Financially Strapped Bank Drafts Recovery Plan

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Just weeks after revealing another quarter of projected dismal earnings, PFF Bancorp Inc. expects to complete a recapitalization that should get the company out of immediate financial trouble but likely will substantially dilute the stake of existing shareholders.

PFF, which is based in Rancho Cucamonga and operates PFF Bank & Trust offices throughout Southern California, expects this week to complete a $460 million private placement of units consisting of debt and stock.

The offering is multiple times the size of the PFF’s market capitalization, which has shrunk 96 percent over the past year to just $27 million as a result of bad loans made to homebuilders and residential land developers.

Analysts began speculating last month that the bank, which has $4.4 billion in assets, would seek a buyer after revealing that it would take a $159 million loss for its fiscal fourth quarter ended March 31.

“They either had to raise some capital or sell the company,” said Joseph Gladue, an analyst with B. Riley & Co. LLC. “They still have a lot of problems, but if they can get this done, it removes a lot of the pressure on the bank, at least for the near term.”

Founded in 1892, PFF is one of the state’s oldest banks and operates 38 branch offices in Los Angeles, Riverside, San Bernadino and Orange counties. It offers community banking services, as well as the origination of commercial real estate and business loans.

The bank has been hit particularly hard by its significant exposure to the Inland Empire real estate market, which has seen high rates of foreclosure and plummeting land values.

It revealed last month that it expects to set aside $196 million in loan loss provisions for its fiscal fourth quarter, bringing the bank’s total loan losses for the year to nearly $290 million far surpassing any previous year.

With a total loan portfolio of about $4 billion, the provision represents more than 7 percent of total loans, and analysts say that proportion could continue to rise in the coming months.

For the same quarter last year, the bank took just a $4.8 million provision for loan and lease losses. That brought its total loss provision for the fiscal year 2007 to $9.7 million, which accounted for less than 1 percent of its loan portfolio.

In a filing last year with the Securities and Exchange Commission, executives said the bank has “experienced a low historical loss rate in our loan portfolio” but that was before the Inland Empire real estate market collapsed.


Dilution expected

The bank has revealed few details about the private placement aside from the fact it will consist of convertible secured senior notes due 2009 in combination with common stock and executives did not return calls last week.

But in a statement, PFF said the effort is intended “to strengthen the bank’s capital levels.” The bank also noted it will use the capital to pay off a $44 million interbank loan. That loan was recently restructured, with its maturity date extended to June 16 from May 31.

Gladue said the fact that bank expects to complete the offering this week demonstrates a considerable amount of investor confidence. It will reduce the chances that the bank will face a serious liquidity issue in the coming months, and likely takes selling the company off the table for now.

And while it’s unclear what will be the ratio of debt to equity in the offering, Gladue noted in a June 6 research note that the bank is joining other smaller banks in making private placement offerings to raise capital.

He also speculated that if it’s anything like a recent offering by Sovereign Bancorp Inc. of Philadelphia, PFF may offer a 50-50 mix of stock and debt and price the equity close to the current share price. Shares closed June 12 at $1.21 up 2.5 percent for the day.

That would mean PFF would issue some 150 million shares of stock, which would reduce the stake of current shareholders to 13 percent and give the new shareholders an 87 percent stake in the company. It also would reduce the bank’s book value to $2.08 from $7.14.

Despite the dilution to existing shareholders and the decline in the book value, Gladue favors the placement and recently raised his rating on the stock to “neutral” from sell. Two other analysts who follow the stocks have maintained “market perform” rating.

Still, it’s unclear how long this infusion of capital will keep the company solvent. However, if PFF is forced to seek a buyer later this year, Gladue believes it should find takers.

“There’s still some value there,” he said.

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