First Federal Bancshares (FFBI) 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

Commission file number 0-30753

FIRST FEDERAL BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Delaware	37-1397683
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

109 East Depot Street, Colchester, Illinois 62326

(Address of principal executive offices) (Zip Code)

(309) 776-3225

(Registrant’s telephone number, including area code)

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  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

As of November 1, 2005, the Registrant had outstanding 1,244,499 shares of common stock.

FIRST FEDERAL BANCSHARES, INC.

Form 10-Q Quarterly Report

Index

			Page
PART I -Financial Information
	Item 1	Financial Statements	1
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	11
	Item 4	Controls and Procedures	12
PART II -Other Information
	Item 1	Legal Proceedings	13
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	13
	Item 3	Defaults Upon Senior Securities	13
	Item 4	Submission of Matters to a Vote of Securities Holders	13
	Item 5	Other Information	13
	Item 6	Exhibits	14
SIGNATURES			15

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Financial Condition

(in thousands of dollars, except share data)

(unaudited)

	September 30, 2005			December 31, 2004
ASSETS
Cash and cash equivalents	$	13,195		$	14,387
Time deposits in other financial institutions		295			295
Securities available-for-sale, at fair value		139,770			153,622
Loans receivable, net		173,155			136,331
Real estate owned, net		520			101
Premises and equipment, net		3,350			3,471
Accrued interest receivable		1,703			1,363
Goodwill		1,340			1,340
Core deposits and other intangibles		218			248
Other assets		1,855			1,329
TOTAL ASSETS	$	335,401		$	312,487
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits	$	287,638		$	273,711
Advances from borrowers for taxes and insurance		153			184
Federal Home Loan Bank advances		17,226			6,450
Accrued interest payable		717			592
Other liabilities		392			209
Subordinated debentures		7,217			7,217
Total liabilities		313,343			288,363
SHAREHOLDERS’ EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued or outstanding		—			—
Common stock, $.01 par value, 4,000,000 shares authorized; 2,242,500 shares issued		22			22
Additional paid-in capital		23,089			22,954
Unearned ESOP shares		(897	)		(1,032	)
Unearned stock awards		(271	)		(474	)
Treasury stock (September 30 – 998,001 shares, December 31 –925,401)		(29,969	)		(28,185	)
Retained earnings		31,689			31,393
Accumulated other comprehensive loss		(1,605	)		(554	)
Total shareholders’ equity		22,058			24,124
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	335,401		$	312,487

See notes to consolidated financial statements.

1

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

(in thousands of dollars, except share data)

(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005			2004
Interest income
Loans	$	2,564		$	2,092	$	6,988		$	6,248
Securities		1,432			1,470		4,384			4,425
Other interest income		53			30		169			120
Total interest income		4,049			3,592		11,541			10,793
Interest expense
Deposits		1,893			1,400		5,221			4,161
Federal Home Loan Bank advances		170			40		303			117
Subordinated debtentures		106			106		316			218
Total interest expense		2,169			1,546		5,840			4,496
Net interest income		1,880			2,046		5,701			6,297
Provision for loan losses		143			—		258			—
Net interest income after provision for loan losses		1,737			2,046		5,443			6,297
Noninterest income
Service charges on deposit accounts		26			25		74			61
Loan origination and servicing fees		71			73		199			189
Other fee income		169			124		437			292
Net gain (loss) on sale of securities		(7	)		192		222			576
Recovery of impairment loss		—			—		—			25
Other income		8			8		39			35
Total noninterest income		267			422		971			1,178
Noninterest expense
Compensation and benefits		1,130			1,019		3,305			3,221
Occupancy and equipment		146			147		425			418
Data processing		168			102		489			417
Federal insurance premiums		29			29		88			88
Advertising		36			46		116			121
Professional fees		58			63		214			241
Other noninterest expenses		218			253		665			691
Total noninterest expense		1,785			1,659		5,302			5,197
Income before income taxes		219			809		1,112			2,278
Provision for income taxes		77			349		396			1,002
Net income	$	142		$	460	$	716		$	1,276
Earnings per share
Basic	$	.13		$	.39	$	.62		$	.88
Diluted	$	.12		$	.37	$	.59		$	.82
Weighted average shares		1,130,709			1,165,612		1,149,044			1,455,628
Comprehensive income (loss)	$	(452	)	$	2,064	$	(335	)	$	686

See notes to consolidated financial statements.

