First Federal Bankshares (FFSX) 10-Q 2008 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2008

OR

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 0-25509

First Federal Bankshares, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	42-1485449
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	identification number)
329 Pierce Street, Sioux City, Iowa	51101
(Address of principal executive offices)	(Zip Code)

712-277-0200

(Registrant's telephone number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

    YES þ    NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer  oþ           Accelerated filer þ           Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

    YES o    NO þ

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at May 16, 2008
Common Stock, $.01 par value	3,304,471

FIRST FEDERAL BANKSHARES, INC.

INDEX

		Page
PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements of First Federal Bankshares, Inc. and Subsidiaries	1
Consolidated Statements of Financial Condition at March 31, 2008 and June 30, 2007		1
Consolidated Statements of Operations for the three and nine month periods ended March 31, 2008 and 2007		2
Consolidated Statements of Changes in Stockholders’ Equity for the three and nine month periods ended March 31, 2008 and 2007		3
Consolidated Statements of Comprehensive Income (Loss) for the  three and nine month periods ended March 31, 2008 and 2007		4
Consolidated Statements of Cash Flows for the  nine month periods ended March 31, 2008 and 2007		5
Notes to Consolidated Financial Statements		6
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	27
ITEM 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION	27
ITEM 1.	Legal Proceedings	27
ITEM 1A.	Risk Factors	27
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
ITEM 3.	Defaults upon Senior Securities	28
ITEM 4.	Submission of Matters to a Vote of Security Holders	28
ITEM 5.	Other Information	28
ITEM 6.	Exhibits	28
	Signatures	29

PART I.               FINANCIAL  INFORMATION
ITEM 1.               FINANCIAL  STATEMENTS
First Federal Bankshares, Inc. and Subsidiaries
Consolidated  Statements of Financial Condition (Unaudited)
	March 31,			June 30,
	2008			2007
ASSETS
Cash and due from banks	$	13,238,045		$	11,613,908
Interest-bearing deposits in other financial institutions		-			14,124,559
Cash and cash equivalents		13,238,045			25,738,467
Securities available-for-sale (amortized cost $108,882,846 and $122,595,377, respectively)		96,975,511			122,309,017
Securities held-to-maturity (fair value $8,453,190 and $9,472,865, respectively)		8,327,942			9,549,072
Mortgage loans held for sale		3,042,178			2,130,709
Loans receivable		411,005,041			429,751,342
Allowance for loan losses		(4,693,223	)		(1,797,393	)
Net loans		406,311,818			427,953,949
Federal Home Loan Bank ("FHLB") stock, at cost		4,794,500			3,559,600
Office property and equipment, net		18,857,967			16,204,913
Accrued interest receivable		2,801,489			2,939,993
Goodwill		18,417,040			18,417,040
Foreclosed and repossessed assets		3,419,300			2,156,217
Deferred tax asset		5,234,000			165,000
Other assets		15,908,342			14,692,533
Total assets	$	597,328,132		$	645,816,510
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit liabilities	$	464,179,835		$	507,865,063
Advances from FHLB and other borrowings		70,124,509			62,202,229
Advance payments by borrowers for taxes and insurance		407,136			916,021
Accrued interest payable		3,109,739			2,690,658
Accrued expenses and other liabilities		1,819,821			1,887,317
Total liabilities		539,641,040			575,561,288
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, authorized 1,000,000 shares; issued none		-			-
Common stock, $.01 par value, authorized 12,000,000 shares;
issued 5,068,726 and 5,067,226 shares, respectively		50,639			50,604
Additional paid-in capital		39,459,787			39,230,016
Retained earnings, substantially restricted		54,755,814			58,704,525
Treasury stock, at cost, 1,764,255 shares and 1,677,255 shares, respectively		(28,535,663	)		(26,885,723	)
Accumulated other comprehensive loss		(7,466,335	)		(179,360	)
Unearned ESOP		(577,150	)		(664,840	)
Total stockholders’ equity		57,687,092			70,255,222
Total liabilities and stockholders’ equity	$	597,328,132		$	645,816,510
See Notes to Consolidated Financial Statements.

1

First Federal Bankshares, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
	Three months ended					Nine months ended
	March 31,					March 31,
	2008			2007		2008			2007
Interest income:
Loans receivable	$	6,641,165		$	7,341,477	$	21,474,432		$	22,512,248
Investment securities		1,864,437			1,530,616		5,883,674			3,329,176
Deposits in other financial institutions		66,944			73,503		124,993			317,336
Total interest income		8,572,546			8,945,596		27,483,099			26,158,760
Interest expense:
Deposits		3,570,052			4,183,302		12,046,935			11,389,579
Advances from FHLB and other borrowings		1,092,033			918,449		3,244,971			2,958,206
Total interest expense		4,662,085			5,101,751		15,291,906			14,347,785
Net interest income		3,910,461			3,843,845		12,191,193			11,810,975
Provision for loan losses		2,681,059			31,424		3,194,096			534,087
Net interest income after provision for loan losses		1,229,402			3,812,421		8,997,097			11,276,888
Non-interest income:
Service charges on deposit accounts		773,793			771,344		2,391,645			2,534,044
Fees on commercial and consumer loans		57,706			50,967		278,321			135,796
Gain on sale of real estate held for development		-			15,000		46,610			75,000
Other-than-temporary impairment of investment securities		(489,526	)		-		(3,760,120	)		-
Mortgage banking revenue		148,381			152,141		519,252			529,669
Earnings from bank owned life insurance		138,981			132,978		413,655			396,977
Other income		275,159			230,271		838,144			783,737
Total non-interest income		904,494			1,352,701		727,507			4,455,223
Non-interest expense:
Personnel expense		2,932,250			2,567,397		8,563,378			7,705,644
Office property and equipment		732,344			751,356		2,134,206			2,116,168
Data processing, ATM and debit card transaction costs,
and other item processing expense		392,700			308,999		1,179,402			911,505
Professional, insurance and regulatory expense		282,510			251,598		789,571			810,387
Advertising, donations and public relations		287,678			160,197		1,054,004			543,872
Communications, postage and office supplies		212,127			212,019		647,440			614,059
Other expense		351,302			287,757		808,738			660,207
Total non-interest expense		5,190,911			4,539,323		15,176,739			13,361,842
Income (loss) before income taxes
and discontinued operations		(3,057,015	)		625,799		(5,452,135	)		2,370,269
Income tax expense (benefit)		(1,210,000	)		120,000		(2,267,000	)		561,000
Income (loss) from continuing operations		(1,847,015	)		505,799		(3,185,135	)		1,809,269
Income from discontinued operations, net of tax
of $322,000 and $368,000 respectively in 2007		-			513,883		-			589,679
Net income (loss)	$	(1,847,015	)	$	1,019,682	$	(3,185,135	)	$	2,398,948
Per share information:
Basic earnings (loss) per share from continuing operations	$	(0.57	)	$	0.15	$	(0.98	)	$	0.54
Basic earnings per share from discontinued operations		-			0.16		-			0.18
Basic earnings (loss) per share	$	(0.57	)	$	0.31	$	(0.98	)	$	0.72
Diluted earnings (loss) per share from continuing operations	$	(0.57	)	$	0.15	$	(0.98	)	$	0.54
Diluted earnings per share from discontinued operations		-			0.15		-			0.18
Diluted earnings (loss) per share	$	(0.57	)	$	0.30	$	(0.98	)	$	0.72

See Notes to Consolidated Financial Statements.

2

First Federal Bankshares, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity  (Unaudited)
	Nine Months
	Ended March 31,
	2008			2007
Capital Stock:
Beginning of year balance	$	50,604		$	50,109
Restricted stock vested: 2,062 shares		20			-
Stock options exercised: 1,500 and 50,611 shares, respectively		15			485
End of period balance		50,639			50,594
Additional paid-in capital:
Beginning of year balance		39,230,016			38,293,233
Stock options exercised		14,860			655,295
Stock compensation expense		129,640			72,196
Employee stock grants awarded		-			(5,742	)
Stock appreciation of allocated ESOP shares		49,342			107,179
Amortization of employee stock grants		35,929			21,596
End of period balance		39,459,787			39,143,757
Retained earnings, substantially restricted:
Beginning of year balance		58,704,525			57,013,427
Adoption of FIN 48		180,000			-
Adoption of SFAS 156		79,374			-
Net income (loss)		(3,185,135	)		2,398,948
Dividends paid on common stock: $0.315 and $0.31 per share, respectively		(1,022,950	)		(1,028,750	)
End of period balance		54,755,814			58,383,625
Treasury stock, at cost:
Beginning of year balance		(26,885,723	)		(25,920,685	)
Employee stock grants awarded		-			5,742
Treasury stock acquired: 87,000 and 38,589 shares, respectively		(1,649,940	)		(850,180	)
End of period balance		(28,535,663	)		(26,765,123	)
Accumulated other comprehensive (loss):
Beginning of year balance		(179,360	)		(325,650	)
Net change in unrealized gains (losses) on securities
available-for-sale, net of income taxes		(9,644,095	)		299,310
Less: reclassification adjustment for net realized losses
included in net income, net of income taxes		2,357,120			-
End of period balance		(7,466,335	)		(26,340	)
Unearned ESOP shares:
Beginning of year balance		(664,840	)		(786,540	)
ESOP shares allocated		87,690			91,830
End of period balance		(577,150	)		(694,710	)
Total stockholders' equity	$	57,687,092		$	70,091,803

See Notes to Consolidated Financial Statements.

