First Federal Bank Hangs Hat On Mortgages, Internet Game

Boone County in autumn is a calico “Mayberry,” a place where kids still peddle their bikes around Harrison and a ladies Bible study group can take as long as it pleases to finish brunch biscuits at The Benton House.r

It’s the kind of place — this city of 12,000 — that on first glance seems like a trip back to the Arkansas our grandparents knew. That is, until stepping into the new 40,000-SF corporate headquarters of First Federal Bancshares Inc., because grandma never saw anything like this.r

Twin flat-screen computer terminals flicker in the grand foyer of the publicly traded firm, a holding company for stock savings and loan First Federal Bank F.A. The Internet banking terminals, and a couple of televisions flashing the latest from Wall Street, mark the path to a new generation of tellers who because of thrift’s aggressive online strategy are seeing less of the under-35 crowd. The $5.2 million building also includes a high-tech training facility and auditorium.r

First Federal’s deposits shrank fractionally from $575.482 million in 2002 to $572.989 million this year, reducing the thrift’s statewide market share 5.59 percent. But 2002 was also the most profitable year in First Federal’s 68-year existence.r

Larry Brandt, the company’s president and CEO, said First Federal simply draws its strength from what it knows best. These days, that’s a blend of hometown handshakes and uptown technology.r

“We have one of the top of the line Internet banking programs,” Brandt said. “That has brought our average customer age down considerably … We feel like with our basic roots as a savings and loan that we are a home loan specialist.r

“When we were first established, we had two objectives. One was to provide a good place for people to save their money and to provide home ownership, and those two things are still fundamental objectives for us today.”r

In fact, First Federal is one of the few lending institutions in the region that offers online loan-origination technology. Home buyers can log on to www.ffbh.com and potentially get a loan approval in minutes.r

“Many other banks have an application online, but our system actually underwrites and can approve the application online,” said Ross Mallioux, First Federal’s executive vice president, chief lending officer and Northwest Arkansas regional manager. “We never have to see the customer until closing.” r

Mallioux said the technology has been in place for about a year. It was developed by a trade organization called America’s Community Bankers.r

“People can pick a rate and key in an application,” Mallioux said. “There are so many people that need to buy a house that don’t have time to go into a bank.”r

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Strategic Approachr

First Federal’s net income of $7.8 million was a 42 percent increase over the $5.5 million it netted in 2001. Its earnings per share rise 58 percent from $1.75 per share in 2001 to $2.77 last year, and it’s sent dividend checks to it shareholders for the past 27 consecutive quarters.r

But melding technology and a “sound, traditional banking approach” aren’t the only reasons Brandt said his bank already has $5.5 million in net income through 2003’s first three quarters or why it’s outperformed the Standard & Poor’s 500 for the last three years.r

The bank is making sure it targets the right demographics and geographic areas with the right products. Naturally, that means Northwest Arkansas’ burgeoning home loan market has been a focus.r

About 50 percent of all loans the bank made in 2003 have come from Washington and Benton counties. The bank has two branches each in Bentonville, Rogers and Fayetteville in addition to one in Tontitown. r

“You’ve got to go where the ducks are flying, and they are flying in Benton and Washington County,” Mallioux said. “We recognize the strength of the Washington and Benton County market area and are placing a great deal of our focus and our efforts on increasing our market share of loans in this region.”r

Brandt said that last year the bank originated about $300 million in loans in Northwest Arkansas and has already exceeded that year-to-date.r

First Federal’s Benton County deposits grew 4.26 percent from $50.298 million in 2002 to $52.441 million this June. But it also had 3.08 less market share because its deposits didn’t grow as fast as the county’s overall rate of 7.57 percent. Same deal in Washington County where its deposits grew 3.59 percent from $73.836 million to $76.487 million, but its market share was down 2.67 percent (see chart, p. 13).r

“People in Northwest Arkansas, when they think of home loans, they generally think of First Federal Bank as one of their primary considerations,”Brandt said.r

The bank also has one branch in Berryville, three in Harrison, one in Yellville and two in Mountain Home. Brandt said the bank adds an average of one bank branch per year to its territory but won’t try to grow too quickly by paying “excessively high rates.” The bank has 17 total locations in Benton, Marion, Washington, Carroll, Baxter and Boone counties.r

“We have a five-year strategic plan that looks into different areas, but I can’t completely comment on that,” Brandt said.r

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Old Dogs, New Tricksr

Brandt said First Federal tailors its emphasis differently in markets such as Mountain Home, where it competes aggressively in the certificate of deposit market because of the large population of retirees. Although he said it’s hard to describe First Federal’s “typical customer” these days, the thrift has already shifted to court another kind of client in all of its markets.r

Brandt said the bank has tried to increase its average yield on commercial and construction loans. It can lend up to $10 million to one borrower and has the ability to offer participation with other banks for larger projects.r

“We just see ourselves evolving more into the commercial line just because of the economic factors involved,” Brandt said. “Sometimes there can be more profits in commercial lending. They command a little bit higher interest rate.”r

Mallioux said the bank has hired an experienced commercial lender in Rodney Stine and streamlined its loan processing centers in Fayetteville and Harrison. r

He also said the thrift’s $31.1 million decrease in family residential loans for the nine months of 2003 offset the overall increase in other lending sectors. But that decrease was due to large sales volume of secondary market loans.r

“The mortgages get put into larger pools,” said Mallioux. “The 30-year fixed rate loan isn’t something that banks keep in their portfolio.”r

According to First Federal’s 2003 third-quarter report, loan originations for the nine month period in 2003 totaled about $162.4 million in family residential loans, $103.6 million of which originated for sale in the secondary market, $6 million in multifamily residential loans, $30 million in commercial real estate loans, $17.4 million in commercial loans, $66.5 million in construction loans and $44.3 million in consumer installment loans, of which $19.3 million consisted of home equity loans and $12.3 million consisted of automobile loans. r

Residential construction loans accounted for $60.5 million in construction loans and nonresidential construction loans accounted for $6 million.r

Even though the run on refinancing has slowed with an interest rate hike, the bank has already grown its assets from $679.9 at 2002’s close to $695.8 million through this year’s third quarter.r

“There is always a rush in the market to get a piece of the action,”Brandt said. “But we’ve been here and we will be there in the future. As things slow down we will still be here making home loans, whereas some brokers might pull out.”r