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.
The Downey and PFF branches brings U.S. Bank’s California total to 561 branches, compared with more than 1,000 each for Bank of America Corp. and Wells Fargo & Co.
The $2.1-billion loss brings the deposit insurance fund’s losses on failed banks to about $15 billion this year, said Arlington, Va., bank consultant Bert Ely.
Ely said that amount could have been far lower if regulators had stepped in earlier to force the operators of big thrifts like Washington Mutual Inc. and Downey to find a buyer or clean up their acts before their loan problems became so severe.
“It’s really sad about Downey,” Ely said. “It was a great institution with a great branch system and customer base, and it made it through all the bank troubles of the 1980s. In the end, it was just like WaMu. These problems are like a fresh-caught fish, not like a fine red wine -- they don’t get better with age.”
Downey Financial Corp., parent of Downey Savings, was co-founded in 1957 by developer Maurice McAlister, a bass fisherman and nickelodeon collector who built shopping centers with Downey branches. McAlister remained chairman until July, when Downey’s woes were already apparent.
PFF was the oldest banking outfit based in Southern California, founded in Pomona in 1892 to serve towns in what was then the citrus belt. Parent PFF Bancorp Inc., based in Rancho Cucamonga, had hoped to sell itself to Oak Park, Ill.-based FBOP Corp., which owns California National Bank and other community banks.
The seizures are likely to make permanent the disappearance of the stock market value of Downey Financial and PFF Bancorp. Since the end of 2006, when the mortgage meltdown began, Downey’s shares have lost 99% of their value. PFF’s stock is down 99.8%.
Regulators allowed Downey and PFF to complete their business Friday before stepping in.
At Downey’s headquarters, a group of 10 FDIC and US Bancorp officials strode into the lobby of pink granite and marble at 6:06 p.m. and took the elevator to the fifth-floor executive offices to begin the transition to new ownership.
Downey and PFF were the 21st and 22nd FDIC-insured institutions to fail this year. No. 20, a bank in Georgia, was seized earlier Friday.
Other collapses this year have included Pasadena’s IndyMac Bank, the largest Southern California S&L;, whose failure in July is expected to cost the deposit insurance fund $8.7 billion. The FDIC is operating IndyMac while seeking a buyer for it.
US Bancorp said it would modify home loans for struggling Downey borrowers using as a model an aggressive program the FDIC has adopted at IndyMac.
Downey and PFF’s customers are better off than some of IndyMac’s because all of their deposits were assumed by U.S. Bank. IndyMac customers whose accounts weren’t fully insured haven’t gotten, and may never get, access to all of their money.
Before the announcement, Tim Stevenson, 54, a retired construction contractor who was getting money from an ATM at Downey’s Burbank branch, said he had considered moving his more than $80,000 at Downey to another bank.
“I heard they were hurting, but what’s happening to their stock is not something I wanted to hear,” Stevenson said. “I thought they’d cranked things back up.”
Joe Schweitzer, 69, a retired teacher and a longtime Downey customer in Sherman Oaks, said Friday afternoon that he had known the thrift was at risk of failing.
“I heard that their stock was below $1, that they had bad loans and that the government wasn’t going to help them,” he said. “But as long as my money’s insured, I’m not scared.”
Still, when a certificate of deposit matured two weeks ago, he and his wife transferred the money to Citibank.
Schweitzer said he was frustrated to learn that Citibank’s parent company, Citigroup Inc., had its own problems. Its stock plunged 60% this week.
“We moved the CD to Citibank, and now look at where they are in the stock market,” he said. “They’re where everyone’s money is going to, but they’re also in terrible shape. It’s like jumping from one hot potato to another.”
Some Southern California banks whose stock prices have cratered continue to operate.
Temecula Valley Bank Chairman Stephen H. Wacknitz said Friday that Temecula was not in as dire a situation as PFF, Downey or Vineyard Bancorp in Corona. All four banks have seen their stocks punished by investors worried about the banks’ loan troubles.
Wacknitz said Temecula had stopped its high-risk lending on speculative buildings seven or eight months ago.
“You show me a bank whose stock hasn’t gone down,” he said. “Look at Citigroup.”