ended March 31, 2008, as compared to the same period of the prior year, due to increases in deposits and assets on which they are based, as well as the depletion of Colonial Bank’s assessment credits in 2007 which reduced prior years’ fees.

Amortization of intangible assets increased for the three months ended March 31, 2008, as compared to the same period of the prior year, due to additional core deposit intangible assets recorded for the Commercial Bankshares, Inc. and Citrus & Chemical Bancorporation, Inc. acquisitions in 2007.

Loss on equity investments increased for the three months ended March 31, 2008, as compared to the same period of the prior year, due primarily to impairment recognized on certain equity investments.

The increase in loan and other related costs for the three months ended March 31, 2008, as compared to the same period of the prior year, were driven by higher expenses related to other real estate.

The increase in advertising expense for the three months ended March 31, 2008, as compared to the same period of the prior year, was primarily due to increased marketing related to deposit promotions during the first quarter of 2008. Advertising expenses increased further during the first quarter of 2008 as a result of higher marketing costs associated with new branch openings.

Travel expenses decreased for the three months ended March 31, 2008, as compared to the same period of the prior year, due to increased focus on reducing travel and entertainment expenses.

Other expenses increased for the three months ended March 31, 2008, as compared to the same period of the prior year, due to fair value adjustments related to short-term participations in mortgage loans held for sale as well as increased subservicing fees associated with the increased balances of mortgage warehouse assets partially offset by gains on the related call options and forward sales contracts.

Severance expense relates primarily to the reduction in force efforts in 2007. This expense decreased significantly for first quarter of 2008.

Merger related expenses were incurred to integrate Commercial Bankshares, Inc. and Citrus & Chemical Bancorporation, Inc. in 2007. The costs consisted of travel, training, marketing, retention bonuses and incremental charges related to the integration of the acquired banks.

During first quarter of 2008, the Company prepaid a $100 million Federal Home Loan Bank advance and incurred a $5.9 million net loss related to the early extinguishment of debt. During the first quarter of 2007, the Company redeemed $70 million of trust preferred securities and incurred a $4.4 million net loss related to the early extinguishment of debt.

Provision for Income Taxes

BancGroup’s provision for income taxes is based on an approximate 28.2% and 33.4% estimated effective tax rates for the three months ended March 31, 2008 and 2007, respectively. The effective tax rate was lower in the first quarter of 2008 primarily due to increases in permanent exclusions and tax credits as a percentage of pretax income, as compared to the prior year. The provisions for income taxes for the three months ended March 31, 2008 and 2007 was $9.7 million and $18.3 million, respectively.

REVIEW OF STATEMENT OF CONDITION

Financial Condition

Changes in selected components of the Company’s balance sheet from December 31, 2007 to March 31, 2008 are as follows:


	March 31, 2008		December 31, 2007		Increase (Decrease)
	March 31, 2008		December 31, 2007		$			%
	(Dollars in thousands)
Securities purchased under agreements to resell	$	2,106,205	$	2,049,664	$	56,541		2.8	%
Securities		3,494,654		3,682,510		(187,856	)	(5.1	)
Loans held for sale		2,951,777		1,544,222		1,407,555		91.1
Loans, net of unearned income		16,094,478		15,923,178		171,300		1.1
Goodwill		1,005,211		1,008,168		(2,957	)	(0.3	)
Total assets		27,352,747		25,975,989		1,376,758		5.3
Non-time deposits		9,577,551		9,771,573		(194,022	)	(2.0	)
Total deposits		19,271,328		18,544,267		727,061		3.9
Short-term borrowings		1,179,589		568,721		610,868		107.4
Long-term debt		4,169,939		4,023,836		146,103		3.6
Minority interest/REIT preferred securities		293,058		293,058		—		—
Shareholders’ equity		2,172,017		2,273,571		(101,554	)	(4.5	)

Securities

The composition of the Company’s securities portfolio is reflected in the following table:


	Carrying Value at March 31, 2008		Carrying Value at December 31, 2007
	(In thousands)
Securities available for sale:
Mortgage-backed securities and other pass-through securities of Government Sponsored Entities (GSE’s)	$	648,008	$	655,636
Collateralized mortgage obligations		2,236,593		2,404,914
Obligations of state and political subdivisions		361,998		371,930
Federal Reserve and FHLB stock and other		246,855		248,802

Total securities available for sale		3,493,454		3,681,282

Held to maturity securities:
U.S. Treasury securities and obligations of GSE’s		500		500
Mortgage-backed securities of GSE’s		458		486
Collateralized mortgage obligations		9		9
Obligations of state and political subdivisions		233		233

Total held to maturity securities		1,200		1,228

Total securities	$	3,494,654	$	3,682,510

Securities by Credit Rating at March 31, 2008

Government /
GSE Obligations

Standard & Poor’s or Equivalent
Designation

Other

Total

AAA

A-to AA+

Unrated

(In thousands)

