FDIC audit: Regulators too slow

By Paul Donsky

The Atlanta Journal-Constitution

Signs that FirstBank Financial Services was headed for trouble appeared long before the small McDonough bank failed last February.

Regulatory examinations that took place almost every year since the bank opened its doors in 2002 found that it had grown too fast and took on too much risk related to the booming housing market.

But federal regulators took no action to force the bank to change its ways until October 2008, when the bank was already in free fall.

What took so long?

According to a federal audit released Thursday that explored regulators’ role in FirstBank’s failure, regulators were slow because the bank’s risky behavior had yet to show up on the balance sheet. Borrowers were paying on time, profits were rolling in.

The report said the Atlanta office of the Federal Deposit Insurance Corp. relies on “moral suasion” rather than formal actions to prod changes at banks that have problems but are doing well financially.

Atlanta regulators said “it is a challenge to examiners to determine which action is appropriate when a financial institution has a high level of [real estate] concentrations but no negative financial impact.”

But the audit, from the FDIC’s Office of Inspector General, said regulators did not do enough to prevent FirstBank from going under, a failure that cost the FDIC’s deposit insurance fund an estimated $112 million.

“Consideration of the associated risk that the [federal and state] examinations identified could have resulted in elevated supervisory concern and action to address FirstBank’s problems earlier,” the audit said.

The inspector general also released an audit late last month on the failure of MagnetBank, a Utah-based bank founded by Atlanta investors with a sizable chunk of its operations based in Atlanta.

The blistering report said the bank engaged in a host of questionable lending practices before failing in spectacular fashion last January, just 40 months after opening its doors.

The audit catalogued examples of “inappropriate” actions by MagnetBank’s loan officers, including misrepresentation of facts, falsifying inspections on real estate collateral, and a lease transaction for an individual with a prior conviction for fraudulent leases.The audit also said loan officers were hired based on their ability to bring in business rather than sound credit judgment.

The audit referred to a July 2008 note from the bank’s board of directors to federal regulators which said board members “believe they were, at times, misled by the bank’s former Chairman and Chief Executive Officer.”

The bank was unusual in that it didn’t operate any branches. It funded its operations not with checking and savings accounts but with volatile “brokered” deposits from national investors who shop for the best rates.