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(Includes information about published reports of federal raids at Colonial Bankshares locations.)



) --One of the costliest bank failures over the past two years looms and another large institution sits on the brink after two holding companies made dire announcements following Friday's market close.

Corus Bankshares


on Friday filed a preliminary earnings report announcing that main subsidiary

Corus Bank NA

was technically insolvent, with core capital of negative $157 million.

Federal agents from several agencies on Monday raided the Orlando, Fla., offices of

Colonial BancGroup


, according to published reports. The raid comes just three days after company on Friday expressed "substantial doubt" about its ability to "continue as a going concern" in its second-quarter earnings release.

Both holding companies have been exploring strategic opportunities to be acquired, raise capital or sell substantial assets, to no avail. In the current environment, potential acquirers, including bank holding companies and private equity investors, are insisting on government assistance as part of any deal to acquire substantial amounts of distressed loans. The Federal Deposit Insurance Corp. is only willing to share in losses on failed institutions.

Saga of a Condo Lender

Corus Bankshares had $7.1 billion in total assets as of June 30. In its preliminary second-quarter earnings release, the Chicago holding company announced a second-quarter net loss of $487 million, or $9.07 per diluted share, wiping out its capital and making it likely that main subsidiary Corus Bank NA would quickly be shut down by the Office of the Comptroller of the Currency.

Corus has been at the forefront of the boom and bust cycle for condominium construction and conversion lending in hard-hit housing markets, including Florida, Arizona and California.

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was early in highlighting Corus's heavy exposure to a frothy condo market nearly

two years ago

, saying that the company wouldn't be able to sustain its dividend of 7% at that time. Not only was the regular dividend on common shares high, the company had just paid a special dividend of $1 per share, or $56 million.

With loan quality continuing to plummet, Corus finally

eliminated its dividend

on common shares in May 2008.

After reporting in

early February

that its nonperforming assets had increased to $1.9 billion or 23% of total assets, Corus said that while it was still well-capitalized under ordinary

regulatory capital guidelines

as of Dec. 31, its capital requirements were likely to be increased by regulators. Sure enough, the company entered into an agreement with the OCC on Feb., 18 to achieve and maintain a Tier 1 leverage ratio of at least 9% by June 18.

Corus Bank's Tier 1 leverage ratio stood at a negative 2.1% as of June 30. While the preliminary second-quarter report didn't contain information on credit quality, nonperforming assets comprised 33% of total assets as of March 31, and the bank could had so many problem loans that its net interest income (income from loans and investments less the cost of funds) was negative for the first quarter.

The failure of Corus Bank would likely be very costly for the FDIC, since the bank had $3.7 billion in loans as of June 30, most of which were nonaccrual condominium and commercial real estate loans.

The costliest failure during the 2008-2009 banking crisis so far was

IndyMac Bank

, which failed in July 2008, with an estimated cost to the FDIC's insurance fund of $10.7 billion. The second most costly was


, which failed May 21, costing the FDIC an estimated $4.9 billion.

The largest bank or thrift failure was Washington Mutual, which failed last September but cost the FDIC nothing, since

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report

acquired all of the thrift's deposits, branches and most other assets, with no loss-sharing agreement with the government.

Colonial's Confusing Communications

The federal raid at Colonial comes as the company faces scrutiny for its litany of confusing announcements related to its application for government bailout funds.

According to published reports, federal agents from the Federal Bureau of Investigation, Treasury Department and Department of Housing and Urban Development were seen carying boxes from Colonial's office. The office of the TARP Inspector General would only confirm that agents served a search warrant in Orlando and at one other Florida location, according to WESH News in Orlando. According to, federal agents also raided the offices of Taylor, Bean & Whitaker Mortgage, which in March had agreed to invest $300 million in Colonial.

Colonial BancGroup had total assets of $25 billion as of June 30 and operates 352 branches in Florida, Alabama, Georgia, Nevada and Texas. The company announced a second-quarter net loss of $606 million, or $3.02 per common share. This left the company's main subsidiary, Colonial Bank, adequately capitalized with a Tier 1 leverage ratio of 4.18% and a total risk-based capital ratio of 9.21%.

Colonial has a major residential lending operation, with $12.4 billion in first mortgage originations in 2008.

Colonial is operating under a cease and desist order with the Fed, FDIC and State of Alabama. An earlier memorandum of understanding between the holding company and FDIC and state regulators required Colonial Bank to achieve and maintain respective Tier 1 leverage and total risk-based capital ratios of at least 8% and 12% by March 31. These ratios normally need to be at least 5% and 10% for a bank to be considered



Colonial made several attempts to raise capital, publicized in several ill-advised announcements made by the company. For starters, Colonial said on Dec. 2 in a Securities and Exchange Commission filing that the Treasury had

approved its application

to receive a capital infusion of $553 million via the Troubled Asset Relief Program, or TARP.

Not until Jan. 27 did Colonial share an important feature of its "approval" for TARP money -- the company was first required to raise $300 million in new capital from other sources.

Then on March 31, Colonial announced a deal with wholesale mortgage lender Taylor, Bean & Whitaker to raise $300 million. The company didn't actually receive any money that day, since the investor group wouldn't fork over the money until receiving confirmation from Colonial that the TARP money would be received.

Since the agreement came right at the deadline for the company to raise capital under its regulatory agreement, there were several breathlessly positive headlines suggesting that Colonial had actually gotten the money, while

expressed doubt


Colonial remained positive about its prospects for raising capital in a May 22 press release, saying that the "due diligence contingency under the stock purchase agreement dated March 31, 2009 has been satisfied."

The company never got the money and announced Friday that the agreement with Taylor, Bean & Whitaker was terminated.

Colonial BancGroup's nonperforming assets comprised 6.54% of total assets as of June 30. The company's net charge-offs (actual loan losses) for the second quarter totaled $244 million or an annualized 7.02% of average loans. This is a fast pace for charge-offs. In comparison, the company's ratio of loan loss reserves to total loans was 3.69% as of June 30, meaning that unless loan charge-off activity slows down considerably, Colonial will need to set aside large amounts for loan loss reserves over coming quarters to keep up with the charge-offs, leading to more net losses.

-- Written by Philip van Doorn in Jupiter, Fla.


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.