3

First Federal Bankshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2008			2007		2008			2007
Net income (loss)	$	(1,847,015	)	$	1,019,682	$	(3,185,135	)	$	2,398,948
Net change in unrealized gains (losses) on securities
available-for-sale, net of taxes		(5,243,634	)		53,212		(9,644,095	)		299,310
Less: reclassification adjustment for net realized losses
included in net income, net of taxes		306,526			-		2,357,120			-
Total comprehensive income (loss)	$	(6,784,123	)	$	1,072,894	$	(10,472,110	)	$	2,698,258

See Notes to Consolidated Financial Statements.

4

First Federal Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)	Nine months ended
	March 31,
	2008			2007
Cash flows from continuing operating activities:
Net income (loss)	$	(3,185,135	)	$	2,398,948
Income from discontinued operations		-			(589,679	)
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by continuing operating activities:
Loans originated for sale to investors		(51,446,000	)		(30,512,000	)
Proceeds from sale of loans originated for sale		51,789,360			31,639,058
Provision for losses on loans		3,194,096			534,087
Depreciation and amortization		1,104,005			794,345
Provision for deferred taxes		(555,000	)		438,000
Equity-based compensation		302,621			292,801
Excess tax benefit resulting from stock options exercised		(1,000	)		(151,000	)
Net gain on sale of loans		(519,252	)		(481,294	)
Net gain on sale of real estate held for development		(46,610	)		(75,000	)
Other-than-temporary impairment on investment securities		3,760,120			-
Amortization of premiums and discounts on loans,
mortgage-backed securities and investment securities		50,476			(291,507	)
Decrease (increase) in accrued interest receivable		138,504			(338,460	)
Decrease (increase) in other assets		(3,467	)		1,169,427
Increase in accrued interest payable		419,081			846,787
Decrease in accrued expenses and other liabilities		(67,496	)		(210,153	)
Decrease in accrued taxes on income		(1,627,391	)		(888,269	)
Net cash provided by continuing operating activities		3,306,912			4,576,091
Cash flows from continuing investing activities:
Proceeds from maturities of securities held-to-maturity		1,210,945			1,510,893
Purchase of securities available-for-sale		(3,171,641	)		(92,479,223	)
Proceeds from maturities of securities available-for-sale		13,085,412			8,945,286
Redemption (purchase) of FHLB stock		(1,234,900	)		1,335,000
Loans purchased		(6,831,000	)		(10,247,000	)
Proceeds from sales of loans		-			10,356,585
Decrease in loans receivable		22,340,902			27,944,279
Proceeds from sale of office property and equipment		3,892			66,511
Purchase of office property and equipment		(3,494,201	)		(3,044,909	)
Proceeds from sale of foreclosed real estate		717,281			365,168
Proceeds from sale of real estate held for development		804,844			1,989,961
Expenditures on real estate held for development		(309,020	)		(1,754,991	)
Net cash provided by (used in) continuing investing activities		23,122,514			(55,012,440	)
Cash flows from continuing financing activities:
Increase (decrease) in deposits		(43,685,228	)		59,473,284
Proceeds from advances from FHLB and other borrowings		108,351,245			4,401,072
Repayment of advances from FHLB and other borrowings		(100,428,965	)		(30,000,000	)
Net decrease in advance payments by borrowers for taxes and insurance		(508,885	)		(596,803	)
Issuance of common stock under stock options exercised		13,875			504,780
Excess tax benefit resulting from stock options exercised		1,000			151,000
Repurchase of common stock		(1,649,940	)		(850,180	)
Cash dividends paid		(1,022,950	)		(1,028,750	)
Net cash provided by (used in) continuing financing activities		(38,929,848	)		32,054,403
Cash flows from discontinued operations:
Net cash used in operating activities of discontinued operations		-			(78,314	)
Net cash provided by investing activities of discontinued operations		-			1,027,167
Net cash provided by discontinued operations		-			948,853
Net decrease in cash and cash equivalents		(12,500,422	)		(17,433,093	)
Beginning of year		25,738,467			39,904,749
End of year	$	13,238,045		$	22,471,656
SUPPLEMENTAL DISCLOSURES
Cash paid (received) during the period for:
Interest	$	14,872,825		$	13,500,998
Income taxes		(86,508	)		953,279
See Notes to Consolidated Financial Statements.

5

FIRST FEDERAL BANKSHARES, INC. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of presentation

The consolidated financial statements as of and for the three and nine month periods ended March 31, 2008 and 2007, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosure normally included in year-end financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to these rules and regulations.  These consolidated financial statements should be read in conjunction with the Company’s Audited Consolidated Financial Statements and notes that are included in its Annual Report for the year ended June 30, 2007, filed on Form 10-K.

In the opinion of management of the Company these financial statements reflect all adjustments, consisting only of normal recurring accruals necessary to present fairly these consolidated financial statements.  The results of operations for the interim periods are not necessarily indicative of results that may be expected for an entire year.

Certain amounts previously reported have been reclassified to conform to the presentation in these consolidated financial statements.  These reclassifications did not affect previously reported net income or retained earnings.

Critical Judgments and Estimates   The Company describes all of its significant accounting policies in Note 1 of the Company's Audited Consolidated Financial Statements in its 2007 Annual Report on Form 10-K.   Particular attention should be paid to the Company’s allowance for losses on loans, which requires significant management judgments and/or estimates because of the inherent uncertainties surrounding this area and/or the subjective nature of the area.  Information on the impact loss allowances have had on the Company's financial condition and results of operations for the three  and nine month periods ended March 31, 2008 and 2007, can be found below, in the sections entitled  "Results of Operations – Provision for Losses on Loans" and “Financial Condition – Non-Performing and Adversely Classified Assets”.

Significant judgments and/or estimates are made in the valuation of the Company’s goodwill.  For a discussion of the judgments and estimates relating to goodwill refer to the appropriate section in Note 1 of the Company’s 2007 Audited Consolidated Financial Statements.

Management also makes judgments and estimates to determine whether the decline in fair value of available-for-sale securities below their cost is “other than temporary.”  Declines in fair value of available-for-sale securities below their cost that are deemed “other than temporary” are reflected in earnings as realized losses.  In estimating “other than temporary” impairment losses, management considers a number of factors including (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

The Company’s critical accounting policies and their application are periodically reviewed by the Audit Committee and the full Board of Directors.

Other Accounting Estimates   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Note 2.  Organization

The Company is the holding company for Vantus Bank (the “Bank” formerly known as “First Federal Bank”).  The Company owns 100% of the Bank’s common stock.  Currently, the Company engages in no other significant activities beyond its ownership of the Bank’s common stock.

6

Note 3.  Discontinued Operations

The Company sold substantially all the assets of its title search and abstract continuation business in a cash sale on March 1, 2007.  The results of operations of this business are shown in the Company’s consolidated statements of income for the three and nine months ended March 31, 2007, as “discontinued operations.”   The assets of the business sold have not been presented separately because those amounts are not material.

Note 4.  Effect of New Accounting Standards

In March 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets (as Amended) (“SFAS 156”).  This Statement amends Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”), with respect to the accounting for separately recognized servicing assets and servicing liabilities.  SFAS 156 requires the separate accounting for servicing assets and servicing liabilities which arise from the sale of financial assets; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value; permits the choice of an amortization method or fair value method for subsequent measurements; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.  SFAS 156 was effective July 1, 2007, for the Company.  The Company has chosen to use the fair value method in measuring its servicing asset.  As a result of the adoption of SFAS 156, the Company’s stockholders’ equity increased approximately $79,000 net of income tax on July 1, 2007, as a result of the adjustment of its servicing asset to fair value.  Subsequent adjustments to fair value are reflected in income as a component of mortgage banking revenue on the consolidated statements of income.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”).  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on de-recognition, classification, interest and penalties, interim period accounting, disclosure and transition for tax positions.  FIN 48 was effective for the Company on July 1, 2007.

As a result of the implementation of FIN 48 on July 1, 2007, the Company recognized an $180,000 decrease to reserves for uncertain tax positions, resulting in a liability for unrecognized tax benefits of $127,000 at July 1, 2007.  This adjustment was accounted for as an adjustment to retained earnings.  The Company has included in the liability for unrecognized tax benefits approximately $26,000 for the payment of interest and penalties at March 31, 2008.  There have been no significant changes to this amount during the nine months ended March 31, 2008, and the Company does not expect that there will be any significant increase or decrease through the remainder of fiscal year 2008.

In September 2006, the Emerging Issues Task Force ("EITF") reached a final consensus on Issue 06-04, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (“EITF 06-04).  In March 2007, the EITF reached a final conclusion on Issue 06−10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements.  The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement.  The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement and, therefore, a liability for the postretirement obligation must be recognized. EITF 06-04 is effective for annual reporting periods beginning after December 15, 2007, with earlier adoption permitted.  The Company plans to adopt EITF 06-04 on July 1, 2008.  EITF 06-04 allows the Company to record the initial recognition of the liability through stockholders’ equity.  Upon the adoption of EITF 06-04 management estimates the Company’s stockholders’ equity will decrease approximately $459,000 after income tax effect.  Ongoing expenses will be recognized through current period income.  Management estimates the first year’s expense will be approximately $20,000 after income taxes or less than $0.01 per share.

7

In September 2006, the FASB issued Statement No. 157, (“SFAS 157”), Fair Value Measurements.  SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  This Statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value.  This Statement is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted.  At this time, the Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operations, and cash flows, but will require additional disclosures.

In February 2007, the FASB issued Statement No. 159, (“SFAS 159”) The Fair Value Option for Financial Assets and Financial Liabilities – Including an  amendment of FASB Statement No. 115.  This Statement provides entities with an option to report selected financial assets at fair value.  The objective of the Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting.  SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.  Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of SFAS 157.  At this time, the Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operations, and cash flows.

