Why did 1st Centennial Bank, Redlands CA

Earlier, I wrote about 1st Centennial Bank of Redlands, CA failure. The Office of Audits has an interesting report on 1st Centennial Bank and I found it online. The report linked HERE tells the story pretty much how a bank imploded by just following the rules given to it by the government. The regulators really didn’t find anything wrong:

Cause of Failure and Material Loss – 1st Centennial failed primarily due to bank management’s pursuit of asset growth concentrated in high-risk CRE/ADC loans without adequate loan underwriting and credit administration practices. In addition to a concentration in CRE/ADC loans, the bank also concentrated its loan portfolio in one geographic area that experienced a severe economic downturn, further increasing the risk to the bank. The bank did not ensure that underwriting adequately considered the borrowers’ ability to repay and the adequacy of the underlying collateral. Credit administration practices did not sufficiently ensure that CRE/ADC loans were adequately managed and monitored. Examiners determined that 1st Centennial’s asset quality was seriously deficient at the FDIC’s April 2008 examination, primarily due to deterioration in the bank’s CRE/ADC loan portfolio. Also, examiners found that the bank became increasingly dependent on wholesale funding, including brokered deposits. The examiners concluded that bank management failed to implement adequate risk management controls to effectively mitigate loan portfolio risk and ensure that the allowance for loan and lease losses (ALLL) was properly funded. Significant provisions to the ALLL reduced earnings, eroded capital, and tightened the bank’s liquidity position. Ultimately, the bank became critically undercapitalized and failed.

Nothing really wrong. No fraud, no malfeasence. Everything noted by government regulators is Monday morning quarterbacking. That is the scary part. When banks go bust by following the rules, then a LOT of banks are going to go under.

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