Westrock Sets Sights on More Banking Deals

Shareholders in Harrison's First Federal Bank hope new investors will bring their golden touch to the once-profitable thrift.

Westrock Capital Partners, in turn, hopes its proposed $55 million investment in First Federal Bancshares of Arkansas Inc. will be followed by more deals in the financial services sector.

"We at Westrock have looked at literally dozens of banks and, one way or another, looked at probably 100 banks," said Rick Massey, partner at the Little Rock investment management firm. "I think there is a renaissance in community banks. I believe they will flourish over the next decade.

"With that thesis in mind, we've been looking for more than two years. More lenders will get sicker and not survive."

The First Federal transaction is happening through Bear State Financial Holdings LLC, a group of about two dozen investors anchored by a well-known cadre of former stakeholders in Little Rock's Pinnacle Bancshares Inc.

Bear State investors will end up owning more than 80 percent of a business if regulators approve the deal, which includes a government forbearance component. This part of the transaction would allow Bear State to repay First Federal's $16.5 million TARP loan at a 64 percent discount.

As structured, First Federal would remain as a public company. Its stock, now trading in the $2.75 range, reached as high as $25.74 on March 27, 2006.

Massey, a leading shareholder in Pinnacle and co-founder of the Little Rock office of Kutak & Rock, is a mergers-and-acquisitions veteran with stints at the Rose Law Firm, Stephens Inc. and Alltel Corp. to his credit.

Dabbs Cavin, also a Pinnacle shareholder and founding executive of the bank, will join the operational leadership at First Federal as part of the shift in ownership.  His specific duties and title with the thrift remain to be determined.

"I love working with these guys, and I'll be happy working with whatever title they give me," he said. "We think a lot of their management team and their folks.

"We just want to come alongside them and help stabilize and grow the business. As far as my role with the company, we want me to be where it makes the most sense."

Other Little Rock members from the old Pinnacle gang have rejoined as investors in Bear State. They include Witt Stephens Jr., co-chairman and CEO of the Stephens Group LLC; Joe and Scott Ford, the father-son team of Alltel Corp. fame and partners in Westrock; and Gus Blass III, general partner with Capital Properties LLC and principal with Falcon Securities Inc.

Ron Cameron, CEO of Mountaire Corp., wasn't part of the Pinnacle Bancshares effort but is a Little Rock member of the Bear State investors.

"We didn't want this to be exclusively a Little Rock group of people," said Massey. "Other investors are in northwest and north Arkansas."

He and Cavin declined to name the other 18 or so Bear State investors.

"I've been watching and had an interest in First Federal for years," Massey said. "I met Larry [Brandt, president and CEO of First Federal] way back when. I just like the communities they're in, and they have hard-working people, everything you like."


'A Big Write-Down'

The deal got rolling when Massey contacted Frank Conner, a First Federal director and former chief financial officer at American Freightways Corp., the Harrison less-than-truckload carrier that was sold a decade ago to FedEx Corp. for $1.2 billion.

Since last April, First Federal has labored under a cease-and-desist order from the Office of Thrift Supervision that accompanied its restated 2009 earnings. That recalculation added nearly $20 million to the loss column and pushed the total loss for the year to more than $45 million.

"It became apparent that the company had taken a big write-down," Massey said. "It looked like they were going to need new capital."

Massey had a business relationship with Conner that dated back to his days at the Rose Law Firm doing work for American Freightways.

Massey's pitch regarding First Federal: "We love this franchise, and if you're in the mind to raise more capital, we'd love to be your partner."

Discussions began in earnest last summer, along with a thorough examination of First Federal's loan portfolio and roster of real estate holdings.

"When you're going to recapitalize a troubled bank, the analysis has to focus on their loan assets," Massey said. "We pored over those in a pretty focused fashion."

The Bear State investors bring strong connections to the Little Rock market that point to First Federal expanding to central Arkansas.

"We want to stabilize the business and work through problem assets," Cavin said. "That's priority No. 1. Then we'll look at other opportunities down the road."

The Brandt family, which currently holds an 11.8 percent stake in First Federal and has ties to the company's founding in 1934, still will be involved with the thrift.

"We're really excited about the opportunity with Bear State," Larry Brandt said. "We'll be getting back to being more active making loans and increasing our deposit base."


Millions in New Capital

Improving its capital base was among the regulatory mandates for First Federal. The Bear State investment will provide $40.3 million of new capital in exchange for stock priced at 60 cents per share.

An additional $8.7 million in capital will be raised through a new stock offering, also valued at 60 cents per share. Existing First Federal stockholders will be given first crack. Any new shares not acquired by the existing shareholders will be acquired by Bear State.

One component of the proposed transaction will allow the thrift to shed $16.5 million of TARP-share obligations. Bear State is offering to buy those preferred shares from Uncle Sam for $6 million, a 64 percent discount.

The TARP shares would be converted to warrants for 10 million common shares valued at 60 cents per share for Bear State investors.

The Bear State group will own between 82 and 95 percent of First Federal, depending on how many new shares are purchased by current shareholders.

A reverse stock split will move First Federal shares from penny stock status to $3 per share. During the past 52 weeks, shares traded as high as $3.91 on April 15 to as low as 94 cents on November 24.

The Bear State transaction should be completed during the second quarter, likely during May, if approved by stockholders, regulators and securities officials.

"Right now, we're on track to accomplish that," Brandt said.

What is the reaction to the Bear State offer?

"They see the opportunities for us in the future," Brandt said. "We've heard nothing but positive, I guess you could say, praise from the local stockholders. This will allow us to get back to business as normal."

Massey said the due diligence was a pleasant experience with few surprises along the way.

"There will be some losses, and we don't know exactly how much," he said. "But under all the scenarios we've looked at, this will be one of the best capitalized banks in the state after all is said and done, and there will be opportunities down the road for consolidation."

Profitable Pinnacle

Pinnacle Bancshares Inc., a de novo venture formed in January 1997 and backed with two stock offerings totaling $7.3 million, grew to $135 million in total assets.

The one-bank holding company for Pinnacle Bank with two Little Rock locations was sold in March 2002 for $21.2 million to BancorpSouth Inc. of Tupelo, Miss.

The transaction reflected a purchase price of 2.4 times book value, ranking it among the most lucrative bank deals in Arkansas. As structured, the sale represented a compounded annual rate of return on investment of about 21 percent.

The Pinnacle Bank name went dormant before gaining new life in 2004 when the moniker was purchased for a new bank effort in Rogers.