<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006
                                       OR
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
               For the transition period from ________ to ________

                        Commission File Number: 000-51385

                    FIRST FEDERAL BANC OF THE SOUTHWEST, INC.
                  --------------------------------------------
                 (Name of Small Business Issuer in its Charter)

              DELAWARE                                  85-0453611
    -------------------------------      ---------------------------------------
    (State or Other Jurisdiction of      (I.R.S. Employer Identification Number)
    Incorporation or Organization)

300 NORTH PENNSYLVANIA AVENUE, ROSWELL, NEW MEXICO              88201
--------------------------------------------------            ----------
(Address of Principal Executive Office)                       (Zip Code)

                                 (505) 622-6201
                 -----------------------------------------------
                 (Issuer's Telephone Number including area code)

           Securities Registered Pursuant to Section 12(b) of the Act:

                                                  NAME OF EACH EXCHANGE
            TITLE OF CLASS                         ON WHICH REGISTERED
            --------------                         -------------------

COMMON STOCK, PAR VALUE $0.01 PER SHARE        THE NASDAQ STOCK MARKET, LLC

           Securities Registered Pursuant to Section 12(g) of the Act:

                                      NONE
                                      ----
                                (Title of Class)

     Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [_]

     Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Registrant was required to file reports) and (2)
has been subject to such requirements for the past 90 days.

YES   X    NO
    -----.    -----.

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. [X]

     Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [_] YES [X] NO

     The Registrant's revenues for the fiscal year ended September 30, 2006 were
$39 million.

     As of December 15, 2006, there were 4,007,053 shares issued and outstanding
of the Registrant's Common Stock. The aggregate value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the closing price
of the Common Stock as of December 15, 2006 was $50.2 million.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Annual Report to Stockholders (Parts II and III)
2.   Proxy Statement for the 2007 Annual Meeting of Stockholders (Part III)

<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS
-------------------------------

FORWARD LOOKING STATEMENTS

     This Annual Report contains certain "forward-looking statements" which may
be identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage, and other loans,
real estate values, competition, changes in accounting principles, policies, or
guidelines, changes in legislation or regulation, and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing products and services.

FIRST FEDERAL BANC OF THE SOUTHWEST, INC.

     In August 1998, First Federal Banc of the Southwest, Inc. was formed to be
the holding company for First Federal Bank. First Federal Banc of the Southwest
is referred to as First Federal. First Federal is incorporated under the laws of
the State of Delaware and is a savings and loan holding company registered with
the Office of Thrift Supervision.

     At September 30, 2006, First Federal had $547.4 million of assets and
stockholders' equity of $53.8 million, or 9.8% of total assets. First Federal
derives its revenues primarily from the operations of First Federal Bank in the
form of distributions from First Federal Bank to First Federal.

     The executive offices of First Federal are located at 300 North
Pennsylvania Avenue, Roswell, New Mexico 88201, and its telephone number at that
address is (505) 622-6201.

     The principal activities of First Federal are providing assistance in the
management and coordination of the financial resources of First Federal Bank and
providing capital, business development and long-range planning services to
First Federal Bank.

     As a savings and loan holding company, First Federal is subject to
regulation by the Office of Thrift Supervision. The Office of Thrift Supervision
regulates the types of banking and nonbanking activities in which First Federal
Bank may engage. Under applicable federal rules, there are generally no
limitations or restrictions on the non-bank activities of First Federal.

     First Federal has no full-time employees. Certain of the executive officers
and all of the directors of First Federal Bank also serve as executive officers
and directors of First Federal. The executive officers receive no direct
compensation for the duties performed by them for First Federal, although some
may receive compensation from First Federal Bank by virtue of their positions as
executive officers or directors of First Federal Bank. First Federal may
determine to compensate its executive officers in the future although First
Federal has no current plan to do so.

FIRST FEDERAL BANK

     First Federal Bank is a full-service, community-oriented savings bank that
provides financial services to individuals, families and businesses through 14
banking offices and 17 ATMs throughout Bernalillo, Chaves, Eddy, Dona Ana,
McKinley, Lincoln, Otero and San Juan Counties, New Mexico and El Paso County,
Texas.

     Originally organized in 1920 as a mutual savings association, First Federal
Bank converted to the stock form of ownership in 1979. On August 18, 1998, First
Federal Bank reorganized into a holding company structure with the formation of
First Federal.





<PAGE>

     First Federal Bank is a full-service financial institution and offers a
wide range of financial services, including the acceptance of checking, savings
and certificates of deposit, and the making of residential mortgage loans,
commercial real estate loans, consumer loans, commercial non-real estate loans,
construction loans, and other loans. First Federal Bank does not offer trust
services. First Federal Bank also invests in mortgage-backed and other
securities, and funds a portion of its activities through FHLB activities and
other third party borrowings.

     For the convenience of its customers, First Federal Bank offers
drive-through banking facilities, night depository, personalized checks, credit
cards through a correspondent bank, ATM/Debit Cards and safe deposit boxes.
First Federal Bank's operation services include cashier's checks, travelers'
checks, domestic wire transfers, account research, stop payments and
photocopies.

MERGER AGREEMENT

     On October 10, 2006, First Federal and Washington Federal, Inc.
("Washington Federal"), the holding company for Washington Federal Savings and
Loan Association, entered into an Agreement and Plan of Reorganization (the
"Merger Agreement). Pursuant to the Merger Agreement, and subject to the terms
and conditions set forth therein, First Federal will merge with and into
Washington Federal, with Washington Federal being the surviving corporation of
such merger. Under the terms of the Merger Agreement, stockholders of First
Federal will receive $24.14 for each of their shares of First Federal common
stock. The transaction has a total indicated value of approximately $99 million.
Subject to regulatory and stockholder approvals, the transaction is expected to
close in the first quarter of 2007.

ACQUISITION OF GFSB BANCORP, INC.

     After the close of business on May 31, 2005, the Company completed its
acquisition of GFSB Bancorp, Inc. ("GFSB") pursuant to the terms of an Agreement
and Plan of Merger by and between GFSB and First Federal (the "Merger
Agreement"). Pursuant to the Merger Agreement, all shareholders of GFSB who
properly elected and surrendered their GFSB shares received in exchange for each
of their shares either $20 in cash, 1.17806 shares of the Company's common
stock, or a combination of the merger consideration (51% stock and 49% cash).
Those shareholders not properly electing pursuant to the Merger Agreement
received merger consideration for each of their shares of $6.0588 in cash and
0.821178789 shares of common stock. Additionally, all outstanding stock options
for GFSB officers and directors were cancelled by providing merger consideration
for the difference between the strike price of the option and $20.

     The Merger Agreement stated the value of each share of common stock of the
Company was $16.977. The Company issued 720,765 shares of common stock at a
value of approximately $12.2 million. In addition, GFSB shareholders were paid
approximately $11.9 million in cash. Including certain costs to complete the
acquisition, the total cost was approximately $24.9 million. The acquisition was
accounted for under the purchase method of accounting in accordance with SFAS
No. 141. Under this method of accounting, the purchase price was allocated to
assets acquired and liabilities assumed based on their fair values at the
acquisition date. The Company recorded identifiable intangibles and goodwill of
approximately $3.6 million and $1.9 million, respectively. At May 31, 2005, GFSB
had loans of approximately $139.6 million, deposits of $129.5 million and
shareholders' equity of $19.6 million.

MARKET AREA

     First Federal Bank offers a diverse range of financial services to
businesses and individuals as an alternative to money center and super-regional
banks in our market area. Our primary market for deposits is currently
concentrated around Chaves, Dona Ana, Eddy, McKinley, Lincoln and San Juan
Counties, New Mexico; although, in recent years, our commercial loan growth has
greatly increased through our entrance into the Albuquerque, New Mexico and El
Paso County, Texas markets. Chaves, Eddy, Dona Ana and Lincoln counties are
located in the southern part of New Mexico. Chaves County, with Roswell being
the county seat, boasts one of the largest privately held airplane runways in
the United States, is the seventh largest producer of milk in the United States
with 82,000 dairy cattle, and is also the home to one of the largest mozzarella
cheese plants worldwide. Eddy County is well known for petroleum production and
agriculture. Dona Ana County, with Las Cruces as its county seat, is the home to
New Mexico State University. Las Cruces was recently ranked the number one
"Metro Area to


                                        3

<PAGE>

Do Business" by the Forbes/Milken Institute and a "Top Area in the U.S. to
Retire" by MONEY Magazine. Lincoln County boasts the mountain community of
Ruidoso with its skiing in the winter and horse racing in the summer, and
Capitan and Lincoln with the western history of Billy the Kid and Sheriff Pat
Garrett. McKinley County hosts many of the wonders of Native America including
several compelling land features such as Canyon De Chelly, the sacred Mt.
Taylor, and Shiprock Gallup. San Juan County is located in the beautiful "Four
Corners" area of the U.S and recognized worldwide for premier big game hunting
and for abundant fishing and numerous outdoor activities. The economic
environment in Chaves, Eddy, Dona Ana, Lincoln, McKinley, and San Juan and
contiguous counties continues to be favorable and has supported increased
commercial and residential activity in recent years.

     Between 2000 and 2005, the population of Chaves, Dona Ana, Bernalillo,
Otero, Lincoln, and San Juan increased by approximately 0.8%, 8.5%, 8.6%, 2.0%,
8.2%, 10.9%, respectively, and McKinley, Eddy declined 3.9%, 0.4% respectively,
while the population of the State of New Mexico as a whole increased by 6.0%
during the same period.

     The economy of our primary market area is based on a mixture of service,
agriculture, manufacturing, oil and gas production and wholesale/retail trade.
Nearly all of the markets served provide numerous opportunities for employment
through their diverse large and small business employers and governmental
entities. As of September 2006, the unemployment rate in Chaves County was 4.5%,
Eddy was 3.6%, Dona Ana was 4.3%, Lincoln County was 3.4%, McKinley County was
6.2%, Bernalillo County was 3.9%, Otero County was 4.2% and San Juan County was
4.2%. The overall rate for the State of New Mexico at 4.2% was slightly lower
than the United States as a whole at 4.6%.

LENDING ACTIVITIES

     GENERAL. Although First Federal Bank originates first mortgage loans
secured by one- to four-family residences, our focus has been on our commercial
real estate and other loans. To a lesser extent, First Federal Bank also makes
loans secured by deposit accounts. First Federal Bank retains most of the loans
it originates, although it may sell longer-term one- to four-family residential
loans and participations in some large commercial loans. The vast majority of
First Federal Bank's loan officers have come from commercial banking
backgrounds.

     ONE- TO FOUR-FAMILY REAL ESTATE LENDING. First Federal Bank offers
conforming and non-conforming, fixed-rate and adjustable-rate residential
mortgage loans with maturities of up to 30 years and maximum loan amounts
generally of up to $750,000. This portfolio totaled $170.1 million or 40.5% of
our total loan portfolio at September 30, 2006. These loans have an average
original loan balance of approximately $110,000. First Federal Bank also offers
both FHA and VA government loans. All government guaranteed or insured loans are
sold into the secondary market.

