FIRST FEDERAL
BANKSHARES, INC.
PRESS RELEASE
August 11, 2009
For Immediate Release
For Further Information Contact: Levon Mathews
President and Chief Executive Officer
First Federal Bankshares, Inc.
712.277.0201
FIRST FEDERAL BANKSHARES, INC. REPORTS FOURTH QUARTER AND FISCAL
YEAR END RESULTS AND RESIGNATION OF CHIEF EXECUTIVE OFFICER
Sioux City, Iowa. First Federal Bankshares, Inc. (the "Company") (Nasdaq Global
Market: FFSX), the parent company of Vantus Bank (the "Bank"), recorded a net
loss for the three months ended June 30, 2009, of $17.7 million or $5.46 per
diluted share, compared to a net loss of $22.2 million, or $6.84 per diluted
share, for the three months ended June 30, 2008. For the twelve months ended
June 30, 2009, the Company recorded a net loss of $18.6 million, or $5.75 per
diluted share, compared to a net loss of $25.4 million, or $7.82 per diluted
share, for the twelve months ended June 30, 2008. The loss for the three and
twelve months ended June 30, 2009 was primarily attributable to "other than
temporary impairment" ("OTTI") charges of $12.3 million and $19.2 million,
respectively, relating to the Company's pooled trust preferred collateralized
debt obligations ("trust preferred CDOs"). In addition, based on an evaluation
of the Bank's deferred tax asset as of June 30, 2009, the Company concluded that
it was more likely than not that a portion of the deferred tax asset will not be
realized. As a result, the financial results for the three and twelve months
ended June 30, 2009 reflected a valuation allowance of $8.8 million related to
the deferred tax asset.
Analysis of Financial Results
The Company's trust preferred CDOs are substantially illiquid, and their
valuation is highly complex and involves a comprehensive process including
quantitative modeling and significant judgment. As a result, the Company engaged
an independent consulting firm to assist in the valuation of these securities.
Based on the consulting firm's findings, management determined the Company's
trust preferred CDO securities had an aggregate fair value of $10.0 million at
June 30, 2009. To determine the write down on these securities, management
completed an analysis of projected cash flows and discounted the cash flows at
the original purchased yield. The difference in the cost basis of the security
and the net present value of the cash flows was considered a credit-related loss
and was recorded through operations as an impairment loss.
The effects of the trust preferred CDO securities on the Company's operations
and capital position will continue to be influenced by external market
conditions and other factors outside of the Company's control, including but not
limited to, specific issuer credit deterioration, deferral and default rates of
specific issuer financial institutions, failure or government seizure of the
underlying financial institutions, rating agency actions, and the prices at
1
which observable market transactions in these types of securities occur. While
management closely monitors the performance of the Company's trust preferred CDO
securities and does not intend to sell these securities prior to the recovery in
value, the current market environment significantly limits the Company's ability
to mitigate its exposure to future credit-related OTTI write downs and price
changes in these securities. Accordingly, if the aforementioned market
conditions deteriorate further, it is likely that the Company would then
determine additional credit-related OTTI on the Company's trust preferred CDO
securities. Such a determination would correspondingly have a further material
adverse impact on the Company's earnings, shareholders' equity and regulatory
capital.
Net interest income for the three-month period ended June 30, 2009 decreased
$0.5 million from $4.0 million for the three months ended June 30, 2008, to $3.5
million for the three months ended June 30, 2009. Even though the dollar amount
of net interest income decreased, net interest margin increased. For the three
months ended June 30, 2009, the Company's net interest margin was 3.22% compared
to 3.13% for the same period a year ago. The increase in margin was due to
liability costs falling faster than the yield of the Company's interest-earning
assets. The increase in margin was offset by a decrease in the Company's average
interest-earning assets. Average interest-earning assets decreased to $436.1
million during the most recent quarter compared to $520.1 million for the three
months ended June 30, 2008. The change in earning assets was primarily due to
increased prepayments in the declining interest rate environment. In addition,
the decline in earning assets was attributable to the sale of the Bank's
Grinnell, Iowa branch that closed in December 2008 and a bulk sale of
approximately $14.0 million of single-family mortgages that occurred during the
third fiscal quarter.
