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Executives

Lisa Free - IR

Bobby Lowder - Chairman of the Board, President and CEO

Sarah Moore - Senior Executive Vice President and CFO

Patti Hill – COO

Sandra Jansky - CCO

Kamal Hosein - Treasurer

Analysts

Kevin Fitzsimmons - Sandler O'Neill

Christopher Marinac - Fig Partners

Ken Zerbe - Morgan Stanley

Ken Usdin - Bank of America

Steven Alexopoulos - JPMorgan

Jefferson Haralson - KBW

Al Savastano - Fox-Pitt Kelton

Dave Bishop - Stiefel Nicholas

Colonial BancGroup Inc. (CNB) Q4 2008 Earnings Call January 27, 2009 5:00 PM ET

Operator

Welcome and thank you for standing by. At this time all participants are in a listen only mode. After the presentation we will conduct a question and answer session. (Operator Instructions). Today's conference is being recorded. If you have any objections you may disconnect at this time.

Now we will turn the meeting over to Lisa Free. Please go ahead Ma'am.

Lisa Free

Thank you. We appreciate you joining us this afternoon for Colonial BancGroup's fourth quarter 2008 results conference call. Our report was released this afternoon, and many of you should have already received copies. If not, you can access the report as well as the slide presentations for this call under the Investor Relations section of our website, colonialbank.com

With me today are: Colonial BancGroup's CEO, Bobby Lowder; Chief Financial Officer, Sarah Moore; Chief Operating Officer, Patti Hill; Chief Credit Officer, Sandra Jansky; and Kamal Hosein, our Treasurer.

First, the advisory. I will remind you that any forward-looking statements made during this presentation are subject to risk and uncertainty. Further, we have no obligation to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. If you are interested in factors that do cause our results to differ materially from any forward-looking statements they are detailed on our website, in our SEC filings, and summarized in our press release from this morning.

With that I will turn it over to Mr. Lowder.

Bobby Lowder

Thank you, Lisa. Good afternoon. We appreciate your attendance. I’d first like to give a summary of our results for 2008 and then we’ll get into the details. We are reporting a net loss of $4.11 per share for the quarter and $4.71 for the full year. That includes goodwill impairment charge of $575 million and a tax benefit of $40.6 million associated with the impairment charge which nets to a loss of $2.66 per share in the quarter. Excluding, the net good real impairment charge operating loss was a $1.45 per share. We have had an aggressive loan work out efforts that intensified during the quarter. We saw $317 million of problem assets and transferred another $49 million to hold for sale. We did strengthen our loan loss reserves 2.24 net loans at 12/31/08 compared to 1.50 which at 12/31/07. We have a strong liquidity position; we increased our cash and interest bearing deposits in banks to over $2 billion at the end of the year.

Our deposits increased some 11% annualized over the previous quarter and a 12/31 our capital ratios remained above “well capitalized” minimums. Tier 1 risk-based capital of 8.88% total risk-based capital of 13.16% in Tier 1 leverage ratio was 6.13%. Our net interest margin of 2.37 for the fourth quarter compared with 2.85 in the third quarter, primarily resultant from the significant liquidity position that we maintained.

Our financial stability achievements during the year, we did raise $350 million of common stock, we issued $250 million of subordinated debt, we have so $427 million of troubled assets, we provided $729 million for loan losses, we have reduced our risk weighted assets by $1.7 billion and we have improved all the key measures of liquidity.

Our key capital ratios, when you compare with the end of this year with the end of '07, our Tier 1 ratio is up, our total risked-based ratio was considerably up and our leverage ratio was down slightly.

As we have said throughout the year, credit maintained, we have been working on. I'm happy to have with us today our new Chief Credit Officer, Sandra Jansky. I have known, Sandra for a very long time. Many of you have followed her carrier for Sun Bank to SunTrust where she was Chief Credit Officer. I am very excited to have Sandra joined us. She not only knows loans and administration of loans but she understands the markets that we haven’t been in part for a long, long time. So with that I'll introduce Sandra Jansky to talk about our credit.

