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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                          to                         

Commission File #0-07945

THE COLONIAL BANCGROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

7½% Convertible Subordinated Debentures, due 2011

(Title of Class)

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

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

The aggregate market value of the voting stock of the registrant held by non-affiliates as of February 20, 2003 based on the closing price of $11.40 per share for Common Stock was $1,410,977,065. (For purposes of calculating this amount, all directors, officers and principal shareholders of the registrant are treated as affiliates).

Shares of Common Stock outstanding at February 20, 2003 were 123,769,918.

DOCUMENTS INCORPORATED BY REFERENCE

PART I

Item 1.    Business

General

The Registrant, The Colonial BancGroup, Inc. (“BancGroup”) is a Delaware corporation organized in 1974 as a bank holding company under the Bank Holding Act of 1956, as amended (the “BHCA”). BancGroup was originally organized as Southland Bancorporation, and its name was changed in 1981. In 1997, pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, BancGroup consolidated its banking subsidiaries located in Georgia, Florida and Tennessee into Colonial Bank, its banking subsidiary in Alabama. In 2000, pursuant to the Gramm-Leach-Bliley Financial Services Modernization Act (“Gramm-Leach”), BancGroup elected to become a financial holding company which allows it to affiliate with securities firms and insurance companies and to engage in other activities that are financial in nature, incidental to such financial activities, or complementary to such activities.

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

Bank Subsidiary

As of December 31, 2002 Colonial Bank had a total of 269 branches, with 121 branches in Alabama, 103 branches in Florida, 22 branches in Georgia, nine branches in Texas, 11 branches in Nevada and three branches in Tennessee. Colonial Bank conducts a general commercial banking business in its respective service areas. Colonial Bank offers a variety of demand, savings and time deposit products as well as extensions of credit through personal, commercial and mortgage loans within each of its market areas. Colonial Bank also provides additional services to its markets through cash management services, electronic banking services, credit card and merchant services and financial planning services. Financial planning services include trust services, insurance sales and the sales of various types of investment products such as mutual funds, annuities, stocks, municipal bonds, U.S. government securities.

Colonial Bank encounters intense competition in its commercial banking business, generally from other banks located in its respective metropolitan and service areas. Colonial Bank competes for interest bearing funds with other banks and with many issuers of commercial paper and other securities, which are not banks. In the case of larger customers, competition exists with banks in other metropolitan areas of the United States, many of, which are larger in terms of capital resources and personnel. In the conduct of certain aspects of its commercial banking business, Colonial Bank competes with savings and loan associations, credit unions, mortgage banks, factors, insurance companies and other financial institutions. At December 31, 2002, Colonial Bank accounted for approximately 99.7% of BancGroup’s consolidated assets.

Nonbanking Subsidiaries

BancGroup has the following directly and wholly owned nonbanking subsidiaries that are currently active. Colonial Brokerage, Inc., a Delaware Corporation, provides full service and discount brokerage services and investment advice and became a member of the National Association of Securities Dealers (“NASD”) in September 2001. The Colonial BancGroup Building Corporation, an Alabama Corporation, was established primarily to own and lease certain buildings and land used by Colonial Bank. Colonial Capital II, a Delaware business trust, issued $70 million in trust preferred securities in 1997, which are guaranteed by BancGroup. Colonial Capital Trust III, a Delaware business trust, was formed in March 2002 and issued $100 million in trust preferred securities which are guaranteed by BancGroup. MBI Capital Trust was acquired in March 2002 as part

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of the acquisition of Mercantile BancCorp, Inc. and has $8 million in trust preferred securities outstanding. BancGroup acquired Great Florida Title, LLC, which operates as a title insurance agency, as part of the Manufacturer Bancshares, Inc. acquisition in October 2001.

In 2002, BancGroup acquired interests in several real estate developments located in the Atlanta metropolitan area of Georgia. Their names and BancGroup’s respective ownership percentages in each are as follows: CB Habersham, LLC—45%, Colonial Crabapple, LLC—60%, Eagle White Columns Development, LLC—24%, and CB Dogwood, LLC—45%.