U.S. Treasury securities and obligations of GSE’s

500

—

500

Mortgage-backed and other pass-through securities of GSE’s

648,466

—

648,466

Collateralized mortgage obligations

711,364

1,525,238

—

2,236,602

Obligations of state and political subdivisions

—

215,315

142,953

1,264

2,699

362,231

Federal Reserve and FHLB stock and other

—

3,991

—

242,864

246,855

Total securities

1,360,330

1,740,553

146,944

1,264

245,563

3,494,654

Securities by Credit Rating at December 31, 2007


	Government / GSE Obligations		Standard & Poor’s or Equivalent Designation						Other		Total
	Government / GSE Obligations		AAA		A-to AA+		Unrated		Other		Total
	(In thousands)
U.S. Treasury securities and obligations of GSE’s	$	500	$	—	$	—	$	—	$	—	$	500
Mortgage-backed and other pass-through securities of GSE’s		656,122		—		—		—		—		656,122
Collateralized mortgage obligations		703,876		1,701,047		—		—		—		2,404,923
Obligations of state and political subdivisions		—		368,048		2,321		1,794		—		372,163
Federal Reserve and FHLB stock and other		—		—		4,965		—		243,837		248,802

Total securities	$	1,360,498	$	2,069,095	$	7,286	$	1,794	$	243,837	$	3,682,510

Mortgage Warehouse Assets

Colonial had a facility in which it sold certain mortgage warehouse loans and short-term participations reported as loans held for sale to a wholly-owned special purpose entity which then sold interests in those assets to third-party commercial paper conduits (conduits). The Company’s strong liquidity position enabled Colonial to reduce mortgage warehouse assets sold to $0, at which point the facility was terminated by its terms. The assets that had been sold to the conduits had the same high quality credit characteristics as those on Colonial’s balance sheet.

A summary of the major components of the mortgage warehouse division’s assets is shown in the table below:


	March 31, 2008		December 31, 2007
	(In thousands)
Securities purchased under agreements to resell	$	1,606,205	$	1,549,664
Loans held for sale		2,885,498		1,484,502
Mortgage warehouse loans		598,021		290,603

Total mortgage warehouse assets on balance sheet		5,089,724		3,324,769
Interests sold
Loans held for sale		—		769,221
Mortgage warehouse loans		—		230,779

Total mortgage warehouse assets under management	$	5,089,724	$	4,324,769

Loans Held for Sale

Loans held for sale is comprised of three elements: short-term participations in mortgage loans, retail mortgages and other loans held for sale. Total loans held for sale at March 31, 2008 increased $1.4 billion, or 91%, from December 31, 2007, primarily due to an increase in participations purchased by the mortgage warehouse division in the first quarter driven by customer demand and an increase in VA and FHA retail mortgages originated by Colonial. Loans held for sale fluctuate as demand for residential mortgages changes and customer demands change.

Loans

As real estate markets in the U.S. have deteriorated over the past two quarters, the demand for loan products has declined. The impact has been most noticeable in the residential construction market. The impact of the slowdown to Colonial is less demand for loans from customers who meet the Company’s underwriting criteria. While loans in the mortgage warehouse division increased $307 million from December 31, 2007, total loans, net of unearned income, excluding the mortgage warehouse division, decreased $136 million, or 1%.

Gross Loan Portfolio

LOGO

The following table shows the Company’s loans by type at March 31, 2008 and December 31, 2007:


	March 31, 2008			December 31, 2007
	(In thousands)
Commercial, financial and agricultural	$	1,792,340		$	1,506,986
Commercial real estate		5,054,001			5,012,773
Real estate construction		6,179,380			6,296,262
Residential real estate		2,653,791			2,673,823
Consumer and other		434,006			452,642

Total loans		16,113,518			15,942,486
Less: unearned income		(19,040	)		(19,308	)

Total loans, net of unearned income	$	16,094,478		$	15,923,178

Loans classified as commercial, financial and agricultural consist of secured and unsecured credit lines and amortizing loans for various industrial, agricultural, commercial, financial, retail or service businesses, as well as mortgage warehouse lines of credit.

Commercial real estate loans are collateralized by real estate held for investment and business purposes. Included in commercial real estate are loans categorized as owner-occupied, which totaled $1.8 billion, or 10.9% of the total loan portfolio, at March 31, 2008.

Real estate construction loans are made to individuals, companies or developers for use in the purchase or construction of commercial properties such as single and multi-family residential and non-residential real estate. These loans are repaid by the cash flows generated through the operation, sale or refinancing of the underlying commercial property.

Residential real estate loans consist primarily of adjustable and fixed rate first mortgages on single-family, owner-occupied properties.

Consumer and other loans include loans to individuals or businesses for various purposes that may be unsecured or secured with assorted types of collateral such as cars, trucks, boats, stocks and depository accounts.

Types of loans in this category include loans for investment purposes, vehicle purchases, purchases of personal property, personal expense loans and overdrafts of deposit accounts. These loans are made to individuals and businesses such as financial institutions, municipalities and not-for-profit organizations.

Other Earning Assets

Other earning assets is comprised of interest bearing deposits in banks, federal funds sold and securities purchased under agreements to resell. Total other earning assets decreased $32 million, or 2%, from December 31, 2007 to March 31, 2008, primarily from a decrease in federal funds sold offset by an increase in securities purchased under agreements to resell.

