Colonial Divestitures Seen Despite Capital-Deal Report

Though Colonial BancGroup Inc. is reportedly near a deal to secure outside investment, the ailing company may still have to shed part of its Southern franchise to raise additional capital.

"There is no doubt that this will be a smaller franchise," said Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., who said he believes Colonial's writedowns could top $2 billion. "Even if they are able to make this sale work, they will need a lot more capital."

The $25.8 billion-asset company reportedly is closing in on $300 million in outside funding that would hand over control of the company to an investor group led by the Ocala, Fla.-based lender Taylor, Bean & Whitaker Mortgage Corp. (See related story.)

Colonial has been operating for several months under an agreement with state and federal regulators that requires it to boost its Tier 1 leverage ratio by 197 basis points from its Dec. 31 level, to 8%, by March 31. The bank also must raise its total risk-based capital ratio 63 basis points, to 12%. The regulatory "memorandum of understanding" warned that the company could face seizure if it failed to reach those capital levels.

Analysts believe, however, that mounting losses in Colonial's $14.5 billion loan portfolio may require more aggressive steps, including divestitures. The company has reported three straight quarterly losses. In 2008 it charged off $643 million of loans, and nonperforming assets remained high, at $709.8 million, or 2.72% of total assets, at yearend.

To get more breathing room Colonial may have to continue to shrink its balance sheet in order to free up capital. Analysts said Colonial could seek to jettison some of its 19 branches and $1.3 billion of assets in Georgia and 21 branches and $1.8 billion of assets in Texas. The company's operations in Texas, which had $793 million in deposits at Dec. 31, earned $26.6 million for Colonial last year. The Georgia branches, with $775 million in deposits, lost $33.5 million.Overall, Colonial lost $880.5 million last year.

Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, noted that any asset divestitures could become a fire sale.

"Those are the first things that would be considered noncore," he said. "But selling those assets would be painful because they wouldn't be selling them at great prices right now."

Under the agreement with regulators, obtaining $300 million in private capital was made a prerequisite for getting another $536 million in capital from the Treasury Department.

A spokeswoman at Colonial, which has been mum on any possible investment, was unavailable to comment.

Analysts differ on just how much capital Colonial could obtain should it secure an infusion of cash from the investor group.

Fitzsimmons estimated that Colonial could attract about $1.2 billion should the company also raise money from the Treasury, which would require it to submit to a government stress test to assess its potential losses and capital adequacy.

Observers do agree on one thing: Colonial chairman and chief executive Robert E. Lowder Jr. is unlikely to remain with the company. Lowder. the company's founder and its largest individual shareholder, which may complicate matters.

"This is going to be a Lowder-less franchise," Patten said.

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