In its final days, leaders of 1st Centennial Bank were locked in a dispute with regulators over the condition of the Redlands-based company's loan portfolio and its ability to survive as the Inland housing market deteriorated.

The matter of corrective measures remained unsettled when the bank, after failing to boost capital or find a buyer, was shut down in January, according to a post-failure audit report issued by investigators at the Federal Deposit Insurance Corp.

Bank leaders contended that the situation was not as dire as regulators said at the time of the closure, and at least one former member of the bank's board of directors says 1st Centennial, a local business mainstay since 1990, could have survived if it was given more time to benefit from loans in its portfolio that still had good long-term prospects.

"We were in better shape than a lot of banks that are still around today but haven't been closed," Douglas Welebir, a local trial attorney who served on the 1st Centennial board of directors for 19 years, said in an interview Friday.

Before the deterioration of the local economy, 1st Centennial had been among at least three U.S. banks participating in a program that expedited bank reviews but that nevertheless failed during the past year, Bloomberg News reported. .

The FDIC audit report, issued in August, said 1st Centennial failed primarily due to the bank's pursuit of asset growth concentrated in high-risk commercial real estate loans tied to development and construction of single-family housing tracts. In addition, the portfolio was concentrated primarily in the Inland area, where the housing demand had begun to sink dramatically starting in late 2007.

"The bank did not ensure that underwriting adequately considered the borrowers' ability to repay and the adequacy of the underlying collateral," the report says.

As home demand dropped, home builders and other developers tied to the residential housing sector experienced problems paying back loans.

An April 2008 examination by the FDIC reported $110 million in delinquent loans, resulting in a "rapid deterioration of the bank's financial condition."

The bank agreed at the time to raise $30 million in additional capital by Aug. 1, but it was unable to do so.

By December, regulators said, the bank's situation had deteriorated further and it was judged to be "critically undercapitalized."

On Jan. 23, the California agency shut down the bank and turned it over to the FDIC as a receiver, which in turn entered into a purchase agreement with First California Bank of Westlake Village to take over the bank's deposits and six offices.

The FDIC estimated shutting down the bank cost the federal Deposit Insurance Fund $227 million.

According to the Bloomberg report, 1st Centennial was among at least three failed banks that were in the FDIC's program aimed at boosting efficiency by focusing examiners' attention on weaker firms. The program started in 2002 but was terminated in March 2008 after examiners complained that guidelines usurped their judgment.

FDIC representatives told Bloomberg that its monitoring of 1st Centennial, and other banks in the Merit program, was not adversely affected by staffing issues.

In its 1st Centennial audit, the FDIC said it conducted timely examinations of the bank from 1990 through its closing this year.

But it acknowledged that it could have responded more quickly after finding in April 2006 that the bank had high levels of construction loans in its portfolio that "posed a potential risk."

FDIC representatives and other 1st Centennial leaders could not be reached for comment this week.

In its audit report, the FDIC contends that 1st Centennial continued to report itself as "well capitalized to adequately capitalized" long after its operations had begun to deteriorate.

Welebir, the former board member, said bank officials had no problems with regulator oversight during most of the past 20 years.

But a key dispute that arose between the bank's executive board and regulators in late 2008 was over how regulators classified healthy vs. non-performing assets. He said regulators wanted to apply certain accounting standards that had not yet been adopted nationally and weren't yet being applied to most institutions.

Partly because of that issue, the bank's executive board rejected terms of regulators' cease-and-desist order issued in October.

"They basically wanted us to sign a document saying we were incompetent," Welebir said Friday. "I said, 'I won't do that.' "

He said board members contended that a large portion of the bank's loans and other assets -- later sold off at bargain prices after the shutdown -- would likely have paid off later had the bank been given more time by regulators.

Welebir said he and his board colleagues were pained to see the loss of what had been an institution in the community over a 20-year span, with business and personal ties to the local area that won't be recovered.

"It was the worst thing I've seen in my life," he said.

The bank's holding company, 1st Centennial Bancorp, is in federal Chapter 7 liquidation bankruptcy proceedings.

Reach Lou Hirsh at 951-368-9559 or lhirsh@PE.com