Monday, August 17, 2009

Major Bank Fails in South

Colonial's Assets Sold to Rival in 6th-Largest Collapse on Record; Blow to FDIC

By DAN FITZPATRICK, DAVID ENRICH and MICHAEL R. CRITTENDEN

Wall Street Journal

Regulators seized Colonial Bank on Friday after reaching a deal to sell its branches, deposits and most of its assets to rival BB&T Corp. in the sixth-largest bank failure in U.S. history.

The demise of Colonial, a regional bank based in Montgomery, Ala., with assets of $25 billion and 346 branches in five states, signals an ominous phase in the nation's banking crisis. Even as some large institutions show signs of stabilizing, a slew of regional lenders remain on the ropes. And regulators appear to be giving up hope that some of them can be saved.

Colonial, a unit of Colonial BancGroup Inc., is the largest bank to fail since Washington Mutual Inc.'s banking operations collapsed last September and were sold to J.P. Morgan Chase & Co.

Colonial's slide came largely as a result of aggressive real-estate lending in Florida and other frothy markets. The company had been teetering for months, but federal and state regulators gave it time to try to secure a financial lifeline from outside investors or another bank.

Those prospects dimmed in recent weeks. A planned deal between Colonial and a Florida mortgage company unraveled amid a federal criminal investigation. Colonial said last week that the Justice Department is investigating one of its lending units and related accounting irregularities. That prompted federal regulators to start shopping Colonial to potential buyers, according to people familiar with the situation.

Aside from BB&T, a regional bank in Winston-Salem, N.C., that has avoided the brunt of the financial crisis, bidders for Colonial were scarce, even though the Federal Deposit Insurance Corp. offered to shield buyers from some potential losses, according to a person involved in the talks. "No one wanted to touch this thing," said Morgan Keegan & Co. analyst Bob Patten.

The FDIC agreed to share losses with BB&T on $15 billion of the $22 billion in assets included in the deal.

Colonial's inability to find a buyer, and the limited interest in the FDIC auction, is a reminder of the industry's lingering troubles, experts say. Colonial, founded in 1981 by Alabama real-estate developer Robert E. Lowder, for years had a coveted franchise. But the severity of the losses facing the bank scared away several buyers, according to the person familiar with the talks.

Colonial's collapse will cost the FDIC's dwindling deposit-insurance fund an estimated $2.8 billion, the agency said. The fund stood at just $13 billion as of March. "Our industry-funded reserves have covered all losses to date," FDIC Chairman Sheila Bair said on Friday.

n addition to Colonial, regulators seized four financial institutions in Arizona, Nevada and Pennsylvania with combined assets of $1.82 billion and deposits of $1.65 billion. The FDIC was unable to find a buyer for the largest of those four banks, Community Bank of Nevada, based in Las Vegas, and encouraged customers to move their deposits elsewhereThere have been 77 U.S. bank failures this year, including 32 since July 1. More banks have failed in 2009 than any year since 1992.

Friday's four seizures of smaller banks will cost the deposit-insurance fund an estimated $874.8 million, according to the FDIC.

To help stop the bleeding, federal officials are discussing ways to relieve banks of some of their bad assets, such as troubled real-estate loans. One plan under discussion, referred to within the government as "Spinco," would allow banks to spin off bad assets into a separate entity, which would be owned by existing bank shareholders, according to people familiar with the plans. The new entity would have an FDIC guarantee that would enable it to raise money. The plan is in early stages of discussion, these people say.

BB&T, which recently repaid the $3.1 billion capital infusion it got under the federal Troubled Asset Relief Program, has been growing through a string of acquisitions. The Colonial acquisition is one of BB&T's biggest ever. BB&T will pick up hundreds of branches in Texas and throughout the southern U.S.

As Colonial's chairman and CEO, Mr. Lowder, 67 years old, repeatedly rebuffed overtures from potential suitors, pushing Colonial to keep growing. He orchestrated 68 acquisitions in five states. And he focused on real-estate lending such as residential mortgages and construction projects. Even when the real-estate boom seemed to be ending, and regulators were warning banks to scale back on such lending, Mr. Lowder forged ahead.

