The housing slump in California's once-booming inland valleys has caught up with PFF Bancorp Inc.
The $4.5 billion-asset Rancho Cucamonga company said late Wednesday that earnings in its first fiscal quarter, which ended June 30, were nearly wiped out by huge losses on loans to residential developers.
Analysts said that even though other banking companies that lend to residential developers in California may also report a rise in troubled loans, they do not expect any to report as hard a hit as PFF. Roughly a third of its loans are in residential construction and land development.
Kevin McCarthy, PFF's president and chief executive, said in an interview Thursday that the sudden deterioration in credit quality "is primarily the reflection of a single borrower." However, "we're recognizing other weaknesses in the portfolio as well, and we're aggressively reserving to address those concerns."
PFF expects to record a loan-loss provision of $20 million to $21 million for the quarter; the provision would cut earnings by 48 to 51 cents a share. A year earlier the company earned $15.4 million, or 62 cents a share.
It also said it expects to report net chargeoffs of $7.5 million to $8 million, mainly because of three loans made to one residential developer in the San Joaquin Valley. PFF has additional loans of about $32 million to the same developer that it has classified as either "special mention" or "substandard."
James Abbott, an analyst at Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., downgraded PFF's stock Thursday to "market perform," from "outperform." He lowered his price target by $12, to $23 a share, and he lowered his earnings estimates by $1.64 for this calendar year, to $1.51, and by 30 cents for the next calendar year, to $2.10.
PFF "has a track record for being very proactive in downgrading credits, provisioning for potential losses, and disclosure to investors," Mr. Abbott wrote in a research note. "Nevertheless, we are raising our expectation for further delinquencies … and provisions for the next several quarters to account for the unanticipated."
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville, said in an interview that other banking companies making construction loans in the inland valleys are likely to report an increase in nonperforming loans.
Citing statistics by foreclosureradar.com, he said that during the first half of this year banks foreclosed on 30,000 California properties with mortgages worth $12 billion. Last month banks foreclosed on 6,000 properties with mortgages worth $2.7 billion.
"Banks that have done construction loans with … [a large number of] leveraged developers may have been a little too optimistic, and they're going to have some hits," Mr. Rabatin said.
Investors are already getting skittish. Shares of one of PFF's chief competitors, the $2.4 billion-asset Vineyard National Bancorp in Corona, fell more than 3% Thursday, to $21.28.
"Investors are really concerned about credit quality, and rightfully so," Mr. Rabatin said. "We'll see this contagion for at least a quarter or two more."
Joseph K. Morford 3rd, an analyst in the San Francisco office of Royal Bank of Canada's RBC Capital Markets, said that even though Vineyard makes many residential construction loans, it has "manageable" credit risk.
"The bulk of their construction lending is for rebuilding homes in higher-end coastal beach communities, and that market continues to be healthy," Mr. Morford said. Vineyard is also expanding into other markets, like northern California, he added.
Most of PFF's problem loans are in the San Joaquin and Coachella valleys, but Mr. McCarthy said the company expects the level of nonperforming loans to remain elevated over the next few quarters, because of decreased home sales and downward pricing pressures in all of its markets.
Still, it expects the slowdown in residential construction to be temporary and future earnings to rebound once the market heats up again, he said.
"This is a matter of excess inventory in certain segments of our market that just needs to be absorbed," Mr. McCarthy said. "We feel very strongly that Inland Empire" — a vast region east of Los Angeles — "is one of the strongest markets in the country in terms of job growth and population growth, and there will continue to be very strong loan demand.
