Federal regulators seized Downey Savings & Loan and PFF Bank & Trust late Friday, saying hundreds of millions of dollars in bad loans from the housing bubble had rendered the Southern California banking fixtures unsound.
The banks' branches will continue operating as usual under the ownership of Minneapolis-based U.S. Bank, one of the country's largest banks, and no depositors will lose any money because of the failures, regulators said.
Newport Beach-based Downey lost $547.7 million in the first nine months of 2008, largely because of risky "option ARM" mortgages -- adjustable-rate loans that let borrowers pay so little each month that their loan balances rose.
PFF, short for Pomona First Federal, specialized in loans to Inland Empire developers and home builders, running up $289.5 million in losses in the January-September period.
"The closing of these two thrifts once again demonstrates the tremendous impact of the housing market distress on the state of California," John Reich, director of the Office of Thrift Supervision, said in a statement announcing the seizure of the institutions.
After seizing the banks, the agency handed them over to the Federal Deposit Insurance Corp., which immediately agreed to have U.S. Bank, a unit of US Bancorp, acquire virtually all their assets and assume all of their deposits.
US Bancorp agreed to shoulder the first $1.6 billion in losses on the two thrifts' loans. The FDIC will be on the hook for losses after that, which it estimates will be $2.1 billion.
Of the $3.7 billion in total estimated losses, $2.9 billion is on Downey's loans and $800 million is on PFF's.
The FDIC said it entertained other offers for the two thrifts. But the agency determined US Bancorp's offer was the least costly to the federal deposit insurance fund, which is financed by premiums paid by banks and thrifts.
US Bancorp, which has largely escaped the mortgage losses plaguing many banks, said acquiring Downey and PFF was part of its strategy of expanding in the West, particularly in California, where it recently completed the acquisition of Mellon Business Bank in downtown Los Angeles.
Before the latest deals, U.S. Bank had 353 California branches, a modest number in contrast with the presence the bank maintains in downtown Los Angeles. Its name appears on the former Library Tower on Fifth Street, the highest U.S. skyscraper west of the Mississippi.
