May 1--The first quarter of 2009 marked another period of losses or reduced earnings for Inland-based banks, as institutions continued to deal with fallout from last year's housing market collapse and resulting rise in loan defaults.

Bank leaders and industry observers said this week that banks will continue to play things conservatively for the rest of the year, writing off bad loans and adding to their reserves to guard against losses on future delinquencies.

"The first quarter is about what we expected to see," said Michael Natzic, a community banking specialist in the Big Bear Lake office of brokerage firm Stone & Youngberg. "I think we've seen the worst of it."

While earnings have not been reported by the troubled Corona-based Vineyard Bancorp, Natzic said figures reported so far by Inland-headquartered banks indicate they are well capitalized but guarding against future earnings surprises by adding to their federally required loan loss reserves.

Derek Ferber, an industry research analyst with SNL Financial in Virginia, said that for the rest of the year, what happens nationally with unemployment will play a big role in the fortunes of banks. Rising unemployment could lead to more home foreclosures and other delinquent consumer loans. And the ability of businesses to pay off commercial loans could be affected if the economy continues to squelch consumer spending.

"Right now, playing it conservative is the key," Ferber said. "Adding to loss reserves might hurt their earnings reports now, but it's going to help them in the long run."

So far, Inland-based banks reporting their earnings for the period ending March 31 have cited additions to loan loss reserves as the key reason for lowered earnings compared with a year ago, or losses for the period. Those include the parent companies of Ontario-based Citizens Business Bank (earnings down 18.6 percent), Temecula's Mission Oaks Bank ($2.5 million loss), and Riverside-based Provident Savings Bank ($2.5 million loss).

Discussing his bank's latest quarter in a conference call Thursday, Provident Chairman and CEO Craig Blunden reported the past three months have seen a significant uptick over the prior quarter in new home mortgage loans and refinancings, spurred in part by dropping interest rates.

"Our mortgage banking business has returned to profitability," Blunden said.

Ferber said banks nationwide that deal with home mortgages are seeing a rise in new loans and refinancing, from a combination of factors including low interest rates and federal tax breaks to encourage homebuying.

However, banks are generally seeing continued deterioration in the quality of loans they made in the past to residential and commercial borrowers, and may need to continue boosting loss reserves for the rest of the year and beyond, depending on whether the overall economy improves.

William Powers, an Inland-based regional president with San Diego-headquartered Pacific Western Bank, said his bank has always maintained conservative lending standards for its mostly business clientele, but is still dealing with delinquencies like most banks.

"Nobody is unscathed," he said.

In 2009, there has been a general slowdown in commercial lending, mostly because borrowers don't want to get in more debt for business and development projects, he said.

His bank traditionally has not loaned for more than 65 percent of the value of a commercial project.

But Powers said other lenders could run into problems later this year -- for instance, if shopping center and industrial park operators lose tenants and are unable to find replacements. That could affect their ability to pay back loans, similar to what has already happened with national mall operator General Growth Properties.

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

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