First Federal Bancshares of Arkansas Inc Reports Operating Results (10-Q)

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Nov 01, 2012
First Federal Bancshares of Arkansas Inc (FFBH, Financial) filed Quarterly Report for the period ended 2012-09-30.

First Federal Bancshares Of Arkansas Inc has a market cap of $191.9 million; its shares were traded at around $10.05 with and P/S ratio of 6.5.

Highlight of Business Operations:

The Company's net income was $1.3 million for the nine months ended September 30, 2012, compared to a net loss of $5.8 million for the same period in 2011. The primary reason for the increase in net income was an increase in net gains on sales of investment securities of $1.0 million and a decrease in net REO expenses of $6.4 million. The decrease in net REO expenses was primarily attributable to a $4.3 million decrease in loss provisions on REO and a $1.9 million increase in net gains on sales of REO properties. In December 2011, the Bank posted write-downs of REO of $11.3 million. This was a result of management's evaluation of the overall REO portfolio and based on the decision to more aggressively market certain properties. A consequence of this write-down was a reduction in the loss provision on REO for the three and nine months ended September 30, 2012, as minimal additional changes to REO values since year end were necessary.

The Company's net income was $353,000 for the three months ended September 30, 2012, compared to a net loss of $2.0 million for the three months ended September 30, 2011. The primary reason for the increase in net income was a $2.5 million decrease in net REO expenses attributable to a $1.6 million decrease in loss provisions on REO and a $933,000 increase in net gains on sales of REO properties.

The decrease in deposit fee income for the three month comparative period was primarily due to a decrease in insufficient funds fee income. The increase in noninterest income in the nine month comparative periods ended September 30, 2012 and 2011 was primarily due to increases in gains on sales of investment securities and gains on sales of loans, offset by a decrease in deposit fee income.

The decrease in REO loss provisions in 2012 compared to 2011 was primarily related to the Bank's comprehensive review of its REO portfolio as of December 31, 2011, and its decision to more aggressively market certain properties, which were written down at that time. Since the economic recession began in 2008, real estate values in the Bank's primary market areas have not fully recovered and the Bank continues to have higher levels of foreclosed assets. Sales of certain types of property, principally undeveloped land and developed residential subdivision lots, have been slow and as a result, management has made a strategic decision to more aggressively market certain REO properties, including reductions in the asking price on certain properties. However, there can be no guarantee that the properties can be sold given the current market environment. The previous carrying values were primarily based on third-party appraisals using marketing periods that exceed the Bank's more aggressive marketing strategy. Management reviewed the REO portfolio and individually analyzed the recorded value for many of its foreclosed properties by obtaining new broker pricing opinions or discounting current appraisals or valuations based on the Bank's recent experience selling or attempting to sell similar properties. The Bank also analyzed sales of REO during 2011 in order to estimate an average loss for each category of REO and applied these average loss percentages to the remainder of the REO portfolio to estimate net realizable values. Carrying values of the Bank's REO properties were adjusted as necessary based on the new estimated net realizable values as a result of management's intent to more aggressively market REO properties. This review resulted in an $11.3 million loss provision during the fourth quarter of 2011. The majority of these write-downs were made in the developed lots and raw land categories, where properties are more speculative in nature and market activity has been slow.

The increase in the net gain on sales of REO properties for the three and nine months ended September 30, 2012 compared to the same periods in 2011, was primarily related to the sale of 61 single-family residential properties with a total gain of $881,000 located in the Northwest Arkansas region. These properties were transferred to REO in December 2011 and valued based on updated appraisals. These properties were not additionally written down as part of the comprehensive review of REO in December as the Bank had received current appraisals and the properties were transferred to REO at the end of December.

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