Colonial BancGroup ( CNB) on Tuesday said a private investor group agreed to invest $300 million, but the deal remains hung up on variables including the government's approval of an infusion of bailout funds and the group's financing.

Shares were up 18% to $1.06 in recent trading Wednesday, after Colonial announced its deal with Taylor, Bean & Whitaker, a wholesale mortgage lender headquartered in Ocala, Fla. The deal would leave the investor group with control of about 75% of the Colonial's common stock.

The deal came at the deadline at which Colonial was required under a regulatory agreement to increase its tier-1 leverage ratio to 8% and its total risk-based capital ratio to 12%, or face possible seizure by regulators. For the holding company, these ratios were 7.29% and 14.18% as of Dec. 31. For main subsidiary Colonial Bank, the capital ratios were 6.11% and 11.78% as of Dec. 31.

But the capital infusion from the investor group isn't a sure thing, since the money won't be forked over until "receipt by Colonial of satisfactory confirmation and final approval that the U.S. Treasury Department will purchase shares of preferred stock and warrants pursuant to the Capital Purchase Program equal to 3% of Colonial's risk weighed assets."

Based on risk-weighted assets of $18.4 billion as of Dec. 31, this would be a TARP investment of $554 million. So Colonial needs the Treasury and the investor group to come to a quick agreement.

Moody's Investors Service on Wednesday downgraded Colonial because of the threat to the deal being consummated, "heightened by the current challenging environment for obtaining such financing." The rating agency downgraded its financial strength rating for Colonial Bank to E+ from D, and long-term bank deposits rating to B1 from Ba2.

"The downgrade reflects its opinion that, given the likely credit costs in the bank's commercial real estate portfolio, there is a significant risk of the firm becoming undercapitalized, absent a substantial capital injection," Moody's said. The ratings remain on review with direction uncertain, pending the outcome of the capital raise, it said.

Colonial was roundly criticized after the company disclosed on Jan. 27 that its approval to receive $553 million in TARP funds -- announced on Dec. 2 -- was contingent upon Colonial first raising $300 million privately.

The rancor was compounded when Colonial CEO Robert Lowder was less than forthcoming about a Dec. 15 memorandum of understanding the company entered into with Alabama bank regulators.

According to the company's fourth-quarter conference call transcript, Lowder said "we are under no C&D cease and desist order and we are under no prompt corrective action condition," when asked directly by Sandler O'Neill analyst Kevin Fitzsimmons if Colonial was operating under "any prompt corrective action or C&D with the regulators," While this was technically true, the MOU is a serious regulatory action and should have been disclosed.

The lack of disclosure of the MOU provided grist for several shareholder lawsuits against Colonial.

Taylor, Bean & Whitaker is privately held, and now operates as a thrift holding company, since it controls Platinum Community Bank of Rolling Meadows, Ill. Platinum Community had $87 million in total assets as of Dec. 31. The plan is to convert Colonial, which had $26 billion in total assets to an S&L charter after the deal is completed.

Philip W. van Doorn joined TheStreet.com Ratings Inc. in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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