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

DBRS has today downgraded the senior debt rating for Colonial BancGroup, Inc. (Colonial or the Company) to C from CC, the senior debt rating for Colonial Bank (Bank), its principal banking subsidiary to CC from CCC and the Bank’s subordinated debt rating to C from CC. The Bank’s deposit rating is unchanged at CCC. All ratings remain Under Review with Negative Implications. The rating actions follow Colonial’s disclosures regarding SEC and U.S. Department of Justice investigations into the Company’s operations and accounting.

The rating actions reflect DBRS’s view that the SEC and the Department of Justice investigations will place additional significant strain on Colonial’s ability to survive and remain as a going concern. Indeed, DBRS notes that these investigations may result in financial re-statements, possible penalties and perhaps reduce the likelihood of additional capital raises and asset sales. At this time, DBRS notes the need to bifurcate the Bank’s senior debt and deposit ratings, in view of the higher expected loss rate for the senior debt holders versus that for uninsured depositors to which the deposit rating applies.

DBRS notes that the Company’s capital position and asset quality remains under severe pressure, especially given its substantial troubled Florida-based construction and development portfolio. DBRS will continue monitoring the Bank’s ability to protect its deposit franchise, which is an underlying factor in the ratings.

In an 8-k published today, Colonial disclosed that it was informed by the U.S. Department of Justice that it is the target of a federal criminal investigation relating to its warehouse lending division and related alleged accounting irregularities. Moreover, the Company disclosed that the SEC has issued subpoenas to it, seeking documents relating to, among other things, its disclosures related to its participation in the U.S. Treasury TARP program, and disclosures respecting accounting for loan loss reserves. Finally, the Alabama State Banking Department provided notice to Colonial that its board will meet on August 12, 2009, at which time, the Bank will be asked to consent to the Superintendent’s exercise of his statutory authority to appoint the FDIC as receiver or conservator for the Bank, if and when the Superintendent deems such appointment to be necessary.

Notes:
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.