Goodwill

BancGroup records goodwill in an amount equal to the excess of the cost of an acquisition over the fair value of the net assets acquired. During the first quarter of 2008, BancGroup continued to finalize the purchase accounting for acquisitions that closed during 2007, thereby resulting in a $3 million reduction in goodwill from December 31, 2007. BancGroup tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. The challenging interest rate and credit environments that have persisted since late 2007 have impacted BancGroup’s results of operations and, should they persist, could impact the recoverability of the Company’s goodwill, particularly with respect to the Florida reporting units. BancGroup continues to monitor this matter and, based on current results and expectations, has determined that the fair value of its reporting units continues to exceed their carrying values.

Deposits

Total deposits increased $727 million, or 4%, from December 31, 2007 to March 31, 2008. The increase was driven by time deposits which increased $921 million, or 10.5%, over that same time period. Refer to the Liquidity and Funding section of Management’s Discussion and Analysis for further information.

Wholesale Borrowings

Wholesale borrowings are comprised of short-term borrowings and long-term debt. Short-term borrowings consist of repurchase agreements and federal funds purchased. Long-term debt consists of FHLB advances, subordinated debt, junior subordinated debt and capital lease obligations. Total short-term borrowings increased $611 million, or 107%, from December 31, 2007 to March 31, 2008. Asset growth outpaced the growth in deposits during the quarter, resulting in an increase in short-term borrowings, primarily of Federal Funds Purchased, which increased by $639 million. Total long-term debt increased $146 million, or 4%, from December 31, 2007 to March 31, 2008 as the Company issued $250 million of subordinated debt, which qualifies as Tier II regulatory capital, and paid off a $100 million FHLB borrowing and $7.7 million of variable rate subordinated debt. Refer to Note 11, Long-Term Debt, for additional information.

RISK MANAGEMENT

Credit Risk Management

Colonial has some measure of credit risk in most of its primary banking activities, but the majority of this risk is associated with lending. Colonial’s Credit Risk Management philosophy has historically been, and continues to be, focused on establishing and administering policies and procedures such that Colonial’s credit quality has outperformed Colonial’s peers in most economic environments. Consistent with this philosophy, Colonial has maintained conservative underwriting and credit product standards and has generally avoided nontraditional credit products. The Company’s credit risk management process is centered on comprehensive credit and underwriting policies and procedures, a strong and effective loan approval process, continual audit and review functions and experienced credit professionals at the regional, business-line and BancGroup levels. In

addition, Colonial has a credit risk reporting and analysis group which falls under the supervision of the Chief Executive Officer. This group continually evaluates changes in credit risk, monitors large concentrations and exposures of all types and locations and implements Colonial Bank’s allowance methodology. Colonial also has a special assets/collections group which is charged with minimizing losses, maximizing recoveries and implementing strategies to reduce problem asset levels. In addition, the internal auditors and regulatory examiners review and perform detailed tests of the Company’s credit risk management activities, such as credit underwriting, loan administration and the allowance process. The overall goals of Colonial’s credit risk management activities include providing a sound basis for new credit extensions and early recognition of problems/risks so that Colonial can maintain a high quality loan portfolio and achieve long-term earnings growth.

In addition to lending, credit risk is present in Colonial’s securities portfolio, derivative instruments and certain deposit activities. The Company’s treasury and deposit departments have credit risk management processes in place in order to manage credit risk in these activities.

Commercial Real Estate and Real Estate Construction Loan Categories

A large portion of BancGroup’s loans are secured by real estate, with commercial real estate and construction loans representing 31.4% and 38.3% of total loans as of March 31, 2008, respectively. BancGroup’s commercial real estate and construction loans are spread geographically throughout Alabama, Florida and other areas including metropolitan Atlanta, Dallas, Reno and Las Vegas with no more than 12.67% of total commercial real estate and construction loans in any one metropolitan statistical area (MSA). The Alabama economy generally experiences a slow but steady rate of growth, while BancGroup’s markets in Florida, Georgia, Nevada and Texas have historically experienced higher rates of growth. Currently, Florida, metro Atlanta and Nevada are experiencing a slow-down in real estate markets due to over supply of houses in said markets as well as less demand for real estate in the current environment. The collateral held in the commercial real estate and construction portfolios consists of various property types such as retail properties, 1-4 family residential developments and lots, office buildings, land held for future development or construction, residential homes under construction, multi-family housing, condominium properties, warehouses, lodging and health service facilities. The relatively small average loan size and the application of conservative underwriting guidelines further reduce risk. Colonial focuses its commercial real estate and construction lending efforts on high quality properties owned and/or developed by experienced customers with whom BancGroup has established relationships. In addition to the subject properties, substantially all construction and commercial real estate loans have personal guarantees of the principals involved. The owner-occupied commercial real estate portfolio represented 34.8% of the total commercial real estate portfolio outstanding at March 31, 2008. Owner-occupied real estate is primarily dependent on cash flows from operating businesses rather than on the sale or rental of the property; therefore, these loans generally carry less risk than other commercial real estate loans.