2

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Shareholders’ Equity

Nine months ended September 30, 2004 and 2005

(in thousands of dollars, except share data)

(unaudited)

	Common Stock		Additional Paid-in Capital			Unearned ESOP Shares			Unearned Stock Awards			Treasury Stock			Retained Earnings			Accumulated Other Compre- hensive Income (loss)			Total Share- holders’ Equity
Balance at December 31, 2003	$	22	$	22,852		$	(1,211	)	$	(745	)	$	(9,902	)	$	30,180		$	197		$	41,393
Purchase of 559,993 shares of treasury stock		—		—			—			—			(18,917	)		—			—			(18,917	)
Options exercised (22,692 shares)				(224	)		—			—			620						—			396
ESOP shares earned		—		265			135			—			—			—			—			400
Stock awards earned		—		—			—			203			—			—			—			203
Dividends declared ($.33 per share)		—		—			—			—			—			(455	)		—			(455	)
Comprehensive income
Net income		—		—			—			—			—			1,276			—			1,276
Change in fair value of securities classified as available-for-sale, net of reclassification and tax effects		—		—			—			—			—			—			(590	)		(590	)
Total comprehensive loss																						686
Balance at September 30, 2004	$	22	$	22,893		$	(1,076	)	$	(542	)	$	(28,199	)	$	31,001		$	(393	)	$	23,706
Balance at December 31, 2004	$	22	$	22,954		$	(1,032	)	$	(474	)	$	(28,185	)	$	31,393		$	(554	)	$	24,124
Purchase of 75,075 shares of treasury stock		—		—			—			—			(1,859	)		—			—			(1,859	)
Options exercised (2,475 shares)		—		(32	)		—			—			75			—			—			43
ESOP shares earned		—		167			135			—			—			—			—			302
Stock awards earned		—		—			—			203			—			—			—			203
Dividends declared ($.36 per share)		—		—			—			—			—			(420	)		—			(420	)
Comprehensive income
Net income		—		—			—			—			—			716			—			716
Change in fair value of securities classified as available-for-sale, net of reclassification and tax effects		—		—			—			—			—			—			(1,051	)		(1,051	)
Total comprehensive income																						(335	)
Balance at September 30, 2005	$	22	$	23,089		$	(897	)	$	(271	)	$	(29,969	)	$	31,689		$	(1,605	)	$	22,058

See notes to consolidated financial statements.

3

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(in thousands of dollars)

(unaudited)

	Nine Months Ended September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	716		$	1,276
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		192			195
Gain on sale of real estate owned		1			8
Net amortization of premiums and discounts		109			115
ESOP compensation expense		302			400
Stock award compensation expense		203			203
Amortization of intangible assets		30			30
Deferred income tax		91			—
Provision for loan losses		258			—
Federal Home Loan Bank stock dividends		(62	)		(66	)
Net gain on sale of securities		(222	)		(576	)
Net changes in
Accrued interest receivable and other assets		(253	)		(899	)
Deferred loan costs		(35	)		166
Accrued interest payable and other liabilities		303			964
Net cash from operating activities		1,633			1,816
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		(5,110	)		(58,646	)
Principal paydowns on mortgage-backed securities		12,540			12,958
Purchase of Federal Home Loan Bank stock		(42	)		(65	)
Sale of Federal Home Loan Mortgage Corporation stock		239			—
Proceeds from maturities of securities		—			8,609
Proceeds from sale of securities available-for-sale		5,398			36,699
Dividend reinvestments		(717	)		(767	)
Purchase of loans		(30,599	)		(2,220	)
Sale of loans		1,619			—
Net increase in loans receivable		(8,655	)		(1,546	)
Proceeds from sale of real estate owned		169			250
Purchase of property and equipment		(71	)		(157	)
Net cash from investing activities		(25,229	)		(4,885	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits		13,927			(582	)
Net change in advances from borrowers for taxes and insurance		(31	)		(58	)
Advances from the Federal Home Loan Bank		13,227			450
Federal Home Loan Bank advance repayments		(2,451	)		—
Purchase of treasury stock		(1,859	)		(18,917	)
Proceeds from subordinated debentures		—			7,217
Dividends paid		(452	)		(493	)
Options exercised		43			396
Net cash from financing activities		22,404			(11,987	)
Net change in cash and cash equivalents		(1,192	)		(15,056	)
Cash and cash equivalents
Beginning of period		14,387			29,124
End of period	$	13,195		$	14,068
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest	$	5,715		$	4,423
Taxes, net of refunds		278			562
Transfers to real estate owned		778			187
Due to broker		—			3,900

See notes to consolidated financial statements.