For the twelve month period ended June 30, 2009, net interest income decreased
to $16.0 million compared to $16.2 million for the same period ended June 30,
2008 For the twelve months ended June 30, 2009, the Company's net interest
margin was 3.44% compared to 2.97% for the same period a year ago. The increase
in margin was offset by a decrease in average earning assets. Average
interest-earning assets for the twelve month period ended June 30, 2009
decreased to $471.2 million compared to $551.2 million for the twelve months
ended June 30, 2008.
The provision for loan losses for the three months ended June 30, 2009, was $1.7
million compared to $1.4 million for the three months ended June 30, 2008. For
the twelve months ended June 30, 2009, provision for loan losses totaled $3.8
million as compared to $4.6 million for the twelve months ended June 30, 2008.
During the current quarter, the Company recognized specific allowances of
$350,000 on a loan to a used car dealership in Des Moines, Iowa, $933,000 on a
loan for the construction of a bio-diesel plant in south-eastern Nebraska, and
$230,000 on a loan for the purchase of rental properties in Central Iowa.
Non-interest income for the three months ended June 30, 2009 totaled $1.6
million as compared to $1.7 million for the three months ended June 30, 2008.
The decrease was attributable to decreases in services charges on commercial and
consumer loans as the level of prepayment activity on these types of loans
decreased causing a decrease in the level of prepayment penalties on these
loans. In addition, other income decreased. Other income relates to income
2
generated from the sale of fixed annuities and mutual funds. The level of sales
of these items declined for the three months ended June 30, 2009 as compared to
the three months ended June 30, 2008. Excluding the gain on sale of the
Grinnell, Iowa branch, for the twelve months ended June 30, 2009, non-interest
income totaled $6.4 million as compared to $6.2 million for the twelve months
ended June 30, 2009. The increase was attributable to an increase in service
fees on deposits and an increase in mortgage banking revenue. The improvement in
service charges on deposit accounts was primarily attributable to the overall
increase in the number of deposit accounts as compared to last year and the
increase in mortgage banking revenue was attributable to the aforementioned bulk
sale of single family mortgages.
Excluding the goodwill impairment that occurred in fiscal year 2008,
non-interest expense for the three months ended June 30, 2009 increased $0.3
million to $5.3 million as compared to $5.0 million for the three months ended
June 30, 2008. For the twelve months ended June 30, 2009, non-interest expense
increased to $20.8 million from $20.2 million during the same time period a year
ago. The increase for both periods was due to an increase in FDIC deposit
insurance premium expense and professional, insurance and regulatory expense,
partially offset by a decrease in compensation and benefit expense. The increase
in the professional, insurance, and regulatory expense was due to costs of
consulting firms assisting the Company in evaluating "other than temporary"
impairment issues related to the Company's investment in trust preferred
securities. In addition, legal fees have increased due to the enhanced
regulatory enforcement oversight of the Bank. Also contributing to the increase
was an increase in insurance costs. FDIC deposit insurance premium expense
increased due to the FDIC special assessment of approximately $250,000 that was
recognized during the current quarter and an overall increase in the Company's
deposit premiums. The decrease in compensation and benefit expense was primarily
due to the sale of the Grinnell, Iowa branch and the reorganization plan that
the Company implemented in the second and third quarters during the current
fiscal year. The reorganization plan reduced the number of full-time equivalent
employees to 144 as compared to 195 in the previous year. Management anticipates
the reorganization will save the Company approximately $2.5 million a year.
Although non-performing assets increased to $29.2 million at June 30, 2009
compared to $18.6 million at June 30, 2008, non-performing assets decreased
during the quarter as compared to $29.6 million as of March 31, 2009. The
decrease from quarter to quarter was attributable to the sale of previously
foreclosed properties.
Total assets decreased by $61.5 million to $503.5 million at June 30, 2009, from
$565.0 million at June 30, 2008. The decrease was partially due to the
aforementioned sale of the Grinnell, Iowa, branch, the aforementioned bulk sale
of mortgage loans and planned run-off in the Bank's commercial real estate
portfolio. Deposits totaled $392.9 million at June 30, 2009, as compared to
$446.6 million at June 30, 2008. The decrease was primarily attributed to the
aforementioned sale of the Bank's Grinnell, Iowa, branch.
