DBRS Changes Colonial BancGroup, Inc.’s Trend to Positive; Confirms Ratings at BBB

Dominion Bond Rating Service (DBRS) has today changed the trend to Positive from Stable for all of Colonial BancGroup, Inc.’s (Colonial or the Company) ratings. DBRS confirmed the Company’s ratings as follows: Colonial Bank, N.A.’s Short Term Instruments at R-2 (high), Deposits & Senior Debt at BBB (high) and Subordinated Debt at BBB; Colonial BancGroup, Inc.’s Short Term Instruments at R-2 (middle) and Issuer & Senior Debt at BBB. DBRS has also assigned the following new ratings: Colonial BancGroup, Inc.’s Subordinated Debt at BBB (low), and Colonial Capital II, Colonial Capital Trust III and Colonial Capital Trust IV’s Trust Preferred Securities at BBB (low). All trends are Positive.

The trend change to Positive reflects Colonial’s progress amidst a difficult operating environment in improving its financial fundamentals on an absolute basis and relative to peer performance levels. The Company continues to improve its core profitability, liquidity and capitalization while reducing reliance on wholesale funding and maintaining strong asset quality. Moreover, Colonial has delivered consistent incremental margin improvement for the past ten quarters in a flattening and then inverted yield curve environment. DBRS also notes Colonial’s good expense discipline as reflected in an efficiency ratio of 54% in the first nine months of 2006 compared with 59% for the year 2004.

All of the improvements stated above have taken place in the context of the Company’s expansion through acquisitions and de novo branch openings. The improvement in financial fundamentals is the result of Colonial’s disciplined balance sheet management, conservative underwriting standards and extensive integration experience. DBRS believes that any potential rating upgrade would be dependent on Colonial’s ability to sustain its improved operating performance over the near term. However, DBRS notes that the prospects for subsequent higher ratings are constrained by the Company’s heavy focus and reliance on commercial real estate (CRE) and its currently limited, albeit expanding, product range.

Colonial has transformed itself into a Florida growth franchise from a small Alabama bank over the past ten years. Through numerous small acquisitions and solid organic growth Colonial has built a commercial bank business along with a small, albeit growing, consumer banking franchise. DBRS notes that the Company has established a sustainable deposit franchise in several high-growth Florida MSAs that will serve as its primary growth engine in the near to medium term. In addition to the high-growth Florida market, the Company has also established footholds in Georgia, Nevada and Texas for future expansion.

Colonial’s earnings are driven by its growing deposit base and a CRE-dominated loan portfolio. The loan portfolio, however, is less granular than those of its peers and features bulky relationship exposures. This, along with a high CRE and construction dominated portfolio, exposes Colonial to a potential earnings and capital depletion in case of a severe real estate downturn in the Southeast. DBRS believes, however, that this risk is mitigated by the Company’s conservative approach to underwriting and a long track record of superior performance throughout various economic, real estate and interest rate environments. This experience has been translated in excellent credit quality over the past decade.

The Company faces several challenges that are mostly due to its narrow business focus. The majority of Colonial’s revenues originate from real estate-generated net interest income with a minimal fee income contribution highlighting the lack of revenue diversity. In addition, tangible capitalization levels, albeit improving, are below peer level as a result of the Company’s acquisition appetite over the years, which make tangible capital retention difficult and therefore impacts tangible capital ratios adversely.

Headquartered in Montgomery, Alabama, Colonial BancGroup, Inc. is a financial holding company engaged in commercial and retail banking with a focus on real estate lending. The holding company operates a single operating bank subsidiary, Colonial Bank, N.A., under a national bank charter, with a majority of its branches and deposits in the state of Florida. With $22 billion in assets, the Company is the 27th-largest commercial bank in the United States as of September 30, 2006.

The BBB (high) Deposits & Senior Debt rating of Colonial Bank, N.A. is equivalent to DBRS’s intrinsic assessment (IA) of the Bank’s SA-3 support assessment (SA). For more detail on the IA and SA methodology, please see the related DBRS press release issued on October 6, 2006.

Note:
The Trust Preferred Securities may contain certain unique covenants that give them some equity-like characteristics.