Sandra Jansky

Thank you, Mr. Lowder. As Mr. Lowder indicated, during fourth quarter we continued an aggressive management of problem loans. With sales of $317 million of problem assets, a movement of $49 million of nonaccrual loans to held for sale. We charged-off during 2008, $643 million net or 4.16% of average loans. Our nonperforming loans assets excluding loans moved to help or fail due declined by $17 million during the fourth quarter bringing our non-performing assets to 4.51% of loans and other real estate and repos. We also have provisions that exceeded net charge-offs by $40 million. And as disclosed earlier, we strengthened the loan loss reserve to 2.24% of net loans at December 31. Our excess capital plus the loan loss reserve cushion equaled a 110% of our nonperforming assets to 12.31%. 79% of our non-performing assets are in the construction-related sector of the loan portfolio. Fortunately, we have a very highly qualified and experienced commercial work out group that is managing our problem assets.

If you turn to page seven, we have provided an overview of the loan portfolio with December 31,20 08. As you can see, our residential construction outstandings have been reduced considerably by $407.2 million since September 30. Our commercial construction also declined by $77 million in the quarter. Overall, we have loan portfolio reductions of $638.4 million. You see from the chart that again 79% of our nonperforming assets are in the construction sector.

On page eight, we provide some information on the actions that have been taken in our construction loan portfolio. As had been reported in the past, we scaled back lending, we tightened underwriting standards in Florida that actually went back to May of 2006 and curtailed new approvals beginning in quarter two of 2007. The management team has worked to identify and isolate problem credits through a thorough portfolio review that are ongoing.

Texas comprises 24% of the portfolio and continues to perform better than other markets and only 11% of our residential construction and condo loans have interest reserves, and of those loans, 33% are located in Texas, which has seen limited credit deterioration.

I have already discussed the decline in the residential construction portfolio which now stands at 14% on the total loan portfolio. I think its significance is that the overall construction loan portfolio for Colonial has declined $1.4 billion or 22% in 2008.

Now, as I joined the company, I was very pleased to see the commitment from mortgage warehouse lending. Over the years I have had the opportunity to work with the leadership team that Colonial has in place and that manages this profitable line of business and I am delighted to see Colonial's continued commitment to the industry.

I will turn it over to Kamal for some additional information.

Kamal Hosein

Thanks Sandra. Speaking from page nine as you mentioned. We remain very committed and proud of our warehouse lending business. It provides short-term funding for loans that are eventually sold in the secondary market that are of agency confirming standards. We are proud of its low losses and strong profitability even during what's been a very difficult mortgage market.

Estimates are that warehouse lending to the industry as a whole it has declined by nearly 90% over just the past two years and Colonial is now a top ten warehouse lender across the nation providing what we estimate to be about 16% of the available financing of the industry. We provided over $70 billion of interim financing to mortgage companies across the country representing nearly 400,000 residential mortgage loans in 2008.

We’ve continued to have great demand for this business, I know that everyone is aware of the strains around mortgages and we look forward with additional capital to increasing this business going forward.

I'll turn it over to Sandra to go through some of our financial highlights.

Sarah Moore

Thank Kamal. In this slide, as mentioned, we did report a loss of $825 million to $4.11 per share in the quarter, excluding goodwill impairment and related income tax benefit for a loss of $291 million over $1.45 per share.

Goodwill recorded on past acquisitions in Florida and Nevada became impaired in the fourth quarter, primarily due to increased credit cost and declining valuations of bank. The write-off of goodwill totaled 55% of intangible. Credit cost including net charge-off, and the loans build, interest reversal on loans placed on nonaccrual and losses on sale and write-down of other real estate totaled $485 million pretax were included to a $1.57 per share in the quarter.

Net interest income and net interest margin decreased during quarter. I'll review the balance sheet and margin in more detail in a moment. Core noninterest income was down 13% in the third quarter levels primarily from decreased economic activity. Service charges on deposit accounts decreased primarily from a decline and then assess the accounts as consumers and businesses decreased spending activity.

Mortgage banking revenues and wealth management revenues were down in the fourth quarter compared to the third. However, these lines of business held up very well considering the economic environment in the quarter. Year-over-year mortgage banking revenues more than doubled and revenues from wealth management increased 7%.

Next I want to make a few comments on expenses. Credit related costs and other unusual costs inflated fourth quarter expenses. Colonial recognized $20 million of losses on ORE including losses on sales, write downs and expenses. Colonial recognized impairment charges on low income housing investments and real estate joint ventures in the quarter of $7.5 million. Excluding, the increases and these expense lines alone all other expenses decreased $2 million during quarter. We recognized that we need to further reduce our expenses.

