Thursday, September 4, 2008

FirstFed Financial Corp. (FED)

FirstFed Financial Corp (FED) is one the most heavily shorted financial stocks in the market. It is the parent company of First Federal Bank of California, and the bank is considered one of the Option ARM triplets along with Downey Financial (DSL) and BankUnited Financial Corporation (BKUNA)

As you can see in the chart below the stock traded above $40 in February 2008, and then cratered down to hit an intraday low of $2.91 on July 14.



Now it has bounced back to $14.52, a 500% move off of its bottom. So my question as a Value Investor is just what the hell going on here? Is this move up a result of changing fundamentals at the company, or is it some combination of short covering and a technical bounce?

Here is the data from the latest CALL report from the Office of Thrift Supervision (OTS) with data as of 6/30/08.

Tier 1 (Core) Capital Ratio is 9.45%
Total Risk-Based Capital Ratio is 17.83%
Tier 1 Risk-Based Capital Ratio is 16.52 %
Tangible Equity Ratio is 9.45 %

The capital ratios are strong, but these can be deceptive as a bad couple of quarters can wipe out a large amount of capital.

Loans in nonaccrual status are $491.7 million, plus another $210 million in loans that are 30-89 days past due but still considered accruing. The bank also owns $ 96.6 million in real estate that it took from borrowers who couldn’t pay.

The Allowance for loan losses to cover the $798 million in non-performing assets and “possible non-performing assets” is $259 million. First Federal also charged off $80 million in the second quarter, helping to take down its total equity capital from $792 million to $690 million.

It doesn’t seem, after what I will admit is a superficial look at the bank, that anything has changed. The market was a little relieved and bid the stock up because of two events:

An analyst put out a report suggesting that there might be naked short selling going on, and recent operating data released by the bank showed that the “percentage of adjustable-rate loans to the total portfolio fell to 77.5 percent in July, down from 79.7 percent in June and 96.6 percent in the same month last year.”

This hardly seems like news that is likely to break out the champagne in my house. It may be time for investors to re short this name if you can find shares to borrow.

Disclosure - No Position.

This article was written by the Stock Market Prognosticator. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

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