* Failure would be biggest bank failure this year
* Deal approved by FDIC on Thursday, report says (Adds background)
By Anurag Kotoky and Sweta Singh
BANGALORE, Aug 14 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 reported.
BB&T shares soared as much as 10 percent on the New York Stock Exchange, while trading in Colonial shares was halted.
"BBT is trading up on the news as they would likely be able to assume the deposits at an attractive price," analyst Paul Miller of FBR Capital Markets wrote in a note to clients. "Given Colonial's risky loan portfolio, we would expect significant FDIC loss-sharing to be involved."
Colonial officials did not respond to repeated calls seeking confirmation. The FDIC said it does not comment on open and operating institutions. A BB&T spokesman declined to comment.
Colonial, based in Montgomery, Alabama, operates 355 branches in Florida, Alabama, Georgia, Nevada and Texas and has more than $25 billion in assets.
Its failure would be the largest bank failure since Wachovia's near collapse last September. Last year Wells Fargo & Co (WFC.N) won an FDIC-brokered deal to buy Wachovia after a brief but acrimonious battle with rival bidder Citigroup Inc (C.N), which initially had agreed to buy Wachovia's banking assets with government assistance.
Colonial was organized as a bank-holding company in 1981 with $166 million in assets. It website says it provides "the strength and stability of a Top 30 commercial bank."
BB&T ended June with $152.4 billion of assets. It operates 1,505 branches in 11 states and Washington, D.C.
In June, BB&T repaid the U.S. government the $3.1 billion it received under the Troubled Asset Relief Program after regulators determined the bank was well capitalized.
"We would view the transaction as a big positive for BBT," Miller said. "It would be very accretive to net interest margin."
Earlier this week, the Alabama State Banking Department had said it might appoint the FDIC as receiver or conservator for its banking unit after Aug. 12.
On Wednesday, however, Alabama banking regulators canceled a scheduled meeting with Colonial to discuss the bank's fate, without giving a reason. [ID:nN8C121593] Colonial has been battered by the credit crisis and faces a U.S. Justice Department criminal probe into alleged accounting irregularities at its mortgage lending unit.
NO IMMEDIATE PANIC
At one of Colonial Bank's main branches in downtown Montgomery, Alabama, business appeared to continue as normal but there was no immediate sign of panic from customers.
"As long as it doesn't mess with my money, I'm fine," said Dawn Williams, a 24-year-old mother of two.
But another customer told Reuters she was worried and wanted to withdraw her money.
"I am freaking out. It doesn't makes sense to play with people's money. They work hard for it," said retired nurse Deborah Burney, 53, who has an account with husband at the branch.
"I had asked my husband to take the money out of this bank when I heard something on the TV the other night," she said. "I have been married 35 years, and that hardhead can take the money out or say goodbye."
In July, Colonial posted a $606 million second-quarter loss, its fifth loss in a row, as higher charge-offs and rising foreclosures in the bank's Florida construction-loan portfolio continue to strain its balance sheet.
BB&T shares were 7 percent higher at $27.58 by midafternoon after trading as high as $28.41, while Colonial shares remained halted. (Additional reporting by Verna Gates in Montgomery, Alabama, and Karey Wutkowski in Washington; Editing by Anil D'Silva and Mike Miller; Reuters messaging: email@example.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800))