Till the end, Colonial has taken a number of steps; first of all, we froze salaries for executive in 2008 and 2009 and eliminated balances for 2008. Colonial eliminated merit increases for all employees in 2009 and suspended all non-production bonus plans.

In early December, Colonial launched a project known internally at Colonial 1st. We named the project Colonial 1st as it is designed to encourage employees to submit ideas for the best interest of our company, the shareholders and our customers first. Today thousands of ideas have been generated and as a conclusion of the project late in the first quarter of 2009, the proven ideas will be implemented. We expect to achieve savings ranging from 5% to 8% of noninterest expense.

If you please turn to slide 11. As we were talking about, all year margin and net interest income have been adversely impacted by increased deposit cost, customer preference for certificates of deposits, increases and nonperforming assets, and a decrease in average loans due to company's concerted efforts to reduce the amount of construction exposure. The fourth quarter was no exception to what we've previously reported to you.

Kamal has an encouraging update on deposit pricing for us.

Kamal Hosein

Thank you, Sarah. As everyone knows, the liquidity problems of larger institutions throughout 2008, and the migration from non-time to time accounts, these things took a tremendous toll on the margin. And despite said decreases of the Fed funds rate throughout 2008 and even into the fourth quarter liability cost, if anything, but we’re steady if not increasing in some areas. However, with the inflow especially the FDIC guaranteed money during December-end to January, we're pleased to report that CD and money market costs are down substantially over just the last 30 to 40 days. And we think that this will both very well for improving the margin during 2009. As an example, what I would say a benchmark 12-month CD is probably down from in the 3.5% to 4% range down to in the low twos as we’re saying right now and seemingly on a continued pattern down. So I think that we’re sure of improving interest cost for the industry as a whole coming into 2009.

Sarah Moore

Thank you, Kamal. In addition as Sandra has mentioned previously we made a conscious decision beginning of the third quarter to increase our liquid assets seasonally and certainly in the market place. Deposit growth in the fourth quarter was greater than we anticipated and in year end the company had over $2 billion in cash and deposits for the Federal Reserve which represented 7% of total assets at year end. In fact the cash had stated equity and 12/31/2008. The cost of maintaining our liquidity in the fourth quarter decreased margin by 22 basis points. We plan to invest the excess cash and we expect a receipt of additional capital in their finance as liquidity and have quality loans and investments going forward, will provide us significant earnings opportunities for the company.

Slide 12 shows how we actively reduced the balance sheet over the course of the year to conserve capital and reduce risk. Colonial’s loan portfolio excluding mortgage warehouse loans decreased 12% form the end of 2007 to the end of 2008.

On slide 13 is a snapshot of the year end deposit composition and funding position. Deposits now fund 72% of total assets versus 70% as September 30. The liquidity position that I referred to earlier was profitable because of the power of Colonial’s franchise to grow deposit. Total deposits were up 1% year-over-year, but importantly the retail franchise grew deposit $445 million or 11% annualized just in the fourth quarter.

Slide 15 is an overview of our capital position. Although Colonial incurred a significant loss in the fourth quarter, we maintained capital ratios above where we ended the first quarter of 2008 and above “well capitalized” minimums.

Preliminary approval of TARP is conditioned upon Colonial obtaining $300 million of additional capital. We are considering our strategic options that will both increase capital and preserve shareholder value. And with that I’ll turn over to Mr. Lowder.

Bobby Lowder

Thank you, Sarah. We have entered into a letter of intent with SunTx Capital Partners of Dallas, Texas for a potential investment of up to 24.9% of the proforma capitalization of the company. We are also working with several other investors and we expect to complete the capital raise in process in the first quarter of 2009. As we had said we understand the importance of getting this additional capital to go with the TARP as we have said throughout the year, that we were going to be a very aggressive in addressing all of the situations in front of us. We have been aggressive and as we have attacked our loan portfolio. I think there is hope arising from that standpoint. We have been very aggressive and identified everything, Sandra Jansky has come in and providing a lot of new leadership for us there and we feel very good about that. So going forward we note 2009 will be a difficult year but our team with people throughout and our entire franchise is very motivated, morale is very good. You can see from the results a lot of positive growth and good things happening there. So we are up to the task and we are looking forward to 2009.

