Few bank or thrift companies have been hit as hard by the real estate meltdown in California's Inland Empire region as PFF Bancorp Inc. in Rancho Cucamonga.
After losing more than $22 million in the last six months of 2007 — and suggesting in January that the worst of its credit-quality troubles were behind it — PFF warned investors this week that it is expecting loss provisions for the quarter that ended March 31 to exceed $168 million. The $4.4 billion-asset PFF is not expected to report its earnings for the quarter and its just-concluded fiscal year until May, but one analyst said its quarterly loss could top $66 million.
Analysts said that, given the extent of its credit-quality woes, PFF is likely to try to sell itself.
Asked Wednesday whether PFF would court prospective buyers, chief executive Kevin McCarthy said its board is "considering all of our options, whether it would be attracting additional capital or changing strategic direction."
Mr. McCarthy said he is unsure at this point whether losses would continue to pile up in the next few quarters.
"I would hope this would be the worst of it, but until I see the market make a comeback, I can't say for sure," he said.
PFF is hardly the only bank or thrift company in the Inland Empire struggling with credit quality.
The $2.5 billion-asset Vineyard National Bancorp in Corona, took a $9.2 million fourth-quarter provision for losses on residential construction loans, up 737% from the year earlier.
On Tuesday, the $690 million-asset 1st Centennial Bancorp in Redlands, said that it is now classifying roughly 10% of its residential construction loans as impaired, up from 2.29% just three months earlier.
Still, their troubles do not match those of PFF, whose credit quality began to deteriorate rapidly in its 2008 fiscal second quarter, which ended Sept. 30.
Late Tuesday, it said its thrift subsidiary, PFF Bank and Trust, would take a loss provision in the fiscal fourth quarter of $120 million or more, due to a drastic drop in the value of the collateral underlying its residential construction loan portfolio. In addition, the PFF subsidiary Diversified Builder Services Inc. expects to take a $48 million provision in the quarter, after selling at a significant discount "substantially all" of its portfolio of particularly risky residential construction loans, many of which were unsecured and had second trust deeds.
Joseph Gladue, an analyst at Riley & Co. in Los Angeles, said a sale of PFF "could be a good solution for shareholders.
"I know they are being aggressive in addressing the problems, but there is only so much they can do in a tough economy like this," he said. "I think it could be a tough road for PFF to become healthy and profitable again."
A hedge fund looking for distressed assets could be a likely suitor, he said.
The $14.7 billion-asset FBOP Corp. in Oak Park, Ill., which has a 9.85% stake in PFF, had been trying to increase its stake to as much as 24.9%. But the Illinois company withdrew its application in late January after PFF protested to the Federal Reserve Board that FBOP was attempting a hostile takeover. FBOP had said in its December application that it only wanted to be a "passive" investor.
In a brief interview Wednesday, FBOP's president, Robert M. Heskett, declined to discuss PFF's problems or address the possibility of FBOP's buying it outright.
Robert Bohlen, an associate vice president at KBW Inc.'s Keefe Bruyette & Woods Inc., said that PFF's chances of "making it" alone would be contingent upon home sales picking up — or at least stabilizing — in the Inland Empire, which includes Riverside and San Bernardino counties.
"It's going to be very dependent on how well the marketplace allows them to earn through their" current problems, Mr. Bohlen said.
There are signs of home sales' increasing in the region, Mr. McCarthy said, but it is still too early to tell whether conditions are really improving.
In a research note Wednesday, David Rochester, an analyst at Friedman, Billings, Ramsey & Co. Inc., reduced his fiscal 2008 per-share estimate of results from a loss of 85 cents, to a loss of $6.90. He also trimmed his fiscal 2009 estimate from a gain of $1.30, to a gain of 70 cents.
PFF's risk-based capital ratio would probably drop 120 basis points, to 10.1%, necessitating a boost in capital either through an issuance of additional trust-preferred securities or a securitizing of the higher-quality mortgages on its books, Mr. Rochester wrote. However, either measure would further reduce PFF's net interest margin, he said. The margin was 3.22% at Dec. 31. Moreover, PFF would probably have to open an additional line of credit to fund ongoing operations.
Mr. Rochester also said that he expects "increasing market chatter surrounding the probability of a sale of the company at a sub-optimal level in 2008."
PFF also announced Tuesday that, at the request of the Office of Thrift Supervision, its board would seek approval from the regulator before paying any future dividend and before incurring or rolling over any debt. PFF had announced in January that it would suspend its cash dividend due to the uncertainty about the timing of a housing market recovery in the Inland Empire and about the impact of its credit troubles on operating results.
In his research note, Mr. Rochester also wrote that, after PFF's announcement of the massive provision, greater potential exists "for more meaningful regulatory action over the next six to nine months."
PFF's shares fell 19.1% by Wednesday's close, to $6.86.
