FirstFed Financial Corp. (FED)

canadianbanker (< 20) Submitted: 5/24/08 4:09 AM

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You fall victim to stock / debt rating companies. Moody's and S&P almost always adjust their ratings after the fact (i.e. they are meaningless & useless). Take a look at a few of the financial statistics & use some common sense:
(a) Deposit base is shrinking (deposits are now below where they were 10 years ago).
(b) Look at FED's asset growth: went from approx $5 billion in assets in 2004 to over $10 billion by 2006 - asset - i.e. loan growth - doubled! And examine the time frame at which the bank doubled its assets - the peak of the housing market. So simple math tells you that a majority of the portfolio that was orginated during this period is under-water and will drive non-accruals / foreclosure over the next several years as these loans re-set and borrowers default.
(c) Non-accruals spiked in Dec 2007 to approx $180 million, with the trend continuing through the end of the first quarter 2008 to approx $370 million. This bank, however, continues to be way under-reserved but clearly the smart money is not fooled by this accounting game. Look for reserves to increase throughout the year until the bank recognizes that investors are not fooled. Reserves were approx $190 million (well below the amt of non-accruals)
(d) Almost $2 billion of loans orginated in 2005 will reset over the next two years. Given the industry trend of foreclosures, continued erosion of housing prices, and increasing non-accurals, it is safe to assume that at least 50% of these loans will become impaired ($1 billion).
(e) The banks loan portfolio is heavily concentrated in one geographic market - S. California, which continues to lead the nation in declining home prices / sales.
(f) Real Estate Owned (REOs) - or foreclosures - now exceed 6% of the bank's total assets (in past cycles, 5% caused great concern w/ regulators). As this number trends up, an astute investor must begin to wonder how over-stated assets and earnings were in 2006 and 2007 (my guess, is by a large magnitude). Recall, GAAP allows banks to add the neg amort payment as loan growth while also recognizing it as earnings when in fact the "true earnings" cycle never occurred.

Bottom line, the question is not how low the stock will go but whether the bank will survive.

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