What’s been rumored took place today: Colonial Bank was shut down by the FDIC and then taken over by Bank Branching and Trust of Winston-Salem, N.C. This could be a big deal in the industry because it was heavily involved in real estate development lending. Here is the FDIC press release:
Colonial Bank, Montgomery, Alabama, was closed today by the Alabama State Banking Department, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Branch Banking and Trust (BB&T), Winston-Salem, North Carolina, to assume all of the deposits of Colonial Bank.
Colonial Bank’s 346 branches in Alabama, Florida, Georgia, Nevada and Texas will reopen under normal business hours beginning tomorrow and operate as branches of BB&T. Depositors of Colonial Bank will automatically become depositors of BB&T. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branches until BB&T can fully integrate the deposit records of Colonial Bank.
This evening and over the weekend, depositors of Colonial Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
“The past 18 months have been a very trying period in the financial services arena, but the FDIC and its staff have performed as Congress envisioned when it created the corporation more than 75 years ago,” said FDIC Chairman Sheila C. Bair. “Today, after protecting almost $300 billion in deposits since the current financial crisis began, the FDIC’s guarantee is as certain as ever. Our industry funded reserves have covered all losses to date. In fact, losses from today’s failures are lower than had been projected. I commend our staff for their excellent work in assuring once again a smooth transition for bank customers with these resolutions. The FDIC continues to stand by the nation’s insured deposits with the full faith and credit of the U.S. government. No depositor has ever lost a penny of their insured deposits.”
Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-405-8739. The phone number will be operational this evening until 9:00 p.m., Central Daylight Time (CDT); on Saturday from 9:00 a.m. to 6:00 p.m., CDT; on Sunday from noon to 6:00 p.m., CDT; and thereafter from 8:00 a.m. to 8:00 p.m., CDT. Interested parties can also visit the FDIC’s Web site at http://www.fdic.gov/bank/individual/failed/colonial-al.html.
As of June 30, 2009, Colonial Bank had total assets of $25 billion and total deposits of approximately $20 billion. BB&T will purchase approximately $22 billion in assets of Colonial Bank. The FDIC will retain the remaining assets for later disposition.
The FDIC and BB&T entered into a loss-share transaction on approximately $15 billion of Colonial Bank’s assets. BB&T will share in the losses on the asset pools covered under the loss-share agreement. The loss-sharing arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement is also expected to minimize the disruptions for loan customers.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $2.8 billion. BB&T’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to alternatives. Colonial Bank is the 74th FDIC-insured institution to fail in the nation this year, and the first in Alabama. The last FDIC-insured institution to be closed in the state was Birmingham FSB, Birmingham, on August 21, 1992.
Dave,
Thanks for keeping us posted on the activities of the FDIC. I can only smile when I read FDIC Chairman Bair’s comment that “the FDIC and its staff have performed as Congress envisioned when it created the corporation more than 75 years ago. Today, after protecting almost $300 billion in deposits since the current financial crisis began, the FDIC’s guarantee is as certain as ever.”
In regulating banks, the FDIC has established certain standards and criteria that are designed to minimize losses, not simply “protect” against them. Locally, the FDIC approved Horizon Bank’s 1994 application to continue to engage in risky real estate development activities. However, the FDIC wisely restricted the bank to SINGLE-family residential development and limited its exposure to 25% of the bank’s Tier 1 capital.
More than five years ago, Horizon Bank invested $16+ million in its Fairhaven Highlands property, a predominantly MULTI-family project. To make matters worse, as of June 30, 2009, the “consolidated carrying amount” of Horizon Bank’s “real estate joint venture” has mushroomed to $27.2 million while its Tier 1 capital has fallen to $45.3 million. As a result, Horizon’s real estate development activities now exceed 60% of its Tier 1 capital, a far cry from the 25% limit imposed by the FDIC.
The FDIC is aware that Horizon Bank has violated the terms of the 1994 FDIC Order, terms designed to limit losses the FDIC insures against. Failing to enforce these terms allows these losses to grow, even if they can all be miraculously insured. Notwithstanding Chairman Bair’s optimism the “the FDIC’s guarantee is as certain as ever,” I fear that the cost of these guarantees will ultimately fall on the taxpayer, as fewer banks remain who are capable of paying the exorbitant FDIC insurance premiums.
I wonder if you have an opinion on the FDIC’s failure to property enforce its 1994 Order that approved Horizon Bank’s application to operate as a real estate developer (assuming you are allowed to express your opinion).
Hi New Vision,
I have to admit I’m still playing catch-up to this aspect of Horizon Bank; with the over-lapping beats we have, Chuckanut Ridge has been tackled in the growth/political parts of the paper. I am studying how this type of agreement works, but I don’t have an opinion about it yet.
One opinion I will throw out there is that while Chuckanut is a problem for Horizon, they seem to have a myriad of issues (other large non-performing real estate loans in Pierce and Snohomish, for example) that all add up to their current troubled situation.
Dave,
Thanks for taking time to respond. My real question is about the FDIC rather than about Chuckanut Ridge, per se.
Does FDIC Chair’s claims (that the FDIC has “performed as Congress envisioned” and “the FDIC’s guarantee is as certain as ever”) really hold water?
If the FDIC fails to properly regulate Horizon Bank’s violations, isn’t it likely it is failing to properly regulate other banks? Won’t that failure translate into steeper losses and, perhaps, a taxpayer bailout a la the Savings & Loan debacle? Is the FDIC’s guarantee really as certain as she claims?
Wouldn’t it be better if the FDIC properly regulated its 1994 Order with Horizon Bank and all other requirements it established to ensure a sound banking system?
Ah, okay. Hopefully I can get someone at the FDIC to talk about it.
That should be an interesting conversation. Please let us know what the FDIC says.
Any word from the FDIC?