FIRST FEDERAL
BANKSHARES, INC.
March 11, 2008
Securities and Exchange Commission
Division of Corporation Finance
100 F Street NE
Mail Stop 4561
Washington, DC 20549
Attn: Mr. John A. Spitz, Senior Staff Accountant
Re: First Federal Bankshares, Inc.
Item 4.02 Form 8-K
Filed February 25, 2008
File Number: 000-25509
Dear Mr. Spitz:
This letter is in response to your letter dated February 28, 2008, transmitting
comments of the staff of the Securities and Exchange Commission (the
"Commission") on the Form 8-K filed by First Federal Bankshares, Inc. (the
"Company") on February 25, 2008.
Background Information
As of December 31, 2007, the Bank owned $65.2 million in trust-preferred pooled
securities ("TPSs"). At the time of purchase, each of the TPSs were rated either
single-A (61% of the portfolio) or triple-B (39% of the portfolio) by a
nationally recognized rating agency. Since purchase, only one TPS in the
portfolio has been downgraded (Trapeza 2006-10A D2), representing 7.8% of the
portfolio. The cash flows for the Company's TPSs are derived from trust
preferred securities and subordinated debt issued by well-diversified pools of
banks and thrifts (73%), insurance companies (25%), and REIT/homebuilders (2%).
The Bank's TPS securities are secured through a combination of subordination
from lower classes within the TPS structures, as well as over-collateralization
of available future contractual cash flows. Subordinated classes absorb losses
before higher rated classes within the TPS structure. Exhibit A (attached)
contains relevant information regarding the Company's TPS portfolio.
Management Responses
Following is the specific information requested by the staff under Item 1 of its
letter:
o The specific securities held by the Company as of December 31, 2007, are
identified in Exhibit A.
o Exhibit A clearly identifies the types of underlying issuers that support
each TPS.
o Exhibit A lists the purchase date for each TPS.
o September 30, 2007, was the first reporting date that any of the Company's
TPS were in an unrealized loss position.
o Exhibit A shows the unrealized loss position of each TPS on September 30,
2007, and December 31, 2007. As mentioned above, only one TPS in the
Company's portfolio has experienced a downgrade since issuance. On December
21, 2007, Trapeza 2006-10A D2 was downgraded from "triple-B" to "triple-C".
This downgrade and resulting price decline were the sole reason for the
restatement described in Form 8-K filed on February 25, 2008, and was
caused by the default of a limited number of REITs within the security.
<page>
Please refer to our response to Item 2 on the next page for additional
discussion regarding this downgrade and resulting impact on price
indications received from third-party brokers.
o The Company based its decision to classify Trapeza 2006-10A D2 as
temporarily impaired on the following considerations:
1. Despite its recent downgrade, the issue's available future contractual
cash flows have not been compromised. This is due to the diverse
source of the cash flows that secure the issue, as well as the
subordination and over-collateralization inherent in the structure of
the security. As part of the Company's analysis, the issue's available
future contractual cash flows were reviewed in detail through direct
discussions with the third-party manager of the issue.
2. The Company reviewed a sensitivity analysis of the cash flows from
this security under various future default scenarios and concluded
that the current subordination within the issue, as well as the
over-collateralization of cash flows within the issue, was sufficient
to absorb reasonable amount of potential future defaults. As a result,
compromise of the future available contractual cash flows was not
considered probable at this time.
3. Based on discussions with the third-party manager, the Company
concluded it is possible the investment rating of the security could
be upgraded in the future as conditions improve.
4. The market value for this security has been less than the Company's
cost basis for only three months as of December 31, 2007.
5. The Company has the positive intent and ability to hold the security
for a period of time sufficient to allow for anticipated recovery in
market value or until redemption/maturity. It should be noted that the
security has par call features that are effective in approximately
four years.