Regulatory Update
The Bank's regulatory capital ratios as of June 30, 2009 were as follows: a Tier
1 Leverage Ratio of 4.47% (compared to the adequately capitalized threshold of
4.00%); a Tier 1 Risk-Based Capital Ratio of 3.35% (compared to the adequately
3
capitalized threshold of 4.00%); and a Total Risk-Based Capital Ratio of 3.98%
(compared to the adequately capitalized threshold of 8.00%). As previously
reported, the Company received notification on May 10, 2009 from the Office of
Thrift Supervision ("OTS") that the Bank was considered significantly
undercapitalized under the Prompt Corrective Action (PCA) capital categories and
that the Bank must increase its capital and return to adequately capitalized
status. As previously reported, the Company has been anticipating the issuance
by the OTS of a PCA Directive and Stipulation to a PCA Directive. Also as
previously reported, on July 31, 2009, the Company consented to the issuance of
a Cease and Desist Order. Among other things, the Cease and Desist Order
requires that by August 31, 2009, the Board of Directors must adopt and submit
to the OTS a business plan for enhancing the consolidated capital and earnings
of the Company. At a minimum, the business plan must address how the Bank will
increase its Tier 1 Capital Ratio to at least 8.0% and its Total Risk-Based
Capital Ratio to at least 12.0% by December 31, 2009, and how it will maintain
these ratios thereafter.
The Company has been in contact with several private equity groups related to a
possible capital infusion in the Bank. However, there can be no assurance that
the Company will succeed in raising additional capital from private equity or
other sources. Moreover, such a transaction would likely result in substantial
dilution to the Company's current stockholders and could adversely affect the
price of the Company's common stock.
Going Concern Assessment
As a result of the above-described regulatory actions and the current
uncertainties associated with the Company's ability to increase the Bank's
capital levels to meet regulatory requirements, management believes the
Company's independent registered public accounting firm may express substantial
doubt about the Company's ability to continue as a going concern in the
auditors' report contained within the Company's annual report on Form 10-K. The
Company is working to implement the capital infusion described above in order to
increase the Bank's regulatory capital ratios to address the uncertainties
giving rise to a possible going concern assessment.
Resignation of President and Chief Executive Officer
On August 10, 2009, Levon Mathews submitted his resignation as President and
Chief Executive Officer of the Company and of the Bank. Mr. Mathews has accepted
a position as President and Chief Executive Officer of a financial institution
outside the Bank's market area. Mr. Mathews' resignation is effective September
25, 2009 and he is expected to remain as President and Chief Executive Officer
of the Company and the Bank through that date. The Board of Directors has
initiated a search for a successor to Mr. Mathews and will consider internal as
well as external candidates for the position.
About Vantus Bank
The Company's banking subsidiary, Vantus Bank, is headquartered in Sioux City,
Iowa. Founded in 1923, Vantus Bank is a community bank serving businesses and
4
consumers in seven full-service offices in northwest Iowa, a full-service office
in South Sioux City, Nebraska, and six full-service offices in central Iowa,
including four in the Des Moines market area.
Certain matters in the press release are "forward-looking statements" intended
to qualify for the safe harbor from liability as established by the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include words and phrases such as "believes" "will likely result," "are expected
to," "will continue," "is anticipated," "estimate," "project," "intends to," or
similar expressions. Similarly statements that describe the Company's future
plans, objectives, or goals are forward-looking statements. The Company wishes
to caution the readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date of the press release, and to advise
readers that various factors could affect the Company's financial performance
and could cause results for future periods to differ materially from those
anticipated or projected. Such factors include, but are not limited to: (i)
general market interest rates, (ii) general economic conditions, (iii)
legislative/regulatory changes, (iv) monetary and fiscal policies of the U.S.
Treasury and Federal Reserve, (v) changes in the quality or composition of
Company's loan and investment portfolios, (vi) demand for loan products, (vii)
deposit flow, (viii) competition, (ix) demand for financial services in
Company's markets and (x) changes in accounting principles, policies, or
guidelines.
