Colonial Bank (United States)

Colonial Bank

Company type	Division of Colonial BancGroup
Industry	Banking
Founded	1981
Fate	Failed and taken over by FDIC in 2009; deposits sold to BB&T Corp.
Headquarters	Montgomery, Alabama , United States
Area served	Alabama, Georgia, Florida, Nevada, Texas
Products	Commercial banking services

Colonial Bank, once a division of Colonial BancGroup, had its main office in Montgomery, Alabama. The bank operated a network of 346 branches spanning Alabama, Georgia, Florida, Nevada, and Texas.

From an initial asset base of $166 million in 1981, Colonial's holdings expanded to $26 billion. The bank extended its reach beyond Alabama into rapidly developing regional markets such as Florida, Georgia, Texas, and Nevada. It ranked as the fifth-largest commercial bank within Florida and held the 27th position nationwide. Throughout its history, Colonial was often speculated to be a likely target for acquisition by larger banking institutions.

Establishment and Growth

Colonial Bank was established in 1981 during Colonial BancGroup's relocation from Mobile to Montgomery. Its origins trace back to the Exchange National Bank of Montgomery, which was under the ownership of Robert E. Lowder. Throughout the 1980s, Colonial pursued an aggressive acquisition strategy within Alabama; by 1985, after merging with the Bank of Oxford, it controlled $750 million in assets and maintained operations across all major metropolitan areas in Alabama. That same year marked the commencement of construction on the Colonial Financial Center, intended to serve as its headquarters and house affiliated enterprises.

In 1987, Colonial sought to enter the Florida Panhandle market through acquiring Liberty Bank of Pensacola, though this transaction ultimately did not proceed. Expansion persisted with the 1993 purchase of First AmFed based in Huntsville, which added Tennessee branches and elevated Colonial to become Alabama’s fifth-largest bank holding company. By the end of 1993, following its acquisition of United Savings Bank of Anniston, the bank operated 96 branches throughout Alabama and Tennessee.

The year 1996 marked simultaneous entry into Georgia and Florida markets via acquisitions including Southern Bank of Orlando, Commercial Bank of Georgia in Atlanta, and Dothan Federal Savings Bank. Between July 1996 and July 1997, Colonial acquired seven additional Florida banks and consolidated all operations under a single Alabama charter, resulting in 181 branches with assets totaling $6 billion.

Colonial further extended its footprint beyond the Southeast through its mortgage division servicing 45 states and by acquiring institutions such as Las Vegas-based Commercial Bank and FirstBank of Dallas in 1998. Nevertheless, disappointing financial results led to cost reduction efforts by the end of that year. By 2002, the branch network had expanded to 263 locations.

Collapse

In the late 2000s, Colonial Bank faced severe challenges after it was uncovered that it had purchased more than $1 billion in mortgages from Taylor, Bean & Whitaker that were not legitimately owned by Taylor Bean—constituting one of the largest frauds recorded in history. Lee Farkas, CEO of Taylor, Bean & Whitaker, was convicted for his role in this fraud; meanwhile, Colonial Bank CEO Bobby Lowder was investigated but ultimately cleared of involvement.

From 2002 through 2009, Catherine Kissick—former senior vice president at Colonial Bank and head of its Mortgage Warehouse Lending Division—collaborated with conspirators including Farkas in orchestrating a scheme defrauding multiple parties: Colonial Bank, Colonial BancGroup, Taylor, Bean & Whitaker, the Troubled Asset Relief Program (TARP), and investors.

Court filings indicate that Taylor, Bean & Whitaker began overdrawing its master bank account at Colonial Bank. To mask these overdrafts, Kissick, Farkas, and others engaged in fraudulent activities starting in 2002—initially transferring funds between accounts before progressing to fictitious "sales" of mortgage loans to Colonial Bank under a plan known as "Plan B." This involved selling loans that were either nonexistent or had previously been sold to other investors.

Kissick admitted that these fraudulent transactions caused Colonial Bank to pay for worthless assets. As a result, false entries were recorded on Colonial’s financial records to depict ownership of legitimate mortgage loan pools that lacked actual value or securitization potential.

This misconduct led Colonial BancGroup to submit materially inaccurate financial statements to the SEC via Forms 10-K and 10-Q that overstated mortgage loan assets.

On August 4, 2009, Colonial disclosed ongoing legal troubles after federal authorities executed search warrants at its mortgage warehouse lending offices. Additionally, the Federal Reserve issued a cease and desist order concerning accounting methods and recognition of losses.

Ten days later, on August 14, 2009, Colonial Bank failed; regulators took control over its entire network of 346 branches. The FDIC arranged a sale of $22 billion in deposits to BB&T Corp. This failure represented the largest bank collapse in 2009 and ranked as the sixth-largest bank failure ever recorded in U.S. history. The event cost the FDIC’s Deposit Insurance Fund approximately $2.8 billion and was identified as the seventy-fourth bank failure nationwide that year.

Lawsuit against PricewaterhouseCoopers

The bankruptcy trustee representing Taylor, Bean & Whitaker Mortgage Corp., a formerly prominent private mortgage company, initiated legal action against PricewaterhouseCoopers in its role as auditor of Colonial Bank, pursuing $5.5 billion in damages. On December 28, 2017, a Federal court held PwC responsible.

Filed in 2013, the lawsuit claimed that PwC exhibited negligence by failing to uncover the fraudulent activities that led to the downfall of Taylor, Bean & Whitaker and subsequently caused Colonial Bank’s collapse in 2009. Colonial Bank, headquartered in Montgomery, Alabama, managed $25 billion in assets and was among the largest bank failures in the U.S. during the Great Recession.

This prominent litigation brought to light significant issues regarding auditors’ obligations in identifying fraud. PwC maintained that its responsibility was confined to adhering to accounting standards, which do not necessarily expose fraudulent conduct. Contrarily, a pretrial submission referenced former PwC chairman Dennis Nally, who asserted that the auditing profession "has always had a responsibility for the detection of fraud."

On March 15, 2019, the FDIC, acting as receiver for Colonial Bank, disclosed a $335 million settlement with PwC addressing claims of professional negligence connected to audits of the defunct bank.