Colonial Bank controls the following significant subsidiaries: CBG, Inc., a Nevada Corporation, owns certain trade names and trademarks which it licenses to BancGroup, Colonial Bank, Colonial Brokerage and their affiliates for use in their businesses. CBG Investments, Inc., a Nevada corporation, owns and manages investment securities. Colonial Investment Services, Inc., an Alabama corporation; Colonial Investments Services of Florida, Inc., a Florida corporation; Colonial Investment Services of Tennessee, Inc., a Tennessee corporation; Colonial Investment Services of Georgia, Inc., a Georgia corporation; and Colonial Investment Services of Nevada, Inc., a Nevada corporation, all offer various insurance products and annuities for sale to the public. Colonial Asset Management, Inc., an Alabama corporation, is an investment advisor registered under the Investment Advisors Act of 1940. Colonial Bank’s 72.43% ownership of Goldleaf Technologies, Inc., a Delaware corporation, which provides internet and ACH services to community banks. CBG Florida REIT Corp., a Florida corporation and Real Estate Investment Trust formed in 2002, owns and manages certain real estate loans. CBG Nevada Holding Corp., a Nevada corporation and wholly owned subsidiary of Colonial Bank, owns all of the common stock and in excess of 90% of the preferred stock of CBG Florida REIT Corp.

At December 31, 2002, BancGroup and its subsidiaries employed 3,883 persons. BancGroup’s principal offices are located at and its mailing address is: One Commerce Street, Suite 800, Montgomery, Alabama 36104. BancGroup’s telephone number at its principal offices is (334) 240-5000.

Available Information

BancGroup makes available, free of charge through its Internet website (www.colonialbank.com), the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after electronically filing or furnishing such material with the Securities and Exchange Commission.

Certain Regulatory Considerations

The following is a brief summary of the regulatory environment in which BancGroup and Colonial Bank operate and is not designed to be a complete discussion of all statutes and regulations affecting such operations, including those federal and state statutes and regulations specifically mentioned herein. Changes in the laws and regulations applicable to BancGroup and Colonial Bank can affect the operating environment in substantial and unpredictable ways. BancGroup cannot accurately predict whether legislation will ultimately be enacted, and if enacted the ultimate effect that implementing regulations would have on BancGroup or its subsidiaries’ financial condition or results of operations.

BancGroup is a registered financial holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As such, it is subject to the BHCA and many of the Federal Reserve’s regulations promulgated thereunder. The Federal Reserve has broad enforcement powers over bank holding companies, including the power to impose substantial fines and civil penalties.

Colonial Bank, an Alabama state-chartered bank that is a member of the Federal Reserve System, is subject to supervision and examination by the Federal Reserve and the Alabama State Banking Department (the “Department”). The deposits of Colonial Bank are insured by the FDIC to the extent provided by law. The FDIC

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assesses deposit insurance premiums the amount of which may, in the future, depend in part on the condition of Colonial Bank. Both the Federal Reserve and the Department have jurisdiction over a number of the same matters, including lending decisions and mergers. The bank regulatory agencies have broad enforcement powers over depository institutions under their jurisdiction, including the power to terminate deposit insurance, to impose fines and other civil and criminal penalties, and to appoint a conservator or receiver if any of a number of conditions are met.

Mergers, Acquisitions and Changes in Control

One limitation under the BHCA and the Federal Reserve’s regulations requires that BancGroup obtain prior approval of the Federal Reserve before BancGroup acquires, directly or indirectly, more than 5% of any class of voting securities of another bank. Prior approval also must be obtained before BancGroup acquires all or substantially all of the assets of another bank, or before it merges or consolidates with another bank holding company. Because BancGroup is a registered bank holding company, persons seeking to acquire 25% or more of any class of its voting securities must receive the approval of the Federal Reserve. Similarly, under certain circumstances, persons seeking to acquire between 5% and 25% also may be required to obtain prior Federal Reserve approval.

In September 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. This legislation, among other things, amended the BHCA to permit bank holding companies, subject to certain limitations, to acquire either control or substantial assets of a bank located in states other than that bank holding company’s home state regardless of state law prohibitions. This legislation became effective on September 29, 1995. In addition, this legislation also amended the Federal Deposit Insurance Act to permit, beginning on June 1, 1997 (or earlier where state legislatures provided express authorization), the merger of insured banks with banks in other states, subject to certain limitations.

FDIC Improvement Act

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

Consumer Protection Laws

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

Gramm-Leach

In 1999, Gramm-Leach was signed into law and it became effective on March 11, 2000. The primary purpose of Gramm-Leach was to eliminate barriers between investment banking and commercial banking and to permit, within certain limitations, the affiliation of financial service providers. Generally, Gramm-Leach

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(1) repealed the historical restrictions against, and eliminated many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers, (2) provided a uniform framework for the activities of banks, savings institutions and their holding companies, (3) broadened the activities that may be conducted by and through national banks and other banking subsidiaries of bank holding companies, (4) provided an enhanced framework for protecting the privacy of consumers’ information, (5) adopted a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the Federal Home Loan Bank System, (6) modified the laws governing the implementation of the Community Reinvestment Act, and (7) addressed a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.