In September 2006, the FASB issued Statement No. 158, (“SFAS 158”), Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R).  SFAS 158 requires a company that sponsors a postretirement benefit plan (other than a multi-employer plan) to fully recognize, as an asset or liability, the over-funded or under-funded status of its benefit plan in its balance sheet.  The funded status is measured as the difference between the fair value of the plan’s assets and its benefit obligation (projected benefit obligation for pension plans and accumulated postretirement benefit obligation for other postretirement benefit plans).  Currently, the funded status of such plans is reported in the notes to the financial statements.  This provision was effective for the Company on July 1, 2006.  In addition, SFAS No. 158 also requires a company to measure its plan assets and benefit obligations as of its year end balance sheet date. Currently, a company is permitted to choose a measurement date up to three months prior to its year end to measure the plan assets and obligations.  This provision is effective for the Company on July 1, 2008.  Since the Company participates in a multi-employer pension plan, it expects that the adoption of SFAS 158 will not have a material impact on its financial position, results of operation and cash flows.

Note 5.  Earnings Per Share

The following information was used in the computation of net earnings per common share on both a basic and diluted basis for the periods presented.

8

	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2008			2007		2008			2007
Basic earnings (loss) per share computation:
Income (loss) from continuing operations	$	(1,847,015	)	$	505,799	$	(3,185,135	)	$	1,809,269
Income from discontinued operations		-			513,883		-			589,679
Net income (loss)	$	(1,847,015	)	$	1,019,682	$	(3,185,135	)	$	2,398,948
Weighted average common shares outstanding		3,238,079			3,329,442		3,245,390			3,316,039
Basic earnings (loss) per share from continuing operations	$	(0.57	)	$	0.15	$	(0.98	)	$	0.54
Basic earnings per share from discontinued operations		-			0.16		-			0.18
Basic earnings (loss) per share	$	(0.57	)	$	0.31	$	(0.98	)	$	0.72
Diluted earnings (loss) per share computation:
Income (loss) from continuing operations	$	(1,847,015	)	$	505,799	$	(3,185,135	)	$	1,809,269
Income from discontinued operations		-			513,883		-			589,679
Net income (loss)	$	(1,847,015	)	$	1,019,682	$	(3,185,135	)	$	2,398,948
Weighted average common shares outstanding		3,238,079			3,329,442		3,245,390			3,316,039
Incremental option and recognition and retention plan shares
using treasury stock method		-			19,673		-			30,072
Diluted shares outstanding		3,238,079			3,349,115		3,245,390			3,346,111
Diluted earnings (loss)  per share from continuing operations	$	(0.57	)	$	0.15	$	(0.98	)	$	0.54
Diluted earnings per share from discontinued operations		-			0.15		-			0.18
Diluted earnings (loss) per share	$	(0.57	)	$	0.30	$	(0.98	)	$	0.72
Anti-dilutive options not included in diluted shares outstanding		171,328			30,550		150,200			26,280

Note 6.  Dividends

On April 17, 2008, the Board of Directors of First Federal Bankshares, Inc., took action to suspend the payment of the Company's quarterly dividend.  The Board took this step to maintain the capital strength of the Company given recent negative trends in the Company’s operating performance, asset quality, as well as recent deterioration in economic conditions and financial markets.  The Company intends to reassess the dividend on a quarterly basis, but does not anticipate reinstatement until operating results and asset quality improve and/or economic conditions and financial markets stabilize.  This decision is expected to preserve approximately $1.4 million in capital on an annualized basis.

Note 7.  Operating Segments

An operating segment is generally defined as a component of a business for which discrete financial information is available and the operating results of which are regularly reviewed by the chief operating decision-maker. The Company’s primary business segment is banking.  The banking segment generates revenue through interest and fees on loans, service charges on deposit accounts, and interest on investment securities.  The banking segment includes the Bank and the Company and related elimination entries between the two; since the Company’s primary activity is its ownership of the common stock of the Bank.  The “other” segment includes the Company’s real estate development subsidiary.  ‘Discontinued operations’ is related to a wholly-owned subsidiary of the Bank that operated a title search and abstract continuation business in Iowa.  The Company sold substantially all the assets of this subsidiary in March of 2007.

Selected financial information on the Company’s segments is presented below for the three and nine months ended March 31, 2008 and 2007.

9

	Three Months Ended March 31, 2008
(Dollars in Thousands)	Banking			Other		Consolidated
Interest income	$	8,573			-	$	8,573
Interest expense		4,662			-		4,662
Net interest income		3,911			-		3,911
Provision for loan losses		2,681			-		2,681
Net interest income after provision for loan losses		1,230			-		1,230
Non-interest income		904			-		904
Non-interest expense		5,191			-		5,191
Loss before income tax benefit		(3,057	)		-		(3,057	)
Income tax benefit		(1,210	)		-		(1,210	)
Net income (loss)	$	(1,847	)		-	$	(1,847	)
Depreciation and amortization	$	384			-	$	384

	Three Months Ended March 31, 2007
(Dollars in Thousands)	Banking		Other		Consolidated
Interest income	$	8,945		-	$	8,945
Interest expense		5,102		-		5,102
Net interest income		3,843		-		3,843
Provision for loan losses		31		-		31
Net interest income after provision for loan losses		3,812		-		3,812
Non-interest income		1,338	$	15		1,353
Non-interest expense		4,526		13		4,539
Income before income taxes and discontinued operations		624		2		626
Income taxes		120		-		120
Income from continuing operations		504		2		506
Income from discontinued operations, net of tax (including
gain on disposal of $510, net of tax, in 2007)		-		514		514
Net income	$	504	$	516	$	1,020
Depreciation and amortization	$	206		-	$	206

10

	Nine Months Ended March 31, 2008
(Dollars in Thousands)	Banking			Other		Consolidated
Interest income	$	27,483			-	$	27,483
Interest expense		15,292			-		15,292
Net interest income		12,191			-		12,191
Provision for loan losses		3,194			-		3,194
Net interest income after provision for loan losses		8,997			-		8,997
Non-interest income		678		$	50		728
Non-interest expense		15,165			12		15,177
Income (loss) before income tax (benefit)		(5,490	)		38		(5,452	)
Income tax benefit		(2,281	)		14		(2,267	)
Net income (loss)	$	(3,209	)	$	24	$	(3,185	)
Depreciation and amortization	$	1,104			-	$	1,104
Total assets	$	597,328			-	$	597,328

	Nine Months Ended March 31, 2007
(Dollars in Thousands)	Banking		Other		Consolidated
Interest income	$	26,159		-	$	26,159
Interest expense		14,348		-		14,348
Net interest income		11,811		-		11,811
Provision for loan losses		534		-		534
Net interest income after provision for loan losses		11,277		-		11,277
Non-interest income		4,380	$	75		4,455
Non-interest expense		13,300		62		13,362
Income before income taxes and discontinued operations		2,357		13		2,370
Income taxes		556		5		561
Income from continuing operations		1,801		8		1,809
Income from discontinued operations, net of tax (including
gain on disposal of $510, net of tax, in 2007)		-		590		590
Net income	$	1,801	$	598	$	2,399
Depreciation and amortization	$	794		-	$	794
Total assets	$	646,769	$	937	$	647,706

Note 8.  Stock-Based Compensation

The Company uses the Black-Scholes option pricing model to estimate the fair value of share-based payment awards. Weighted-average assumptions used for stock appreciation rights (SAR) granted during the nine months ended March 31, 2008 under the 2006 Stock-Based Incentive Plan were: dividend yield of 3.12%; expected volatility of 22.0%; risk-free interest rate of 3.46%; expected life of 5.0 years; and weighted-average grant date fair value of $2.309.

A summary of SAR activity as of March 31, 2008, and changes since June 30, 2007 is presented below:

					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Number		Price		Term (years)		Value
Outstanding SARs as of June 30, 2007		59,246	$	19.10
Granted		34,585		13.45
Outstanding at March 31, 2008		93,831	$	17.02		9.3	$	12,105
Exercisable at March 31, 2008		3,333	$	22.04		8.6		-

11

No stock options were granted during the nine months ended March 31, 2008.  A summary of option activity for the nine months ended March 31, 2008 is presented below:

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Number			Price		Term (years)		Value
Outstanding options as of June 30, 2007		81,000		$	17.49
Exercised		(1,500	)		9.25
Forfeited		(2,750	)		23.46
Outstanding at March 31, 2008		76,750		$	17.44		5.7	$	83,389
Exercisable at March 31, 2008		61,350		$	16.39		5.0	$	83,389

Share-based compensation expense for the nine months ended March 31, 2008 and 2007 totaled approximately $130,000 and $72,000, respectively. As of March 31, 2008, there was $313,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, to be recognized over a weighted-average period of 1.3 years.

A summary of the status of the Company’s non-vested shares of restricted stock as of March 31, 2008, and changes during the nine months ended March 31, 2008, is as follows:

				Weighted-Average
				Grant-Date
	Number			Fair Value
Non-vested restricted shares		6,400		$	21.02
Vested		(1,600	)		19.58
Non-vested at March 31, 2008		4,800		$	21.50

Restricted stock expense for the nine months ended March 31, 2008 and 2007 was $36,000 and $22,000, respectively.  As of March 31, 2008, there was $59,000 of total unrecognized compensation cost related to non-vested restricted shares.  The cost is expected to be recognized over a weighted-average period of 3.8 years.  The total fair value of shares vested during the nine months ended March 31, 2008 was $25,000.

Note 9.  Other than temporary impairment on securities

In March 2008, the Company recognized a $490,000 write-down of one of its trust preferred securities to reflect “other than temporary” impairment.  The security is the same security that experienced a write down in December 2007.  The market value continued to decline during the current quarter.  Although management believes it is possible all principal and interest will be received, the market value decline was severe enough to warrant the recognition of additional write-downs of this security.  For further discussion, please refer to Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations “Financial Condition – Securities Available-for-Sale and Held-to-Maturity” and “Financial Condition – Stockholders’ Equity.”