Management believes that Colonial’s existing diversity of commercial real estate and construction loans reduces BancGroup’s risk exposure. The current distribution remains diverse in location, size and collateral function. This diversification, in addition to Colonial’s emphasis on quality underwriting, serves to reduce the risk of losses. The following charts reflect the geographic diversity and property type distribution of total construction and commercial real estate loans at March 31, 2008:


	Construction		% of Total		Commercial Real Estate		% of Total
	(Dollars in thousands)
Average Loan Size	$	1,057			$	694
Geographic Diversity (by property location)(1)
Florida	$	2,973,466	48.1	%	$	3,237,770	64.1	%
Alabama		622,560	10.1	%		616,182	12.2	%
Georgia		628,295	10.1	%		331,965	6.5	%
Texas		999,381	16.2	%		309,982	6.1	%
Nevada		511,473	8.3	%		205,772	4.1	%
Other		444,205	7.2	%		352,330	7.0	%

Total	$	6,179,380	100.0	%	$	5,054,001	100.0	%


	Property Type Distribution %					Property Type Distribution %
	Construction Portfolio		Total Portfolio			Commercial Real Estate Portfolio		Total Portfolio
Residential development and lots	26.3	%	10.1	%	Office	23.2	%	7.3	%
Residential land	7.4	%	2.8	%	Retail	22.9	%	7.2	%
Residential home construction	12.8	%	4.9	%	Warehouse	14.7	%	4.6	%
Commercial development and lots	9.9	%	3.8	%	Multi-Family	8.6	%	2.7	%
Commercial land	16.4	%	6.3	%	Healthcare	6.9	%	2.1	%
Condominium	6.3	%	2.4	%	Lodging	5.0	%	1.6	%
Retail	5.9	%	2.3	%	Church or School	3.9	%	1.2	%
Multi-Family	3.9	%	1.5	%	Industrial	2.6	%	0.8	%
Office	3.2	%	1.2	%	Farm	2.5	%	0.8	%
Healthcare	2.4	%	0.9	%	Recreation	0.8	%	0.3	%
Other(2)	5.5	%	2.1	%	Other(2)	8.9	%	2.8	%

Total Construction	100.0	%	38.3	%	Total Commercial Real Estate	100.0	%	31.4	%

(1)	No more than 12.67% of construction and commercial real estate loans are in any one MSA.

(2)	Other includes all loans in categories smaller than the lowest percentages shown above.

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


	Construction			Commercial Real Estate
75 Largest Loans Total (in thousands)	$	1,404,281		$	856,242
% of 75 largest loans to category total		22.7	%		16.9	%
Average Loan to Value Ratio (75 largest loans)		70.5	%		69.9	%
Average Debt Coverage Ratio (75 largest loans)		N/A			1.51x

Residential Construction Loan Category

The Company’s residential construction portfolio consists of residential development and lots, residential land and residential home construction. The majority of the Company’s nonperforming assets and net charge-offs during the fourth quarter of 2007 and the first quarter of 2008 relate to residential construction loans. The loans are generally short-term, have the personal guarantees of the borrowers and were underwritten such that each borrower has substantial equity in the project. The lack of real estate sales has caused liquidity issues for some of the Company’s borrowers which has resulted in higher nonperforming loans and losses than historical norms in the portfolio.

The following table and chart show the components of residential construction loans at March 31, 2008:

Residential Construction Loans


	Total Outstanding				Acquisitions & Development		Builder Lot Inventory		Consumer- Owned Lots		Residential Presold		Residential Speculative		Land		Condominiums		National Builders
	Amount		%		Acquisitions & Development		Builder Lot Inventory		Consumer- Owned Lots		Residential Presold		Residential Speculative		Land		Condominiums		National Builders
	(Dollars in millions)
Florida	$	1,608	49	%	$	568	$	72	$	99	$	113	$	214	$	224	$	298	$	20
Texas		540	17			279		41		5		17		74		75		16		33
Georgia		410	13			188		32		2		30		115		20		23		—
Alabama		393	12			126		32		27		26		151		24		7		—
Nevada		204	6			80		1		2		22		25		49		25		—
Other		110	3			32		2		1		3		3		48		21		—

Total	$	3,265	100	%	$	1,273	$	180	$	136	$	211	$	582	$	440	$	390	$	53

Residential Construction Loans

LOGO

Other Loan Categories

The risks associated with loans classified as commercial, financial and agricultural are generally related to the earnings capacity of, and the cash flows generated from, the specific business activities of the borrowers.

BancGroup has a history of successful residential real estate lending, and the asset quality ratios for residential real estate loans remain favorable. The Company has conservative underwriting guidelines and has not offered any products targeting sub-prime borrowers and does not offer higher risk mortgage products such as option ARMS, “pick a payment” loans and low or no documentation loans.

Regarding consumer and other loans, the principal source of repayment is the earning capacity of the individual borrower and, on collateralized loans, the collateral serves as a secondary source of repayment.

Allowance for Loan Losses

Management’s ongoing evaluation of the adequacy of the allowance for loan losses considers both impaired and unimpaired loans and takes into consideration Colonial’s past loan loss experience, known and inherent risks in the portfolio, existing adverse situations that may affect the borrowers’ ability to repay, estimated value of any underlying collateral, an analysis of existing guarantees and an analysis of current economic conditions.

