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"There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy."

--Securities Exchange Bill of 1934

Colonial BancGroup's

( CNB) recent disclosure of potentially problematic terms tied to a previously announced government investment should give investors pause about basing investment decisions on companies' statements about government bailout applications.

Colonial on Dec. 2 said in a

Securities and Exchange Commission

filing that the Treasury had approved an application for a $553 million preferred equity investment through the Troubled Asset Relief Program, or TARP. Shares of the $26 billion Montgomery, Ala., holding company responded by rallying 50%, closing at $3.08 that day.

Investors wondering why Colonial hadn't made any further announcements likely got their answer when the company reported earnings after the market close on Jan. 27. In the report, Colonial mentioned that its preliminary approval to receive $553 million (a revised number) in TARP money

was contingent upon

raising an additional $300 million in capital on its own.

The problem is the company never mentioned this in its Dec. 2 filing. In an environment where the public equity market was pretty much closed to banks, and the competition for private money was fierce, this might have raised concern to some investors who believed receiving the TARP money was a mere formality.

Investors in

BankAtlantic Bancorp

(BBX) - Get Report

, which has not updated the status of its Nov. 14 application for $124 million in bailout funds, and

E*Trade Financial

(ETFC) - Get Report

, which has not yet received word from the government since its Nov. 7 application for $800 million, might want to take heed.

Colonial BancGroup

Colonial on Jan. 27 reported a fourth quarter loss of $825 million, which included a non-cash goodwill charge of $575 million. Excluding the non-cash items, the operating loss for the fourth quarter was $291 million, or $1.45 per share. Not surprisingly, shares were down 46% on Jan. 28, which was a great day for many other bank stocks.

Colonial has expressed confidence it would complete the private capital raise and receive the TARP money in the first quarter. And while the company's failure to disclose that the TARP approval was contingent on the private capital-raising in the Dec. 2 filing might have been an oversight, some lawyers believe Colonial could be a violation of an SEC rule that bars companies from making untrue statements or omitting material facts that would keep financial statements from being misleading.

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The revelation comes at a time when Colonial faces a potentially dire capital situation.

Even though the company emphasized it had increased reserves and was well capitalized with leverage and risk-based capital ratios of 6.13% and 13.16%, the ratio of nonperforming assets to total assets was rising to 4.83% as of Dec. 31, up from 4.43% in September. Meanwhile, net loan charge-offs for the fourth quarter were $415 million. The annualized pace of net charge-offs to average loans was 11.15%. Colonial's ratio of loan loss reserves to total loans was 2.24% as of Dec. 31.

If this level of loan losses continues over the next few quarters, Colonial will easily blow through its capital, even including the $853 million it expects to raise.

E*Trade Financial

While the government is required by law to disclose TARP investments once they are made, companies may be better off remaining silent about applications before the government acts on them.

E*Trade on Nov. 7 said it had applied for $800 million TARP money and that its application was being reviewed by the Office of Thrift Supervision, its primary regulator. On Nov. 25, E*Trade said it was continuing "to work constructively with regulators through each phase" of its application, and again expressed confidence it would receive approval.

As the weeks dragged on with no decision by the government, investors and analysts grew uneasy. In late December, Standard & Poor's said


could face further downgrades if the TARP application wasn't approved. Meanwhile, investors worried that the government was hesitating to aid E*Trade for fear of appearing to benefit hedge fund

Citadel Investments

, its largest investor.

When E*Trade announced its fourth quarter earnings results after the market close on Tuesday, the company said its application to the Treasury was "under active review," but no longer expressed confidence in ultimate approval.

"Given the changeover in administrations, at this time we cannot predict the timing of a determination on the application," CEO Donald Layton said during the company's conference call.

For the fourth quarter, E*Trade continued to experience a decline in asset quality. Nonperforming loans (those past due 90 days or more) comprised 3.69% of total loans as of Dec. 31, up from 3.02% in September and 2.32% at the end of 2007. Net charge-offs for the fourth quarter totaled $306 million, for an annualized ratio of net charge-offs to average loans of 4.72%. The company's provision for loan losses for the fourth quarter was $513 million, down slightly from $518 million in the third quarter. The quarter-end ratio of loan loss reserves to total loans was 4.23%, not too far behind the annualized charge-off pace.

E*Trade said in the press release that main subsidiary E*Trade Bank had $716 million in risk-based capital in excess of that required to be considered well-capitalized under regulatory guidelines. The bank's tier-1 and risk-based capital ratios were 6.29% and 12.96%.

E*Trade's level of loan loss reserves measured up decently compared to its pace of fourth quarter charge-offs, especially when compared with many other holding companies that recently reported reserve ratios that were way behind the annualized pace of charge-offs.

Regardless, there is a lot riding on the company's application for TARP money, and the company's previous announcements can lead to nasty consequences if the application is ultimately denied.


BankAtlantic of Fort Lauderdale, Fla., is awaiting word of its TARP application as it faces a litany of challenges.

The SEC is


the company, according to its third-quarter 10-Q filing. It also faces a class action lawsuit, led by State-Boston Retirement System, alleging the company and its executives violated BankAtlantic's lending policies and mislead investors when reporting nonperforming loans.

The class action lawsuit was amended from a previous complaint first filed in October 2007, which was dismissed by a federal judge on Dec. 11 for relying on unsubstantiated information from confidential witnesses.

An amended complaint, citing information provided by confidential witnesses identified as former bank employees, was filed on Jan. 12, alleges that the company and its executives concealed some of its risk from loan losses on its commercial real estate loan portfolio in filings and an earnings conference call in April 2007.

BankAtlantic didn't return a call requesting comment for this story. The company is expected to report fourth-quarter earnings results after the market close on Feb. 10.

Philip W. van Doorn joined 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.