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Note 10.  Non-performing assets

Non-performing assets increased to $12.7 million at March 31, 2008, from $3.4 million as of June 30, 2007.  As a result, non-performing assets as a percentage of total assets increased from 0.19% at June 30, 2007, to 2.13% as of March 31, 2008.  The following table sets forth information regarding non-performing loans and other assets at the dates indicated.

(Dollars in Thousands)	March 31, 2008			June 30, 2007
Loans accounted for on a non-accrual basis:
Single-family mortgage loans	$	329		$	405
Commercial real estate loans		7,091			732
Commercial business loans		1,728			-
Consumer loans		138			105
Total non-performing loans		9,286			1,242
Foreclosed and repossessed assets		3,419			2,156
Total non-performing assets	$	12,705		$	3,398
Restructured loans not included in other non-performing categories above	$	3,544		$	2,827
Non-performing loans as a percentage of total loans		2.24	%		0.29	%
Non-performing assets as a percentage of total assets		2.13	%		0.19	%

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ITEM 2.                      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties.  When used in this report, or in the documents incorporated by reference herein, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, and similar expressions identify such forward-looking statements.  Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein.  These forward-looking statements are based largely on the expectations of the Company’s management and are subject to a number of risks and uncertainties, including but not limited to economic, competitive, regulatory, and other factors affecting the Company’s operations, markets, products and services, as well as expansion strategies and other factors discussed elsewhere in this report filed by the Company with the Securities and Exchange Commission (“SEC”).  Many of these factors are beyond the Company’s control.

Results of Operations

Quarter Overview   The Company’s net loss for the three months ended March 31, 2008, was $1.8 million or $0.57 per diluted share compared to net income of $1.0 million or $0.30 per diluted share in the same period last year.

The decline in net income for the three months ended March 31, 2008, as compared to the three months ended March 31, 2007, was due to a $2.7 million increase in provision for loan losses, a $448,000 decrease in non-interest income, and a $651,000 increase in non-interest expense.  In addition, discontinued operations contributed $514,000 during the three months ended March 31, 2007.  These developments were offset by a $1.3 million decrease in income tax expense and a $67,000 increase in net interest income.

Nine Month Overview   The Company’s net loss for the nine months ended March 31, 2008, was $3.2 million or $0.98 per diluted share, compared to net income of $2.4 million or $0.72 per diluted share in the same period last year.

The decline in net income for the nine months ended March 31, 2008, as compared to the nine months ended March 31, 2007, was due to a $2.7 million increase in provision for loan losses, a $3.7 million decrease in non-interest income and a $1.8 million increase in non-interest expense.  In addition, discontinued operations contributed $590,000 for the nine months ended March 31, 2007.  These developments were offset by a $2.8 million decrease in income tax expense and a $380,000 increase in net interest income.

The following paragraphs discuss the aforementioned changes in more detail along with other changes in the components of net income during the three and nine periods ended March 31, 2008.

Net Interest Income   Net interest income for the three-month period ended March 31, 2008, increased $0.1 million from $3.8 million for the three months ended March 31, 2007, to $3.9 million for the three months ended March 31, 2008.  For the three months ended March 31, 2008, the Company’s net interest margin was 2.86% compared to 2.79% 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.  During the most recent quarter, the Company’s cost of interest-bearing liabilities declined 40 basis points in response to overall decreases in market interest rates.   Asset yields decreased 20 basis points.  Approximately half of this decrease was due to a decline in yields on the Company’s loan portfolio.  The remaining decrease was related to the reversal of interest on loans that were placed on non-accrual during the period.  The increase in margin was offset by a decrease in the Company’s average interest-earning assets.  Average interest-earning assets decreased $7.0 to $553.1 million during the most recent quarter compared to $560.1 million for the three months ended March 31, 2007.

For the nine month period ended March 31, 2008, net interest income increased to $12.2 million compared to $11.8 million for the same period in the previous year.  For the nine months ended March 31, 2008, the Company’s net interest margin remained at 2.93%.  However, average interest-earning assets for the nine month period ended March

14

31, 2008, increased $15.9 million to $561.5 million compared to $545.7 million for the nine months ended March 31, 2007.  The change is primarily due to increases in the Company’s investment portfolio.

The following tables set forth information regarding the average balances of the Company’s assets, liabilities, and equity, as well as the average yield on assets and average cost of liabilities for the periods indicated.  The information is based on daily average balances during the three and nine month periods ended March 31, 2008 and 2007.

	Three months ended March 31,
	2008							2007
	Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable (1)	$	416,552	$	6,641		6.47	%	$	446,975	$	7,341		6.66	%
Investment securities (2)		126,771		1,864		6.10	%		107,646		1,531		5.99	%
Deposits in other financial institutions		9,802		67		2.77	%		5,482		74		5.44	%
Total interest-earning assets		553,125		8,572		6.32	%		560,103		8,946		6.52	%
Non-interest-earning assets		66,823							56,164
Total assets	$	619,948						$	616,267
Interest-bearing liabilities:
Deposit liabilities	$	412,414		3,570		3.51	%	$	427,384		4,183		3.97	%
Borrowings		93,054		1,092		4.76	%		72,804		919		5.12	%
Total interest-bearing liabilities		505,468		4,662		3.74	%		500,188		5,102		4.14	%
Non-interest-bearing:
Deposit liabilities		44,269							41,614
Other liabilities		4,709							4,185
Total liabilities		554,446							545,987
Stockholders’ equity		65,502							70,280
Total liabilities and
stockholders' equity	$	619,948						$	616,267
Net interest income			$	3,910						$	3,844
Interest rate spread						2.58	%						2.38	%
Net interest margin						2.86	%						2.79	%
Ratio of average interest-earning assets
to average interest-bearing liabilities						109.43	%						111.98	%

(1)	Average balances include nonaccrual loans and loans held for sale.  Interest income includes amortization of
	deferred loan fees, which is not material.
(2)	Investment securities income is presented without the benefit of the tax effect of tax exempt income; yields are
	presented on a tax-effected basis.
(3)	Net interest margin represents net interest income, tax-effected, as a percentage of average earning assets.

15

	Nine months ended March 31,
	2008							2007
	Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable (1)	$	428,187	$	21,474		6.68	%	$	453,741	$	22,512		6.61	%
Investment securities (2)		128,535		5,884		6.24	%		83,762		3,329		5.56	%
Deposits in other financial institutions		4,807		125		3.46	%		8,166		318		5.18	%
Total interest-earning assets		561,529		27,483		6.55	%		545,669		26,159		6.43	%
Non-interest-earning assets		64,796							55,626
Total assets	$	626,325						$	601,295
Interest-bearing liabilities:
Deposit liabilities	$	424,035		12,047		3.78	%	$	403,661		11,390		3.76	%
Borrowings		86,409		3,245		5.00	%		81,028		2,958		4.86	%
Total interest-bearing liabilities		510,444		15,292		3.99	%		484,689		14,348		3.94	%
Non-interest-bearing:
Deposit liabilities		43,207							42,055
Other liabilities		4,860							4,680
Total liabilities		558,511							531,424
Stockholders’ equity		67,814							69,871
Total liabilities and
stockholders' equity	$	626,325						$	601,295
Net interest income			$	12,191						$	11,811
Interest rate spread						2.56	%						2.49	%
Net interest margin						2.93	%						2.93	%
Ratio of average interest-earning assets
to average interest-bearing liabilities						110.01	%						112.58	%

(1)	Average balances include nonaccrual loans and loans held for sale.  Interest income includes amortization of
	deferred loan fees, which is not material.
(2)	Investment securities income is presented without the benefit of the tax effect of tax exempt income; yields are
	presented on a tax-effected basis.
(3)	Net interest margin represents net interest income, tax-effected, as a percentage of average earning assets.

Provision for Losses on LoansProvision for losses on loans increased to $2.7 million for the three months ended March 31, 2008, from $31,000 for the three months ended March 31, 2007.  For the nine months ended       March 31, 2008, the provision for loan losses increased to $3.2 million from $534,000 during the same time period last year.  Provision of losses on loans during the three and nine months ended March 31, 2008, were negatively impacted by a significant increase in non-performing loans and adversely classified assets.  Non-performing loans increased from $3.1 million or 0.72% of loans receivable at December 31, 2007, to approximately $9.3 million or 2.24% of loans receivable at March 31, 2008.  In addition, adversely classified assets (which include non-performing loans) increased from $8.5 million or 1.36% of total assets at December 31, 2007, to approximately $14.2 million or 2.38% of total assets at March 31, 2008.    Adversely classified assets consists of loans rated “Substandard”, “Doubtful”, or “Loss”, as well as foreclosed and repossessed assets.  Loans rated “Special Mention” increased from $13.9 million at      December 31, 2007, to approximately $21.7 million at March 31, 2008.

The increase in non-performing loans and adversely classified assets was primarily driven by deterioration in four large loan relationships.   During the most recent quarter a bio-diesel plant operator ($2.9 million), a land development firm ($1.3 million), a condominium developer ($0.8 million), and an ethanol plant operator ($0.6 million) defaulted on their loans to the Company.  As a result, these loans were downgraded to “Substandard” and were placed on non-accrual.   In addition to these loans, the Company downgraded to “Special Mention” a $6.1 million loan on a land development project and a $3.2 million loan to formalwear distributor that is secured by the borrower’s corporate headquarters and warehouse facility. In all of these instances, management of the Company believes the estimated fair

16

value of the collateral securing these loans exceeds the amounts due the Company.  Accordingly, the Company does not anticipate a need for specific loss allowance on these relationships at this time, although there can be no assurances.