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

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

Other Subsidiary Regulation

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

As part of its acquisition of Manufacturers Bancshares, Inc. in 2001, BancGroup acquired Great Florida Title, LLC, which operates as a title insurance agency in Tampa, Florida. It is regulated by the Florida Department of Insurance.

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

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

Pursuant to authority granted in Gramm-Leach, during 2002, BancGroup made a number of merchant banking investments in limited liability companies located in Georgia that engage in real estate development. Due to the amount of equity owned by BancGroup, each is considered a subsidiary of BancGroup and an affiliate of Colonial Bank for purposes of Sections 23A and 23B of the Federal Reserve Act. These subsidiaries of BancGroup include CB Habersham, LLC, CB Dogwood, LLC, Colonial Crabapple, LLC and Eagle White Columns Development, LLC.

Privacy Laws

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

Protection of Customer Information

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

Safety and Soundness Standards

Pursuant to FDICIA, the federal banking regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards for depository institutions such as Colonial Bank. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the agencies adopted regulations that authorize an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If the institution fails to submit an acceptable compliance plan or fails to implement an accepted plan, the agency must issue an order directing action to correct the deficiency and may

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issue an order directing other actions be taken, including restricting asset growth, restricting interest rates paid on deposits, and requiring an increase in the institution’s ratio of tangible equity to assets.

Payment of Dividends and Other Restrictions

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

In addition, Colonial Bank and its subsidiaries are subject to limitations under Sections 23A and 23B of the Federal Reserve Act with respect to extensions of credit to, investments in, and certain other transactions with, BancGroup and its subsidiaries other than Colonial Bank. Furthermore, loans and extensions of credit are also subject to various collateral requirements. On October 31, 2002, the Federal Reserve adopted Regulation W, which combines the Federal Reserve’s interpretations and exemptions relating to Sections 23A and 23B of the Federal Reserve Act. Regulation W becomes effective on April 1, 2003.

Capital Adequacy

The Federal Reserve has adopted minimum risk-based and leverage capital guidelines for bank holding companies. The minimum required ratio of total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%, of which 4% must consist of Tier 1 capital. As of December 31, 2002, BancGroup’s total risk-based capital ratio was 10.93%, including 7.76% of Tier 1 capital. The minimum required leverage capital ratio (Tier 1 capital to average total assets) is 3% for bank holding companies that meet certain specified criteria, including that they have the highest regulatory rating. A minimum leverage ratio of 4% is required for bank holding companies not meeting these criteria. As of December 31, 2002, BancGroup’s leverage capital ratio was 6.50%. Higher capital ratios may be required for any bank holding company if warranted by its particular circumstances or risk profile. Failure to meet capital guidelines can subject a bank holding company to a variety of enforcement remedies, including restrictions on its operations and activities.

Regarding depository institutions, federal banking statutes establish five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”), and impose significant restrictions on the operations of an institution that is not at least adequately capitalized. Under certain circumstances, an institution may be downgraded to a category lower than that warranted by its capital levels, and subjected to the supervisory restrictions applicable to institutions in the lower capital category. As of December 31, 2002, Colonial Bank was “well capitalized” under the regulatory framework for prompt corrective action.

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

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

Support of Subsidiary Bank

Under Federal Reserve Board policy, BancGroup is expected to act as a source of financial strength to, and to commit resources to support, Colonial Bank. This support may be required at times when, absent such Federal Reserve Board policy, BancGroup might not otherwise be inclined to provide it.

FDIC Insurance Assessments

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

Under FDIC regulations, institutions are assigned to one of three capital groups for insurance premium purposes (well capitalized, adequately capitalized and undercapitalized). These three groups are then divided into subgroups, which are based on supervisory evaluations by the institution’s primary federal regulator, resulting in nine assessment classifications. Assessment rates vary depending upon the assessment classification. In addition, regardless of the potential risk to the insurance fund, federal law requires the FDIC to establish assessment rates that will maintain each insurance funds ratio of reserves to insured deposits at 1.25%. During 2002 and for the first semiannual assessment period of 2003, assessment rates for BIF-insured institutions ranged from 0 cents per $100 of assessable deposits for well-capitalized institutions with minor supervisory concerns to 27 cents per $100 of assessable deposits for undercapitalized institutions with substantial supervisory concerns. The assessment rate schedule is subject to change by the FDIC and, accordingly, the assessment rate could increase or decrease in the future.