4

FIRST FEDERAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(table amounts in thousands of dollars, except share data)

Note 1 – Basis of Presentation

The accompanying interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles are not included herein. These interim consolidated statements should be read in conjunction with First Federal Bancshares, Inc.’s (“First Federal Bancshares” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2004. The December 31, 2004 consolidated balance sheet presented herein has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, but does not include all disclosures required by U.S. generally accepted accounting principles.

Interim statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2005. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reported period. Actual results could differ from these estimates.

Note 2 – Earnings Per Share

For purposes of per share calculations, the Company had 1,130,709 and 1,165,612 shares of common stock outstanding at September 30, 2005 and 2004 respectively. Basic earnings per share for the three months and nine months ended September 30, 2005 and 2004 were computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings per share for the three months and nine months ended September 30, 2005 and 2004 were computed by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of the outstanding stock options and stock awards. Computations for basic and diluted earnings per share are provided below.

5

	For the three months Ended September 30,				For the nine months Ended September 30,
	2005		2004		2005		2004
	(in thousands, except per share data)
Basic
Net income	$	142	$	460	$	716	$	1,276
Weighted average common shares outstanding		1,131		1,166		1,149		1,456
Basic earnings per common share	$	.13	$	.39	$	.62	$	.88
Diluted
Net income	$	142	$	460	$	716	$	1,276
Weighted average common shares outstanding		1,131		1,166		1,149		1,456
Dilutive effect of stock options		50		68		58		93
Dilutive effect of stock awards		4		9		5		13
Diluted average common shares		1,185		1,243		1,212		1,562
Diluted earnings per common share	$	.12	$	.37	$	.59	$	.82

Note 3 – Stock-Based Compensation

The Company applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation expense has been recognized at the date of grant. Had compensation expense been determined based on the fair value at the grant dates for awards under the plan consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share would have been reduced to the pro forma amounts in the table below. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options’ vesting period.

	For the three months Ended September 30,				For the nine months Ended September 30,
	2005		2004		2005		2004
	(in thousands, except per share data)
Net income as reported	$	142	$	460	$	716	$	1,276
Pro forma net income		117		437		641		1,208
Earnings per share as reported
Basic		.13		.39		.62		.88
Diluted		.12		.37		.59		.82
Pro forma earnings per share
Basic		.10		.37		.56		.83
Diluted		.10		.35		.53		.77

Pursuant to the Company’s 2001 stock-based incentive plan, which approved 89,700 shares of restricted stock, 73,999 shares were granted during 2001 and 15,701 were held in reserve for future grants. Of those held, 3,000 and 12,701 shares were awarded in 2003 and 2004, respectively. These shares vest over a five-year period. The unamortized cost of shares not yet earned (vested) is reported as a reduction of shareholders’ equity.

6

SFAS 123R, “Accounting for Stock-Based Compensation, Revised,” requires all public companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. The Securities and Exchange Commission in April 2005 amended the compliance dates for SFAS 123R to the next fiscal year from periods beginning after June 15, 2005. Compensation cost will also be recorded during the remaining vesting periods. Estimated compensation costs for 2006, 2007, 2008 and 2009 are approximately $165,000, $19,000, $19,000 and $17,000, respectively.

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

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and its wholly-owned subsidiary include, but are not limited to, changes in: interest rates; general economic conditions; legislative/regulatory provisions; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company’s market area; and accounting principles, policies, and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

The following discussion compares the consolidated financial condition of First Federal Bancshares and its wholly owned subsidiary, First Federal, at September 30, 2005 to its consolidated financial condition at December 31, 2004 and the consolidated results of its operations for the three-month and nine-month periods ended September 30, 2005 to the same periods in 2004. This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included herein.