The Company’s absolute level of classified assets, management’s assessment of current economic conditions, and its assessment of the likelihood of near-term charge-offs, are key components in the calculation of the Company’s allowance for loan losses.   As a result of the overall increase in classified assets, management determined that a significant increase in the Company’s allowance for loan losses was appropriate.  In addition, management’s reassessment of current economic conditions, as well as its near-term expectations for losses, warranted an increase in certain subjective factors used in the Company’s computation of its allowance for loan loss.  As a result of these developments, as well as $505,000 in specific loss allowances on two other loan relationships discussed in the next paragraph, the Company recorded a provision for loan losses of approximately $2.7 million during the three months ended March 31, 2008.    In addition, the Company recorded a loss of $171,000 as a result of the disposition of certain foreclosed real estate properties during the period.  This amount has been included in other non-interest expense.

In addition to the developments discussed in the previous paragraph, a $1.4 million loan to a concrete pumping contractor deteriorated further during the quarter.  The borrower’s attempts to negotiate a workout with its creditors failed during the period, which resulted in the borrower filing for Chapter 11 bankruptcy.   As a result of this development, management believes the probable outcome for this loan relationship will be the complete liquidation of the loan collateral to satisfy the amounts owed to the Company.  Accordingly, during the quarter the Company increased its specific allowance on this loan relationship from $180,000 to $560,000 based on management’s assessment of the value of the collateral, which consists of a number of concrete pumping trucks.  Although management has used a professional appraisal firm to assist it in its valuation of the vehicles, there can be no assurances that the Company will be able to liquidate the collateral for the value estimated by management.  The Company also recorded a specific loss allowance of $125,000 against a $297,000 loan to a small commercial business.  For additional discussion, refer to “Financial Condition – Non-Performing and Adversely Classified Assets.”

The Company’s allowance for loan loss increased from $2.0 million or 0.46% of total loans at  March 31, 2007, to $4.7 million or 1.13% of total loans at March 31, 2008.   The Company’s allowance for loan losses represented 50.5% and 65.6% of non-performing loans as of March 31, 2008, and March 31, 2007, respectively.  Although management believes that the Company’s present level of allowance for loan losses is adequate, there can be no assurance that future adjustments to the allowance will not be necessary, which could adversely affect the Company’s results of operations.

The following table summarizes the activity in the Company’s allowance for loan losses for the three and nine months ended March 31, 2008 and 2007.

	Three months ended						Nine months ended
	March 31						March 31
(Dollars in Thousands)	2008			2007			2008			2007
Balance at beginning of period	$	2,056		$	2,044		$	1,797		$	5,466
Provision for loan losses		2,681			31			3,194			534
Charge-offs:
Commercial real estate loans		-			(4	)		(182	)		(24	)
Commercial business loans		-			(3	)		(71	)		(2,620	)
Consumer loans		(70	)		(63	)		(149	)		(190	)
Total loans charged-off		(70	)		(70	)		(402	)		(2,834	)
Loans transferred to held for sale		-			-			-			(1,300	)
Recoveries		26			26			104			165
Charge-offs, net of recoveries		(44	)		(44	)		(298	)		(3,969	)
Balance at end of period	$	4,693		$	2,031		$	4,693		$	2,031
Allowance for loan losses to total loans		1.14	%		0.46	%		1.14	%		0.46	%
Allowance for loan losses to non-performing loans		50.54	%		65.64	%		50.54	%		65.64	%
Net annualized charge-offs to average loans outstanding		0.04	%		0.04	%		0.09	%		1.17	%

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Non-Interest Income   Non-interest income totaled $904,000 for the three months ended March 31, 2008, compared to $1.4 million for the three months ended March 31, 2007.  For the nine months ended March 31, 2008, non-interest income totaled $728,000 compared to $4.5 million for the nine months ended March 31, 2007.  The following paragraphs discuss the principal components of non-interest income and the primary reasons for the changes from 2007 to 2008.

Service Charges on Deposit Accounts  Service charges on deposits increased $2,000 to $773,000 for the three month period ended March 31, 2008, as compared to the same period in the previous year.  For the nine months ended March 31, 2008, service charges on deposit accounts totaled $2.4 million as compared to $2.5 million for the nine months ended March 31, 2007.   This decline was primarily due to the elimination of fees on internet banking services and lower income from overdraft fees as a result of the implementation of an overdraft protection product.  These changes were driven by competitive forces in the Company’s market places.

Fees on Commercial and Consumer Loans   Service charges on commercial and consumer loans increased $7,000 to $58,000 for the three month period ended March 31, 2008, as compared to the same period in the previous year.  For the nine months ended March 31, 2008, service charges on loans increased $142,000 to $278,000.  These increases were primarily due to the collection of prepayment penalties on commercial and commercial real estate loans during the current periods.  The collection of prepayment penalties increased due to the general decline in market interest rates during the periods and a corresponding increase in refinancing activity in the commercial real estate portfolio.

Gain on Sale of Real Estate Held for Development   The gain on sale of real estate held for development for the three months ended March 31, 2008 and 2007, was zero and $15,000, respectively.  For the nine months ended March 31, 2008 and 2007, gain on the sale of real estate held for development totaled $47,000 and $75,000, respectively.  The gains recognized in both periods were due to sales from a condominium development project in the Company’s real estate development subsidiary.  This project is now completed.  The Company does not intend to undertake any further real estate development projects.

Other-than-Temporary Impairment of Investment Securities    In March 2008, the Company recognized a $490,000 write-down of one of its trust preferred securities to reflect “other than temporary” impairment.  The security is the same security that experienced a write down in December 2007.  The market value continued to decline during the current quarter.  Although management believes it is possible all principal and interest will be received, the market value decline was severe enough to warrant the recognition of additional write-downs of this security.  For further discussion, please refer to “Financial Condition – Securities Available-for-Sale and Held-to-Maturity” and “Financial Condition – Stockholders’ Equity.”

Mortgage Banking Revenue   Mortgage banking revenue consists of gain on sale of residential loans, loan origination and closing fees, and mortgage servicing income and changes to the mortgage servicing valuation.  Mortgage banking revenue declined $4,000 from $152,000 for the three months ended March 31, 2007, to $148,000 for the three months ended March 31, 2008.  For the nine months ended March 31, 2008, mortgage banking revenue decreased $11,000 to $519,000 from $530,000 during the same period last year.  These decreases were due to declines in the market value of the Company’s mortgage servicing portfolio during the respective periods due to a falling interest rate environment.    These declines were offset by an increase in fixed rate mortgage origination volumes also due to the overall decline in market interest rates.

Earnings from Bank Owned Life Insurance   Earnings from bank owned life insurance increased $6,000 to $139,000 for the three months ended March 31, 2008.  For the nine months ended March 31, 2008, earnings for bank owned life insurance increased $17,000 to $414,000 from $397,000 during the same period last year.  These changes were attributable to an increase in the investment yield of the underlying insurance policies.

Other Income   Other income for the three months ended March 31, 2008, increased $45,000 to $275,000 compared to the same period a year ago.  For the nine months ended March 31, 2008, other income totaled $838,000 as compared to $784,000 for the nine months ended March 31, 2007.  These changes were primarily due to an increase in sales of fixed annuities and mutual funds.

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Non-Interest Expense   Non-interest expense for the three months ended March 31, 2008, was $5.2 million compared to $4.5 million for the three months ended March 31, 2007.  For the nine months ended March 31, 2008, non-interest expense totaled $15.2 million compared to $13.4 million for the same period a year ago.   The following paragraphs discuss the principal components of non-interest expense and the primary reasons for the changes from 2007 to 2008.

Personnel Expense    Compensation and employee benefits was $2.9 million for the three months ended March 31, 2008, compared to $2.6 million for the three months ended March 31, 2007.  The increase in expense was due to annual merit increases and an increase in the number of full-time equivalent employees.  The number of full-time equivalent employees was 196 as of March 31, 2008, compared to 182 at the same time last year.  The number of employees increased during the year due to the opening of a two new banking centers in the Des Moines market as well as the hiring of certain key employees over the last twelve months.

Office Property and Equipment   Office property and equipment expense decreased $19,000 to $732,000 during the three months ended March 31, 2008, compared to the same period in the previous year.  For the nine months ended March 31, 2008 and 2007, office property and equipment expense totaled $2.1 million.  The decline in the current period is due to decreased snow removal costs as compared to the previous year.

Data Processing, ATM and Debit Card Transaction Costs, and Other Item Processing Expense     This expense category increased from $309,000 for the three months ended March 31, 2007, to $393,000 for the three months ended March 31, 2008.  For the nine months ended March 31, 2008, this expense increased to $1.2 million from $0.9 million.  These increases were partially due to costs associated with the purchase of new debit card stock in association with the Bank’s name change.  In addition, the Company has been successful in increasing the number of individuals using online banking and bill pay as well as cell phone banking.  As a result, processing costs through these channels have increased.

Professional, Insurance, and Regulatory   Professional, insurance and regulatory expense for the three months ended March 31, 2008, increased to $283,000 from $252,000 for the same period a year ago.  This increase was due to a higher level of legal expenses related to increased foreclosures on commercial real estate loans as compared to the prior period.  For the nine months ended March 31, 2008, professional, insurance, and regulatory expense decreased to $790,000 from $810,000 for the nine months ended March 31, 2007.  The Company incurred consulting and legal costs last year related to the implementation of the Company’s long-term incentive plan and cash incentive plan offset by the aforementioned legal costs.

Advertising, Donations, and Public Relations   Expenses related to advertising, donations, and public relations increased from $160,000 for the three months ended March 31, 2007, to $288,000 for the three months ended March 31, 2008.  For the nine months ended March 31, 2008, expenses related to advertising, donations and public relations totaled $1.1 million as compared to $0.5 million for the nine months ended March 31, 2007.   These increases are due to the promotion of the Company’s new brand and image.