###
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
June 30 June 30
(Dollars in thousands, except per share amounts) 2009 2008
- -----------------------------------------------------------------------------------------------------------------
ASSETS
- ------
Cash and due from banks $12,313 $12,491
Interest-bearing deposits in other financial institutions 43,197 -
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 55,510 12,491
- -----------------------------------------------------------------------------------------------------------------
Securities available-for-sale, at fair value 48,062 84,229
Securities held-to-maturity, at cost 5,525 7,000
Mortgage loans held for sale 1,963 1,102
Loans receivable, net 332,712 407,819
Office property and equipment, net 16,082 18,762
Federal Home Loan Bank stock, at cost 5,879 4,283
Accrued interest receivable 1,880 2,535
Foreclosed and repossessed assets 7,463 873
Deferred tax asset 12,255 9,870
Other assets 16,208 16,042
- -----------------------------------------------------------------------------------------------------------------
Total assets $503,539 $565,006
==================================================================================================================
LIABILITIES
- -----------
Deposits $392,945 $446,568
Advances from FHLB and other borrowings 101,322 81,637
Advance payments by borrowers for taxes and insurance 571 884
Accrued interest payable 1,778 1,801
Accrued expenses and other liabilities 3,699 2,124
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 500,315 533,014
- -----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, $.01 par value 51 51
Additional paid-in capital 39,560 39,505
Retained earnings, substantially restricted 13,629 32,583
Treasury stock, at cost (28,536) (28,536)
Accumulated other comprehensive loss (21,042) (11,062)
Unearned ESOP (438) (549)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,224 31,992
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $503,539 $565,006
=================================================================================================================
Actual number of shares outstanding at end
of period, net of treasury stock 3,304,471 3,304,471
Average shares outstanding used to compute:
Basic earnings (loss) per share 3,249,853 3,244,570
Diluted earnings (loss) per share 3,249,853 3,244,570
Shareholders' equity to total assets 0.64% 5.66%
Book value per share $0.98 $9.68
=================================================================================================================
<page>
FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended Twelve months ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 2009 2008 2009 2008
- -----------------------------------------------------------------------------------------------------------------
Interest on loans $4,748 $6,142 $21,886 $27,618
Interest on investment securities 1,157 1,474 5,242 7,357
Interest on cash and cash equivalents 4 1 6 126
- -----------------------------------------------------------------------------------------------------------------
Total interest income 5,909 7,617 27,134 35,101
- -----------------------------------------------------------------------------------------------------------------
Interest on deposit liabilities 1,896 2,857 8,782 14,904
Interest on borrowings 537 731 2,313 3,976
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 2,433 3,588 11,095 18,880
- -----------------------------------------------------------------------------------------------------------------
Net interest income 3,476 4,029 16,039 16,221
Provision for loan losses 1,712 1,376 3,836 4,570
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision 1,764 2,653 12,203 11,651
- -----------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 890 884 3,787 3,275
Service charges on commercial and consumer loans 29 70 152 348
Gain on sale of bank branch offices - - 5,570 -
Mortgage banking revenue 307 318 906 838
Earnings from bank owned life insurance 149 139 588 554
Other income 241 291 922 1,183
- -----------------------------------------------------------------------------------------------------------------
Total non-interest income 1,616 1,702 11,925 6,198
- -----------------------------------------------------------------------------------------------------------------
Compensation and benefits 2,063 2,907 9,733 11,470
Restructure costs - - 709 -
Office property and equipment 641 713 2,851 2,847
Data processing, ATM and debit card transaction
costs, and other item processing expense 386 385 1,588 1,564
Professional, insurance, and regulatory expense 957 360 2,027 1,094
Deposit insurance premiums 855 13 1,055 55
Advertising, donations, and public relations 60 321 798 1,375
Communications, postage, and office supplies 157 235 755 883
Loss (gain) on other real estate owned 44 (161) 534 95
Goodwill impairment - 18,417 - 18,417
Other expense 218 260 874 836
- -----------------------------------------------------------------------------------------------------------------
Total non-interest expense 5,381 23,450 20,924 38,636
- -----------------------------------------------------------------------------------------------------------------
Other-than-temporary impairment losses related to credit (12,263) (5,394) (19,293) (9,154)
- -----------------------------------------------------------------------------------------------------------------
Loss before income taxes (14,264) (24,489) (16,089) (29,941)
Income tax expense (benefit) 3,506 (2,315) 2,594 (4,582)