"We've always been a real-estate bank," he said in a 2006 interview. "We understand real-estate lending. For us, we think it's a good, safe market to be in."

Mr. Lowder developed a reputation on Wall Street for being involved in every corner of the bank. "It was a very old-school type of banking model where the CEO really ran things and there wasn't a whole lot of debate," says Kevin Fitzsimmons, a banking analyst with Sandler O'Neill & Partners.

As he was building the bank, Mr. Lowder was pursuing other interests that made him a major figure in Alabama, particularly at his alma mater, Auburn University.

As a trustee there since 1983, appointed by Gov. George Wallace, he wielded considerable clout, particularly in the university's vaunted football program. In the mid-1990s, he won a fierce legal and political campaign against Alabama's governor and state lawmakers to retain his seat on Auburn's board. He used Colonial's corporate jet to recruit for the Auburn Tigers football team, according to an Auburn spokesman. ESPN named him in 2006 the most powerful booster in college sports.

Ever since the banking crisis erupted, Colonial has been regarded as a potential casualty as swelling loan defaults depleted its capital buffers. Efforts by Mr. Lowder's team to stabilize the bank repeatedly fell short. In June, Mr. Lowder announced he was retiring, handing the reins to two of the bank's longtime directors. Mr. Lowder couldn't be reached for comment on Friday.

Colonial's downfall illustrates the problems with the current patchwork bank-regulatory system. In 2008, Colonial's primary regulator, the Office of the Comptroller of the Currency, began raising concerns about the bank's commercial-real-estate portfolio. That June, Colonial said it was ditching its OCC charter, opting instead for state regulation in Alabama.

Last fall, despite the worries of some federal regulators about the bank's troubles, the Treasury Department granted Colonial preliminary approval to receive taxpayer funds through TARP.

The $550 million in bailout cash it was slated to get was conditioned on Colonial raising at least $300 million of capital from private investors. That was a tall order, given the bank's woes. Earlier this year, Colonial lined up a capital injection from Florida mortgage lender Taylor, Bean & Whitaker Mortgage Corp. that would have required the company to yet again switch its main regulator, this time to the federal Office of Thrift Supervision.

But that deal fell apart this summer after Colonial and Taylor Bean were raided by federal agents as part of a criminal probe. Taylor Bean has since been forced to shut down.

The FDIC, Federal Reserve Bank of Atlanta, and state of Alabama all slapped Colonial with severe restrictions this year. But by that time, many of the bank's problems were beyond repair.

Federal bank regulators recently began working on a private agreement to prohibit any bank with significant problems from switching charters to escape tough regulation. The Obama administration's proposed overhaul of banking rules would try to make this impossible.

At a Colonial branch in Atlanta on Friday afternoon, customers came and went with no indication that BB&T already had dispatched employees to Colonial markets to prepare for the takeover. "It's business as usual," said Brian Rouse, an assistant bank manager, adding that customers could deposit and withdraw funds normally. There were no long lines inside the branch, an automated-teller machine or drive-through.

Also on Friday, the Office of Thrift Supervision seized Dwelling House Savings and Loan Association, selling most of the tiny Pittsburgh thrift to PNC Financial Services Group Inc.

The FDIC said Friday night that regulators closed Community Bank of Nevada, Community Bank of Arizona, of Phoenix, and Union Bank, based in Gilbert, Ariz.

Community Bank of Nevada had assets of assets of $1.52 billion and deposits of $1.38 billion at the end of June. The FDIC created a new institution to be known as the Deposit Insurance National Bank of Las Vegas.

The agency said the firm will be run by Nevada State Bank and will be open for about 30 days "to allow depositors access to their insured deposits and time to open accounts at other insured institutions."

MidFirst Bank of Oklahoma City agreed to assume the deposits of Community Bank of Arizona and Union Bank, except for $88 million in brokered deposits. MidFirst also agreed to buy $136.5 million in assets from the two banks, and the FDIC said it will hold onto additional assets to sell at a later date.

As part of the deal, the FDIC and MidFirst entered a loss-sharing arrangement on approximately $55.1 million of Community Bank of Arizona's assets.
—Mike Esterl, Damian Paletta, Matthias Rieker and Deborah Solomon contributed to this article.

Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com and David Enrich at david.enrich@wsj.com