Failing colonial BancGroup rescued by BB&T

Wall Street’s biggest banks may be roaring back to life, but trouble still lurks in corners of the financial industry that remain plagued by a legacy of bad investments.

On Friday, Colonial BancGroup, a large lender that rode the excesses of the nation’s real estate boom, was seized by federal regulators, making it the largest bank failure of 2009 and one of the most costly since the collapse of IndyMac Bancorp last year.

Regulators simultaneously brokered a rapid sale of its branches and deposits to BB&T Corporation of North Carolina, a regional bank that has emerged from the financial crisis as one of the industry’s strongest players. The failure is expected to cost the Federal Deposit Insurance Corporation about $2.8 billion.

Regulators also closed four other small banks on Friday in Pennsylvania, Nevada and Arizona, bringing the total number of bank failures to 77 this year. Banking analysts say that the number of failures could easily reach several hundred in the next 18 months as rising commercial real estate losses take their toll.

Alabama state regulators officially closed Colonial Friday night. But it had been embattled for months, and its failure was considered imminent. Its balance sheet was saddled with construction and commercial real estate loans, and its financial condition had been rapidly deteriorating. Toward the end, Colonial tried to secure federal bailout money; but those efforts turned up several accounting irregularities that prompted a criminal investigation by the Department of Justice and the Treasury Department.

The deal ensures that the bank’s depositors will not suffer losses, although its stockholders will be wiped out. But the F.D.I.C.’s industry-supported insurance fund will be liable for a big portion of Colonial’s $25 billion loan portfolio.

The F.D.I.C. will absorb all the losses on a $3 billion pool of the most risky assets, including those believed to be entangled in fraud, according to a person briefed on the pool. Federal regulators will split the losses with BB&T on another $15 billion pool that is largely made up of commercial real estate and construction loans. BB&T will be responsible for losses on the remaining $7 billion worth of assets, which it will own outright.

Federal regulators have offered similar loss-sharing arrangements to lure prospective buyers for several other seized banks. With the number of bank failures expected to rise, F.D.I.C officials have grown increasingly concerned about protecting the deposit insurance fund. It had been drained to about $13 billion at the end of the first quarter, the latest number available, and some banking experts are worried that the agency might be forced to turn to an emergency credit line from the Treasury Department for short-term funding.

That, in turn, could put even more pressure on the banking industry if the F.D.I.C. imposed another costly assessment on banks. “Banks need that money to rebuild capital so they can lend more,” said Jaret Seiberg, a financial policy analyst in Washington.

Sheila C. Bair, the F.D.I.C. chairwoman, said in a statement that the fund had ample resources and noted that the losses from the Colonial failure were lower than projected. Federal officials said that BB&T paid a healthy premium for the Colonial’s deposits, lowering the overall cost to the fund.

BB&T’s purchase of Colonial may be another indication that the financial markets are healing. Unlike other deals that protected bondholders, Colonial’s creditors will probably suffer severe losses. And unlike the F.D.I.C.-brokered deals for IndyMac Bancorp of California and BankUnited of Florida, Colonial was sold to a rival bank. No private equity firms were involved in the deal.

For BB&T, based in Winston-Salem, N.C., the takeover will help extend its presence along the Southeast coast into Texas, a fast-growing area that has held up better than other hot housing markets because of its exposure to a booming oil and commodities trade. It will take control of Colonial’s 346 branches and $20 billion of deposits in Alabama, Florida, Georgia, Nevada and Texas, giving it a total of more than 1,800 locations. Colonial depositors will automatically become BB&T customers, and will continue to be covered by the federal deposit insurance limits.

Kelly King, BB&T’s chief executive, called the deal “an exciting growth opportunity” that will allow it to gain market share with minimal risk to the bank because of its loss-sharing agreement with the government.

For Colonial, the collapse represents the end of a roller-coaster run that took off with the real estate boom. Robert E. Lowder founded Colonial in 1981 and stitched together the bank with dozens of acquisitions.

Colonial moved from state regulation to federal in 2003, as deregulation gained favor in Washington. But in June 2008, it switched back to being regulated by the Alabama state regulators.

In December, the Treasury agreed to invest more than $500 million in the bank, but only if Colonial could raise $300 million in capital from another source. In March, Colonial said investors led by Taylor, Bean & Whitaker Mortgage Corporation had agreed to put up $300 million, but the deal fell apart last month.

Mr. Lowder, 67, stepped down as Colonial’s chairman and chief executive in June. A few days later, regulators issued a cease-and-desist order demanding that the bank increase its capital and reduce its bad loans. Colonial also said it was facing a Justice Department criminal investigation relating to alleged accounting irregularities in its mortgage warehouse lending division.

Source: New York Times