Operational Losses At First Federal Draw Heightened Regulatory Scrutiny

by George Waldon  on Monday, Dec. 14, 2009 12:00 am  

The details are different, but today's financial vibe harkens back to the savings and loan crisis of the 1980s. It's a comparison that Larry Brandt, CEO of First Federal Bancshares of Arkansas Inc., himself has made as his S&L holding company endures losses of $25.6 million through the first nine months of this year.

These days, the culprit hammering the thrift's balance sheet isn't loan participations backing commercial real estate in unfamiliar regional markets. Direct loans to fund real estate projects closer to home are causing the current round of fiscal anguish.

"Our problems are in northwest Arkansas in Benton and Washington counties, with an oversupply of houses and lots," Brandt said. "We haven't made a development loan since 2006; we've had to rework some though.

"We saw the downturn in the economy coming, and when it hit, it hit quickly. That's when the bubble burst."

But it wasn't until this year that the red ink began splattering First Federal's financial statements. Battering the bottom line were allowances for loan losses that mushroomed from $6.4 million at year-end 2008 to more than $41 million as of Sept. 30.

Shares that traded at $9.50 a year ago have plummeted to $2.83, hovering near historic lows for the company.

The Office of Thrift Supervision formalized its operational concerns on Nov. 19 with a written directive restricting First Federal's activities and requiring OTS approval regarding certain actions.

Among the items requiring OTS approval are commercial real estate loans of $1 million or more, opening any new offices and accepting, renewing or rolling over any brokered deposits.

Many of the other restrictions were already in place when the company accepted $16.5 million from the Troubled Asset Relief Program Capital Purchase Program - the so-called "bank bailout" - in March.

"We thought it would be a good insurance policy to have that," Brandt said of the decision to participate in the CPP. "We truly didn't feel like we needed it. But it has provided more of a cushion to our capital.

"We're still making loans. The thing with loans is you have to have someone requesting loans. Credit-worthy borrowers aren't beating down our doors to get new loans."

The CPP money helped shore up the thrift's capital as First Federal waded into its troubled loan portfolio, dominated by real estate-related loans.

The six biggest categories for nonaccrual loans at the Harrison thrift as of Sept. 30 are land, $25.3 million; one- to four-family residential, $13.6 million; land development, $10.3 million; commercial real estate, $7.7 million; commercial loans, $3.4 million; and speculative one- to four-family construction, $2.7 million.



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