In the failure of PFF Bancorp Inc. of Rancho Cucamonga, Calif., lies the wreckage of another deal.

Just two weeks ago the $3.7 billion-asset PFF still planned to sell itself to FBOP Corp. of Oak Park, Ill., under a $30.5 million deal struck in June.

But it appears that deal was torpedoed by a seemingly unrelated event — the government's takeover of Fannie Mae and Freddie Mac. And with PFF unable to survive on its own, regulators shut it down Friday. Its branches and deposits went to U.S. Bancorp.

FBOP was forced to write off $936 million of its investment securities in the third quarter, mostly Fannie and Freddie stock, leaving it undercapitalized and, according to industry observers, in no position to take on a bank as troubled as PFF.

FBOP did not return a phone call, but the $17 billion-asset company has said it would apply for a cash infusion through the Treasury Department's Capital Purchase Program.

FBOP's troubles illustrate how the fallout from the government takeover of Fannie and Freddie continues to ripple through the marketplace. Hundreds of banks and thrifts had invested in the preferred shares of the government-sponsored enterprises.

At least two companies —the $2.1 billion-asset Gateway Financial Holdings Inc. in Virginia Beach and the $354 million-asset State of Franklin Bancshares Inc. in Johnson City, Tenn. — agreed to sell themselves in September after the plunging value of their Fannie and Freddie holdings depleted their capital.

Analysts say they expect the Treasury to look favorably on companies with heavy Fannie and Freddie exposure when making capital investments. That's what happened with the $3.6 billion-asset Midwest Banc Holdings Inc. in Melrose Park, Ill. A $64.5 million impairment charge on Fannie and Freddie shares contributed heavily to Midwest's $159.7 million loss in the third quarter.

But Midwest said this month that it would receive $85.5 million in government capital, which was nothing short of a lifeline. It had hit a wall in its effort to raise up to $125 million of capital on its own.

Last week the Treasury set a Dec. 8 deadline for private companies to apply for capital.

According to an article in Crain's Chicago Business, FBOP asked for $522 million through the program, the most that it would be eligible to receive.

The company, which owns nine banks in four states, swung to a $551 million third-quarter loss from a profit of $55 million a year earlier, according to Federal Deposit Insurance Corp. data.

Its total risk-based capital ratio fell to 7.54%. (Regulators set a minimum of 10% to be well capitalized and 8% to be adequately capitalized.)

FBOP, which bought a 9.85% stake in PFF last year, had struck a deal to acquire the rest of it after the real estate meltdown in the Inland Empire led to hundreds of millions of dollars in losses at the thrift company.

PFF would have been rolled into FBOP's California National Bank subsidiary, and in an interview at the time Gregory A. Mitchell, California National's president and chief executive officer, spoke highly of the benefits from the proposed merger. He said despite PFF's poor asset quality, it had "an extraordinarily strong retail franchise," with 38 branches in Riverside and San Bernardino counties.

FDIC data shows that California National's capital also got hammered by losses on investment securities. Its total risk-based capital ratio at Sept. 30 was 6.50%.

But as recently as Nov. 10 the deal for PFF was still on and expected to close by yearend. In a Securities and Exchange Commission filing, PFF said that FBOP was working to extend the Federal Reserve Board's approval of the deal and to obtain other regulatory approvals.

None of the regulatory agencies would comment, but several observers said they doubt FBOP walked away. Citing FBOP's depleted capital, they suggested that the deal fell through because regulators would not bless it.

Michael Iannaccone, managing director with Performance Trust Capital Partners LLC in Chicago, said no factor "could have been bigger than the fact that FBOP lost $800 million of its capital."

While FBOP has a good chance of being able to get government capital — since its problem is related to GSEs and not bad loans — the Treasury investment would not have been enough to return FBOP to well-capitalized status if it bought PFF, Mr. Iannaccone said.

Matthew Anderson, a partner at Foresight Analytics LLC in Oakland, Calif., agreed that the collapse of the PFF deal likely had to do with the FBOP's securities hit. "They just got creamed," Mr. Anderson said.

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