DBRS Downgrades Colonial BancGroup, Inc.; Maintains Ratings Under Review with Negative Implications

DBRS has today downgraded the ratings for Colonial BancGroup, Inc. (Colonial or the Company), and its related entities, including Colonial’s Issuer & Senior debt rating to CCC (high) from B (high) and its bank subsidiary, Colonial Bank’s (Bank) Deposits & Senior Debt rating to BB (low) from BB (high). All ratings remain Under Review with Negative Implications.

The rating action reflects DBRS’s view that the cease and desist order agreed to by Colonial Bank on June 9, 2009, will further strain the Company’s financial flexibility and may hamper its ability to raise additional capital. Colonial Bank entered into a Stipulation and Consent agreeing to the issuance of an Order to Cease and Desist (C&D) with the Federal Deposit Insurance Corporation (FDIC) and the Alabama State Banking Department. Within the C&D are numerous requirements including maintaining qualified management, increasing capital at the Bank, reducing classified assets and reducing the Company’s reliance on brokered deposits.

The requirements of the C&D are somewhat open ended and may place additional pressure on the Company’s equity raise with an investor group, led by Taylor, Bean and Whitaker Mortgage Company (TBW), and the U.S. Treasury (Treasury). Further pressuring the Company’s financial flexibility is its informal MOU with the Federal Reserve Bank of Atlanta. The key elements of the MOU include utilization of the holding company’s resources to support the Bank and prior regulatory approval for the issuance of debt, payment of dividends or purchase of treasury stock.

Colonial is currently seeking to strengthen its capital position through a $300 million investment by an investor group, led by TBW and roughly $540 million in TARP funding. The TBW led equity raise is subject to approval by the Bank’s regulatory authorities and the satisfaction of several conditions, including confirmation that the Treasury will purchase shares of Colonial preferred stock and warrants and the approval to convert the Bank into a federal savings and loan association. The capital investment by the Treasury is conditioned upon Colonial attaining $300 million in additional capital.

In DBRS’s opinion, the inability of Colonial to obtain additional capital will limit its ability to absorb future credit costs and other unforeseen charges. DBRS comments that the Company’s asset quality remains under pressure, especially given its substantial troubled Florida-based construction and development portfolio. Given the declining economy and downturn in the housing market, it is anticipated that Colonial’s capital will remain under significant pressure during 2009.

Although perhaps less likely, DBRS notes that positive ratings actions may occur if Colonial successfully secures the additional capital. Conversely, the inability of Colonial to obtain the capital, would likely lead to a multiple-notch downgrade. Moreover, DBRS will continue monitoring the Bank’s ability to protect its deposit franchise, which is an underlying factor in the ratings.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.