With that I'll open to any questions.

Lisa Free

In order that we respond to as many individuals as possible, we ask that you limit your questions to a single question with one follow-up. Operator we are ready for the question-and-answer session to begin.

Question-and-Answer Session

Operator

(Operator Instructions). We have our first question from Kevin Fitzsimmons, Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill

Good evening, everyone.

Bobby Lowder

Hi Kevin.

Kevin Fitzsimmons - Sandler O'Neill

Two questions. First, Bobby, I know you say how the top funds are subject to the 300 million in equity. Is there any kind of beyond that: is there any kind of formal agreement, any prompt corrective action or C&D with the regulators, number one. And then, if you can, just on the subject to credit, you've been very aggressive on the resi construction in Florida which has been the main issue. What's the outlook though, what are you seeing on the horizon in terms of income commercial real estate and even by market in Texas, Texas has held up very well, but its energy and what's happening there beginning to hurt Texas? Thanks.

Bobby Lowder

Okay. I think there was a couple of questions there. First of all, Kevin, we are under no C&D and we are under no prompt corrective action condition. So there is no debt outstanding. We are working towards raising the capital. As we said, we have met with a number of folks since December when we've received the top conditional approval. It's going to be a difficult environment out there. It deteriorated as we have gone through the last couple of months. Market conditions have deteriorated. And due diligent requirements of potential investors has increased significantly from prior period. So that having been said, we are well underway as far as raising our capital, and we anticipate to be complete with that in this quarter. There was a question I think Sandra about Texas, yeah.

Sandra Jansky

So far the numbers and the portfolio reviews that we are getting out of Texas continue to be favorable. We are just not seeing the indicators that there is a looming problem there although we're watching all of our markets very closely. But the Texas portfolio continues to perform extremely well across all boards including low levels of delinquency. I think we've got a really strong team in place there and it's very familiar with that market so they are on top of that market.

Kevin Fitzsimmons - Sandler O'Neill

About income commercial real estate in general across your markets?

Sandra Jansky

We’ve looked at income producing properties by property type as well as across the geographies. We are seeing in Florida a little weakness in office and a little weakness in multi-family. It’s a little too early for me to tell you whether that is a one off or whether it's something changing in the market that we're watching all other sectors very closely. We went through all of our retail exposure in the last couple of weeks, and did a quick look to make sure that we have there a limited exposure to a lot of the companies that have announced, that have closed in 2008 and have announced further store closing in 2009 and we look like we are in pretty good shape there.

Kevin Fitzsimmons - Sandler O'Neill

Okay, thank you.

Operator

And we'll go next to Christopher Marinac with Fig Partners.

Christopher Marinac - Fig Partners

Thanks Bobby. If I could, can I go back to Kevin's question. So what has changed in the month of December and in January really. In the department, was there some discussion after they gave you some preliminary approval in early December?

Bobby Lowder

Well, we got preliminary approval, but we made it clear that our approval was subject to certain conditions and so, this was one of the conditions, only is the condition. Ours was approved on to raise this additional capitals. And so as part of our regular earnings announcement, we are just updating everyone on our various capital raising plans and to tell you all where we are right now.

Christopher Marinac - Fig Partners

Okay, so this was part of the original approval key back in December.

Bobby Lowder

That’s right.

Christopher Marinac - Fig Partners

Okay. And then secondly. On the disclosure you gave in the 10Q last quarter, about the classified assets, what is the new number for that as of 12/31?

Sandra Jansky

I don’t have that number with me. I can get that and get back to you.

Christopher Marinac - Fig Partners

That would be great. Thank you very much Sandra.

Sandra Jansky

Okay.

Operator

And we’ll have our next question from Ken Zerbe with Morgan Stanley.

Ken Zerbe - Morgan Stanley

Great, thanks. Can you just talk a little bit about the marker for loan sales? I think you did sell just over $300 million of loans during the quarter. Many other companies have commented that the market for loan sales has pretty much shut down during the fourth quarter but you guys managed to sell off quite a bit. What are you seeing there and is there any sort of trends, or I guess, the broad types of loans that you were selling, assuming they’re not just construction?

