(Includes information about published reports of federal raids at Colonial Bankshares locations.)JUPITER, Fla. ( TheStreet) --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 ( CORS) 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 ( CNB), 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.
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 BankUnited, 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) acquired all of the thrift's deposits, branches and most other assets, with no loss-sharing agreement with the government.
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 TheStreet.com 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..