Dear Shareholders,
Colonial had an outstanding year and delivered record results in 2005. Earnings per share increased 16% from 2004 to a record $1.52. Net income reached a record high of $229 million, a 32% increase over 2004.
You were rewarded with a one-year total return which includes stock price appreciation and dividends of over 15% in 2005. This return was achieved in a year when the S&P Bank Index fell 4.76%.
We have a long-term strategy of growing in the right places. In 2005, we added 42 locations in some of the country’s most vibrant places. Colonial acquired two great institutions this year – Union Bank of Florida and First Federal Savings Bank of Lake County (FFLC). The February acquisition of Union added 17 locations and $631 million in deposits in the high-growth, densely populated areas of southeast Florida while FFLC added 16 locations and $842 million in deposits in a fast-growing area of central Florida near Orlando.
With our strategy of locating in high-growth markets, we evaluate all of our branch locations to determine whether each branch is in the right location, whether the market in which the branch is located is growing and whether our resources are being used wisely. As a result of our ongoing evaluations, we determined that Colonial should exit the northwest Alabama market and deploy our resources into higher growth markets with more opportunity. The Company sold 20 branches in the slow or no growth markets of northwest Alabama and southern Tennessee in 2005. At year end, Colonial had 72% of its deposits and 69% of its 301 branches in the higher growth markets of Florida, Georgia, Texas and Nevada.
Colonial’s markets are expected to grow almost 11%1 over the next five years compared to the average for the United States of 6%. Why is this important? As you know, population growth and job growth drive the economy. When the economy is good for the country, the higher growth markets have been great. When the economy is not as good for the country, the higher growth markets will typically outperform.
Colonial’s high growth franchise outperformed most banks and produced above average growth in both deposits and loans in 2005. We targeted our retail banking and marketing efforts in 2005 to capitalize on the strength of our franchise. The results were significant. We grew average deposits organically by 16% during the year. Our largest franchise, Florida, grew deposits organically 23% while the Nevada and Texas franchises grew by 32% and 27%, respectively, for the year. Our emphasis has been and will continue to be on increasing the number of customers in the bank and deepening our relationships with those customers. We do this by providing personal and business banking services, including wealth management, mortgage loans, cash management and merchant services.
Colonial’s loan portfolio grew organically by 10%2 in 2005. We grew without sacrificing credit quality, which has always been a strength for Colonial. We actually tightened our underwriting standards in 2005 and achieved record credit quality. Our nonperforming asset ratio ended the year at an all-time low of 0.21% and net charge-offs were 0.14% of average loans. I believe that you can do many things right in banking, but if you mess up on credit quality you will fail.
An important measure of how well a bank is performing is revenue growth. Colonial grew its revenues by 23% over 2004. For the past three years, Colonial’s annual revenue growth has averaged 15%. This year was particularly challenging for net interest income growth. The yield curve became flat and then inverted, presenting a significant challenge to overcome. Colonial effectively managed through the yield curve environment of 2005 and was one of the very few banks which not only increased its net interest income and did so by more than 25%, but also increased its net interest margin each and every quarter since September 30, 2003.
Colonial had an outstanding year in 2005, and we expect great things in our future. I believe that the best things really do come out of the “blue,” that is, Colonial BancGroup – growth, strength and most importantly results.
Thank you for your investment in Colonial. As always, I continue to solicit your suggestions, comments and advice.
Sincerely,
Robert E. Lowder
Chairman of the Board,
Chief Executive Officer
and President