Biggest Bank Failure Of 2009

Five more banks including Colonial BancGroup Inc. (CNB) were shuttered by U.S. regulators on Friday. This takes the total number of failed federally insured banks in this year to 77, compared to 25 in 2008 and 3 in 2007.

Alabama-based lender Colonial was the biggest financial institution to fail this year, with about $25 billion assets and 346 branches in Florida, Alabama, Georgia and Texas. This is the largest financial institution failure since the shut-down of Seattle-based thrift Washington Mutual in September 2008, which had about $307 billion in assets.

The four other banks were Community Bank of Nevada, Las Vegas; Community Bank of Arizona, Phoenix; Union Bank, Gilbert, Ariz; and Dwelling House Savings and Loan, Pittsburgh. The Federal Deposit Insurance Corporation (FDIC) has been appointed receiver of these banks.

Out of Colonial’s $25 billion assets, the FDIC has approved the sale of about $22 billion to BB&T Corporation (BBT) along with $20 billion in deposits. FDIC will hold the rest of about $3 billion assets, which will be sold later.

As of June 30, 2009, Community Bank of Nevada had assets of $1.52 billion and deposits of $1.38 billion, while Community Bank of Arizona had assets of $158.5 million and deposits of $143.8 million as of June 30 and Union Bank had assets of $124 million and deposits of $112 million as of June 12. Dwelling House had $13.4 million in assets and $13.8 million in deposits as of March 31.

Colonial had been feeling significant pressure. It has been under criminal investigation by the Justice Department in connection with alleged accounting irregularities, and a civil search by the Securities and Exchange Commission relating to accounting issues and the bid for federal bailout funds.

On August 13, Colonial’s troubles escalated as a federal court in Miami froze $1 billion of its assets in response to a lawsuit filed by Bank of America Corporation (BAC). Bank of America sued Colonial to protect its claim on certain loans after the troubled company refused to return more than $1 billion it owed to Freddie Mac (FRE).

The estimated cost of Colonial’s failure to the deposit insurance fund would be $2.8 billion. The FDIC and BB&T signed an agreement to share losses on about $15 billion of Colonial’s loans and other assets.

The Colonial deal is the biggest acquisition in BB&T’s history, creating the nation’s eighth-largest financial holding company by deposits. BB&T is a dominant player in Southeastern U.S. , where many closures have happened. So bank failures benefited BB&T as most of these failed banks were acquired by it.

In the first quarter of 2009, the number of banks on the FDIC’s list of problem institutions jumped to 305. This is the highest number since the savings and loan crisis in 1994. The FDIC anticipates U.S. bank failures to cost $70 billion through 2013.

The failed banks are victims of recession and rising loan losses. As a result of the ongoing market turmoil, these institutions experienced massive capital erosion stemming from losses arising from significant exposure in collateralized mortgage obligations (CMOs), commercial real estate loans and other commercial and industrial loans.

The current year has been difficult for consumers to pay off debt as a result of high unemployment, falling home prices and declining personal wealth.

Though current signals indicate that the economy may stabilize, we expect loan losses on commercial real estate portfolio to remain high for banks that hold large amounts of high-risk loans.

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