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Bank Failure Friday Costs FDIC Nearly $4 Billion

The Federal Deposit Insurance Corp. shuttered five banks on Friday, bringing the total number of failures for the year to 77. The agency's insurance fund took a hit of nearly $4 billion. In March, the FDIC reported that its fund was at a 16-year low of $13 billion. New assessments on member institutions are expected to help replenish the fund, but the recent failures will likely intensify speculation that the FDIC might need a taxpayer bailout at some point.

Two of the five institutions -- Colonial Bank and Community Bank of Nevada -- accounted for the bulk of the losses. Both institutions have been zombies for months, kept alive by regulators as they scrambled to find the least costly way to put them down. Outside events and a sputtering economy appear to have finally forced the FDIC's hand.

The FDIC estimates that the failure of Alabama-based Colonial will cost the fund $2.8 billion. Colonial's deposits will be assumed by Branch Banking and Trust (BB&T) of Winston-Salem, N.C. BB&T purchased approximately $22 billion of Colonial Bank's assets, instantly making it the ninth-biggest U.S. bank by assets, according to Bloomberg News. Colonial had 346 branches spread out over Alabama, Florida, Georgia, Nevada and Texas. Today, these opened as branches of BB&T. The North Carolina bank has also agreed to share a small portion of the losses with the FDIC.


Colonial's passing was truly a death foretold. It reported a $606 million second-quarter loss, its fifth straight quarterly deficit, according to Bloomberg. The bank tried to get money from the TARP but didn't meet the requirements. A deal for private investors to put $300 million into the bank fell apart. Early this month, Colonial reported that it was the target of a criminal investigation by federal authorities over its mortgage lending activities. The Securities and Exchange Commission also issued subpoenas for documents relating to its accounting procedures. And, it was under a cease and desist enforcement order with its regulators to halt its "unsafe and unsound" banking practices. Then, on Thursday, Bank of America won a restraining order against Colonial in an attempt to reclaim $1 billion it says it is owed.

The failure of Community Bank of Nevada is expected to cost the FDIC insurance fund $781.5 million. The bank has been in a free fall for at least a year. Its risky construction and development lending helped produce a $151.9 million loss last year. Non-performing assets, which include delinquent loans and repossessed real estate, made up 30 percent of total loans on June 30, reports the Las Vegas Review-Journal. Despite assets of $1.5 billion, the bank had just $878,000 in reserves.

Try as it might, the FDIC could not find a buyer for this mess. It contacted 166 potential bidders to no avail, the FDIC told the Review-Journal. So instead, in a once-rare maneuver, the FDIC established a temporary bank -- the Deposit Insurance National Bank of Las Vegas -- to allow depositors time to open accounts at other insured institutions. This is the third time this year the FDIC has established a so-called "Bridge Bank," because it couldn't find buyers for a failed institution.

Community Bancorp, the Las Vegas-based holding company for the Nevada bank, also operated a similarly named bank in Arizona, which also failed. The Community Bank of Arizona cost the FDIC deposit fund only an estimated $25.5 million. Its deposits were assumed by MidFirst Bank of Oklahoma City. MidFirst also scooped up another small community bank that failed yesterday, Union Bank of Arizona, whose failure cost the FDIC an estimated $61 million.

The last to be mentioned but the first to fail on Friday was little Dwelling House Savings and Loan Association of Pittsburgh. The failure cost the FDIC a paltry $6.8 million. PNC Bank, also of Pittsburgh, got the deposits.

The collapse of Colonial and its $2.8 billion price tag for the FDIC is understandably dominating the headlines as it appears to be the third costliest bank failure for the FDIC since the economic crisis began.The Associated Press provides some perspective:

The May closing of struggling Florida thrift BankUnited FSB is expected to cost the insurance fund $4.9 billion, the second-largest hit since the financial crisis began. The costliest was the July 2008 seizure of big California lender IndyMac Bank, on which the insurance fund is estimated to have lost $10.7 billion.

The largest U.S. bank failure ever also came last year: Seattle-based thrift Washington Mutual Inc. fell in September, with about $307 billion in assets. It was acquired by JPMorgan Chase & Co. for $1.9 billion in a deal brokered by the FDIC.

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