     First Federal Bank currently offers both fixed- and adjustable-rate
conventional mortgage loans with terms of 10 to 30 years that are fully
amortizing with monthly payments. One- to four-family residential mortgage loans
are generally underwritten according to Fannie Mae or Freddie Mac guidelines,
and loans that conform to such guidelines are referred to as "conforming loans."
First Federal Bank generally originates both fixed-rate and ARM loans in amounts
up to the maximum conforming loan limits as established by Fannie Mae and
Freddie Mac, which is currently $417,000 for single-family homes. Private
mortgage insurance is generally required for loans with loan-to-value ratios in
excess of 80%. First Federal Bank also originates loans above conforming limits,
referred to as "jumbo loans," that have been underwritten to the credit
standards of Fannie Mae or Freddie Mac. During the year ended September 30,
2006, First Federal Bank only originated nine of these jumbo loans. These loans
are generally eligible for sale to various firms that specialize in the purchase
of such non-conforming loans, although First Federal Bank retained two of these
loans in our portfolio with an original principal balance of $1.5 million
originated in fiscal 2006. First Federal Bank also originates loans that do not
meet the standards of Fannie Mae or Freddie Mac, but are deemed to be acceptable
risks. The balance of such loans as of September 30, 2006 was $20.8 million, all
of which are retained in our loan portfolio.

     First Federal Bank actively monitors its interest rate risk position to
determine the desirable level of investment in fixed-rate mortgages. First
Federal Bank does not retain the servicing rights on the loans it sells.
Historically, First Federal Bank has not retained any fixed-rate loans with a
maturity over 15 years.


                                        4

<PAGE>

     First Federal Bank currently offers several ARM loan products secured by
residential properties with rates that are fixed for a period ranging from 12
months to five years. After the initial term, the interest rate on these loans
is generally reset every year based upon a contractual spread or margin above
the average yield on either U.S. Treasury securities or the London InterBank
Offered Rate (LIBOR), adjusted to a constant maturity of one year, as published
weekly by the Federal Reserve Board or the Federal National Mortgage
Association, respectively, and subject to certain periodic and lifetime
limitations on interest rate changes. Many of the borrowers who select these
loans have shorter-term credit needs than those who select long-term, fixed-rate
loans. ARM loans generally pose different credit risks than fixed-rate loans
primarily because the underlying debt service payments of the borrowers rise as
interest rates rise, thereby increasing the potential for default. At September
30, 2006, our ARM portfolio included approximately $20.8 million in loans that
re-price annually after an initial fixed-rate period of one, three or five
years.

     First Federal Bank requires that borrowers maintain fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) in an amount
at least equal to the lesser of the loan balance or the replacement cost of the
improvements.

     COMMERCIAL REAL ESTATE LENDING. First Federal Bank originates real estate
loans secured by first liens on commercial real estate. The commercial real
estate properties are predominantly non-residential properties such as office
buildings, shopping centers, retail strip centers, motels/hotels, industrial and
warehouse properties and, to a lesser extent, more specialized properties such
as mobile home parks and restaurants. First Federal Bank may, from time to time,
purchase commercial real estate loan participations. First Federal Bank targets
commercial real estate loans with initial principal balances between $150,000
and $2.5 million. Loans secured by commercial real estate totaled approximately
$145.3 million or 34.6% of our total loan portfolio at September 30, 2006.
Substantially all of our commercial real estate loans are secured by properties
located in our primary market area.

     Most of our commercial real estate loans are written as adjustable-rate or
ten-year fixed-rate mortgages and have maturities of five to ten years.
Amortization on these loans is typically based on 15- to 20-year payout
schedules. First Federal Bank also originates some 15- to 20-year fixed-rate,
fully amortizing loans. These fixed rate loans are matched with FHLB advances.
Margins generally range from 250 basis points to 360 basis points above the
applicable Federal Home Loan Bank advance rate.

     In the underwriting of commercial real estate loans, First Federal Bank
generally lends up to 75% of the property's appraised value. Decisions to lend
are based on the economic viability of the property and the creditworthiness of
the borrower. In evaluating a proposed commercial real estate loan, First
Federal Bank emphasizes primarily the ratio of the property's projected net cash
flow to the loan's debt service requirement (generally requiring a ratio of 1.20
times), computed after deduction for a vacancy factor and property expenses it
deems appropriate. In addition, a personal guarantee of the loan is generally
required from the principal(s) of the borrower. First Federal Bank requires
title insurance insuring the priority of our lien, fire and extended coverage
casualty insurance, and flood insurance, if appropriate, in order to protect our
security interest in the underlying property.

     Commercial real estate loans generally carry higher interest rates and
generally have shorter terms than those on one- to four-family residential
mortgage loans. Commercial real estate loans, however, entail significant
additional credit risks compared to one- to four-family residential mortgage
loans, as they typically involve large loan balances concentrated with a single
borrower or groups of related borrowers. In addition, the payment experience on
loans secured by income-producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
general economy.

     CONSUMER LOANS. First Federal Bank originates a variety of consumer and
other loans, including real estate loans, home equity lines of credit,
automobiles, recreational vehicles and personal unsecured loans. The terms of
these are fixed-rate installment loans and variable rate lines of credit. As of
September 30, 2006, consumer loans totaled $31.2 million, or 7.4% of the total
loan portfolio.

     At September 30, 2006, the largest group of consumer loans consisted of
$22.1 million or 5.3% of our total loan portfolio, which are loans secured by
first and second liens on residential properties. First Federal Bank offers


                                        5

<PAGE>

fixed-rate, fixed-term and second mortgage loans, referred to as homeowner
loans, and it also offers adjustable-rate home equity lines of credit.

     Other consumer loans include automobile loans. As of September 30, 2006,
consumer automobile loans totaled $6.7 million or 1.6% of our total loan
portfolio. Automobile loans are written with fixed rates and are fully
amortizing. The rate and term are primarily determined by the credit worthiness
of the borrower and the age of the automobile. The value of the automobile
financed will typically not exceed 120% of the vehicle's MSRP or NADA retail.
First Federal's ability to originate automobile loans is dependent in part on
the availability to consumers of low cost financing from automobile
manufacturers.

     Other consumer loans also include secured and unsecured installment loans
for other purposes. Unsecured installment loans generally have shorter terms
than secured consumer loans, and generally have higher interest rates than rates
charged on secured installment loans with comparable terms.

     Our procedures for underwriting consumer loans include an assessment of an
applicant's credit history and the ability to meet existing obligations and
payments on the proposed loan. Although an applicant's creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan amount.

     Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly. In addition, the repayment of
consumer loans depend on the borrower's continued financial stability, as their
repayment is more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy than a single family mortgage loan.

     COMMERCIAL BUSINESS LOANS. First Federal Bank makes various types of
secured and unsecured commercial loans to customers in our market area for the
purpose of financing equipment acquisition, expansion, working capital,
agri-business and other general business purposes. The terms of these loans
generally range from less than one year to five years. The loans are either
negotiated on a fixed-rate basis or carry adjustable interest rates indexed to
Wall Street Journal Prime. At September 30, 2006, commercial loan balances were
$32.4 million or 7.7% of our total loan portfolio.

     Commercial credit decisions are based upon a credit assessment of the loan
applicant. A determination is made as to the applicant's ability to repay in
accordance with the proposed terms as well as an overall assessment of the risks
involved. An evaluation is made of the applicant to determine character and
capacity to perform within the terms of the loan. Personal guarantees of the
principals are generally required. In addition to an evaluation of the loan
applicant's financial statements, a determination is made of the probable
adequacy of the primary and secondary sources of repayment to be relied upon in
the transaction. Credit agency reports of the applicant's credit history
supplement the analysis of the applicant's creditworthiness. Checks with other
banks and trade investigations also may be conducted. Collateral supporting a
secured transaction also is analyzed to determine its marketability. Commercial
business loans generally bear higher interest rates than residential loans of
like duration because they involve a higher risk of default since their
repayment is generally dependent on the successful operation of the borrower's
business and the sufficiency of collateral, if any.

     CONSTRUCTION LOANS. First Federal Bank originates land acquisition,
development and construction loans to builders and other borrowers in our market
area. At September 30, 2006, construction loans totaled $40.5 million, or 9.7%
of our total loan portfolio. Most of the growth in construction loans is being
generated from the Las Cruces and Albuquerque markets. These office added
several lenders that brought more builders and developers into the bank and
their loans into the loan portfolio.

     Acquisition loans help finance the purchase of land intended for future
development, including single-family homes, multi-family housing, and commercial
income property. In some cases, First Federal Bank may make an acquisition loan
before the borrower has received approval to develop the land as planned. In
general, the maximum loan-to-value ratio for a raw land acquisition loan is 60%
of the appraised value of the property. It also makes development loans to
builders and developers in our market area to finance improvements to real
estate, consisting mostly of single-family subdivisions, typically to finance
the infrastructure-type cost of utilities, roads, sewers and other development
costs. Builders generally rely on the sale of single family homes to repay


                                        6

<PAGE>

development loans, although in some cases the improved building lots may be sold
to another builder. Most development loan agreements specify the amount of
repayment from each lot sale. The maximum loan amount is generally limited to
the lesser of 85% of the cost of the improvements or 75% of the appraised value.
Advances are made in accordance with a schedule reflecting the cost of the
improvements incurred.

     First Federal Bank also grants construction loans to area builders in
conjunction with development loans. In the case of residential subdivisions,
these loans finance the cost of completing homes (including unsold homes) on the
improved property. Advances on construction loans are made in accordance with a
schedule reflecting the cost of construction incurred. Repayment of construction
loans on residential properties is normally expected from the sale of units to
individual purchasers. In the case of income-producing property or
owner-occupied property, repayment is usually expected from permanent financing
upon completion of construction.

     Land acquisition, development and construction lending exposes us to
greater credit risk than permanent mortgage financing. The repayment of land
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
completion of all improvements. In the event First Federal Bank makes an
acquisition loan on property that is not yet approved for the planned
development, there is the risk that approvals will not be granted or will be
delayed. These events may adversely affect the borrower and the collateral value
of the property. Development and construction loans also expose us to the risk
that improvements will not be completed on time in accordance with
specifications and projected costs. In addition, the ultimate sale or rental of
the property may not occur as anticipated.


                                        7

<PAGE>

     LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of our loan portfolio, not including loans held for sale, by type of loan at the
dates indicated.

<TABLE>
<CAPTION>
                                                                AT SEPTEMBER 30,
                         ---------------------------------------------------------------------------------------------
                                2006               2005               2004               2003               2002
                         -----------------  -----------------  -----------------  -----------------  -----------------
                          AMOUNT   PERCENT   AMOUNT   PERCENT   AMOUNT   PERCENT   AMOUNT   PERCENT   AMOUNT   PERCENT
                         --------  -------  --------  -------  --------  -------  --------  -------  --------  -------
                                                             (DOLLARS IN THOUSANDS)
<S>                      <C>        <C>     <C>        <C>     <C>        <C>     <C>        <C>     <C>        <C>
Residential mortgage...  $170,135    40.5%  $189,038    45.3%  $114,615    45.1%  $106,082    41.8%  $106,418    41.9%
Commercial mortgage....   145,343    34.6%   129,133    31.0%    89,873    35.3%    88,137    34.7%    70,659    27.8%
Construction...........    40,536     9.7%    30,828     7.4%    14,502     5.7%    15,812     6.2%    16,132     6.3%
Commercial.............    32,379     7.7%    35,645     8.5%    14,282     5.6%    17,307     6.9%    25,601    10.1%
Consumer and other
   loans...............    31,243     7.4%    32,329     7.8%    21,020     8.3%    26,440    10.4%    35,448    13.9%
                         --------   -----   --------   -----   --------   -----   --------   -----   --------   -----
Total loans............   419,636   100.0%   416,973   100.0%   254,292   100.0%   253,778   100.0%   254,258   100.0%
                                    =====              =====              =====              =====              =====
Other items:

Net, deferred loan
   origination fees....      (955)            (1,100)              (377)              (398)              (405)
Allowance for loan
   losses..............    (3,758)            (3,800)            (2,253)            (2,495)            (2,468)
                         --------           --------           --------           --------           --------
Total loans, net.......  $414,923           $412,073           $251,662           $250,885           $251,385
                         ========           ========           ========           ========           ========
</TABLE>


                                        8

<PAGE>

     LOAN PORTFOLIO MATURITIES AND YIELDS. The following table summarizes the
scheduled repayments of our loan portfolio at September 30, 2006. Demand loans,
loans having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.