In addition to deposit insurance assessments, the FDIC is authorized to collect assessments against insured deposits to be paid to the Finance Corporation (“FICO”) to service FICO debt incurred in the 1980s. The FICO assessment rate is adjusted quarterly. The average annual assessment rate in 2002 was 1.75 cents per $100 of assessable deposits for BIF-insured deposits. For the first quarter of 2003, the FICO assessment rate for such deposits will be 1.68 cents per $100 of assessable deposits.

The Bank’s FICO assessment expense for the year ended December 31, 2002 equaled $1,456,000.

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

Additional Information

Additional information, including statistical information concerning the business of BancGroup, is set forth herein. See “Selected Financial Data and Selected Quarterly Financial Data 2002-2001” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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Executive Officers and Directors

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

Item 2.    Properties

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

As of December 31, 2002, Colonial Bank owned 193 and leased 76 of its full-service banking offices. See Notes to the Consolidated Financial Statements included herein.

Item 3.    Legal Proceedings

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

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

Not Applicable

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PART II

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

BancGroup’s Common Stock is traded on the New York Stock Exchange under the symbol “CNB.” This trading commenced on February 24, 1995. As of February 20, 2003, BancGroup had outstanding 123,769,918 shares of Common Stock, with 9,684 registered shareholders.

The following table indicated the high and low closing prices for and dividends paid on Common Stock during 2002 and 2001.

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

Equity Compensation Plans

The following table summarizes BancGroup’s equity compensation plans as of December 31, 2002:

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Item 6.    Selected Financial Data

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

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Selected Quarterly Financial Data 2002-2001

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

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

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

Our annual report to our stockholders and our Annual Report on Form 10-K contain “forward-looking statements” within the meaning of the federal securities laws. Words such as “believes,” “estimates,” “plans,” “expects,” “should,” “may,” “might,” “outlook,” and “anticipates,” and similar expressions are intended to identify forward-looking statements. The forward-looking statements in these reports are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among other things, the following possibilities:

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Many of these factors are beyond our control. Readers are 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 undertakes no obligation to update or revise any forward-looking statements. For a discussion of factors that could cause our actual results to differ, please see the discussions in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K for the year ended December 31, 2002.

CRITICAL ACCOUNTING POLICIES

BancGroup’s significant accounting policies are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other footnotes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Those accounting policies involving significant estimates and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact comprehensive income, are considered critical accounting policies. BancGroup recognizes the following as critical accounting policies: Accounting for Acquisitions, Accounting for Allowance for Loan Losses, and Accounting for Income Taxes.

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

Accounting for Allowance for Loan Losses.    Management’s ongoing evaluation of the adequacy and allocation of the allowance considers both impaired and unimpaired loans and takes into consideration the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, estimated value of any underlying collateral, the reviews of regulators, and an analysis of current economic conditions. While management believes that it has exercised prudent judgment and applied reasonable assumptions which have resulted in an allowance presented in accordance with generally

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accepted accounting principles, there can be no assurance that in the future, adverse economic conditions, increased nonperforming loans, regulatory concerns, or other factors will not require further increases in, or re-allocation of the allowance. Further discussion regarding BancGroup’s accounting for allowance for loan losses is included at Note 1 to the consolidated financial statements.

Accounting for Income Taxes.    BancGroup uses the asset and liability method of accounting for income taxes. Determination of the deferred and current provision requires analysis by management of certain transactions and the related tax laws and regulations. Management exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. Those judgments and estimates are re-evaluated on a continual basis as regulatory and business factors change.

FINANCIAL ACCOUNTING STANDARDS BOARD RELEASES

See Note 1, “Summary of Significant Accounting and Reporting Policies”, in the notes to the consolidated financial statements.

STRATEGY

Through acquisitions and internal growth Colonial has grown from a bank with $166 million in assets in 1981 to become one of the top 50 banks in asset size in the nation with $15.8 billion in assets and 269 branch sales offices operating in six states.

Management expects to continue expanding by adding branches in existing markets and through selective acquisitions.

Foundation.    Colonial’s foundation is built upon a community banking philosophy that encourages and supports local responsibility for customer relationships and creates an atmosphere that nurtures and personalizes those relationships. We refer to this strategy as “financial strength in local hands”. This operating philosophy has been important in developing a strong customer base, particularly with respect to lending relationships, retaining skilled and highly motivated local management teams, involving local boards of directors and in making acquisitions. Colonial’s community banking philosophy requires a fundamental understanding of the marketplace it serves and the very best in customer service.

