Can Colonial Make It? (CNB)

Colonial Bancgroup Inc. (NYSE: CNB) is looking like it is the next banking institution on the verge of tipping over into the abyss.  Its earnings report leaves nothing to be desired.  But a 44% drop in the stock on double an average day’s volume will raise eyebrows even if the shares have now fallen under the $1.00-mark.  The bank better be thankful that the NYSE has eased some of its share price rules.

Analysts were already looking for a loss or more than $0.30 per share,but it posted -$1.45 EPS for Q4-2008.  There is a real problem here.Colonial has already been slated for $533 million in TARP money, but itappears that it is subject to a $300 million increase in equity.  Thecompany is speaking to SunTx Capital Partners and others. 

The bank has a non-binding letter of intent with SunTx Capital Partnersand others that would cover a potential investment in the company.This appears to be nearly 25% of the bank’s capitalization, but youhave to wonder if it will hold.  The price was said to be in a range of$1.00 to $1.50.  Shares are under $1.00 today.  That is only one of thereasons to be concerned about the financing. 

Colonial unloaded more than $300 million of its problem assets, and ittransferred almost $50 million more in assets to be classified as "heldfor sale" during the quarter.   Charge-offs are roughly $415 million.

The goodwill impairment per share charge is now larger than its entireshare price, which was listed as $2.66 per share for that impairmentcharge.  Its fourth quarter results were marred additionally because ofa $575 million non-cash charge.  A $40.6 million tax benefit fromimpairment charges is going to be of little help.  The net loss afteritems was listed as being roughly $825 million.

Posting an $825 million headline loss just isn’t going to satisfyshareholders in this environment.  We are not convinced that theadditional capital will come.  If it does, it seems that there might bea push-back over the price.  There would be if it was our decision tomake.  Whether we’d even make the investment is a conversation foranother time.

This will have either ended up being the opportunity of a lifetime, orit will have ended up being a huge tax loss for investors.  Shares aredown over 45% at $0.85 on more than double its average of 4.3 millionshares.  A 90%+ drop is bad enough. This down from a yearly high of more than $16.00, and that is down from more than $25.00 in recent years.

The company has frozen executive salaries and eliminated employee pay raises in 2009.  Does anyone really care? 

Jon C. Ogg
January 28, 2009