Colonial BancGroup – Is There Any Reason For Not Closing This Failed Bank?

What Are The Regulators Waiting For?

Recent events at Colonial BancGroup Inc present a picture of a bank beyond any hope of financial recovery.

• Colonial has been under FDIC and Alabama Banking Department oversight since June when it was obvious that Colonial could not survive without additional capital.  A possible merger or sale has been explored by Colonial without success.
• Colonial has seen a severe deterioration in its financial condition to the point that Colonial’s own management admits that Colonial cannot survive.  Colonial’s second quarter showed a loss of $606 million and charge offs increased to over 7% of its loan portfolio.  Losses for the past five quarters total $1.6 billion.
• Colonial announced that the Alabama State Banking Board may recommend that Colonial be put into FDIC receivership
• Colonial announced that it would not file the second quarter financial reports due to accounting irregularities being investigated by regulators.
• The FBI raided the Florida offices of Colonial as well as mortgage lender Taylor, Bean who was one of Colonial’s largest borrowers.  Taylor, Bean has since been shut down by regulators.
• Colonial has been issued cease and desist orders and demands by regulators to raise addtional capital.   Ironically, Taylor, Bean Mortgage had been leading the failed efforts to provide Colonial with $300 million in capital.
• Colonial is the target of a federal criminal investigation.

Regulators have let other zombie banks such as Corus Bankshares and Guaranty Financial stay open as they attempt to find other banks that will take them over.  (See Guaranty Financial Seen As Next Banking Failure and  Deathwatch At Corus.)  In the case of Colonial, regulators may cause more depositor anxiety by letting Colonial stay open instead of closing it down.  The FDIC describes its mission as promoting “the safety and soundness” of the financial institutions with FDIC insured deposits.  It is well past the time for the banking regulators to close Colonial, which is neither safe nor sound.

Reuters is reporting this afternoon that Colonial will be placed into FDIC receivership today.

Aug 14 (Reuters) – U.S. Southeast regional bank BB&T Corp (BBT.N) will buy deposits and branches of Colonial BancGroup Inc (CNB.N) following a move by regulators to take the struggling lender into receivership, media reports said, citing people familiar with the matter.

The deal was approved by the Federal Deposit Insurance Corp (FDIC) on Thursday night and is expected to be announced later on Friday, Dow Jones news agency reports

Colonial has $25 billion in assets and 355 branches in five states.  Colonial will be the fifth largest U.S. banking failure in history.  The previous largest banking failure was of Washington Mutual which was taken over by JP Morgan last year.