Aug. 1 (Bloomberg) -- Colonial BancGroup Inc., the ailing Alabama bank, said there is “substantial doubt” it can survive after posting a fifth straight quarterly loss and canceling a sale to an investor group.

The second-quarter net loss widened to $606 million, or $3.02 a share, from $8.96 million, or 5 cents, a year earlier when there were fewer shares outstanding, the bank said yesterday. An agreement to sell a 75 percent stake for a $300 million capital investment fell through when it failed to win regulatory approval.

Colonial, with $26 billion in assets and 355 branches, is one of “the larger U.S. banks with obvious financial problems,” said Ralph “Chip” MacDonald, a Jones Day lawyer in Atlanta. Colonial’s losses in the past five quarters total more than $1.6 billion, mostly from defaults on loans to Florida builders and developers. The bank hasn’t met capital requirements to receive U.S. rescue funds.

“I’m sure Colonial would have liked to have had a shot to get additional funding” through the U.S. Troubled Asset Relief Program, said Jim Barth, a former chief economist at the Office of Thrift Supervision and a professor of finance at Auburn University in Alabama. “Colonial was considered one of the stronger smaller regional banks a few short years ago, but now it appears to be desperate in raising capital.”

Colonial canceled the proposed $300 million investment by a group led by Taylor Bean & Whitaker Mortgage Corp., an independent lender in Ocala, Florida. Taylor Bean had assembled about 30 mortgage companies to take a 75 percent stake in Colonial, one of the largest U.S. companies extending credit to smaller home lenders.

‘Going Concern’

“Management has concluded that there is a substantial doubt about Colonial’s ability to continue as a going concern,” the bank said in the statement. The lender said it can’t increase capital levels to meet regulatory requirements. Colonial said it has met with “potential strategic acquisition candidates and private equity investment firms.”

Colonial declined 1 cent to 61 cents in regular New York Stock Exchange composite trading yesterday. It has fallen 91 percent in the past year.

The Montgomery-based bank said it had $1.7 billion of loans that aren’t accruing interest, or 12 percent of total loans, and cited “economic distress in our markets, primarily in Florida.” The bank wrote off as uncollectible $244 million in loans, up from $132 million during the first quarter.

Fitch Ratings downgraded Colonial’s credit rating and said it will be “extremely challenging” for the bank to raise more capital to meet regulators’ requirement by a Sept. 30 deadline.

Liquidity, Loan Losses

Colonial has signed orders with federal and state banking regulators that require the bank to deal with liquidity and its allowance for loan losses and seek approval for management changes.

Colonial is among the largest warehouse lenders, providing money that independent mortgage companies use to make home loans. It is Alabama’s second-largest bank after Regions Financial Corp.

Calls to Colonial spokesman Merrie Tolbert and Taylor Bean spokeswoman Melissa Spata weren’t returned.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: August 1, 2009 00:00 EDT