Communication, Postage, and Office Supplies   Communications, postage, and office supplies totaled $212,000 for the three months ended March 31, 2008 and 2007.  For the nine months ended March 31, 2008, communication postage and office supply expense increased $33,000 to $647,000 as compared to last year.   These increases were due to printing and postage related to the Bank’s name change and the opening of the aforementioned Des Moines banking centers.

Other Non-Interest Expense   Other non-interest expense increased from $288,000 for the three months ended March 31, 2007, to $351,000 for the three months ended March 31, 2008.  For the nine months ended March 31, 2008, other non-interest expense increased to $809,000 compared to $660,000 for the nine months ended March 31, 2007.  These increases were due to costs incurred by the Company to dispose of foreclosed property and the recognition of allowances for debit card fraud and checking account overdraft losses.

Income Tax Expense   Income tax benefit for the nine months ended March 31, 2008, was $2.3 million compared to an expense of $561,000 for the nine months ended March 31, 2007.  Income tax benefit for the three months ended March 31, 2008, was $1.2 million compared to an expense of $120,000 for the same period a year ago.  The effective tax rate for the nine months ended March 31, 2008 was 41.6% compared to 23.7% for the nine months

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ended March 31, 2007.  The effective tax rate for the three months ended March 31, 2008 was 39.5% compared to 19.2% for the nine months ended March 31, 2007.  The effective tax rate between periods has increased because tax exempt income was a smaller percentage of the Company’ pre-tax loss in the most recent reporting periods as compared to the prior reporting periods.

Financial Condition

Overview Total assets decreased by $48.5 million or 7.5% to $597.4 million at March 31, 2008, from $645.8 million at June 30, 2007.  This decrease was due to short-term investments and cash flows from maturing loans and investments that were used to repay wholesale borrowings.  In addition, loans receivable declined $18.7 million as loan prepayment activity increased.  Total deposits declined significantly from June 30, 2007, as a result of management’s decision to replace $50 million in brokered certificates of deposit with $50 million in advances from the FHLB.   Excluding brokered certificates, deposit liabilities increased $6.3 million or 1.4% since June 30, 2007.  This increase was led by total checking accounts, which were up $4.9 million or 3.6%.

Interest-Bearing Deposits with Banks Interest-bearing deposits with banks, which consist primarily of overnight investments at the FHLB, decreased by $14.1 million to zero as of March 31, 2008.  These balances were used to fund the aforementioned decreases in the Company’s wholesale borrowings.

Mortgage Loans Held for Sale  Mortgage loans held for sale increased $0.9 million to $3.0 million as of March 31, 2008.  This change is attributable to increased originations of fixed-rate mortgage loans during the period due to an overall decline in mortgage interest rates.

Securities Available-for-Sale and Held-for-Investment  Total securities decreased by $26.6 million to $105.3 million at March 31, 2008, from $131.9 million at June 30, 2007.  The decrease was primarily due to the maturity of commercial paper and principal repayments on the Company’s mortgage backed security (“MBS”) portfolio.  These funds were principally used to repay wholesale borrowings.  In addition, the Company recognized a write-down of $490,000 of one of its trust-preferred pooled securities (“TPSs”).  The security is the same security that experienced a write down in December 2007.  The market value continued to decline during the current quarter.  Although management believes it is possible all principal and interest will be received, the market value decline was severe enough to warrant the recognition of additional write-downs of this security.

Federal law and regulation generally permit the Company's federal savings association subsidiary to invest up to 35% of its assets in commercial paper and corporate debt securities. Notwithstanding this investment limit, guidance issued by the Office of Thrift Supervision ("OTS") imposes lower limits on such investments, absent OTS approval. 

The Company was recently advised by the OTS that the aggregate amount of the Company's portfolio of trust-preferred pooled securities ($65.2 million amortized cost at March 31, 2008) exceeds OTS regulatory guidelines. The Company is currently in discussions with the OTS about the size of this portfolio and, in response to an OTS request, on         May 15, 2008, a plan was filed to come into compliance with such regulatory guidelines and the timeframe for doing so.  As part of such plan, the Company intends to seek OTS approval to allow the Company to retain such securities, notwithstanding the regulatory guidelines. There can be no assurance that the Company will obtain the approval. Any future directive by the OTS to sell such securities could result in the securities being classified as “other than temporarily impaired” due to a lack of positive intent and ability by the Company to hold these securities to maturity and/or forecasted recovery.  During the most recent quarter, the Company recognized an “other than temporary” impairment charge on one trust preferred security that the Company owns.  Regardless of the OTS’s decision, continued deterioration in the performance and/or fair value of these securities could result in the securities being classified as “other than temporarily impaired” or “permanently impaired” in a future reporting period.  Such classification, regardless of reason, could have a material adverse effect on the Company's future earnings and stockholders' equity.  Please refer to “Financial Condition – Stockholders’ Equity,” below, for additional discussion relating to the Company’s trust-preferred securities (“TPSs”) portfolio.

Loans Receivable  Loans receivable decreased by $18.7 million, to $411.0 million as of March 31, 2008, from $429.8 million at June 30, 2007.  Repayments from the one-to-four family residential and commercial real estate portfolios were offset by an increase in commercial business loans and home equity and second mortgage loans.  The following table sets forth information regarding the Company’s loan portfolio, by type of loan, on the dates indicated.

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	March 31, 2008						June 30, 2007
(Dollars in Thousands)	Amount			%			Amount			%
First mortgage loans:
Secured by one to four family residences (1)	$	114,539			28.2		$	124,229			29.0
Secured by multi-family and non-residential properties (2)		175,082			43.1			197,952			46.2
Commercial business loans		62,206			15.3			50,439			11.8
Home equity and second mortgage loans		29,038			7.2			28,594			6.7
Other non-mortgage loans (3)		30,497			7.5			28,996			6.8
Loans in process, unearned discounts, premiums and
net deferred loan fees and costs		(357	)		(0.1	)		(459	)		(0.1	)
Loans receivable		411,005			101.2			429,751			100.4
Allowance for  loan losses		(4,693	)		(1.2	)		(1,797	)		(0.4	)
Net loans	$	406,312			100.0		$	427,954			100.0

(1)	Includes construction loans of $8.9 million and $6.4 million, respectively.
(2)	Includes construction loans of $20.1 million and $18.7 million, respectively.
(3)	Includes other secured and unsecured personal loans.

Office property and equipment   Office property and equipment increased $2.6 million from $16.2 million at June 30, 2007, to $18.8 million at March 31, 2008.  The increase was due to construction costs associated with a new banking office in Ankeny, Iowa.  The Company opened the banking center in March of 2008.

FHLB Stock   The Company’s FHLB stock increased from $3.6 million at June 30, 2007, to $4.8 million at March 31, 2008.  The change was a direct result of the increase in FHLB advances, which increases the level of FHLB stock required to be held.

Deposit Liabilities   Deposit liabilities decreased by $43.7 million, to $464.2 million at March 31, 2008, from $507.9 million at June 30, 2007.  The decrease in deposits was partially due to the replacement of matured brokered certificates of deposits with lower cost FHLB advances of similar term.  The following table sets forth information regarding the Company’s deposit portfolio on the dates indicated.

	March 31, 2008				June 30, 2007
(Dollars in Thousands)	Amount		%		Amount		%
Non-interest-bearing checking	$	47,963		10.33	$	45,200		8.90
Interest-bearing checking accounts		94,649		20.39		91,723		18.06
Money market accounts		55,117		11.87		55,848		11.00
Savings accounts		24,522		5.28		25,931		5.10
Certificates of deposit		241,929		52.13		289,163		56.94
Total deposits	$	464,180		100.00	$	507,865		100.00

FHLB Advances and Other Borrowings   The Company’s FHLB advances and other borrowings increased by $7.9 million, to $70.1 million at March 31, 2008, from $62.2 million at June 30, 2007.  The increase was due to the aforementioned replacement of brokered certificates of deposit with FHLB advances offset by the repayment of FHLB advances with short-term investments and cash flows from maturing loans and investments.

Stockholders’ Equity Total stockholders’ equity decreased by $12.5 million from $70.3 million at  June 30, 2007, to $57.7 million at March 31, 2008.  This decrease was primarily attributable to the aforementioned write-down of one of the Company’s trust preferred securities and a $7.2 million increase in accumulated other comprehensive loss.  This increase was caused by a decline in the fair value of the Company’s remaining TPS portfolio.  The cash flows of the Company’s TPSs are derived from trust preferred securities and subordinated debt issued by well-diversified pools of banks and thrifts (76%), insurance companies (24%), and REIT/homebuilders (1%).  The Company’s TPS securities are secured through a combination of subordination from lower classes within the TPS

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structures, as well as over-collateralization of available future contractual cash flows.  At the time of purchase, each of the securities in the Company’s TPS portfolio were rated either single-A (61% of the portfolio) or triple-B (39% of the portfolio) by a nationally recognized rating agency. In recent months, well-publicized volatility in world credit markets has resulted in significant fluctuations in the value of the Company’s TPSs.  In the opinion of management this volatility is principally due to market perceptions of credit risk and only secondarily to actual deterioration in the underlying credit quality or performance of the community banks, thrifts, insurance companies, and, to a much lesser degree, REITs that secure the Company’s TPSs.

One of the Company’s TPSs with a principal face value of $5.0 million was downgraded to “triple-C” by a third-party rating agency in December 2007.   This downgrade was caused by the default of one of the REITs that secure the TPS, as well as financial difficulties of another REIT that subsequently defaulted in the TPS.  As a result, management concluded this security is “other than temporarily” impaired.  In December 2007, the Company recognized a write down of this security of $3.3 million.  During the most recent quarter, the security continued to experience market value declines.  As a result, management recognized an additional $490,000 in the current period.  Although management believes it is possible all principal and interest will be received, the market value decline was severe enough to warrant the recognition of additional write-downs of this security.

