May 5, 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:
We are writing to respond to your letter dated May 2, 2008, transmitting an
additional comment of the staff of the Securities and Exchange Commission (the
"Commission") related to the Form 8-K filed by First Federal Bankshares, Inc.
(the "Company") on February 25, 2008.
Following are management's responses to the staff's comments:
o In the judgment of management, a conclusion as to whether securities rated
less than double-A are or are not within the scope of Emerging Issues Task
Force Issue No. 99-20 (EITF 99-20) rests on a subjective conclusion that
the "securities [are] sufficiently collateralized to ensure the possibility
of credit loss is remote." Although management believes this to be true (as
it does at the time it makes all of its lending and investing decisions),
due to the extremely subjective nature of these types of conclusions,
management is not able to provide the "persuasive evidence" requested by
the staff in its letter. Therefore, management will concede for discussion
purposes that the Company's trust-preferred pooled securities (TPSs), all
of which were investment grade at the time of purchase, fall within the
scope of EITF 99-20.
o Paragraph 12 of EITF 99-20 requires holders of beneficial interests in
securitized financial assets to "update the estimated cash flows over the
life of the beneficial interests." Paragraph 12(b) further states that if
upon evaluation "the fair value of the beneficial interest has declined
below its reference amount [carrying value] an enterprise should determine
whether the decline is other-than-temporary." The evaluation specified in
paragraph 12(b) centers on management's assessment of whether "there has
been an adverse change in the estimated cash flows" of the beneficial
interest. Such assessment must "take into consideration both timing and
amount of the estimated cash flows." The Company has acknowledged in
previous correspondence with the staff that the fair value of Trapeza
2006-10A D2 has declined below its carrying value. This question is not at
issue. However, as communicated in previous correspondence, management
believes there has been no adverse change in the amount of probable future
contractual cash flows of the security. Management acknowledges that there
has been a change in the "timing" of cash flows of the security due to the
deferral of interest for the holders of the D2 class, as was also
communicated in our previous correspondence. However, due to the
subordination and over-collateralization of cash flows within the TPS's
structure, the Company will receive interest on deferred interest on this
security and so the current total amount of cash flows exceed the expected
amount of cash flows at the time of purchase.
As such, the current present value of the cash flows of Trapeza 2006-10A D2
using the accretable yield (as specified in paragraph 12(b) of EITF 99-20)
is identical to the security's carrying value. Therefore, as provided in
EITF 99-20 12(b), management concludes there is no adverse change in the
estimated cash flows of this TPS. Accordingly, management concludes that
the decline in the fair value of Trapeza 2006-10A D2 is not
"other-than-temporary."
o Management closely monitors all of its TPSs on a regular basis. Management
is not aware of any credit downgrades on any of the securities in the
Company's TPS portfolio nor is it aware of any additional defaults of
underlying companies that secure its TPSs. Management is aware, however, of
a very modest number of interest payment deferrals by companies of the
underlying the TPS, but these deferrals have not affected the current cash
flows the Company is receiving as a security holder. In addition, none of
these deferrals have materially impacted management's assessment of the
future probable contractual cash flows on any of its TPSs due to the
subordination and over-collateralization inherent in the TPS structures.
We trust this letter addresses the staff's comment. 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
cc: Registrant Legal Counsel
Registrant Independent Auditors
Registrant Board of Directors
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