DBRS Downgrades Colonial BancGroup, Inc. to BBB (low); Changes Trend to Negative

DBRS has today downgraded all ratings for Colonial BancGroup, Inc. (Colonial or the Company) and its related entities, including Colonial’s Issuer & Senior Debt rating to BBB (low) from BBB. The trend on all ratings has been changed to Negative from Stable.

These rating actions follow Colonial’s release of Q4 2008 and FY 2008 results, which included net losses of $825 million and $880 million, respectively. The losses for the quarter reflected $455 million in credit costs and a $575 million goodwill impairment charge, most of which was related to its Florida operations. In certain circumstances, DBRS can tolerate losses equivalent to one year’s worth of income before provisions and taxes; however, when losses exceed this amount and underlying creditworthiness is impaired, negative rating action is normally taken. DBRS notes that Colonial has surpassed this threshold for FY 2008.

The Negative ratings trend reflects DBRS’s view that Colonial faces considerable headwinds over the near-to-intermediate term, including sustained asset quality erosion and volatile earnings generation. Moreover, the Negative trend reflects the potential for more severe rating actions, if Colonial does not obtain the additional capital necessary to satisfy the conditional agreement it has with the U.S. Department of the Treasury (Treasury). DBRS notes that Colonial received preliminary approval to obtain a $540 million capital infusion from the Treasury’s Capital Purchase Program. However, the approval is conditioned upon Colonial obtaining $300 million of additional capital. This capital raise is in process. DBRS comments that the absence of elevated credit costs leading to sustained profitability and the successful capital raises may result in the restoration of the trend to Stable.

Although Colonial’s capital position currently provides adequate cushion to absorb heightened credit costs over the short term, its ability to absorb elevated provisions and unforeseen charges over the intermediate and long term is somewhat limited.
Colonial maintains an adequate liquidity position and has a solid presence in the highly stressed, albeit demographically favorable, southeastern markets. Ratings also take into account the Company’s volatile profitability and severely strained asset quality.

Colonial’s asset quality remains under considerable pressure, due to the rapidly deteriorating economy, especially within its Florida footprint, where Colonial has a significant concentration. The Company’s high credit costs continue to reflect deterioration within its residential and commercial construction portfolios. At December 31, 2008, Colonial’s non-performing assets (NPA) represented a high 4.83% of loans, up from 4.43% at September 30, 2008, and Q4 2008 net charge-offs (NCO) represented 11.15% of average loans, up from 3.17% for the prior quarter. DBRS notes that a portion of the charge-offs represents charge-downs related to loan and OREO sales. For 2008, loan loss provisions of $729 million exceeded NCOs by 1.1 times. Colonial’s allowance for loan loss reserves to non-accruals was low, at 46%. With a loan portfolio highly concentrated in commercial real estate, with roughly 33% of the total portfolio related to construction, DBRS believes that Colonial’s credit costs will remain very high over the next several quarters.

The Company’s liquidity position is acceptable and underpinned by its core deposit base, which represents 82% of net loans (at September 30, 2008). A securities portfolio that amounts to 15% of total assets and access to the Federal Home Loan Bank and the Federal Reserve Discount Window round out the Company’s liquidity profile.

Headquartered in Montgomery, Alabama, Colonial is a financial holding company engaged in commercial banking, retail banking and wealth management services, with a focus on real estate lending. At December 31, 2008, Colonial reported $26 billion in assets and $1.6 billion in equity.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.