<TABLE>
<CAPTION>
                  RESIDENTIAL         COMMERCIAL
                   MORTGAGE            MORTGAGE          CONSTRUCTION        COMMERCIAL          CONSUMER             TOTAL
              ------------------  ------------------  -----------------  -----------------  -----------------  ------------------
                        WEIGHTED            WEIGHTED           WEIGHTED           WEIGHTED           WEIGHTED            WEIGHTED
                         AVERAGE             AVERAGE            AVERAGE            AVERAGE            AVERAGE             AVERAGE
               AMOUNT     RATE     AMOUNT     RATE     AMOUNT    RATE     AMOUNT    RATE     AMOUNT    RATE     AMOUNT     RATE
              --------  --------  --------  --------  -------  --------  -------  --------  -------  --------  --------  --------
                                                             (DOLLARS IN THOUSANDS)
<S>           <C>          <C>    <C>          <C>    <C>         <C>    <C>        <C>     <C>         <C>    <C>          <C>
1 year or
   less...... $    709     7.8%   $ 14,774     9.1%   $38,258     9.7%   $10,998    10.0%   $ 2,414     7.4%   $ 67,152     9.5%
Greater than
   1 to
   5 years...   22,297     5.7%     53,666     8.5%     2,278     8.7%    15,461     8.8%    11,696     7.5%    105,376     7.8%
More than
   5 years...  147,129     5.9%     76,903     8.1%        22     6.8%     5,920     8.4%    17,133     7.8%    247,108     6.8%
              --------            --------            -------            -------            -------            --------
Total........ $170,135            $145,343            $40,536            $32,379            $31,243            $419,636
              ========            ========            =======            =======            =======            ========
</TABLE>

     The total amount of loans due after September 30, 2007 which have
predetermined interest rates is $275.6 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $76.9
million.


                                        9

<PAGE>

     LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. While First Federal Bank
originates both fixed-rate and adjustable-rate loans, our ability to generate
each type of loan depends upon borrower demand, market interest rates, borrower
preference for fixed- versus adjustable-rate loans, and the interest rates
offered on each type of loan by other lenders in our market area. This includes
competing banks, savings banks, credit unions, mortgage banking companies and
life insurance companies that may also actively compete for local loans. Loan
originations are derived from a number of sources, including branch office
personnel, existing customers, builders, attorneys, real estate broker referrals
and walk-in customers.

     Our loan origination and sales activity may be adversely affected by a
rising interest rate environment that typically results in decreased loan
demand, while declining interest rates may stimulate increased loan demand.
Accordingly, the volume of loan origination, the mix of fixed and
adjustable-rate loans, and the profitability of this activity can vary from
period to period. One- to four-family residential mortgage loans are generally
underwritten to current Fannie Mae and Freddie Mac seller/servicer guidelines,
and closed on standard Fannie Mae/Freddie Mac documents. If such loans are sold,
the sales are conducted using standard Fannie Mae/Freddie Mac purchase contracts
and master commitments as applicable. One- to four-family mortgage loans may be
sold both to Fannie Mae and Freddie Mac on a non-recourse basis whereby
foreclosure losses are generally the responsibility of the purchaser and not
First Federal Bank. Our policy has been to release the servicing rights for all
loans sold. However, First Federal Bank does service loans for others. As of
September 30, 2006, it serviced approximately $15.1 million of loans for others.

     LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Board of Directors approves
all loans where the total relationship exposure ("TRE") exceeds $2,500,000. The
Board of Directors has granted lending authority to the Director's Loan
Committee, the members of which are four Directors, Chief Financial Officer and
Chief Credit Officer of First Federal Bank. The Director's Loan Committee
approves all loans where the TRE is in excess of $1,500,000 but does not exceed
$2,500,000. The Board of Directors has also granted lending authority to the
Senior Loan Committee, whose members are the Chief Credit Officer and other
officers designated by the Chief Executive Officer. The Senior Loan Committee
approves all loans where the TRE is in excess of $500,000 but does not exceed
$1,500,000. Finally, the Board of Directors has granted lending authority to
designated officers of First Federal Bank, based on their duties and their
experience, to approve loans within specified TRE levels. The maximum individual
lending authority granted by the Board of Directors is $500,000 secured and
$100,000 unsecured.

     First Federal Bank has established a risk rating system for our commercial
business loans, commercial and multi-family real estate loans, agricultural
loans, acquisition and development, and construction loans to builders. The risk
rating system assesses a variety of factors to rank the risk of default and risk
of loss associated with the loan. These ratings are initially performed by the
originating officer and are reviewed periodically through First Federal's
internal asset review procedures.

     In connection with our residential and commercial real estate loans, First
Federal Bank generally requires property appraisals to be performed by
independent appraisers who are approved by the Board of Directors. Appraisals
are then reviewed by the appropriate loan underwriting areas. For loans under
$250,000, an appraisal or an evaluation is required, unless the real estate is
taken as collateral out of an abundance of caution. It also requires hazard
insurance and, if indicated, flood insurance on property securing mortgage
loans. Title insurance is required with the exception of consumer loans under
$50,000, such as home equity lines of credit and homeowner loans and some
promotional, refinance loans.

     LOAN ORIGINATION FEES AND COSTS. In addition to interest earned on loans,
First Federal Bank may also receive loan origination fees. Such fees vary with
the volume and type of loans and commitments made, and competitive conditions in
the markets. Pursuant to SFAS 91, First Federal Bank defers loan origination
fees and costs, and amortizes such amounts as an adjustment to yield and fee
income over the term of the loan by use of the level-yield method. The balance
of the loan fees (net of costs) to defer for future years was $1.0 million at
September 30, 2006.

     LOANS TO ONE BORROWER. At September 30, 2006, our five largest aggregate
amounts loaned to any one borrower and certain related interests (including any
unused lines of credit) consisted of secured and unsecured


                                       10

<PAGE>

financing of $7.5 million, $5.3 million, $5.1 million, $3.2 million and $3.1
million. At that date, all of these loans were performing in accordance with
their terms.

DELINQUENT LOANS, OTHER REAL ESTATE OWNED AND CLASSIFIED ASSETS

     COLLECTION PROCEDURES. A late notice is sent on the sixth, eleventh and
fifteenth day after the payment due date on a loan requesting the payment due
plus any late charge that was assessed. Accounts are distributed to a collector
or account officer to contact borrowers, determine the reason for delinquency
and arrange for payment, and accounts are monitored for receipt of payments. If
payments are not received within 30 days of the original due date, a letter
demanding payment of all arrearages is sent and contact efforts are continued.
If payment is not received within 60 days of the due date, loans are generally
accelerated and payment in full is demanded. Failure to pay within 90 days of
the original due date generally results in legal action, notwithstanding ongoing
collection efforts. Unsecured consumer loans are charged-off after 120 days. For
commercial loans, loans are charged off at the time a loss is recognized by
management, but generally not later than 120 days past due. Loans that are well
collateralized and in the process of collection may not be charged off in the
120 day time frame.

     LOANS PAST DUE AND NON-PERFORMING ASSETS. Loans are reviewed on a regular
basis, and are placed on non-accrual status when either principal or interest is
90 days or more past due. In addition, loans are placed on non-accrual status
when, in the opinion of management, there is sufficient reason to question the
borrower's ability to continue to meet contractual principal or interest payment
obligations. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is reversed from interest income. Interest payments received
on non-accrual loans are not recognized as income unless warranted based on the
borrower's financial condition and payment record. At September 30, 2006, First
Federal Bank had non-accrual loans of $922,000.

     Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses.

     Loans designated as "troubled debt restructurings" involves a situation in
which a portion of interest or principal has been forgiven and/or loans modified
at interest rates materially less than current market rates.


                                       11

<PAGE>

     NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated.

<TABLE>
<CAPTION>
                                                      AT SEPTEMBER 30,
                                           --------------------------------------
                                            2006     2005    2004   2003    2002
                                           ------   ------   ----   ----   ------
                                                   (DOLLARS IN THOUSANDS)
<S>                                        <C>      <C>      <C>    <C>    <C>
Non-accrual loans:
   Residential mortgage.................   $  594   $  785   $ 78   $214   $  239
   Commercial mortgage..................      241      274     --    665      188
   Construction.........................       --      232    417     47      399
   Commercial...........................       87      213     --     --       57
   Consumer and other...................       --       62     --     --       --
                                           ------   ------   ----   ----   ------
      Total non-performing loans........   $  922   $1,566   $495   $926   $  883
                                           ------   ------   ----   ----   ------
Loans greater than 90 days delinquent
   and still accruing:
   Residential mortgage.................   $   --   $   --   $ --   $ --   $   27
   Commercial mortgage..................       --       --     --     --       --
   Construction.........................       --       --     --     --       --
   Commercial...........................       --       --     --     --      150
   Consumer and other...................       --       --     --     --       --
                                           ------   ------   ----   ----   ------
      Total loans 90 days and still
         accruing.......................   $   --   $   --   $ --   $ --   $  177
                                           ------   ------   ----   ----   ------
Real estate owned:
   Residential mortgage.................   $  176   $  219   $ --   $ --   $  167
   Commercial mortgage..................       --       45     --     --       --
   Construction.........................       --       --     --     --       --
   Commercial...........................       --       --     --     --       --
   Consumer and other...................        6       --     --     --       10
                                           ------   ------   ----   ----   ------
      Total real estate owned...........   $  182   $  264   $ --   $ --   $  177
                                           ------   ------   ----   ----   ------
Total non-performing assets.............   $1,104   $1,830   $495   $926   $1,237
                                           ======   ======   ====   ====   ======
Troubled debt restructurings............   $  240   $  326   $424   $503   $  163
                                           ======   ======   ====   ====   ======
Ratios:
Non-performing loans to total loans.....      0.2%     0.4%   0.2%   0.4%     0.3%
Non-performing assets to total assets...      0.2%     0.3%   0.1%   0.3%     0.4%
</TABLE>

     For the year ended September 30, 2006, gross interest income that would
have been recorded had the non-accrual loans at the end of the year remained on
accrual status throughout the year amounted to approximately $88,000. Interest
income actually recognized on such loans for the year totaled approximately
$17,000.

