Posted 12/14/2009 12:00 am
Updated 11 months ago
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.
Total nonperforming assets and performing restructured loans of $101 million at Sept. 30 were written down to nearly $80.9 million, about 11 percent of total assets.
That write-down total compares with $55.7 million at year-end 2008, about 7 percent of First Federal's total assets.
Boosting loan loss reserves was the big-ticket item behind the company posting a whopping $23.2 million loss for the third quarter.
"We took a big hit, but we were aggressive in building up our loan loss provisions and doing what we needed to do to clean up the balance sheet," Brandt said.
He said paring its portfolio of real estate has become a focal point for First Federal management.
"That's a priority for us," Brandt said. "We're fortunate in that we don't have a $10 million or $12 million project we have to work through. We're not at a level we can't work out."
Real estate-backed loans totaled $517 million at the end of the third quarter, a decline of $24 million compared with nine months earlier.
Back in the Day
During the 1980s, venturing into new markets was encouraged by regulators who advised First Federal and other lenders to broaden their horizons if local loan demand wasn't good.
"Needless to say, everything went good for awhile and then the participation loans collapsed regionally," Brandt said. "We had our lumps then and worked through it. We had some losing years, but recovered and got through it by the early 1990s."
First Federal, one of only six remaining Arkansas thrifts, finds itself working with regulators and sorting through a tangled loan portfolio along with lenders around the nation.
"We're like most banks; we're trying to control our growth," Brandt said. "We're not going to be doing any new branching in northwest Arkansas. We've done all we're going to do in the near future.
"We're back to basics and conservative bank lending. Regulators are emphasizing this with lenders throughout the nation. Northwest Arkansas is still one of the best locations. It's one of the regions that will lead the economic rebound.
"I believe that, and a lot of people do too."
Real Estate Owned & Troubled Land Loans
The real estate owned portfolio at First Federal Bancshares of Arkansas is dominated by property in Benton and Washington counties and represents more than $27.9 million in bad loans as of Sept. 30.
Land and land developments recovered by the lender account for $11.8 million of that total, the biggest piece of the real estate owned portfolio.
With $25.3 million in nonaccrual loans secured by land, First Federal expects that tally to increase in the coming quarters. More than $20 million in loan loss allowances already are assigned to land and land development loans.
Nonaccrual Loans Secured by Land
52 single-family lots and 25 acres of undeveloped land, Fayetteville
Loan Balance: $4.59 million
80 acres for future residential development, Fayetteville
Loan Balance: $3.81 million
40 acres, proposed residential subdivision, Farmington
Loan Balance: $3.41 million
35 acres, proposed residential subdivision, Fayetteville
Loan Balance: $3.4 million
60 acres, residential zoned, Fayetteville
Loan Balance: $3.3 million
29 acres for future commercial development, Springdale
Loan Balance: $3.2 million
96 single-family lots, Fayetteville
Loan Balance: $2.83 million
2.49 acres commercial land, Rogers
Loan Balance: $2.33 million
42 single-family lots, Cave Springs
Loan Balance: $2.18 million
24 acres, commercial zoned, Lowell
Loan Balance: $2.1 million
Other, 20 loans under $1 million each
Total: $25.35 million
Real Estate Owned Land
110 single-family lots, Springdale
Loan Balance: $3.8 million
61 single-family lots, Lowell
Loan Balance: $1.68 million
63.3 acres for future residential development, Elm Springs
Loan Balance: $1.44 million
48 single-family lots, Elm Springs
Loan Balance: $1.28 million
30.7 acres for future residential development, Lowell
Loan Balance: $1.25 million
35 single-family lots, Pea Ridge
Loan Balance: $654,000
10 single-family lots, Farmington
Loan Balance: $593,000
Other, 29 properties
Loan Balance: $1.06 million
Total: $11.83 million