- -----------------------------------------------------------------------------------------------------------------
Net (loss) (17,770) ($22,174) ($18,683) ($25,359)
=================================================================================================================
Per share information:
Basic (loss) per share ($5.46) ($6.84) ($5.75) ($7.82)
Diluted (loss) per share ($5.46) ($6.84) ($5.75) ($7.82)
Cash dividends declared per share - - - $0.315
<page>
FIRST FEDERAL BANKSHARES, INC and SUBSIDIARIES
SELECTED FINANCIAL DATA (unaudited)
At or for the three months ended At or for the twelve months ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 2009 2008 2009 2008
- -----------------------------------------------------------------------------------------------------------------
Average total assets $505,332 $588,500 $532,213 $616,908
Average interest-earning assets 436,104 520,131 471,191 551,244
Average interest-bearing liabilities 440,511 480,134 457,423 502,905
Average interest-earning assets to average
interest-bearing liabilities 99.00% 108.33% 103.01% 109.61%
=================================================================================================================
Activity in the allowance for loan losses during the period:
Balance at beginning of period $6,231 $4,693 $5,894 $1,797
Provision for loan losses 1,712 1,376 3,836 4,570
- -----------------------------------------------------------------------------------------------------------------
Charge-offs:
Single-family mortgage loans - - - (165)
Commercial real estate loans - - (471) (17)
Commercial business loans (347) (145) (1,333) (216)
Consumer loans (173) (46) (561) (195)
- -----------------------------------------------------------------------------------------------------------------
Total loans charged-off (520) (191) (2,365) (593)
Recoveries 31 16 89 120
- -----------------------------------------------------------------------------------------------------------------
Charge-offs net of recoveries (489) (175) (2,276) (473)
- -----------------------------------------------------------------------------------------------------------------
Balance at end of period $7,454 $5,894 $7,454 $5,894
=================================================================================================================
Non-performing loans receivable $21,781 $17,749 $21,781 $17,749
Other non-performing assets 7,463 881 7,463 881
- -----------------------------------------------------------------------------------------------------------------
Total non-performing assets $29,244 $18,630 $29,244 $18,630
=================================================================================================================
Non-performing loans as a percentage of total loans receivable 6.40% 4.29% 6.40% 4.29%
Total non-performing assets as a percentage of total assets 5.81% 3.30% 5.81% 3.30%
Allowance for loan losses to non-performing loans 34.22% 33.21% 34.22% 33.21%
Ratio of allowance for loan losses to total loans
held for investment at end of period 2.19% 1.42% 2.19% 1.42%
=================================================================================================================
Selected operating data: (1)
Return on average assets -14.07% -15.07% -3.51% -4.11%
Return on average equity -443.09% -157.01% -70.42% -39.10%
Net interest rate spread 3.26% 2.91% 3.36% 2.65%
Net yield on average interest-earning assets (2) 3.22% 3.13% 3.44% 2.97%
Efficiency ratio (3) 105.67% 87.84% 93.10% 90.21%
- -----------------------------------------------------------------------------------------------------------------
(1) Annualized except for efficiency ratio.
(2) Net interest income, tax-effected, divided by average interest-earning
assets.
(3) Non-interest expense divided by net interest income plus non-interest
income, less gain (loss) on sale of bank branch offices and fixed assets.
=================================================================================================================
<page>
FIRST FEDERAL BANKSHARES, INC and SUBSIDIARIES
SELECTED FINANCIAL DATA (unaudited)
Weighted
June 30 Average
(Dollars in thousands, except per share amounts) 2009 Rate
- -----------------------------------------------------------------------------------------------------------------
Time deposits maturing within...
Three months $19,757 2.86%
Four to six months 61,234 3.23%
Seven to twelve months 74,978 2.98%
More than twelve months 59,155 3.49%
- -----------------------------------------------------------------------------------------------------------------
Total time deposits $215,124 3.18%
=================================================================================================================
FHLB advances and all other borrowings maturing within...
Three months $59,072 1.30%
Four to six months 38,000 3.13%
Seven to twelve months - -
More than twelve months 4,250 4.91%
- -----------------------------------------------------------------------------------------------------------------
Total FHLB advances and all other borrowings $101,322 2.14%
=================================================================================================================
Three months ended Twelve months ended
June 30 June 30
2009 2008 2009 2008
- -----------------------------------------------------------------------------------------------------------------
Market price per share:
High for the period $3.23 $14.87 $7.95 $19.00
Low for the period $1.30 $6.00 $1.00 $6.00
Close at end of period $1.31 $6.57 $1.31 $6.57
=================================================================================================================