The same considerations itemized above apply to every other TPS owned
by the Company, except that such securities have not experienced a
downgrade. Further, the Company is not aware of any information that
would cause such securities to be classified as "other than
temporarily impaired" or "permanently impaired".
o As noted in Item 8.01 of Form 8-K filed on February 25, 2008, the Company
must submit a plan to the Office of Thrift Supervision ("OTS") specifying
how it will come into compliance with certain regulatory guidelines
relating to the size of its TPS portfolio. Notice of the requirement to
submit a plan was received from the OTS after the Company had filed its
December 31, 2007, Form 10-Q. As part of such plan, the Company intends to
seek OTS approval to allow the Company to retain the securities,
notwithstanding the regulatory guidelines. Such approval is within the
statutory authority of the OTS given that federal law and regulation permit
federal savings associations to invest up to 35% of their assets in these
types of securities. Although there can be no assurances the OTS will grant
such approval, informal discussions with the OTS staff prior to the
issuance of the Form 8-K, as well as continuing discussions subsequent to
that date, provided no indications to management that the Company's ability
and intent to hold its TPS portfolio until anticipated recovery or
redemption/maturity has been compromised. Accordingly, management concluded
that it was appropriate to wait until discussions with the OTS have been
completed before concluding anything other than the Company has the ability
and intent to hold its TPS portfolio until recovery or redemption/maturity.
It should be noted that the Company requested and received a 60-day
extension from the OTS to submit its plan. The plan is due to the OTS no
later than May 15, 2008.
Following is the Company's response to Item 2 in your letter:
On February 19, 2008, the Audit Committee of the Board of Directors of the
Company (the "Committee") and management met to discuss the error in the
<Page>
Company's previously filed Form 10-Q. Management described to the Committee its
usual and customary practice of receiving security ratings information and
market price indications from third party sources after the close of each
reporting period. Management noted that these sources failed to indicate that
the TPS in question had been downgraded as of the reporting date. Management
also noted that none of the market price indications received from third-party
brokers on the TPS in question indicated that a downgrade had occurred. Indeed,
when presented with the knowledge of the downgrade after it was discovered by
management, the brokers substantially lowered the price indications they had
previously provided to the Company. In light of these facts, the Committee
concluded that the Company's internal controls were functioning as intended and
that a material weakness did not exist. Further, the Committee concluded that
given the facts, circumstances, and timing of the Company's discovery of the
error, a material weakness did not exist in the Company's disclosure controls. *
* * * *
The Company acknowledges that it is responsible for the adequacy and accuracy of
disclosures in filings with the Commission. Further, the Company acknowledges
that staff comments or changes in disclosures in response to staff comments do
not foreclose the Commission from taking any action with respect to the filing.
Finally, the Company acknowledges that it may not assert staff comments as a
defense in any proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
* * * * *
We trust this letter addresses the staff's comments. Please do not hesitate to
contact me at 712-277-0222 or mdosland@vantusbank.com if there are additional
questions or comments.
Sincerely,
/s/ Michael W. Dosland
Michael W. Dosland
President and Chief Executive Officer
Encl: Exhibit A (Trust Preferred Securities Portfolio Summary)
cc: Registrant Legal Counsel
Registrant Independent Auditors
Registrant Board of Directors
Exhibit A
First Federal Bankshares, Inc.
Trust Preferred Securities Portfolio Summary
December 31, 2007
Original December 31, 2007 (1)
Settlement 12/31/07 Purchased Amortized Market Unrealized
Date Issue Name CUSIP Rating Face Cost Value Gain (Loss)
-------------- -------------------- ------------ --------- ---------- ----------- ----------- ------------