Continued volatility in the market value for the Company’s TPSs, whether caused by changes in market perceptions of credit risk or actual defaults of the financial companies that secure the Company’s portfolio of TPSs, could result in significant fluctuations in the value of these securities.  This could have a material adverse impact on the Company’s accumulated other comprehensive loss and stockholders’ equity depending on the direction of the fluctuations.  Furthermore, future defaults of the companies that secure the Company’s TPSs could result in future classifications of these securities as “other than temporarily impaired,” “permanently impaired,” or a combination thereof.  This will likely have a material impact on the Company’s future earnings and stockholders’ equity.

Refer to “Financial Condition–Securities Available-for-Sale and Held-for-Investment,” above, for additional discussion relating to the Company’s TPS portfolio.

Stockholders’ equity also declined due to the Company’s repurchase of 87,000 treasury shares during the nine months ended March 31, 2008, at an average price of $18.96.

Non-Performing and Adversely Classified Assets   Non-performing assets increased to $12.7 million at March 31, 2008, from $3.4 million as of June 30, 2007.  As a result, non-performing assets as a percentage of total assets increased from 0.19% at June 30, 2007, to 2.13% as of March 31, 2008.  The following table sets forth information regarding non-performing loans and other assets at the dates indicated.

(Dollars in Thousands)	March 31, 2008			June 30, 2007
Loans accounted for on a non-accrual basis:
Single-family mortgage loans	$	329		$	405
Commercial real estate loans		7,091			732
Commercial business loans		1,728			-
Consumer loans		138			105
Total non-performing loans		9,286			1,242
Foreclosed and repossessed assets		3,419			2,156
Total non-performing assets	$	12,705		$	3,398
Restructured loans not included in other non-performing categories above	$	3,544		$	2,827
Non-performing loans as a percentage of total loans		2.24	%		0.29	%
Non-performing assets as a percentage of total assets		2.13	%		0.19	%

As of March 31, 2008, the Company’s adversely classified assets totaled $14.2 million (which includes non-performing assets in the above table) or 2.38% of total assets compared to $4.9 million or 0.76% as of June 30, 2007.  Adversely classified assets include loans rated “Substandard”, “Doubtful”, or “Loss”, as well as foreclosed and repossessed assets.

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The Company is closely monitoring ten loan relationships and two foreclosed assets totaling $12.8 million that are included in the $14.2 million of adversely classified assets.  The following paragraphs contain a brief discussion of each of these items.

In May of 2007 the Company purchased $3.0 million in a $33.0 million loan for construction of a bio-diesel plant in south-eastern Nebraska.  In February of 2008 the Company was notified that the parent company was having financial difficulties and was unable to support this project.  As a result, the plant has not been completed.  The bank group has agreed to allow the borrower to use escrow funds and proceeds from the sale of raw materials in order to complete the project.  Construction is expected to be completed by June of 2008 at which time the plant will be able to provide cash flow to make regular payments or be sold to another entity that will be able to support the project.  Management has classified this loan as “Substandard” and it was placed on non non-accrual status.  Management does not anticipate a loss on this loan at this time.  However, there can be no assurances.

In January of 2006 the Company purchased $1.4 million participation of a $5.3 million loan to a concrete pumping business in Colorado.  In November 2006, the Bank was notified that the borrower was having cash flow problems stemming from the slow down in residential construction and a slower than expected ramp up of business in a new market.  The borrower’s attempts to negotiate a workout with its creditors failed during the most recent period, which resulted in the borrower filing for Chapter 11 bankruptcy.   As a result of this development, management believes the probable outcome for this loan relationship will be the complete liquidation of the loan collateral to satisfy the amounts owed to the Company.  Accordingly, during the quarter the Company increased its specific allowance on this loan relationship from $180,000 to $560,000 based on management’s assessment of the value of the collateral, which consists of a number of concrete pumping trucks.  Although management has used a professional appraisal firm to assist it in its valuation of the vehicles, there can be no assurances that the Company will be able to liquidate the collateral for the value estimated by management.  In addition, since this loan is primarily secured by equipment, management continues to classify this loan as “Doubtful” in order to properly reflect the risk in the calculation of the Company’s allowance for loan loss.  This loan is also accounted for on a non-accrual basis.

In 2003, the Company originated a $1.3 million loan for development of land in Des Moines, Iowa.  Management is currently negotiating with the borrowers to bring the loan current.  However, if the borrower cannot bring the loan current, foreclosure proceedings will commence.  Management has classified this loan as “Substandard” and it was placed on non non-accrual status.  Management does not anticipate a loss on this loan at this time.  However, there can be no assurances.

The Company purchased $0.9 million of a $4.2 million loan for an apartment complex in Chicago, Illinois.  In March of 2008, the borrower filed for bankruptcy.  A court hearing regarding the bankruptcy is scheduled for May of 2008.  Management has classified this loan as “Substandard” and it was placed on non non-accrual status.  Management does not anticipate a loss on this loan at this time.  However, there can be no assurances.

In December of 2006 the Company originated a loan to a real estate developer in Des Moines.  The purpose of the loan was to purchase and develop lots and single-family residences.  The current balance of this loan is $0.8 million.  It is delinquent as of March 31, 2008.  Management is currently negotiating with the borrowers to bring the loan current.  However, if the borrower cannot bring the loan current, foreclosure proceedings will commence.  Management has classified this loan as “Substandard” and was placed on non-accrual status.  Management does not anticipate a loss on this loan at this time.  However, there can be no assurances.

In March of 2006, the Company purchased $0.7 million of a $54 million credit facility for construction of an ethanol plant in southern Kansas.  The plant is operational.  However cash flow is not sufficient to support the debt.  Management is currently negotiating with the borrowers to bring the loan current.  However, if the borrowers cannot bring the loan current, foreclosure proceedings will commence.   Management has classified this loan as “Substandard” and is on non-accrual status.  Management does not anticipate a loss on this loan at this time.  However, there can be no assurances.

In 1999 and subsequent years the Company originated loans to a restaurant in Sioux City.  The current balance of these loans totaled $0.6 million at March 31, 2008.  The borrower has experienced several years of operating losses and cash flow from the business is not sufficient to service the debt.  Despite the lack of cash flow, the loan is current due to the guarantor injecting cash into the business.  This loan remains on accrual, but has been classified as

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“Substandard”.  Management believes the value of the collateral securing this loan is insufficient to repay the loan should the borrower default.  Should the Company be forced to foreclose, management anticipates that a loss could exceed $100,000.  However, management does not believe a loss is probable at this time, although there can be no assurances.

In 2004 the Company originated loans to a small manufacturer in Des Moines.  The current balance of these loans total $0.6 million at March 31, 2008.  The loans are current and remain on accrual.  However, the owners of the company do not have the ability to inject additional capital in the business.  Capital injections are needed to improve the company’s overall cash flow.  Management has classified this loan as “Substandard”.  Management believes the value of the collateral securing this loan is sufficient to repay the loan if foreclosure is necessary.  No loss is expected at this time. However, there can be no assurances.

In 1999 and 2000 the Company originated loans to an educational toy retailer in Sioux City.  The current balance of these loans totaled $0.5 million at March 31, 2008.  The borrower has experienced several years of operating losses and cash flow from that business is not sufficient to service the debt.  Despite the lack of cash flow, the loan is current due to the guarantor injecting cash into the business.  Management believes this loan is adequately secured by the underlying collateral which consists of real estate and to a lesser degree inventory and equipment.  This loan remains on accrual, but has been classified as “Substandard”.  No loss is expected at this time. However, there can be no assurances.

In May of 2007, the Company originated a $0.3 million loan for the purchase of a small commercial business in Central Iowa.  As a result of the weakening economy, sales for the business declined significantly.  As a result, the borrower was forced to close the business.  The Company has started foreclosure proceedings.  Management has classified this loan as “Doubtful” and has placed it on non-accrual status.  A specific allowance of $125,000 was recorded in March.  Management does not anticipate additional losses on this loan at this time.  However, there can be no assurances.

In 2005 the Bank purchased a $1.8 million participation in a $19.3 million loan for a senior housing facility in Minneapolis, Minnesota.  The borrower subsequently defaulted on the loan and the collateral was transferred to foreclosed assets in the fourth quarter of the previous fiscal year.  An offer to purchase the property for $21.0 million has been accepted by the bank group, but is contingent on bank group financing not to exceed $17.0 million.  In addition, it is anticipated that the purchaser will invest an additional $3.0 million of cash into this project for improvements.   The transaction is anticipated to close in the fourth quarter of fiscal year 2008.  Management expects no loss at this time.  However, there can be no assurances.

In December of 2007, the Company foreclosed on $1.5 million of singe-family residences and lot loans to two real estate developers in Des Moines.  The Company is in the process of disposing of these properties.  At March 31, 2008, the balance remaining was $0.9 million.  Management does not believe a material loss on the ultimate disposition of these properties is probable at this time.  However, there can be no assurances.

In addition to the aforementioned adversely classified assets, the Company is also closely monitoring four loan relationships rated “Special Mention”.  The total of these relationships is $11.4 million.  The following paragraphs contain a brief discussion of each of these relationships.

In 2005, the Bank originated a loan to an investor group for the purchase and renovation of an existing office building into condominiums in Des Moines.  The current balance of this loan is $6.9 million.  Condominium sales have been slow and the project has not met its sales targets.  As a result, capital injections were made by the investor group to improve cash flow, service the debt, and complete the renovation.  Management has classified this loan “Special Mention”.  Management does not expect a loss at this time.  However, there can be no assurances.

