U.S. regulators were aware of high loan concentrations at a California bank years before those same loans helped precipitate the firm's failure, government auditors said in a report released on Friday.
The Office of the Inspector General for the Federal Deposit Insurance Corp. said examiners did not take the steps necessary to rein in risky practices at First Centennial Bank in Redlands, Calif. The firm failed in January with an estimated cost to the federal deposit insurance fund of $215.4 million.
The report said that examiners noted as early as 2004 that First Centennial had high concentrations of commercial real estate and construction loans, but that no actions were taken to ensure the bank maintained higher capital levels in line with its risk profile.
Even when regulators did start to take actions against the bank in 2008, the process was delayed, auditors found. In October the bank was sent a proposed cease-and-desist letter that would have required it to raise capital and reduce its reliance on brokered deposits. First Centennial balked at the order, saying in early November it would not comply.
That forced the FDIC to seek approval from a federal administrative law judge to mandate changes at First Centennial, but those restrictions were still pending judicial review when the bank failed in late January.
The FDIC, in a letter responding to the auditor's report, acknowledged that it has taken steps to address the concerns raised by the bank's failure and said that "we continue to look for and implement improvements to our supervisory program."