When developer Empire Land sought protection in U.S. Bankruptcy Court in Riverside in April, its biggest debt by far -- $5.1 million -- was to PFF Bank & Trust.
Southern California's oldest bank, PFF -- formerly Pomona First Federal -- had doubled its loan portfolio to $4 billion over the last decade, in large part by financing residential developers and builders of affordable housing in the Inland Empire.
But the bank's losses on such lending has soared, sending the stock price of its parent company, PFF Bancorp, down 90% this year. Desperate for fresh capital, the company agreed Monday to be acquired for $30.5 million in cash.
Home-mortgage specialists may have been the first lenders to suffer for their roles in financing the housing bubble. But, as foreclosures rise and home prices fall, many smaller banks and thrifts that backed residential developers and home builders are watching black ink turn red and are spending uncomfortable amounts of time with regulators. The financial institutions also are enduring jabs from critics who say they tossed lending standards out the window.
PFF Chief Executive Kevin McCarthy said in an interview that his bank started pulling back on land loans two years ago, anticipating a downturn like "the normal economic cycles we've always had out here."
"But nobody foresaw what would happen to the housing market, or that sub-prime mortgages would collapse so completely," he said. As for the sale to Oak Park, Ill.-based FBOP Corp., parent company of community banks including California National Bank, McCarthy said it was a hard but necessary choice: "I'm doing this to keep as many employees on the job as I can."
Community banks embraced commercial lending in recent years, largely ceding home loans, credit cards and other mass-market products to big national players.
Residential construction loans, which generate big fees, were especially profitable for smaller banks -- until housing collapsed in places like the Inland Empire, where prices are down more than 30% from their highs, and the Central Valley, where some former boom markets are off more than 40%. Raw land on which Ontario-based Empire Land installed roads, sewers and utilities, expecting to then sell it to builders, has declined even more.
"In the Inland Empire, we're hearing land is going for 20 or 30 cents on the dollar" of its appraised value when the loans were made, said RBC Capital Markets analyst Joe Morford.
According to data tracker Foresight Analytics of Oakland, 15.8% of single-family home construction loans were at least 30 days delinquent in Riverside and San Bernardino counties last quarter, up from just 1.7% a year earlier. The delinquency rate was 14.7% in Los Angeles County, 14.9% in Orange County and 15.4% in Ventura County. It was 30.4% in Merced County, near Sacramento.
Regulators were late to recognize the severity of the problems with these loans, Morford said. But this year they have taken notice.
In a report last week on regional economic activity, the Federal Reserve said of conditions in the West: "Credit quality eroded a bit further, mainly for loans related to the housing sector, with the most significant adverse impacts on asset portfolios noted for smaller community banks."
Regulators are now aggressively requiring banks to write down the value of questionable loans and to raise more capital to make up for those write-offs. That creates a pinch for banks, one that is apparent in their regulatory filings.
Security Pacific Bancorp of West L.A. -- which resembles in name only the former L.A.-based banking giant acquired in 1992 by what is now Bank of America Corp. -- has written off millions in dud Inland Empire housing loans. In a recent order, the Federal Deposit Insurance Corp. and state regulators required Security Pacific, with $585 million in assets, to diversify its operations, cut off deadbeat clients and "determine that the lending staff has the expertise necessary to properly supervise construction loans."
Other Inland Empire-based construction loan specialists also are feeling the pain.
Corona-based Vineyard National Bancorp, with $2.3 billion in assets, lost $70 million in its last two quarters, and its stock is down 82% from a year ago. It has blamed inland housing loans, though it also specializes in another tricky business, financing builders of expensive custom homes in West L.A., the South Bay and coastal Orange County. Its executives declined to be interviewed.
Regulators now classify Vineyard and its subsidiary, Vineyard Bank of Rancho Cucamonga, as troubled. The company had postponed its annual meeting while it negotiated for new investment, but said last week that discussions with an interested party had fallen through.