Colonial, through its lending and credit functions, continuously reviews its loan portfolio for credit risk. Colonial employs an independent credit review area that reviews the lending and credit functions to validate that credit risks are appropriately identified. The Company remains committed to the early recognition of problem loans and to ensuring an adequate level of allowance to cover inherent losses. Using input from the credit risk identification process, the Company’s credit risk management area analyzes and validates the Company’s allowance for loan losses calculations. The analysis includes four basic components: general allowances for loan pools, specific allowances for individual loans, allowances based on identified economic conditions and other risk factors and the overall allowance level (which gives rise to the unallocated component of the allowance).

Management reviews the methodology, calculations and results and ensures that the calculations are appropriate and that all material risk elements have been assessed in order to determine the appropriate level of allowance for the inherent losses in the loan portfolio at each quarter end. Past due balances, nonaccrual balances, and potential problem loan balances are not absolute indicators of the losses inherent in the loan portfolio, but are considered in the overall evaluation of the adequacy of the allowance for loan losses. In addition, the allowance for loan losses methodology is discussed with and reviewed by the Risk Committee of the Board of Directors on a quarterly basis.

The following table summarizes the Company’s loan loss experience for the periods ended March 31, 2008 and 2007:


	Three Months Ended
	March 31, 2008			March 31, 2007
	(In thousands)
Allowance for loan losses—January 1	$	238,845		$	174,850
Net charge-offs		(33,593	)		(2,195	)
Provision for loan losses		35,543			2,250
Reduction due to sale of mortgage loans originally held for investment		—			(2,303	)

Allowance for loan losses—end of period	$	240,795		$	172,602

Analysis of Net Charge-Offs


	March 31
	2008			2007
	(Dollars in thousands)
Charge-offs:
Commercial, financial and agricultural	$	2,262		$	1,021
Commercial real estate		994			236
Real estate construction		27,998			1,031
Residential real estate		1,460			213
Consumer and other		2,376			1,041

Total charge-offs		35,090			3,542

Recoveries:
Commercial, financial and agricultural		270			485
Commercial real estate		81			22
Real estate construction		277			39
Residential real estate		214			233
Consumer and other		655			568

Total recoveries		1,497			1,347

Net charge-offs:
Commercial, financial and agricultural		1,992			536
Commercial real estate		913			214
Real estate construction		27,721			992
Residential real estate		1,246			(20	)
Consumer and other		1,721			473

Net charge-offs	$	33,593		$	2,195

Percent of net charge-offs to average loan category (annualized basis):
Commercial, financial and agricultural		0.50	%		0.16	%
Commercial real estate		0.07	%		0.02	%
Real estate construction		1.80	%		0.06	%
Residential real estate		0.19	%		—
Consumer and other		1.36	%		0.40	%
Total		0.84	%		0.06	%

Nonperforming Assets and Potential Problem Loans

Management maintains an aggressive nonaccrual and problem loan identification philosophy. Through the ongoing monitoring and review of all pools of risk in the loan portfolio, this philosophy ensures that problem loans are identified quickly and the risk of loss is minimized.

Nonperforming assets consists of loans on nonaccrual status, renegotiated loans, other real estate owned, repossessions and loans held for sale. When management determines that a loan no longer meets the criteria for a performing loan and collection of interest appears doubtful, the loan is placed on nonaccrual status. Loans are generally placed on nonaccrual if full collection of principal and interest becomes unlikely (even if all payments are current) or if the loan is delinquent in principal or interest payments for 90 days or more, unless the loan is well secured and in the process of collection. BancGroup’s policy is to charge-off consumer installment loans 120 days past due unless they are in the process of foreclosure and are adequately collateralized. Management closely monitors all loans that are contractually 90 days past due, renegotiated or nonaccrual.

Other real estate owned includes real estate acquired through foreclosure or deed taken in lieu of foreclosure. These amounts are recorded at estimated fair value, less costs to sell the property, with any difference between the fair value of the property and the carrying value of the loan being charged to the

allowance for loan losses. Subsequent changes in fair value are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the assets at the time of transfer. Those subsequent changes, as well as any gains or losses recognized on the sale of these properties, are included in noninterest income or noninterest expense.


	March 31, 2008			December 31, 2007
	(Dollars in thousands)
Nonaccrual loans:
Commercial, financial and agricultural	$	2,088		$	2,467
Commercial real estate		14,447			6,374
Real estate construction		210,701			96,397
Residential real estate		18,359			15,993
Consumer and other		887			655

Total nonaccrual loans		246,482			121,886
Renegotiated loans		—			—

Total nonperforming loans*		246,482			121,886
Other real estate owned and repossessions		19,831			15,760
Loans held for sale		—			—

Total nonperforming assets*	$	266,313		$	137,646

Allowance as a percent of nonperforming assets*		90	%		174	%
Aggregate loans contractually past due 90 days or more for which interest is still accruing	$	70,638		$	23,837
Net charge-offs quarter-to-date	$	33,593		$	33,895
Net charge-offs year-to-date	$	33,593		$	54,066
Total nonperforming assets* as a percent of net loans and other real estate		1.65	%		0.86	%
Allowance as a percent of net loans		1.50	%		1.50	%
Allowance as a percent of nonperforming loans*		98	%		196	%

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

The balance of nonperforming assets can fluctuate due to changes in economic conditions, nonperforming assets obtained in acquisitions and the disproportionate impact of larger assets. The increase in nonperforming assets in the first quarter of 2008 was primarily due to the downturn in the residential real estate market during the latter part of 2007 and the first quarter of 2008, which negatively impacted the liquidity of a number of our borrowers. Refer to the Allowance for Loan Losses discussion in the Risk Management section of Management’s Discussion and Analysis for additional information.