     CLASSIFICATION OF ASSETS. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets that are
considered to be of lesser quality as "other assets especially mentioned"
("OAEM"), "substandard", "doubtful", or "loss" assets. A special mention credit
is considered to be currently protected from loss but is potentially weak. No
loss of principal or interest is foreseen; however, proper supervision and
management attention is required to deter further deterioration in the credit.
An asset is considered substandard if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses inherent
in those classified substandard with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly questionable and
improbable. Assets classified as loss are those considered uncollectible and of
such little value that their continuance as assets is not warranted. Assets that
do not expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess potential weaknesses that deserve
our close attention, are required to be designated as "watch". As of September
30, 2006, First Federal Bank had $6.4 million of assets designated as watch.

     Assets are classified into the above-mentioned categories and allocations
are made based on historical loss experience. The allowance for loan losses
represents amounts that have been established to recognize losses inherent in
the loan portfolio that are both probable and reasonably estimable at the date
of the financial statements.


                                       12

<PAGE>

When it classifies problem assets as "loss", First Federal Bank charges off such
amount. Our determination as to the classification of our assets and the amount
of our loss allowances are subject to review by our regulatory agencies, which
can order the establishment of additional loss allowances. Management regularly
reviews our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of our assets at September 30, 2006, classified assets
consisted of OAEM assets of approximately $1.3 million, substandard assets of
approximately $9.0 million and approximately $110,000 in doubtful assets.

     ALLOWANCE FOR LOAN LOSSES. First Federal Bank provides for loan losses
based on the allowance method. Accordingly, all loan losses are charged to the
related allowance and all recoveries are credited to it. Additions to the
allowance for loan losses are provided by charges to income based on various
factors which, in management's judgment, deserve current recognition in
estimating probable losses. Management regularly reviews the loan portfolio and
makes provisions for loan losses in order to maintain the allowance for loan
losses in accordance with accounting principles generally accepted in the United
States of America. The allowance for loan losses consists of amounts
specifically allocated to non-performing loans and other criticized or
classified loans (if any) as well as allowances determined for each major loan
category. After it establishes a provision for loans that are known to be
non-performing, criticized or classified, it calculates a percentage to apply to
the remaining loan portfolio to estimate the probable losses inherent in that
portion of the portfolio. When the loan portfolio increases, therefore, the
percentage calculation results in a higher dollar amount of estimated probable
losses than would be the case without the increase, and when the loan portfolio
decreases, the percentage calculation results in a lower dollar amount of
estimated probable losses than would be the case without the decrease. These
percentages are determined by management based on historical loss experience for
the applicable loan category, which may be adjusted to reflect our evaluation
of:

     1.   Portfolio composition, size, and maturities of the various segmented
          portions of the portfolio.

     2.   Concentrations of borrowers, industries, geographical sectors, loan
          product, loan classes and collateral types, etc.

     3.   Off balance sheet risks, letters of credit (where there is no back-up
          note), unfunded commitments, and lines of credit.

     4.   Volume and trend of loan delinquencies and those on non-accrual.

     5.   Criticized and classified assets. Trends in the aggregate and
          developments in significant individual credits identified as problems
          or Watch List items.

     6.   Non-Performing Loans and Non-Performing Assets. Trends in the
          aggregate and developments on significant individual items.

     7.   Historical trends of actual loan losses or charge-offs (net
          recoveries) based on volume and types of loans.

     8.   Specific issues brought to the attention of Senior Management citing
          weakness or deficiencies in systems and procedures or any violations
          of First Federal Bank policies which may lead to or create any undue
          risk to First Federal Bank.

     9.   Significant recoveries or additions to the allowance for loan losses.

     10.  Changes in national and local economic conditions, including rapid
          changes in interest rates.

     Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. The allowance for losses on loans is based on
management's estimates. In connection with the


                                       13

<PAGE>

determination of the value of foreclosed real estate, management obtains
independent appraisals for significant properties.

     While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review First
Federal's allowances for losses on loans and foreclosed real estate. Such
agencies may require First Federal to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and the valuation of foreclosed real estate may
change materially in the near term.

     The following table sets forth activity in our allowance for loan losses
for the years indicated.

<TABLE>
<CAPTION>
                                          AT OR FOR THE YEARS ENDED SEPTEMBER 30,
                                        ------------------------------------------
                                         2006     2005     2004     2003     2002
                                        ------   ------   ------   ------   ------
                                                  (DOLLARS IN THOUSANDS)
<S>                                     <C>      <C>      <C>      <C>      <C>
Balance at beginning of year ........   $3,800   $2,253   $2,495   $2,468   $2,263
                                        ------   ------   ------   ------   ------
Charge-offs:
   Residential mortgage .............       11       53       14       22        1
   Commercial mortgage ..............       --       --       --       38       71
   Construction .....................       --       --       --       --        7
   Commercial .......................      106       64        3       15       45
   Consumer and other ...............       37       36       45       25       42
                                        ------   ------   ------   ------   ------
      Total charge-offs .............   $  154   $  153   $   62   $  100   $  166

Recoveries:
   Residential mortgage .............        7       14       --        5        1
   Commercial mortgage ..............       --       --       12        2        4
   Construction .....................       --       --       --       --       --
   Commercial .......................       35       16        4       17       --
   Consumer and other ...............       18        3        2       12        8
                                        ------   ------   ------   ------   ------
      Total recoveries ..............   $   60   $   33   $   18   $   36   $   13

Net charge-offs .....................      (94)    (120)     (44)     (64)    (153)
Adjustment (GFSB balance transfer)...       --    1,661       --       --       --
Provision for loan losses ...........       52        6     (198)      91      358
                                        ------   ------   ------   ------   ------
Balance at end of year ..............   $3,758   $3,800   $2,253   $2,495   $2,468
                                        ======   ======   ======   ======   ======
Ratios:
Net charge-offs to average loans
   outstanding ......................       --%      --%      --%      --%    (0.1)%
Allowance for loan losses to non-
   performing loans at end of year...    407.6%   242.6%   455.1%   269.4%   279.5%
Allowance for loan losses to
   total loans at end of year .......      0.9%     0.9%     0.9%     1.0%     1.0%
</TABLE>


                                       14

<PAGE>

     ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the
allowance for loan losses allocated by loan category, the total loan balances by
category (including loans held for sale), and the percent of loans in each
category to total loans at the dates indicated. The allowance for loan losses
allocated to each category is not necessarily indicative of future losses in any
particular category and does not restrict the use of the allowance to absorb
losses in other categories.

<TABLE>
<CAPTION>
                                                            AT SEPTEMBER 30,
                        ----------------------------------------------------------------------------------------
                                            2006                                         2005
                        -------------------------------------------  -------------------------------------------
                                                        PERCENT OF                                   PERCENT OF
                                                      LOANS IN EACH                                LOANS IN EACH
                        ALLOWANCE FOR  LOAN BALANCES   CATEGORY TO   ALLOWANCE FOR  LOAN BALANCES   CATEGORY TO
                         LOAN LOSSES    BY CATEGORY    TOTAL LOANS    LOAN LOSSES    BY CATEGORY    TOTAL LOANS
                        -------------  -------------  -------------  -------------  -------------  -------------
                                                         (DOLLARS IN THOUSANDS)
<S>                         <C>           <C>             <C>            <C>           <C>             <C>
Residential mortgage..      $  300        $170,135         40.5%         $1,440        $189,038         45.3%
Commercial mortgage...       1,942         145,343         34.6%          1,220         129,133         31.0%
Construction..........       1,008          40,536          9.7%            290          30,828          7.4%
Commercial............         303          32,379          7.7%            337          35,645          8.5%
Consumer and other....         205          31,243          7.4%            513          32,329          7.8%
                            ------        --------        -----          ------        --------        -----
Total.................      $3,758        $419,636        100.0%         $3,800        $416,973        100.0%
                            ======        ========        =====          ======        ========        =====

<CAPTION>
                                      AT SEPTEMBER 30,
                        -------------------------------------------
                                            2004
                        -------------------------------------------
                                                        PERCENT OF
                                                      LOANS IN EACH
                        ALLOWANCE FOR  LOAN BALANCES   CATEGORY TO
                         LOAN LOSSES    BY CATEGORY    TOTAL LOANS
                        -------------  -------------  -------------
                                   (DOLLARS IN THOUSANDS)
<S>                         <C>           <C>             <C>
Residential mortgage..      $  281        $114,615         45.1%
Commercial mortgage...       1,389          89,873         35.3%
Construction..........         103          14,502          5.7%
Commercial............         102          14,282          5.6%
Consumer and other....         378          21,020          8.3%
                            ------        --------        -----
Total.................      $2,253        $254,292        100.0%
                            ======        ========        =====
</TABLE>

<TABLE>
<CAPTION>
                                                            AT SEPTEMBER 30,
                        ----------------------------------------------------------------------------------------
                                            2003                                         2002
                        -------------------------------------------  -------------------------------------------
                                                        PERCENT OF                                   PERCENT OF
                                                      LOANS IN EACH                                LOANS IN EACH
                        ALLOWANCE FOR  LOAN BALANCES   CATEGORY TO   ALLOWANCE FOR  LOAN BALANCES   CATEGORY TO
                         LOAN LOSSES    BY CATEGORY    TOTAL LOANS    LOAN LOSSES    BY CATEGORY    TOTAL LOANS
                        -------------  -------------  -------------  -------------  -------------  -------------
                                                         (DOLLARS IN THOUSANDS)
<S>                         <C>           <C>             <C>            <C>           <C>             <C>
Residential mortgage..      $  565        $106,082         41.8%         $  361        $106,418         41.9%
Commercial mortgage...       1,191          88,137         34.7%          1,193          70,659         27.8%
Construction..........         108          15,812          6.2%             73          16,132          6.3%
Commercial............         119          17,307          6.9%            115          25,601         10.1%
Consumer and other....         512          26,440         10.4%            726          35,448         13.9%
                            ------        --------        -----          ------        --------        -----
Total.................      $2,495        $253,778        100.0%         $2,468        $254,258        100.0%
                            ======        ========        =====          ======        ========        =====
</TABLE>


                                       15

<PAGE>

SECURITIES ACTIVITIES

     Our securities investment policy is established by our Board of Directors.
This policy dictates that investment decisions be made based on the safety of
the investment, liquidity requirements, potential returns, cash flow targets,
and consistency with our interest rate risk management strategy. The board
oversees our investment program and evaluates on an ongoing basis our investment
policy and objectives. Our chief financial officer, or our chief financial
officer acting with our chief executive officer, is responsible for making
securities portfolio decisions in accordance with established policies. Our
chief financial officer and chief executive officer have the authority to
purchase and sell securities within specific guidelines established by the
investment policy. In addition, all transactions are reviewed by the Board at
least monthly.

     Our current investment policy generally permits securities investments in
debt securities issued by the U.S. Government and U.S. Agencies, and municipal
bonds, as well as investments in preferred and common stock of government
agencies and government sponsored enterprises such as Fannie Mae, Freddie Mac
and the Federal Home Loan Bank of Dallas (federal agency securities). Securities
in these categories are classified as "investment securities" for financial
reporting purposes. The policy also permits investments in mortgage-backed
securities, including pass-through securities issued and guaranteed by Fannie
Mae, Freddie Mac and Ginnie Mae. Our current investment strategy uses a risk
management approach of diversified investing in fixed-rate securities with
short- to intermediate-term maturities, as well as adjustable-rate securities,
which may have a longer term to maturity. The emphasis of this approach is to
increase overall investment securities yields while managing interest rate risk.
Maturities on fixed rate instruments are limited to five years or less. Any
exceptions must be approved by the Board of Directors. Some of investment
securities acquired with the GSB acquisition were of a longer duration than
permitted by the Investment Policy. The transaction was approved by the Board of
Directors including the investment portfolio.