FINANCIAL CONDITION

Total assets were $335.4 million at September 30, 2005 and $312.5 million at December 31, 2004. During the nine months ended September 30, 2005, cash and cash equivalents decreased $1.2 million to $13.2 million and securities available-for-sale decreased $13.9 million to $139.8 million primarily as a result of principal paydowns on mortgage-backed securities. Loans receivable increased $36.8 million primarily due to increases of $33.1 million in loans originated, $17.8 million in purchased 1-4 family loans, $12.8 million in purchased participation loans, and $8.8 million in commercial loans, net of repayment of principal. These purchases are part of the Company’s strategy to increase income through an increase in interest-earning assets, in particular loans receivable. Management feels the asset growth needed in loans receivable can be accomplished through purchasing loans to augment local residential and commercial production. Any future purchases will be dependent upon the Company’s local lending production and pricing levels.

7

The allowance for loan losses was $941,000 at September 30, 2005 and $942,000 at December 31, 2004. There were no impaired loans at either date. The allowance for loan losses represented .54% of total loans and 76.42% of nonperforming loans at September 30, 2005 compared to .69% of total loans and 51.45% of nonperforming loans at December 31, 2004. Nonperforming assets totaled $1.8 million and $2.0 million at September 30, 2005 and December 31, 2004, respectively. The ratio of non-performing assets to total assets at September 30, 2005 was .52% compared to .63% at December 31, 2004.

Total liabilities at September 30, 2005 were $313.3 million compared to $288.4 million at December 31, 2004, an increase of $24.9 million. The increase in total liabilities primarily reflects an increase in customer deposits of $13.9 million and a $10.8 million increase in Federal Home Loan Bank advances, which were both used to fund the increase in loans receivable.

Shareholders’ equity at September 30, 2005 was $22.1 million compared to $24.1 million at December 31, 2004, a decrease of $2.0 million. The decrease in equity primarily reflects the repurchase of 75,050 shares totaling approximately $1.9 million, and a decrease in the fair value of securities available-for-sale, net of tax of $1.1 million offset by net income of $716,000. Other items affecting equity include ESOP and stock awards earned, dividends paid, and options exercised.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

Net income decreased $318,000 to $142,000 for the quarter ended September 30, 2005 compared to the same period in 2004. The decrease in net income was a result of a decrease in net interest income and an increase in provision for loan losses, and decreased noninterest income and increased noninterest expense partially offset by a decrease in the provision for income taxes.

Net interest income was $1.9 million for the quarter ended September 30, 2005 compared to $2.0 million for the same prior year period. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 105.18% from 106.20% for the three-month periods, respectively. The net interest spread and the net interest margin decreased to 2.17% and 2.31%, respectively, for the quarter ended September 30, 2005 from 2.58% and 2.71%, respectively, for the same period in 2004. The decrease in the spread and margin was due to increases in both volume and rate of interest-bearing liabilities primarily as a result of an increase of $10.8 million in Federal Home Loan Bank advances, which increased the average rate by 127 basis points. The increase in the cost of funds exceeded the increase in the yield on interest-earning assets as interest-bearing liabilities repriced upward more quickly than interest-earning assets in reaction to the increasing short-term interest rate environment and flat yield curve. The average yield on interest-earning assets increased to 4.97% for the quarter ended September 30, 2005 from 4.76% for the same quarter in 2004, while the average cost of interest-bearing liabilities increased to 2.80% for the quarter ended September 30, 2005 from 2.18% for the same period in 2004.

The provision for loan losses was $143,000 for the quarter ended September 30, 2005 compared to zero for the same period in 2004 primarily due to allocations for $23.1 million in 1-4-family mortgages and commercial mortgages originated and purchased during the current period. Management considered the allowance for loan losses to be adequate during both periods.