In 2006, the Bank originated a loan to an investment group for the purpose of acquiring and constructing an office building near the Jordan Creek Mall area in Des Moines.  The current balance of this loan is $2.4 million.  One of the guarantors, the primary developer, has experienced financial difficulties.  As a result, construction of the office building was delayed and the loan became past due.  Management has classified this loan as “Special Mention”.  Subsequently, the other guarantors of the project brought the loan current and are currently looking for another

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developer for the project.  Should the Company be forced to foreclose, management anticipates that a loss could exceed $500,000.  However, management does not believe a loss is probable at this time, although there can be no assurances.

In 2002, the Bank purchased a $0.4 million participation of a $3.2 million loan to a golf and social club.  The loan was paying as agreed until December 2006.  At that time the borrower notified the bank group of a significant operating shortfall.  A group of investors continues to negotiate the purchase of the club’s assets.  The loan remains classified as “Special Mention” however continues to be accounted for on a non-accrual basis.  Management believes this loan is adequately secured by the underlying collateral, which consists primarily of real estate and to a lesser degree accounts receivable and equipment.  No loss is expected at this time.  However, there can be no assurances.

In April of 2007, the Bank originated a $6.2 million for development of commercial properties in the Jordan Creek area.  The borrower’s is currently experiencing financial difficulties.  As a result, cash flow is not sufficient to service the debt.  The borrower is currently looking for a partner to provide additional cash flow for this project.   Management has classified this loan as “Special Mention”.   Management does not anticipate a loss on this loan at this time.  However, there can be no assurances.

Liquidity and Capital

           The Bank is required to maintain specified amounts of capital pursuant to regulations promulgated by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”).  The Bank's objective is to maintain its regulatory capital in an amount sufficient to be classified in the highest regulatory capital category (i.e., as a "well-capitalized" institution).  At March 31, 2008, the Bank's regulatory capital exceeded all regulatory minimum requirements, as well as the amount required to be classified as a "well-capitalized" institution.  The Bank's actual and required capital amounts and ratios as of March 31, 2008, and June 30, 2007, were as follows:

	March 31, 2008
											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	Dollars in Thousands
Tangible capital	$	44,420		7.52	%	$	8,856		1.50	%		-		-
Tier 1 leverage (core)		44,420		7.52			23,617		4.00		$	29,521		5.00	%
Tier 1 risk-based capital		44,420		9.60			18,492		4.00			27,739		6.00
Risk-based capital		48,149		10.41			36,985		8.00			46,231		10.00

The Company is also required by OTS regulation to maintain sufficient liquidity to assure its safe and sound operation.  The Company's primary sources of liquidity are deposits obtained through its branch office network, borrowings from the FHLB and other sources, amortization, maturity, and prepayment of outstanding loans and

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investments, and sales of loans and other assets.  During the nine months ended March 31, 2008, the Company used these sources of funds to fund loan commitments, purchase loans, and cover maturing liabilities and deposit withdrawals.  The Company had a total of $56.8 million of loan commitments outstanding as of March 31, 2008.   In addition, at March 31, 2008 the Company had $101.6 million in certificates of deposits, $47.4 million in FHLB advances, and $10.0 million in other borrowings that were scheduled to mature within one year.

Management believes that the Company has adequate resources to fund all of these obligations as well as the loan commitments it makes in the normal course of its business.  The Company also believes it can adjust the rates it offers on certificates of deposit and other customer deposits to retain these deposits in changing interest rate environments.  Management is not aware of any known trends, events or uncertainties that will have or are reasonably likely to have a material effect on the Company’s or the Bank’s liquidity, capital or operations, nor is management aware of any current recommendations by regulatory authorities which, if implemented would have a material effect on the Company’s or the Bank’s liquidity, capital or operations.

The Company also has a $5.0 million line of credit with another financial institution to provide liquidity at the holding company.  The line of credit has a one-year term and is priced at 175 basis points over the three month LIBOR rate.  The purpose of this line of credit is to provide cash for stock buybacks or to provide the holding company the ability to inject capital into the Bank.  As of March 31, 2008, there was no outstanding balance on this line of credit.

The Bank has entered into agreements with three financial institutions to provide federal funds lines of credit in the amount of $5.0 million per financial institution.  As of March 31, 2008, there were no outstanding balances on any of the lines of credit.  In addition, at March 31, 2008, the Bank had $92.2 million of borrowing capacity with the FHLB.

On October 25, 2007, the Board of Directors authorized an extension of the Company’s stock repurchase plan.  In November of 2005, the Board of Directors initially authorized the repurchase of 346,000 shares, or approximately 10% of the Company’s then outstanding shares of stock.  The extension is for one year, expiring on October 25, 2008.

The following table presents, as of March 31, 2008, the expected future payments of the Bank’s contractual obligations.

	Payments Due in:
(In thousands)	Less than One Year		One Year to Less Than Three Years		Three Years to Less Than Five Years		Five Years or Greater		Total
FHLB advances	$	47,402	$	8,500		-	$	1,250	$	57,152
Other borrowings (1)		9,973		-		-		3,000		12,973
Operating lease		141		315	$	373		441		1,270
Data processing		512		363		80		-		955
Off-balance-sheet (2)		56,798		-		-		-		56,798
Total	$	114,826	$	9,178	$	453	$	4,691	$	129,148

(1)	Includes securities sold under repurchase agreements.
(2)	Includes commitments to extend credit, net of commitments to sell loans.

 

Off-Balance Sheet Arrangements

In addition to the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States of America are not recorded in our financial statements.  These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and letters of credit.  For the three months ended March 31, 2008, the Company engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market prices and interest rates. The Company’s market risk is primarily comprised of interest rate risk resulting from its core banking activities of lending and deposit taking.  Interest rate risk is the risk that changes in market interest rates might adversely affect the Company’s net interest income or the economic value of its portfolio of assets, liabilities and off-balance-sheet contracts.  Management continually develops and applies strategies to mitigate this risk.  The Company primarily relies on the OTS Net Portfolio Value Model (the “Model”) to measure its susceptibility to interest rate changes.  For various assumed hypothetical changes in market interest rates, the Model estimates the current economic value of each type of asset, liability and off-balance-sheet contract.  The present value of expected net cash flows from existing assets minus the present value of expected net cash flows from existing liabilities plus or minus the present value of expected net cash flows from existing off-balance-sheet contracts results in a net portfolio value (“NPV”) estimate.  An analysis of the changes in NPV in the event of hypothetical changes in interest rates is presented in the Form 10-K filed by the Company for the fiscal year ended June 30, 2007.  The Company’s NPV ratio after a 200 basis point rate-shock was 9.16% at December 31, 2007, compared to 9.16% at June 30, 2007, and 8.94% at December 31, 2006, as measured by the Model.  As of that date, the Company’s interest rate risk, as measured by the Model, was within the Company’s Asset Liability Policy guidelines and the OTS “level of risk” was reported as “minimal”.  Management does not believe that the Company’s primary market risk exposures and how those exposures were managed during the three months ended March 31, 2008, have changed significantly when compared to the immediately preceding quarter ended December 31, 2007.  However, the Company’s primary market risk exposure has not yet been quantified at March 31, 2008, and the complexity of the Model makes it difficult to accurately predict results.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.  Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.  Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fiscal quarter ended  March 31, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, there have been no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s current quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.             OTHER INFORMATION

ITEM 1.  Legal Proceedings

There are various claims and lawsuits in which the Company is periodically involved incidental to the Company's business.  In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.

ITEM 1A. Risk Factors

There has been one addition to the risk factors disclosed in the Company’s 2007 Annual Report on  Form 10-K.

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The Net Realizable Value of Our Investment Securities Could Be Lower than the Fair Values Assigned to Them Under Accounting Principles Generally Accepted in the United States of America.

The Company determines the fair value of the investment securities in accordance with the guidance set forth in Statement of Financial Accounting Standards 115, Accounting for Certain Investments in Debt and Equity Securities  (“SFAS 115”). Pursuant to this guidance, the Company determines fair value based on the most recent price indications from third party investment brokers for the security as of the applicable balance sheet date.  The Company uses price indications to determine the amount of any unrealized losses that must be reflected in the other comprehensive income and the net book value of the investment securities.

The fair value assigned to a security under SFAS 115 may differ from the price for which the security could be sold in a market transaction.  Among other things, when fair value is based on the quoted market price for a security, adjustments to reflect discounts that could arise in the context of an actual sale, including block trade, illiquidity and other discounts resulting from the inability of the market to absorb the number of shares of the security offered for sale, are not considered.  Consequently, the price at which the security could be sold in a market transaction could be significantly lower than the quoted market price for the security, particularly if the quoted market price is based on trades involving a small number of shares, the security has an infrequent trading history, the market for the security is illiquid, or a large number of shares must be sold.

ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered securities during the nine months ended March 31, 2008.

The Company did not repurchase any shares during the quarter ended March 31, 2008.

On October 25, 2007, the Board of Directors authorized an extension of the Company’s stock repurchase plan.  In November of 2005, the Board of Directors initially authorized the repurchase of 346,000 shares, or approximately 10% of the Company’s then outstanding shares of stock.  The extension is for one year, expiring on October 25, 2008.

ITEM 3.  Default upon Senior Securities

None.

ITEM 4.  Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the period covered by this report.

ITEM 5.  Other Information

            (a) Not applicable.

(b) Not applicable.

ITEM 6.  Exhibits

Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302
Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Section 302
Exhibit 32	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.

FIRST FEDERAL BANKSHARES, INC.

DATE:  May 16, 2008	BY:	/s/ Michael W. Dosland
		Michael W. Dosland
		President and Chief Executive Officer
DATE:  May 16, 2008	BY:	/s/ Michael S. Moderski
		Michael S. Moderski
		Senior Vice President, Chief Financial Officer
		and Treasurer

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