Industry experts say Inland bankers' cautious approach of late 2008 will likely carry well into 2009 as institutions continue to boost loan loss reserves to guard against prolonged tough times.

They'll also be looking to avoid the fate of two recently failed local banking mainstays -- Rancho Cucamonga-based PFF Bank & Trust and Redlands-based 1st Centennial Bank, both of which placed big losing bets on the region's homebuilding sector at the height of the local housing boom.

In their most recent earnings statements, Inland-based banks have reported reduced earnings compared with a year ago or net losses instead of earnings. For the most part, said Stone & Youngberg broker Michael Natzic, those declines are mainly on paper, as banks move funds into reserve that otherwise would have gone toward reported earnings.

Federal agencies require banks to place funds in reserve in anticipation of projected losses on loans, to ensure they are able to meet future obligations if payments from borrowers don't materialize.

"Regulators have been requiring them to do this more over the past year, but it's also just a prudent business practice," said Natzic, a community banking specialist in the brokerage firm's Big Bear Lake office. "The banks are making sure their losses are covered."

Locally based banks as a group remain well insured and capitalized. Conceivably, local banks that have added to loss reserves as a precaution could pull some of those funds out of reserve if loan losses end up less than anticipated, and put that money toward earnings again. However, Natzic said the current caution mode is likely to continue at least into the second quarter, and possibly through the end of 2009, he said.

Frank Basirico, CEO of Temecula Valley Bank, said his bank and others are on watch for a potential "lag effect," as problems related to Inland housing cause ripple effects for other types of lending, such as retail, industrial and office development. That caution prompted Temecula Valley to boost loan reserves significantly in the past year, resulting in a net loss of $16 million for 2008.

"Until the existing inventory of homes is completely cleared out, hopefully later this year, I don't think you're going to see a lot of changes in terms of loan loss reserve issues," Basirico said.

In a recent earnings conference call, Craig Blunden, CEO of Riverside-based Provident Savings Bank, said Inland foreclosures and layoffs are also prompting his institution to plan on the side of caution. Boosts in loan loss reserves contributed to Provident's $6.51 million loss in its most recent quarter.

Still to report its latest earnings is the troubled Corona-based Vineyard National Bank, which like PFF and 1st Centennial reported heavy losses in 2008 tied to delinquent residential construction loans.

Vineyard announced in November that it would be acquired by a private investment group organized by its board chairman. Natzic noted that the company, whose bank deposits are federally insured, has nonetheless remained publicly silent about its future in the past two months.

Vineyard officials could not immediately be reached to comment.

Experts said most Inland-based banks are still generating income despite the pre-emptive boosts in loan loss reserves. But Natzic said current trends should prompt investors to look beyond earnings numbers when deciding to buy, sell or hold stock in locally based banks.

"The question (investors) need to ask is, why are the earnings down?" he said. "Is it because the bank is actually losing money or because it is protecting itself against future losses?"

For community banks, which focus primarily on business lending, caution will also show in the form of lending practices, though most local bank leaders interviewed recently said credit remains available to well-qualified borrowers.

"We're still going to make loans when it makes sense," said William Powers, an Inland-based regional president with Pacific Western Bank, headquartered in San Diego. "We're not going to make loans based on speculation or where a business has no cash flow."

Powers said Pacific Western could be scoping out acquisitions in the long run as the economy recovers. Some well-run smaller banks could emerge as bargains with their stock prices recently dropping, and Powers noted that Pacific Western has made 20 acquisitions since 2000.

Smaller banks will also be looking to seize new small-business loan clients as the economy thaws.

"The good news is that independent community banks entered this economic downturn in a much better financial position than the largest money-center banks and are faring far better than the big banks," said Paul Merski, chief economist for the Washington, D.C.-based trade group Independent Community Bankers of America.

Merski said community banks are generally "common sense lenders" that did not trip up on subprime loans, credit default swaps and other exotic investments that hurt some national players.