La Jolla Bank Closure: A Victim of the Commercial Real Estate Bubble

Strategic Insights -

La Jolla Bank FSB, with 10 branches in Southern California and Texas, was shut down by federal regulators on a Friday evening due to its excessive exposure to commercial real estate loans. The bank's assets swelled to $3.6 billion during the construction boom of the 2000s, but 21.6% of its loans became non-performing as the housing market declined in 2006. The bank's aggressive investment strategy and possible fraudulent lending practices led to its downfall.

Key Takeaways:

  • La Jolla Bank FSB was closed by federal regulators due to its overextension in commercial real estate loans, with a 5,000% higher capital in outstanding commercial building and development loans compared to its available funds.
  • The bank invested heavily in land, development, and apartment construction between 2004 and 2007, doubling its assets during the construction boom.
  • 21.6% of La Jolla Bank's $3.6 billion in loans were considered non-performing, as the housing market began to decline in 2006.
  • The bank's aggressive investment strategy and possible fraudulent lending practices have raised concerns among regulators.
  • OneWest Bank FSB was brought in to manage the loans and share the losses, taking over La Jolla Bank's $2.8 billion in deposits and its 10 branches in Southern California and Texas.
  • The FDIC said employees from La Jolla Bank have stayed on to assist with the transition to OneWest, ensuring a smooth transition for depositors.

Statistics:

  • La Jolla Bank FSB had $3.6 billion in outstanding loans, with 21.6% considered non-performing.
  • The bank had 5,000% more capital in its commercial real estate loans than it had on hand to cover the debt.
  • OneWest Bank FSB took over La Jolla Bank's $2.8 billion in deposits and its 10 branches in Southern California and Texas.
  • La Jolla Bank FSB's assets swelled to $3.6 billion during the construction boom of the 2000s.
  • 2004-2007: La Jolla Bank FSB doubled its assets through heavy investments in land, development, and apartment construction.
  • 2006: The housing market began to decline, leading to 21.6% of La Jolla Bank's loans becoming non-performing.

Sources:

  • Office of Thrift Supervision, prepared statement
  • Eric Wolff, staff writer, North County Times
  • Greg Hernandez, FDIC spokesman in Washington, D.C.
  • Edith Gray, FDIC spokeswoman
  • McClatchy-Tribune Information Services