Colonial Bank Fails, Acquired by BB&T

MONTGOMERY, Ala. ( TheStreet) -- Colonial Bank was shut down late Friday, the fifth largest bank to fail in U.S. history and the largest financial institution closed by regulators since Washington Mutual last fall.

The Alabama Banking Department took over Colonial Bank, a subsidiary of Colonial BancGroup ( CNB), and appointed the Federal Deposit Insurance Corp. receiver. The FDIC then sold all of the institution's deposits and branches to BB&T Corp. ( BBT).

Colonial's failure came after regulators shut down Dwelling House Savings and Loan Association of Pittsburgh, whose sole branch and all of its deposits were acquired by PNC Financial Services Group ( PNC).

Colonial BancGroup shares were halted in trading Friday, after Dow Jones Newswires, citing sources, reported Colonial would be closed later in the day. Colonial is the 74th bank or saving & loan to fail in 2009.

With $25 billion in total assets and 346 branches in Florida, Alabama, Georgia and Texas, Colonial is the largest financial institution to fail since Washington Mutual, which saw most of its deposits and branches acquired by JPMorgan Chase ( JPM) in September 2008.

In addition to the deposits and branches, BB&T acquired $22 billion in assets from the failed bank, with the FDIC agreeing to share in losses on $15 billion. The FDIC retained the rest of Colonial's assets for later disposition and estimated the cost to its deposit insurance fund would be $2.8 billion.

Colonial's branches were set to reopen for normal business hours Saturday as branches of BB&T.

The acquisition of Colonial appeared to be an excellent one for BB&T, since the acquired branches established footholds in Texas and Nevada, while instantly making BB&T a major player in Florida and Alabama.

All previous bank failures since the beginning of 2008 are detailed on's interactive Bank Failure Map.

Georgia continues to lead all states with 21 bank or thrift failures during 2008 and 2009, followed by Illinois with 14 failures, California with 13, and then Florida with eight and NevadaNevada with four failures.

In addition to BB&T, PNC and JPMorgan Chase, large bank holding companies that have acquired failed institutions during 2008 and 2009 include SunTrust Banks ( STI), Regions Financial ( RF), Fifth Third Bancorp ( FITB), US Bancorp ( USB) and Zions Bancorp ( ZION).

Colonial's Slide and Troublesome Disclosures Ratings had assigned Colonial Bank an E-minus (Very Weak) financial strength rating after Colonial BancGroup released its second quarter results and expressed "substantial doubt" about the bank's ability to continue operating. The rating was a downgrade from a D-minus (weak), which was based on March 31 financial reports.

Then last Friday, the company disclosed that it was the subject of a criminal investigation by the Justice Department related to its warehouse mortgage lending and a separate Securities and Exchange Commission investigation of its disclosures related to Colonial's application for new capital via the Troubled Assets Relief Program, or TARP.

As highlighted back in February, Colonial announced on Dec. 2 that it had been approved to receive a $553 capital infusion via TARP. While the company's shares rallied 50% that day, Colonial had failed to disclose that to get the money from the Treasury, Colonial would have to first raise $300 million in new capital on its own.

Colonial disclosed the condition in a press release and SEC filing on Jan. 27. Meanwhile, because of mounting loan quality concerns, the company had entered into a memorandum of understanding, or MOU, with the Federal Reserve and Alabama regulators for Colonial Bank to increase its Tier 1 leverage ratio 8% and its total risk-based capital ratio to 12% by March 31. These ratios need to be at least 5% and 10%, respectively, or most banks to be considered well-capitalized.

On March 31, the company announced a deal to raise $300 million by issuing preferred shares to an investor group lead by Taylor, Bean & Whitaker, subject to the investor group's due diligence and receipt of confirmation that the TARP money would be forthcoming. The money was never received, despite news headlines that day saying that company had beaten its regulatory deadline to raise capital and another announcement by Colonial on May 26 that the investor group's due diligence requirements had been "satisfied."

Free Financial Strength Ratings for Banks and Thrifts

While depositors suffered no losses from Colonial Bank's failure, there have been five instances this year when a bank failed and the FDIC was unable to find another institution to acquire its deposits. Depositors with total balances exceeding FDIC insurance limits lost money in four of those failures.

Even if your personal deposits are under FDIC insurance limits, you or someone you know are probably associated with a business, organization or government entity (such as a school district) with large deposits of somebody else's money in a local bank.

While the FDIC's temporary increase of the basic individual deposit insurance limit to $250,000 has been extended through 2013, the agency has not yet decided whether or not to extend the waiver on deposit insurance for non-interest-bearing business checking accounts. This means that at the end of the year, businesses and municipalities might have to take a more active approach in managing their risks.

For depositors shopping for high rate CDs through brokers, it is also important to consider the health of a bank or thrift, since attractive CD rates that are locked in can be lost when an institution fails. Ratings issues independent and very conservative financial strength ratings on each of the nation's 8,500 banks and savings and loans which are available at no charge on the Banks & Thrifts Screener.

In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the Insurers & HMOs Screener.

-- 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.

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