FirstFed Financial Corp.'s $244.8 million fourth-quarter loss shaved its capital so much that observers say it needs a cash infusion to keep regulators at bay.
But Babette Heimbuch, the $7.5 billion-asset Los Angeles company's chief executive officer, said a plan to shrink assets and cut expenses should help it build the capital cushion so that it can absorb more losses.
"We probably will have more losses in coming quarters. Not at these levels, but more losses," she said in an interview after FirstFed reported its quarterly results Monday. "But we anticipate that we will still be well capitalized."
Ms. Heimbuch said her bigger concern had been how customers might react after hearing last week that the Office of Thrift Supervision had imposed a cease-and-desist order requiring FirstFed to keep its thrift unit well capitalized.
The company ended up fielding questions from some customers, and it called others. But Ms. Heimbuch said people are not panicking the way they did after IndyMac failed in July.
Instead, FirstFed's retail deposits have been on the rise.
"We didn't have much reaction in our deposit base — minimal, minimal," she said. "We still grew last week, and got more money in than left."
Ms. Heimbuch said she suspects that, ironically, the failures of Washington Mutual, Downey Savings Bank, and PFF Bank and Trust have contributed to the sense of calm. She said all three operated in FirstFed's market, and the failures "went off without a hitch," so local depositors might be less fearful these days.
Like others in California — a state with six failures since July — FirstFed has been hurt by the real estate downturn.
In particular, it has been reeling from trouble with option adjustable-rate mortgages, in many cases made with low documentation and teaser rates.
Its loss of $17.91 a share for the fourth quarter is the largest of its four straight quarterly losses.
It reported earnings of $8.4 million, or 61 cents a share, for the fourth quarter of 2007.
FirstFed attributed the loss mostly to a $220 million provision — double the amount it set aside in the third quarter and about 10 times the year-earlier amount. It also wrote down $112.3 million of its deferred tax assets.
Its First Federal Bank of California had a core capital ratio of 5.35% at yearend, or 35 basis points above the level regulators require for it to be considered well capitalized. That is a steep drop from a year earlier, when the ratio had been 10.97%.
"It continues to be a dicey situation for them," said Bert Ely, an independent analyst in Alexandria, Va. "The question is, are they going to be able to power through this? Can they generate enough earnings to cover the cost of the sins of the past?"
How much the company needs to add to reserves might make the difference in its survival, Mr. Ely said. "It's so close to 5%, the loss reserving becomes a critical factor."
The OTS said in the enforcement order that it wants a capital plan detailing how the thrift intends to remain well capitalized at the end of each quarter over the next two years, and that it wants updates every two weeks on how the plan is working.
If the thrift dips below well capitalized, it has 15 days to submit a contingency plan with specific time frames for selling or liquidating itself.
Paul Miller, an analyst at Friedman, Billings, Ramsey & Co. Inc., said in a research note that remaining well capitalized will be a challenge, given the rising credit costs.
He said FirstFed needs a capital infusion from investors to do so, which would be difficult under such tough market conditions.
Despite FirstFed's hefty provision, Mr. Miller also wrote that its cushion against losses remains a concern. "Further substantial reserve build is necessary, therefore pressuring capital levels."
He predicted losses will go higher, because FirstFed's loans are concentrated in the deteriorating housing market in its home state. "We have not seen any signs of stabilization in the California housing market," he wrote.
Chargeoffs jumped to $163 million, or 10% of total loans on an annual basis, from $103 million, or 6.74%, in the third quarter.
Ms. Heimbuch said that a significant rise in unemployment last quarter compounded the problem of falling home prices, and that the company opted to be aggressive in marking down loans.
"What we really wanted to do is get this, as much as possible, behind us," she said.
Option ARMs that reached their maximum allowable negative amortization and required an increased payment had a significant impact on FirstFed's delinquencies last year, the company said. Negative amortization is unpaid interest that is added to the principal balance of the loan.
FirstFed estimated that $802 million of loans recast last year and that $396 million is scheduled to recast this year.
But Ms. Heimbuch said falling interest rates are helping reduce the overall impact on borrowers. "The payment shock for people who have teaser rates is going to be a lot lower, because rates are coming down."
With all the loan troubles, net interest income eroded by 31% from the year earlier, to $39.6 million.
Ms. Heimbuch said the economic stimulus bill in Congress could be a boon for her company.
The bill contains a provision that would allow losses to carry back five years, instead of the current two years. If this is enacted, FirstFed would realize an immediate $75 million credit on its federal taxes.
Ms. Heimbuch said this alone would boost its core capital ratio to 6.30% as of Dec. 31.
But Mr. Ely said such help is far from guaranteed. "Everything is still up in the air in regard to the stimulus bill," he said. "It's been indicated that the Senate might substantially rework the bill passed by the House."
Karen Dorway, the president of BauerFinancial Inc. in Coral Gables, Fla., said her company, which rates the strength of banks and thrifts nationwide from zero to five stars, gave First Federal Bank only one star as of the third quarter, indicating it is "troubled."
Though FirstFed is well capitalized, its loan delinquency rate was nearly double that of thrifts nationwide with more than $1 billion of assets, and its chargeoff rate was more than three times its peers', Ms. Dorway said. Brokered deposits also had been trending higher, accounting for 29% of its total that quarter. Ms. Dorway said her company would analyze the fourth-quarter data only after it is available from the Federal Deposit Insurance Corp.
Mr. Miller put a price target of 60 cents on FirstFed's shares, or 3% of its current book value. He said the shares — which have lost 98% of their value over the past 52 weeks — would continue to trade at a steep discount until credit trends and capital levels improve. The stock closed at 69 cents a share Wednesday, up a penny.
Mr. Miller said FirstFed could be acquired; however, potential buyers and investors, unable to estimate losses on the options ARMs, might stay away.
Ms. Heimbuch agreed that a sale seems unlikely, though she said the company would be open to considering one.
"It's hard to imagine at this point in time that another bank would have interest, because of everything that's gone on in the banking industry," she said. "I think every bank is thinking, I'm going to sit tight and make sure I get through this."