Included in nonperforming assets are loans that are considered impaired. Impaired loans totaled $235.2 million and $105.4 million at March 31, 2008, and December 31, 2007 respectively. The related allowance for loan losses on impaired loans was $22.7 million at March 31, 2008 compared with $11.0 million at December 31, 2007. All of the impaired loans were on nonaccrual status.

In addition to nonperforming assets, the Company is aware of a number of potential problem loans where possible credit problems of borrowers cause management to have concerns as to the ability of such borrowers to comply with present loan repayment terms and which may result in these loans being classified as nonperforming in the future. There were $542 million of potential problem loans at March 31, 2008. Although these loans have been identified as potential problem loans, they may never become delinquent, nonperforming or impaired. Additionally, these loans are generally secured by commercial real estate or other assets, thus reducing the potential for loss should they become nonperforming. Potential problem loans are considered in the determination of the adequacy of the allowance for loan losses.

Asset/Liability Management

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

Interest Rate Risk

Interest rate risk, and its potential effect on earnings, is inherent in the operation of a financial institution. BancGroup is subject to interest rate risk because:

•

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

•

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

•

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

•

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

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

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

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

The following table represents the output from the Company’s simulation model based on the balance sheet at March 31, 2008, with comparable information for December 31, 2007. The table measures, consistently for both periods, the impact on net interest income of an immediate and sustained change in all market interest rates in 100 basis point increments for the twelve calendar months following the date of the change. This twelve-month projection of net interest income under these scenarios is compared to the twelve-month net interest income projection with rates unchanged.


	Fed Funds Rate		Percentage Change in 12 Month Projected Net Interest Income Versus Projected Net Interest Income Under No Rate Change(1)
	March 31, 2008	December 31, 2007	March 31, 2008		December 31, 2007
Basis Points Change
+200	4.25	6.25	3.6	%	3.0	%
+100	3.25	5.25	1.7	%	2.1	%
No rate change	2.25	4.25	—		—
-100	1.25	3.25	1.8	%	(2.0	)%

(1)

The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, estimates of rates on loans and deposits given these rate changes, the ability to maintain interest rate floors on loans as market rates decline, deposit decay rates and loan/investment prepayments. Further, the computations do not take into account changes to the slope of the yield curve, changes in the relative relationship of various market rates, changes in the volume or mix of assets and liabilities on the balance sheet nor do they contemplate any actions BancGroup could undertake in response to changes in interest rates.

As shown in the table, the Company's balance sheet became liability sensitive in rates down from December 31, 2007. On the asset side, an increase in the proportion of variable rate assets from December 31, 2007 to March 31, 2008 due to the increase in mortgage warehouse loans and loans held for sale increased asset sensitivity as these balances were funded primarily with term deposits and overnight wholesale borrowings. Due to the significant drop in market rates of 200 basis points in the base scenario, mortgage warehouse asset rate floors are now either in the money or close to their strike price which offsets and swings the sensitivity of the balance sheet structure in the down scenarios to be liability sensitive.

Liquidity and Funding

Liquidity is the ability of an organization to meet its financial commitments and obligations on a timely basis. These commitments and obligations include credit needs of customers, withdrawals by depositors, repayment of debt when due and payment of operating expenses and dividends. Management of liquidity also includes management of funding sources and their utilization based on current, future and contingency needs. Maintaining and managing adequate liquidity and funding are other prominent focuses of ALM. The Company expects its liquidity needs to be met by deposit growth and through wholesale funding sources.

Deposit growth remains a primary focus of BancGroup’s funding and liquidity strategy. Colonial’s period end noninterest bearing deposits grew by $62 million, or 8% annualized over December 31, 2007. Total average deposits for the three months ended March 31, 2008, increased $2.8 billion, or 17%, over the same period of the prior year. Excluding brokered deposits, total average deposits for the three months ended March 31, 2008 increased $1.6 billion, or 10%, over the same period of the prior year. With branches in four states where the population is expected to grow twice as fast as the rest of the United States, retail deposits have been and are expected to continue to be a major component of BancGroup’s funding growth. However, intense competition for retail deposits has increased the cost of deposits above certain wholesale sources.