On a quarterly basis, management of the Company meets to review the allowance for loan losses. Management classifies loans in compliance with regulatory classifications. Classified loans are individually reviewed to arrive at specific reserves for those loans. Once the specific portion of the allowance is calculated, management calculates a historical portion for each loan category based on loan loss history, peer data, current economic conditions and trends in the portfolio, including delinquencies and impairments, as well as changes in the composition of the loan portfolio. Although management believes that the allowance for loan losses reflected probable incurred losses on existing loans at September 30, 2005, there could be no assurance that such losses will not exceed estimated amounts. Future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions that may be beyond the Company’s control. The allowance for loan losses as of September 30, 2005 was maintained at a level that represents management’s best estimate of probable incurred losses inherent in the loan portfolio.

8

Noninterest income was $267,000 for the three-month period ended September 30, 2005 compared to $422,000 for the same period in 2004. The decrease in noninterest income was primarily a result of a $199,000 decrease in net gains on the sale of securities, partially offset by an increase of $45,000 in other fee income due to the implementation of an overdraft protection program.

Noninterest expense was $1.8 million for the quarter ended September 30, 2005 compared to $1.7 million for the same prior year period. Compensation and benefits expense increased $111,000 due to annual salary increases and increased health insurance premiums. Data processing expense increased $66,000 compared to the same quarter in 2004. These increases were offset by a $35,000 decrease in other non-interest expenses and slight decreases in advertising and professional fees. The Company received notice in October 2005 from the third-party administrator of its retirement plan regarding an increase in its required contribution for the 2005 – 2006 plan year which will increase compensation and benefits expense by approximately $43,000 quarterly beginning in the fourth quarter 2005.

The Company’s income tax expense decreased $272,000 to $77,000 for the quarter ended September 30, 2005 compared to $349,000 during the same period in 2004 primarily as a result of decreased income. Income tax expense was approximately 35% and 43% of pretax income for the quarter ended September 2005 and 2004, respectively. The decrease in the effective tax rate is primarily due to the filing of a consolidated tax return during the current period, thereby allowing the Company to utilize and record the tax benefits not recorded in the prior comparative period.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

Net income decreased $560,000 to $716,000 for the nine months ended September 30, 2005 compared to $1.3 million for the nine-month period ended September 30, 2004. The decrease in net income was primarily a result of a decrease in net interest income and noninterest income, and an increase in the provision for loan losses and noninterest expense, offset by a decrease in the provision for income taxes.

Net interest income was $5.7 million for the nine months ended September 30, 2005 compared to $6.3 million for the same prior year period. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 105.55% from 108.63% for the nine-month periods, respectively. The net interest spread and the net interest margin decreased to 2.26% and 2.40%, respectively, for the nine months ended September 30, 2005 from 2.53% and 2.70%, respectively, for the same period in 2004. The decrease in the spread and margin was due to an increase in volume and rate of interest-bearing liabilities. These increases were primarily a result of subordinated debt issued in connection with the trust preferred securities offering, an increase of $10.8 million in Federal Home Loan Bank advances, and the increase in the cost of funds exceeding the increase in the yield on interest-earning assets as interest-bearing liabilities repriced upward more quickly than interest-earning assets in reaction to the increasing short-term interest rate environment, partially offset by the increase in volume of interest-earning assets. The average yield on interest-earning assets increased to 4.85% for the nine months ended September 30, 2005 from 4.62% for the same period in 2004, while the average cost of interest-bearing liabilities increased to 2.59% for the nine months ended September 30, 2005 from 2.09% for the same period in 2004.

The provision for loan losses was $258,000 for the nine months ended September 30, 2005 compared to zero for the same period in 2004 due to increased loan volume in 1-4 family mortgages and commercial mortgages for the nine months ended September 30, 2005. Commercial mortgage loans are inherently more risky than 1-4 family mortgages. Management considered the allowance for loan losses to be adequate during both periods.

9

Noninterest income was $971,000 for the nine-month period ended September 30, 2005 compared to $1.2 million for the same period in 2004. The decrease in noninterest income was primarily a result of a $354,000 decrease in net gains on the sale of securities. In addition, in 2004 the Company recorded a $25,000 recovery of impairment loss related to certificates of deposit purchased through a broker who was charged by the SEC with securities fraud in relationship to these certificates. The decreases were partially offset by an increase of $13,000 in service charges, an increase of $10,000 in loan origination and servicing fees, and an increase of $145,000 in other fee income due to the implementation of an overdraft protection program.