10/12/06 Preferred Term 74042WAD6 A 6,000,000 6,036,109 5,773,200 (262,909)
XVIII
10/12/06 Preferred Term XIX 74042HAE7 A 2,000,000 1,996,721 1,896,641 (100,080)
10/12/06 Preferred Term XXII 7402MAJ5 A 2,000,000 1,988,381 1,877,182 (111,199)
See Note (3) Alesco 9A C1 01449TAF0 A 9,000,000 8,959,512 8,418,914 (540,598)
1/16/07 Alesco 12A C1 01450DAE4 A 6,000,000 6,000,000 5,565,000 (435,000)
1/24/07 Alesco 10A C1 01449WAD8 A 10,000,000 10,028,751 9,350,000 (678,751)
12/14/06 Preferred Term XXIV 74043CAG2 A 5,000,000 5,000,000 4,681,500 (318,500)
-------------- -------------------- ------------ --------- ---------- ----------- ----------- ------------
Subtotal - 'A' Rated 40,000,000 40,009,474 37,562,437 (2,447,037)
2/16/07 Preferred Term XXII 7402MAN6 BBB 5,000,000 4,998,625 4,543,971 (454,654)
3/15/07 Trapeza 2007-12A E1 89413GAS7 BBB 5,000,000 5,000,000 4,587,500 (412,500)
3/22/07 Preferred Term XXV 74042FAL5 BBB 3,000,000 2,988,154 2,661,549 (326,605)
3/26/07 Alesco 8A D1 01449CAN0 BBB 1,000,000 1,006,738 920,000 (86,738)
3/28/07 Alesco 11A D 01449YAA0 BBB 1,000,000 1,016,937 955,000 (61,937)
3/29/07 Alesco 15A D 01450BAF5 BBB 5,000,000 5,000,000 4,762,500 (237,500)
-------------- -------------------- ------------ --------- ---------- ----------- ----------- ------------
Subtotal - 'BBB' Rated 20,000,000 20,010,454 18,430,520 (1,579,934)
2/1/07 Trapeza 2006-10A D2 89413CAL1 CCC 5,000,000 5,145,594 1,875,000 (3,270,594)
-------------- -------------------- ------------ --------- ---------- ----------- ----------- ------------
Total Trust Preferred Securities 65,000,000 65,165,522 57,867,957 (7,297,565)
=================================== ============ ========= ========== =========== =========== ============
Company's Collateral Analysis (2)
----------------------------------------------
September 30, 2007 Percent of Collateral
--------------------------------- -------------------------------
Settlement Amortized Market Unrealized Current Bank
Gain
Date Issue Name CUSIP Cost Value (Loss) Subordination & Thrift Insurance REIT
- -------------- -------------------- --------- ---------- ---------- ----------- -------------- ---------- ---------- ----------
10/12/06 Preferred Term 74042WAD6 6,039,784 5,961,000 (78,784) 13.5% 76% 24% 0%
XVIII
10/12/06 Preferred Term XIX 74042HAE7 2,005,341 1,952,000 (53,341) 11.0% 74% 26% 0%
10/12/06 Preferred Term XXII 7402MAJ5 2,002,101 1,935,000 (67,101) 13.4% 73% 27% 0%
See Note (3) Alesco 9A C1 01449TAF0 8,958,976 8,764,651 (194,325) 15.6% 67% 33% 0%
1/16/07 Alesco 12A C1 01450DAE4 6,000,000 5,820,000 (180,000) 13.1% 72% 28% 0%
1/24/07 Alesco 10A C1 01449WAD8 10,031,013 9,750,000 (281,013) 11.7% 67% 33% 0%
12/14/06 Preferred Term XXIV 74043CAG2 5,000,000 4,843,750 (156,250) 13.1% 75% 25% 0%
- -------------- -------------------- --------- --------- ---------- ----------- -------------- ---------- ---------- ----------
Subtotal - 'A' Rated 40,037,215 39,026,401 (1,010,814) 13.3% 70% 30% 0%
2/16/07 Preferred Term XXII 7402MAN6 5,035,135 4,750,000 (285,135) 6.9% 73% 27% 0%
3/15/07 Trapeza 2007-12A E1 89413GAS7 5,000,000 4,787,500 (212,500) 11.7% 90% 10% 0%
3/22/07 Preferred Term XXV 74042FAL5 3,000,000 2,812,500 (187,500) 7.0% 75% 25% 0%
3/26/07 Alesco 8A D1 01449CAN0 1,006,922 965,000 (41,922) 9.0% 67% 33% 0%
3/28/07 Alesco 11A D 01449YAA0 1,017,947 988,750 (29,197) 4.7% 69% 31% 0%
3/29/07 Alesco 15A D 01450BAF5 5,000,000 4,930,000 (70,000) 5.7% 85% 15% 0%
- -------------- -------------------- --------- ---------- ---------- ----------- -------------- ---------- ---------- ----------
Subtotal - 'BBB' Rated 20,060,004 19,233,750 (826,254) 7.80% 80% 20% 0%
2/1/07 Trapeza 2006-10A D2 89413CAL1 5,156,068 4,775,000 (381,068) 4.0% 67% 6% 27%
- -------------- -------------------- --------- ----------- ---------- ----------- -------------- ---------- ---------- ----------
Total Trust Preferred Securities 65,253,287 63,035,151 (2,218,136) 10.86% 73% 25% 2%
=================================== ========= =========== ========== =========== ============== ========== ========== ==========
Notes:
(1) Market value shown for Trepeza 2006-10A D2 as restated.
(2) Information obtained from security prospectuses and/or bond trustee
reports. Updated for defaults, if any.
(3) Purchsases of Alesco 9A C1 settled on 1/23/07 ($5,000,000 original face)
and 5/18/07 ($4,000,000 original face).