While the financial woes faced by PFF Bank & Trust (NYSE: PFB) and Vineyard National Bancorp (Nasdaq: VNBC) dominate the headlines, observers say the problems are isolated and other local banks are faring well.

San Francisco-based financial services firm Stone & Youngberg recently issued a fourth quarter 2007 bank analysis summary report with a financial overview of community banks; 10 local banks were listed in the report.

"The problems lie in larger banks like Vineyard and PFF, these banks put a dark cloud over the group," said Michael Natzic, senior vice president of Community Bankgroup, a division within Stone & Youngberg. "The smaller banks have been managing their risk very well."

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Financing new home developments caused problems for some local banks as home sales slowed and construction loans went unpaid.

Rancho Cucamonga-based PFF recently saw its stock trading halted briefly on the day t reported its largest ever quarterly loss of $159 million for the three months ended March 31.

Corona-based Vineyard has been embroiled in a proxy fight between former president and chief executive officer Norman Morales and the bank's board of directors.

Morales resigned earlier this year following Vineyard's net loss of nearly $60 million for the quarter ended Dec. 31.

"The banks are not faring well," said Joe Morford, an analyst with San Francisco-based RBC Capital Markets who covers Vineyard. "We're all continuing to see a rapid rise in credit problems."

The fight for power within Vineyard, which according to the latest Securities and Exchange Commission filings seem to favor Morales, is an unprecedented event in the community-banking sector Natzic said.

"It's pretty unusual," he said. "We've done this a long time and trade a lot of banks and a lot of stocks, but this is the first time we've seen a fight to this magnitude."

"You have rifts," he added. "But never of this magnitude."

PFF and Vineyard are not among the local banks covered by Stone & Youngberg.

"We no longer make a market in Vineyard," Natzic said. "We're kind of waiting to see what unfolds there."

Some banks avoided the pitfalls of PFF and Vineyard by shying away from construction and development loans SEC filings suggest that nonperforming construction and development loans hurt PFF and Vineyard.

"We all differ in the types of lending that we've done and the types of real estate markets that we're in," said Craig Blunden, chairman, president and chief executive officer of Riverside-based Provident Bank (Nasdaq: PROV). "We differ quite a bit from PFF and Vineyard; we were never a large construction lender."

Provident's real estate lending focuses primarily on single-family homes, the sector has struggled due to rising foreclosures, but not enough to affect the bank's standing.

Blunden did not speak in detail on Provident's first quarter earnings, as they have not been released.

Provident reported a net income of $1.18 million, or 19 cents per diluted share in the second quarter of its fiscal year ended Dec. 31, compared with net income of $1.5 million or 22 cents per share in the comparable period a year ago.

Provident benefited from the Federal Reserve Bank lowering interest rates as well.

"We were fortunate that the Fed lowered interest rates a couple times," Blunden said. "What that did, it lowered the index, so many of our customer's loans are not adjusting now and many have adjusted down."

Subprime loans were not a problem for Provident, he said.

"As a rule of thumb, community banks avoid subprime lending," Natzic said. "It's not an area of the market for community banks."

Downsizing and unemployment have factored into Provident's real estate lending concerns.

"For us subprime is not the issue," Blunden said. "The issue for us is how are people doing employment-wise and will they have a problem with their regular payment, not payment shock."

Smaller banks have managed to maintain low non-accrual loans, and because of their size, they've been able to manage risk a bit better, Natzic said.

Stone & Youngberg pays close attention to is non-accrual loan percentage, Natzic said.

A non-accrual loan is a loan in which interest is overdue and collection of principal is uncertain.

"It's a red flag with any bank," Natzic said. "We use the benchmark of 1% (of non-accrual loans to total loans). When it starts getting over 1%, it's getting high."

"A couple of these banks are running pretty high," he said. PFF has almost 6% and Vineyard is close to 5.5% non-accrual loans; Temecula Valley is over 4%, Natzic said.

By comparison, the relatively young Riverside-based Security Bank of California (OTC: SBOC) has no non-accrual loans on its books.

With the struggles some banks face, the climate is right for a flurry of acquisitions and mergers, Natzic said.

"Banks are going to look at these guys because of their weakness and say it's a good takeover point," he said.

Low stock prices for banks could make common stock offerings difficult, he said.

"Where do they get the capital from to do the acquisition? The sector is pretty beat up across the board," Natzic said. "A lot of banks with stocks that are undervalued make acquisition difficult."

"But there are some out there," he added. "Citizens Business Bank officials have been very vocal that they're looking for an acquisition, it's just finding the right opportunity for the right price."

CVB Financial (Nasdaq: CVBF) president and chief executive officer Chris Myers stated that CVB "doesn't have anything in the hopper in terms of acquiring another bank" but is evaluating different opportunities.

CVB avoided lending catastrophe similar to Provident by staying out of construction lending for the most part.

"Only 4% of our outstanding loans are residential construction loans," Myers said. "We try to be very consistent with our credit underwriting through different economic times; if the economy is good we might be a little more flexible in terms of lending criteria but not much."