At March 31, 2008 and December 31, 2007, the Company had estimated wholesale funding available to it in excess of $5 billion. BancGroup has worked to expand the availability of short-term and long-term wholesale funding sources to complement its core deposit base. The Company draws on a variety of funding sources to assist in funding earning asset growth and managing deposit fluctuations. Federal funds lines and collateralized funding facilities are sources for short-term borrowings. Availability from the FHLB is also an important part of BancGroup’s wholesale funding. From time to time, BancGroup has issued REIT preferred securities, subordinated debentures, subordinated notes and junior subordinated debt to provide both capital and funding.

Operational Risk Management

In providing banking services, Colonial processes cash, checks, wires and ACH transactions which expose Colonial to operational risk. Controls over such processing activities are closely monitored to safeguard the assets of Colonial and its customers. However, from time to time, Colonial has incurred losses related to these processes and there can be no assurance that such losses will not occur in the future.

Operational risk is the risk of losses attributable to human error, systems failures, fraud or inadequate internal controls and procedures. This risk is mitigated through a system of internal controls that are designed to keep operational risk at levels appropriate to Colonial’s corporate standards in view of the risks inherent in the markets in which Colonial operates. The system of internal controls includes policies and procedures that require the proper authorization, approval, documentation and monitoring of transactions. Each business unit is responsible for complying with corporate policies and procedures. Colonial’s internal auditors monitor the overall effectiveness of the system of internal controls on an ongoing basis.

Colonial does not engage in business processes that are out of its primary areas of expertise but rather outsources non-core processing functions to limit operational risk associated with non-core business.

Operational losses are monitored closely and historically have had no material impact to earnings or capital.

CAPITAL MANAGEMENT

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. 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 as well as upon applicable statutory constraints such as the Delaware law requirement that dividends may be paid only out of capital surplus and net profits for the fiscal year in which the dividend is declared and the preceding fiscal year.

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

The Federal Reserve Board has issued guidelines identifying minimum Tier I leverage ratios relative to total assets and minimum capital ratios relative to risk-adjusted assets. The minimum leverage ratio required for BancGroup is 4%. The minimum risk adjusted capital ratios established by the Federal Reserve are 4% for Tier I and 8% for total capital. Higher capital ratios may be required by the Federal Reserve if warranted by the circumstance or risk profile. BancGroup’s actual capital ratios and the components of capital and risk adjusted asset information (subject to regulatory review) are stated below:


	March 31, 2008			December 31, 2007
	(Dollars in thousands)
Risk-Based Capital:
Shareholders’ equity	$	2,172,017		$	2,273,571
Unrealized losses on securities available-for-sale		103,313			3,673
Net impact of cash flow hedges and actuarial gains		(843	)		741
Qualifying minority interests in consolidated subsidiaries		293,917			293,812
Qualifying trust preferred securities		105,000			105,000
Intangible assets (net of allowed deferred taxes)		(1,046,453	)		(1,053,822	)
Other adjustments		(4,278	)		(3,304	)

Tier I Capital		1,622,673			1,619,671

Allowable loan loss and unfunded commitment reserves		241,795			239,845
Subordinated debt		555,156			310,805

Tier II Capital		796,951			550,650

Total Capital	$	2,419,624		$	2,170,321

Risk-Adjusted Assets	$	20,158,342		$	19,715,951
Quarterly Average Assets (for regulatory purposes)	$	26,600,393		$	24,266,011

Tier I Leverage Ratio		6.10	%		6.67	%
Risk-Adjusted Capital Ratios:
Tier I Capital Ratio		8.05	%		8.22	%
Total Capital Ratio		12.00	%		11.01	%

Common Stock Offering

On April 25, 2008, the Company completed a public common stock offering of 43.7 million shares at $8.00 per share for $350 million. The Company received proceeds of $333 million, which is net of all expenses, commissions and underwriters’ discounts. The Company will use the proceeds for general corporate purposes as well as investments in subsidiaries.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in internal control over financial reporting during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s disclosure controls and procedures. See the certifications by the Company’s Chief Executive Officer and Chief Financial Officer filed as Exhibits 31.1 and 31.2 to this Report.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings—See Notes to the Unaudited Consolidated Financial Statements—Note 8—Commitments and Contingent Liabilities

Item 1A.

Risk Factors

The Company has identified the following additional risk factors that should be considered along with the risk factors included in BancGroup’s Annual Report on Form 10-K for the year ended December 31, 2007:

As a financial services company, our business and earnings are significantly affected by general business and economic conditions, particularly in the real estate industry, and accordingly, our business and earnings could be harmed in the event of an economic slowdown or recession or a market downturn or disruption.

Our business and earnings are sensitive to general business, economic and market conditions in the United States. These conditions include changes in short-term and long-term interest rates, inflation, deflation, fluctuation in the real estate and debt capital markets, developments in national and regional economies and changes in government policies and regulations.

Our business and earnings are particularly sensitive to economic and market conditions affecting the real estate industry because most of our loan portfolio consists of commercial real estate, construction and residential loans. While generally containing lower risk than unsecured loans, commercial real estate and construction loans generally involve higher credit risk than conventional single-family residential loans. Such loans generally involve larger individual loan balances. In addition, real estate construction loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because many real state construction borrowers’ ability to repay their loans is dependent on successful development of their properties, as well as the factors affecting residential real estate borrowers. Risk of loss on a construction loan depends largely upon whether the initial estimate of the property’s value at completion of construction equals or exceeds the cost of property construction (including interest) and the availability of permanent take-out financing. During the construction phase, a number of factors can result in delays and cost overruns. Construction and commercial real estate loans also involve greater risk because they may not be fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability to make a balloon payment may depend on the borrower being able to refinance the loan, timely sell the underlying property or liquidate other assets.