     SFAS No. 115 requires that, at the time of purchase, First Federal Bank
designate a security as held to maturity, available for sale, or trading,
depending on our ability and intent. Securities available for sale are reported
at fair value, while securities held to maturity are reported at amortized cost.
It does not have a trading portfolio.

     GOVERNMENT SECURITIES. At September 30, 2006, First Federal Bank held
government securities available for sale with a fair value of $14.7 million,
consisting primarily of agency obligations with short- to medium-term maturities
(one to five years). While these securities generally provide lower yields than
other investments such as mortgage-backed securities, our current investment
strategy is to maintain investments in such instruments to the extent
appropriate for liquidity purposes and as eligible collateral for borrowings or
pledging for governmental deposits.

     MUNICIPAL BONDS. At September 30, 2006, First Federal Bank held
approximately $5.0 million in municipal bonds. All the municipal securities were
held in the available for sale category.

     EQUITY SECURITIES. At September 30, 2006, our equity securities available
for sale had a fair value of approximately $10.5 million, and primarily
consisted of a mutual fund that invests in adjustable rate mortgages. At
September 30, 2006, First Federal Bank also held approximately $5.1 million (at
cost), of Federal Home Loan Bank of Dallas common stock, a portion of which must
be held as a condition of membership in the Federal Home Loan Bank System, with
the remainder held as a condition to our borrowing under the Federal Home Loan
Bank advance program.

     MORTGAGE-BACKED SECURITIES. First Federal Bank purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower credit risk as a result of the guarantees
provided by Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase
liquidity. It invests primarily in mortgage-backed securities issued or
sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae. At September 30, 2006, our
mortgage-backed securities portfolio totaled approximately $16.8 million,
consisting of $16.8 million classified as available for sale at fair value and
$7,000 held to maturity at amortized cost.

     Mortgage-backed securities are created by pooling mortgages and issuing a
security collateralized by the pool of mortgages with an interest rate that is
less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages,


                                       16

<PAGE>

although most of our mortgage-backed securities are collateralized by
single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including Fannie Mae,
Freddie Mac and Ginnie Mae) pool and resell the participation interests in the
form of securities to investors, such as us, and guarantee the payment of
principal and interest to these investors. Investments in mortgage-backed
securities involve a risk that actual prepayments will be greater or less than
the prepayment rate estimated at the time of purchase, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments, thereby affecting the net yield on such
securities. First Federal Bank reviews prepayment estimates for our
mortgage-backed securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the securities at issue and
current interest rates, and to determine the yield and estimated maturity of the
mortgage-backed securities portfolio. Periodic reviews of current prepayment
speeds are performed in order to ascertain whether prepayment estimates require
modification, which would cause amortization or accretion adjustments.


                                       17

<PAGE>

     INVESTMENT SECURITIES PORTFOLIO. The following table sets forth the
composition of our investment securities portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                          AT SEPTEMBER 30,
                                   ----------------------------------------------------------------------------------------------
                                                2006                            2005                            2004
                                   ------------------------------  ------------------------------  ------------------------------
                                   AMORTIZED    FAIR   DIFFERENCE  AMORTIZED    FAIR   DIFFERENCE  AMORTIZED    FAIR   DIFFERENCE
                                      COST     VALUE    IN VALUE      COST     VALUE    IN VALUE      COST     VALUE    IN VALUE
                                   ---------  -------  ----------  ---------  -------  ----------  ---------  -------  ----------
                                                                           (IN THOUSANDS)
<S>                                 <C>       <C>        <C>        <C>       <C>         <C>       <C>       <C>         <C>
DEBT SECURITIES:
   U.S. Government and agency
      obligations ...............   $14,985   $14,739    $(246)     $25,186   $24,868    $(318)     $37,457   $37,359     $(98)
   State agency and municipal
      obligations ...............     4,958     4,964        6        6,027     6,065       38        1,695     1,703        8
                                    -------   -------    -----      -------   -------    -----      -------   -------     ----
   Corporate bonds and other
      obligations ...............        --        --       --           --        --       --           --        --       --
                                    -------   -------    -----      -------   -------    -----      -------   -------     ----
   Asset-backed securities:
      Pass-through securities:
         Fannie Mae .............    10,773    10,632     (141)      14,488    14,381     (107)         988     1,030       42
         Freddie Mac ............     2,763     2,737      (26)       4,105     4,087      (18)         981     1,023       42
         Ginnie Mae .............     2,344     2,339       (5)       3,371     3,367       (4)          --        --       --
         Sallie Mae .............       463       462       (1)         787       786       (1)          --        --       --
         CMOs ...................     1,127     1,108      (19)       1,960     1,958       (2)          --        --       --
                                    -------   -------    -----      -------   -------    -----      -------   -------     ----
   Total debt securities ........    37,413    36,981     (432)      55,924    55,512     (412)      41,121    41,115       (6)
                                    -------   -------    -----      -------   -------    -----      -------   -------     ----
MARKETABLE EQUITY SECURITIES:
   Common stock .................        10        10       --        1,006       896     (110)          10        10       --
   Preferred stock ..............        --        --       --           --        --       --           --        --       --
   Mutual funds .................    10,569    10,488      (81)      10,726    10,623     (103)         600       571      (29)
                                    -------   -------    -----      -------   -------    -----      -------   -------     ----
   Total equity securities ......    10,579    10,498      (81)      11,732    11,519     (213)         610       581      (29)
                                    -------   -------    -----      -------   -------    -----      -------   -------     ----
   Total investment securities ..   $47,992   $47,479    $(513)     $67,656   $67,031    $(625)     $41,731   $41,696     $(35)
                                    =======   =======    =====      =======   =======    =====      =======   =======     ====
</TABLE>


                                       18

<PAGE>

     At September 30, 2006, the available-for-sale federal agency securities, at
fair value, totaled $14.7 million, or 2.7% of total assets. Of the portfolio,
based on amortized cost, approximately $6.5 million had maturities of one year
or less and a weighted average yield of 3.3%, and approximately $8.5 million had
maturities of between one and five years and a weighted average yield of 3.8%.
The agency securities portfolio includes both non-callable and callable
debentures. The agency callable debentures contain various call terms from
continuously callable after 30 days, to quarterly callable with no call for the
first six months.

     At September 30, 2006, our available-for-sale mortgage-backed securities
and asset-backed securities, approximately $17.2 million, at fair value,
consisted of pass-through securities, which totaled 3.1% of total assets.

     At September 30, 2006, our held to maturity mortgage-backed securities
portfolio totaled approximately $7,000 at amortized cost, with a weighted
average yield of 8.2%.


                                       19

<PAGE>

     PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the
investment securities portfolio and the asset-backed securities at September 30,
2006 are summarized in the following table. Maturities are based on the earliest
callable date for debentures and final contractual payment dates for
mortgage-backed securities, and do not reflect the impact of prepayments or
early redemptions that may occur. State and municipal securities yields have not
been adjusted to a tax-equivalent basis.

<TABLE>
<CAPTION>
                                                      MORE THAN ONE YEAR  MORE THAN FIVE YEARS
                                  ONE YEAR OR LESS    THROUGH FIVE YEARS    THROUGH TEN YEARS
                                -------------------  -------------------  --------------------
                                           WEIGHTED             WEIGHTED              WEIGHTED
                                AMORTIZED   AVERAGE  AMORTIZED   AVERAGE  AMORTIZED    AVERAGE
                                   COST      YIELD      COST      YIELD      COST       YIELD
                                ---------  --------  ---------  --------  ---------  ---------
<S>                              <C>          <C>      <C>         <C>      <C>          <C>
DEBT SECURITIES:
   U.S. Government and
      agency securities.......   $ 6,495      3.3%     $8,490      3.8%     $   --        --
   State agency and
      municipal obligations...       328      3.2%        104      3.1%        679       8.4%
                                 -------      ---      ------      ---      ------       ---
   Corporate bonds and other
      obligations.............        --       --          --       --          --        --
                                 -------      ---      ------      ---      ------       ---
   Asset-backed
   securities:
      Pass-through
      securities:
         Fannie Mae...........        --       --         237      5.8%      1,670       5.4%
         Freddie Mac..........        32      5.8%        312      5.9%         --        --
         Ginnie Mae...........        --       --          --       --          --        --
         Sallie Mae...........        --       --          --       --         463       5.6%
         CMOs.................        --       --          --       --         210       4.6%
                                 -------      ---      ------      ---      ------       ---
   Total debt securities......     6,855      3.4%      9,143      3.9%      3,022       6.0%
                                 -------      ---      ------      ---      ------       ---
MARKETABLE EQUITY SECURITIES:
   Common stock...............        10                   --                   --
   Preferred stock............        --                   --                   --
   Mutual funds...............    10,569                   --                   --
                                 -------               ------               ------
   Total equity securities....    10,579                   --                   --
                                 -------               ------               ------
   Total investment
      securities..............   $17,434               $9,143               $3,022
                                 =======               ======               ======

<CAPTION>
                                MORE THAN TEN YEARS        TOTAL SECURITIES
                                -------------------  ----------------------------
                                           WEIGHTED                      WEIGHTED
                                AMORTIZED   AVERAGE  AMORTIZED    FAIR    AVERAGE
                                   COST      YIELD      COST     VALUE     YIELD
                                ---------  --------  ---------  -------  --------
<S>                              <C>          <C>     <C>       <C>         <C>
DEBT SECURITIES:
   U.S. Government and
      agency securities.......   $    --       --     $14,985   $14,739     3.6%
   State agency and
      municipal obligations...     3,847      4.1%      4,958     4,964     4.6%
                                 -------      ---     -------   -------     ---
   Corporate bonds and other
      obligations.............        --       --          --        --      --
                                 -------      ---     -------   -------     ---
   Asset-backed
   securities:
      Pass-through
      securities:
         Fannie Mae...........     8,866      5.2%     10,773    10,632     5.2%
         Freddie Mac..........     2,419      4.6%      2,763     2,737     4.8%
         Ginnie Mae...........     2,344      4.6%      2,344     2,339     4.6%
         Sallie Mae...........        --       --         463       462     5.6%
         CMOs.................       917      4.1%      1,127     1,108     4.2%
                                 -------      ---     -------   -------     ---
   Total debt securities......    18,393      4.8%     37,413    36,981     4.4%
                                 -------      ---     -------   -------     ---
MARKETABLE EQUITY SECURITIES:
   Common stock...............        --                   10        10
   Preferred stock............        --                   --        --
   Mutual funds...............        --               10,569    10,488
                                 -------              -------   -------
   Total equity securities....        --               10,579    10,498
                                 -------              -------   -------
   Total investment
      securities..............   $18,393              $47,992   $47,479
                                 =======              =======   =======
</TABLE>


                                       20

<PAGE>

SOURCES OF FUNDS

     GENERAL. Deposits, borrowings, repayments and prepayments of loans and
securities, proceeds from sales of loans and securities, proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes.

     DEPOSITS. First Federal Bank offers a variety of deposit accounts with a
range of interest rates and terms. Our deposit accounts consist of savings
accounts, NOW accounts, checking accounts, money market accounts, club accounts,
certificates of deposit, IRAs and other qualified plan accounts. It provides
various commercial checking accounts for businesses. In addition, it provides
low-cost checking account services for low-income customers.

