By Colin Barr
April 28, 2010

Colonial Bank, which tried to make the case that it was close to a turnaround, turns out to have been in worse shape than anyone knew.

The plot thickens surrounding last summer’s failure of Colonial Bank, the Alabama commercial lender and mortgage warehouser that is the third-biggest bank to fail since the financial meltdown started in 2008.

The inspector general of the Federal Deposit Insurance Corp. said Wednesday that the FDIC’s losses on the Colonial failure have risen by $1 billion, to $3.8 billion, in the eight months since the Birmingham, Ala.-based bank collapsed.

The inspector general’s material loss review said Colonial was carrying a portfolio of mortgage-backed securities on its books at a paper loss of $377 million as of June 2009, two months before it was closed. But that turned into a realized loss of $760 million when the FDIC sold the portfolio to Colonial’s purchaser, BB&T.

The FDIC also estimated Colonial lost $1.7 billion on its mortgage warehouse lending operations, which were tied to Taylor Bean & Whitaker – a loan originator that went under earlier in 2009, amid suspicions that it was engaging in fraud.

The material loss report makes clear that Colonial was badly laboring even as it claimed to be on the cusp of deliverance by bailout. In December 2008, CEO Bobby Lowder said Colonial would get $553 million in TARP funds. That same month, the bank told regulators at the FDIC and the Alabama state banking department that it would “designate a chief lending officer with the requisite authority to implement sound lending practices and assume overall responsibility for the lending area.”

Taylor Bean and Colonial’s warehouse lending operation were raided in August by inspectors from the Special Inspector General for the Troubled Asset Relief Program, as well as the FBI and other agencies. Neil Barofsky, the TARP inspector general, highlighted the Colonial case this week as one of nine cases being investigated as a result of SigTARP probes.

So it’s a good bet we haven’t heard the last of Colonial and Taylor Bean.

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