Colonial BancGroup Inc.'s bumpy road to a private-equity bailout, and by extension its access to funds in the Treasury Department's Capital Purchase Program, have already taken a toll on the credibility of its longtime chairman and chief executive, Robert E. Lowder, with the analyst community.
So much so that some analysts say they think no deal can happen unless Colonial gets new leadership.
While bank executives have come in for plenty of criticism over the past year as their institutions faltered, the mistrust analysts display toward Colonial's management in general and Mr. Lowder in particular goes farther, veering at times into outright animosity.
At issue is Colonial's series of announcements regarding its application for Tarp financing. It applied to sell shares to the government in November and on Dec. 2 said it had gotten preliminary approval to get up to $550 million.
Left out of that announcement was a significant caveat. On Jan. 27, it made a subsequent announcement, in which it disclosed that it needed to raise $300 million on its own to get the government money. That day, Colonial said it was negotiating to raise some of that by selling nearly a 25% stake to a group led by SunTx Capital Partners in Dallas for $1 to $1.50 a share. On Wednesday Colonial's shares closed at 48 cents, meaning the group would either have to pay well above market value for Colonial to hit its target, or receive a much larger stake — something that regulators would have to green-light. Calls to SunTx were not returned.
Trabo Reed, Alabama's deputy banking superintendent, said he did not "have an opinion" on Colonial's Tarp disclosure and would not discuss the status of its negotiations with private-equity investors. In June Colonial switched to a state charter, shedding the Office of the Comptroller of the Currency as its main regulator.
Shareholders and analysts have been more forthcoming with opinions.
"The value and the depth of the franchise are hampered by the stupidity of senior management. To get the money, they need a management change," said Christopher Marinac, an analyst at FIG Partners LLC.
Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co., agreed. Mr. Lowder, in particular, "has come out wrong and misguided investors several times over the past year," he said.
Mr. Marinac said that Mr. Lowder's departure may be the one thing that could lift the stock to a level that would salvage the private-equity deal.
A Colonial spokeswoman would not comment.
Shareholders have sued the company and Mr. Lowder, 65, asking when he and other executives knew of the conditions imposed on the company's request for government funds.
On Feb. 9, the Washington law firm Klafter Olsen & Lesser LLP filed suit in U.S. District Court for the Middle District of Alabama on behalf of shareholders who bought the company's stock between Dec. 2 and Jan. 27, claiming that Mr. Lowder, who has run the company since 1981, and other senior executives knew more than they disclosed on Dec. 2. Six other suits have been filed since then.
Though still "well capitalized," with a Tier 1 ratio of 8.88% at Dec. 31, mounting loan losses have been eating away Colonial's capital cushion. Colonial is crippled by significant exposure to the ailing Florida real estate market and reported its third-straight quarterly loss last quarter. It charged off $643 million of loans last year, but nonperforming assets remained high, at $709.8 million or 2.72% of total assets, at yearend.
Liquidity could be a larger concern than capital.
"Colonial's margin got crushed last quarter because they are paying up for liquidity," Mr. Patten said. Its net interest margin shrank by 48 basis points from the third quarter and 106 basis points from a year earlier, to 2.37%.
Analysts said the challenge for regulators may involve crafting an appropriate level of incentives to entice would-be buyers to take on Colonial's exposure. Possible solutions could include giving Colonial's Tarp funds to an acquirer, as regulators did in PNC Financial Services Group's deal for National City Corp., or providing a backstop on some losses in Colonial's $14.5 billion loan portfolio.
Ousting Mr. Lowder could be tough. His stake of more than 5% is far bigger than that of any of the 16 other directors. "He has had long-standing influence over that board," Mr. Patten added.
However, analysts said the board could find ammunition by citing an April 2008 decision to sell just $350 million of common stock. This offering, priced at $8 a share, was oversubscribed. "There was extra demand there, and they should have sold twice as much stock," Mr. Marinac said.
Mr. Patten said management "was just plain late" on a series of other decisions, ranging from the reduction and suspension of the quarterly dividend to a decision to sell problematic assets at steep discounts.