Any sustained period of weakness or weakening business or economic conditions in the markets in which we do business or in related markets could result in a decrease in the demand for loans, a reduction in the value of the real estate assets securing loans that we hold or an increase in the number of borrowers who become delinquent or default on their loans, any of which could adversely affect our results of operations and financial condition, including the value of our intangible assets. An increase in the number of delinquencies or defaults could result in a higher level of nonperforming assets, net charge-offs and provision for loan losses, which could adversely affect our results of operations.

Our allowance for loan losses may not be adequate to cover actual loan losses, which may require us to take a charge to our earnings and adversely impact our financial condition and results of operations.

We maintain an allowance for estimated loan losses that we believe is adequate for absorbing any probable losses in our loan portfolio. Management determines the provision for loan losses based upon an analysis of general market conditions, credit quality of our loan portfolio, and performance of our customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating, and other conditions, including changes in interest rates that may be beyond our control and such losses may exceed the allowance for estimated loan losses. Although management believes that the allowance for estimated loan losses is adequate to absorb any probable losses on existing loans that may become uncollectible, there can be no assurance that the allowance will prove sufficient to cover actual loan losses in the future. Significant increases to the provisions for loan losses may be necessary if material adverse changes in general economic conditions occur

or the performance of our loan portfolio deteriorates. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review the allowance for estimated loan losses. If these regulatory agencies require us to increase the allowance for estimated loan losses, it could have a negative effect on our results of operations and financial condition.

We may be required to raise additional capital in the future, but that capital may not be available when it is needed, which could adversely affect our financial condition and results of operations.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to maintain such levels and/or support our growth.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired.

Conditions in the financial markets may limit our access to additional short-term funding to meet our liquidity needs.

We anticipate that our current sources of liquidity, which include deposits, Federal Home Loan Bank advances, cash on hand and short-term borrowings will remain adequate to meet our liquidity needs. However, the limited availability of liquidity as a result of the subprime mortgage crisis may require us to make short-term borrowings, if needed, on terms and conditions that adversely affect our results of operations.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds—Issuer purchases of equity securities


Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(1)
2007 total	8,606,800	$	24.26	8,606,800	$	91,175,000

January 1—March 31, 2008	—	$	—	—	$	91,175,000

1^st Quarter 2008 total	—	$	—	—	$	91,175,000

Cumulative total	8,606,800	$	24.26	8,606,800	$	91,175,000

(1)	Information is as of the end of the period.

In 2006, the Company publicly announced two share repurchase programs to purchase shares of BancGroup Common Stock not to exceed a combined total of $150 million. The 2006 repurchase programs were completed in 2007. On June 11, 2007, the Company publicly announced another share repurchase program to purchase shares of BancGroup Common Stock not to exceed $150 million, of which approximately $91.2 million has yet to be purchased. This program will terminate on the earlier of its completion or June 8, 2009.

Item 3. Defaults

Upon Senior Securities—N/A

Item 4. Submission

of Matters to a Vote of Security Holders—N/A

Item 5. Other

Information—N/A

Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K


Exhibit
1.1		Underwriting agreement dated February 28, 2008, between The Colonial BancGroup, Inc. and the underwriters, filed as exhibit 1.1 to the Registrant’s Current Report on Form 8-K, dated March 5, 2008, and incorporated herein by reference.

4.1		Indenture from The Colonial BancGroup, Inc. to The Bank of New York Trust Company, N.A., Trustee, relating to the 8.875% Subordinated Notes due 2038 dated March 1, 2008, filed as exhibit 4.1 to the Registrant’s Current Report on Form 8-K, dated March 5, 2008, and incorporated herein by reference.

4.2		Form of the Subordinated Notes due 2038, filed as exhibit 4.2 to the Registrant’s Current Report on Form 8-K, dated March 5, 2008, and incorporated herein by reference.

4.3		Dividend Reinvestment and Common Stock Purchase Plan of Registrant dated May 2, 2008, filed as the Registrant’s Registration Statement on Form S-3 (File No. 333-150623), filed and made effective May 2, 2008.

10.1		The Colonial BancGroup, Inc. Stock Plan for Directors, as amended.

10.2		The Colonial BancGroup, Inc. Management Incentive Plan, as amended.

31.1		Rule 13a-14(a)/15d-14(a) Certifications of the Chief Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certifications of the Chief Financial Officer.

32.1		Rule 13a-14(b) Certifications of the Chief Executive Officer.

32.2		Rule 13a-14(b) Certifications of the Chief Financial Officer.

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Montgomery, Alabama, on the 5th day of May, 2008.


THE COLONIAL BANCGROUP, INC.

By:		/s/ SARAH H. MOORE
		Sarah H. Moore Chief Financial Officer