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Apr. 25 2008, 12:26 PM ET
Nearest price: 12.45 (04/25/08)
by martinroad (profile)
(all of martinroad's ratings)
First Federal Bancshares of Arkansas (FFBH) -- $12.85 -- 84% of stated TBV -- $62.5 million market cap – 5.5% NPAs & 90+ Days/Assets

Last month I traveled to northwest Arkansas (Fayetteville & Bentonville) to assess the real estate situation. Bentonville is the home of Wal Mart and an area I would have thought would be doing fine (since Wal Mart seems to being doing fine). However, even though employment is fine and the economy has only slowed slightly, the residential real estate situation is a disaster. I’ve spent a fair amount of time assessing residential real estate in areas such as Florida, the Inland Empire, Las Vegas, Phoenix, Chicago’s Western Suburbs, etc. and would say that northwest Arkansas ranks up near top with excess supply related to land, land development, lots, and vertical construction of homes. So, even with Wal Mart doing well, in my opinion most of Northwest Arkansas is going to have a major problems with real estate. In my travels, it wasn’t uncommon in areas such as Fayetteville to see entire streets that had been developed with spec homes, 90% of them not sold/not occupied. The land/lot situation is really crazy…just way too many lots. Lots that were selling for $40,000+/lot are now on the market for sale in bulk at $10,000/lot and there are plenty available at that price. The severity of losses related to these is going to be huge.

Prior to my trip, I attempted to setup a meeting with First Federal Bancshares (wasn’t sure if it would be a long or a short…but thought there could be an opportunity one way or the other if I got my hands around the real estate situation). Nobody from the company returned my call. The day I arrived, I was going to leave a message for the CEO and called at 6:30 AM figuring that would be a good time to get his voicemail. He actually picked up and I introduced myself and told him about my visit to the area….he said they don’t meet with people like me and he hung up.

FFBH is interesting in that they have about 1/3rd of their loan portfolio in construction/land/lots. Further, they have 5.5% NPAs & 90 days+ past due/assets, while only having 1.03% reserves/loans. They are well capitalized with $74 million of tangible equity (8.9% tangible equity/assets). However, after seeing what is going on with the residential real estate market there, especially on the land/lot side of things, I question whether FFBH will have enough capital to survive this downturn. FFBH currently has $31.8 million of nonperforming loans, $11.2 million in OREO, and about $3 million of 90 day+ past due. In their 10-K (a quarter old now) they provided a good breakdown of loans by category and even listed some of the larger loans that are still performing in the land development portfolio (providing origination date, maturity date, commitment, funded amount, accrued interest, number of lots, status, and county). They have a few fairly large loans that mature in from April - June 2008. One project with 9- lots was on hold and was 45% funded at 12/31/08…I can’t imagine that is going be a good situation. Another with 137 lots that was fully funded was complete…but after visiting that area I can’t imagine many developers are going to get out of lots at anywhere near their cost. The third situation was set to mature in April 2008 and was on hold, and the borrower informed the bank of their intention to move the loan to another institution for a better rate – I sure would like to know the name of that other institution.

Construction loans are another area I think FFBH will have more problems. They typically made with a max LTV of 80% on an as-completed basis (I interpret this at 100% of the cost). At 12/31/07 the bank had loans out on 195 spec homes totaling $40.9 million of exposure. It wouldn’t surprise me to see them have some problems in that portfolio as well. There are just too many home for sale and they aren’t moving.

To FFBH’s credit, according to the 10-K, they have slowed and/or stopped making a lot of these loans. That being said, I think they are going to be dealing with these problems for a while.

There is very little short interest with only 31,579 shares being short (0.7% of the outstanding) as of 3/31/08. The stock is really illiquid (only trades about 2,000 shares per day). There are a couple of large institutional holders, Dimensional owns 372,996 shares (7.7%) and First Manhattan owns 343,384 shares (7.1%) they hadn’t started selling as of their 3/31/08 filing. Dimensional is a quant fund and probably won’t sell unless the place blows up. First Manhattan is usually smarter, but I’ve seen them stick around some banks way too long.

Although it is at 84% of stated book, I think FFBH will have severe losses related to a decent portion of their portfolio. In 1Q08, FFBH earned $0.22/share, but that included a $1.2 million ($0.16/share after tax) non-recurring item related to a death benefit claim on a life insurance policy.

It is my view that credit issues will start eating into FFBH’s capital over the next year and that tangible book value per share will decline significantly. On the short side, I have been trying to attempt to find stocks I think have a good chance of failing or needing more capital. I think FFBH fits this category.

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