     At September 30, 2006, our deposits totaled $377.4 million. NOW and
interest-bearing deposits totaled $60.1 million, and non-interest-bearing demand
deposits and cashiers' checks outstanding totaled $64.8 million. Savings and
money market deposits totaled $124.6 million at September 30, 2006. Also at that
date, First Federal Bank had a total of $127.8 million in certificates of
deposit, of which $71.3 million had maturities of one year or less.

     Although it has a significant portion of our deposits in shorter-term
certificates of deposit, management monitors activity on these accounts and,
based on historical experience and our current pricing strategy it believes it
will retain a large portion of such accounts upon maturity.

     Our deposits are obtained predominantly from the areas in which our branch
offices are located. First Federal Bank relies on our favorable locations,
customer service and competitive pricing to attract and retain these deposits.
While it accepts certificates of deposit in excess of $100,000 for which it may
provide preferential rates, it does not actively solicit such deposits, as they
are more difficult to retain than core deposits.

     The following tables set forth the distribution of total deposit accounts,
by account type, at the dates indicated.

<TABLE>
<CAPTION>
                                                                     AT SEPTEMBER 30,
                                  -------------------------------------------------------------------------------------
                                              2006                         2005                         2004
                                  ---------------------------  ---------------------------  ---------------------------
                                                     WEIGHTED                     WEIGHTED                     WEIGHTED
                                   AVERAGE            AVERAGE   AVERAGE            AVERAGE   AVERAGE            AVERAGE
                                   BALANCE  PERCENT    RATE     BALANCE  PERCENT    RATE     BALANCE  PERCENT    RATE
                                  --------  -------  --------  --------  -------  --------  --------  -------  --------
<S>                               <C>        <C>        <C>    <C>        <C>        <C>    <C>        <C>        <C>
DEPOSIT TYPE:
Demand deposits.................  $ 62,621    16.5%     0.0%   $ 47,330    15.7%     0.0%   $ 34,189    12.9%     0.0%
NOW/Interest bearing checking...    63,873    16.8%     0.2%     53,144    17.7%     0.1%     45,787    17.2%     0.1%
Money market deposits...........    47,360    12.5%     3.1%     12,936     4.3%     0.7%      8,166     3.1%     0.3%
Regular savings.................    69,336    18.3%     1.7%     85,284    28.3%     0.8%     95,889    36.1%     0.7%
                                  --------   -----      ---    --------   -----      ---    --------   -----      ---
   Total transaction
      accounts..................  $243,190    64.1%     1.1%   $198,694    66.0%     0.4%   $184,031    69.3%     0.4%

   Certificates of deposit......   136,126    35.9%     3.6%    102,286    34.0%     2.8%     81,521    30.7%     2.7%
                                  --------   -----      ---    --------   -----      ---    --------   -----      ---
   Total deposits...............  $379,316   100.0%     2.0%   $300,980   100.0%     1.2%   $265,552   100.0%     1.1%
                                  ========   =====      ===    ========   =====      ===    ========   =====      ===
</TABLE>


                                       21

<PAGE>

     As of September 30, 2006, the aggregate amount of outstanding certificates
of deposit in amounts greater than or equal to $100,000 was approximately $45.3
million. The following table sets forth the maturity of those certificates as of
September 30, 2006.

                                                       AT
                                               SEPTEMBER 30, 2006
                                               ------------------
                                                 (IN THOUSANDS)
     Three months or less...................         $11,054
     Over three months through six months...           5,549
     Over six months through one year.......           5,285
     Over one year to three years...........           7,499
     Over three years.......................           4,099
                                                     -------
     Total..................................         $33,486
                                                     =======

     BORROWINGS. Our borrowings consist primarily of advances from the Federal
Home Loan Bank of Dallas. At September 30, 2006, First Federal Bank had access
to additional Federal Home Loan Bank advances of up to $122.5 million. The
following table sets forth information concerning balances and interest rates on
our Federal Home Loan Bank advances at the dates and for the years indicated.

<TABLE>
<CAPTION>
                                                          AT OR FOR THE YEARS ENDED
                                                                SEPTEMBER 30,
                                                        -----------------------------
                                                          2006       2005       2004
                                                        --------   --------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                     <C>        <C>        <C>
     Balance at end of year..........................   $101,136   $107,991   $57,329
     Average balance during year.....................   $104,570   $ 76,121   $59,757
     Maximum outstanding at any month end............   $110,155   $107,991   $64,893
     Weighted average interest rate at end of year...        4.5%       4.3%      4.3%
     Average interest rate during year...............        4.4%       4.1%      4.6%
</TABLE>

ACTIVITIES OF SUBSIDIARIES AND AFFILIATED ENTITIES

     First New Mexico Service Corp. is a wholly owned subsidiary of First
Federal Bank. It was established in 1993 for the purpose of holding an
investment in real estate. It no longer holds that real estate and currently has
no activity. At September 30, 2006, First Federal's investment in this
subsidiary was $0.

COMPETITION

     First Federal Bank faces significant competition in both originating loans
and attracting deposits. Most of the communities it operates in have a high
concentration of financial institutions, many of which are significantly larger
institutions with greater financial resources than us, and many of which are our
competitors to varying degrees. Our competition for loans comes principally from
commercial banks, savings banks, mortgage banking companies, credit unions,
insurance companies and other financial service companies. Our most direct
competition for deposits has historically come from commercial banks, savings
banks and credit unions. First Federal Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. It has emphasized
personalized banking and the advantage of local decision making in our banking
business, and this strategy appears to have been well received in our market
areas. It does not rely on any individual, group, or entity for a material
portion of our deposits.

EMPLOYEES

     At September 30, 2006, First Federal had 164 full-time employees and 15
part-time employees. The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be good.


                                       22

<PAGE>

LEGAL PROCEEDINGS

     First Federal is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to our financial condition and results of operations.

                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     GENERAL. First Federal and First Federal Bank are subject to federal income
taxation in the same general manner as other corporations, with some exceptions
discussed below. Neither First Federal's nor First Federal Bank's federal tax
returns are currently under audit, and neither entity has been audited during
the past five years. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to First Federal or First
Federal Bank.

     METHOD OF ACCOUNTING. For federal income tax purposes, First Federal
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending September 30 for filing its federal and state income
tax returns.

     BAD DEBT RESERVES. Historically, First Federal Bank was subject to special
provisions in the tax law regarding allowable tax bad debt deductions and
related reserves. Tax law changes were enacted in 1996 pursuant to the Small
Business Protection Act of 1996 (the "1996 Act"), which eliminated the use of
the percentage of taxable income method for tax years after 1995 and required
recapture into taxable income over a six year period all bad debt reserves
accumulated after 1987. First Federal Bank has fully recaptured its post-1987
reserve balance.

     Currently, the First Federal Bank consolidated group uses the specific
charge off method to account for bad debt deductions for income tax purposes.

     TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 (pre-base year reserves) were subject
to recapture into taxable income if First Federal Bank failed to meet certain
thrift asset and definitional tests.

     As a result of the 1996 Act, bad debt reserves accumulated after 1987 are
required to be recaptured into income over a six-year period. However, all
pre-base year reserves are subject to recapture if First Federal Bank makes
certain non-dividend distributions, repurchases any of its stock, pays dividends
in excess of tax earnings and profits, or ceases to maintain a bank charter. As
mentioned earlier, First Federal Bank has fully recaptured its post-1987 reserve
balance.

     ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes an alternative
minimum tax ("AMT") at a rate of 20% on a base of regular taxable income plus
certain tax preferences ("alternative minimum taxable income" or "AMTI"). The
AMT is payable to the extent such AMTI is in excess of an exemption amount and
the AMT exceeds the regular income tax. Net operating losses can offset no more
than 90% of AMTI. Certain payments of AMT may be used as credits against regular
tax liabilities in future years. First Federal and First Federal Bank have not
been subject to the AMT and have no such amounts available as credits for
carryover.

     NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. At September 30, 2006, First Federal Bank had no
net operating loss carryforwards for federal income tax purposes.

     CORPORATE DIVIDENDS-RECEIVED DEDUCTION. First Federal may exclude from its
federal taxable income 100% of dividends received from First Federal Bank as a
wholly owned subsidiary. The corporate dividends-received deduction is 80% when
the dividend is received from a corporation having at least 20% of its stock
owned by the recipient corporation. A 70% dividends-received deduction is
available for dividends received from a corporation having less than 20% of its
stock owned by the recipient corporation.


                                       23

<PAGE>

STATE TAXATION

     The State of New Mexico has a corporate tax which subjects First Federal's
New Mexico taxable income to tax rates ranging from 4.80% to 7.60% on taxable
income over $1,000,000. New Mexico taxable income is computed by applying
certain modifications to federal taxable income. The principal difference
between state and federal taxable income is that interest earned on U.S.
government obligations is not taxable for state purposes.

                           SUPERVISION AND REGULATION

GENERAL

     As a federally chartered savings bank, First Federal Bank is regulated and
supervised by the Office of Thrift Supervision and, to a lesser extent, the
Federal Deposit Insurance Corporation. This regulation and supervision
establishes a comprehensive framework of activities in which a financial
institution may engage and is intended primarily for the protection of the
Federal Deposit Insurance Corporation's deposit insurance funds and depositors.
Under this system of federal regulation, financial institutions are periodically
examined to ensure that they satisfy applicable standards with respect to their
capital adequacy, assets, management, earnings, liquidity and sensitivity to
market interest rates. After completing an examination, the federal agency
critiques the financial institution's operations and assigns its rating (known
as an institution's CAMELS rating). Under federal law, an institution may not
disclose its CAMELS rating to the public. First Federal Bank also is a member
of, and owns stock in, the Federal Home Loan Bank of Dallas, which is one of the
12 regional banks in the Federal Home Loan Bank System. First Federal Bank is
also subject to regulations issued by the Board of Governors of the Federal
Reserve System with regard to reserves to be maintained against deposits and
other matters. The Office of Thrift Supervision examines First Federal Bank and
prepares reports for the consideration of its Board of Directors on any
operating deficiencies. First Federal Bank's relationship with its depositors
and borrowers also is regulated to a great extent by both federal and state
laws, especially in matters concerning the ownership of deposit accounts and the
form and content of First Federal Bank's loan documents.

     There can be no assurance that laws, rules and regulations will not change
in the future, which could make compliance more difficult or expensive or
otherwise adversely affect our business, financial condition, results of
operations or prospects. Any change in these laws or regulations, or in
regulatory policy, whether by the Federal Deposit Insurance Corporation, the
Office of Thrift Supervision, the Board of Governors of the Federal Reserve
System, or Congress, could have a material adverse impact on First Federal,
First Federal Bank and their respective operations.

FEDERAL BANKING REGULATION

     BUSINESS ACTIVITIES. A federal savings bank derives its lending and
investment powers from the Home Owners' Loan Act, as amended, and the
regulations of the Office of Thrift Supervision. Under these laws and
regulations, First Federal Bank may invest in mortgage loans secured by
residential and nonresidential real estate, commercial business and consumer
loans, certain types of debt securities and certain other loans and assets.
First Federal Bank also may establish subsidiaries that may engage in activities
not otherwise permissible for First Federal Bank directly, including real estate
investment, securities brokerage and insurance agency.

