WASHINGTON — Just days after federal authorities launched a probe of alleged accounting irregularities at Colonial BancGroup Inc., its $25 billion-asset bank collapsed Friday.
Alabama regulators executed the fifth largest failure of all time — and the biggest this year — late Friday, taking over Montgomery-based Colonial Bank and selling most of its operations to BB&T Corp.
Branch Banking and Trust agreed to assume all $20 billion of Colonial’s deposits, according to the Federal Deposit Insurance Corp, which was appointed as Colonial’s receiver. The agency said the resolution was estimated to cost $2.8 billion to the Deposit Insurance Fund.
The FDIC said all of Colonial’s 346 branches across five states will reopen under normal hours as part of Branch Banking and Trust.
The seizure culminated a dizzying turn of events for Colonial, which just last month appeared headed to salvation with a deal to sell itself.
But as August began, the deal was off, and agencies including the Federal Bureau of Investigation raided the offices of Colonial’s suitor — Taylor, Bean & Whitaker Mortgage Corp. — and one of the banking company’s own warehouse facilities in Florida.
Soon after, Taylor Bean stopped originating loans and Alabama state regulators were pressuring Colonial to consent to receivership.
By Friday evening, the conversion of Colonial’s network to BB&T was complete.
"I commend our staff for their excellent work in assuring once again a smooth transition for bank customers," FDIC Chairman Sheila Bair said in a press release.
While details of the law enforcement investigation are unclear, observers said the tumult likely shook customers’ faith in Colonial, which had suffered five straight quarters of losses, speeding up the need for regulatory action.
"The Department of Justice search warrants are probably the trigger, because that influences everybody’s confidence until all the answers are known," said Walter G. Moeling 4th, a partner at Bryan Cave LLP in Atlanta. "It doesn’t mean depositors will start a run. But something like that will typically trigger, if not a run, at least a walk."
In addition to assuming Colonial’s deposits, BB&T also agreed to acquire roughly $22 billion of the failed bank’s assets. BB&T and the FDIC entered into an agreement to share losses from $15 billion of Colonial’s assets.
With Colonial’s collapse, the industry’s failed-bank assets this year jumped by over 50%, to $72 billion, placing more stress on the DIF and increasing the likelihood of higher premiums across the industry.
Still, following the Colonial failure, and an earlier closure Friday of a small thrift in Pennsylvania, Bair said in the release that losses from Friday’s actions were lower than originally projected.
The failure was the largest since that of $307 billion-asset Washington Mutual Bank in September 2008, and exceeded in size that of $17 billion-asset First Republic Bank, which failed in Dallas in 1988.
Yet the transaction did provide some piece of good news to the industry: a healthier bank played a role in a large resolution. With a shortage of bank capital available for mergers and acquisitions of late, the FDIC has had to turn largely to nonbank private-equity firms to pick up the pieces of difficult failures.
Private capital controlled $30 billion-asset IndyMac Bank after its FDIC takeover in July 2008. Investors also inherited $13 billion BankUnited after its failure in May.