Colonial constructed its foundation upon a strong lending strategy. Attention to creating personal relationships with quality borrowers, while maintaining sound and conservative underwriting standards, is the backbone of our philosophy, and has allowed Colonial to effectively manage its asset quality throughout its history. Local expertise with established customer relationships combined with independent oversight of credit decisions and conservative underwriting standards is a proven approach to the maintenance of high asset quality. The Company has established regional bank loan committees made up of local officers and directors that approve loans up to certain levels. These committees provide local business and market expertise, while Colonial provides independent oversight through senior management participation in the state loan committees and senior credit administration review of large credits prior to approval in addition to its regular review of other credits. This process, which includes regional directors and management, allows Colonial to stay on top of local market trends. Maintaining high asset quality will always be a primary focus. Colonial’s asset quality is demonstrated by its charge-off history and nonperforming asset levels, which for the past ten years have been among the lowest for southeastern regional banks. Nonperforming assets as a percentage of loans and other real estate were 0.78 % at December 31, 2002. Net charge-offs were 0.29% of average loans in 2002 and 0.28% in 2001, which compares favorably to the southern regional banks as defined by Sandler O’Neill and Partners, which were 0.59% in 2002 and 0.41 % in 2001, respectively.

Colonial emphasizes loan, deposit and noninterest income growth in each market area of the 11 regional banks. Because markets and communities differ widely, as well as individual circumstances, customers require

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different answers and solutions to their financial needs. We believe customers appreciate the knowledge of their needs and the local environment that our bank officers can provide. Colonial’s structure of local customer relationship responsibility supported by centralized operations gives our local banks decision making capability and an operational structure to service the customer in a cost effective and efficient manner. Using this strategy to meet the needs of retail and commercial banking customers in each market has proven successful as evidenced by our growth in loans, deposits and noninterest income.

Growth.    Colonial remains committed to a strategy of building a solid franchise in growth markets. Colonial’s growth market expansion has been concentrated in Florida, Georgia, Texas and Nevada. According to the Census Bureau, these areas represent four of the five fastest growing states in the country as measured by population growth from July 2001 to July 2002. As of December 31, 2002, Colonial has a well-established presence in these areas as reflected in the following table.

Colonial continues its expansion by selectively filling in these high growth markets through strategic placement of new branch locations and branch or bank acquisitions that increase our ability to provide customer service in the market. In addition to six new branch openings in 2002, Colonial also completed the acquisition of a community bank headquartered in Dallas, Texas with five branches in March 2002, and a community bank headquartered in Palm Beach, Florida with eight branches in September 2002. Management plans to continue assessing acquisition opportunities when presented.

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Due to the success of our growth strategies, Colonial’s geographic mix of loans and deposits has significantly changed over the past six years. The following tables illustrate the loan and deposit contribution of each state and reflect the significant impact of the high growth markets.

Internal loan growth from Georgia, Florida, Texas and Nevada, was 14% for 2002 and 10% for 2001, while core deposits from these areas grew 10% in 2002 and 12% in 2001.

The keys to Colonial’s retail banking initiatives are sales, service and relationships. Colonial’s retail banking strategy is based on a top-down sales management approach that establishes specific goals to enhance profit and growth by deepening customer relationships. We have successfully converted all branches into sales offices by redefining branch personnel roles and responsibilities to align our organization for more efficient sales management. We continue our proactive sales and service culture by enhancing SCORE (Selling Customer on Relationships Effectively), our ongoing retail banking sales and relationship-building training program. Management continues to enhance a branch incentive plan to focus on noninterest income and core deposit growth. We believe that all of these efforts have contributed to the continual improvement of cross-sell ratios resulting in growth in loans, deposits and noninterest income. In 2002 we exceeded our cross-sell ratio goal, selling more products to existing customers. We are raising that goal in 2003 with expectations to continue our momentum. Management expects our established franchise, especially in the higher growth markets, to provide plenty of untapped opportunities for growth through the sale of additional products and services to existing customers.

Products and services.    Colonial’s goal is to be every customer’s number-one provider of financial services—from traditional deposit products, investment products, consumer, commercial, mortgage loans, to financial planning, insurance, cash management, electronic banking, credit card and merchant services. Colonial Bank expects to realize growth opportunities in its markets by acquiring new customers and through deepening customer relationships with existing customers.