Noninterest expense was $5.3 million for the nine-month period ended September 30, 2005 and $5.2 million for the nine months ended September 30, 2004. Compensation and benefits expense and data processing expense increased $84,000 and $72,000, respectively, for the nine-month period ended September 30, 2005 compared to the same period in 2004. The increases were offset partially by a $27,000 decrease in professional fees and a $26,000 decrease in other noninterest expense. The Company received notice in October 2005 from the third-party administrator of its retirement plan regarding an increase in its required contribution for the 2005 – 2006 plan year which will increase compensation and benefits expense by approximately $43,000 quarterly beginning in the fourth quarter 2005.

The Company’s income tax expense decreased $606,000 to $396,000 for the nine-month period ended September 30, 2005 compared to $1.0 million during the same period in 2004 as a result of decreased income. Income tax expense was approximately 36% and 44% of pretax income in September 2005 and 2004, respectively. The decrease in the effective tax rate is primarily due to the filing of a consolidated tax return during the current period, thereby allowing the Company to utilize and record the tax benefits not recorded in the prior comparative period.

LIQUIDITY

The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments, and to take advantage of investment opportunities. The Company invests excess funds in overnight deposits and other short-term interest-bearing assets to provide liquidity to meet these needs. At September 30, 2005, cash and cash equivalents totaled $13.2 million. At September 30, 2005, the Company had commitments to fund loans of $1.3 million. At the same time, certificates of deposit which are scheduled to mature in one year or less totaled $109.0 million. Management believes, based on past experience that a significant portion of those deposits will remain with the Company. Based on the foregoing, in addition to the Company’s high level of core deposits and capital, the Company considers its liquidity and capital resources sufficient to meet its outstanding short-term and long-term needs. First Federal Bank has the ability to borrow funds at the Federal Home Loan Bank (FHLB) per the Credit Policy of the FHLB. Services utilized have been term advances and open lines of credit. At September 30, 2005 the Bank had $17.0 million in FHLB advances with an average weighted rate of 3.88% and tiered maturities from January 2006 through June 2008. In addition, an advance totaling $226,000 at 5.07% is scheduled for payments to amortize over a ten-year period, maturing in August 2015. Collateral used for these purposes are mortgage-backed securities issued by government sponsored agencies, namely, GNMA and FNMA, with a total value of $30.6 million, or 21.9% of total available-for-sale securities, and therefore does not significantly impact the Company’s liquidity.

10

CAPITAL RESOURCES

The Bank is subject to capital-to-asset requirements in accordance with bank regulations. The following table summarizes the Bank’s regulatory capital requirements versus actual capital as of September 30, 2005:

	ACTUAL				REQUIRED				EXCESS
	AMOUNT		%		AMOUNT		%		AMOUNT		%
Core capital (to adjusted total assets)	$	24,020	7.22	%	$	13,310	4.00	%	$	10,710	3.22	%
Tangible capital (to adjusted total assets)		24,020	7.22			4,991	1.50			19,029	5.72
Risk-based capital (to risk-weighted assets)		24,478	15.39			12,723	8.00			11,755	7.39

The decline in capital was a result of the Bank’s dividend payments to the Company totaling $2.0 million during the first quarter 2005. These dividends were primarily used by the Company to repurchase its stock. Although the level of capital has declined, it continues to exceed minimum requirements for a well-capitalized institution.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative Aspects of Market Risk.The Company’s most significant form of market risk is interest rate risk. The principal objectives of the Company’s interest rate risk management are to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the level of risk appropriate given the Company’s business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with the Board of Director’s approved guidelines. The Company has an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets monthly and reports trends and interest rate risk position to the Board of Directors quarterly. The extent of the movement of interest rates is uncertainty that could have a negative impact on the earnings of the Company.

The Company has used the following strategies to manage interest rate risk: (1) emphasizing the origination and purchase of adjustable-rate and balloon loans and not originating long-term, fixed-rate loans for retention in its loan portfolio; (2) emphasizing shorter term consumer loans; (3) introducing floating-rate commercial business loans tied to the prime rate; (4) maintaining a high quality securities portfolio that provides adequate liquidity and flexibility to take advantage of opportunities that may arise from fluctuations in market interest rates, the overall maturity of which is monitored in relation to the repricing of its loan portfolio; and (5) using Federal Home Loan Bank advances to better structure maturities of its interest rate sensitive liabilities. The Company currently does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.

