Colonial Bancgroup
| Company type | Public company |
|---|---|
| Industry | Banking, Financial services |
| Predecessor | Southland Bancorporation (renamed in 1981) |
| Founded | 1974 in Montgomery, Alabama, United States |
| Defunct | 2009 |
| Fate | Filed for Chapter 11 bankruptcy; banking operations acquired by BB&T |
| Headquarters | Montgomery, Alabama , United States |
Area served | Alabama, Georgia, Florida, Nevada, Texas |
| Products | Retail and commercial banking, wealth management, mortgage banking, insurance |
Colonial BancGroup Inc. was a bank holding company based in Montgomery, Alabama, United States, which collapsed in 2009. Through its subsidiaries, it delivered a variety of financial services such as retail and commercial banking, wealth management, mortgage banking, and insurance offerings. Prior to its downfall, it was ranked among the 50 largest banks in the US, with its subsidiary, Colonial Bank, operating 346 branches across Alabama, Georgia, Florida, Nevada, and Texas.
The failure of the firm was triggered by disclosures that it had acquired $1 billion in counterfeit mortgages from Taylor, Bean & Whitaker, marking one of the most significant mortgage fraud scandals ever recorded. On August 25, 2009, Colonial BancGroup initiated Chapter 11 bankruptcy proceedings. Following this, its banking operations and branch network were acquired by BB&T through a transaction facilitated by the Federal Deposit Insurance Corporation (FDIC).
History
Established in 1974 in Montgomery, Alabama under the name Southland Bancorporation, the entity was renamed The Colonial BancGroup, Inc. in 1981.
The primary function of the BancGroup was to manage and coordinate the activities of its subsidiaries while supplying capital and support services. A majority of its revenue stemmed from dividends received from Colonial Bank. Its subsidiary, Colonial Brokerage, Inc., provided both full-service and discount brokerage services along with investment advisory solutions. Additionally, the BancGroup maintained investments in multiple residential and commercial real estate projects located in the southeastern United States and central Texas.
On January 31, 2006, Colonial Bank sold its stake in Goldleaf Technologies, Inc., a company offering internet and automated clearing house services tailored for community banks.
By the end of 2008’s fourth quarter, Colonial BancGroup’s Texas ratio—a critical indicator of asset quality—had escalated sharply to 53.4%, rising from 25% at the beginning of that year, signaling severe financial instability.
Taylor, Bean & Whitaker Mortgage Fraud
From 2004 through 2009, management at Taylor, Bean & Whitaker engaged in fraudulent activity by selling $400 million in fictitious mortgages to Colonial Bank with assistance from a Colonial executive. Key figures involved included Catherine Kissick, former senior vice president of Colonial Bank’s Mortgage Warehouse Lending Division, and Lee Farkas, Chairman of Taylor, Bean & Whitaker. Their conspiracy defrauded Colonial Bank, Colonial BancGroup, Taylor, Bean & Whitaker itself, the Troubled Asset Relief Program (TARP), as well as investors.
Court records indicate that beginning in 2002, Taylor, Bean & Whitaker ran overdrafts on its master account held at Colonial Bank. To mask these deficits, Kissick, Farkas, and others employed deceptive tactics such as moving funds between accounts and fabricating mortgage loan sales to Colonial—known internally as "Plan B." They submitted data for loans that were either nonexistent or had already been sold to other parties.
Kissick admitted these activities caused Colonial Bank to pay for worthless assets. This resulted in false entries on Colonial’s financial records that incorrectly reflected ownership of legitimate mortgage pools which lacked any real value and could not be securitized.
Consequently, Colonial BancGroup submitted materially inaccurate financial reports to the SEC through Forms 10-K and 10-Q that overstated asset values linked to these worthless mortgage loans.
In totality, this fraudulent scheme inflicted losses exceeding $1.9 billion on Colonial.
Disclosure and Collapse
On August 4, 2009, Colonial revealed legal complications following a federal raid at its mortgage warehouse lending offices located in Orlando, Florida. The previous month, the bank had been compelled to agree to a cease and desist order issued by the Federal Reserve and regulatory authorities due to concerns over its accounting methods and recognition of losses. Subsequently, on August 14, BB&T declared its intention to acquire Colonial’s branches and deposits through a transaction arranged with the FDIC.
This event represented the most significant bank failure of 2009. Later, on August 25, Colonial BancGroup initiated Chapter 11 bankruptcy proceedings in the U.S. Bankruptcy Court for the Middle District of Alabama.
PwC Litigation
The bankruptcy trustee overseeing Taylor, Bean & Whitaker Mortgage Corp.—once among the largest privately owned mortgage firms—filed a lawsuit against PwC, the auditor for Colonial Bank, seeking damages totaling $5.5 billion. The complaint accused PwC of negligence for not uncovering an extensive fraud scheme that precipitated the downfall of Taylor, Bean & Whitaker and subsequently led to Colonial Bank’s collapse, which involved assets amounting to $25 billion amid the Great Recession.
This lawsuit brought to light critical discussions regarding auditors’ obligations to identify fraud under established accounting standards. The dispute was resolved in August 2016 with a confidential settlement. PwC defended its position by emphasizing adherence to accounting principles that do not guarantee fraud detection, although former PwC chairman Dennis Nally had previously affirmed that auditing inherently carries responsibility for uncovering fraudulent activity.