Sandra Jansky

The majority of loans that were sold in the fourth quarter were construction. There were a few others mixed in but that was the majority of what we were able to move in the fourth quarter.

Bobby Lowder

Yeah anything, the article can be sold.

Sandra Jansky

Right.

Bobby Lowder

Anything in the article can be sold. As we've always maintained, we thought our projects would be a little more desirable. But the mark gets deeper because there is just more and more stuff out there on the markets. The regulators are coming out with a big sale I think soon, and so that makes it more difficult. But we did have success and we are going to market again this quarter with some things. And we feel pretty good about what we can move there.

Ken Zerbe - Morgan Stanley

And what kind of marks are you taking? Are those on the loan sales?

Sandra Jansky

The loan sale on average, it was a 56% loss.

Ken Zerbe - Morgan Stanley

Okay. All right, great. Thanks.

Operator

(Operator Instructions). We'll go next to Ken Usdin with Bank of America.

Ken Usdin - Bank of America

Hi. Good afternoon, couple of questions. First of all, the 300 million contingent number in order to get the TARP. Can you just walk through how that number was arrived at? Is it to target a specific capital ratio? Is there a focus on TCE versus a certain regulatory based ratio?

Bobby Lowder

No, I don’t think so. We did. Our preliminary approval was 3% of our earlier space and that was 553. And no, I don’t know, but I don't think it was.

Ken Usdin - Bank of America

So there is no reason, how the number came to 300 as opposed to 200 or 400?

Bobby Lowder

Not to my knowledge.

Ken Usdin - Bank of America

Okay. Is there any prospects? I guess there is follow-up on capital. Then do you have an idea where you're really aiming them to manage capital for the company at going forward? Or what your most important targeted metric will be?

Bobby Lowder

Well, if we receive the TARP and its 300 million in the quarter our capital ratios will be extremely half. Sarah, you can talk about it.

Sarah Moore

Just around the 12/31/08 proforma ratios and because our TARP approval was originally based on the September 30 risk-related assets. It will now be ready from a 12/31/08 risk-weighted assets which are down a little bit. So 3% of the year-end numbers will yield TARP capital of $540 million, so 540 plus the $300 million if you perform about a 1231, and I'll just call out the regulatory capital ratios, it would bring our Tier 1 leverage ratio to over 9%, 9.06%. Tier 1 Risk Based Capital ratio of 13.54% and total risk based capital ratio to 17.82%. The tangible comment as I already gave you that one as well is 5.44% on a proforma basis.

Ken Usdin - Bank of America

Okay, and the second question. Can you tell? I know you said you didn’t have the classified absolutely the potential problem asset number on him, but can you give us a little bit of color behind the scenes as far as new in flows? Obviously with the large charge-off number you got a lot of problem assets out of the bank. But can you talk to us a little bit about incremental, non-performing and troubled assets formation? Where it might be accelerating still? Where you are looking for the next potential issues?

Sarah Moore

Well, actually from where is it today, I'm looking at the portfolio and I think we'll see our NPAs remain relatively flat for first quarter. So, at that, the inflows are actually, I am hopeful, we’ll see those slowdown considerably.

Ken Usdin - Bank of America

And, is that largely based on just a premise of the construction book getting work down and charged off to a large extent so you are not really seeing it well through other parts of the portfolio?

Sarah Moore

Primarily, I think we do have a large part of our construction portfolio that is performing, that of a good solid credit they continue to perform. We’re obviously monitoring all of them and we're watching all of the markets, but that’s just where I fear today.

Bobby Lowder

Most of those long to on a short term basis, so they can give during this past year, and so they had to be addressed and that all, you may want us to speak out with Sandra about past news were a little higher than we would like from there be it but I think you've checked on many of those loans.

Sandra Jansky

Well, if you look on page 17. Y ou look at our past dues, as December 31. Our past dues did increased quite a bit over to on third quarter, but actually if you look at residential construction as an example, the $3 past due sale about $8 million, but the percentage increase is of course due to the portfolio decline. But even of that what was reported as delinquent at 12/31, we've had about a 10% of that well current as of yesterday. In commercial construction, we had an increase of about $35 million in the quarter and I am pleased to report that half of that is now being brought current in the last two to three weeks and we have similar things in our season commercial loans as well as our 1-4 Family. 1-4 Family had about $9.4 million and our C&I had about $9.4 increase and it’s now about 48% of that’s been brought current. So, I think we had a lot of unusual activity at year end where the people were not available, didn’t get renewals done or whatever. So while the numbers are up, I am not seeing anything that is of real concern at this point.