Quantitative Aspects of Market Risk.The Company primarily utilizes an interest sensitivity analysis prepared by the Office of Thrift Supervision to review the level of interest rate risk of the Bank. This analysis measures interest rate risk by computing changes in the net portfolio value of the Bank’s cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or decrease in market interest rates with no effect given to any steps that management might take to counter the effect of that interest rate movement. The following table, which is based on information provided to the Bank by the Office of Thrift Supervision, presents the change in the Bank’s net portfolio value at September 30, 2005, the latest date for which information is available, that would occur upon an immediate change in interest rates based on Office of Thrift Supervision assumptions, but without giving effect to any steps that management might take to counteract that change. All model outputs associated with the –300 bp scenarios are not applicable because of the abnormally low prevailing interest rate environment.

11

Change in Interest Rates in Basis Points (Rate Shock)	Net Portfolio Value						NPV as % of Portfolio Value of Assets
	Amount		$ Change		% Change		NPV Ratio		Basis Point Change
	(Dollars in thousands)
300	$	18,069	(13,903	)	(43	)%	5.69	%	(378	)bp
200		23,360	(8,612	)	(27	)	7.19		(228	)bp
100		28,038	(3,934	)	(12	)	8.46		(101	)bp
Static		31,972	—		—		9.47		—
(100)		34,710	2,737		9		10.13		66	bp
(200)		35,370	3,398		11		10.24		77	bp

The Office of Thrift Supervision uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features, which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

ITEM 4: CONTROLS AND PROCEDURES

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

12

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interest, claims involving the making and servicing of real property loans and other issues incident to the Company’s business. In the opinion of management, after consultation with the Company’s legal counsel, no significant loss is expected from any of such pending claims or lawsuits. The Company is not a party to any material pending legal proceedings.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table provides certain information with regard to shares repurchased by the Company in the third quarter of 2005.

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Appropriate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1, 2005 through July 31, 2005	—			—	—	—
August 1, 2005 through August 31, 2005	—			—	—	—
September 1, 2005 through September 30, 2005	25	(1)	$	20.79	—	—

(1) Purchased through unsolicited private transactions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.

None

ITEM 5. OTHER INFORMATION.

None

13

ITEM 6. EXHIBITS

3.1	Certificate of Incorporation of First Federal Bancshares, Inc. (1)
3.2	Bylaws of First Federal Bancshares, Inc. (2)
4.0	Specimen Stock Certificate of First Federal Bancshares, Inc. (1)
10.1	Employment Agreement between First Federal Bancshares, Inc. and James J. Stebor (3)
10.2	Employment Agreement between First Federal Bank and James J. Stebor (3)
10.3	First Federal Bank Supplemental Executive Retirement Plan (3)
10.4	First Federal Bank Employee Severance Compensation Plan (3)
10.5	First Federal Bancshares, Inc. 2001 Stock-Based Incentive Plan (4)
10.6	PFSB Bancorp, Inc. 2000 Stock-Based Incentive Plan (5)
10.7	Form of NSO Award Agreement (6)
31.1	Rule 13a – 14(a)/15d – 14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a – 14(a)/15d – 14(a) Certification of the Chief Financial Officer.
32.1	Section 1350 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.

(1) Incorporated herein by reference from the Exhibits to Form SB-2, Registration Statement and amendments thereto, initially filed on May 5, 2000, Registration No. 333-36368.

(2) Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-KSB, filed on March 28, 2002.

(3) Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-QSB filed on November 14, 2000.

(4) Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-QSB filed on August 13, 2001.

(5) Incorporated by reference to PFSB Bancorp, Inc.’s Registration Statement on Form S-8 (SEC No. 333-35020) filed on April 18, 2000.

(6) Incorporated by reference from the Exhibits to the Annual Report on Form 10-K, filed on March 31, 2005.

14

SIGNATURES

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

	FIRST FEDERAL BANCSHARES, INC.
Date: November 7, 2005	/s/ James J. Stebor
	James J. Stebor
	President and Chief Executive Officer
Date: November 7, 2005	/s/ Cathy D. Pendell
	Cathy D. Pendell
	Treasurer

15