Colonial’s asset/liability and product and services management teams provide regional bank management with the resources to remain competitive in their market areas by identifying and implementing products and services with attractive pricing.

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Because of the location of our markets and the types of customers we serve, we expect financial planning products and services to play a major role in our future growth. Income from financial planning services increased 27% from 2001 to 2002, while maintaining a 35% gross margin. Through Colonial’s investment services, we offer discount brokerage, investment sales, asset management, trust services and insurance including term, universal, whole life and long-term care.

Colonial has made efforts to facilitate our competitive stance in the brokerage, trust, insurance and asset management markets. Colonial Brokerage, Inc., a member of the NASD, was established in 2001. This allowed Colonial to offer additional brokerage products to better serve our customers. Along with our Trust Department, we have partnered with highly respected trust companies to provide additional trust services to our customers. In 2002, we also partnered with a leading insurance annuity provider to offer our own proprietary annuity. Together with these efforts, and to ensure that our product offerings remain competitive, the Company’s financial planning group plans to advance to another level in 2003 through the development and coordination of its products and sales programs.

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

Support.    By centralizing many operational functions such as loan and deposit operations and customer and branch support, the local banking officers have been allowed to concentrate on the customer and service his or her needs. Centralized operations provide an advantage in servicing the customer base across our enterprise by providing continuity and efficiency.

Tools.    Colonial continues to enhance the tools available to our employees to further our sales culture, improve customer service and enhance operational efficiencies. Colonial’s new retail delivery solution is expected to be fully implemented by the end of 2003.

Colonial began the Eagle project in 2001. The objective of Eagle is to upgrade the Company’s automated retail delivery solution so that we may better produce sales, provide exceptional service and promote profitable customer relationships while gaining operational efficiencies. Eagle epitomizes our philosophy that banking is a people business. We recognize that while investing in technology is important, it matters most how you deploy that technology to better enable our people to serve our customers. We implemented phase one during 2002, including a new Internet banking product and enhanced call center delivery system. During 2003 we expect to implement new branch service and loan delivery systems. Some anticipated advantages of the new retail delivery solution are: robust sales features with automatic product suggestions and sales prompts, automated referrals, automated workflow of many manual processes and improved sales incentive plan and compliance reporting. Eagle combines advances in technology with the reengineering of processes to eliminate nonvalue added procedures while improving customer service through enhanced product and service delivery.

A future investment in technology is an anticipated imaging project with conversion planned for 2004-2005. Imaging, which is internet enabled, is expected to provide process improvement opportunities and cost containment while improving customer service.

Value.    We believe that continued implementation of our strategy offers the best opportunity to increase shareholder value. We are established in fast-growing, economically vibrant markets. We expect to deepen our market coverage internally by benefiting from the population growth in these markets, by distinguishing ourselves from our competition through excellent customer service and by providing new products. Since these are growing markets, we believe we have the ability to establish a strong customer base by continuing our successful community banking strategy. This strategy consists of providing strong lending expertise in the local

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markets, accompanied by competitive deposit and loan products and other financial services such as financial planning services, cash management and electronic banking. By focusing on sales and customer service, these locally developed and maintained customer relationships should continue to grow.

Colonial cannot guarantee its success in implementing the initiatives or reaching the goals outlined in this discussion. The following analysis of financial condition and results of operations provides details with respect to this summary material and identifies trends concerning the initiatives taken in and prior to 2002.

BUSINESS COMBINATIONS

BancGroup continued its expansion into high growth areas by selectively filling in existing markets with two acquisitions in 2002.

In March 2002, BancGroup acquired Mercantile Bancorp, Inc. (“Mercantile”) and its wholly owned subsidiary bank, First Mercantile Bank, N.A. (“Mercantile Bank”). Mercantile Bank operated four branch offices in Dallas, Texas and one in Austin, Texas. At the time of acquisition, Mercantile had $354 million in assets, $282 million in loans and mortgage loans held for sale, and $302 million in deposits. BancGroup issued 4,652,809 shares of its common stock to shareholders of Mercantile.

In September 2002, BancGroup acquired Palm Beach National Holding Company (“Palm Beach”) and its wholly owned subsidiary, Palm Beach National Bank & Trust Company (“PBN Bank”). Palm Beach operated eight branch offices in Palm Beach County, Florida. At the time of acquisition, Palm Beach had approximately $355 million in assets, $285 million in loans, and $315 million in deposits. BancGroup issued 6,118,967 shares of its common stock to shareholders of Palm Beach.

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REVIEW OF RESULTS OF OPERATIONS

Overview

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

Line of Business Results