     CAPITAL REQUIREMENTS. Office of Thrift Supervision regulations require
savings banks to meet three minimum capital standards: a ratio of tangible
capital to adjusted total assets of 1.5%, a ratio of Tier 1 (core) capital to
adjusted total assets of 4.0% (3% for institutions receiving the highest rating
on the CAMELS rating system) and a ratio of total capital to total risk-adjusted
assets of 8.0%. The prompt corrective action standards discussed below, in
effect, establish a minimum 2% tangible capital standard.

     The risk-based capital standard for savings banks requires the maintenance
of Tier 1, or core, and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks inherent in the type of asset. Core capital is
defined as common stockholders' equity (including


                                       24

<PAGE>

retained earnings), certain noncumulative perpetual preferred stock and related
surplus and minority interests in equity accounts of consolidated subsidiaries,
less intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative perpetual preferred stock, long-term preferred stock, mandatory
convertible securities, subordinated debt and intermediate-term preferred stock,
allowance for loan and lease losses up to a maximum of 1.25% of risk-weighted
assets and up to 45% of net unrealized gains on available-for-sale equity
securities with readily determinable fair market values. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.

     At September 30, 2006, First Federal Bank's capital exceeded all applicable
requirements.

     LOANS TO ONE BORROWER. A federal savings bank generally may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and surplus on an unsecured basis. An additional amount may
be loaned, equal to 10% of unimpaired capital and surplus, if the loan is
secured by readily marketable collateral, which generally does not include real
estate. As of September 30, 2006, First Federal Bank was in compliance with the
loans-to-one-borrower limitations.

     QUALIFIED THRIFT LENDER TEST. As a federal savings bank, First Federal Bank
is subject to a qualified thrift lender, or "QTL," test. Under the QTL test,
First Federal Bank must maintain at least 65% of its "portfolio assets" in
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the
conduct of the savings bank's business.

     "Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to those purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans. First
Federal Bank also may satisfy the QTL test by qualifying as a "domestic building
and loan association" as defined in the Internal Revenue Code of 1986.

     A savings bank that fails the QTL test must either convert to a bank
charter or operate under specified restrictions. At September 30, 2006, First
Federal Bank maintained approximately 84.3% of its portfolio assets in qualified
thrift investments, and, as of that date, satisfied the QTL test.

     CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern
capital distributions by a federal savings bank, which include cash dividends,
stock repurchases and other transactions charged to the institution's capital
account. A savings bank must file an application for approval of a capital
distribution if:

     o    the total capital distributions for the applicable calendar year
          exceed the sum of the savings bank's net income for that year to date
          plus the savings bank's retained net income for the preceding two
          years;

     o    the savings bank would not be at least adequately capitalized
          following the distribution;

     o    the distribution would violate any applicable statute, regulation,
          agreement or Office of Thrift Supervision-imposed condition; or

     o    the savings bank is not eligible for expedited treatment of its
          filings.

     Even if an application is not otherwise required, every savings bank that
is a subsidiary of a holding company must still file a notice with the Office of
Thrift Supervision at least 30 days before the board of directors declares a
dividend or approves a capital distribution.

     The Office of Thrift Supervision may disapprove a notice or application if:

     o    the savings bank would be undercapitalized following the distribution;


                                       25

<PAGE>

     o    the proposed capital distribution raises safety and soundness
          concerns; or

     o    the capital distribution would violate a prohibition contained in any
          statute, regulation or agreement.

     LIQUIDITY. A federal savings bank is required to maintain a sufficient
amount of liquid assets to ensure its safe and sound operation.

     COMMUNITY REINVESTMENT ACT AND FAIR LENDING LAWS. All savings banks have a
responsibility under the Community Reinvestment Act and related regulations of
the Office of Thrift Supervision to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In connection
with its examination of a federal savings bank, the Office of Thrift Supervision
is required to assess the savings bank's record of compliance with the Community
Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act prohibit lenders from discriminating in their lending practices on
the basis of characteristics specified in those statutes. A savings bank's
failure to comply with the provisions of the Community Reinvestment Act could,
at a minimum, result in regulatory restrictions on its activities. The failure
to comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in enforcement actions by the Office of Thrift Supervision, as well as
other federal regulatory agencies and the Department of Justice. First Federal
Bank received an "Outstanding" Community Reinvestment Act rating in its most
recent federal examination.

     TRANSACTIONS WITH RELATED PARTIES. A federal savings bank's authority to
engage in transactions with its "affiliates" is limited by Office of Thrift
Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act
and its implementing regulations. The term "affiliates" for these purposes
generally means any company that controls or is under common control with an
institution. First Federal and its non-savings institution subsidiaries will be
affiliates of First Federal Bank. In general, transactions with affiliates must
be on terms that are as favorable to the savings bank as comparable transactions
with non-affiliates. In addition, certain types of these transactions are
restricted to an aggregate percentage of the savings bank's capital. Collateral
in specified amounts must usually be provided by affiliates in order to receive
loans from the savings bank. In addition, Office of Thrift Supervision
regulations prohibit a savings bank from lending to any of its affiliates that
are engaged in activities that are not permissible for bank holding companies
and from purchasing the securities of any affiliate, other than a subsidiary.

     First Federal Bank's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the Federal Reserve Act and its implementing regulations. Among other things,
these provisions require that extensions of credit to insiders (i) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features, and (ii) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of First Federal Bank's capital. In addition, extensions of credit in
excess of certain limits must be approved by First Federal Bank's Board of
Directors.

     ENFORCEMENT. The Office of Thrift Supervision has primary enforcement
responsibility over savings associations and has the authority to bring
enforcement action against all "institution-affiliated parties," including
stockholders, attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or a cease and desist order to removal of officers and/or directors of
the institution, receivership, conservatorship or the termination of deposit
insurance. Civil penalties cover a wide range of violations and actions, and
range up to $25,000 per day, unless a finding of reckless disregard is made, in
which case penalties may be as high as $1 million per day. The Federal Deposit
Insurance Corporation also has the authority to recommend to the Director of the
Office of Thrift Supervision that enforcement action be taken with respect to a
particular savings association. If action is not taken by the Director, the
Federal Deposit Insurance Corporation has authority to take action under
specified circumstances.


                                       26

<PAGE>

     STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation and other operational
and managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under federal
law. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The guidelines address
internal controls and information systems, internal audit systems, credit
underwriting, loan documentation, interest rate risk exposure, asset growth,
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.

     PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings banks. For this purpose, a
savings bank is placed in one of the following five categories based on the
savings bank's capital:

     o    well-capitalized (at least 5% leverage capital, 6% tier 1 risk-based
          capital and 10% total risk-based capital);

     o    adequately capitalized (at least 4% leverage capital, 4% tier 1
          risk-based capital and 8% total risk-based capital);

     o    undercapitalized (less than 3% leverage capital, 4% tier 1 risk-based
          capital or 8% total risk-based capital);

     o    significantly undercapitalized (less than 3% leverage capital, 3% tier
          1 risk-based capital or 6% total risk-based capital); and

     o    critically undercapitalized (less than 2% tangible capital).

     Generally, the banking regulator is required to appoint a receiver or
conservator for a savings bank that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
Office of Thrift Supervision within 45 days of the date a bank receives notice
that it is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the savings bank, including, but not limited to,
restrictions on growth, investment activities, capital distributions and
affiliate transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
savings banks, including the issuance of a capital directive and the replacement
of senior executive officers and directors.

     At September 30, 2006, First Federal Bank met the criteria for being
considered "well capitalized."

     INSURANCE OF DEPOSIT ACCOUNTS. Deposit accounts in First Federal Bank are
insured by the Savings Association Insurance Fund and, to a limited extent, the
Deposit Insurance Fund of the Federal Deposit Insurance Corporation, generally
up to a maximum of $100,000 per separately insured depositor or up to $250,000
for self-directed retirement accounts, such as Individual Retirement Accounts.
First Federal Bank's deposits, therefore, are subject to Federal Deposit
Insurance Corporation deposit insurance assessments. The Federal Deposit
Insurance Corporation has adopted a risk-based system for determining deposit
insurance assessments. The Federal Deposit Insurance Corporation is authorized
to raise the assessment rates as necessary to maintain the required ratio of
reserves to insured deposits of 1.25%. In addition, all Federal Deposit
Insurance Corporation-insured institutions must pay assessments to the Federal
Deposit Insurance Corporation at an annual rate of approximately 0.0125% of
insured deposits to fund interest payments on bonds maturing in 2017 that were
issued by a federal agency to recapitalize the predecessor to the Savings
Association Insurance Fund.


                                       27

<PAGE>

     On November 2, 2006, the Federal Deposit Insurance Corporation adopted
final regulations establishing a risk-based assessment system that will enable
the FDIC to more closely tie each financial institution's premiums to the risk
it poses to the deposit insurance fund. Under the new risk-based assessment
system, which becomes effective in the beginning of 2007, the Federal Deposit
Insurance Corporation will evaluate the risk of each financial institution based
on three primary sources of information: (1) its supervisory rating, (2) its
financial ratios, and (3) its long-term debt issuer rating, if the institution
has one. The new rates for nearly all of the financial institution industry will
vary between five and seven cents for every $100 of domestic deposits. At the
same time, the Federal Deposit Insurance Corporation also adopted final
regulations designating the reserve ratio for the Deposit Insurance Fund during
2007 at 1.25% of estimated insured deposits.

     PROHIBITIONS AGAINST TYING ARRANGEMENTS. Federal savings banks are
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.

     FEDERAL HOME LOAN BANK SYSTEM. First Federal Bank is a member of the
Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan
Banks. The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions. As a member of the Federal Home Loan Bank of
Dallas, First Federal Bank is required to acquire and hold shares of capital
stock in the Federal Home Loan Bank in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its borrowings from the
Federal Home Loan Bank, whichever is greater. As of September 30, 2006, First
Federal Bank was in compliance with this requirement.

FEDERAL RESERVE SYSTEM

     Federal Reserve Board regulations require savings banks to maintain
noninterest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At September 30,
2006, First Federal Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision.

HOLDING COMPANY REGULATION

     First Federal is a unitary savings and loan holding company, subject to
regulation and supervision by the Office of Thrift Supervision. The Office of
Thrift Supervision has enforcement authority over First Federal and its
non-savings institution subsidiaries. Among other things, this authority permits
the Office of Thrift Supervision to restrict or prohibit activities that are
determined to be a risk to First Federal Bank

     Under prior law, a unitary savings and loan holding company generally had
no regulatory restrictions on the types of business activities in which it could
engage, provided that its subsidiary savings bank was a qualified thrift lender.
The Gramm-Leach-Bliley Act of 1999, however, restricts the activities of unitary
savings and loan holding companies not existing on, or applied for before, May
4, 1999 to those permissible for financial holding companies or for multiple
savings and loan holding companies. First Federal is a grandfathered unitary
savings and loan holding company and, therefore, is generally not limited in its
activities.

     Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another savings institution or holding company thereof, without prior written
approval of the Office of Thrift Supervision. It also prohibits the acquisition
or retention of, with specified exceptions, more than 5% of the equity
securities of a company engaged in activities that are not closely related to
banking or financial in nature or acquiring or retaining control of an
institution that is not federally insured. In evaluating applications by holding
companies to acquire savings institutions, the Office of Thrift Supervision must
consider the financial and managerial resources and future prospects of the
savings institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.