Operator

I'll go next to Steven Alexopoulos with JP Morgan.

Steven Alexopoulos - JPMorgan

Hi, everyone.

Bobby Lowder

Hi Steven.

Steven Alexopoulos - JPMorgan

Related first, of 300 million were required investment, what does up to 24.9% of proforma cap mean? Does it look like the share count would at least double with that?

Sarah Moore

Steven, as other investors come in; as you negotiate with other investors, they save our annual overall capitalization increase. So it’s a moving number. So if I asked her if the cap conjunctions are done, you calculate it on the proforma basis.

Steven Alexopoulos - JPMorgan

But your assumption is the entire 300 million would be raised, and this is in the $1 to $1.50 range though you are seeing here.

Sarah Moore

We are seeing. We have a letter of intent with this one investor SunTx to raise up to 24.9%. We have not quantified the dollar amount that they are going to put in the company yet.

Steven Alexopoulos - JPMorgan

Seriously? Okay, Bobby, when we look at, I guess it's 2 billion or so of the residential construction that’s not performing, so it’s currently performing. Have you undergone a comprehensive review of that entire portfolio at this point?

Bobby Lowder

Yes, we have to. And so it’s having training but, I mean we venture at loan-by-loan, relationship-by-relationship is an ongoing review. So, yes, we have.

Steven Alexopoulos - JPMorgan

Okay, thank you.

Operator

We will go next to Jefferson Haralson with KBW.

Jefferson Haralson - KBW

Thanks. I’ll just follow-up on Steve's question on the $300 million of total capital that you are looking to raise. After your road show can you comment whether or not I guess that (inaudible) we know the raise is $300 million it’s a pretty tough environment and if you can say anything about potential pricing?

Bobby Lowder

Well, we have been working diligently to raise it. We've been encouraged recently by our meetings we've had so, yes, we are encouraged that we can raise to $300 million.

Jefferson Haralson - KBW

All right, thanks a lot.

Operator

We will go next to Al Savastano with Fox-Pitt Kelton

Al Savastano - Fox-Pitt Kelton

Good evening. How are you?

Bobby Lowder

Hi Al.

Al Savastano - Fox-Pitt Kelton

Just a question on the TARP funds. Is there a deadline of to get those funds?

Sandra Jansky

Our attorneys are working through that. We believe that we'll be well within the timeframe to be able to receive the TARP funds by the end of first quarter.

Al Savastano - Fox-Pitt Kelton

Okay, great. Thank you.

Operator

(Operator Instructions). We will go next to Dave Bishop with Stiefel Nicholas.

Dave Bishop - Stiefel Nicholas

Hey, good evening, ladies and gentlemen. Turning on to some reviewed. Bobby, maybe you can walk us through some of the nature of the increase in the net charge-offs this quarter was with portfolio is there an M&A where I assume mostly that were the construction portfolio?

Bobby Lowder

Yes. I think Sandra has got those charge-off right now.

Sandra Jansky

Well we had $178 million of the losses came through the loan sales of $217 million in asset and then we wrote down our non-performing assets by about a $136 million or 31% of their balances. We also are wrote down the loans that were transferred to held for sale by about that 59%. And as Sarah mentioned earlier we wrote down our some ORE by approximately $20 million and we saw about $32 million of ORE for a $10 million loss.

Dave Bishop - Stiefel Nicholas

I'm sorry. How much was sold?

Sandra Jansky

32 million.

Dave Bishop - Stiefel Nicholas

Thank you.

Operator

And that concludes our question-and-answer session. I'll turn the conference back over to Ms. Free for any additional or closing remarks.

Bobby Lowder

We appreciate your attendance this afternoon. We appreciate your patience with us. And we're going to be working hard through this quarter to achieve these things we've talked about. Thank you very much.

Operator

That concludes today's conference. You may disconnect at this time. We do appreciate your participation.

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Source: Colonial BancGroup Inc. Q4 2008 Earnings Call Transcript
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