The Collapse of PFF Bank and Trust

Founded in 1892, PFF Bank and Trust was a California based bank with a very long history. It had survived and prospered for over 100 years, but then the financial crisis hit. It all ended on November 7, 2008, when PFF Bank and Trust’s assets were seized by the government and they were forced to declare bankruptcy.

Operating solely in California, PFF Bank and Trust provided various retail banking services to consumers as well commercial banking services for businesses. Like many other banks at the time, it had more debt on its books than it should have had.

2008 was the beginning of a very rough period for American banks. The most prominent bank failure in that year was without a doubt the bankruptcy of Washington Mutual, but in total 25 American banks had to close their doors. That number only increased, with 140 failed banks in 2009, and a massive 157 bank failures in 2010. The trend slowly reversed in 2011 (92 bankruptcies), and in 2015 it was back down to more normal levels, with only eight bank failures.

But what specifically led to the collapse of PFF Bank and Trust? Like many other American banks at the time, it had given too many loans to people who probably shouldn’t have gotten one. It was the fact that about 90% of its loan portfolio was secured by real estate that ultimately led to its demise.

In the second half of 2008 the real estate market in southern California collapsed. This meant that the majority of loans that PFF Bank had on its books became de facto worthless. It was happening all over the country. Banks had given out way too many subprime mortgages. The widespread practice of combining these loans into extremely non-transparent and risky subprime mortgage securities, and selling them onwards, further contributed to the riskiness of this system.

So when housing prices started to come tumbling down in southern California in 2008, PFF Bank and Trust was in trouble. It lead to mortgage delinquencies and large numbers of foreclosures. Foreclosures are a healthy and a necessary part of the lending process, but in this case, with the massive and continuing fall in prices, the houses that PFF Bank received were practically worthless. With the vast majority of their loans now worth nothing, PFF Bank had to declare Chapter 11 bankruptcy in November of 2008.

The banks $3.7 billion of assets and $2.4 billion of deposits were bought by the Ohio based U.S. Bank and all of its locations continued operating as before.

However, this wasn’t the end of it. PFF’s management became the target of various lawsuits by shareholders and employees. In 2012 the bank’s former CEO and COO both agreed on a $8.25 million settlement with investors who alleged that they had been deceived about risky lending practices. An allegation that would be heard again and again over the next few years as the financial crisis progressed.