The sum of its parts may be more valuable than keeping Colonial BancGroup Inc. intact.
Colonial's decision to sell its 21 Nevada branches and roughly $440 million in loans to an entity tied to a private-equity firm has reignited speculation that the Montgomery, Ala., company could parcel itself out to multiple buyers instead of completing a sale to Taylor, Bean & Whitaker Mortgage Corp.
It's a curious move, if nothing else, given what's at stake for Colonial, some analysts said.
The July 31 termination deadline for the sale to Taylor Bean is approaching, and on that date either company can walk away from the $300 million capital infusion provided it would not delay the deal's closing.
Should Taylor Bean leverage Colonial's Nevada sales to exit its purchase deal, it could threaten Colonial's best chance at tapping a crucial $550 million lifeline from the Treasury Department's Troubled Asset Relief Program. Colonial was slapped with a cease-and-desist order last month requiring it to raise capital levels or face possible seizure.
The company, which could raise at least $28 million in the Nevada transaction, has yet to comply.
Colonial officials and Taylor Bean's chief executive, Lee Farkas, did not respond to e-mails. An OTS spokeswoman said the agency does not comment on pending applications.
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said it is unclear whether the Nevada sale announced Tuesday represents another way of boosting capital or shows that regulators are pushing for an orderly dismantling of the company. "Getting Nevada off the table maybe makes Colonial more palatable for someone else," including even Taylor Bean, he said. "It makes an outright sale less complicated."
Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said the sale also raises questions about what type of franchise Taylor Bean would get to buy. "They are leaving Taylor Bean with all the junk," said Patten. He said he believes Colonial may also look to sell its assets and branches in Texas. "What are you left with after you sell all those assets off?" he said.
Analysts said the sale to Taylor Bean is in doubt for another reason: it requires approval from the Office of Thrift Supervision of a thrift charter application. The OTS has been under fire for how it regulated BankUnited Financial Corp., IndyMac Bancorp, and Washington Mutual Inc. before each was undone by the financial crisis. It is now debatable whether the regulators would want to take on Colonial, which would merge into a thrift already owned by Taylor Bean.
If it needs one, the OTS may have a convenient reason for denying the charter, some observers said. Colonial disclosed in its application that it has a unit that holds mortgage-backed securities that do not comply with regulations for federal savings institutions. Colonial, which did not publicly detail the nature of the problems, requested two years to comply.
"I know exceptions are made sometimes, but … this could make for an easy angle to consider rejection of the application," said Christopher Marinac, an analyst at FIG Partners LLC.
But Fitzsimmons, a former bank examiner with the Federal Reserve, said it would be perilous for the OTS to deny the charter. "If they outright reject the application, you may be looking at a run on the bank, so I think they're looking for the most orderly way to handle things."
Colonial, meanwhile, agreed to sell a portion of its Nevada balance sheet after Global Consumer Acquisition Corp. was allowed to choose what it wanted to buy, and chose to take on only 28% of the $1.6 billion in loans it reviewed.
Jason Ader, Global Consumer Acquisition's chairman and CEO, said during a conference call that it is buying only "what it deemed to be higher-quality assets, leaving the seller with everything else." He added, "We have no burden from troubled legacy loans."
Analysts said it is unclear how Taylor Bean would view the disposition of such assets and whether Farkas is less interested in Colonial than when he finalized the purchase agreement in May.
By selling some of its best loans in Nevada and elsewhere, Colonial is leaving its would-be buyer with a less-valuable franchise, on paper, anyway, than the one it agreed to buy, analysts said. But Taylor Bean may actually want the $26 billion-asset Colonial to unload certain assets, such as commercial real estate, that are inconsistent with Taylor Bean's strategic plans. More than 80% of the loans Colonial is selling are CRE or real estate construction, though it also leaves the company even more concentrated in Florida, with about 46% of total assets.
Jeff Davis, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets, said Taylor Bean's "real interest is the depository to fund the mortgage banking, and Nevada isn't core to what they're trying to do." He said it is widely believed that Colonial had been marketing its Texas branches, "but bidders balked at taking loans."
Colonial is not allowed to seek other buyers but, if approached, could strike a deal with another party if it is willing to pay a $10 million termination fee. That clause, however, covered the sale of the entire company.