                                       28

<PAGE>

SARBANES-OXLEY ACT OF 2002

     The Sarbanes-Oxley Act of 2002 was enacted to address, among other issues,
corporate governance, auditing and accounting, executive compensation, and
enhanced and timely disclosure of corporate information. Under Section 302(a) of
the Sarbanes-Oxley Act, the Chief Executive Officer and Chief Financial Officer
of First Federal are required to certify that its quarterly and annual reports
filed with the Securities and Exchange Commission do not contain any untrue
statement of a material fact. Rules promulgated under the Sarbanes-Oxley Act
require that these officers certify that: they are responsible for establishing,
maintaining and regularly evaluating the effectiveness of our internal controls;
they have made certain disclosures to our auditors and the audit committee of
the Board of Directors about our internal controls; and they have included
information in our quarterly and annual reports about their evaluation and
whether there have been significant changes in our internal controls or in other
factors that could significantly affect internal controls. First Federal is
subject to additional reporting and audit requirements beginning with the fiscal
year ending September 30, 2008 under the Sarbanes-Oxley Act. First Federal has
existing policies, procedures and systems designed to comply with these
regulations, and is further enhancing and documenting such policies, procedures
and systems to ensure continued compliance with these regulations.

FEDERAL SECURITIES LAWS

     Shares of First Federal common stock are registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended. First
Federal is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the Securities Exchange Act of 1934.

     The registration under the Securities Act of 1933 of shares of common stock
issued in the offering does not cover the resale of those shares. Shares of
common stock purchased by persons who are not affiliates of First Federal may be
resold without registration. Shares purchased by an affiliate of First Federal
will be subject to the resale restrictions of Rule 144 under the Securities Act
of 1933. If First Federal meets the current public information reporting
requirements of Rule 144 under the Securities Act of 1933, each affiliate of
First Federal that complies with the other conditions of Rule 144, including
those that require the affiliate's sale to be aggregated with those of other
persons, would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of 1% of
the outstanding shares of First Federal or the average weekly volume of trading
in the shares during the preceding four calendar weeks. In the future, First
Federal may permit affiliates to have their shares registered for sale under the
Securities Act of 1933.

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

     The following table provides certain information with respect to our 15
banking offices as of September 30, 2006:

CORPORATE OFFICE:

     300 N. Pennsylvania Ave.
     (Includes a detached drive-up facility)
     Roswell, NM 88201
     (505) 622-6201

BRANCH OFFICES:

     1810 S. Main St.        1800 S. Telshor (Includes a
     Roswell, NM 88203       detached drive-up facility)
     (505) 622-6201          Las Cruces, NM 88011
                             (505) 522-2664

     3201 N. Main St.        301 W. Amador
     Roswell, NM 88201       Las Cruces, NM 88005
     (505) 622-6201          (505) 522-2664


                                       29

<PAGE>

     398 Sudderth            7015 N. Mesa
     Ruidoso, NM 88345       El Paso, TX 79912
     (505) 257-4006          (915) 587-6599

     100 Smokey Bear         2290 Trawood Dr.
     Capitan, NM 88316       El Paso, TX 79935
     (505) 354-5030          (915) 594-0681

     604 N. 26th Street      4301 The 25 Way, NE
     Artesia, NM 88210       Albuquerque, NM 87109
     (505) 627-5691          (505) 341-3240

     300 E. 1st St.          1301 Wyoming Blvd.
     Alamogordo, NM 88310    Albuquerque, NM 87112
     (505) 439-0011          (505) 237-0052

     1501 San Juan Blvd.     221 West Aztec Avenue
     Farmington, NM 87401    Gallup, NM 87301
     (505) 327-6100          (505) 722-4361

     The net book value of our premises, land and equipment was approximately
$13.6 million at September 30, 2006.

     For information regarding the Company's investment in mortgages and
mortgage-related securities, see "Item 1. Business" herein.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     From time to time, we are involved as plaintiff or defendant in various
legal proceedings arising in the ordinary course of business. At September 30,
2006, we were not involved in any legal proceedings, the outcome of which would
be material to our financial condition or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
------------------------------------------------------------------------
         BUSINESS ISSUER PURCHASES OF SECURITIES
         ---------------------------------------

     (a)  Not applicable.

     (b)  Not Applicable.

     (c)  First Federal did not repurchase any shares of its common stock during
          the relevant period.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
         OF OPERATIONS
         -------------

     The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of First Federal's 2006 Annual Report to
Stockholders is incorporated herein by reference.

ITEM 7. FINANCIAL STATEMENTS
----------------------------

     The consolidated financial statements included in First Federal's 2006
Annual Report to Stockholders are incorporated herein by reference.


                                       30

<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
         FINANCIAL DISCLOSURE
         --------------------

     None.

ITEM 8A. CONTROLS AND PROCEDURES
--------------------------------

     Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Our management,
including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures will prevent all errors and
all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, but not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues within the Company have been detected.

     Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports that First Federal files or submits
under the Securities Exchange Act of 1934, is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.

     There has been no change in First Federal's internal control over financial
reporting during First Federal's fourth quarter of fiscal year 2006 that has
materially affected, or is reasonably likely to materially affect, First
Federal's internal control over financial reporting.

ITEM 8B. OTHER INFORMATION
--------------------------

     None.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
----------------------------------------------------------------------
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
         -------------------------------------------------

     First Federal has adopted a Code of Ethics that applies to First Federal's
principal executive officer, and principal financial officer. The Code of Ethics
is filed as Exhibit 14 to this Form 10-KSB.

     Information concerning Directors and executive officers of First Federal is
incorporated herein by reference from our definitive Proxy Statement (the "Proxy
Statement"), specifically the section captioned "Proposal I--Election of
Directors," or will be filed by amendment to this annual report.

ITEM 10. EXECUTIVE COMPENSATION
-------------------------------

     Information concerning executive compensation is incorporated herein by
reference from our Proxy Statement, specifically the section captioned "Proposal
I -- Election of Directors," or will be filed by amendment to this annual
report.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
---------------------------------------------------------------------------
         RELATED STOCKHOLDER MATTERS
         ---------------------------

     Information concerning security ownership of certain owners and management
is incorporated herein by reference from our Proxy Statement, specifically the
sections captioned "Voting Securities and Principal Holders Thereof" and
"Proposal I -- Election of Directors," or will be filed my amendment to this
annual report.


                                       31

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

     Information concerning relationships and transactions is incorporated
herein by reference from our Proxy Statement, specifically the section captioned
"Transactions with Certain Related Persons," or will be filed by amendment to
this annual report.

ITEM 13. EXHIBITS
-----------------

     3.1   Certificate of Incorporation of First Federal Banc of the Southwest,
           Inc.*

     3.2   Bylaws of First Federal Banc of the Southwest, Inc.*

     4.1   Form of Common Stock Certificate of First Federal Banc of the
           Southwest, Inc.*

     10.1  Form of Employment Agreement with Jerry R. Spurlin *

     10.2  Form of Employment Agreement with William W. Head, Jr.*

     10.3  Form of Employment Agreement with Leonard C. Scalzi*

     10.4  Release on Non-Compete Agreement with Richard P. Gallegos*

     10.5  Purchase Agreement, dated as of May 9, 2003, by and between First
           Federal Bank and Aubrey L. Dunn, Jr.*

     10.6  Form of Change in Control Agreement with Debra S. Fischer*

     10.7  Form of Change in Control Agreement with Ginger R. Palmer*

     10.8  First Federal Bank 1995 Stock Option Plan**

     10.9  First Federal Banc of the Southwest, Inc. 2002 Stock Option and
           Incentive Plan**

     10.10 Employment Agreement with George A. Rosenbaum, Jr.***

     10.11 Employment Agreement of Aubrey L. Dunn, Jr.****

     10.12 First Amendment to the Employment Agreement of Aubrey L. Dunn,
           Jr.*****

     10.13 First Federal Banc of the Southwest, Inc. 2006 Retention Pay
           Plan*****

     10.14 First Federal Banc of the Southwest, Inc. Severance Plan*****

     13    Portions of Annual Report to Stockholders

     14    Code of Ethics******

     21    Subsidiaries of Registrant*

     23    Consent of Independent Resistered Public Accounting Firm

     31.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
           of the Securities Exchange Act of 1934, as amended, as adopted
           pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     31.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
           of the Securities Exchange Act of 1934, as amended, as adopted
           pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

----------
*      Incorporated by reference to the Registration Statement on Form S-4 of
       First Federal (file no. 333-120729), originally filed with the Securities
       and Exchange Commission on November 24, 2004.

**     Incorporated by reference to the Registration Statement on Form S-8 of
       First Federal (file no. 333-128308), originally filed with the Securities
       and Exchange Commission on September 14, 2005.

***    Incorporated by reference to the Quarterly Report on Form 10-QSB for the
       quarterly period ended June 30, 2005 (file no. 000-51243), filed with the
       Securities and Exchange Commission on August 15, 2005.

****   Incorporated by reference to the Current Report on Form 8-K for the event
       of May 18, 2006 (file no. 000-51243), filed with the Securities and
       Exchange Commission on May 19, 2006.

*****  Incorporated by reference to the Current Report on Form 8-K for the event
       of October 10, 2006 (file no. 000-51243), filed with the Securities and
       Exchange Commission on October 16, 2006.

****** Incorporated by reference to the Annual Report on Form 10-KSB for the
       year ended September 30, 2005 (File No. 000-51243), filed with the
       Securities and Exchange Commission on January 13, 2006.


                                       32

<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------

      Information concerning principal accountant fees and services is
incorporated herein by reference from our Proxy Statement; specifically the
section captioned "Proposal II-Ratification of Appointment of Independent
Registered Public Accounting Firm," or will be filed by amendment to this annual
report.


                                       33

<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                       FIRST FEDERAL BANC OF THE SOUTHWEST, INC.


Date: December 26, 2006                By: \s\ Aubrey L. Dunn, Jr.
                                           -------------------------------------
                                           Aubrey L. Dunn, Jr.
                                           President and Chief Executive Officer
                                           (Duly Authorized Representative)

      Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

         Signatures                        Title                      DATE
         ----------                        -----                      ----


\s\ Aubrey L. Dunn, Jr.        President, Chief Executive      December 26, 2006
----------------------------   Officer and Director
Aubrey L. Dunn, Jr.            (Principal Executive Officer)


\s\ George A. Rosenbaum, Jr.   Executive Vice President and    December 26, 2006
----------------------------   Chief Financial Officer
George A. Rosenbaum, Jr.       (Principal Financial and
                               Accounting Officer)


\s\ Edward K. David            Chairman of the Board           December 26, 2006
----------------------------
Edward K. David


\s\ Marc Reischman             Vice Chairman of the Board      December 26, 2006
----------------------------
Marc Reischman


\s\ Kay R. McMillan            Director                        December 26, 2006
----------------------------
Kay R. McMillan


                               Director
----------------------------
Michael A. McMillan


\s\ Arturo Jurado              Director                        December 26, 2006
----------------------------
Arturo Jurado

<PAGE>


\s\ Russell P. Weems           Director                        December 26, 2006
----------------------------
Russell P. Weems


\s\ Larry L. Sheffield         Director                        December 26, 2006
----------------------------
Larry L. Sheffield


\s\ James E. Paul, Jr.         Director                        December 26, 2006
----------------------------
James E. Paul, Jr.


                               Director
----------------------------
Catherine Gutierrez


                               Director
----------------------------
Michael P. Mataya


                               Director
----------------------------
Richard C. Kauzlaric