Colonial BancGroup becomes biggest bank failure of 2009

Aug 14, 2009,

BB&T takes over after FDIC shuts Alabama lender at cost of $2.8 billionExplore related topics

SAN FRANCISCO -- Colonial BancGroup Inc. became the largest bank failure this year Friday after the Federal Deposit Insurance Corporation seized the struggling Alabama-based lender and sold it to BB&T Corp.

The deal will knock roughly $2.8 billion off a pool of money, known as the Deposit Insurance Fund, which the FDIC maintains to guarantee bank customer deposits.

BB&T /quotes/comstock/13*!bbt/quotes/nls/bbt (BBT 28.63, +0.40, +1.42%) agreed to assume all of Colonial's deposits, which totaled about $20 billion at the end of June, the FDIC said. Depositors of Colonial will automatically become depositors of BB&T and customers can continue accessing their money by writing checks or using ATMs and debit cards, the regulator stressed.

Colonial had $25 billion in assets at the end of June. That makes it the largest bank failure this year, exceeding the collapse of Florida's BankUnited Financial /quotes/comstock/11i!bkunq (BKUNQ 0.30, -0.01, -1.64%) , which had less than $13 billion in assets. See full story.

BB&T agreed to buy about $22 billion of Colonial's assets. The FDIC said it will hold on to the rest - about $3 billion worth - and will try to sell them later.

The FDIC and BB&T will share losses on $15 billion of Colonial's assets. Loss-sharing deals have become common since the financial crisis struck last year, as the FDIC tries to encourage more stable banks to take over failing institutions.

This year, 74 banks have failed this year as a lingering recession and surging unemployment leaves the industry nursing heavy loan losses. More than 1,000 banks may fail during the next three to five years, RBC Capital Markets estimated in February. See full story.

The FDIC estimated Friday that the Colonial deal will cost its Deposit Insurance Fund about $2.8 billion. The regulator recently imposed a one-time assessment on banks to top the fund up. However, the surge in bank failures has increased concern about the fund, despite the fact that the FDIC can borrow hundreds of billions of dollars from the Treasury Department if it needs to.

"Today, after protecting almost $300 billion in deposits since the current financial crisis began, the FDIC's guarantee is as certain as ever," FDIC Chairman Sheila Bair said in a statement late Friday. "Our industry funded reserves have covered all losses to date. In fact, losses from today's failures are lower than had been projected."

Shares of Colonial /quotes/comstock/13*!cnb/quotes/nls/cnb (CNB 0.41, -0.06, -11.94%) dropped 12% to 41 cents before trading was halted Friday morning. BB&T shares jumped more than 9% to close at $28.43.

BB&T, with more than $150 billion in assets, is seen by some analysts as a beneficiary of bank failures. Many closures have happened in the Southeast of the U.S., where BB&T is a dominant player.

Colonial Bank "is probably a manageable purchase although we expect some losses from the purchase," said Egan-Jones Ratings, a rating agency that's paid by investors rather than issuers, in a statement Friday.

Colonial wasn't the only lender to fail on Friday.

Pittsburgh, Pa.-based Dwelling House Savings and Loan Association was closed by federal regulators. Dwelling had total assets of $13.4 million and $13.8 billion in deposits at the end of March, the FDIC said.

PNC Bank N.A., owned by PNC Financial Services /quotes/comstock/13*!pnc/quotes/nls/pnc (PNC 41.50, -0.35, -0.84%) /quotes/comstock/13*!pnc/quotes/nls/pnc, agreed to purchase about $3 million of the failed bank's assets. The FDIC estimated the failure will cost its Deposit Insurance Fund $6.8 million.