Colonial BancGroup Inc. defied some expectations this week when it said it had secured preliminary approval for funds from the federal bailout program.
Still, analysts question whether the capital is enough to ensure independence for the Montgomery, Ala., company, which is dealing with mounting credit deterioration in its home builder portfolio. Also this week, Colonial parted company with its chief credit officer, though it would not provide a reason.
Those hoping for more clarity on these issues were disappointed when the $26 billion-asset company canceled a scheduled appearance at a conference Thursday afternoon.
After weeks of speculation about its ability to secure money, Colonial had said Tuesday that it had received approval to sell $550 million of preferred stock to the Treasury Department through the Troubled Asset Relief Program. The company said the money would boost its Tier 1 leverage ratio to 9.46% and its total risk-based capital ratio to 17.16%. (As of Sept. 30 its Tier 1 leverage ratio was 7.29%, and its total risk-based capital ratio was 14.18%.)
When the approval was announced, Robert Lowder, Colonial's chief executive, said in a press release, the funds "will enhance our capital cushion and will allow Colonial Bank to meet our customers' financing needs with additional lending activity throughout our five-state footprint." A Colonial spokeswoman on Thursday declined to comment beyond the company's statement Tuesday.
Colonial's shares had soared 54% that day, to $3.08, but Adam Barkstrom, an analyst at Sterne, Agee & Leach Inc., said that even if Colonial used the government funds to help clean up its balance sheet, its tangible equity ratio — 5.3% at Sept. 30 — would likely drop further. "Tarp bought them a little more time, but Tarp just doesn't fix its tangible equity problem," Mr. Barkstrom said.
If it does not secure more capital, he said, it may have to sell itself, and the list of likely buyers would include BB&T Corp., SunTrust Banks Inc., Royal Bank of Canada, or even Capital One Financial Corp. (which announced Thursday that it was buying Chevy Chase Bank for $520 million). Neither SunTrust nor BB&T would not discuss the speculation. Royal Bank and Capital One did not return calls.
On Thursday neither JPMorgan Chase & Co. nor Colonial would not say why Mr. Lowder and other executives had pulled out of JPMorgan Chase's midcap conference in New York.
(One analyst, who asked not to be named, speculated that the officials canceled before they knew the government had approved Colonial's application for bailout money, and that they wanted to save face in case the application was denied.) Mr. Barkstrom said the federal government might have given Colonial the funds "with strings attached" — namely, a requirement to raise additional capital to raise its tangible equity ratio. A weak stock price will make it hard to find takers for any kind of offering, he said. Colonial's shares fell 14%Thursday, to $2.51.
Albert Savastano, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, would not weigh in on Colonial's fate, except to say government funds may only be able to help the company so much. He expects Colonial to continue to post high levels of provisions and record losses for both this year and next year.
Colonial reported a third-quarter net loss of $71 million. Its provision more than doubled from the second quarter and grew 33-fold from a year earlier, to $159.4 million. The company lost $9 million in the second quarter and earned $69.4 million a year earlier.