Lender rides out expanding Inland Empire housing market.

THE big question in Southern California real estate is whether there's a housing bubble--and if so. when it will burst?

Larry Rinehart, president and chief executive of PFF Bancorp, is trying to convince shareholders that there won't be a slowdown in real estate lending, even if the housing market loses some air.

Pomona-based PFF Bancorp, an active construction lender in the Inland Empire, saw a sharp stock run-up last year. Since January, shares have fallen 10 percent to around $28 last week. (Still, its stock is up 18 percent in the past year.)

Rinehart insists that a bank built on real estate lending can avoid a hard landing by sticking to a reliable real estate maxim: Location, location, location.

"The Inland Empire is one of the fastest-growing areas in the U.S. in terms of housing, jobs and population growth," he said. "When the market gets soft, our builders will move to more affordable type housing--priced from $300,000 to $500,000."

Analysts say 2005 could be a tough year for thrifts and banks carrying mortgage loans on their books.

In the past decade, PFF Bancorp has reduced its reliance on single-family residential mortgages. It controls roughly 25 percent market share of construction lending in the Inland Empire, with one-third to one-quarter of its total earnings exposed to real estate. Originations in the third quarter rose 29.9 percent to $134.1 million, led by construction and commercial loan originations.

In addition to the bank, PFF operates Glencrest Investment Advisors, a money management operation targeting about 85,000 wealthy households, from Claremont to Palm Springs. It also runs Diversified Builder Services Inc., a two-year old start-up that provides consulting, property entitlement and mezzanine lending to homebuilders. The DBS unit contributed $3 million, or roughly 7 percent to 8 percent, of the bank's net income last year, Rinehart said.

James Abbott, an analyst at Friedman Billings Ramsey, recently urged large shareholders to overweight their exposure to financial institutions in California, reiterating that he does not see any trigger near-term event that could cause the Southern California housing market to collapse.

DataQuick Information Services reported last week that L.A. County's median home price reached $424,000 in February, up 20 percent from February 2003. In the Inland Empire markets of San Bernardino and Riverside counties, prices rose 41.1 percent and 30.5 percent, respectively.

Activity and price increases were particularly strong in these relatively affordable areas, DataQuick said, noting that there were still few signs of market distress.

"If people stopped building and stopped needing loans, then the portfolio could shrink very quickly," Abbott said. "But in order for home prices to go down in value, you have to see a material job outflow for a sustained period of time, and I don't see anything like that."

In its 112-year history, PFF has made no acquisitions--nor does it intend to. The company, once called Pomona First Federal Savings & Loan, was formed in 1892 by newspaper publisher Charles Irving Lorbeer. The bank still operates under a thrift charter.

The bank plans to open five branches this year, on top of the 29 now open.

"We open branches where our builders are building and where the customers move to," said Rinehart.

He also says the bank's veteran management team knows the cycles of Southern California real estate. When construction lending dried up in the early 1990s and housing prices fell, PFF increased lending for low-income housing construction. That helped create a loyal clientele of builders and developers.

The bank reported third-quarter net income of $9.6 million, compared with $11.1 million for the like period a year earlier. Net interest income rose 15 percent in the third quarter to $38.7 million, but the bottom line was hurt by several nonrecurring items, including a higher tax rate on a portion of its Employee Stock Ownership Plan. As the company's stock price increases, the nondeductible portion of its ESOP expenses rises, pushing up its effective tax rate.

PFF Bancorp. Inc.

[GRAPHIC OMITTED]

YEAR (March 31)          2004      2003    SUMMARY

Revenue (millions)     $180.3    $185.4    Business: Financial
                                             services holding
                                             company
Loan Loss Provision
  (millions)              2.7       4.8    Headquarters: Pomona
Total Expenses
  (millions)             52.1      77.1    CEO: Larry M. Rinehart
Operating Income                           Market Cap: $707 million
  (millions)            128.2     108.3      Dividend Yield: 2.1
Net Income                                 Total Assets: $3.87-billion
  (millions)             40.9      35.4      P/E Ratio: 16
Earnings Per Share      $1.63     $1.35    Shareholders' Equity:
                                             $346.8 million

Staff reporter Kate Berry can be reached at [phone], ext. 228, or at [e-mail].